10-K 1 a07-5330_210k.htm 10-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2006

or

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

For the transition period from: Not Applicable

Commission file number 1-14776

Hearst-Argyle Television, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

 

74-2717523

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

300 West 57th Street

 

 

New York, NY 10019

 

(212) 887-6800

(Address of principal
executive offices)

 

(Registrant’s telephone number,
including area code)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class

 

Name of Each Exchange On Which Registered

Series A Common Stock,
par value $.01 per share

 

New York Stock Exchange

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

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

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

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

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

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

Large accelerated filer o

Accelerated Filer x

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company. Yes o  No x

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates on June 30, 2006 based on the closing price for the registrant’s Series A Common Stock on such date as reported on the New York Stock Exchange (the “NYSE”), was approximately $327,954,902.

Shares of the registrant’s Common Stock outstanding as of February 15, 2007: 93,293,318 shares (consisting of 51,994,670 shares of Series A Common Stock and 41,298,648 shares of Series B Common Stock).

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement relating to the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14).

 




FORWARD-LOOKING STATEMENTS

This report includes or incorporates forward-looking statements. We base these forward-looking statements on our current expectations and projections about future events. These forward-looking statements generally can be identified by the use of statements that include phrases such as “anticipate”, “will”, “may”, “likely”, “plan”, “believe”, “expect”, “intend”, “project”, “forecast” or other such similar words and/or phrases. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained in this report, concerning, among other things, trends and projections involving revenue, income, earnings, cash flow, liquidity, operating expenses, assets, liabilities, capital expenditures, dividends and capital structure, involve risks and uncertainties, and are subject to change based on various important factors. Those factors include the impact on our operations from

·       Changes in Federal regulations that affect us, including changes in Federal communications laws or regulations;

·       Local regulatory actions and conditions in the areas in which our stations operate;

·       Competition in the broadcast television markets we serve;

·       Our ability to obtain quality programming for our television stations;

·       Successful integration of television stations we acquire;

·       Pricing fluctuations in local and national advertising;

·       Changes in national and regional economies;

·       Our ability to service and refinance our outstanding debt;

·       Changes in advertising trends and our advertisers’ financial condition; and

·       Volatility in programming costs, industry consolidation, technological developments, and major world events.

For a discussion of additional risk factors that are particular to our business, please refer to Part I, Item 1A. “Risk Factors” beginning on page 17. These and other matters we discuss in this report, or in the documents we incorporate by reference into this report, may cause actual results to differ from those we describe. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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HEARST-ARGYLE TELEVISION, INC.

2006 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I

Item 1.

 

Business

 

4

 

Item 1A.

 

Risk Factors

 

17

 

Item 1B.

 

Unresolved Staff Comments

 

24

 

Item 2.

 

Properties

 

24

 

Item 3.

 

Legal Proceedings

 

26

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

26

 

PART II

Item 5.

 

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

 

27

 

Item 6.

 

Selected Financial Data

 

30

 

Item 7.

 

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

 

32

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 

49

 

Item 8.

 

Financial Statements and Supplementary Data

 

50

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

88

 

Item 9A.

 

Controls and Procedures

 

88

 

Item 9B.

 

Other Information

 

89

 

PART III

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

90

 

Item 11.

 

Executive Compensation

 

90

 

Item 12.

 

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

 

90

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

90

 

Item 14.

 

Principal Accounting Fees and Services

 

90

 

PART IV

Item 15.

 

Exhibits and Financial Statement Schedules

 

90

 

 

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PART I

ITEM 1.                BUSINESS

General

Hearst-Argyle Television, Inc. (the “Company” or “we”) is one of the country’s largest independent, or non-network-owned, television station groups. Headquartered in New York City, we own or manage 29 television stations reaching approximately 20.2 million, or approximately 18.1%, of television households in the United States. Our 13 ABC-affiliated television stations, which reach 8.3% of U.S. television households, represent the largest ABC affiliate group. Our 10 NBC-affiliated television stations, which reach 7.2% of U.S. television households, represent the second largest NBC affiliate group. We own two CBS-affiliated television stations, one CW station and one MyNetworkTV station, and we also manage one CW station and one independent station for The Hearst Corporation (“Hearst”). Our primary objective is to maximize the revenue and profits of our media properties by optimizing audience ratings and market share. We believe that local news leadership, the effective showcasing of network and syndicated programs, and serving our local communities, drive market-competitive ratings, revenue share and station and Website profitability. We are a leader in the convergence of local broadcast television and the Internet through our investment in, and operating agreement with, Internet Broadcasting, which operates a nation-wide network of television Websites. Our stations’ Websites typically provide news, weather, community information, user generated content and entertainment content to our audience. Our stations’ Websites attracted a combined average of 3.9 million unique viewers and generated 106.9 million average page views per month during 2006. Also, as part of our ongoing initiative to explore additional uses of our digital spectrum, 12 of our stations broadcast additional channels on a multicast stream in addition to their main digital channel. Our NBC-affiliated stations multicast the NBC Weather Plus Network, the first ever 24/7, all digital, local and national broadcast network, and two of our other stations launched similar station-branded multicast weather channels in 2006. We also manage two radio stations which are owned by Hearst.

We provide, through our local television stations, free over-the-air programming to our local communities. Our programming includes three main components:

·       programs produced by networks with which we are affiliated, such as ABC’s Grey’s Anatomy, NBC’s Law and Order and CBS’ CSI: Crime Scene Investigation, and special event programs like The Academy Awards, the Olympics and the Super Bowl;

·       programs that we produce at our stations, such as local news, weather, sports and entertainment; and

·       first-run syndicated programs that we acquire, such as The Oprah Winfrey Show and Entertainment Tonight.

In keeping with our commitment to serve the public interest of the local communities in which we operate, our television stations and Websites also provide public service announcements and political coverage and sponsor community service projects and other public initiatives.

Our primary source of revenue is the sale of advertising to advertisers. We seek to attract advertising customers and increase our advertiser base by delivering mass audiences in key demographics, primarily in the top 75 U.S. television markets as measured by Nielsen Media Research. We also seek to attract our television audience by providing compelling content on multiple media platforms. We provide leading local news programming and popular network and syndicated programs at each of our television stations, 20 of which are in the top 50 U.S. television markets. In addition, we seek to make our content available to our audience as they use additional content platforms, such as the Internet and portable devices, during their day. We stream a portion of our television programming, including our news and weather forecasts, and we

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publish community information, user generated content and entertainment content on our stations’ Websites. In certain markets, we have also established a mobile presence for our stations’ Websites. We believe that aligning our content offerings with audience media consumption patterns in this manner ultimately benefits our advertisers. Our advertisers benefit from a variety of marketing opportunities, including traditional spot campaigns, community events and sponsorships at our television stations, as well as on our stations’ Internet and/or mobile Websites, enabling them to reach our audience in multiple ways.

We believe that excellence in news coverage is a key determinant to developing a loyal audience, which is instrumental to a station’s competitive, operational and financial success. We focus on the coverage of local and national issues, breaking news, accurate and timely forecasting of local weather conditions and the latest information at times of emergencies, as well as coverage of political issues, candidates, debates, and elections. We typically rank either first or second (in total household ratings and by share of demographic audience, adults aged 25-54) in local morning and evening news programs in at least 19 of the 25 markets where we produce news. In addition, our television stations have been recognized with numerous local, state and national awards for outstanding news coverage. Our stations have received numerous honors in recent years, including three consecutive Walter Cronkite Awards bestowed by the University of Southern California’s Annenberg School for Communication, Edward R. Murrow Awards, George Foster Peabody Awards, Alfred I. duPont Columbia Awards, National Headliner Awards, the NAB Service to America Award, as well as numerous state and local Emmy and Associated Press honors.

We believe that capitalizing on the opportunities afforded the television industry by digital media, such as digital multi-casting, streaming on broadband, video-on-demand and mobile and other portable devices, is important to our future success. We devote substantial energy and resources to integrating such media into our business and seek investment opportunities in companies which we believe are well-positioned for emerging trends in digital media.

For the year ended December 31, 2006, we had revenue of $785.4 million, employed 3,312 full-time and part-time employees and operated in 25 U.S. markets. Information about our financial results is discussed under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 32, and presented under Item 8 “Financial Statements and Supplementary Data” beginning on page 50.

Hearst-Argyle is incorporated under the laws of the State of Delaware. Our principal executive offices are located at 300 West 57th Street, New York, New York 10019, and our main telephone number at that address is (212) 887-6800. Our Series A Common Stock is listed on the New York Stock Exchange under the ticker symbol “HTV”.

Company Background

Hearst-Argyle Television, Inc. was formed in August 1997 when Hearst combined its television broadcast group and related broadcast operations (the “Hearst Broadcast Group”) with those of Argyle Television, Inc. (“Argyle”).

Founded by William Randolph Hearst in 1887, The Hearst Corporation entered the broadcasting business in 1928 with its acquisition of radio station WSOE in Milwaukee, Wisconsin. In 1948, Hearst launched its first television station, WBAL-TV, in Baltimore, Maryland, which was the nation’s 19th television station. That same year, WLWT(TV), in Cincinnati, Ohio, later to become an Argyle station, was launched as the nation’s 20th television station and WDSU(TV), in New Orleans, Louisiana, later to be acquired by the Pulitzer Publishing Company, was launched as the nation’s 48th television station. By 1997, when Hearst and Argyle combined their broadcast operations to form our company, the two companies had a combined total of 15 owned and managed television stations and two managed radio stations.

5




Since that time, we have acquired additional television stations through asset purchase, asset exchange or merger transactions, including merger transactions in 1999 with Pulitzer Publishing Company, in which we acquired nine television stations and five radio stations, and with Kelly Broadcasting Company, in which we acquired our television stations in Sacramento, California, and a three-party asset exchange transaction in 2001 pursuant to which we sold three Phoenix, Arizona radio stations and acquired WMUR-TV, Manchester, New Hampshire. In 2004, we purchased an ABC affiliate, WMTW-TV, in Portland, Maine and in 2006, we purchased a CW affiliate, WKCF(TV), in Orlando, Florida.

We also have a strategic equity investment in Internet Broadcasting Systems, Inc. (“Internet Broadcasting”). Each of our stations has a Website for which certain services and content are produced and managed by Internet Broadcasting. Our stations’ Websites typically provide news, weather, community information, user generated content and entertainment content. These Websites are part of a nation-wide network of local Websites that we and Internet Broadcasting have built with other television station groups. The Internet Broadcasting network provides local Internet coverage of 57 markets, reaching 65% of U.S. households. We also have a strategic equity investment in Ripe Digital Entertainment, Inc. (“Ripe TV”), an advertising-supported free digital video-on-demand program service for distribution via multiple platforms, including digital cable, broadband, and cell phones. In addition, we have a minority interest in the Arizona Diamondbacks major league baseball team, which we acquired in the Pulitzer transaction.

As of February 15, 2007, Hearst owned, through its wholly-owned subsidiaries, Hearst Holdings, Inc., a Delaware corporation (“Hearst Holdings”), and Hearst Broadcasting, Inc., a Delaware corporation (“Hearst Broadcasting”), 100% of the issued and outstanding shares of our Series B Common Stock, par value $.01 per share, (the “Series B Common Stock,” and together with our Series A Common Stock, par value $.01 per share, the “Series A Common Stock,” the “Common Stock”) and approximately 52.9% of the issued and outstanding shares of our Series A Common Stock, representing in the aggregate approximately 73.75% of the outstanding voting power of our Common Stock (except with regard to the election of directors, which is discussed below). On February 15, 2007, Hearst Broadcasting also owned 500,000 Series B Redeemable Convertible Preferred Securities due 2021 that were issued by Hearst-Argyle Capital Trust, our wholly-owned subsidiary trust. Hearst Broadcasting may convert the Series B Redeemable Convertible Preferred Securities into 986,131 shares of our Series A Common Stock, representing in the aggregate approximately 1.9% of the outstanding voting power of our Common Stock (except with respect to the election of directors, which is discussed below) as of February 15, 2007. Because of Hearst’s ownership, we are considered a “controlled company” under New York Stock Exchange rules.

Hearst Broadcasting’s ownership of our Series B Common Stock entitles it to elect as a class all but two members of our Board of Directors (the “Board”). The holders of our Series A Common Stock are entitled to elect the remaining two members of our Board. When Hearst combined the Hearst Broadcast Group with Argyle in August 1997, Hearst agreed that, for purposes of any vote to elect directors and for as long as it held any shares of our Series B Common Stock, it would vote any shares of Series A Common Stock that it owned only in the same proportion as the shares of Series A Common Stock not held by Hearst are voted in the election.

The Stations

We own 26 television stations. In addition, we manage three television stations (WMOR-TV in Tampa, Florida, WPBF(TV) in West Palm Beach, Florida and KCWE(TV) in Kansas City, Missouri) and two radio stations (WBAL(AM) and WIYY(FM) in Baltimore, Maryland), all of which are owned by Hearst. Of the 29 television stations we own or manage, 20 are in the top 50 of the 210 generally recognized geographic designated market areas (“DMAs”) according to Nielsen Media Research (“Nielsen”) estimates for the 2006-2007 television broadcasting season.

