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 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 8-K

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CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

 

Date of Report (Date of earliest event reported): May 29, 2014 (May 29, 2014)

 

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GRAY TELEVISION, INC.

(Exact name of registrant as specified in its charter)

 

Georgia (State of incorporation or organization)	1-13796 (Commission File Number)		58-0285030 (IRS Employer Identification No.)
4370 Peachtree Road, NE, Atlanta, GA (Address of Principal Executive Offices)		30319 (Zip Code)

 

Registrant’s telephone number, including area code: (404) 504-9828

 

Not Applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

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Item 7.01. Regulation FD Disclosure

 

Beginning on May 29, 2014, Gray Television, Inc. (including its consolidated entities, “Gray” or the “Company”) intends to meet with and make presentations to prospective lenders in connection with a proposed senior credit facility refinancing, the proceeds of which are intended to be used to refinance the Company’s outstanding indebtedness under its existing senior credit facility and to complete the Company’s pending material acquisitions, including of certain television stations owned by Hoak Media, LLC (including its consolidated entities, “Hoak”). These presentations are expected to include certain strategic business and financial information relating to the Company’s historical and expected results of operations and financial condition (after giving effect to various completed and pending acquisitions).

 

A copy of the slides to be used in connection with such meetings and presentations is furnished as Exhibit 99.1 hereto and incorporated herein by this reference.

 

As previously disclosed, due to regulatory requirements Hoak’s 5 television stations in the Panama City and Grand Junction markets will be simultaneously divested to Nexstar Broadcasting, Inc. (“Nexstar”) and Mission Broadcasting, Inc. (Mission”).

 

The Company is also furnishing herewith the following historical consolidated financial statements of Hoak (which consolidated financial statements include financial information and results of operations of the stations that will be sold to Nexstar or Mission and will not be retained by Gray):

 

•     Hoak Media, LLC unaudited consolidated statements of operations for the three months ended March 31, 2014 and 2013, unaudited consolidated balance sheets as of March 31, 2014 and December 31, 2013, and unaudited statements of cash flows for the three months ended March 31, 2014 and 2013;

 

•     Hoak Media, LLC and subsidiaries audited consolidated financial statements and report of independent certified public accountants as of December 31, 2013 and 2012, and for the years then ended; and

 

•     Hoak Media, LLC and subsidiaries audited consolidated financial statements and report of independent certified public accountants as of December 31, 2012 and 2011, and for the years then ended.

 

The foregoing consolidated financial statements of Hoak are attached hereto as Exhibits 99.2, 99.3 and 99.4, respectively, and are incorporated herein by this reference.

 

The information set forth under this Item 7.01 is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

 

 

Item 9.01.     Financial Statements and Exhibits.

 

(d)                                Exhibits.

 

Number		Exhibit
99.1		Prospective lender meeting slides
99.2		Hoak Media, LLC unaudited consolidated statements of operations for the three months ended March 31, 2014 and 2013, unaudited consolidated balance sheets as of March 31, 2014 and December 31, 2013, and unaudited consolidated statements of cash flows for the three months ended March 31, 2014 and 2013
99.3		Hoak Media, LLC and subsidiaries audited consolidated financial statements and report of independent certified public accountants as of December 31, 2013 and 2012, and for the years then ended
99.4		Hoak Media, LLC and subsidiaries audited consolidated financial statements and report of independent certified public accountants as of December 31, 2012 and 2011, and for the years then ended

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

		GRAY TELEVISION, INC.
Date: May 29, 2014	By:	/s/ James C. Ryan
		Name: James C. Ryan Title: Chief Financial Officer and Senior Vice President

 

 

exhibit list

 

Number		Exhibit
99.1		Prospective lender meeting slides
99.2		Hoak Media, LLC unaudited consolidated statements of operations for the three months ended March 31, 2014 and 2013, unaudited consolidated balance sheets as of March 31, 2014 and December 31, 2013, and unaudited consolidated statements of cash flows for the three months ended March 31, 2014 and 2013
99.3		Hoak Media, LLC and subsidiaries audited consolidated financial statements and report of independent certified public accountants as of December 31, 2013 and 2012, and for the years then ended
99.4		Hoak Media, LLC and subsidiaries audited consolidated financial statements and report of independent certified public accountants as of December 31, 2012 and 2011, and for the years then ended

 

 

- 5 -

 

Exhibit 99.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 99.2

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

 

 

		March 31, 2014				December 31, 2013
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash		$	3,032,660			$	3,778,402
Accounts receivable, net of allowance for doubtful accounts of $293,011 and $288,516 as of March 31, 2014 and December 31, 2013, respectively			13,412,805				14,938,806
Prepaid expenses and other current assets			367,989				440,173
Income tax receivable			136,750				8,112
Deferred income taxes, net			21,301				19,417
Assets of discontinued operations			1,259,525				1,331,478
Total current assets			18,231,030				20,516,388
PROPERTY AND EQUIPMENT, at cost
Land			3,259,972				3,259,972
Buildings and improvements			11,026,273				10,966,461
Towers			12,306,589				12,287,084
Transmitters and antennas			18,865,556				18,776,438
Broadcast equipment			31,382,110				30,672,148
Other			5,185,986				5,168,169
			82,026,486				81,130,272
Accumulated depreciation			(54,500,711	)			(53,202,042	)
PROPERTY AND EQUIPMENT, net			27,525,775				27,928,230
INTANGIBLE ASSETS, net			116,355,341				116,412,583
GOODWILL			37,826,986				37,826,986
ASSETS OF DISCONTINUED OPERATIONS			3,835,380				3,835,380
OTHER NONCURRENT ASSETS, net			2,275,488				2,386,638
Total assets		$	206,050,000			$	208,906,205

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS - CONTINUED

 

 

		March 31, 2014				December 31, 2013
		(Unaudited)
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	499,188			$	839,420
Accrued liabilities			4,585,794				5,104,692
Deferred revenue			132,782				811,752
Current portion of notes payable			13,000,000				13,000,000
Accrued interest			103,069				121,674
Accrued income taxes			43,691				-
Liabilities of discontinued operations			1,846,202				2,064,620
Total current liabilities			20,210,726				21,942,158
NOTES PAYABLE, net of current portion			131,169,441				136,946,294
DEFERRED INCOME TAXES, net			14,951,097				15,011,373
LIABILITIES OF DISCONTINUED OPERATIONS			6,379,321				6,379,321
Total liabilities			172,710,585				180,279,146
COMMITMENTS AND CONTINGENCIES
MEMBERS’ EQUITY
Members’ interests			40,247,186				35,539,054
Noncontrolling interest			(6,907,771	)			(6,911,995	)
Total members’ equity			33,339,415				28,627,059
Total liabilities and members’ equity		$	206,050,000			$	208,906,205

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

Three Months Ended March 31,

 

 

		2014				2013
		(Unaudited)
Gross revenue
Local and regional advertising		$	12,540,664			$	12,348,730
National advertising			3,383,951				3,415,643
Political advertising			642,992				87,267
Barter and other revenue			7,280,675				6,162,656
Gross revenue			23,848,282				22,014,296
Commissions
Agency commissions			1,792,056				1,762,652
National representative commissions			211,635				182,396
Total commissions			2,003,691				1,945,048
Net revenue			21,844,591				20,069,248
Operating expenses
Program and production			3,080,654				2,808,780
News			2,353,443				2,137,578
Technical			896,834				810,677
Sales and promotion			2,048,169				1,999,315
General and administrative			3,294,927				3,223,088
Depreciation and amortization			1,355,930				1,531,576
Barter and other operating expenses			705,760				713,344
Total operating expenses			13,735,717				13,224,358
Operating income			8,108,874				6,844,890
Interest expense, net			(1,697,175	)			(1,074,396	)
Other income (expense), net			2,590				(21,271	)
Income from continuing operations before income taxes			6,414,289				5,749,223
Income tax expense			(152,893	)			(431,230	)
Income from continuing operations			6,261,396				5,317,993
Income from discontinued operations			145,485				67,628
Net income			6,406,881				5,385,621
Less: Net income (loss) attributable to noncontrolling interest			42				(23,042	)
Net income attributable to Hoak Media, LLC		$	6,406,839			$	5,408,663

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Three Months Ended March 31,

 

 

		2014				2013
		(Unaudited)
Cash flows from operating activities
Net income		$	6,406,881			$	5,385,621
Net income from discontinued operations			(145,485	)			(67,628	)
Net income from continuing operations			6,261,396				5,317,993
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			1,355,930				1,531,576
Bad debt expense			28,895				12,215
(Excess) deficit of barter revenue over barter expense			(22,372	)			6,851
Noncash compensation			108,579				178,917
Loss (gain) on sale of assets			(2,621	)			21,269
Amortization of deferred financing costs			135,156				116,691
Deferred income taxes			(62,160	)			79,880
Net changes in current assets and liabilities
Accounts receivable, net			1,519,478				239,488
Prepaid expenses and other current assets			72,184				(54,668	)
Income tax receivable			(84,947	)			1,350
Accounts payable			(341,222	)			(660,883	)
Accrued liabilities			(537,493	)			(129,763	)
Deferred revenue			(678,970	)			(680,039	)
Net cash provided by operating activities, continuing operations			7,751,833				5,980,877
Net cash (used in) operating activities, discontinued operations			(108,671	)			(81,756	)
Net cash provided by operating activities			7,643,162				5,899,121
Cash flows from investing activities
Additions to property and equipment			(897,817	)			(1,142,849	)
Proceeds from sale of assets			4,205				7,208
Net cash used in investing activities, continuing operations			(893,612	)			(1,135,641	)
Net cash provided by investing activities, discontinued operations			-				-
Net cash used in investing activities			(893,612	)			(1,135,641	)

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

 

Three Months Ended March 31,

 

 

