NEXSTAR BROADCASTING GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with Item 6.

"Selected Financial Data" and our Consolidated Financial Statements and related Notes included in Part IV, Item 15(a) of this Annual Report on Form 10-K.

As a result of our deemed controlling financial interest in Mission, in accordance with U.S. GAAP, 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. Refer to Note 2 to our Consolidated Financial Statements for a discussion of our determination that we are required to consolidate Mission's financial position, results of operations and cash flows under the authoritative guidance for variable interest entities. Therefore, the following discussion of our financial position and results of operations includes Mission's financial position and results of operations.

Executive Summary 2012 Highlights • Net revenue increased 23.5% during 2012 compared to 2011. The increase in net revenue was primarily due to our July and December 2011 acquisitions of WFRV and WEHT, respectively, our December 2012 acquisition of ten television stations and Inergize Digital Media from Newport and increases in political advertising and retransmission compensation, which were partially offset by the discontinuance of management fee revenue from our terminated management services agreement with Four Points Media Group, LLC as well as termination of certain station affiliation agreements. The 2012 and 2011 acquired stations contributed a total of approximately $38.6 million to our net revenue for the year ended December 31, 2012.

• On December 1, 2012, we acquired the assets of ten television stations in seven markets and Inergize Digital Media, a digital media management entity that offers solutions for companies in building presence on the web and in the mobile arena, from Newport for $225.5 million in cash, exclusive of working capital adjustment, funded by our senior secured credit facility.

• On December 1, 2012, we and Mission entered into amendments to each of our senior secured credit facilities with a group of commercial banks which replaced the Company's previous credit facilities. The new senior secured credit facilities consist of a $246.0 million term loan and a $65.0 million revolving credit facility for us and a $104.0 million term loan and $35.0 million revolving credit facility for Mission. We and Mission used the proceeds of these loans to finance acquisitions as well as for Mission to repay $38.1 million debt outstanding under its previous Term Loan B, plus accrued interest.

33-------------------------------------------------------------------------------- • On December 1, 2012, we sold the net assets of KBTV, our FOX and Bounce TV affiliate in Beaumont-Port Arthur, TX, to Deerfield Media (Port Arthur), Inc.

and San Antonio Television, LLC for $13.9 million, net of $0.1 million working capital sold. Proceeds of the sale were used to repay debt obligations and for general corporate purposes. We recognized a $5.1 million gain on disposal of KBTV, net of $3.1 million of income tax expense.

• On November 26, 2012, we announced a new dividend policy pursuant to which our board of directors intends to declare a total annual cash dividend with respect to our outstanding shares of Class A common stock and Class B common stock of $0.48 per share in equal quarterly installments of $0.12 per share.

On January 24, 2013, our board of directors declared a quarterly dividend of $0.12 per share of our Class A and Class B common stock. The first dividend payment was made on March 1, 2013 for a total of $3.5 million to our shareholders of record on February 15, 2013.

• On November 9, 2012, we completed the sale and issuance of our $250.0 million 6.875% Senior Notes due 2020 (the "6.875 Notes") at par. The proceeds of the 6.875% Notes were used to retire the 7% Notes and the 7% PIK Notes, repay the amounts outstanding under our previous senior secured credit facility and for related fees and expenses. The 6.875% Notes are our senior unsecured obligations and are guaranteed by Mission.

• On November 9, 2012, we retired our previous senior secured credit facility, repaying the outstanding principal balances of $108.9 million of Term Loan B and $23.0 million of revolving loans, plus accrued interest. During October and November of 2012, Mission repaid the principal amounts outstanding of its revolving credit facility of $10.0 million plus accrued interest. These transactions resulted in a loss on extinguishment of debt of $1.7 million.

• On November 9, 2012, we redeemed $3.8 million and $110.7 million of our 7% senior subordinated notes due 2014 ("7% Notes") and 7% senior subordinated PIK notes due 2014 ("7% PIK Notes"), respectively, for $1,003 per each $1,000 of outstanding principal, plus accrued and unpaid interest in accordance with the tender offer dated October 24, 2012. The tender offer expired on November 21, 2012 and we redeemed the remaining $0.1 million and $1.9 million outstanding principal balance of the 7% Notes and 7% PIK Notes, respectively, at the redemption price of 100.0%. These transactions resulted in a loss on extinguishment of debt of $1.0 million.

• On November 2, 2012, we and Mission entered into definitive agreements to acquire the assets of WFFF, the FOX affiliate, and WVNY, the ABC affiliate, both in the Burlington, Vermont, from Smith Media for a total purchase price of $16.9 million, subject to working capital adjustment. We made an initial payment of $0.8 million pursuant to the terms of the purchase agreement. We and Mission completed the acquisition and paid the remaining $16.1 million on February 15, 2013, funded by a combination of the Company's borrowings from revolving credit facilities and cash on hand.

• On November 1, 2012, we entered into a definitive agreement and made an initial payment of $3.5 million to acquire the assets of KGPE, the CBS affiliate in the Fresno, California market, and KGET, the NBC/CW affiliate, and KKEY-LP, the low powered Telemundo affiliate, both in the Bakersfield, California market, from Newport for a total purchase price of $35.4 million, subject to working capital adjustment. We completed the acquisition and paid the remaining $31.9 million on February 15, 2013 funded by existing cash on hand.

• On July 18, 2012, Mission entered into a definitive agreement and made an initial payment of $6.0 million to acquire the assets of KLRT, the FOX affiliate, and KASN, the CW affiliate, both in the Little Rock, Arkansas market, from Newport for a total of purchase price $60.0 million, subject to working capital adjustment. Mission completed the acquisition on January 1, 2013 and paid the remaining $54.0 million on January 3, 2013 funded by the proceeds of Mission's senior secured credit facility.

• On May 11, 2012, we redeemed $34.0 million of our outstanding 7% Notes at 100%. As a result of the redemption, we recorded $0.5 million of loss on extinguishment of debt related to this transaction. We funded the redemption from cash on hand and borrowings under our revolving credit facility.

• Throughout 2012, we and Mission repaid the contractual maturities under each of our previous Term Loan B, for a total of $1.1 million.