6




The following table sets forth certain information for each of our owned and managed television stations as of December 31, 2006:

Station

 

 

 

Market

 

Market
Rank(1)

 

Network
Affiliation(2)

 

Analog
Channel

 

Digital
Channel(3)

 

Percentage
Of U.S.
Television
Households(4)

 

WCVB

 

Boston, MA

 

 

7

 

 

 

ABC

 

 

 

5

 

 

 

20

 

 

 

2.130

%

 

WMUR

 

Manchester, NH(5)

 

 

7

 

 

 

ABC

 

 

 

9

 

 

 

59

 

 

 

 

 

WMOR

 

Tampa, FL

 

 

12

 

 

 

IND

 

 

 

32

 

 

 

19

 

 

 

1.577

%

 

WESH

 

Orlando, FL

 

 

19

 

 

 

NBC

 

 

 

2

 

 

 

11

 

 

 

1.254

%

 

WKCF

 

Orlando, FL(6)

 

 

19

 

 

 

CW

 

 

 

18

 

 

 

17

 

 

 

 

 

KCRA

 

Sacramento, CA

 

 

20

 

 

 

NBC

 

 

 

3

 

 

 

35

 

 

 

1.229

%

 

KQCA

 

Sacramento, CA(7)

 

 

20

 

 

 

MNT

 

 

 

58

 

 

 

46

 

 

 

 

 

WTAE

 

Pittsburgh, PA

 

 

22

 

 

 

ABC

 

 

 

4

 

 

 

51

 

 

 

1.045

%

 

WBAL

 

Baltimore, MD

 

 

24

 

 

 

NBC

 

 

 

11

 

 

 

59

 

 

 

0.985

%

 

KMBC

 

Kansas City, MO

 

 

31

 

 

 

ABC

 

 

 

9

 

 

 

7

 

 

 

0.820

%

 

KCWE

 

Kansas City, MO(8)

 

 

31

 

 

 

CW

 

 

 

29

 

 

 

31

 

 

 

 

 

WLWT

 

Cincinnati, OH

 

 

33

 

 

 

NBC

 

 

 

5

 

 

 

35

 

 

 

0.797

%

 

WISN

 

Milwaukee, WI

 

 

34

 

 

 

ABC

 

 

 

12

 

 

 

34

 

 

 

0.793

%

 

WYFF

 

Greenville, SC

 

 

36

 

 

 

NBC

 

 

 

4

 

 

 

59

 

 

 

0.742

%

 

WPBF

 

West Palm Beach, FL

 

 

38

 

 

 

ABC

 

 

 

25

 

 

 

16

 

 

 

0.693

%

 

WGAL

 

Lancaster, PA

 

 

41

 

 

 

NBC

 

 

 

8

 

 

 

58

 

 

 

0.641

%

 

KOAT

 

Albuquerque, NM

 

 

45

 

 

 

ABC

 

 

 

7

 

 

 

21

 

 

 

0.595

%

 

KOCO

 

Oklahoma City, OK

 

 

46

 

 

 

ABC

 

 

 

5

 

 

 

7

 

 

 

0.595

%

 

WXII

 

Greensboro, NC

 

 

47

 

 

 

NBC

 

 

 

12

 

 

 

31

 

 

 

0.593

%

 

WLKY

 

Louisville, KY

 

 

48

 

 

 

CBS

 

 

 

32

 

 

 

26

 

 

 

0.582

%

 

WDSU

 

New Orleans, LA

 

 

54

 

 

 

NBC

 

 

 

6

 

 

 

43

 

 

 

0.509

%

 

KITV

 

Honolulu, HI

 

 

72

 

 

 

ABC

 

 

 

4

 

 

 

40

 

 

 

0.376

%

 

KCCI

 

Des Moines, IA

 

 

73

 

 

 

CBS

 

 

 

8

 

 

 

31

 

 

 

0.375

%

 

WMTW

 

Portland-Auburn, ME

 

 

74

 

 

 

ABC

 

 

 

8

 

 

 

46

 

 

 

0.367

%

 

KETV

 

Omaha, NE

 

 

75

 

 

 

ABC

 

 

 

7

 

 

 

20

 

 

 

0.362

%

 

WAPT

 

Jackson, MS

 

 

87

 

 

 

ABC

 

 

 

16

 

 

 

21

 

 

 

0.309

%

 

WPTZ/WNNE

 

Plattsburgh, NY/
Burlington, VT

 

 

90

 

 

 

NBC

 

 

 

5/31

 

 

 

14/25

 

 

 

0.294

%

 

KHBS/KHOG

 

Fort Smith/
Fayetteville, AR

 

 

102

 

 

 

ABC

 

 

 

40/29

 

 

 

21/15

 

 

 

0.252

%

 

KSBW

 

Monterey-Salinas, CA

 

 

124

 

 

 

NBC

 

 

 

8

 

 

 

10

 

 

 

0.196

%

 

 

 

TOTAL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18.111

%

 


(1)          Television market rank is based on the relative size of the DMAs (defined by Nielsen as geographic markets for the sale of national “spot” and local advertising time) among the 210 generally recognized DMAs in the United States, based on Nielsen estimates for the 2006-2007 season.

(2)          ABC refers to the ABC Television Network; CBS refers to the CBS Television Network; IND refers to an independent station not affiliated with a network; NBC refers to the NBC Television Network; CW refers to The CW Network, formed by the 2006 merger of the UPN and WB networks; MNT refers to MyNetworkTV, launched in 2006 by the Fox Broadcasting Company.

(3)          Our television stations are required to transition from analog television service to digital television service by February 17, 2009. At present, all of our stations are operating both analog and digital channels (with the exception of WDSU, which is in the process of reconstructing its digital

7




transmission facility due to damage sustained from Hurricane Katrina, and KMAU (satellite of KITV), which is permitted to flash cut to digital on its current analog channel at the end of the digital transition). At the end of the transition, each station must operate with only one digital channel; however, this channel may be subdivided into several sub-channels containing different content. In 2005, each station was required to elect a channel for operation after the digital transition. The elected channel is either the station’s current analog channel, current digital channel, or it may be a new channel. The FCC has tentatively approved the channel elections of each of our stations. Notwithstanding a station’s ultimate digital channel, during and after the digital transition, stations may maintain their local brand identification associated with their analog channel number through use of the Program and System Information Protocol (“PSIP”). In general and as required by the FCC, PSIP works in conjunction with digital receivers and associates a station’s digital channel with the station’s analog channel number. For example, WCVB, which operates on analog channel 5 and digital channel 20, uses channel 5 as its “major” PSIP channel, and viewers access the station’s digital channel by tuning to channel 5 on their digital receivers. Due to PSIP, the fact that WCVB’s digital station technically operates on channel 20 is not apparent to the viewer.

(4)          Based on Nielsen estimates for the 2006-2007 season.

(5)          Because WMUR and WCVB are in the same DMA, the FCC counts audience reach in this DMA only once for the two stations.

(6)          Because WESH and WKCF are in the same DMA, the FCC counts audience reach in this DMA only once for the two stations.

(7)          Because KQCA and KCRA are in the same DMA, the FCC counts audience reach in this DMA only once for the two stations.

(8)          Because KCWE and KMBC are in the same DMA, the FCC counts audience reach in this DMA only once for the two stations.

The following table sets forth certain information for each of our managed radio stations:

Station

 

 

 

Market

 

Market
Rank(1)

 

Format

WBAL(AM)

 

Baltimore, MD(2)

 

21

 

News/Talk

WIYY(FM)

 

Baltimore, MD(2)

 

21

 

Rock


(1)          Radio market rank is based on the relative size of the Metro Survey Area (defined by Arbitron as generally corresponding to the Metropolitan Statistical Areas, defined by the U.S. Office of Management and Budget) for Arbitron’s Fall 2006 Radio Market Report.

(2)          We manage WBAL(AM) and WIYY(FM) under a management agreement with Hearst.

We have an option to acquire WMOR-TV and KCWE(TV) from Hearst, at their fair market value as determined by the parties, or by an independent third-party appraisal, subject to certain specified parameters (and we may withdraw any option exercise after we receive the third-party appraisal). However, if Hearst elects to sell either station during the option period, we will have a right of first refusal to acquire that station substantially on the terms agreed upon between Hearst and the potential buyer. We also have a right of first refusal to purchase WPBF(TV) if Hearst proposes to sell the station to a third party We will exercise any option or right of first refusal related to these properties by action of our independent directors. The option periods and the rights of first refusal expire in December 2007.

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Network Affiliations

General.   Twenty-eight of our 29 owned or managed television stations are affiliated with one of the following networks pursuant to a network affiliation agreement: ABC (13 stations), NBC (10 stations), CBS (two stations), CW (two stations) and MyNetworkTV (one station). WMOR-TV in Tampa, Florida currently operates as an independent station.

Each affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the network, which constitute approximately 14 hours of programming on a typical weekday on our ABC, NBC and CBS stations. In return, the network has the right to sell a significant portion of the advertising time during those broadcasts. The duration of a majority of our stations’ affiliations with their networks has exceeded 40 years and, for certain stations, has continued for more than 50 years. Our two radio stations also have an affiliation agreement with a network that provides certain content (e.g., news and sports) for the stations. However, our radio stations are less dependent on their affiliation agreements for programming.

Network Compensation.   Historically, broadcast television networks have paid compensation to their affiliates, primarily in exchange for the broadcasting of network programming. In recent years, network compensation has been reduced and in the future may be eliminated. Our affiliation agreements with NBC and CBS provide for compensation that is weighted toward the first part of the term and declines to zero by the end of the term. In addition, more recently established networks generally have paid little or no cash compensation for the clearance of network programming or have required payment from their affiliates.

ABC.   The term of each affiliation agreement for our ABC-affiliated stations—WCVB, WMUR, WTAE, KMBC, WISN, WPBF, KOCO, KOAT, KITV, WMTW, KETV, WAPT and KHBS/KHOG—is for a period of five years, expiring December 31, 2009.

NBC.   The term of the affiliation agreement for our NBC-affiliated stations—KCRA, WESH, WBAL, WLWT, WYFF, WGAL, WDSU, WXII, WPTZ/WNNE and KSBW—is for a period of nine years, six months, expiring December 31, 2009. In addition, certain of our NBC stations have become affiliates of the NBC Weather Plus network. See “Digital Media Initiatives.”

CBS.   The term of each affiliation agreement for our CBS-affiliated stations—WLKY and KCCI—is for a period of ten years, expiring June 30, 2015.

CW.   Warner Brothers and CBS Corp., respective owners of the former WB and UPN networks, discontinued the WB and UPN networks in the fall of 2006. On September 18, 2006, Warner Brothers and CBS Corp., in a joint venture, commenced operation of a new network, The CW. Certain former WB and UPN network affiliates are now affiliated with The CW, including KCWE and WKCF. The term of each affiliation agreement for our CW-affiliated stations is for a period of five years, expiring September 18, 2011.

MyNetworkTV.   On September 5, 2006, News Corporation created a new prime-time network called MyNetworkTV. KQCA is affiliated with MyNetworkTV. The term of KQCA’s MyNetworkTV affiliation agreement is for a period of 2 years, expiring September 5, 2008.

Digital Media Initiatives

We and other television station groups have entered into operating agreements with Internet Broadcasting to operate a nation-wide network of local Websites. The Internet Broadcasting network, which covers 57 markets and reaches 65% of U.S. households, attracted on the average 12.2 million monthly unique viewers, according to Nielsen NetRatings, and generated 402.0 million average page views per month during 2006. Our stations’ local Websites are part of this national network, for which Internet Broadcasting provides content, production and management services on their technology platform. Our

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stations’ Websites typically provide news, weather, community information, user generated content and entertainment content, including live video streams of breaking news events and access to video clip archives. Our stations’ Websites attracted a combined average of 3.9 million monthly unique viewers, according to Nielsen NetRatings, and generated 106.9 million average page views per month during 2006. Three of our executive officers, Harry T. Hawks, Steven A. Hobbs and Terry Mackin, serve on the Board of Directors of Internet Broadcasting.

In addition to the Internet-based services that we and Internet Broadcasting provide, we deliver various forms of content optimized for wireless devices in 12 of our markets, including Orlando, Sacramento and Boston. We also have launched station-branded multicast weather channels in Omaha and Des Moines. We continually seek to expand and enhance our multicasting, Internet and mobile content offerings to meet the changing needs of our audience and, ultimately, to attract advertisers.

