NXST

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2006 for Nexstar Broadcasting Group, Inc. (Nexstar). Nexstar operates in a single reportable segment: television broadcasting. As of the reporting date, the company owned and operated 29 television stations and provided sales, programming, and other services to 17 additional stations through local service agreements, including 15 stations owned by Mission Broadcasting, Inc. (Mission), which Nexstar consolidates as a Variable Interest Entity (VIE). The company is highly leveraged and operates in markets across the United States.

Key Financial Metrics

Note: Available borrowings under credit facilities were approximately $10 million as of March 31, 2006, based on covenant calculations.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 12.2% to $59.8 million, driven by a 11.3% increase in local advertising, a 10.5% increase in national advertising, and a significant 533% surge in political advertising ($1.9 million vs. $0.3 million) due to the 2006 election cycle. Retransmission consent cash compensation also rose 302% to $2.0 million.
• Operating Income: Income from operations improved significantly to $6.1 million from $1.6 million, primarily due to revenue growth outpacing expense increases.
• Net Loss Reduction: The net loss narrowed to $7.3 million from $12.8 million. This improvement was aided by a $0.9 million decrease in interest expense following the redemption of 12% senior subordinated notes in 2005, partially offset by higher interest rates on current credit facilities.
• Operating Cash Flow Decline: Net cash provided by operating activities decreased by $5.2 million to $6.1 million. This was primarily due to a $6.2 million decrease in cash flows from interest payable and a $5.5 million decrease in cash flows from accounts receivable.
• Capital Expenditures: Capital expenditures increased to $3.0 million from $2.9 million, largely due to digital conversion costs rising to $1.2 million from $0.8 million.

Guidance, Outlook, and Risks

• Accounting Changes: Effective January 1, 2006, the company adopted SFAS No. 123(R), requiring the expensing of stock-based compensation. This resulted in $0.4 million of expense for the quarter. Management anticipates annual expense of approximately $1.6 million for 2006.
• Depreciation Impact: Due to new legislation setting a 2009 deadline for analog-to-digital transition, the company accelerated depreciation of analog transmission equipment, increasing annual depreciation expense by approximately $2.3 million.
• Network Affiliation Changes: Three UPN-affiliated stations will not join the new CW network but will instead affiliate with My Network TV in September 2006. Management does not expect a material financial impact.
• Retransmission Agreements: The company reached multi-year retransmission consent agreements with approximately 150 content distributors, expected to generate $49 million in revenue over the life of the agreements.
• Debt and Liquidity Risks: The company is highly leveraged with total debt of $644.5 million. While compliant with all debt covenants as of March 31, 2006, the company's ability to refinance or repay debt depends on future cash flows and market conditions. A significant portion of cash flow is dedicated to debt service.
• Regulatory Risks: The company faces FCC regulatory risks regarding digital television build-out deadlines and potential fines for indecent material broadcasts (a Notice of Apparent Liability for Forfeiture was issued regarding a CBS program).

Investor Verification Checklist

• Debt Covenant Compliance: Verify continued compliance with leverage and coverage ratios given the high debt load ($644.5 million) and limited available borrowing capacity ($10 million).
• Digital Conversion Costs: Monitor capital expenditure requirements for full-power digital transmission, estimated at $1.5 million per station for 36 stations.
• Political Revenue Sustainability: Assess the impact of the election cycle on revenue, as political advertising contributed significantly to Q1 2006 growth ($1.9 million).
• Stock-Based Compensation: Track the ongoing impact of SFAS 123(R) adoption on future operating expenses.
• Retransmission Consent Revenue: Confirm the realization of the projected $49 million in revenue from new retransmission agreements.
• UPN Affiliation Transition: Evaluate the financial performance of the three stations transitioning to My Network TV in September 2006.