• During 2012, we and Mission repaid $24.3 million, net, of our revolving loan borrowings under our senior secured credit facilities.

34--------------------------------------------------------------------------------Overview of Operations We owned and operated 45 television stations and 10 digital multi-cast channels as of December 31, 2012. Through various local service agreements, we programmed or provided sales and other services to 19 additional television stations and four digital multicast channels, including 17 television stations and four digital multicast channels owned and operated by Mission as of December 31, 2012. 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, 2012 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, WAWV, WYOU, KODE, WTVO, KTVE and WTVW (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. Each SSA allows our station in the market to provide services including news production, technical maintenance and security, in exchange for our right to receive certain payments from Mission as described in the SSAs. Each JSA permits us to sell the station's advertising time and retain a percentage of the station's net advertising revenue, as described in the JSAs.

Our ability to receive cash from Mission is governed by these local service agreements. Under the local service agreements, we have received substantially all of Mission's available cash, after satisfaction of its operating costs and debt obligations. We anticipate we will continue to receive substantially all of Mission's available cash, after satisfaction of its operating costs and debt obligations.

We also guarantee all obligations incurred under Mission's senior secured credit facility. Similarly, Mission is a guarantor of our senior secured credit facility and senior subordinated notes. In consideration of our guarantee of Mission's senior secured credit facility, Mission has granted us purchase options to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent, for an amount equal to the greater of (1) seven times the station's cash flow, as defined in the option agreement, less the amount of its indebtedness as defined in the option agreement, or (2) the amount of its indebtedness. Additionally, on November 29, 2011, Mission's shareholders granted Nexstar an option to purchase any or all of Mission's stock, subject to FCC consent, for a price equal to the pro rata portion of the greater of (1) five times the stations' cash flow, as defined in the agreement, reduced by the amount of indebtedness, as defined in the agreement, or (2) $100,000. These option agreements (which expire on various dates between 2013 and 2022) are freely exercisable or assignable by Nexstar without consent by Mission or its shareholders. These option agreements expire on various dates between 2013 and 2022 and are freely exercisable or assignable by us without consent or approval by Mission. We expect these option agreements to be renewed upon expiration.

We do not own Mission or its television stations. However, we are deemed under U.S. GAAP to have a controlling financial interest in Mission because of (1) the local service agreements Nexstar has with the Mission stations, (2) Nexstar's guarantee of the obligations incurred under Mission's senior secured credit facility, (3) Nexstar having power over significant activities affecting Mission's economic performance, including budgeting for advertising revenue, advertising and hiring and firing of sales force personnel and (4) purchase options granted by Mission that permit Nexstar to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent. In compliance with FCC regulations for both us and Mission, Mission maintains complete responsibility for and control over programming, finances and personnel for its stations.

The operating revenue of our stations is derived primarily from broadcast and website 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, 2012 and 2011, revenue generated from local broadcast advertising represented 71.4% and 73.4%, respectively, of our consolidated spot revenue (total of local and national broadcast advertising revenue, excluding political advertising revenue). The remaining broadcast 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 35-------------------------------------------------------------------------------- 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.

Most of our stations have a network affiliation agreement pursuant to which the network provides programming to the stations during specified time periods, including prime time. NBC and CBS compensate some of the stations for distributing the network's programming over the air and for allowing the network to keep a portion of advertising inventory during those time periods. The affiliation agreements with ABC, FOX, MyNetworkTV, The CW and Bounce TV do not provide for compensation. In recent years, in conjunction with the renewal of affiliation agreements with NBC, CBS, ABC and FOX, network compensation is being eliminated and many of the networks are now seeking cash payments from their affiliates.

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 practice is referred to as barter broadcast rights.

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 programming expense is recognized over the license period or period of usage, whichever ends earlier.

Our primary operating expenses consist of commissions on advertising revenue, employee compensation and 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 remains relatively fixed.

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. The Company's stations' advertising revenue is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to, and including, the holiday season. In addition, advertising revenue is generally higher during even-numbered years, when state, congressional and presidential elections occur and from advertising aired during the Olympic Games. As 2012 was an election year, we are reporting significantly more political advertising revenue in 2012 compared to 2011, which is consistent with our expectations.

Debt Transactions On December 1, 2012, we and Mission entered into amendments to each of our senior secured credit facilities with a group of commercial banks which replaced the Company's previous credit facilities. The new senior secured credit facilities consist of a $246.0 million term loan and a $65.0 million revolving credit facility for us and a $104.0 million term loan and $35.0 million revolving credit facility for Mission. We and Mission used the proceeds of these loans to finance acquisitions as well as for Mission to repay $38.1 million debt outstanding under its previous Term Loan B, plus accrued interest.

On November 9, 2012, we retired our previous senior secured credit facility, repaying the outstanding principal balances of $108.9 million of Term Loan B and $23.0 million of revolving loans, plus accrued interest. During October and November of 2012, Mission repaid the principal amounts outstanding of its revolving credit facility of $10.0 million plus accrued interest. These transactions resulted in a loss on extinguishment of debt of $1.7 million.

On November 9, 2012, we redeemed $3.8 million and $110.7 million of our 7% Notes and 7% PIK Notes, respectively, for $1,003 per each $1,000 of outstanding principal, plus accrued and unpaid interest in accordance with the tender offer dated October 24, 2012. The tender offer expired on November 21, 2012 and we redeemed the remaining $0.1 million and $1.9 million outstanding principal balance of the 7% Notes and 7% PIK Notes, respectively, at the redemption price of 100.0%. These transactions resulted in a loss on extinguishment of debt of $1.0 million.

On November 9, 2012, we completed the sale and issuance of our 6.875% Notes at par. The proceeds of the 6.875% Notes were used to retire the 7% Notes and the 7% PIK Notes, repay the amounts outstanding under our previous senior secured credit facility and for related fees and expenses. The 6.875% Notes are our senior unsecured obligations and are guaranteed by Mission.