		2014				2013
		(Unaudited)
Cash flows from financing activities
Distributions		$	(1,803,104	)		$	(2,973,391	)
Deferred financing costs			(24,006	)			-
Repayment of note payable			(5,776,853	)			(3,500,000	)
Net cash used in financing activities, continuing operations			(7,603,963	)			(6,473,391	)
Net cash provided by financing activities, discontinued operations			-				-
Net cash used in financing activities			(7,603,963	)			(6,473,391	)
Net decrease in cash			(854,413	)			(1,709,911	)
Cash at beginning of year, continuing and discontinued operations			3,985,861				4,107,980
Cash at end of year, continuing operations		$	3,032,660			$	2,330,591
Cash at end of year, discontinued operations		$	98,788			$	67,478
Supplemental cash flow information
Interest paid		$	1,630,638			$	976,114
Taxes paid		$	300,000			$	350,000

 

5

 

Exhibit 99.3

 

 

Consolidated Financial Statements and Report of Independent Certified Public Accountants

Hoak Media, LLC and Subsidiaries

December 31, 2013 and 2012

 

 

Table of Contents

 

 

Report of Independent Certified Public Accountants	2
Consolidated Financial Statements
Consolidated Balance Sheets	3
Consolidated Statements of Operations	5
Consolidated Statements of Changes in Members’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9

 

 

Report of Independent Certified Public Accountants

 

 

 

 

 

The Board of Directors

Hoak Media, LLC

 

 

We have audited the accompanying consolidated financial statements of Hoak Media, LLC (a Delaware limited liability company) and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hoak Media, LLC and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Grant Thornton LLP

 

Dallas, Texas

February 27, 2014

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

 

December 31,

 

 

 

 

ASSETS		2013			2012
CURRENT ASSETS
Cash		$	3,778,402		$	3,958,746
Accounts receivable, net of allowance for doubtful accounts of $288,516 and $281,617 as of December 31, 2013 and 2012, respectively			14,938,806			13,203,212
Prepaid expenses and other current assets			440,173			455,515
Income tax receivable			8,112			7,072
Deferred income taxes, net			19,417			20,013
Assets of discontinued operations			1,331,478			1,144,732
Total current assets			20,516,388			18,789,290
PROPERTY AND EQUIPMENT, at cost
Land			3,259,972			3,259,972
Buildings and improvements			10,966,461			10,930,007
Towers			12,287,084			12,271,066
Transmitters and antennas			18,776,438			22,884,293
Broadcast equipment			30,672,148			33,159,533
Other			5,168,169			4,976,014
			81,130,272			87,480,885
Accumulated depreciation			(53,202,042	)		(56,428,376	)
PROPERTY AND EQUIPMENT, net			27,928,230			31,052,509
INTANGIBLE ASSETS, net			116,412,583			116,733,266
GOODWILL			37,826,986			37,826,986
ASSETS OF DISCONTINUED OPERATIONS			3,835,380			3,835,380
OTHER NONCURRENT ASSETS, net			2,386,638			1,991,714
Total assets		$	208,906,205		$	210,229,145

 

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

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS - CONTINUED

 

December 31,

 

 

 

LIABILITIES AND MEMBERS’ EQUITY		2013				2012
CURRENT LIABILITIES
Accounts payable		$	839,420			$	1,650,095
Accrued liabilities			5,104,692				3,635,299
Deferred revenue			811,752				885,762
Current portion of notes payable			13,000,000				12,800,000
Accrued interest			121,674				78,238
Liabilities of discontinued operations			2,064,620				1,748,023
Total current liabilities			21,942,158				20,797,417
NOTES PAYABLE, net of current portion			136,946,294				90,145,888
DEFERRED INCOME TAXES, net			15,011,373				14,692,450
LIABILITIES OF DISCONTINUED OPERATIONS			6,379,321				6,879,321
Total liabilities			180,279,146				132,515,076
COMMITMENTS AND CONTINGENCIES
MEMBERS’ EQUITY
Members’ interests			35,539,054				85,296,629
Noncontrolling interest			(6,911,995	)			(7,582,560	)
Total members’ equity			28,627,059				77,714,069
Total liabilities and members’ equity		$	208,906,205			$	210,229,145

 

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

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

Years ended December 31,

 

 

 

		2013				2012
Gross revenue
Local and regional advertising		$	51,281,034			$	49,707,815
National advertising			15,164,410				13,907,865
Political advertising			1,512,267				17,992,480
Barter and other revenue			24,664,855				19,372,474
Gross revenue			92,622,566				100,980,634
Commissions
Agency commissions			7,469,916				9,603,254
National representative commissions			856,564				1,569,481
Total commissions			8,326,480				11,172,735
Net revenue			84,296,086				89,807,899
Operating expenses
Program and production			11,479,574				9,082,462
News			8,826,209				8,644,507
Technical			3,421,934				3,319,641
Sales and promotion			8,150,816				8,011,695
General and administrative			12,910,515				12,784,825
Depreciation and amortization			5,922,190				6,525,938
Barter and other operating expenses			2,999,512				2,889,312
Total operating expenses			53,710,750				51,258,380
Operating income			30,585,336				38,549,519
Interest expense, net			(6,048,755	)			(4,021,680	)
Other (expense) income, net			(92,570	)			49,220
Income from continuing operations before income taxes			24,444,011				34,577,059
Income tax expense			(2,133,479	)			(1,973,137	)
Income from continuing operations			22,310,532				32,603,922
Income from discontinued operations			367,417				131,017
Net income			22,677,949				32,734,939
Less:  Net income (loss) attributable to noncontrolling interest			670,565				(414,551	)
Net income attributable to Hoak Media, LLC		$	22,007,384			$	33,149,490

 

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

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

 

 

 

 

		Hoak Media, LLC  Members’ Interests								Noncontrolling
		Units				Amount				Interest				Total
Balance at January 1, 2012			114,276,145			$	135,758,033			$	(7,168,009	)		$	128,590,024
Contributions			800,000				800,000				-				800,000
Noncash compensation			-				715,668				-				715,668
Distributions			-				(85,126,562	)			-				(85,126,562	)
Net income			-				33,149,490				(414,551	)			32,734,939
Balance at December 31, 2012			115,076,145				85,296,629				(7,582,560	)			77,714,069
Contributions			25,000				25,000				-				25,000
Noncash compensation			-				738,919				-				738,919
Distributions			-				(72,528,878	)			-				(72,528,878	)
Net income			-				22,007,384				670,565				22,677,949
Balance at December 31, 2013			115,101,145			$	35,539,054			$	(6,911,995	)		$	28,627,059

 

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

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years ended December 31,

 

 

 

 

 

		2013				2012
Cash flows from operating activities
Net income		$	22,677,949			$	32,734,939
Net income from discontinued operations			(367,417	)			(131,017	)
Net income from continuing operations			22,310,532				32,603,922
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			5,922,190				6,525,938
Bad debt expense			75,868				64,810
(Excess) deficit of barter revenue over barter expense			(112,323	)			10,817
Noncash compensation			738,919				715,668
Loss (gain) on sale of assets			92,569				(49,359	)
Amortization of deferred financing costs			559,692				291,603
Deferred income taxes			319,519				641,857
Net changes in current assets and liabilities
Accounts receivable, net			(1,719,290	)			(1,029,385	)
Prepaid expenses and other current assets			15,342				31,680
Income tax receivable			(1,040	)			71,840
Accounts payable			(737,088	)			829,487
Accrued liabilities			1,512,829				852,637
Deferred revenue			(74,010	)			11,327
Net cash provided by operating activities, continuing operations			28,903,709				41,572,842
Net cash provided by (used in) operating activities, discontinued operations			58,225				(312	)
Net cash provided by operating activities			28,961,934				41,572,530
Cash flows from investing activities
Additions to property and equipment			(2,649,012	)			(2,722,553	)
Proceeds from sale of assets			23,047				54,851
Net cash used in investing activities, continuing operations			(2,625,965	)			(2,667,702	)
Net cash provided by investing activities, discontinued operations			-				-
Net cash used in investing activities			(2,625,965	)			(2,667,702	)

 

 

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

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

 

Years ended December 31,

 

 

 

 

 

		2013				2012
Cash flows from financing activities
Contributions		$	25,000			$	800,000
Distributions			(72,528,878	)			(85,126,562	)
Proceeds from note payable			66,081,168				79,383,852
Deferred financing costs			(954,616	)			(2,199,231	)
Repayment of note payable			(19,080,762	)			(30,180,315	)
Net cash used in financing activities, continuing operations			(26,458,088	)			(37,322,256	)
Net cash provided by financing activities, discontinued operations			-				-
Net cash used in financing activities			(26,458,088	)			(37,322,256	)
Net (decrease) increase in cash			(122,119	)			1,582,572
Cash at beginning of year, continuing and discontinued operations			4,107,980				2,525,408
Cash at end of year, continuing operations		$	3,778,402			$	3,958,746
Cash at end of year, discontinued operations		$	207,459			$	149,234
Supplemental cash flow information
Interest paid		$	5,445,690			$	3,745,674
Taxes paid		$	1,815,000			$	1,260,000

 

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

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2013 and 2012

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Hoak Media, LLC (Hoak) is a Delaware limited liability company established in July 2003. At December 31, 2013, Hoak was owned primarily by James M. Hoak, Centennial Hoak Media, Inc., Columbia Capital and affiliates, Morgan Stanley and affiliates, and Blue Sage Capital. Hoak shall continue in existence until all or substantially all of its assets are sold or a decision to dissolve is made by members owning at least 50.1% of the outstanding units. Under the terms of the limited liability company agreement, profits and losses are allocated in accordance with respective ownership percentages. The members shall not be obligated personally for debts, obligations and liabilities of Hoak. Cash distributions are allocated in accordance with the requirements for the allocation of profit. Hoak owns and operates the following television stations:

   