In November 2004 NBC Universal and the NBC Television Affiliates Association formed NBC Weather Plus Network LLC, a 50/50 joint venture which launched the first ever 24/7, all digital, local and national broadcast network. NBC-affiliated stations participated in the venture by investing in a limited liability company called Weather Network Affiliates Company, LLC, one of the entities which invested in NBC Weather Plus Network LLC. Stations participating in the venture broadcast 24-hour national and local weather and related community information using their digital spectrum (as a multi-cast stream which is separate from their main digital channel). We have launched NBC Weather Plus in all of our NBC markets. Terry Mackin, one of our executive officers, serves as the past Chairman of the Board of the NBC Television Affiliates Association, which is the managing member and the owner of certain ownership interests in Weather Network Affiliates Company, LLC. As past NBC Affiliate Chairman, Mr. Mackin serves as chairman of the NBC Affiliates “Futures” committee, which is responsible for developing strategic projects between NBC and the NBC Affiliates. Mr. Mackin served as the Chairman of the NBC Television Affiliates Association Board from May 2004 to May 2006. Additionally, since May 2006, Mr. Mackin has served as a member of the Board of Directors of NBC Weather Plus Network LLC.

In July 2005, we made an equity investment in Ripe TV. Ripe TV was formed in 2003 to create an advertising-supported, free, digital video-on-demand program service, consisting primarily of short-form entertainment content. Launched in October 2005, the program service targets men aged 18-34 and is available for distribution via multiple platforms, including digital cable, broadband, and cell phones. Ripe TV is currently carried on the video-on-demand tiers of both Comcast’s and Time Warner’s cable services. Two of our executive officers, Steven A. Hobbs and Terry Mackin, serve on the Board of Directors of Ripe TV.

The Commercial Television Broadcasting Industry

General.   Commercial television broadcasting began on a regular basis in the 1940s. Currently a limited number of channels are available for over-the-air broadcasting in any one geographic area, and a license to operate a television station must be granted by the FCC. All television stations in the country are grouped by Nielsen into 210 generally recognized television markets that are ranked in size based upon actual or potential audience. Each of these markets, called “Designated Market Areas” or “DMAs”, is designated as an exclusive geographic area consisting of all counties whose largest viewing share is given to stations of that same market area. Nielsen regularly publishes data on estimated audiences for the television stations in each DMA, which data is a significant factor in determining our advertising rates.

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Revenue.   Television station revenue is derived primarily from local, regional and national advertising and, to a lesser extent, from retransmission revenue (consisting of compensation paid to us by multi-channel, video program distributors (“MVPDs”) as compensation for retransmitting our stations’ signals), network compensation and other sources. Advertising rates are set based upon a variety of factors, including

·       a program’s popularity among the viewers an advertiser wishes to attract;

·       the number of advertisers competing for the available time;

·       the size and demographic makeup of the market served by the station; and

·       the availability of alternative advertising media in the market.

Also, advertising rates are determined by a station’s ratings and audience share among particular demographic groups.

Competition 

General.   Competition in the television industry takes place on three primary levels:

·       competition for audience;

·       competition for programming; and

·       competition for advertisers.

Competition for Audience.   We compete for audience on the basis of program popularity, which programming consists not only of our locally-produced news, public affairs and entertainment programming, but syndicated and network programming as well. The popularity of our programming has a significant effect on the rates we can charge our advertisers. In addition, although the commercial television broadcast industry historically has been dominated by the broadcast networks ABC, NBC, CBS and FOX, other non-broadcast networks and programming originated to be distributed solely via MVPDs, such as cable and satellite systems, have become significant competitors for the broadcast television audience. Currently, broadcast-originated programming accounts for about half of all television viewing.

In addition, while we stream a portion of our television programming, including our news and weather forecasts, and we publish community information, user generated content and entertainment content, on our stations’ Websites, and have established a mobile presence in certain of our markets, we increasingly compete for audience with other content providers who operate on these platforms, as well.

Other sources of competition for audience include

·       home entertainment and recording systems (including VCRs, DVDs, DVRs and playback systems);

·       video-on-demand and pay-per-view;

·       television game devices;

·       other sources of home entertainment.

Competition for Programming.   Competition for non-network programming involves negotiating with national program distributors or syndicators that sell first-run and off-network packages of programming. Our stations predominantly carry first-run syndicated product and compete against other local broadcast stations for exclusive local access to the most popular programs (such as The Oprah Winfrey Show, which we carry in a majority of our markets). To a lesser extent, we compete for exclusive local access to off-network reruns (such as Friends). MVPDs also compete with local stations for programming, and various national cable and satellite networks from time to time have acquired programs that otherwise would have

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been offered to local television stations. In addition, networks have recently begun to distribute their programming directly to the consumer via the Internet and portable digital devices such as video iPods and cell phones.

Competition for Advertisers.   Broadcast television stations compete for advertising revenue and marketing sponsorship with other broadcast television stations, and a station’s competitive edge is in large part determined by the success of its programming. Broadcast television stations also compete for advertising revenue with a variety of other media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, the Internet and MVPDs serving the same market.

Additional factors relevant to a television station’s competitive position include signal strength and coverage within a geographic area and assigned frequency or channel position. Television stations that broadcast over the VHF band (channels 2-13) of the spectrum historically have had a competitive advantage over television stations that broadcast over the UHF band (channels above 13) of the spectrum because the former usually have better signal coverage and operate at a lower transmission cost. However, the improvement of UHF transmitters and receivers, the complete elimination from the marketplace of VHF-only receivers, the expansion of MVPD systems (such as cable and satellite) and the commencement of and transition to digital broadcasting have reduced the VHF signal’s competitive advantage.

Seasonality, Cyclicality and Materiality of Automotive Advertising

Our business has experienced and is expected to continue to experience seasonality due to, among other things, seasonal advertising patterns and seasonal influences on people’s viewing habits. The advertising revenue of our stations is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. Additionally, advertising revenue is cyclical, benefiting in even-numbered years from advertising placed by candidates for political offices and issue-oriented advertising, and demand for advertising time in Olympic broadcasts. While political and Olympic advertising cycles have been a normal pattern for our industry for decades, the variability has become more pronounced in recent years as these respective categories of revenue have grown significantly in size. The seasonality and cyclicality inherent in our business make it difficult to estimate future operating results based on the previous results of any specific quarter.

In addition, the Company derives a material portion of its ad revenue from the automotive industry. Approximately 22% of the Company’s total revenue came from the automotive category in 2006. An increase or decrease in revenue from this category therefore may disproportionately impact our operating results.

Federal Regulation of Television Broadcasting

General.   Broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the “Communications Act”). The Communications Act requires the FCC to regulate broadcasting so as to serve “the public interest, convenience and necessity.” The Communications Act prohibits the operation of broadcast stations except pursuant to licenses issued by the FCC and empowers the FCC, among other things, to

·       issue, renew, revoke and modify broadcasting licenses;

·       assign frequency bands;

·       determine stations’ frequencies, locations and power; and

·       regulate the equipment used by stations.

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The Communications Act prohibits the assignment of a license or the transfer of control of a license without the FCC’s prior approval. The FCC also regulates certain aspects of the operation of cable television systems, direct broadcast satellite (“DBS”) systems and other electronic media that compete with broadcast stations. In addition, although the FCC has reduced its regulation of broadcast stations, the FCC continues to regulate matters such as television station ownership, network-affiliate relations, cable and DBS systems’ carriage of television station signals, carriage of syndicated and network programming on distant stations, political advertising practices and obscene and indecent programming. In recent years, the FCC and Congress have increased their regulatory focus on indecency, which may impact certain of our programming decisions.

The following discussion summarizes the federal statutes and regulations material to our operations, but does not purport to be a complete summary of all the provisions of the Communications Act or of other current or proposed statutes, regulations, and policies affecting our business. The summaries which follow should be read in conjunction with the text of the statutes, rules, regulations, orders, and decisions described herein.

License Renewals.   Under the Communications Act, the FCC generally may grant and renew broadcast licenses for terms of eight years, though licenses may be renewed for a shorter period under certain circumstances. The Communications Act requires the FCC to renew a broadcast license if the FCC finds that (i) the station has served the public interest, convenience and necessity; (ii) there have been no serious violations of either the Communications Act or the FCC’s rules and regulations by the licensee; and (iii) there have been no other serious violations that taken together constitute a pattern of abuse. In making its determination, the FCC may consider petitions to deny but cannot consider whether the public interest would be better served by issuing the license to a person other than the renewal applicant. In addition, competing applications for the same frequency may be accepted only after the FCC has denied an incumbent’s application for license renewal.

The following table provides the expiration dates for the full power station licenses of our owned and managed television stations:

Station

 

 

 

Market

 

Expiration of
FCC License

WCVB

 

Boston, MA

 

April 1, 2007*

WMUR

 

Manchester, NH(1)

 

April 1, 2007*

WMOR

 

Tampa, Fl

 

February 1, 2013

WESH

 

Orlando, FL

 

February 1, 2013

WKCF

 

Orlando, FL

 

February 1, 2013

KCRA

 

Sacramento, CA

 

December 1, 2014

KQCA

 

Sacramento, CA

 

December 1, 2006*

WTAE

 

Pittsburgh, PA

 

August 1, 2007

WBAL

 

Baltimore, MD

 

October 1, 2012

KMBC

 

Kansas City, MO

 

February 1, 2014

KCWE

 

Kansas City, MO

 

February 1, 2014

WLWT

 

Cincinnati, OH

 

October 1, 2013

WISN

 

Milwaukee, WI

 

December 1, 2005*

WYFF

 

Greenville, SC

 

December 1, 2012

WPBF

 

West Palm Beach, FL

 

February 1, 2013

WGAL

 

Lancaster, PA

 

August 1, 2007

KOAT

 

Albuquerque, NM

 

October 1, 2014

KOCT (satellite station of KOAT)**

 

Carlsbad, NM

 

October 1, 2014

KOVT (satellite station of KOAT)**

 

Silver City, NM

 

October 1, 2014

KOFT-DT (satellite station of KOAT)**

 

Farmington, NM

 

—(2)

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KOCO

 

Oklahoma City, OK

 

June 1, 2014

WXII

 

Greensboro, NC

 

December 1, 2012

WDSU

 

New Orleans, LA

 

June 1, 2013

WLKY

 

Louisville, KY

 

August 1, 2013

KITV

 

Honolulu, HI

 

February 1, 2007*

KHVO (satellite station of KITV)**

 

Hilo, HI

 

February 1, 2007*

KMAU (satellite station of KITV)**

 

Wailuku, HI

 

February 1, 2007*

KCCI

 

Des Moines, IA

 

February 1, 2014

WMTW

 

Portland-Auburn, ME

 

April 1, 2007*

KETV

 

Omaha, NE

 

June 1, 2014

WAPT

 

Jackson, MS

 

June 1, 2013

WPTZ

 

Plattsburgh, NY

 

June 1, 2007*

WNNE (satellite station of WPTZ)**

 

Burlington, VT

 

April 1, 2007*

KHBS

 

Fort Smith, AR

 

June 1, 2013

KHOG (satellite station of KHBS)**

 

Fayetteville, AR

 

June 1, 2013

KSBW

 

Monterey-Salinas, CA

 

December 1, 2014


(1)          Manchester, New Hampshire is determined by Nielsen to be a part of the Boston DMA.

(2)          Our satellite station KOFT-DT in Farmington, NM operates in digital mode only pursuant to a special temporary authority which the FCC must renew periodically.

*                    We have filed for renewal of licenses for these stations, and those applications are pending. A station’s authority to operate is automatically extended while a renewal application is on file and under review.

**             Satellite stations generally retransmit the signal of a primary station, and offer some locally originated programming.

Ownership Regulation.   The Communications Act and FCC rules limit the ability of individuals and entities to have ownership or other attributable interests in certain combinations of broadcast stations and other media. In June 2006, the FCC launched a rulemaking proceeding to promulgate new media ownership rules. This rulemaking is, in part, a response to the 2004 decision of the Third Circuit Court of Appeals, which stayed and remanded several of the ownership rule changes that the FCC had adopted in 2003. The rules adopted in 2003 would have liberalized most of the ownership rules which would have permitted us to acquire television stations in certain markets where we are currently prohibited from acquiring new stations. During the pendency of the FCC’s current rulemaking proceeding, the FCC’s pre-June 2003 broadcast ownership rules remain in effect. The FCC’s currently effective ownership rules that are material to our operations are summarized below:

·       Local Television Ownership.   Under the FCC’s current local television ownership (or “duopoly”) rule, a party may own multiple television stations without regard to signal contour overlap provided they are located in separate Nielsen DMAs. In addition, the rules permit parties to own up to two TV stations in the same DMA so long as (1) at least one of the two stations is not among the top four-ranked stations in the market based on audience share at the time an application for approval of the acquisition is filed with the FCC, and (2) at least eight independently owned and operating full-power commercial and non-commercial television stations would remain in the market after the acquisition. In addition, without regard to the number of remaining or independently owned television stations, the FCC will permit television duopolies within the same DMA so long as the Grade B signal contours of the stations involved do not overlap. Stations designated by the FCC as ‘‘satellite” stations, which are full-power stations that typically rebroadcast the programming of a ‘‘parent’’ station, are exempt from the local television ownership rule. Also, the FCC may grant a waiver of the local television ownership rule if one of the two television stations is a ‘‘failed’’ or

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‘‘failing’’ station or if the proposed transaction would result in the construction of a new television station. We are currently in compliance with the local television ownership rule.