36 -------------------------------------------------------------------------------- On October 23, 2012, we and Mission entered into amendments to each of our senior secured credit facilities. The amendments exclude, through and including December 31, 2012, from the calculation of indebtedness and prepayment requirement, the proceeds of the 6.875% Notes and permit us to hold the net proceeds of the 6.875% Notes, pending repurchase of our outstanding 7% Notes and 7% PIK Notes and refinancing of a portion of the borrowings outstanding under our senior secured credit facilities with such proceeds, until December 31, 2012.

On September 27, 2012, we and Mission entered into amendments to each of our senior secured credit facilities. The amendments remove the requirement for the Company to provide pro forma certificates to the lenders prior to entering into an acquisition and exclude any acquisitions from dollar limitations within the credit agreements if they are not to be funded with the existing senior secured credit facilities.

On May 11, 2012, we redeemed $34.0 million of our outstanding 7% Notes at 100.0%. As a result of the redemption, we recorded approximately $0.5 million of loss on extinguishment of debt related to this transaction. We funded the redemption of the notes from a combination of cash on hand and borrowings under its revolving credit facility.

Throughout 2012, we and Mission repaid the contractual maturities under each of our previous Term Loan B, for a total of $1.1 million.

During 2012, we and Mission repaid $24.3 million, net, of our revolving loan borrowings under our senior secured credit facilities.

Historical Performance Revenue The following table sets forth the amounts of the Company's principal types of revenue (in thousands) and each type of revenue (other than trade and barter) and agency commissions as a percentage of total gross revenue for the years ended December 31: 2012 2011 2010 Amount % Amount % Amount % Local $ 190,168 47.8 $ 181,569 57.3 $ 173,901 52.9 National 76,123 19.1 65,728 20.8 61,995 18.8 Political 46,276 11.6 6,326 2.0 39,318 12.0 Retransmission compensation 60,933 15.4 37,393 11.8 29,911 9.1 eMedia revenue 18,363 4.6 16,224 5.1 13,821 4.2 Network compensation 770 0.2 987 0.3 2,050 0.6 Management fee 1,961 0.6 6,189 2.0 5,674 1.7 Other 2,938 0.7 2,307 0.7 2,270 0.7 Total gross revenue 397,532 100.0 316,723 100.0 328,940 100.0 Less: Agency commissions (40,820 ) (10.3) (31,689 ) (10.0) (35,317 ) (10.7) Net broadcast revenue 356,712 89.7 285,034 90.0 293,623 89.3 Trade and barter revenue 21,920 21,457 19,727 Net revenue $ 378,632 $ 306,491 $ 313,350 37--------------------------------------------------------------------------------Results of Operations The following table sets forth a summary of the Company's operations (in thousands) and each component of operating expense as a percentage of net revenue: 2012 2011 2010 Amount % Amount % Amount % Net revenue $ 378,632 100.0 $ 306,491 100.0 $ 313,350 100.0 Operating expenses (income): Corporate expenses 24,636 6.5 19,780 6.4 19,890 6.3 Station direct operating expenses, net of trade 84,743 22.4 73,829 24.1 70,674 22.6 Selling, general and administrative expenses 92,899 24.5 85,387 27.9 81,001 25.8 Gain on asset exchange - - - - (30 ) - Loss on asset disposal, net 468 0.1 461 0.2 294 0.1 Trade and barter expense 20,841 5.5 21,270 6.9 19,602 6.3 Depreciation and amortization 46,549 12.3 47,824 15.6 44,844 14.3 Amortization of broadcast rights, excluding barter 8,591 2.3 9,947 3.2 9,527 3.0 Income from operations $ 99,905 $ 47,993 $ 67,548 Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenue Gross local advertising revenue was $190.2 million for the year ended December 31, 2012, compared to $181.6 million for the same period in 2011, an increase of $8.6 million, or 4.7%. The increase was primarily related to incremental advertising from our automotive customers and revenue from our acquired stations in December 2012 and during the second half of 2011 which more than offset the decrease associated with the termination of certain station affiliation agreements. Gross national advertising revenue was $76.1 million for the year ended December 31, 2012, compared to $65.7 million for the same period in 2011, an increase of $10.4 million, or 15.8%, primarily attributable to the stations acquired as well as changes in mix between our local and national advertising revenues. Our largest advertiser category, automotive, represented 24.2% and 21.1% of local and national advertising revenue for the year ended December 31, 2012 and 2011, respectively. Overall, this category increased by 24.9%, of which approximately 7.1% came from our acquired stations during the second half of 2011. The other categories representing our top five were fast food/restaurants, which decreased 4.5%, paid programming, which increased 4.3%, furniture, which increased 7.2%, and department/retail stores, which increased 3.3%.

Gross political advertising revenue was $46.3 million for the year ended December 31, 2012, compared to $6.3 million for the same period in 2011, an increase of $40.0 million, or 631.5%, as expected, due to 2012 being an election year.

Retransmission compensation was $60.9 million for the year ended December 31, 2012, compared to $37.4 million for the same period in 2011, an increase of $23.5 million, or 63.0%. The increase in retransmission compensation was primarily the result of contracts providing for higher rates per subscriber during the year. We also earned approximately $4.0 million in retransmission compensation from new stations acquired in December 2012 and during the second half of 2011.

eMedia revenue, representing web-based and mobile advertising revenue generated at the Company's stations, was $18.4 million for the year ended December 31, 2012, compared to $16.2 million for the same period in 2011, an increase of $2.2 million or 13.2%. The increase in eMedia revenue is primarily attributable to eMedia sales efforts and the incremental revenue from new stations acquired in December 2012 and during the second half of 2011.

38 --------------------------------------------------------------------------------Operating Expenses Corporate expenses, related to costs associated with the centralized management of Nexstar's and Mission's stations, were $24.6 million for the year ended December 31, 2012, compared to $19.8 million for the same period in 2011, an increase of $4.8 million, or 24.6%. This was due to an increase in legal and professional fees associated with our acquisitions of $1.9 million and capital market activities of $0.4 million, increased bonus expense related to higher revenues in this political year of $1.3 million, increased payroll and related costs of $0.8 million, primarily resulting from 2012 and 2011 acquisitions, as well as $0.2 million incremental stock-based compensation expense due to stock option grants during the third quarter of 2012.

Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses (net of trade expense) were $177.6 million for the year ended December 31, 2012, compared to $159.2 million for the same period in 2011, an increase of $18.4 million, or 11.6%. The increase was primarily due to expenses of the acquired stations in December 2012 and during the second half of 2011, increase of $4.1 million in programming costs primarily due to the renewed network affiliation agreements entered into during 2012 and 2011, as well as increases of $0.8 million in amounts paid under station outsourcing agreements. These increases were partially offset by a decrease in employee health claims of $0.9 million and a $0.6 million decrease in provision for bad debts due to our improved accounts receivable collection practices.

Amortization of broadcast rights, excluding barter was $8.6 million for the year ended December 31, 2012, compared to $9.9 million for the same period in 2011, a decrease of $1.4 million, or 13.6%, of which $0.5 million is attributable to changes in sports programming on one of our stations and $1.6 million attributable to general programming mix changes among our stations. These were partially offset by the $0.7 million incremental amortization of broadcast rights of acquired stations in 2012 and 2011.

Amortization of intangible assets was $23.0 million for the year ended December 31, 2012, compared to $26.0 million for the same period in 2011, a decrease of $3.0 million, or 11.5%. The decrease was primarily due to termination of certain FOX affiliation contracts which were fully amortized in 2011, partially offset by incremental amortization from acquired stations.

Depreciation of property and equipment was $23.6 million for the year ended December 31, 2012, compared to $21.9 million for the same period in 2011, an increase of $1.7 million, or 7.8%, primarily due to the incremental depreciation of fixed assets of our acquired stations in December 2012 and during the second half of 2011.

Interest Expense Interest expense, net was $51.6 million for the year ended December 31, 2012, compared to $53.0 million for the same period in 2011, a decrease of $1.4 million, or 2.7%. The decrease was primarily attributed to retirement of our 7% Notes and 7% PIK Notes with higher interest financed with our new 6.875% Notes.

We and Mission also refinanced our senior secured credit facilities for a lower interest rate. Additionally, the Company had less average outstanding debt in 2012, compared to 2011.

Loss on Extinguishment of Debt In 2012, the Company recognized $3.3 million of loss on extinguishment of debt, which consisted of $0.6 million and $0.9 million related to the retirement of 7% Notes and 7% PIK Notes, respectively, and $1.8 million related to Nexstar's and Mission's refinancing of their senior secured credit facilities.

Income Taxes The Company recognized an income tax benefit of $132.3 million for the year ended December 31, 2012, compared to income tax expense of $5.7 million for the same period in 2011, an increase in income tax benefit of $138.0 million. The increase in income tax benefit was due to the release of a valuation allowance against deferred tax assets for NOLs and other deferred tax assets partially offset by the tax provision for 2012.

Prior to 2012, the Company's provision for income taxes was primarily created by an increase in the deferred tax liability position arising from the amortization of goodwill and FCC licenses for income tax purposes which are not amortized for financial reporting purposes. In the fourth quarter of 2012, the Company released its valuation allowance against deferred tax assets for NOLs and other deferred tax assets. Management's assessment included consideration of all available positive and negative evidence including recent net operating loss utilization against its 2012 taxable income, cumulative pre-tax book income over the last three (3) years, historical operating results, projected future taxable income over the net operating loss carryforward period, the anticipated ability to sustain a level of earnings, a lower weighted average cost of debt, growth of the Company's e-Media platform and revenue, and the continued renewal of 39 -------------------------------------------------------------------------------- network affiliation and retransmission consent agreements on favorable economic terms. Due to strong financial results and improved credit profile in recent years, the Company was able to obtain a decreased interest rate of 6.875% on its new senior unsecured notes and a lower interest rate on its refinanced senior secured credit facilities in the fourth quarter of 2012. In addition, the Company expanded its line of credit and borrowing capacity on favorable terms that significantly enhanced the Company's ability to grow strategic market share through acquisition. In December 2012, the Company completed the acquisition of ten television stations in seven markets and Inergize Digital Media from Newport which followed three station acquisitions in 2011. Due to the accretive acquisitions in 2011 and the acquisition from Newport in 2012, the Company generated pre-tax income of $45.0 million from continuing operations. This expected level of earnings makes it more likely than not that a substantial portion of the Company's deferred tax assets will be realized.

Based on the results of our in-depth assessment, management determined that it was more likely than not that the NOLs and other deferred tax assets were realizable based on all available positive and negative evidence. As a result, the Company decreased its valuation allowance by $151.4 million through its income tax benefit in the 2012 Consolidated Statement of Operations.

Management made the "more likely than not" assessment separately for both Nexstar and Mission. Mission files federal and state income tax returns separately from Nexstar. Mission is a variable interest entity and there is no common ownership with Nexstar that would allow it to join in a consolidated filing. For this reason, the net operating losses and other deferred tax items of Mission are assessed separately on the basis of realization on the separately filed income tax return.

Gain on Disposal of Station On December 1, 2012, we sold the net assets of KBTV, the FOX and Bounce TV affiliate in Beaumont-Port Arthur, TX, to Deerfield Media (Port Arthur), Inc.

and San Antonio Television, LLC for $13.9 million, net of $0.1 million working capital sold. Proceeds of the sale were used to repay our debt obligations and for general corporate purposes. We recognized a $5.1 million gain on disposal of KBTV, net of $3.1 million income tax expense.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Revenue Gross local advertising revenue was $181.6 million for the year ended December 31, 2011, compared to $173.9 million for the same period in 2010, an increase of $7.7 million, or 4.4%, of which $5.1 million related to acquired stations. Gross national advertising revenue was $65.7 million for the year ended December 31, 2011, compared to $62.0 million for the same period in 2010, an increase of $3.7 million, or 6.0%, of which $2.2 million related to acquired stations. Excluding acquisitions, gross local and national advertising revenue increased by $4.1 million. The increase primarily related to increases in advertising from automotive of $3.3 million, department and retail stores of $1.6 million, school and instruction of $0.9 million and insurance of $0.8 million for the year, which was offset by a decrease in advertising from media (radio, television, cable and newspapers) of $0.8 million, telecom of $0.8 million and grocery stores of $0.8 million for the year. The increase in automotive was primarily driven by increases in domestic manufacturers and dealers and was partially offset by decreases in foreign manufacturers. The increase in department and retail stores was primarily driven by increases in local retailers. The increase in school and instruction advertising was primarily driven by increases in vocational schools, both from existing and new customers.