Call Letters	Network Affiliation	Community Served	Hoak Operating Entity
KREX-TV	CBS	Grand Junction, CO	Hoak Media of Colorado, LLC
KREY-TV	CBS	Montrose, CO	Hoak Media of Colorado, LLC
KREG-TV	CBS	Glenwood Springs/
		Aspen, CO	Hoak Media of Colorado, LLC
KGJT-LPTV	MyNetworkTV	Grand Junction, CO	Hoak Media of Colorado, LLC
KHAS-TV	NBC	Hastings, NE	Hoak Media of Nebraska, LLC
NHAS-DT	CoziTV	Hastings, NE	Hoak Media of Nebraska, LLC
KNOP-TV	NBC	North Platte, NE	Hoak Media of Nebraska, LLC
KIIT-LPTV	FOX	North Platte, NE	Hoak Media of Nebraska, LLC
KAUZ-TV	CBS	Wichita Falls, TX	Hoak Media of Wichita Falls, L.P.
NAUZ-DT	CW	Wichita Falls, TX	Hoak Media of Wichita Falls, L.P.
KFYR-TV	NBC	Bismarck, ND	Hoak Media of Dakota, LLC
KMOT-TV	NBC	Minot, ND	Hoak Media of Dakota, LLC
KUMV-TV	NBC	Williston, ND	Hoak Media of Dakota, LLC
KQCD-TV	NBC	Dickinson, ND	Hoak Media of Dakota, LLC
NFYR-DT	MeTV	Bismarck, ND	Hoak Media of Dakota, LLC
KVLY-TV	NBC	Fargo, ND	Hoak Media of Dakota, LLC
MVLY-DT	MeTV	Fargo, ND	Hoak Media of Dakota, LLC
KSFY-TV	ABC	Sioux Falls, SD	Hoak Media of Dakota, LLC
KPRY-TV	ABC	Pierre, SD	Hoak Media of Dakota, LLC
NSFY-DT	CW	Sioux Falls, SD	Hoak Media of Dakota, LLC
KABY-TV	ABC	Aberdeen, SD	Hoak Media of Dakota, LLC
KNOE-TV	CBS	Monroe, LA	Noe Corp, L.L.C.
NNOE-DT	CW	Monroe, LA	Noe Corp, L.L.C.
KALB-TV	NBC	Alexandria, LA	Hoak Media of Alexandria, LLC
NALB-DT	CBS	Alexandria, LA	Hoak Media of Alexandria, LLC
WMBB-TV	ABC	Panama City, FL	Hoak Media of Panama City, LLC
NMBB-DT	ThisTV	Panama City, FL	Hoak Media of Panama City, LLC

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

  

 

 

NOTE 1 - DESCRIPTION OF BUSINESS - Continued

 

Hoak also operates KFQX-TV, a FOX affiliate in Grand Junction, Colorado, through a Local Marketing Agreement (“LMA”) with Parker Broadcasting, Inc. (“Parker”) and operates KXJB-TV, a CBS affiliate in Fargo, North Dakota, and KAQY-TV, an ABC affiliate in Monroe, Louisiana, through various operating agreements with Parker.

 

Effective August 1, 2009, Texhoma Broadcasting LLC began operating KAUZ-TV and NAUZ-DT (see Note 4).

 

Parker was formed in March 2004 with an initial capitalization of $10 by an unrelated party for the purpose of purchasing television stations which would be operated by Hoak. Hoak guaranteed the loan by which Parker purchased both stations. The purchase of KFQX-TV by Parker was consummated in February 2005. Concurrently, Parker granted Hoak the right to purchase KFQX-TV for $200,000, if and when the Federal Communication Commission (“FCC”) approves such purchase, and entered into an LMA with Hoak for the operation of the station for a monthly payment less certain expenses (primarily payroll, equipment leases, insurance, and maintenance) paid by Hoak on behalf of Parker. The purchase of KXJB-TV by Parker was consummated in January 2007. The purchase of KAQY-TV by Parker was consummated in October 2008. Parker granted Hoak the right to purchase KXJB-TV and KAQY-TV as part of Put and Call Option Agreements between Hoak and Parker and entered into various operating agreements with Hoak for the operation of the stations. These agreements include a Shared Services Agreement and an Advertising Representation Agreement (“Operating Agreements”) whereby Hoak receives monthly payments from Parker for operating the stations. Hoak pays Parker a management fee of $1,000 per month per station associated with the KFQX-TV, KXJB-TV and KAQY-TV agreements. Hoak’s net combined payments to Parker totaled $36,000 in both 2013 and 2012 and are estimated to be $36,000 per year for the remainder of the agreements. At December 31, 2013, Parker has no other operations. The equity of Parker and the results of operations for Parker are shown separately in the consolidated financial statements as noncontrolling interest. The consolidation of Parker represented approximately $11.2 million and $11.4 million of the total assets of the Company, as defined in Note 2, as of December 31, 2013 and 2012, respectively, and approximately $18.1 million and $19.0 million of the total liabilities of the Company as of December 31, 2013 and 2012, respectively. See Note 2.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Hoak and its wholly owned subsidiaries and the accounts of Parker (collectively, the “Company”). All intercompany accounts and transactions have been eliminated.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 

Parker’s equity investment of $10 is not sufficient to finance its operations and pay its note payable. Hoak, through its guarantee of the note payable, has the obligation to absorb losses or fund the cash requirements of Parker. In addition, Hoak has the right to receive expected residual equity returns of Parker due to the purchase options for KFQX-TV, KXJB-TV and KAQY-TV. As a result, Parker is considered to be a variable interest entity under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, requiring consolidation of Parker with Hoak.

 

Cash

 

The Company maintains cash with various domestic financial institutions. From time to time, the Company’s cash balances with its financial institutions may exceed FDIC insurance limits. Management has not experienced any losses in such accounts.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the original sales price to the customer. The Company maintains an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. On an ongoing basis, the collectability of accounts receivable is assessed based upon historical collection trends and current economic factors. The Company evaluates the collectability of specific accounts using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition, recent payment history, current economic environment, and discussions with appropriate Company personnel and with the customers directly. Accounts are written off when it is determined the receivable will not be collected.

 

Property and Equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, generally as follows:

 

		Years
Buildings and improvements				40
Towers				15
Transmitters and antennas				7
Broadcast equipment			2.5	to	5
Other			2.5	to	5

 

Depreciation expense totaled $5,601,507 and $6,057,464 for the years ended December 31, 2013 and 2012, respectively.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 

Intangible Assets

 

Intangible assets consist primarily of broadcast licenses, goodwill, acquired advertising base and network affiliation agreements. The Company’s intangible assets result from its significant business acquisitions. In connection with these acquisitions, the Company obtained appraisals of the significant assets purchased. The excess of the purchase price over the fair value of the assets acquired was recorded as goodwill. The network affiliation agreements are amortized over the expected remaining terms of the respective agreements. Amounts related to acquired advertising base are amortized over a ten-year period based on the estimated declining revenues from the advertisers existing at the date of acquisition.

 

The broadcast licenses are considered to have indefinite lives and are not amortized, but are tested for impairment annually or whenever events or changes in circumstances indicate impairment might exist, based on estimated discounted cash flows on an individual market basis. The Company concluded that no impairment of broadcast licenses existed at December 31, 2013 and 2012.

 

The Company tests the impairment of goodwill annually or whenever events or changes in circumstances indicate impairment might exist. The first step of the impairment test involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Impairment losses, if any, will be reflected in operating income or loss in the statement of operations for the period in which such losses are realized. The Company completed tests for impairment of goodwill at December 31, 2013 and 2012. The Company determined its fair value based on a discounted cash flow approach using a discount rate determined by management to be commensurate with the risk inherent in the Company. The Company concluded that no impairment of goodwill existed at December 31, 2013 and 2012.

 

Long-Lived Assets

 

The Company reviews long-lived assets and definite lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows without interest costs expected to be generated by the asset. If the carrying value of the assets exceed the expected future cash flows, impairment exists and is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets not in use and to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Considerable management judgment is necessary to estimate cash flows and expected fair values. Accordingly, it is reasonably possible that actual results could vary significantly from such estimates. The Company concluded that no impairment of long-lived assets existed at December 31, 2013 and 2012.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 

Program Rights

 

Program rights and the corresponding contractual obligations are recorded when the license period begins and the programs are available for use. The rights to broadcast syndicated programs are stated at the lower of amortized cost or net realizable value. Such rights are amortized over the life of the related contract period.

 

Accrued Expenses

 

Accrued expenses consist primarily of payroll expenses and a medical accrual. The Company is partially self-insured for medical insurance and accrues for costs related to medical claims. Total accrued claims are included in accrued expenses and represent all such reserves and the Company’s estimate for incidents that may have been incurred but not reported as of the balance sheet date. Management believes that any additional costs incurred over amounts accrued will not have a material adverse effect on the Company’s financial position or results of operations; however, actual amounts could differ.

 

Revenue Recognition

 

The Company’s principal source of revenue is local, regional, and national advertising. Revenues are recorded, net of agency and national representative commissions, when the advertising is broadcast. The Company receives compensation from cable and satellite television companies for the rights to carry its signals in their pay television services to consumers. These retransmission consent fees amounted to $16,881,391 and $12,538,405 in 2013 and 2012, respectively, and are recorded in barter and other revenue in the period the services are provided.

 

Barter Agreements

 

The Company accounts for barter transactions at the fair value of the goods or services received from customers. The Company records barter advertising revenue at the time the advertisement is aired and barter expense at the time the goods or services are used. The Company accounts for barter programs at fair value based on a calculation using the actual cash advertisements it sells within barter programs. The Company records barter program revenue and expense when the barter program is aired. Barter revenue or expense related to network programs is not recorded. Revenue and expense related to barter arrangements totaled approximately $3,076,000 and $2,964,000, respectively, in 2013, and $2,842,000 and $2,853,000, respectively, in 2012. Expense related to property and equipment received in barter transactions is included in depreciation and amortization expense as the related assets are depreciated.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 

Income Taxes

 

Hoak and its subsidiaries other than Noe Corp are treated as partnerships for federal income tax purposes. Noe Corp is treated as a corporation for federal income tax purposes. Parker is a C corporation under federal tax law and is a tax-paying entity. Thus, federal income taxes are only payable by, and provided by, Noe Corp and Parker. Hoak’s earnings or losses generated outside of Noe Corp and Parker are included in the separate individual federal income tax returns of the members. A portion of the earnings or losses and/or the net worth of certain of the subsidiaries or divisions of Hoak are subject to state income or franchise taxes. Deferred income taxes are recognized based on temporary differences between the financial statement and the tax basis of assets and liabilities using statutory tax rates in effect in the years in which the temporary differences are expected to reverse. A valuation allowance is applied against net deferred tax assets if it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized.

