| NEXSTAR BROADCASTING GROUP INC Item 1A Risk Factors You should carefully consider the following risk factors, which we believe are all of the significant risks related to our business, as well as the other information contained in this document |
| Risks Related to Our Operations Our substantial debt could limit our ability to grow and compete |
| As of December 31, 2005, we and Mission had dlra646dtta5 million of debt, which represented 111dtta4prca 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 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 |
| 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 19 ______________________________________________________________________ [44]Table of Contents 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 100prca owned by an independent third party |
| We have entered into various 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 |
| In addition, the sole shareholder of Mission has granted to us a purchase option to acquire the assets and liabilities of each Mission station, subject to FCC consent, for consideration equal to the greater of (1) seven times the station’s broadcast 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 we are deemed to have a controlling financial interest in them under US GAAP In order for our arrangements with Mission under the local service agreements to comply with FCC regulations, Mission maintains complete responsibility for and control over 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 |
| Except for KCPN-LP, all of the stations we operate or provide services to have network affiliation agreements––twelve stations have primary affiliation agreements with NBC, eight with CBS, nine with ABC, thirteen with Fox and three with UPN 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 and UPN 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 June 2006 through December 2014, 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 “Business––Network Affiliations |
| ” 20 ______________________________________________________________________ [45]Table of Contents On January 24, 2006, the owners of UPN and WB announced the two television networks will merge to form a new network called The CW We and Mission operate three UPN affiliated stations located in Wichita Falls, Texas; Champaign, Illinois; and Utica, New York |
| Nexstar and Mission do not believe that the loss of any of these stations’ affiliation agreements would have a material impact on revenue |
| 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, 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 has 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 |
| 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 |
| 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 |
| Sook has been instrumental in determining our strategic direction and focus |
| 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 or enter into local service agreements with 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 21 ______________________________________________________________________ [46]Table of Contents 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 15 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 |
| FCC actions may restrict our ability to create duopolies under local service agreements, which would harm our existing operations and impair our acquisition strategy |
| We have created duopolies in some of our markets 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 achieve significant operational efficiencies, 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, we cannot assure you that the FCC will 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 |
| However, if the FCC adopts a JSA attribution rule for TV stations we will be required to comply with the rule |
| 22 ______________________________________________________________________ [47]Table of Contents Cable America Corporation has alleged that Nexstar’s local service agreements with Mission give Nexstar improper control over Mission’s operations |
| 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 |
| Nexstar and Mission submitted a joint opposition to this Petition to Deny and Cable America submitted a reply |
| If the FCC challenges our existing arrangements with Mission (or our similar arrangements with Sinclair Broadcasting Group, Inc |
| ) based on this complaint and determines that our arrangements violate the FCC’s rules or 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 currently attributes toward the local television ownership limits in-market stations when one station owner programs a second in-market station pursuant to a time brokerage agreement or local marketing agreement (“TBA”), if the programmer provides more than 15 percent of the second 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 |
| FCC regulations required all commercial television stations in the United States to commence digital operations on a schedule determined by the FCC and Congress, in addition to continuing their analog operations |
| All of the television stations we and Mission own and operate are broadcasting at least a low-power digital television signal, except for KNWA, for which we have filed a request for extension of time with the FCC When the FCC acts on the extension request, we will have at least six months to complete construction of KNWA’s DTV facilities |
| If KNWA is not broadcasting a digital signal by the end of this six-month period we could be subject to sanctions, including, eventually, loss of the DTV construction permit |
| Digital transmissions were initially permitted to be low-power, but full-power transmission was required by July 1, 2005 for stations affiliated with the four largest networks (ABC, CBS, NBC and Fox) in the top one hundred markets and is required by July 1, 2006 for all other stations |
| We have filed a request for extension of time to construct full-power DTV facilities for our top four affiliates in the top one hundred market stations |
| Mission also has filed a request for such extension for its top four affiliates in the top one hundred market stations |
| For each of the stations we and Mission own and operate that do not obtain an extension of time and are not broadcasting a full-power digital signal by the deadlines set by the FCC, such station may lose its interference protection, which could have a material adverse effect on the station |
| 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-US ownership of companies that own US broadcast stations |
| Under this restriction, a US broadcast company such as ours may have no more than 25prca non-US 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 percent of our total outstanding equity |
| 23 ______________________________________________________________________ [48]Table of Contents 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 5prca 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 33prca 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 certification 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; • 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 |