Gross political advertising revenue was $6.3 million for the year ended December 31, 2011, compared to $39.3 million for the same period in 2010, a decrease of $33.0 million, or 83.9%, as expected since 2011 is not an election year. The year 2011 political revenue primarily related to increased issue and political action spending, special congressional election in Rochester, New York and Wisconsin gubernatorial and state senate recalls.

Retransmission compensation was $37.4 million for the year ended December 31, 2011, compared to $29.9 million for the same period in 2010, an increase of $7.5 million, or 25.0%. The increase in retransmission compensation was primarily the result of renegotiated contracts providing for higher rates per subscriber during the year, which is consistent with industry-wide trends, and additional revenue from WFRV, WJMN and WEHT of $1.0 million.

eMedia revenue, representing web-based advertising revenue generated at our stations, was $16.2 million for the year ended December 31, 2011, compared to $13.8 million for the same period in 2010, an increase of $2.4 million or 17.4%.

The increase in eMedia revenue is attributable to the introduction of new service offerings and increased penetration of our customer base through eMedia sales efforts.

40--------------------------------------------------------------------------------Operating Expenses Corporate expenses, related to costs associated with the centralized management of Nexstar's and Mission's stations, remained consistent at $19.8 million for the year ended December 31, 2011, compared to $19.9 million for the year ended December 31, 2010. Corporate expenses decreased due to the 2010 recognition of $1.6 million of non-cash incremental stock-based compensation expense resulting from the stock option repricing in May 2010 (see Note 11 to the Consolidated Financial Statements), which was offset by an increase of $1.4 million in legal and professional fees associated primarily with our acquisitions, strategic alternatives and our antitrust lawsuit.

Station direct operating expenses, consisting primarily of news, engineering and programming, and selling, general and administrative expenses were $159.2 million for the year ended December 31, 2011, compared to $151.7 million for the same period in 2010, an increase of $7.5 million, or 5.0%. The increase in station expenses was primarily attributed to $5.3 million in station expenses of newly acquired WFRV, WJMN and WEHT and an increase of $1.7 million in employee health care costs, principally due to some large claims during the year.

Amortization of broadcast rights, excluding barter, was $9.9 million for the year ended December 31, 2011, compared to $9.5 million for the same period in 2010, an increase of $0.4 million, or 4.4%. The increase was primarily due to the station acquisitions of $1.3 million, which was partially offset by a decrease due to the termination of syndication of The Oprah Winfrey Show.

Amortization of intangible assets was $26.0 million for the year ended December 31, 2011, compared to $23.7 million for the same period in 2010, an increase of $2.2 million or 9.5%. The increase was due to incremental amortization on our FOX affiliate stations with agreements terminating in 2011, as well as the amortization of newly acquired intangibles.

Depreciation of property and equipment was $21.8 million for the year ended December 31, 2011, compared to $21.1 million for the same period in 2010, an increase of $0.7 million, or 3.5%.

Interest Expense, net Interest expense, net, was $53.0 million for the year ended December 31, 2011, compared to $54.3 million for the same period in 2010, a decrease of $1.3 million, or 2.3%. The decrease in interest expense was primarily attributed to the buyback of notes with higher interest rates, financed with our senior secured credit facility, as well as an overall reduction in debt.

Loss on Extinguishment of Debt In 2011, the Company recognized $1.2 million of loss on extinguishment of debt, including $0.7 million related to the repurchases of the 11.375% Notes, $0.2 million related to the repurchases of the 7% Notes and $0.3 million related to the repurchases of the 7% PIK Notes.

Income Taxes Income tax expense was $5.7 million for the year ended December 31, 2011, compared to $6.7 million for the same period in 2010, a decrease of $1.0 million. Our provision for income taxes is primarily created by an increase in the deferred tax liability 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.

41 --------------------------------------------------------------------------------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 secured 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 our existing senior secured 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 existing senior secured credit facility. We will continue to evaluate the best use of Nexstar's operating cash flow among its capital expenditures, acquisitions and debt reduction.

On January 3, 2013, Mission borrowed $60.0 million in additional term loans under its new senior secured credit facility to fund the acquisition of the assets of KLRT-TV, the FOX affiliate, and KASN, the CW affiliate, both in the Little Rock, Arkansas market, from Newport for a total purchase price of $60.0 million, subject to working capital adjustment.

On November 26, 2012, we announced a new dividend policy pursuant to which our board of directors intends to declare a total annual cash dividend with respect to our outstanding shares of Class A common stock and Class B common stock of $0.48 per share in equal quarterly installments of $0.12 per share. On January 24, 2013, our board of directors declared a quarterly dividend of $0.12 per share of our Class A and Class B common stock. The first dividend payment was made on March 1, 2013 for a total of $3.5 million to our shareholders of record on February 15, 2013. Future dividends, if any, will be at the discretion of our board of directors and will depend on several factors including our results of operations, cash requirements and surplus, financial condition, covenant restrictions and other factors that our board of directors may deem relevant.

On February 1, 2013, Nexstar entered into a definitive agreement to acquire the assets of KSEE, the NBC affiliate serving the Fresno, California market, from Granite for a total purchase price of $26.5 million, subject to adjustments for working capital acquired. Nexstar made a deposit of $20.0 million for the acquisition of the station's non-FCC license assets upon signing the agreement.

Nexstar funded the purchase price of this acquisition with cash on hand and expects the transaction to close in the second quarter of 2013.

On February 15, 2013, Nexstar made a payment for the remaining purchase price of $31.9 million, subject to adjustments for working capital acquired, to complete the acquisition of the assets of KGPE, the CBS affiliate in the Fresno, California market, and KGET, the NBC/CW affiliate, and KKEY-LP, the low powered Telemundo affiliate, both in the Bakersfield, California market, from Newport.

The transaction was funded by cash on hand.