 

Uncertain Tax Positions

 

The Company recognizes the financial statement benefit of a tax position only after determining the relevant tax authority would more likely than not sustain the position following an audit. Tax positions are evaluated in a two-step process. The Company first determines whether it is more-likely-than-not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not threshold, it is then measured to determine the amount of expense to record in the financial statements. The tax position is measured as the largest amount of expense that is greater than 50 percent likely to be realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

 

The Company applied the standard to all positions for which the statute of limitations remained open. As a result of the implementation, the Company had no unrecognized tax benefits, recognized no interest and penalties and had no interest and penalties accrued related to unrecognized tax benefits for 2013 and 2012.

 

Use of Estimates

 

The preparation of consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include valuation allowances for receivables, impairment of long-lived assets, and valuation of broadcast licenses and other intangible assets. Actual results could differ from those estimates.

 

Stock-Based Compensation

 

Compensation expense relating to share-based payments is recognized in net income using a fair-value measurement method. The Company uses the straight-line attribution method of recognizing compensation expense over the vesting period. The fair value of each new stock option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The Company recorded $738,919 and $715,668 of noncash compensation expense in 2013 and 2012, respectively.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 

Fair Value Measurement

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company measured financial assets and liabilities that are not otherwise measured at fair value at historical cost which resulted in no change to the Company’s consolidated financial position, results of operations or cash flows.

 

Certain financial instruments, including cash, accounts receivable and accounts payable are carried in the consolidated financial statements at amounts that approximate fair value. The carrying value of long-term debt and the revolving credit facility approximates fair value due to the variable interest rates associated with these financial instruments.

 

Noncontrolling Interest

 

ASC Topic 810-10-65 requires that noncontrolling interests be reported as a component of equity; net income attributable to the parent and the noncontrolling interest be separately identified in the consolidated results of operations; changes in a parent’s ownership interest be treated as equity transactions if control is maintained; and, upon a loss of control, any gain or loss on the interest be recognized in the consolidated results of operations. The provisions of ASC Topic 810-10-65 are reflected in the accompanying consolidated financial statements in the presentation of noncontrolling interest related to Parker.

 

 

NOTE 3 - RELATED-PARTY TRANSACTIONS

 

There were no related party transactions for the years ended December 31, 2013 and 2012.

 

 

NOTE 4 - ACQUISITIONS AND DISPOSITIONS

 

On July 31, 2009, Hoak sold certain assets of KAUZ-TV, a CBS affiliate, and NAUZ-DT a CW affiliate, operating in the Wichita Falls/Lawton market to Texhoma Broadcasting, LLC (“Texhoma”) for $10 million in cash and a promissory note from Texhoma to Hoak of $500,000. Hoak granted Texhoma the right to purchase the broadcast license as part of a Put and Call Option agreement (the “KAUZ Option Agreement”) and entered into operating agreements with Texhoma for the operation of the station, which expires in July 2014. The promissory note is due and payable on the date of the closing of the sale and acquisition of the broadcast license of KAUZ-TV per the KAUZ Option Agreement. The promissory note bears interest at a rate of 10% per annum, which is payable monthly in arrears. The purchase price of the broadcast license under the KAUZ Option Agreement is the greater of $500,000 or six times the station’s cash flow, as defined, during the year ending immediately prior to the date the exercise notice is given. The consolidated financial statements reflect the operations, assets and liabilities of KAUZ-TV and NAUZ-DT as discontinued operations for all periods presented. As a result of this transaction, the Company recorded a deferred gain of $6,379,321 in the liabilities of discontinued operations on the consolidated balance sheets.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 4 - ACQUISITIONS AND DISPOSITIONS - Continued

 

On November 20, 2013, Hoak and Parker entered into agreements to sell all television stations, excluding the KAUZ-TV broadcast license, to Gray Television, Inc. (“Gray”) and Excalibur Broadcasting, LLC (“Excalibur”), respectively, for a total of $335,000,000 plus up to $10,000,000 for working capital. This transaction is pending regulatory approval and is expected to close in the second quarter of 2014.

 

 

NOTE 5 - INTANGIBLE ASSETS

 

The following table sets forth information regarding intangible assets:

 

						December 31, 2013
		Estimated remaining useful life (years)				Cost				Accumulated amortization/ impairment				Net  book value
Amortizable:
Network affiliation agreements			0.0			$	3,439,350			$	(3,439,350	)		$	-
Advertising base			2.8				6,642,694				(5,970,194	)			672,500
Other intangibles			8.7				1,816,494				(1,150,762	)			665,732
Total amortizable							11,898,538				(10,560,306	)			1,338,232
Nonamortizable:
Broadcast licenses							115,504,449				(430,098	)			115,074,351
Goodwill							37,826,986				-				37,826,986
Total nonamortizable							153,331,435				(430,098	)			152,901,337
Total						$	165,229,973			$	(10,990,404	)		$	154,239,569

 

						December 31, 2012
		Estimated remaining useful life (years)				Cost				Accumulated amortization/ impairment				Net book value
Amortizable:
Network affiliation agreements			0.1			$	3,439,350			$	(3,408,040	)		$	31,310
Advertising base			3.5				6,642,694				(5,740,714	)			901,980
Other intangibles			9.2				1,816,494				(1,090,869	)			725,625
Total amortizable							11,898,538				(10,239,623	)			1,658,915
Nonamortizable:
Broadcast licenses							115,504,449				(430,098	)			115,074,351
Goodwill							37,826,986				-				37,826,986
Total nonamortizable							153,331,435				(430,098	)			152,901,337
Total						$	165,229,973			$	(10,669,721	)		$	154,560,252

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 5 - INTANGIBLE ASSETS - Continued

 

Amortization expense totaled $320,683 and $468,474 for the years ended December 2013 and 2012, respectively. Estimated future amortization expense of the amortizable intangible assets for the five succeeding years and thereafter is as follows:

 

For the year ending December 31:
2014		$	228,966
2015			277,074
2016			141,666
2017			94,451
2018			85,752
Thereafter			510,323
Total		$	1,338,232

 

NOTE 6 - NOTES PAYABLE

 

On January 3, 2007, the Company entered into a credit agreement with a syndicate of financial institutions led by General Electric Capital Corporation (“GE Facility”). The GE Facility provided for a Term Loan in the amount of $62,924,031. The proceeds from the GE Facility were used to consummate the acquisition of the Dakota stations.

 

On May 18, 2012, the Company amended and restated the GE Facility and provided for a Term Loan in the amount of $128,000,000. The proceeds from the GE Facility were used to fund a dividend to holders of limited liability company units and holders of options for the purpose of acquiring units. On June 5, 2013, the Company again amended and restated the GE Facility increasing the Term Loan to $164,000,000. The proceeds from the amended GE Facility were used to fund a dividend to holders of limited liability company units and holders of options for the purpose of acquiring units. The amended and restated GE Facility has a term of five years, expiring on June 5, 2018, is collateralized by all assets of the Company and provides for maximum Revolver advances, as defined, of $4,000,000. There were no outstanding borrowings on the Revolver at December 31, 2013 and 2012.

 

The Company may designate borrowings as Base Rate or LIBOR borrowings. Interest on Base Rate borrowings is computed at the prime rate, as defined, plus a margin (2.00% to 3.00% for Revolver advances and Term Loan, depending upon earnings before interest, taxes, depreciation and amortization leverage (EBITDA Leverage), as defined). Interest on LIBOR borrowings is computed at LIBOR plus a margin (3.00% to 4.00% for Revolver advances and Term Loan, depending upon EBITDA Leverage). At December 31, 2013 and 2012, the rate on Base Rate borrowings was 6.25% and 5.75%, respectively, and the rate on LIBOR borrowings was 4.17% and 3.71%, respectively. As of December 31, 2013, the Company has designated all of its borrowings as LIBOR borrowings.

 

The amended and restated GE Facility requires the Company to maintain a minimum fixed charge coverage ratio, as defined, and a maximum leverage ratio, as defined, measured on a quarter-end basis. The Company was in compliance with all covenants at December 31, 2013 and December 31, 2012.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 6 - NOTES PAYABLE - Continued

 

The Company is required to make minimum quarterly principal payments in the amount of $3,250,000. The Company is also required to prepay the amount due on the GE Facility to the extent of 50% of excess cash flow, as defined, for each fiscal year. Total principal payments for the years ended December 31, 2013 and 2012 were approximately $19.1 million and $30.2 million, respectively.

 

Minimum principal payments on the GE Facility subsequent to 2013 are estimated to be as follows:

 

Years ending December 31:
2014		$	13,000,000
2015			13,000,000
2016			13,000,000
2017			13,000,000
2018			97,946,294
Total		$	149,946,294

 

NOTE 7 - INCOME TAXES

 

Income tax expense consists of the following for the years ended December 31, 2013 and 2012:

 

		2013				2012
Current:
Federal		$	1,654,006			$	1,110,150
State			159,954				221,130
Total current		$	1,813,960			$	1,331,280
Deferred:
Federal		$	319,519			$	641,857
Total		$	2,133,479			$	1,973,137

 

  

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 7 - INCOME TAXES - Continued

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012, are presented below:

 

		2013				2012
Deferred tax assets:
Accounts receivable		$	19,417			$	20,013
Deferred financing costs			-				26,363
Total deferred tax assets		$	19,417			$	46,376
Deferred tax liabilities:
Operating agreement receivable		$	(2,586,790	)		$	(2,029,950	)
Property and equipment			(1,637,497	)			(1,886,696	)
Intangible assets			(10,787,086	)			(10,802,167	)
Total deferred tax liabilities			(15,011,373	)			(14,718,813	)
Deferred tax liability, net		$	(14,991,956	)		$	(14,672,437	)

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. The Company currently expects to realize its deferred tax assets.

 

As of December 31, 2013, the Company’s open tax years for Federal purposes extend back to 2010. For state purposes, the open tax years extend back to 2009.