·       National Television Ownership Cap.   The Communications Act, as amended in 2004, limits the number of television stations one entity may own nationally. Under the rule, no entity may have an attributable interest in television stations that reach, in the aggregate, more than 39% of all U.S. television households.

The FCC currently discounts the audience reach of a UHF station by 50% when computing the national television ownership cap. Further, for entities that have attributable interests in two stations in the same market, the FCC counts the audience reach of the stations in that market only once in computing the national ownership cap. The FCC is currently considering whether to retain the UHF discount. The propriety of the UHF discount will be the subject of further administrative proceedings, but the discount currently remains in effect.

·       Dual Network Rule.   The dual network rule prohibits a merger between or among any of the four major broadcast television networks—ABC, CBS, FOX and NBC.

·       Media Cross-Ownership.   The FCC’s currently effective rules prohibit the licensee of a radio or TV station from directly or indirectly owning, operating, or controlling a daily newspaper if the station’s specified service contour encompasses the entire community where the newspaper is published. While the FCC liberalized this rule in 2003, the new version of the rule remains under review and is not effective. The new rule, if it were adopted, would permit us to acquire stations in certain areas where Hearst, our controlling stockholder, owns newspapers.

The cross-ownership rules also permit cross ownership of radio and television stations under a graduated test based on the number of independently owned media voices in the local market. In large markets, (markets with at least 20 independently owned media voices), a single entity can own up to one television station and seven radio stations or, if permissible under the local television ownership rule (if eight full-power television stations would remain in the market post transaction), two television stations and six radio stations. Our television and radio stations in Baltimore, Maryland, are permanently grandfathered under this rule.

·       Attribution of Ownership.   Under the FCC’s attribution policies, the following relationships and interests generally are attributable for purposes of the FCC’s broadcast ownership restrictions:

·        holders of 5% or more of the licensee’s voting stock, unless the holder is a qualified passive investor, in which case the threshold is a 20% or greater voting stock interest;

·        all officers and directors of a licensee and its direct or indirect parent(s);

·        any equity interest in a limited partnership or limited liability company, unless properly “insulated” from management activities; and

·        equity and/or debt interests which in the aggregate exceed 33% of a licensee’s total assets, if the interest holder supplies more than 15% of the station’s total weekly programming, or is a same-market broadcast company, cable operator or newspaper (the “equity/debt plus” standard).

All non-conforming interests acquired before November 7, 1996, are permanently grandfathered and thus do not constitute attributable ownership interests.

Under the single majority shareholder exception to the FCC’s attribution policies, otherwise attributable interests under 50% are not attributable if a corporate licensee is controlled by a single majority shareholder and the minority interest holder is not otherwise attributable under the “equity/debt plus” standard. Thus, in our case, where Hearst is the single majority shareholder, ownership

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of minority stock interests of up to 33% would not be attributable absent other factors. The FCC is reviewing the single majority shareholder exception, but the exception currently remains in effect.

Digital Television Service.   The Communications Act and the FCC require television stations to transition from analog television service to digital television service. In 2006, new legislation was enacted that establishes a hard transition deadline of February 17, 2009. Until the end of the transition, in general, stations are required to operate both analog and digital facilities.

Cable and Satellite Carriage of Local Television Signals.   Pursuant to the Cable Television Consumer Protection and Competition Act of 1992 (“1992 Cable Act”) and the FCC’s “must carry” regulations, cable operators are generally required to devote up to one-third of their activated channel capacity to the carriage of the analog signals of local commercial television stations. The 1992 Cable Act also prohibits cable operators and other MVPDs from retransmitting a broadcast signal without obtaining the station’s consent. On a cable system-by-cable system basis, a local television broadcast station must make a choice once every three years whether to proceed under the “must carry” rules or to waive the right to mandatory, but uncompensated, carriage and, instead, to negotiate a grant of retransmission consent to permit the cable system to carry the station’s signal, in most cases in exchange for some form of consideration from the cable operator. In 2005, we made cable carriage elections for the three-year period January 1, 2006 to December 31, 2008. We opted to negotiate retransmission consent with most of the cable systems that carry our stations.

The Satellite Home Viewer Improvement Act of 1999 (“SHVIA”) established a compulsory copyright licensing system for the distribution of local television station signals by direct broadcast satellite systems to viewers in each DMA. Under SHVIA’s “carry-one, carry all” provision, a direct broadcast satellite system generally is required to retransmit the analog signal of all local television stations in a DMA if the system chooses to retransmit the analog signal of any local television station in that DMA. Television stations located in markets in which satellite carriage of local stations is offered may elect mandatory carriage or retransmission consent once every three years. In 2005, we made satellite carriage elections for the three-year period January 1, 2006 to December 31, 2008. We opted to negotiate retransmission consent for all satellite systems that carry our stations.

To date, the FCC has determined that cable systems generally will be required under the FCC’s “must carry” rules to carry a single programming stream transmitted by each local digital television station at the end of the digital television transition. During the transition period, cable operators are required to carry either a station’s analog signal or a single programming stream of the digital signal, but not both. Therefore, the FCC does not require cable operators to carry additional multicast programming streams that we may create using our digital spectrum. Petitions filed by the broadcast industry requesting the FCC to reconsider that decision are pending. Nonetheless, we have retransmission consent agreements with a number of cable operators and satellite carriers that require carriage of the analog and certain digital programming streams of our stations.

The Satellite Home Viewer Extension and Reauthorization Act of 2004 (“SHVERA”) extended until December 31, 2009, the separate compulsory copyright license that permits satellite carriers to retransmit distant network signals to unserved households (i.e., those households that do not receive a signal of Grade B intensity from a local network affiliate). SHVERA also created a compulsory copyright license that permits satellite carriers to retransmit a station’s signal out of its DMA into communities in which the station is “significantly viewed” (as that term is defined by the FCC).

Indecency Regulation.   Federal law and the FCC’s rules prohibit the broadcast of obscene material at any time, and the broadcast of indecent or profane material during the period from 6 a.m. through 10 p.m. In recent years, the FCC and its indecency prohibition have received much attention. In 2006, legislation was enacted that raised the maximum monetary penalty for the broadcast of obscene, indecent, or profane language to $325,000 for each “violation,” with a cap of $3 million for any “single act.”

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Employees

As of December 31, 2006, we had approximately 2,938 full-time employees and 374 part-time employees. A total of approximately 923 of our employees are represented by five unions (the American Federation of Television and Radio Artists, the International Brotherhood of Electrical Workers, the International Alliance of Theatrical Stage Employees, the Directors Guild of America, and the National Association of Broadcast Electrical Technicians). We have not experienced any significant labor problems, and believe that our relations with our employees are satisfactory.

Available Information

We maintain an Internet site at www.hearstargyle.com. We make available, free of charge, on our Internet site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the Securities and Exchange Commission (“SEC”).

Our Code of Business Conduct and Ethics, our Corporate Governance Guidelines, our Audit Committee Charter and our Compensation Committee Charter are also posted to the corporate governance section of our Internet site. In addition, you may obtain a free copy of our Code of Business Conduct and Ethics, our Corporate Governance Guidelines, or our Board committee charters that we file on our Internet site by writing to us at Hearst-Argyle Television, Inc., 300 West 57th St. New York, New York 10019, Attention: Corporate Secretary.

We also make available on our Internet site additional information, including news releases, earnings releases, archived audio Web casts and forthcoming corporate events.

ITEM 1A.        RISK FACTORS

The following discussion of risk factors contains “forward-looking statements,” as discussed on page 2 of this report. These risk factors may be important to understanding any statement in this report or elsewhere. The following information should be read in conjunction with Management’s Discussion and Analysis (MD&A), and the consolidated financial statements and related notes in this report.

We Depend Upon Network Affiliation Agreements

Each of the television stations we own or manage is a party to a network affiliation agreement giving such station the right to rebroadcast programs transmitted by the network, except WMOR-TV, in Tampa, Florida, which operates as an independent station. These affiliations are valuable to us because programs provided by the major networks are typically the most popular with audiences, which increases our ability to attract viewers to our programs, including our local newscasts. In exchange for giving us the right to rebroadcast their programs, the networks have the right to sell a substantial majority of the advertising time during such broadcasts. Thirteen of our stations are parties to affiliation agreements with ABC, 10 with NBC, two with CBS, two with CW and one with MyNetworkTV. We may fail to renew these network affiliation agreements, or we may renew them on less favorable terms than we presently have. In addition, because networks increasingly distribute their programming on other platforms, such as the Internet or portable devices, they may become less reliant upon their affiliates to distribute their programming, which could put us at a disadvantage in future contract negotiations. The termination or non-renewal, or renewal on less favorable terms, of our stations’ network affiliation agreements could adversely affect the viewership of our stations and affect our ability to sell advertising, which could materially decrease our revenue and operating results.

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We Depend Upon Networks for Programming

Our viewership levels, and ultimately advertising revenues, for each station are materially dependent upon programming which is either supplied to us by the networks or purchased by us. First, programming which the networks provide to us may not achieve or maintain satisfactory viewership levels. Specifically, because 23 of our 29 owned or managed stations are ABC or NBC affiliates, if ABC or NBC network programming fails to generate satisfactory ratings, our revenues may be adversely affected. Additionally, we purchase syndicated programming to supplement the shows supplied to us by the networks. Generally, however, before we purchase syndicated programming for our stations, this programming must first be cleared in the largest television markets—New York, Los Angeles and Chicago. Network owned and operated stations in those markets typically determine which syndicated shows will be brought to market, and therefore dictate our options for syndicated programs. If those stations do not launch new shows, or if the shows that they launch, and which in turn we acquire, fail to generate satisfactory ratings, our viewership levels may decrease and our revenues may be adversely affected

Increased Programming Costs Could Adversely Affect Our Business and Operating Results

Television programming is one of our most significant operating cost components. We may be exposed in the future to increased programming costs. Should such an increase in our programming expenses occur, it could have a material adverse effect on our operating results. In addition, television networks have been seeking arrangements with their affiliates to share the networks’ programming costs and to change the structure of network compensation. If we become party to an arrangement whereby we share our networks’ programming costs, our programming expenses would increase further. In addition, we usually acquire syndicated programming rights two or three years in advance and acquiring those rights may require multi-year commitments, making it difficult to predict accurately how a program will perform. In some instances, we must replace programs before their costs have been fully amortized, resulting in write-offs that increase station operating costs. An increase in the cost of news programming and content or in the costs for on-air and creative talent may also increase our expenses, particularly during events requiring extended news coverage, and therefore adversely affect our business and operating results. Finally, cable distributors are increasingly competing with us or the networks with which we are affiliated for the rights to carry popular sports programming, which could increase our costs, or if we were to lose the rights to broadcast such sports programming, could adversely affect our audience share and operating results.

A Decline in Advertising Expenditures Could Adversely Affect our Operating Results

We rely substantially upon sales of advertising for our revenues. Our stations compete for advertising revenues with other television stations in their respective markets. They also compete with other advertising media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, the Internet and local cable and satellite system operators. Our stations are located in highly competitive markets. Accordingly, our operating results are and will continue to be dependent upon the ability of each of our stations to compete successfully for advertising revenues in its respective market. Our ability to generate advertising revenues is and will continue to be affected by changes in the national economy, as well as by regional economic conditions in each of the markets in which our stations operate. The size of advertisers’ budgets, which are affected by broad economic trends, affect the broadcast industry in general and the revenues of individual broadcast television stations. If the economic prospects of advertisers or the economy decline, our current or prospective advertisers may purchase less advertising time from us. In addition, the occurrence of disasters, acts of terrorism, political uncertainty or hostilities could cause us to lose our ability to broadcast our television signals or, if we are able to broadcast, our broadcast operations may shift to around-the-clock news coverage, which would

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cause the loss of advertising revenues due to the suspension of advertising-supported commercial programming.

Materiality of a Single Advertising Category Could Adversely Affect Our Business

We derive a material portion of our ad revenue from the automotive industry. For example, approximately 22% of our total revenue came from the automotive category in 2006. If automotive-related advertising revenue decreases, or if revenue from another advertising category that constitutes a material portion of our stations’ revenue in a particular period were to decrease, our business and operating results could be adversely affected.

Increased Competition Due to Technological Innovation May Adversely Impact our Business

Technological innovation, and the resulting proliferation of programming alternatives such as cable, satellite television, video provided by telephone company fiber lines, satellite radio, video-on-demand, pay-per-view, the Internet, home video and entertainment systems, portable entertainment systems, and the availability of television programs on the Internet and portable digital devices have fragmented television viewing audiences and subjected television broadcast stations to new types of competition. Over the past decade, the aggregate viewership of non-network programming distributed via MVPDs such as cable television and satellite systems has increased, while the aggregate viewership of the major television networks has declined. New technologies that enable users to view content of their own choosing, in their own time, and to fast-forward or skip advertisements, such as DVRs, portable digital devices, and the Internet, may cause changes in consumer behavior that could affect the attractiveness of our offerings to advertisers. If this were to occur, our operating results could be adversely affected.