On March 1, 2013, Nexstar and Mission made payments for the remaining purchase price of $16.1 million, subject to adjustments for working capital acquired, to complete the acquisition of the assets of WFFF, the FOX affiliate, and WVNY, the ABC affiliate, both in the Burlington, Vermont market, from Smith Media. The transaction was funded by a combination of Nexstar's and Mission's $10.0 million total borrowings from their revolving credit facilities and cash on hand.

42 --------------------------------------------------------------------------------Overview The following tables present summarized financial information management believes is helpful in evaluating the Company's liquidity and capital resources (in thousands): Years Ended December 31, 2012 2011 2010 Net cash provided by operating activities $ 79,888 $ 40,340 $ 59,268 Net cash used in investing activities (238,617 ) (54,579 ) (13,340 ) Net cash provided by (used in) financing activities 220,182 (1,873 ) (35,022 ) Net increase (decrease) in cash and cash equivalents $ 61,453 $ (16,112 ) $ 10,906 Cash paid for interest $ 66,360 $ 51,088 $ 46,928 Cash paid for income taxes, net $ 1,597 $ 474 $ 397 As of December 31, 2012 2011 Cash and cash equivalents $ 68,999 $ 7,546 Long-term debt including current portion 857,642 640,361 Unused commitments under senior secured credit facilities(1) 100,000 50,700 Based on covenant calculations, as of December 31, 2012, all of the $100 million of total unused revolving loan commitments under the Nexstar and Mission senior secured credit (1) facilities were available for borrowing.

Cash Flows - Operating Activities Net cash provided by operating activities increased by $37.8 million during the year ended December 31, 2012 compared to the same period in 2011. The increase was primarily due to an increase in net revenue of $72.1 million which was partially offset by an increase in cash paid for interest of $15.3 and incremental expenses from acquisitions in December 2012 and 2011. The Company also recognized a $5.1 million gain on disposal of KBTV, net of $3.1 million income tax expense in 2012.

Cash paid for interest increased by $15.3 million during the year ended December 31, 2012 compared to the same period in 2011. This was due to the increase of $17.3 million in cash paid for interest on our 7% Notes and 7% PIK Notes primarily related to the interest items included in the accreted debt balances paid in 2012, and an increase of $0.8 million in cash interest paid on the senior secured credit facilities due to larger amounts outstanding under the Company's revolving credit facilities and. These increases were partially offset by a $2.8 million decrease in cash paid for interest on our 11.375% senior discount notes redeemed in 2011.

Net cash provided by operating activities decreased by $18.9 million during the year ended December 31, 2011 compared to the same period in 2010. The decrease was primarily due to our overall decrease in net broadcast revenue, excluding the impact of the decrease in deferred revenue, of $5.2 million, a decrease of $4.7 million resulting from the timing of collections of accounts receivable, an increase of $4.2 million in cash paid for interest and an increase in station expenses of $7.5 million, which was partially offset by the timing of payments to our vendors of $2.0 million. The increase in cash paid for interest was primarily due to the conversion of the 7% PIK Notes to cash interest payments during 2011, with a payment of $3.9 million during the year.

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 required. During the years ended December 31, 2012 , 2011 and 2010, the Company paid taxes of $1.6 million, $0.5 million and $0.4 million, respectively.

43 --------------------------------------------------------------------------------Cash Flows - Investing Activities Net cash used in investing activities increased by $184.0 million during the year ended December 31, 2012 compared to the same period in 2011. Capital expenditures were $17.3 million during the year ended December 31, 2012 compared to $13.3 million for the same period in 2011. Additionally, the Company acquired the assets of ten television stations in seven markets and Inergize Digital Media from Newport for $225.0 million and made escrow payments of $10.4 million for the acquisitions of seven stations in four markets. These uses of cash for investing activities were partially offset by $13.9 million net proceeds from sale of the net assets of KBTV, our FOX and Bounce TV affiliate in Beaumont-Port Arthur, TX, to Deerfield Media (Port Arthur), Inc. and San Antonio Television, LLC.

Net cash used in investing activities increased by $41.2 million during the year ended December 31, 2011 compared to the same period in 2010. Capital expenditures were fairly consistent at $13.4 million for the year ended December 31, 2011, compared to $13.8 million for the year ended December 31, 2010.

Additionally, Nexstar paid an aggregate of $41.4 million for the acquisitions of WFRV, WJMN, GoLocal.Biz and WEHT. There were no acquisitions in 2010.

Cash Flows - Financing Activities Net cash provided by financing activities was $220.2 million for the year ended December 31, 2012 compared to $1.9 million net cash used in financing activities for the same period in 2011.

On December 1, 2012, Nexstar and Mission obtained $246.0 million and $44.0 million term loans under each of their new senior secured credit facilities to finance their acquisitions as well as for Mission to repay the $38.1 million debt outstanding under its previous Term Loan B, plus accrued interest. On November 9, 2012, Nexstar completed the sale and issuance of its $250.0 million 6.875% Notes in which the proceeds were used to repay debt outstanding of $3.9 million, $112.6 million, $108.9 million and $23.0 million of its 7% Notes, 7% PIK Notes, previous Term Loan B and revolving loans, respectively, plus accrued interest. During October and November of 2012, Mission repaid the principal amounts outstanding of its revolving credit facility of $10.0 million, plus accrued interest. Nexstar and Mission made total payments for debt financing costs of $13.2 million related to their new senior secured credit facilities and Nexstar's 6.875% Notes.

On May 11, 2012, Nexstar redeemed $34.0 million of its outstanding 7% Notes at 100.0%. As a result of the redemption, Nexstar recorded approximately $0.5 million of loss on extinguishment of debt related to this transaction. Nexstar funded the redemption of the notes from a combination of cash on hand and borrowings under its revolving credit facility.

During 2012, Nexstar and Mission repaid the contractual maturities under each of their previous Term Loan B, for a total of $1.1 million. Nexstar and Mission also repaid $24.3 million, net, of borrowings under our revolving credit facilities.

During 2012, Nexstar received proceeds from exercise of stock options of $1.8 million compared to $0.1 million for the same period in 2011.