 

 

NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

Program Rights

 

As of December 31, 2013 and 2012, the Company recorded a current asset and current liability of $26,059 and $23,459, respectively, representing program rights and liabilities for programs whose license period had begun and which were available for use.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 8 - COMMITMENTS AND CONTINGENCIES - Continued

 

As of December 31, 2013, the Company is committed, subject to availability, to license broadcasting rights for various programming not yet available for use as follows:

 

Years ending December 31:
2014		$	1,855,141
2015			1,517,527
2016			951,298
2017			199,204
2018			6,084

 

The obligations will be reflected in the consolidated financial statements when the license period begins and the programs are available for use.

 

Operating Leases

 

As of December 31, 2013, the Company has operating leases for various facilities with minimum payments due as follows:

 

Years ending December 31:
2014		$	441,586
2015			269,629
2016			162,173
2017			47,499
2018			38,762
Thereafter			468,993

 

Total rent expense under these agreements was $541,483 and $518,900 for 2013 and 2012, respectively.

 

Litigation

 

From time to time, the Company is a party to legal proceedings arising in the ordinary course of business. Those proceedings, if any, are not expected to have a material adverse effect on the Company’s consolidated financial statements.

 

 

NOTE 9 - RISKS AND CONCENTRATIONS

 

The industry in which the Company operates is highly competitive and rapidly changing. Significant technological changes, changes in customer demands, or the emergence of competitive products with new capabilities or technologies could adversely affect operating results. The Company’s revenues are derived primarily from local, regional, and national spot advertising. As a result of this revenue concentration, the Company’s business could be harmed by a decline in demand for, or in the prices of, advertising or as a result of, among other factors, a change in the pricing model, increased price competition, or a failure of the Company to keep up with technological change.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 9 - RISKS AND CONCENTRATIONS - Continued

 

Financial instruments subjecting the Company to concentrations of credit risk consist primarily of cash and accounts receivable.

 

The Company’s customers are concentrated in the United States. The Company performs ongoing credit evaluations, generally does not require collateral, and has established an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends, and other information.

 

 

NOTE 10 - MEMBERS’ EQUITY

 

Unit Incentive Plan

 

Hoak’s 2003 Unit Incentive Plan (the “Plan”) permits the grant of units of members’ interests or options to purchase units of members’ interests to employees or consultants of Hoak and its affiliates. Units that may be issued pursuant to the Plan shall not exceed 10% of all members’ interests at the time outstanding on a fully diluted basis. The options vest and become exercisable 20% annually beginning at the first anniversary of the grant date. The options have a ten-year life. In the event of a change in control, as defined, each outstanding option becomes immediately vested and exercisable. Hoak has the option, upon termination of employment, to repurchase vested options for an amount equal to the fair value of the underlying units less the exercise price. If not purchased upon termination, unexercised vested options expire.

 

The following represents activity in the Plan for 2013 and 2012:

 

		Number of Units				Exercise Price				Weighted- Average  Remaining Contractual Term
Outstanding at January 1, 2012			11,355,000			$	1.05				5.3
Granted			2,535,000				1.42
Exercised			(800,000	)			1.00
Outstanding at December 31, 2012			13,090,000			$	1.11				5.6
Exercised			(25,000	)			1.00
Outstanding at December 31, 2013			13,065,000			$	1.11				4.6

 

The weighted-average fair value of the 2012 option grants was $0.70 per share. The value of the 2012 option grants was estimated at the dates of grant with the following assumptions: dividend yield of 0%; expected volatility of 40%, risk-free interest rate of 0.72% and an expected life of five years. The volatility assumptions used in the Black-Scholes-Merton formula are based on the volatility of a sample of public companies within the same industry segment as Hoak.

 

 

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2013 and 2012

 

 

 

NOTE 10 - MEMBERS’ EQUITY - Continued

 

As of December 31, 2013 and 2012, there was $1,565,677 and $2,304,596, respectively, of unrecognized compensation cost related to the unvested portion of options granted under the Plan. That cost was expected to be recognized over a weighted-average period of 3.8 years and 4.2 years at December 31, 2013 and 2012, respectively.

 

As of December 31, 2013 and 2012, 10,837,085 and 9,791,072 options, respectively, were vested, 25,000 were exercised on November 4, 2013, and 800,000 were exercised on December 31, 2012. The weighted-average remaining contractual term of exercisable options at December 31, 2013 and 2012, was 3.7 years and 4.4 years, respectively. At December 31, 2013 and 2012, there were 2,314,938 and 2,289,938 options available for grant under the Plan, respectively. The total fair value and number of shares vested during 2013 was $738,919 and 1,069,000, respectively, and during 2012 was $715,668 and 1,799,150, respectively.

 

 

NOTE 11 - 401(k) PLAN

 

The Company has a 401(k) plan, under which employees who have completed six months of service may voluntarily contribute up to the maximum dollar limit set by law. The Company provided for discretionary matching contributions of 50% of the amount contributed by the employee up to the first 6% of the employee’s annual compensation. The matching contributions vest at 20% for each year of completed service and become 100% vested after five years of employment. The Company made contributions of approximately $287,000 and $274,000 during the years ended December 31, 2013 and 2012, respectively.

 

 

Note 12 - subsequent events

 

The Company has evaluated events that occurred between December 31, 2013 and February 27, 2014 (the date these financial statements were available to be issued) to determine whether any of these events required recognition or disclosure in these financial statements. On February 12, 2014, Texhoma exercised the call option to purchase all of the Company’s right, title and interest in the KAUZ-TV broadcast license for $500,000. This transaction is pending regulatory approval and is expected to close in the second quarter of 2014. No other such events took place, other than those noted in Note 4.

 

 

22

 

Exhibit 99.4

 

Consolidated Financial Statements and Report of Independent Certified Public Accountants

Hoak Media, LLC and Subsidiaries

December 31, 2012 and 2011

 

  

Table of Contents

 

 

Report of Independent Certified Public Accountants	2
Consolidated Financial Statements
Consolidated Balance Sheets	3
Consolidated Statements of Operations	5
Consolidated Statements of Changes in Members’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9

 

  

Report of Independent Certified Public Accountants

 

 

 

 

 

The Board of Directors

Hoak Media, LLC

 

 

We have audited the accompanying consolidated financial statements of Hoak Media, LLC (a Delaware limited liability company) and subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hoak Media, LLC and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

 

/s/ Grant Thornton LLP

 

Dallas, Texas

May 24, 2013

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS

 

December 31,

 

 

 

ASSETS		2012				2011
CURRENT ASSETS
Cash		$	3,958,746			$	2,389,121
Accounts receivable, net of allowance for doubtful accounts of $281,617 and $277,029 as of December 31, 2012 and 2011, respectively			13,203,212				12,270,599
Prepaid expenses and other current assets			455,515				487,195
Income tax receivable			7,072				78,912
Deferred income taxes, net			20,013				47,629
Assets of discontinued operations			1,144,732				1,103,590
Total current assets			18,789,290				16,377,046
PROPERTY AND EQUIPMENT, at cost
Land			3,259,972				3,259,972
Buildings and improvements			10,930,007				10,893,249
Towers			12,271,066				12,246,066
Transmitters and antennas			22,884,293				22,801,340
Broadcast equipment			33,159,533				30,842,574
Other			4,976,014				4,777,577
			87,480,885				84,820,778
Accumulated depreciation			(56,428,376	)			(50,449,011	)
PROPERTY AND EQUIPMENT, net			31,052,509				34,371,767
INTANGIBLE ASSETS, net			116,733,266				117,201,740
GOODWILL			37,826,986				37,826,986
PROGRAM RIGHTS			-				26,059
ASSETS OF DISCONTINUED OPERATIONS			3,835,380				3,835,380
OTHER NONCURRENT ASSETS, net			1,991,714				84,086
Total assets		$	210,229,145			$	209,723,064

     

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED BALANCE SHEETS - CONTINUED

 

December 31,

 

 

 

LIABILITIES AND MEMBERS’ EQUITY		2012				2011
CURRENT LIABILITIES
Accounts payable		$	1,650,095			$	820,608
Accrued liabilities			3,635,299				2,817,685
Deferred revenue			885,762				874,435
Current portion of notes payable			12,800,000				556,625
Accrued interest			78,238				43,215
Liabilities of discontinued operations			1,748,023				1,851,157
Total current liabilities			20,797,417				6,963,725
NOTES PAYABLE, net of current portion			90,145,888				53,185,726
PROGRAM LIABILITIES			-				26,059
DEFERRED INCOME TAXES, net			14,692,450				14,078,209
LIABILITIES OF DISCONTINUED OPERATIONS			6,879,321				6,879,321
Total liabilities			132,515,076				81,133,040
COMMITMENTS AND CONTINGENCIES
MEMBERS’ EQUITY
Members’ interests			85,296,629				135,758,033
Noncontrolling interest			(7,582,560	)			(7,168,009	)
Total members’ equity			77,714,069				128,590,024
Total liabilities and members’ equity		$	210,229,145			$	209,723,064

 

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

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

Years ended December 31,

 

 

 

		2012				2011
Gross revenue
Local and regional advertising		$	49,707,815			$	48,648,174
National advertising			13,907,865				13,849,746
Political advertising			17,992,480				1,769,513
Barter and other revenue			19,372,474				13,424,972
Gross revenue			100,980,634				77,692,405
Commissions
Agency commissions			9,603,254				6,922,801
National representative commissions			1,569,481				760,753
Total commissions			11,172,735				7,683,554
Net revenue			89,807,899				70,008,851
Operating expenses
Program and production			9,082,462				7,111,491
News			8,644,507				8,701,453
Technical			3,319,641				3,198,907
Sales and promotion			8,011,695				8,227,958
General and administrative			12,784,825				11,745,410
Depreciation and amortization			6,525,938				10,221,702
Barter and other operating expenses			2,889,312				3,105,003
Total operating expenses			51,258,380				52,311,924
Operating income			38,549,519				17,696,927
Interest expense, net			(4,021,680	)			(2,084,872	)
Other income (expense), net			49,220				(76,560	)
Income from continuing operations before income taxes			34,577,059				15,535,495
Income tax expense			(1,973,137	)			(1,188,837	)
Income from continuing operations			32,603,922				14,346,658
Income (loss) from discontinued operations			131,017				(177,840	)
Net income			32,734,939				14,168,818
Less:  Net loss attributable to noncontrolling interest			(414,551	)			(1,486,308	)
Net income attributable to Hoak Media, LLC		$	32,320,388			$	15,655,126