Other advances in technology, such as increasing use of local-cable advertising “interconnects,” which allow for easier insertion of advertising on local cable systems, have also increased competition for advertisers. In addition, video compression techniques permit greater numbers of channels to be carried within existing bandwidth on cable, satellite and other television distribution systems. These compression techniques, as well as other technological developments, are applicable to all video delivery systems, including digital over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences. Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized niche programming on cable, satellite and other television distribution systems. We expect this ability to reach very narrowly defined audiences to increase competition both for audience and for advertising revenue. In addition, the expansion of competition due to technological innovation has increased, and may continue to increase, competitive demand for programming. Such increased demand, together with rising production costs, may in the future increase our programming costs or impair our ability to acquire programming, which will in turn impair our ability to generate revenue from the advertisers with which we seek to do business.

We May Lose Audience Share As a Result of the Transition to Digital Television

The Communications Act and the FCC’s rules require television stations to transition from analog television service to digital television service by February 17, 2009. After that time, our analog signals will no longer be available. The United States Government Accountability Office estimates that, as of February 2005, approximately 19 percent of all U.S. households, or roughly 20.8 million households, receive television exclusively by means of analog over-the-air transmissions and do not subscribe to cable or satellite services. In addition to these households, many households that subscribe to cable or satellite services also have one or more television sets that rely on over-the-air transmissions. In total, the FCC estimates that, as of February 2005, there were approximately 73 million television sets in U.S. households that relied on over-the-air transmissions. To continue to receive our stations after the conclusion of the

19




digital television transition, households that rely on over-the-air transmissions will be required to purchase digital televisions, obtain digital to analog converter equipment, or subscribe to satellite or cable service (assuming such services will continue to offer programming for analog televisions). A significant percentage of households with analog over-the-air receivers may not desire or be able to afford to purchase digital televisions. While the federal government has created a subsidy to help such households obtain digital converters, the subsidy may not be large enough to cover all households with over-the-air receivers and some of such households may not take advantage of the subsidy. As a result, the digital transition may cause some households to lose service from our stations. And, to the extent such households elect to subscribe to satellite or cable service, the additional channels available through those services may reduce our viewership from such households. Furthermore, while digital television improves the technical quality of our over-the-air television broadcasts, the digital transition may cause a loss to a portion of our audience because digital over-the-air service areas do not necessarily replicate analog service areas in all respects. While, in many cases, a station’s digital signal covers all of the station’s analog service area, in some circumstances, conversion to digital may reduce a station’s geographical coverage area. We believe that digital television is important to our long-term viability and offers many advantages such as high definition video, multi-channel digital audio and multicast capability. However, we cannot predict the precise effect digital television might have on our stations’ viewership and our operations.

Our Inability to Secure Carriage of Our Stations by Multi-Channel Video Programming Distributors May Adversely Affect Our Business

Cable operators and direct broadcast satellite systems are generally required to carry the analog signal of local commercial television stations pursuant to the FCC’s “must carry” or “carry-one, carry-all” rules. However, these MVPDs are prohibited from carrying a broadcast signal without obtaining the station’s consent. For each distributor, a local television broadcaster must make a choice once every three years whether to proceed under the “must carry” or “carry-one, carry-all” rules or to waive the right to mandatory but uncompensated carriage and negotiate a grant of retransmission consent to permit the system to carry the station’s signal, in most cases in exchange for some form of consideration from the system operator. In 2005, we elected retransmission consent for most of our stations for the three-year period commencing on January 1, 2006. At present, we have retransmission consent agreements with the majority of operators for the period January 1, 2006, to at least December 31, 2008. If our retransmission consent agreements are terminated or not renewed, or if our broadcast signal is distributed on less favorable terms, our ability to distribute our programming could be adversely affected. In many instances, the negotiation of these agreements involves the payment of compensation to us by the MVPDs as consideration. If we are unable to satisfactorily conclude those negotiations our ability to grow our retransmission consent revenue will be adversely affected.

In addition, although cable operators generally will be required, under the FCC’s current “must carry” rules, to retransmit a single programming stream transmitted by each local digital television station at the end of the digital television transition, to date, the FCC has determined that cable operators are not required to carry both a station’s analog signal and digital signal during the transition period. Also, to date and except with respect to stations licensed to Hawaii and Alaska, the FCC has not extended its “carry-one, carry-all” rule to require satellite systems to carry a station’s digital signal. At present, we have retransmission consent agreements with a number of cable systems operators and satellite providers that require carriage of the analog and certain digital signals of our stations.

Our Business is Seasonal and Cyclical and Some Years and Quarters Therefore May Be Less Profitable Than Others

Our business has experienced and is expected to continue to experience seasonality due to, among other things, seasonal advertising patterns and seasonal influences on people’s viewing habits. The

20




advertising revenue of our stations is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. Additionally, advertising revenue is cyclical, benefiting in even-numbered years from advertising placed by candidates for political offices and issue-oriented advertising, and demand for advertising time in Olympic broadcasts. While political and Olympic advertising cycles have been a normal pattern for our industry for decades, the variability has become more pronounced in recent years as these respective categories of revenue have grown significantly in size. The seasonality and cyclicality inherent in our business make it difficult to estimate future operating results based on the previous results of any specific quarter.

The Television Industry is Highly Competitive and Our Competitors May Have Greater Resources Than We Do

The television broadcast industry is highly competitive. Some of our competitors are owned and operated by large national or regional companies that may have greater resources, including financial resources, than we have. Competition in the television industry takes place on several levels: competition for audience, competition for programming and competition for advertisers. Our stations may not be able to maintain or increase their current audience share or revenue share. To the extent that certain of our competitors have, or may in the future obtain, greater resources than we have, we may not be able to successfully compete with them.

We Have a Controlling Stockholder

The Hearst Corporation, through its beneficial ownership of our Series A and Series B Common Stock, has voting control of our company. Through its beneficial ownership of 100% of our Series B Common Stock, Hearst also is entitled to elect as a class all but two members of our Board of Directors (currently, 11 of our 13 Board seats). As a result, Hearst is able to control substantially all actions to be taken by our stockholders, and also is able to maintain control over our operations and business. In addition, Hearst has the ability to cause the redemption of our Series B Debentures, $134.0 million aggregate principal amount of which were outstanding at December 31, 2006. This control, as well as certain provisions of our Certificate of Incorporation and of Delaware law, may make us a less attractive target for a takeover than we otherwise might be, or render more difficult or discourage a merger proposal, tender offer or other transaction involving an actual or potential change of control. Hearst’s voting control also prevents other stockholders from exercising significant influence over our Company’s business decisions.

The Interests and Assets of Our Controlling Stockholder May Adversely Impact Our Ability to Make Certain Acquisitions

The interests of Hearst, which owns or has significant investments in other businesses, including cable television networks, newspapers, magazines and electronic media, may from time to time be competitive with, or otherwise diverge from, our interests, particularly with respect to new business opportunities and future acquisitions. We and Hearst have agreed that, without the prior written consent of the other, neither we nor they will make any acquisition or purchase any assets if such an acquisition or purchase by one party would require the other party to divest or otherwise dispose of any of its assets because of regulatory or other legal prohibitions.

Under current FCC regulations, given the newspaper and other media interests held by Hearst, we are precluded from acquiring television stations in various markets in the United States. While divestiture of a prohibited interest could permit such acquisitions, such a divestiture may not occur or may otherwise adversely impact potential acquisitions. Additionally, Hearst is not precluded from purchasing television

21




stations, newspapers or other assets in other markets. If Hearst were to make such purchases, the FCC rules would preclude us from owning television stations in those markets in the future.

We May Encounter Conflicts of Interest with Our Controlling Stockholder

We and Hearst also have ongoing relationships that may create situations where the interests of the two parties could conflict. For example, we and Hearst are parties to a series of agreements with each other, including

·       a Lease Agreement (whereby we lease one floor of the newly constructed Hearst Tower in Manhattan for our corporate offices

·       a Management Agreement (whereby we provide certain management services, such as sales, news, programming and financial and accounting management services with respect to certain Hearst-owned or managed television and radio stations);

·       an Option Agreement (whereby Hearst has granted us an option to acquire two television stations it owns (KCWE and WMOR), as well as a right of first refusal with respect to a prospective purchaser if Hearst proposes to sell WPBF);

·       a Studio Lease Agreement (whereby Hearst leases space from us for Hearst’s radio broadcast stations);

·       a Name License Agreement (whereby Hearst permits us to use the Hearst name in connection with our name and operation of our business); and

·       a Services Agreement (whereby Hearst provides us certain administrative services, such as accounting, financial, legal, tax, insurance, data processing and employee benefits).

Because we and Hearst are affiliates, it is possible that our interests concerning these agreements may from time to time conflict and that more favorable terms than those we have negotiated with Hearst may be available from third parties.

Changes in FCC Regulations and Enforcement Policies May Adversely Affect Our Business

As discussed more fully in Item 1 “Business; Federal Regulation of Television Broadcasting”, our broadcast operations are subject to extensive regulation by the FCC under the Communications Act. If we do not comply with these regulations, in particular the specific regulations discussed below, or if the FCC adopts a rigorous enforcement policy concerning them, our business and operating results could be adversely affected.

Ownership Rules.   We must comply with extensive FCC regulations and policies in the ownership of our broadcast stations, which restrict our ability to consummate future transactions and, in certain circumstances, could require us to divest some stations. In general, the FCC’s ownership rules limit the number of television and radio stations that we can own in a market, the number of television stations we can own nationwide, and prohibit ownership of stations in markets where Hearst has interests in newspapers. As described in Item 1 “Business; Federal Regulation of Television Broadcasting,” the FCC’s ownership rules are currently under review. The actions Congress or the FCC may take and changes in the FCC’s ownership rules may adversely impact our business.

Indecency Rules.   Federal law and the FCC’s rules prohibit the broadcast of obscene material at any time, and the broadcast of indecent or profane material during the period from 6 a.m. through 10 p.m. In recent years, the FCC has vigorously enforced its indecency prohibition, and in 2006, legislation was enacted that raised the maximum monetary penalty for the broadcast of obscene, indecent, or profane language to $325,000 for each “violation,” with a cap of $3 million for any “single act.” The determination

22




of whether content is indecent or profane is inherently subjective, creates uncertainty as to our ability to comply with the rules (in particular during live programming), and impacts our programming decisions. Violation of the indecency rules could lead to sanctions which may adversely affect our business and results of operations.

Monetary Forfeitures and Penalties.   In recent years, the FCC has also vigorously enforced a number of other rules, typically in connection with license renewals. For example, in recent years, the FCC issued monetary forfeitures and sanctions for violations of its equal employment opportunity rules, public inspection file rules, children’s programming rules, closed captioning rules, and emergency alert system rules. Our stations were not the subject of monetary sanctions in 2006.

Possible Acquisitions, Divestitures or Other Strategic Initiatives May Adversely Impact Our Business

Our management is evaluating, and will continue to evaluate, the nature and scope of our operations and various short-term and long-term strategic considerations. These may include acquisitions or divestitures of, or strategic alliances, joint ventures, mergers or integration or consolidation with, television stations or other businesses, including digital media businesses, as well as discussions with third parties regarding any of these considerations. In the alternative, our management may decide from time to time that such initiatives are not appropriate.

There are uncertainties and risks relating to each of these strategic initiatives. For example, acquisition opportunities may become more limited as a consequence of the consolidation of ownership occurring in the television broadcast industry. Also, prospective competitors may have greater financial resources than we have. Future acquisitions may not be available on attractive terms, or at all. Also, if we do make acquisitions, we may not be able to successfully integrate the acquired stations or businesses. With respect to divestitures, we may experience varying success in making such divestitures on favorable terms, if at all, or in reducing fixed costs or transferring liabilities previously associated with the divested television stations or businesses. In addition, any such acquisitions or divestitures may be subject to FCC approval and FCC rules and regulations. Finally, strategic minority investments we choose to make in digital media projects may ultimately prove unprofitable. Any of these efforts would require varying levels of management resources, which may divert our attention from other business operations. If we do not realize the expected benefits or synergies of such transactions, or, conversely, if we do not realize such benefits or synergies because we chose not to pursue any such transaction, there may be an adverse effect on our financial condition and operating results.

We Could Suffer Losses Due to Asset Impairment Charges for Goodwill and FCC Licenses

At December 31, 2006, 84% of our total assets consisted of goodwill and intangible assets. We test our goodwill and intangible assets, including FCC licenses, for impairment during the fourth quarter of every year, and on an interim date should factors or indicators become apparent that would require an interim test, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” If the fair value of a reporting unit or an intangible asset is revised downward below its net carrying value, an impairment under SFAS 142 could result and a non-cash charge could be required. This could materially affect our reported net earnings and our balance sheet.