During 2011, Nexstar added $50.0 million to its term loan, used to repurchase various outstanding notes, and borrowed $40.4 million of revolving loans, primarily related to the acquisitions, both under the our senior secured credit facility. Nexstar repaid $22.8 million throughout the year of the revolving loans, using cash on hand. The outstanding balance of the 11.375% Notes of $45.9 million, $7.3 million of outstanding 7% Notes and $21.2 million of outstanding 7% PIK Notes were repurchased during the year, from the proceeds of the term loan borrowing and cash on hand, all amounts net of amounts paid related to accrued PIK interest and original issue discount. Mission borrowed $6.7 million of revolving loans under the Mission senior secured credit facility, related to the acquisition of WTVW.

During 2010, Nexstar and Mission paid a total of $299.2 million on ours and Mission's senior secured credit facilities. The outstanding balance of the senior subordinated PIK notes due 2014 was repurchased in various transactions throughout the year for $35.0 million, excluding amounts related to accrued PIK interest and original issue discount. Additionally, throughout 2010, Nexstar completed repurchases of $5.9 million of the 7% PIK Notes, $2.4 million of the 7% Notes and $2.3 million of the 11.375% Notes, all net of amounts related to accrued PIK interest and original issue discount.

44 --------------------------------------------------------------------------------Future Sources of Financing and Debt Service Requirements As of December 31, 2012, Nexstar and Mission had total combined debt of $857.6 million, which represented 99.7% 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 reduces the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes.

Nexstar and Mission had $100.0 million of total unused revolving loan commitments under our respective senior secured credit facilities, all of which was available for borrowing, based on the covenant calculations as of December 31, 2012. The Company's ability to access funds under its senior secured credit facilities depends, in part, on our compliance with certain financial covenants.

Any additional drawings under senior secured credit facilities will reduce our future borrowing capacity and the amount of total unused revolving loan commitments.

The following table summarizes the approximate aggregate amount of principal indebtedness scheduled to mature for the periods referenced as of December 31, 2012 (in thousands): Total 2013 2014-2015 2016-2017 Thereafter Nexstar senior secured credit facility $ 246,000 $ 1,845 $ 4,920 $ 4,920 $ 234,315 Mission senior secured credit facility 44,000 330 880 880 41,910 8.875% senior secured second lien notes due 2017 325,000 - - 325,000 - 6.875% Senior unsecured notes due 2020 250,000 - - - 250,000 $ 865,000 $ 2,175 $ 5,800 $ 330,800 $ 526,225 We make semiannual interest payments on our 8.875% Notes on April 15 and October 15 of each year. We will make semiannual interest payments on our 6.875% Notes on May 15 and November 15 of each year. We fully paid all debt outstanding on our 7% Notes and 7% PIK Notes in 2012. Interest payments on our and Mission's senior secured 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 secured credit facilities, as well as the indentures governing our respective 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 credit facilities, obtain access to new credit facilities or otherwise issue debt in the future and could increase the cost of such debt.

Debt Covenants Our senior secured credit facility contains covenants that require us to comply with certain financial ratios, including: (a) a maximum consolidated total leverage ratio, (b) a maximum consolidated first lien indebtedness ratio, and (c) a minimum consolidated fixed charge coverage ratio. The covenants, which are calculated on a quarterly basis, include the combined results of Nexstar Broadcasting and Mission. Mission's senior secured credit facility does not contain financial covenant ratio requirements; however, it does include an event of default if Nexstar does not comply with all covenants contained in its credit agreement. The 6.875% Notes and 8.875% Notes contain restrictive covenants customary for borrowing arrangements of this type. We believe we and Mission will be able to maintain compliance with all covenants contained in the credit agreements governing our senior secured facilities and the indentures governing our respective notes for a period of at least the next twelve months from December 31, 2012.

No Off-Balance Sheet Arrangements As of December 31, 2012, 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. Our variable interests in other entities are obtained through local service agreements, which have valid business purposes and transfer certain station activities from the station owners to us. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

45 --------------------------------------------------------------------------------Contractual Obligations The following summarizes Nexstar's and Mission's contractual obligations as of December 31, 2012, and the effect such obligations are expected to have on the Company's liquidity and cash flow in future periods (in thousands): Total 2013 2014-2015 2016-2017 Thereafter Nexstar senior secured credit facility $ 246,000 $ 1,845 $ 4,920 $ 4,920 $ 234,315 Mission senior secured credit facility 44,000 330 880 880 41,910 8.875% senior secured second lien notes due 2017 325,000 - - 325,000 - 6.875% senior unsecured notes due 2020 250,000 - - - 250,000 Cash interest on debt 357,273 59,558 118,740 103,796 75,179 Broadcast rights current cash commitments(1) 7,319 4,344 2,809 166 - Broadcast rights future cash commitments 18,017 6,793 8,572 1,274 1,378 Executive employee contracts(2) 22,029 7,724 10,118 4,187 - Operating lease obligations 50,847 5,374 9,538 9,626 26,309 Total contractual cash obligations $ 1,320,485 $ 85,968 $ 155,577 $ 449,849 $ 629,091 -------------------------------------------------------------------------------- (1) Excludes broadcast rights barter payable commitments recorded on the Consolidated Financial Statements as of December 31, 2012 in the amount of $12.4 million.

(2) Includes the employment contracts for all corporate executive employees and general managers of our stations.

As of December 31, 2012, we had $3.7 million of unrecognized tax benefits. This liability represents an estimate of tax positions that the Company has taken in its tax returns which may ultimately not be sustained upon examination by the tax authorities. The resolution of these tax positions may not require cash settlement due to the existence of NOLs.

Critical Accounting Policies and Estimates Our Consolidated Financial Statements have been prepared in accordance with U.S.

GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of 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 goodwill and intangible assets, bad debts, broadcast rights, retransmission revenue, trade and barter and income taxes. 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. 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 We regularly evaluate our local service agreements and other arrangements where we may have variable interests to determine whether we are the primary beneficiary of a variable interest entity ("VIE"). 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. Accounting rules expand the definition of controlling financial interest to include factors other than equity ownership and voting rights.

In applying accounting and disclosure requirements, 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.