 

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

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

 

 

 

		Hoak Media, LLC Members’ Interests								Noncontrolling
		Units				Amount				interest				Total
Balance at January 1, 2011			114,276,145			$	124,011,872			$	(5,681,701	)		$	118,330,171
Noncash compensation			-				1,106,898				-				1,106,898
Distributions			-				(5,015,863	)			-				(5,015,863	)
Net income			-				15,655,126				(1,486,308	)			14,168,818
Balance at December 31, 2011			114,276,145				135,758,033				(7,168,009	)			128,590,024
Contributions			800,000				800,000				-				800,000
Noncash compensation			-				715,668				-				715,668
Distributions			-				(85,126,562	)			-				(85,126,562	)
Net income			-				32,320,388				414,551				32,734,939
Balance at December 31, 2012			115,076,145			$	84,467,527			$	(6,753,458	)		$	77,714,069

 

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

 

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years ended December 31,

 

 

 

		2012				2011
Cash flows from operating activities
Net income		$	32,734,939			$	14,168,818
Net (income) loss from discontinued operations			(131,017	)			177,840
Net income from continuing operations			32,603,922				14,346,658
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			6,525,938				10,221,702
Bad debt expense			64,810				99,518
(Excess) deficit of barter revenue over barter expense			10,817				(15,802	)
Noncash compensation			715,668				1,106,898
(Gain) loss on sale of assets			(49,359	)			76,495
Amortization of deferred financing costs			291,603				42,570
Deferred income taxes			641,857				524,735
Net changes in current assets and liabilities
Accounts receivable, net			(1,029,385	)			(807,173	)
Prepaid expenses and other current assets			31,680				(91,094	)
Income tax receivable			71,840				(358,912	)
Accounts payable			829,487				91,204
Accrued liabilities			852,637				(434,508	)
Deferred revenue			11,327				84,386
Net cash provided by operating activities, continuing operations			41,572,842				24,886,677
Net cash used in operating activities, discontinued operations			(312	)			(136,576	)
Net cash provided by operating activities			41,572,530				24,750,101
Cash flows from investing activities
Additions to property and equipment			(2,722,553	)			(2,408,078	)
Proceeds from sale of assets			54,851				92,426
Net cash used in investing activities, continuing operations			(2,667,702	)			(2,315,652	)
Net cash provided by investing activities, discontinued operations			-				-
Net cash used in investing activities			(2,667,702	)			(2,315,652	)

 

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

 

 

Hoak Media, LLC and Subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

 

Years ended December 31,

 

 

 

		2012				2011
Cash flows from financing activities
Contributions		$	800,000			$	-
Distributions			(85,126,562	)			(5,015,863	)
Proceeds from note payable			79,383,852				-
Deferred financing costs			(2,199,231	)			-
Repayment of note payable			(30,180,315	)			(19,144,367	)
Net cash used in financing activities, continuing operations			(37,322,256	)			(24,160,230	)
Net cash provided by financing activities, discontinued operations			-				-
Net cash used in financing activities			(37,322,256	)			(24,160,230	)
Net increase (decrease) in cash			1,582,572				(1,725,781	)
Cash at beginning of year			2,525,408				4,251,189
Cash at end of year, continuing operations		$	3,958,746			$	2,389,121
Cash at end of year, discontinued operations		$	149,234			$	136,287
Supplemental cash flow information
Interest paid		$	3,745,674			$	2,136,174
Taxes paid		$	1,260,000			$	1,025,000

 

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

 

  

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

December 31, 2012 and 2011

 

 

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Hoak Media, LLC (Hoak) is a Delaware limited liability company established in July 2003. At December 31, 2012, Hoak was owned primarily by James M. Hoak, Centennial Hoak Media, Inc., Columbia Capital and affiliates, Morgan Stanley and affiliates, and Blue Sage Capital. Hoak shall continue in existence until all or substantially all of its assets are sold or a decision to dissolve is made by members owning at least 50.1% of the outstanding units. Under the terms of the limited liability company agreement, profits and losses are allocated in accordance with respective ownership percentages. The members shall not be obligated personally for debts, obligations and liabilities of Hoak. Cash distributions are allocated in accordance with the requirements for the allocation of profit. Hoak owns and operates the following television stations:

 

Call Letters	Network Affiliation	Community Served	Hoak Operating Entity
KREX-TV	CBS	Grand Junction, CO	Hoak Media of Colorado, LLC
KREY-TV	CBS	Montrose, CO	Hoak Media of Colorado, LLC
KREG-TV	CBS	Glenwood Springs/
		Aspen, CO	Hoak Media of Colorado, LLC
KGJT-LPTV	MyNetworkTV	Grand Junction, CO	Hoak Media of Colorado, LLC
KHAS-TV	NBC	Hastings, NE	Hoak Media of Nebraska, LLC
NHAS-DT	ThisTV	Hastings, NE	Hoak Media of Nebraska, LLC
KNOP-TV	NBC	North Platte, NE	Hoak Media of Nebraska, LLC
KIIT-LPTV	FOX	North Platte, NE	Hoak Media of Nebraska, LLC
KAUZ-TV	CBS	Wichita Falls, TX	Hoak Media of Wichita Falls, L.P.
NAUZ-DT	CW	Wichita Falls, TX	Hoak Media of Wichita Falls, L.P.
KFYR-TV	NBC	Bismarck, ND	Hoak Media of Dakota, LLC
KMOT-TV	NBC	Minot, ND	Hoak Media of Dakota, LLC
KUMV-TV	NBC	Williston, ND	Hoak Media of Dakota, LLC
KQCD-TV	NBC	Dickinson, ND	Hoak Media of Dakota, LLC
KVLY-TV	NBC	Fargo, ND	Hoak Media of Dakota, LLC
MVLY-DT	MeTV	Fargo, ND	Hoak Media of Dakota, LLC
KSFY-TV	ABC	Sioux Falls, SD	Hoak Media of Dakota, LLC
KPRY-TV	ABC	Pierre, SD	Hoak Media of Dakota, LLC
NSFY-DT	CW	Sioux Falls, SD	Hoak Media of Dakota, LLC
KABY-TV	ABC	Aberdeen, SD	Hoak Media of Dakota, LLC
KNOE-TV	CBS	Monroe, LA	Noe Corp, L.L.C.
NNOE-DT	CW	Monroe, LA	Noe Corp, L.L.C.
KALB-TV	NBC	Alexandria, LA	Hoak Media of Alexandria, LLC
NALB-DT	CBS	Alexandria, LA	Hoak Media of Alexandria, LLC
WMBB-TV	ABC	Panama City, FL	Hoak Media of Panama City, LLC
NMBB-DT	ThisTV	Panama City, FL	Hoak Media of Panama City, LLC

 

Hoak also operates KFQX-TV, a FOX affiliate in Grand Junction, Colorado, through a Local Marketing Agreement (“LMA”) with Parker Broadcasting, Inc. (“Parker”) and operates KXJB-TV, a CBS affiliate in Fargo, North Dakota, and KAQY-TV, an ABC affiliate in Monroe, Louisiana, through various operating agreements with Parker.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 1 - DESCRIPTION OF BUSINESS - Continued

 

Effective August 1, 2009, Texhoma Broadcasting LLC began operating KAUZ-TV and NAUZ-DT (see Note 4).

 

Parker was formed in March 2004 with an initial capitalization of $10 by an unrelated party for the purpose of purchasing television stations which would be operated by Hoak. Hoak guaranteed the loan by which Parker purchased both stations. The purchase of KFQX-TV by Parker was consummated in February 2005. Concurrently, Parker granted Hoak the right to purchase KFQX-TV for $200,000, if and when the Federal Communication Commission (“FCC”) approves such purchase, and entered into an LMA with Hoak for the operation of the station for a monthly payment less certain expenses (primarily payroll, equipment leases, insurance, and maintenance) paid by Hoak on behalf of Parker. The purchase of KXJB-TV by Parker was consummated in January 2007. The purchase of KAQY-TV by Parker was consummated in October 2008. Parker granted Hoak the right to purchase KXJB-TV and KAQY-TV as part of Put and Call Option Agreements between Hoak and Parker and entered into various operating agreements with Hoak for the operation of the stations. These agreements include a Shared Services Agreement and an Advertising Representation Agreement (“Operating Agreements”) whereby Hoak receives monthly payments from Parker for operating the stations. Hoak pays Parker a management fee of $1,000 per month per station associated with the KFQX-TV, KXJB-TV and KAQY-TV agreements. Hoak’s net combined payments to Parker totaled $36,000 in both 2012 and 2011 and are estimated to be $36,000 per year for the remainder of the agreements. At December 31, 2012, Parker has no other operations. The equity of Parker and the results of operations for Parker are shown separately in the consolidated financial statements as noncontrolling interest. The consolidation of Parker represented approximately $11.4 million and $11.0 million of the total assets of the Company, as defined in Note 2, as of December 31, 2012 and 2011, respectively, and approximately $19.0 million and $18.2 million of the total liabilities of the Company as of December 31, 2012 and December 31, 2011, respectively. See Note 2.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

Parker’s equity investment ($10) is not sufficient to finance its operations and pay its note payable. Hoak, through its guarantee of the note payable, has the obligation to absorb losses or fund the cash requirements of Parker. In addition, Hoak has the right to receive expected residual equity returns of Parker due to the purchase options for KFQX-TV, KXJB-TV and KAQY-TV. As a result, Parker is considered to be a variable interest entity under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, requiring consolidation of Parker with Hoak.