23




The Loss of Key Personnel Could Disrupt our Management or Operations and Adversely Affect our Business

Our business depends upon the continued efforts, abilities and expertise of our chief executive officer and other key employees. We believe that the rare combination of skills and years of media experience possessed by our executive officers would be difficult to replace, and that the loss of our executive officers could have a material adverse effect on our business. Additionally, our stations employ several on-air personnel, including anchors and reporters, with significant loyal audiences. Our failure to retain these personnel could adversely affect our operating results.

Strikes and Other Union Activity Could Adversely Affect Our Business

Certain employees, such as on-air talent and engineers, at some of our stations are subject to collective bargaining agreements. If we are unable to renew expiring collective bargaining agreements, it is possible that the affected unions could take action in the form of strikes or work stoppages. Such actions, higher costs in connection with these agreements, or significant labor disputes could adversely affect our business by disrupting our ability to operate our affected stations.

Our Share Repurchase Program and Hearst’s Share Purchase Program May Affect the Market Price of Our Series A Common Stock.

We have a share repurchase program authorized by our Board of Directors, pursuant to which we may repurchase up to $300 million of our Series A Common Stock from time to time, in the open market or in private transactions, subject to market conditions. In addition, The Hearst Corporation’s Board of Directors authorized a share purchase program, pursuant to which Hearst or its subsidiaries may purchase on the open market or through private transactions up to 25 million shares of our Series A Common Stock. Such repurchases and purchases, or the absence thereof, may increase or decrease the market price of our Series A Common Stock.

ITEM 1B.       UNRESOLVED STAFF COMMENTS

None.

ITEM 2.                PROPERTIES

Our principal executive offices are located at 300 West 57th Street, New York, New York 10019. The real property of each of our stations generally includes owned or leased offices, studios, transmitters and tower sites. Offices and main studios are typically located together, while transmitters and tower sites are often in separate locations that are more suitable for optimizing signal strength and coverage. Set forth below are our stations’ principal facilities as of December 31, 2006. In addition to the property listed below, we and the stations also lease other property primarily for communications equipment.

Station

 

 

 

Location

 

Use

 

Ownership

 

Approximate
Size

 

Corporate

 

Washington D.C.

 

Washington D.C. Office

 

Leased

 

4,007 sq. ft.

 

 

New York, NY

 

New York Office(1)

 

Leased

 

19,866 sq. ft.

 

WCVB

 

Boston, MA

 

Office and studio

 

Owned

 

90,002sq. ft.

 

 

 

 

 

Tower and transmitter

 

Leased

 

1,600 sq. ft.

 

WMUR

 

Manchester, NH

 

Office and studio

 

Owned

 

67,440 sq. ft.

 

 

 

 

Tower and transmitter

 

Owned

 

4.5 acres

 

 

 

 

Office

 

Leased

 

1,963 sq. ft.

 

24




 

KCRA/KQCA

 

Sacramento, CA

 

Office, studio and tower

 

Owned

 

75,000 sq. ft.

 

 

 

 

Tower and transmitter

 

Owned

 

2,400 sq. ft.

 

 

 

 

Tower and transmitter

 

Leased

 

1,200 sq. ft.

 

 

 

 

Office

 

Leased

 

3,085 sq. ft.

 

WTAE

 

Pittsburgh, PA

 

Office and studio

 

Owned

 

68,033 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Owned

 

37 acres

 

 

 

 

 

Office

 

Leased

 

609 sq. ft.

 

WESH/WKCF

 

Orlando, FL

 

Studio, transmitter, tower

 

Owned

 

61,300 sq. ft.

 

 

Daytona Beach, FL

 

Studio and office

 

Leased

 

1,472 sq. ft.

 

 

 

 

Office

 

Leased

 

775 sq. ft.

 

 

 

 

Office

 

Leased

 

535 sq. ft.

 

 

 

 

Transmitter

 

Leased

 

2,025 sq. ft.

 

 

 

 

Tower

 

Partnership*

 

190 acres

 

 

 

 

Transmitter

 

Partnership*

 

8,050 sq. ft.

 

WBAL

 

Baltimore, MD

 

Office and studio

 

Owned

 

63,000 sq. ft.

 

 

 

 

 

Tower

 

Partnership*

 

0.2 acres

 

KMBC

 

Kansas City, MO

 

Office and studio

 

Leased

 

58,514 sq. ft.

 

 

 

 

Tower and transmitter

 

Owned

 

11.6 acres

 

 

 

 

Land(2)

 

Owned

 

8.4 acres

 

WLWT

 

Cincinnati, OH

 

Office and studio

 

Owned

 

52,000 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Owned

 

4.2 acres

 

WISN

 

Milwaukee, WI

 

Office and studio

 

Owned

 

88,000 sq. ft.

 

 

 

 

Tower and transmitter land

 

Leased

 

5.5 acres

 

 

 

 

Transmitter building

 

Owned

 

3,192 sq. ft.

 

WYFF

 

Greenville, SC

 

Office and studio

 

Owned

 

57,500 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Owned

 

1.5 acres

 

 

 

 

 

Office

 

Leased

 

3,000 sq. ft.

 

WDSU

 

New Orleans, LA

 

Office and studio

 

Owned

 

50,525 sq. ft.

 

 

 

 

Transmitter

 

Owned

 

8.3 acres

 

KOCO

 

Oklahoma City, OK

 

Office and studio

 

Owned

 

28,000 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Owned

 

85 acres

 

WGAL

 

Lancaster, PA

 

Office, studio and tower

 

Owned

 

58,900 sq. ft.

 

 

 

 

Office

 

Leased

 

2,380 sq. ft.

 

WXII

 

Winston-Salem, NC

 

Office and studio

 

Owned

 

38,027 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Owned

 

223.6 acres

 

WLKY

 

Louisville, KY

 

Office and studio

 

Owned

 

37,842 sq. ft.

 

 

 

 

Tower and transmitter

 

Owned

 

40.0 acres

 

 

 

 

Transmitter

 

Leased

 

1,350 sq. ft.

 

 

 

 

Transmitter building

 

Owned

 

2,000 sq. ft.

 

KOAT

 

Albuquerque, NM

 

Office and studio

 

Owned

 

37,315 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Owned

 

328.5 acres

 

KCCI

 

Des Moines, IA

 

Office, studio and transmitter

 

Owned

 

52,000 sq. ft.

 

 

 

 

Tower and transmitter

 

Owned

 

119.5 acres

 

WMTW

 

Portland-Auburn, ME

 

Office and studio

 

Leased

 

11,703 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Owned

 

296 acres

 

 

 

 

 

Office and studio

 

Owned

 

16,300 sq. ft.

 

 

 

 

 

Transmitter building

 

Owned

 

5,120 sq. ft.

 

 

 

 

 

Office land

 

Owned

 

13.9 acres

 

25




 

KITV

 

Honolulu, HI

 

Office and studio

 

Owned

 

35,000 sq. ft.

 

 

 

 

Tower and transmitter

 

Leased

 

130 sq. ft.

 

 

 

 

Tower and transmitter

 

Leased

 

304 sq. ft.

 

 

 

 

Tower and transmitter

 

Leased

 

2.6 acres

 

KETV

 

Omaha, NE

 

Office and studio

 

Owned

 

39,204 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Owned

 

23.3 acres

 

 

 

 

 

Transmitter building

 

Owned

 

30,492 sq. ft.

 

 

 

 

 

Office

 

Leased

 

597 sq. ft.

 

WAPT

 

Jackson, MS

 

Office and studio

 

Owned

 

18,000 sq. ft.

 

 

 

 

Tower and transmitter

 

Owned

 

24 acres

 

WPTZ

 

Plattsburgh, NY

 

Office and studio

 

Owned

 

12,800 sq. ft.

 

 

 

 

 

Office

 

Leased

 

5,441 sq. ft.

 

 

 

 

 

Tower and Transmitter

 

Owned

 

2,432 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Owned

 

13.4 acres

 

WNNE

 

White River Junction, VT

 

Office and studio

 

Leased

 

5,600 sq. ft.

 

KHBS/KHOG

 

Fort Smith/Fayetteville, AR

 

Office and studio

 

Owned

 

44,904 sq. ft.

 

 

 

 

 

Office and studio

 

Leased

 

1,110 sq. ft.

 

 

 

 

 

Transmitter Building

 

Owned

 

2100 sq. ft.

 

 

 

 

 

Tower and transmitter

 

Leased

 

2.5 acres

 

 

 

 

 

Tower and transmitter

 

Owned

 

26.7 acres

 

KSBW

 

Monterey-Salinas, CA

 

Office and studio

 

Owned

 

44,000 sq. ft.

 

 

 

 

Tower and transmitter

 

Owned

 

160.2 acres

 

 

 

 

Office

 

Leased

 

900 sq. ft.

 


*                     Owned by the Company in partnership with certain third parties.

(1)           We also sublease to third parties 21,789 square feet of space at 888 Seventh Avenue, New York, New York, the previous location of our corporate headquarters.

(2)           In 2005 we commenced construction of an office and studio facility for KMBC on land we purchased in 2004. When the facility is completed, we will move our operations to the new facility and terminate this station’s office space lease.

ITEM 3.                LEGAL PROCEEDINGS

From time to time, we become involved in various claims and lawsuits that are incidental to our business. In our opinion, there are no legal proceedings pending against us or any of our subsidiaries that are reasonably expected to have a material adverse effect on our consolidated financial condition or results of operations.

ITEM 4.                SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

26




PART II

ITEM 5.                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)   Market Performance of Common Stock and Dividends on Common Stock.   Our Series A Common Stock is listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “HTV.” All of the outstanding shares of our Series B Common Stock are currently held by Hearst Broadcasting, a wholly-owned subsidiary of Hearst Holdings, which is in turn a wholly-owned subsidiary of Hearst. Our Series B Common Stock is not publicly traded. The table below sets forth, for the calendar quarters indicated, the reported high and low sales prices of our Series A Common Stock on the NYSE and the dividends declared on our Series A and Series B Common Stock:

 

 

High

 

Low

 

Dividend

 

2006

 

 

 

 

 

 

 

 

 

First Quarter

 

$

24.17

 

$

23.23

 

 

$

0.07

 

 

Second Quarter

 

23.37

 

21.67

 

 

0.07

 

 

Third Quarter

 

23.81

 

20.00

 

 

0.07

 

 

Fourth Quarter

 

26.04

 

22.93

 

 

0.07

 

 

2005

 

 

 

 

 

 

 

 

 

First Quarter

 

$

26.15

 

$

24.59

 

 

$

0.07

 

 

Second Quarter

 

25.71

 

24.50

 

 

0.07

 

 

Third Quarter

 

26.20

 

23.85

 

 

0.07

 

 

Fourth Quarter

 

25.76

 

23.33

 

 

0.07

 

 

 

On February 15, 2007, the closing price for our Series A Common Stock was $26.38.

(b)   Holders.   On February 15, 2007 there were approximately 816 Series A Common Stock shareholders of record and Hearst Broadcasting was the sole holder of our Series B Common Stock.

(c)   Dividends.   In December 2006, we declared a quarterly cash dividend of $0.07 per share on our Series A Common Stock and our Series B Common Stock, which we paid on January 15, 2007 to holders of record on January 5, 2007, for a total of $6.5 million. During 2006, we paid a total of $26.0 million in dividends. See Note 10 to the consolidated financial statements.

(d)   Securities Authorized for Issuance Under Equity Compensation Plans.   The following table summarizes our equity compensation plans as of December 31, 2006:

 

 

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

Plan Category

 

 

 

Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(1)

 

Weighted average
exercise price of
outstanding options,
warrants and rights

 

Number of securities
remaining available for
future issuance (2)

 

Equity compensation plans approved by security holders

 

 

8,806,296

 

 

 

$

23.85

 

 

 

4,474,174

 

 

Equity compensation plans not approved by security holders

 

 

N/A

 

 

 

N/A

 

 

 

N/A

 

 

Total

 

 

8,806,296

 

 

 

$

23.85

 

 

 

4,474,174

 

 


(1)          Includes shares of Series A Common Stock to be issued upon exercise of stock options granted under the Company’s Amended and Restated 1997 Stock Option Plan and the Company’s 2004 Long Term Incentive Compensation Plan. The Company has also awarded 167,000 shares of restricted stock under the 2004 Long Term Incentive Compensation Plan.

(2)          Includes 252,800 shares of Series A Common Stock available for future stock option and restricted stock grants under the Company’s 2004 Long Term Incentive Compensation Plan and 4,221,374 shares of Series A Common Stock reserved for future issuance under the Company’s Employee Stock Purchase Plan.

27




(e)   Performance Graph.   The following graph compares the annual cumulative total stockholder return on an investment of $100 in the Series A Common Stock on December 31, 2001, based on the market price of the Series A Common Stock and assuming reinvestment of dividends, with the cumulative total return of a similar investment in (i) companies on the Standard & Poor’s 500 Stock Index and (ii) a group of peer companies selected by us on a line-of-business basis and weighted for market capitalization.