| 24 ______________________________________________________________________ [49]Table of Contents 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 history of net losses |
| We and Mission had aggregate net losses of dlra48dtta7 million, dlra20dtta5 million and dlra71dtta8 million for the years ended December 31, 2005, 2004 and 2003, respectively |
| We and Mission may not be able to achieve or maintain profitability |
| 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, 2005, approximately dlra494dtta2 million, or 72dtta7prca, 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 Nodtta 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 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 intangibles assets is revised downward due to impairment, such non-cash charge could materially affect the Company’s consolidated financial position and results of operations |
| On January 24, 2006, the owners of UPN and WB announced that the two television networks will merge to form a new network called The CW We and Mission operate 3 UPN affiliated stations located in Wichita Falls, Texas; Champaign, Illinois; and Utica, New York |
| We and Mission are currently evaluating the impact the merger will have on 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 |
| 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 25 ______________________________________________________________________ [50]Table of Contents economic conditions |
| We also cannot assure you that our programming will attract sufficient targeted viewership or that we will 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 broadcasting station is able to run the advertising at agreed-upon times in the future |
| There can be no assurance that advertisers will agree to run such advertising in future time periods or that space will be available for such advertising |
| We cannot predict the duration of such preemption of local programming 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 the local impact 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 |
| It will be expensive to convert from the current analog broadcast format to the digital broadcast format |
| This conversion required an average initial capital expenditure of approximately dlra0dtta2 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 dlra1dtta5 million per station (for 38 stations) 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 dlra5dtta5 million and dlra0dtta3 million, respectively, for the years ended December 31, 2005 and 2004 |
| Stations that fail to meet the FCC’s build-out deadlines, and that have not received an extension of time from the FCC, will lose interference protection for their signals outside their low-power coverage areas |
| As of December 31, 2005, Mission’s stations WUTR, WTVO and WYOU are transmitting full-power digital signals and Nexstar’s station WBRE is transmitting a full-power digital signal |
| 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 |
| 26 ______________________________________________________________________ [51]Table of Contents 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 |
| The Satellite Home Viewer Extension and Reauthorization Act allows direct broadcast satellite television companies to continue 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 |
| EchoStar currently provides satellite carriage of our and Mission’s stations in the Abilene-Sweetwater, Amarillo, Billings, Champaign-Springfield-Decatur, Erie, Evansville, Fort Wayne, Ft |
| 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 |
| If we are unable to reach retransmission consent agreements with cable companies for the carriage of our stations’ signals, we could lose audience share and revenue |
| The Communications Act grants television broadcasters retransmission consent rights in connection with the carriage of their stations’ signal by cable companies |
| If a broadcaster chooses to exercise retransmission consent rights, a cable television system which is subject to that election may not carry a station’s signal without the broadcaster’s consent |
| This generally requires the cable system operator and the television broadcaster to negotiate the terms under which the broadcaster will consent to the cable system’s carriage of its station’s signal |
| 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 |
| The FCC can sanction us for programming broadcast on our stations which it finds to be indecent |
| In 2004, 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 currently is considering legislation that will substantially increase the maximum amount the FCC can fine broadcasters for the broadcast of indecent programming and may consider permitting the FCC to institute license revocation proceedings against any station which repeatedly violates the indecency regulations |
| 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 27 ______________________________________________________________________ [52]Table of Contents in 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 industry, and particularly the television industry, 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 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 |
| In addition, on February 19, 2002, the US Court of Appeals for the DC Circuit directed the FCC to repeal in its entirety the local television/cable cross-ownership rule, which prohibits any cable television system from carrying the signal of any television broadcast station with a predicted service area that overlaps, in whole or in part, the cable system’s service area, if the cable system (or any of its attributable principals) has an attributable interest in the television station |
| As a result of such repeal, cable systems and co-located television stations now may be commonly-owned |
| This means that the operator of a cable system that carries one of the stations we own or provide services to could become the owner of a competing station in the market |
| On June 2, 2003, the FCC eliminated its radio/television cross-ownership rule and its local television/newspaper cross-ownership rule, replacing both with a new single cross media ownership rule |
| Under this new rule, a daily newspaper, under certain circumstances, may be able to own a television station in the same market |
| This means that the owner of a local newspaper could become the owner of a competing station in the market |
| However, this rule did not become effective and, on June 24, 2004, a three-judge panel of the US Court of Appeals for the Third Circuit remanded the rule back to the FCC for further consideration |
| For more information about this rule, which also remains subject to petitions for reconsideration at the FCC and Congressional review and modification, see “Business—Federal Regulation of Television Broadcasting—Cross Media Ownership |
| ” 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 and to determine whether it should establish formal rules under which broadcasters will be required to serve the local public interest |
| 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 |