 

The consolidated financial statements include the accounts of Hoak and its wholly owned subsidiaries and the accounts of Parker (collectively, the “Company”). All intercompany accounts and transactions have been eliminated.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 

Cash

 

The Company maintains cash with various domestic financial institutions. From time to time, the Company’s cash balances with its financial institutions may exceed FDIC insurance limits. Management has not experienced any losses in such accounts.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the original sales price to the customer. The Company maintains an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. On an ongoing basis, the collectability of accounts receivable is assessed based upon historical collection trends and current economic factors. The Company evaluates the collectability of specific accounts using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition, recent payment history, current economic environment, and discussions with appropriate Company personnel and with the customers directly. Accounts are written off when it is determined the receivable will not be collected.

 

Property and Equipment

 

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, generally as follows:

 

		Years
Buildings and improvements				40
Towers				15
Transmitters and antennas				7
Broadcast equipment			2.5	to	5
Other			2.5	to	5

 

Depreciation expense totaled $6,057,464 and $9,448,035 for the years ended December 31, 2012 and 2011, respectively.

 

Intangible Assets

 

Intangible assets consist primarily of broadcast licenses, goodwill, acquired advertising base and network affiliation agreements. The Company’s intangible assets result from its significant business acquisitions. In connection with these acquisitions, the Company obtained appraisals of the significant assets purchased. The excess of the purchase price over the fair value of the assets acquired was recorded as goodwill. The network affiliation agreements are amortized over the expected remaining terms of the respective agreements. Amounts related to acquired advertising base are amortized over a ten-year period based on the estimated declining revenues from the advertisers existing at the date of acquisition.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 

The broadcast licenses are considered to have indefinite lives and are not amortized, but are tested for impairment annually or whenever events or changes in circumstances indicate impairment might exist, based on estimated discounted cash flows on an individual market basis. The Company concluded that no impairment of broadcast licenses existed at December 31, 2012 and 2011.

 

The Company tests the impairment of goodwill annually or whenever events or changes in circumstances indicate impairment might exist. The first step of the impairment test involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the implied fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. Impairment losses, if any, will be reflected in operating income or loss in the statement of operations for the period in which such losses are realized. The Company completed tests for impairment of goodwill at December 31, 2012 and 2011. The Company determined its fair value based on a discounted cash flow approach using a discount rate determined by management to be commensurate with the risk inherent in the Company. The Company concluded that no impairment of goodwill existed at December 31, 2012 and 2011.

 

Long-Lived Assets

 

The Company reviews long-lived assets and definite lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows without interest costs expected to be generated by the asset. If the carrying value of the assets exceed the expected future cash flows, impairment exists and is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets not in use and to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Considerable management judgment is necessary to estimate cash flows and expected fair values. Accordingly, it is reasonably possible that actual results could vary significantly from such estimates. The Company concluded that no impairment of long-lived assets existed at December 31, 2012 and 2011.

 

Program Rights

 

Program rights and the corresponding contractual obligations are recorded when the license period begins and the programs are available for use. The rights to broadcast syndicated programs are stated at the lower of amortized cost or net realizable value. Such rights are amortized over the life of the related contract period.

 

Accrued Expenses

 

Accrued expenses consist primarily of payroll expenses and a medical accrual. The Company accrues for costs related to medical claims. Total accrued claims are included in accrued expenses and represent all such reserves and the Company’s estimate for incidents that may have been incurred but not reported as of the balance sheet date. Management believes that any additional costs incurred over amounts accrued will not have a material adverse effect on the Company’s financial position or results of operations; however, actual amounts could differ.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 

Revenue Recognition

 

The Company’s principal source of revenue is local, regional, and national advertising. Revenues are recorded, net of agency and national representative commissions, when the advertising is broadcast. The Company receives compensation from cable and satellite television companies for the rights to carry its signals in their pay television services to consumers. These retransmission consent fees amounted to $12,538,405 and $7,094,319 in 2012 and 2011, respectively, and are recorded in barter and other revenue in the period the services are provided.

 

Barter Agreements

 

The Company accounts for barter transactions at the fair value of the goods or services received from customers. The Company records barter advertising revenue at the time the advertisement is aired and barter expense at the time the goods or services are used. The Company accounts for barter programs at fair value based on a calculation using the actual cash advertisements it sells within barter programs. The Company records barter program revenue and expense when the barter program is aired. Barter revenue or expense related to network programs is not recorded. Revenue and expense related to barter arrangements totaled approximately $2,842,000 and $2,853,000, respectively, in 2012, respectively and $2,722,000 and $2,706,000, respectively, in 2011. Expense related to property and equipment received in barter transactions is included in depreciation and amortization expense as the related assets are depreciated.

 

Income Taxes

 

Hoak and its subsidiaries other than Noe Corp are treated as partnerships for federal income tax purposes. Noe Corp is treated as a corporation for federal income tax purposes. Parker is a C corporation under federal tax law and is a tax-paying entity. Thus, federal income taxes are only payable by, and provided by, Noe Corp and Parker. Hoak’s earnings or losses generated outside of Noe Corp and Parker are included in the separate individual federal income tax returns of the members. A portion of the earnings or losses and/or the net worth of certain of the subsidiaries or divisions of Hoak are subject to state income or franchise taxes. Deferred income taxes are recognized based on temporary differences between the financial statement and the tax basis of assets and liabilities using statutory tax rates in effect in the years in which the temporary differences are expected to reverse. A valuation allowance is applied against net deferred tax assets if it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized.

 

Uncertain Tax Positions

 

The Company recognizes the financial statement benefit of a tax position only after determining the relevant tax authority would more likely than not sustain the position following an audit. Tax positions are evaluated in a two-step process. The Company first determines whether it is more-likely-than-not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not threshold, it is then measured to determine the amount of expense to record in the financial statements. The tax position is measured as the largest amount of expense that is greater than 50 percent likely to be realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 

The Company applied the standard to all positions for which the statute of limitations remained open. As a result of the implementation, the Company had no unrecognized tax benefits, recognized no interest and penalties and had no interest and penalties accrued related to unrecognized tax benefits for 2012 and 2011.

 

Use of Estimates

 

The preparation of consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include valuation allowances for receivables, impairment of long-lived assets, and valuation of broadcast licenses and other intangible assets. Actual results could differ from those estimates.

 

Stock-Based Compensation

 

Compensation expense relating to share-based payments is recognized in net income using a fair-value measurement method. The Company uses the straight-line attribution method of recognizing compensation expense over the vesting period. The fair value of each new stock option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The Company recorded $715,668 and $1,106,898 of noncash compensation expense in 2012 and 2011, respectively.

 

Fair Value Measurement

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company measured financial assets and liabilities that are not otherwise measured at fair value at historical cost which resulted in no change to the Company’s consolidated financial position, results of operations or cash flows.

 

Certain financial instruments, including cash, accounts receivable and accounts payable are carried in the consolidated financial statements at amounts that approximate fair value. The carrying value of long-term debt and the revolving credit facility approximates fair value due to the variable interest rates associated with these financial instruments.

 

Noncontrolling Interest

 

ASC Topic 810-10-65 requires that noncontrolling interests be reported as a component of equity; net income attributable to the parent and the noncontrolling interest be separately identified in the consolidated results of operations; changes in a parent’s ownership interest be treated as equity transactions if control is maintained; and, upon a loss of control, any gain or loss on the interest be recognized in the consolidated results of operations. The provisions of ASC Topic 810-10-65 are reflected in the accompanying consolidated financial statements in the presentation of noncontrolling interest related to Parker.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 3 - RELATED-PARTY TRANSACTIONS

 

Until December 31, 2011 various management and operational services were provided to the Company by James M. Hoak & Co., a company controlled by James M. Hoak. The combined fees for these services were $362,548 in 2011 and were recorded in other operating expenses. There were no related party transactions for the year ended 2012.

 

 

NOTE 4 - ACQUISITIONS AND DISPOSITIONS

 

On July 31, 2009, Hoak sold certain assets of KAUZ-TV, a CBS affiliate, and NAUZ-DT a CW affiliate, operating in the Wichita Falls/Lawton market to Texhoma Broadcasting, LLC (“Texhoma”) for $10 million in cash and a promissory note from Texhoma to Hoak of $500,000. Hoak granted Texhoma the right to purchase the broadcast license as part of a Put and Call Option agreement (the “Option Agreement”) and entered into operating agreements with Texhoma for the operation of the station, which expires in October 2018. The promissory note is due and payable on the date of the closing of the sale and acquisition of the broadcast license of KAUZ-TV per the Option Agreement. The promissory note bears interest at a rate of 10% per annum, which is payable monthly in arrears. The purchase price of the broadcast license under the Option Agreement is the greater of $500,000 or six times the station’s cash flow, as defined, during the year ending immediately prior to the date the exercise notice is given. The consolidated financial statements reflect the operations, assets and liabilities of KAUZ-TV and NAUZ-DT as discontinued operations for all periods presented. As a result of this transaction, the Company recorded a deferred gain of $6,379,321 in the liabilities of discontinued operations on the consolidated balance sheets.