CUMULATIVE TOTAL RETURN
Based upon an initial investment of $100 on December 31, 2001
with dividends reinvested

GRAPHIC

 

 

Dec-01

 

Dec-02

 

Dec-03

 

Dec-04

 

Dec-05

 

Dec-06

 

Hearst-Argyle Television

 

 

$

100

 

 

 

$

112

 

 

 

$

128

 

 

 

$

123

 

 

 

$

113

 

 

 

$

122

 

 

S&P 500®

 

 

$

100

 

 

 

$

78

 

 

 

$

100

 

 

 

$

111

 

 

 

$

117

 

 

 

$

135

 

 

Custom Composite Index (6 Stocks)

 

 

$

100

 

 

 

$

114

 

 

 

$

148

 

 

 

$

125

 

 

 

$

95

 

 

 

$

88

 

 

 

The Custom Composite Index consists of Belo Corp., Sinclair Broadcast Group, Inc., Young Broadcasting Inc., Lin TV Corp. (Begin 3Q02), Nexstar Broadcasting Corp, (Begin 1Q04), and Gray Television Inc. (Begin 3Q02).

(f)   Purchase of Equity Securities by the Issuer and Affiliated Purchasers.   The following table reflects purchases made during the three months ended December 31, 2006, of our Series A Common Stock by Hearst Broadcasting, an indirect wholly-owned subsidiary of Hearst:

Period

 

 

 

Total Number of
Shares
Purchased

 

Average Price
Paid Per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Program

 

Maximum Number of
Shares that May Yet
Be Purchased Under
the Program

October 1 – October 31

 

0

 

$0.00

 

0

 

 

November 1 – November 30

 

0

 

$0.00

 

0

 

 

December 1 – December 31

 

0

 

$0.00

 

0

 

1,184,656

Total

 

0

 

$0.00

 

0

 

 


(1)          On September 28, 2005, Hearst increased Hearst Broadcasting’s authorization to purchase the Company’s Series A Common Stock from 20 million to 25 million shares. Hearst may effect such purchases from time to time in the open market or in private transactions, subject to market conditions and management’s discretion. As of December 31, 2006, Hearst has purchased approximately 23.8 million shares of the Company’s outstanding Series A Common Stock. As of

28




December 31, 2006, Hearst owned approximately 53.0% of the Company’s outstanding Series A Common Stock and 100% of the Company’s Series B Common Stock, representing in the aggregate approximately 73.8% of our outstanding common stock.

The following table reflects purchases made by the Company of its Series A Common Stock during the three months ended December 31, 2006.

Period

 

 

 

Total Number of
Shares
Purchased

 

Average Price
Paid Per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Program

 

Approximate Dollar
Value of Shares that
May Yet Be
Purchased
Under the Program

October 1 – October 31

 

0

 

$0.00

 

0

 

 

November 1 – November 30

 

0

 

$0.00

 

0

 

 

December 1 – December 31

 

0

 

$0.00

 

0

 

$196,710,259

Total

 

0

 

$0.00

 

0

 

 


(1)          In May 1998, the Company’s Board of Directors authorized the repurchase of up to $300 million of its outstanding Series A Common Stock. Such purchases may be effected from time to time in the open market or in private transactions, subject to market conditions and management’s discretion. As of December 31, 2006, the Company has spent approximately $110.8 million to repurchase approximately 4.5 million shares of Series A Common Stock at an average price of $24.87. There can be no assurance that such repurchases will occur in the future or, if they do occur, what the terms of such repurchases will be.

29




ITEM 6.                SELECTED FINANCIAL DATA

The selected financial data should be read in conjunction with the historical financial statements and notes thereto included elsewhere herein and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Hearst-Argyle Television, Inc.
(In thousands, except per share data)

 

 

Years Ended December 31,

 

 

 

2006(a)

 

2005(b)

 

2004(b)

 

2003(c)

 

2002(c)

 

Statement of income data:

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

785,402

 

$

706,883

 

$

779,879

 

$

686,775

 

$

721,311

 

Station operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries, benefits and other operating costs

 

397,604

 

364,421

 

355,641

 

330,519

 

331,643

 

Amortization of program rights

 

68,601

 

60,912

 

63,843

 

62,845

 

60,821

 

Depreciation and amortization.

 

59,161

 

51,728

 

50,376

 

55,467

 

43,566

 

Impairment loss(d)

 

 

29,235

 

 

 

 

Corporate, general and administrative expenses

 

31,261

 

23,149

 

25,268

 

19,122

 

19,650

 

Operating income

 

$

228,775

 

$

177,438

 

$

284,751

 

$

218,822

 

$

265,631

 

Interest expense

 

66,103

 

66,777

 

65,445

 

68,726

 

74,142

 

Interest income

 

(6,229

)

(3,402

)

(1,715

)

(511

)

(699

)

Interest expense, net—Capital Trust(e)

 

9,750

 

9,750

 

18,675

 

15,000

 

15,000

 

Other (income) expense, net(f)(g)(h)(i)

 

2,501

 

2,500

 

3,700

 

 

(299

)

Income before income taxes

 

$

156,650

 

$

101,813

 

$

198,646

 

$

135,607

 

$

177,487

 

Income taxes(m)

 

58,410

 

3,012

 

75,724

 

41,958

 

64,959

 

Equity in (income) loss of affiliates, net of tax(j)

 

(483

)

(1,416

)

(1,020

)

(572

)

4,511

 

Net income

 

$

98,723

 

$

100,217

 

$

123,942

 

$

94,221

 

$

108,017

 

Less preferred stock dividends(k)

 

 

2

 

1,067

 

1,211

 

1,377

 

Income applicable to common stockholders

 

$

98,723

 

$

100,215

 

$

122,875

 

$

93,010

 

$

106,640

 

Income per common share—basic

 

$

1.06

 

$

1.08

 

$

1.32

 

$

1.00

 

$

1.16

 

Number of common shares used in the
calculation

 

92,745

 

92,826

 

92,928

 

92,575

 

92,148

 

Income per common share—diluted

 

$

1.06

 

$

1.08

 

$

1.30

 

$

1.00

 

$

1.15

 

Number of common shares used in the
calculation

 

93,353

 

93,214

 

101,406

 

92,990

 

92,550

 

Dividends declared per share(l)

 

$

0.28

 

$

0.28

 

$

0.25

 

$

0.06

 

 

Balance sheet data (at year-end):

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,610

 

$

120,065

 

$

92,208

 

$

71,528

 

$

4,442

 

Total assets

 

$

3,958,088

 

$

3,832,359

 

$

3,842,140

 

$

3,799,087

 

$

3,769,111

 

Long-term debt

 

$

777,122

 

$

777,170

 

$

882,221

 

$

882,409

 

$

973,378

 

Note payable to Capital Trust

 

$

134,021

 

$

134,021

 

$

134,021

 

$

206,186

 

$

206,186

 

Stockholders’ equity

 

$

1,882,807

 

$

1,821,459

 

$

1,753,837

 

$

1,672,382

 

$

1,579,262

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

200,384

 

$

128,730

 

$

193,631

 

$

179,075

 

$

205,452

 

Net cash used in investing activities

 

$

(282,893

)

$

(41,008

)

$

(72,069

)

$

(25,541

)

$

(25,818

)

Net cash used in financing activities

 

$

(18,946

)

$

(59,865

)

$

(100,883

)

$

(86,448

)

$

(178,452

)

Capital expenditures

 

$

64,229

 

$

35,839

 

$

36,380

 

$

25,392

 

$

25,920

 

Program payments

 

$

67,817

 

$

64,104

 

$

62,247

 

$

62,039

 

$

59,870

 

Dividends paid on common stock

 

$

25,954

 

$

25,997

 

$

22,301

 

 

 

Series A Common Stock repurchases

 

$

2,780

 

$

16,385

 

$

10,920

 

 

 

 

See accompanying notes.

30




 

Notes to Selected Financial Data

(a)           Includes (i) the results of our 25 stations which were owned for the entire period presented and the management fees derived from three television stations (WMOR-TV, WPBF-TV and KCWE-TV) and two radio stations (WBAL-AM and WIYY-FM) managed by us for the entire period presented and (ii) the results of WKCF-TV, after its acquisition by us, from August 31, 2006 through December 31, 2006.

(b)          Includes (i) the results of our 24 stations which were owned for the entire period presented and the management fees derived from three television stations (WMOR-TV, WPBF-TV and KCWE-TV) and two radio stations (WBAL-AM and WIYY-FM) managed by us for the entire period presented and (ii) the results of WMTW-TV, after its acquisition by us, from July 1, 2004 through December 31, 2005.

(c)           Includes the results of our 24 television stations which were owned for the entire period presented and the management fees earned by us from the stations we manage for Hearst for the entire period presented.

(d)          In December 2005, we recorded an impairment charge of $29.2 million to write down to fair value WDSU’s FCC license and goodwill. Due to Hurricane Katrina, the future cash flows of our station in New Orleans were negatively impacted resulting in the impairment.

(e)           Represents interest expense on the note payable to our wholly-owned unconsolidated subsidiary trust, which holds solely parent company debentures in the amounts of $134.0 million at December 31, 2006, 2005 and 2004 and $206.2 million at December 31, 2003 and 2002, and a $3.7 million premium paid to redeem the Series A Debentures in the amount of $72.2 million on December 31, 2004, offset by our equity interest in the earnings of the trust.

(f)             In July 2006, USDTV filed for Chapter 7 bankruptcy and as a result, the Company wrote off its investment of $2.5 million.

(g)           In the year ended December 31, 2005, we concluded our joint venture with NBC Universal and recorded a loss of $2.5 million. The investment had been accounted for using the equity method.

(h)          In 2004, ProAct Technologies Corporation sold substantially all of its operating assets to a third party as part of an overall plan of liquidation. The Company wrote-down our investment in ProAct by $3.7 million during the year ended December 31, 2004.

(i)             In the year ended December 31, 2002, Other (income) expense, net represents a supplemental closing fee paid to us in connection with the sale of the Phoenix Stations in March 2001.

(j)              Represents our equity interest in the operating results of: (i) Internet Broadcasting Systems, Inc. from December 2, 1999 through December 31, 2006; (ii) IBS/HATV LLC from September 1, 2002 through December 31, 2005; (iii) NBC/Hearst-Argyle Syndication, LLC from April 1, 2002 through December 31, 2005; and (iv) Ripe Digital Entertainment, Inc. from July 27, 2005 through December 31, 2006.

(k)          Represents dividends on the preferred stock issued in connection with the acquisition of KHBS-TV/KHOG-TV.

(l)             During 2006, our Board of Directors declared quarterly cash dividends on our Series A and Series B Common Stock for a total amount of $26.0 million. Included in this amount was $19.0 million payable to Hearst. During 2005, our Board of Directors declared quarterly cash dividends on our Series A and Series B Common Stock for a total amount of $26.0 million. Included in this amount was $18.0 million payable to Hearst. During 2004, our Board of Directors declared quarterly cash dividends on our Series A and Series B Common Stock for a total amount of $23.2 million. Included in this amount was $15.4 million payable to Hearst. On December 3, 2003, our Board of Directors declared a cash dividend of $0.06 per share on our Series A and Series B Common Stock in the amount of $5.6 million. We did not declare or pay any dividends on Common Stock in 2002.

(m)      During the year ended December 31, 2005, $31.9 million in tax benefits were recorded as a result of the settlement of certain tax return examinations and $5.5 million in tax benefits were recorded as a result of a change in Ohio tax law.

31




ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Organization of Information

Management’s Discussion and Analysis provides a narrative on our financial performance and condition that should be read in conjunction with the accompanying consolidated financial statements. It includes the following sections:

·       Forward-Looking Statements

·       Executive Summary

·       Critical Accounting Policies and Estimates

·       Results of Operations

·       Liquidity and Capital Resources

·       Impact of Inflation

·       Off-Balance Sheet Arrangements

·       New Accounting Pronouncements

Forward-Looking Statements

This report includes or incorporates forward-looking statements. We base these forward-looking statements on our current expectations and projections about future events. These forward-looking statements generally can be identified by the use of statements that include phrases such as “anticipate”, “will”, “may”, “likely”, “plan”, “believe”, “expect”, “intend”, “project”, “forecast” or other such similar words and/or phrases. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained in this report, concerning, among other things, trends and projections involving revenue, income, earnings, cash flow, liquidity, operating expenses, assets, liabilities, capital expenditures, dividends and capital structure, involve risks and uncertainties, and are subject to change based on various important factors. Those factors include the impact on our operations from

·       Changes in Federal regulations that affect us, including changes in Federal communications laws or regulations;

·       Local regulatory actions and conditions in the areas in which our stations operate;

·       Competition in the broadcast television markets we serve;

·       Our ability to obtain quality programming for our television stations;

·       Successful integration of television stations we acquire;

·       Pricing fluctuations in local and national advertising;

·       Changes in national and regional economies;

·       Our ability to service and refinance our outstanding debt;

·       Changes in advertising trends and our advertisers’ financial condition; and

·       Volatility in programming costs, industry consolidation, technological developments, and major world events.