46-------------------------------------------------------------------------------- Mission is included in our Consolidated Financial Statements because we are deemed to have a controlling financial interest in Mission as a VIE for financial reporting purposes as a result of (1) local service agreements we have with the Mission stations, (2) our guarantee of the obligations incurred under Mission's senior secured credit facility, (3) our power over significant activities affecting Mission's economic performance, including budgeting for Mission's advertising revenue, advertising sales and hiring and firing of sales force personnel and (4) purchase options granted by Mission which will permit us to acquire the assets and assume the liabilities of each Mission station, subject to FCC consent. Additionally, on November 29, 2011, Mission's shareholders granted Nexstar an option to purchase any or all of Mission's stock, subject to FCC consent, for a price equal to the pro rata portion of the greater of (1) five times the stations' cash flow, as defined in the agreement, reduced by the amount of indebtedness, as defined in the agreement, or (2) $100,000. These option agreements (which expire on various dates between 2013 and 2022) are freely exercisable or assignable by Nexstar without consent by Mission or its shareholders. These purchase options expire on various dates between 2012 and 2021 and we expect them to be renewed upon expiration.

Valuation of Goodwill and Intangible Assets Intangible assets represented $491.1 million, or 51.9%, of our total assets as of December 31, 2012. Intangible assets principally include FCC licenses, goodwill and network affiliation agreements. If the fair value of these assets is less than the carrying value, we may be required to record an impairment charge.

We test the impairment of our FCC licenses annually or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment test consists of a comparison of the fair value of FCC licenses with their carrying amount on a market-by-market basis using a discounted cash flow valuation method, assuming a hypothetical startup scenario.

We test the impairment of our goodwill annually or whenever events or changes in circumstances indicate that goodwill might be impaired. The first step of the goodwill impairment test compares the fair value of the market ("reporting unit") to its carrying amount, including goodwill. We aggregate our stations by market for purposes of our goodwill and license impairment testing and we believe that our markets are most representative of our broadcast reporting units because we view, manage and evaluate our stations on a market basis. The fair value of a reporting unit is determined through the use of a discounted cash flow analysis. The valuation assumptions used in the discounted cash flow model reflect historical performance of the reporting unit and the prevailing values in the markets for broadcasters. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing an assumed purchase price allocation, using the reporting unit's fair value (as determined in the first step described above) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess but not more than the carrying value of goodwill.

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

We completed our annual test for impairment of goodwill and FCC licenses tested for impairment as of December 31, 2012 and 2011, resulting in no need for impairment charges. All of the fair values of our reporting units and FCC licenses tested for impairment exceeded their carrying amounts. In aggregate, our fair values exceeded their book values by a margin of 165.0% The assumptions used in the valuation testing have certain subjective components including anticipated future operating results and cash flows based on our own internal business plans as well as future expectations about general economic and local market conditions.

47-------------------------------------------------------------------------------- We utilized the following assumptions in our impairment testing for the years ended December 31: 2012 2011 Market growth rates 0.1 - 5.1% 0 - 5.9% Operating profit margins - FCC licenses 12.0 - 34.5% 11.5 - 33.7% Operating profit margins - goodwill 21.0 - 38.6% 20.0 - 38.7% Discount rate 10.0% 10.0% Tax rate 35.2 - 40.6% 34.0 - 40.6% Capitalization rate 7.3 - 9.0% 7.3 - 9.0% 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 collectability of our accounts receivable based on a 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. The allowance for doubtful accounts was $2.0 million and $1.3 million as of December 31, 2012 and 2011, respectively.

Broadcast Rights Carrying Amount We record Broadcast rights contracts as an asset and a liability when the license period has begun, the cost of each program is known or reasonably determinable, we have accepted the program material, and the program is available for broadcast. We consider programs that have been produced prior to our contract period to be available for broadcast, while programs that are produced throughout the contract period are recorded and amortized as they are aired. Broadcast rights are stated at the lower of unamortized cost or net realizable value. Cash broadcast rights are initially recorded at the amount paid or payable to program distributors for the limited right to broadcast the distributors' programming. Barter broadcast rights are recorded at our estimate of the fair value of the advertising time exchanged, which approximates the fair value of the programming received. The fair value of the advertising time exchanged is estimated by applying average historical rates for specific time periods. Amortization of broadcast rights is computed using the straight-line method based on the license period or programming usage, whichever period yields the shorter life. The current portion of broadcast rights represents those rights available for broadcast which will be amortized in the succeeding year.

When projected future net revenue associated with a program is less than the current carrying amount of the program broadcast rights, for example, due to poor ratings, we amortize 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, 2012, the carrying amounts of our current broadcast rights were $8.5 million and non-current broadcast rights were $8.6 million.

Retransmission Revenue We earn revenues from local cable providers, DBS services and other MVPDs for the retransmission of our broadcasts. These revenues are generally earned based on a price per subscriber of the MVPD within the retransmission area. The MVPDs report their subscriber numbers to us periodically, generally upon payment of the fees due to us. Prior to receiving the MVPD reporting, we record revenue based on management's estimate of the number of subscribers, utilizing historical levels and trends of subscribers for each MVPD.

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 fair value of the advertising time exchanged, which approximates the fair value of the program material received. The fair value of advertising time exchanged is estimated by applying average historical advertising rates for specific time periods. We recorded barter revenue of $13.8 million, $13.5 million and $12.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. Trade revenue of $8.1 million, $8.0 million and $7.7 million was recorded for the years ended December 31, 2012, 2011 and 2010, respectively. We incurred trade and barter expense of $20.8 million, $21.3 million and $19.6 million for the years ended December 31, 2012, 2011 and 2010, respectively.

48 --------------------------------------------------------------------------------Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. A valuation allowance is applied against net deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. While we have considered future taxable income 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. Section 382 of the Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. Ownership by our principal shareholder, ABRY, could limit our ability to use our NOLs. Ownership changes are evaluated as they occur.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.

We recognize interest and penalties relating to income taxes as components of income tax expense.

Recent Accounting Pronouncements Refer to Note 2 of our Consolidated Financial Statements in Part IV, Item 15(a) of this Annual Report on Form 10-K for a discussion of recently issued accounting pronouncements, including our expected date of adoption and effects on results of operations and financial position.

[ Back To Technology News's Homepage ]