 

 

NOTE 5 - INTANGIBLE ASSETS

 

The following table sets forth information regarding intangible assets:

 

						December 31, 2012
		Estimated remaining useful life (years)				Cost				Accumulated amortization/ impairment				Net book value
Amortizable:
Network affiliation agreements			0.1			$	3,439,350			$	(3,408,040	)		$	31,310
Advertising base			3.5				6,642,694				(5,740,714	)			901,980
Other intangibles			9.2				1,816,494				(1,090,869	)			725,625
Total amortizable							11,898,538				(10,239,623	)			1,658,915
Nonamortizable:
Broadcast licenses							115,504,449				(430,098	)			115,074,351
Goodwill							37,826,986				-				37,826,986
Total nonamortizable							153,331,435				(430,098	)			152,901,337
Total						$	165,229,973			$	(10,669,721	)		$	154,560,252

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

 

NOTE 5 - INTANGIBLE ASSETS - Continued

 

						December 31, 2011
		Estimated remaining useful life (years)				Cost				Accumulated amortization/ impairment				Net book value
Amortizable:
Network affiliation agreements			0.2			$	3,439,350			$	(3,305,846	)		$	133,504
Advertising base			4.2				6,642,694				(5,434,320	)			1,208,374
Other intangibles			9.8				1,816,494				(1,030,983	)			785,511
Total amortizable							11,898,538				(9,771,149	)			2,127,389
Nonamortizable:
Broadcast licenses							115,504,449				(430,098	)			115,074,351
Goodwill							37,826,986				-				37,826,986
Total nonamortizable							153,331,435				(430,098	)			152,901,337
Total						$	165,229,973			$	(10,201,247	)		$	155,028,726

 

Amortization expense totaled $468,474 and $773,667 for the years ended December 2012 and 2011, respectively. Estimated future amortization expense of the amortizable intangible assets for the five succeeding years and thereafter is as follows:

 

For the year ending December 31:
2013		$	320,674
2014			228,966
2015			277,074
2016			141,666
2017			94,451
Thereafter			596,084
Total		$	1,658,915

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 6 - NOTES PAYABLE

 

On January 3, 2007, the Company entered into a credit agreement with a syndicate of financial institutions led by General Electric Capital Corporation (GE Facility). The GE Facility provided for a Term Loan in the amount of $62,924,031. The proceeds from the GE Facility were used to consummate the acquisition of the Dakota stations.

 

On May 18, 2012, the Company amended and restated the GE Facility and provided for a Term Loan in the amount of $128,000,000. The proceeds from the GE Facility were used to fund a dividend to holders of limited liability company units and holders of options for the purpose of acquiring units. The amended and restated GE Facility has a term of five years, expiring on May 18, 2017, is collateralized by all assets of the Company and provides for maximum Revolver advances, as defined, of $4,000,000. There were no outstanding borrowings on the Revolver at December 31, 2012 and 2011.

 

The Company may designate borrowings as Base Rate or LIBOR borrowings. Interest on Base Rate borrowings is computed at the prime rate, as defined, plus a margin (2.00% to 3.00% for Revolver advances and Term Loan, depending upon earnings before interest, taxes, depreciation and amortization leverage (EBITDA Leverage), as defined). Interest on LIBOR borrowings is computed at LIBOR plus a margin (3.00% to 4.00% for Revolver advances and Term Loan, depending upon EBITDA Leverage). At December 31, 2012 and 2011, the rate on Base Rate borrowings was 5.75% and 5.00%, respectively, and the rate on LIBOR borrowings was 3.71% and 3.04%, respectively. As of December 31, 2012, the Company has designated all of its borrowings as LIBOR borrowings.

 

The amended and restated GE Facility requires the Company to maintain a minimum fixed charge coverage ratio, as defined, and a maximum leverage ratio, as defined, measured on a quarter-end basis. The Company was in compliance with all covenants at December 31, 2012 and the respective covenants at December 31, 2011.

 

The Company is required to make minimum quarterly payments in the amount of $3,200,000. The Company is also required to prepay the amount due on the GE Facility to the extent of 50% of excess cash flow, as defined, for each fiscal year. Total principal payments for the years ended December 31, 2012 and 2011 were approximately $30.2 million and $19.1 million, respectively.

 

Minimum principal payments on the GE Facility subsequent to 2012 are estimated to be as follows:

 

Years ending December 31:
2013		$	12,800,000
2014			12,800,000
2015			12,800,000
2016			12,800,000
2017			51,745,888
Total		$	102,945,888

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 7 - INCOME TAXES

 

Income tax expense consists of the following for the years ended December 31, 2012 and 2011:

 

		2012				2011
Current		$	1,331,280			$	664,102
Deferred			641,857				524,735
		$	1,973,137			$	1,188,837

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011, are presented below:

 

		2012				2011
Deferred tax assets:
Accounts receivable		$	20,013			$	18,827
Net operating loss carryforward			-				28,802
Deferred financing costs			26,363				50,528
Total deferred tax assets			46,376				98,157
Deferred tax liabilities:
Operating agreement receivable			(2,029,950	)			(1,477,733	)
Property and equipment			(1,886,696	)			(2,190,461	)
Intangible assets			(10,802,167	)			(10,460,543	)
Total deferred tax liabilities			(14,718,813	)			(14,128,737	)
Deferred tax liability, net		$	(14,672,437	)		$	(14,030,580	)

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which those temporary differences become deductible. The Company currently expects to realize its deferred tax assets.

 

As of December 31, 2012, the Company has open tax years for Federal purposes extend back to 2009. For state purposes, the open tax years extend back to 2008.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 8 - COMMITMENTS AND CONTINGENCIES

 

Program Rights

 

As of December 31, 2012 and 2011, the Company recorded a long-term asset and liability of $-0- and $26,059, respectively, representing program rights and liabilities for programs whose license period had begun and which were available for use. As of December 31, 2012 and 2011, the current portion of the asset and liability, in the amount of $23,459 and $35,296, respectively, is included in other current assets and accrued liabilities on the consolidated balance sheets.

 

As of December 31, 2012, the Company is committed, subject to availability, to license broadcasting rights for various programming not yet available for use as follows:

 

Years ending December 31:
2013		$	1,983,869
2014			1,281,951
2015			725,166
2016			17,857
2017			9,528
Thereafter			5,200

 

The obligations will be reflected in the consolidated financial statements when the license period begins and the programs are available for use.

 

Operating Leases

 

As of December 31, 2012, the Company has operating leases for various facilities with minimum payments due as follows:

 

Years ending December 31:
2013		$	436,996
2014			315,580
2015			242,694
2016			140,818
2017			29,877
Thereafter			444,646

 

Total rent expense under these agreements was $518,900 and $503,319 for 2012 and 2011, respectively.

 

Litigation

 

From time to time, the Company is a party to legal proceedings arising in the ordinary course of business. Those proceedings, if any, are not expected to have a material adverse effect on the Company’s consolidated financial statements.

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

 

NOTE 9 - RISKS AND CONCENTRATIONS

 

The industry in which the Company operates is highly competitive and rapidly changing. Significant technological changes, changes in customer demands, or the emergence of competitive products with new capabilities or technologies could adversely affect operating results. The Company’s revenues are derived primarily from local, regional, and national spot advertising. As a result of this revenue concentration, the Company’s business could be harmed by a decline in demand for, or in the prices of, advertising or as a result of, among other factors, a change in the pricing model, increased price competition, or a failure of the Company to keep up with technological change.

 

Financial instruments subjecting the Company to concentrations of credit risk consist primarily of cash and accounts receivable.

 

The Company’s customers are concentrated in the United States. The Company performs ongoing credit evaluations, generally does not require collateral, and has established an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends, and other information.

 

 

NOTE 10 - MEMBERS’ EQUITY

 

Unit Incentive Plan

 

Hoak’s 2003 Unit Incentive Plan (the Plan) permits the grant of units of members’ interests or options to purchase units of members’ interests to employees or consultants of Hoak and its affiliates. Units that may be issued pursuant to the Plan shall not exceed 10% of all members’ interests at the time outstanding on a fully diluted basis. The options vest and become exercisable 20% annually beginning at the first anniversary of the grant date. The options have a ten-year life. In the event of a change in control, as defined, each outstanding option becomes immediately vested and exercisable. Hoak has the option, upon termination of employment, to repurchase vested options for an amount equal to the fair value of the underlying units less the exercise price. If not purchased upon termination, unexercised vested options expire.

 

The following represents activity in the Plan for 2012 and 2011:

 

		Number of Units				Exercise Price				Weighted- Average  Remaining Contractual Term
Outstanding at January 1, 2011			11,285,000			$	1.03				6.1
Granted		200,000					1.68
Forfeitures		(130,000		)			1.03
Outstanding at December 31, 2011			11,355,000				1.05				5.3
Granted		2,535,000					1.96
Exercised		(800,000		)			1.00
Outstanding at December 31, 2012			13,090,000			$	1.22				3.7

 

 

Hoak Media, LLC and Subsidiaries

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

 

December 31, 2012 and 2011

 

 

NOTE 10 - MEMBERS’ EQUITY - Continued

 

The weighted-average fair value of the 2012 and 2011 option grants was $0.70 and $0.92 per share, respectively. The value of the 2012 and 2011 option grants was estimated at the dates of grant with the following assumptions: dividend yield of 0%; expected volatility between 40% and 69%, risk-free interest rate between 0.72% and 2.16% and an expected life of five years. The volatility assumptions used in the Black-Scholes-Merton formula are based on the volatility of a sample of public companies within the same industry segment as Hoak.

 

As of December 31, 2012 and 2011, there was $2,304,596 and $1,238,757, respectively, of unrecognized compensation cost related to the unvested portion of options granted under the Plan. That cost was expected to be recognized over a weighted-average period of 3.8 years and 2.1 years at December 31, 2012 and 2011, respectively.

 

As of December 31, 2012 and 2011, 10,537,072 and 8,773,850 options, respectively, were vested and 800,000 were exercised on December 31, 2012. The weighted-average remaining contractual term of exercisable options at December 31, 2012 and 2011, was 3.7 years and 5.0 years, respectively. At December 31, 2012 and 2011, there were 2,289,938 and 3,720,738 options available for grant under the Plan, respectively. The total fair value and number of shares vested during 2012 was $715,668 and 1,799,150, respectively, and during 2011 the total fair value and number of shares vested was $1,099,287 and 1,774,150, respectively.

 

 

NOTE 11 - 401(k) PLAN

 

The Company has a 401(k) plan, under which employees who have completed six months of service and are at least 21 years of age may voluntarily contribute up to the maximum dollar limit set by law. The Company provided for discretionary matching contributions of 50% of the amount contributed by the employee up to the first 6% of the employee’s annual compensation. The matching contributions vest at 20% for each year of completed service and become 100% vested after five years of employment. The Company made contributions of approximately $274,000 and $250,000 during the years ended December 31, 2012 and 2011, respectively.

 

 

Note 12 - subsequent events

 

The Company has evaluated events that occurred between December 31, 2012 and May 24, 2013 (the date these financial statements were available to be issued) to determine whether any of these events required recognition or disclosure in these financial statements. No such events took place.

 

 

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