32




For a discussion of additional risk factors that are particular to our business, please refer to Part I, Item 1A. “Risk Factors” beginning on page 17. These and other matters we discuss in this report, or in the documents we incorporate by reference into this report, may cause actual results to differ from those we describe. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Summary

Hearst-Argyle Television, Inc. and its subsidiaries (hereafter “we” or the “Company”) own and operate 26 network-affiliated television stations. Additionally, we provide management services to two network-affiliated stations and one independent television station and two radio stations owned by The Hearst Corporation (“Hearst”) in exchange for management fees. We are a leader in the convergence of local broadcast television and the Internet through our investment in, and operating agreement with, Internet Broadcasting, which operates a nation-wide network of television Websites. Our stations’ Websites typically provide news, weather, community information, user generated content and entertainment content to our audience. Also, 11 of our stations broadcast additional channels on a multicast stream with their main digital channel.

Events and other factors that have influenced our 2006 results

·       For the year ended December 31, 2006, total revenue increased 11.1%. Results for the year ended reflect record political revenue in a mid-term election year, the positive impact of strategic developments including the successful completion of certain retransmission consent negotiations and a station acquisition, and expanded focus on digital media. These results were offset by the dampening impact of weak automotive advertising.

·       On August 31, 2006, the Company purchased the assets related to broadcast television station WKCF-TV, the CW affiliate in Orlando, Florida, for $217.5 million in cash funded with a combination of cash on hand and a $100 million advance under the Company’s Credit Facility.

·       For the year ended December 31, 2006, the Company recorded digital media revenue and associated expenses of $15.5 million and $10.1 million, respectively. This is primarily due to the restructuring of our relationship with Internet Broadcasting and IBS/HATV LLC which increased our equity interest in Internet Broadcasting to 38% and dissolved IBS/HATV LLC. As of January 1, 2006, we now recognize results of local Websites directly in our income statement.

·       As a result of the adoption of the fair value recognition provisions of SFAS 123(R) as of January 1, 2006, the Company recognized stock-based compensation expense of $7.6 million in the year ended December 31, 2006.

·       In 2006, we recognized insurance proceeds of $5.0 million for a portion of the property damages and expenses incurred at our station WDSU-TV in New Orleans, Louisiana as a result of Hurricane Katrina. Of this amount, $2.4 million offset a receivable from our property insurers established in 2005 while the remaining $2.6 million was recorded as an offset to Salaries, benefits and other operating costs. Additional recoveries are expected in future periods.

·       The Company wrote off its investment of $2.5 million in USDTV which filed for bankruptcy in July 2006.

·       At December 31, 2006, total debt was $867.2 million, unchanged from December 31, 2005.

33




Industry Trends

·       Political advertising increases in even-numbered years, such as 2006, consistent with the increase in the number of candidates running for political office in the interim national election cycle, as well as select state and local elections.

·       Revenue from Olympic advertising occurs exclusively in even-numbered years, such as 2006, with the alternating Winter and Summer Games occurring every two years. Our 10 NBC stations aired the 2006 Winter Olympics in February 2006.

·       The Federal Communications Commission (“FCC”) has permitted broadcast television station licensees to use their digital spectrum for a wide variety of services such as high-definition television programming, audio, data and other types of communication, subject to the requirement that each broadcaster provide at least one free video channel equal in quality to the current technical standards. Our NBC stations currently broadcast the Weather Plus network, a 24/7 local and national weather broadcast network, on a multicast stream in addition to their main digital channels. In addition, two of our other stations launched similar station-branded multicast weather channels in 2006.

·       Compensation from networks to their affiliates in exchange for broadcasting of network programming has been sharply reduced in recent years and may be eliminated in the future.

·       Pursuant to the Cable Television Consumer Protection and Competition Act of 1992 (“1992 Cable Act”) and the FCC’s “must carry” regulations, cable operators are generally required to devote up to one-third of their activated channel capacity to the carriage of the analog signal of local commercial television stations. On a cable system-by-cable system basis, a local television broadcast station must choose once every three years whether to waive the right to mandatory, but uncompensated, carriage and, instead, to negotiate a grant of retransmission consent. We opted to negotiate retransmission consent with most of the cable systems that carry our stations and we record income from most of these relationships.

·       The Satellite Home Viewer Improvement Act of 1999 (“SHVIA”) established a compulsory copyright licensing system for the distribution of local television station signals by direct broadcast satellite systems to viewers in each DMA. Under SHVIA’s “carry-one, carry-all” provision, a direct broadcast satellite system generally is required to retransmit the analog signal of all local television stations in a DMA if the system chooses to retransmit the analog signal of any local television station in that DMA. Television stations located in markets in which satellite carriage of local stations is offered may elect mandatory carriage or retransmission consent once every three years. We opted to negotiate retransmission consent for all satellite systems that carry our stations and we record income from most of these relationship.

·       Legislation that guides the transition from analog to digital television broadcasting includes a deadline of February 17, 2009 for completion of the transition to digital broadcasting and the return of the analog spectrum to the government. As a result, the Company accelerated the depreciation of certain equipment that may have a shorter useful life as a result of the digital conversion.

·       In 2006 Nextel was granted the right from the FCC to reclaim from Broadcasters in each market across the country the 1.9 GHz spectrum to use for an emergency communications system. In order to claim this signal, Nextel must replace all analog equipment currently using this spectrum with digital equipment. All broadcasters have agreed to use the digital substitute that Nextel will provide. The transition will be completed on a market by market basis beginning in 2007. As the transition takes place in each market, we expect to record gains to the extent that the fair market value of the equipment we receive exceeds the book value of the analog equipment.

34




Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowances for doubtful accounts; program rights, barter and trade transactions; useful lives of property, plant and equipment; intangible assets; carrying value of investments; accrued liabilities; contingent liabilities; income taxes; pension benefits; and fair value of financial instruments and stock options. We base our estimates on historical experience and on various other assumptions, which we believe to be reasonable under the circumstances. Had we used different assumptions in determining our estimates, our reported results may have varied. The different types of estimates that are required to be made by us in the preparation of our consolidated financial statements vary significantly in the level of subjectivity involved in their determination. We have identified the estimates below as those which contain a relatively high level of subjectivity in their determination and, therefore, could have a more material effect upon our reported results if different assumptions were used.

Impairment Testing of Intangible Assets—In performing our annual impairment testing of goodwill and FCC licenses, which are both considered to be intangible assets with indefinite useful lives, we must make a significant number of assumptions and estimates in determining the fair value based on the present value of future cash flows. To assist in this process, we utilize the services of an independent valuation consulting firm. See Note 4 to the consolidated financial statements. The assumptions and estimates required under the impairment testing of goodwill and FCC licenses include future market revenue growth, operating profit margins, perpetual growth rates, market revenue share, and weighted-average cost of capital, among others. For the year ended December 31, 2006, estimates of the present value of future cash flows for our stations exceeded the book value of our FCC licenses and goodwill indicating no impairment of these assets. For the year ended December 31, 2005, estimates of future cash flows for our station in New Orleans were reduced significantly from prior year due to the negative impact of Hurricane Katrina on the New Orleans market. As a result, the Company wrote down its book value of indefinite lived intangible assets and goodwill by $29.2 million, which was comprised of $26.2 million of FCC license and $3.0 million of goodwill.

Pension AssumptionsIn computing projected benefit obligations and the resulting pension expense, we are required to make a number of assumptions. To assist in this process, we use the services of an independent consulting firm. See Note 16 to the consolidated financial statements. To compute our projected benefit obligations as of the measurement date of September 30, 2006, we used the discount rate of 5.75% and an average rate of compensation increase of 4.0%. In determining the discount rate assumption of 5.75%, we used a measurement date of September 30, 2006 and constructed a portfolio of bonds to match the benefit payment stream that is projected to be paid from the Company’s pension plans. The benefit payment stream is assumed to be funded from bond coupons and maturities as well as interest on the excess cash flows from the bond portfolio. To compute our pension expense in the year ended December 31, 2006, we assumed a discount rate of 6.0%, an expected long-term rate of return on plan assets of 7.75%, and an average rate of compensation increase of 4.0%. See Note 15 to the consolidated financial statements for further discussion on management’s methodology for developing the expected long-term rate of return assumption. We consider the assumptions used in our determination of our projected benefit obligations and pension expense to be reasonable.

Pension Assumptions Sensitivity Analysis

The weighted-average assumptions used in computing our net pension expense and projected benefit obligation have a significant effect on the amounts reported. A one-percentage point change in each of the

35




assumptions below would have the following effects upon net pension expense and projected benefit obligation, respectively, in the year ended and as of December 31, 2006:

 

 

One Percentage Point Increase

 

One Percentage Point Decrease

 

 

 

Discount
Rate

 

Expected long-
term rate of
return

 

Rate of
compensation
increase

 

Discount
Rate

 

Expected long-
term rate of
return

 

Rate of
compensation
increase

 

 

 

(In thousands)

 

Net pension (benefit)
expense

 

(4,187

)

 

(1,434

)

 

 

910

 

 

 

4,748

 

 

 

1,435

 

 

 

(852

)

 

Projected benefit obligation

 

(26,326

)

 

N/A

 

 

 

5,011

 

 

 

31,300

 

 

 

N/A

 

 

 

(4,184

)

 

 

Income TaxesIncome taxes are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, Accounting for Income Taxes (“SFAS 109”), which requires that deferred tax assets and liabilities be recognized for the differences in the book and tax bases of certain assets and liabilities using enacted tax rates. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not, that some portion or all of the deferred tax assets will not be realized. Income tax expense was $58.4 million or 37.3% of pre-tax income in our Consolidated Statement of Income for the year ended December 31, 2006. Deferred tax assets were approximately $4.7 million and deferred tax liabilities were approximately $838.2 million as of December 31, 2006. Our estimates of income taxes and the significant items giving rise to the deferred assets and liabilities are set forth in Note 9 to the consolidated financial statements. These estimates reflect our assessment of future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both timing and probability. Actual income taxes could vary from such estimates as a result of future changes in income tax law or reviews by the Internal Revenue Service or other tax authorities.

Investment Carrying ValuesWe have investments in unconsolidated affiliates, which are accounted for under the equity method if our equity interest is from 20% to 50%, and under the cost method if our equity interest is less than 20% and we do not exercise significant influence over operating and financial policies. We review the carrying value of investments on an ongoing basis and adjust them to reflect net realizable value, where necessary. See Note 3 to the consolidated financial statements. As part of our analysis and determination of the net realizable value of investments, we must make assumptions and estimates regarding expected future cash flows, which involve assessing the financial results, forecasts, and strategic direction of each company. During the year ended December 31, 2006, the Company wrote off its investment of $2.5 million in USDTV. In December 2005, NBC and the Company concluded the NBC/Hearst-Argyle Syndication, LLC joint venture and as a result, the Company recorded a loss of $2.5 million. During the year ended December 31, 2004, the Company recorded a $3.7 million write-down to net realizable value of the Company’s investment in ProAct Technologies Corporation. We consider the assumptions used in our determination of investment carrying values to be reasonable.

Results of Operations

Results of operations for the years ended December 31, 2006, 2005 and 2004 include (i) the results of our 24 television stations, which were owned for the entire period presented, and the management fees derived by the three television and two radio stations managed by us for the entire period presented; (ii) the results of operations of WKCF-TV, after our acquisition of the station, on August 31, 2006; and (iii) the results of operations of WMTW-TV, after our acquisition of the station, on July 1, 2004.

36




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

 

 

For the years ended
December 31,

 

 

 

 

 

 

 

2006

 

2005

 

$ Change

 

% Change

 

 

 

(In Thousands)

 

 

 

 

 

Total revenue

 

$

785,402

 

$

706,883

 

$

78,519

 

 

11.1

%

 

Station operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Salaries, benefits and other operating costs

 

397,604

 

364,421

 

33,183

 

 

9.1

%

 

Amortization of program rights

 

68,601

 

60,912

 

7,689

 

 

12.6

%

 

Depreciation and amortization

 

59,161

 

51,728

 

7,433

 

 

14.4

%

 

Impairment loss

 

 

29,235

 

(29,235

)

 

-100.0

%

 

Corporate, general and administrative expenses

 

31,261

 

23,149

 

8,112

 

 

35.0

%

 

Operating income

 

$

228,775

 

$

177,438

 

$

51,337

 

 

28.9

%

 

Interest expense

 

66,103

 

66,777

 

(674

)

 

-1.0

%

 

Interest income

 

(6,229

)

(3,402

)

(2,827

)

 

83.1

%

 

Interest expense, net—Capital Trust

 

9,750

 

9,750

 

 

 

0.0

%

 

Other expense

 

2,501

 

2,500

 

1

 

 

0.0

%

 

Income before income taxes and equity

 

$

156,650

 

$

101,813

 

$

54,837

 

 

53.9

%

 

Income tax expense

 

$

58,410

 

$

3,012

 

$

55,398

 

 

1839.2

%

 

Equity in income of affiliates, net of tax

 

(483

)

(1,416

)

933

 

 

-65.9

%

 

Net income

 

$

98,723

 

$

100,217

 

$

(1,494

)

 

-1.5

%

 

 

Total revenue.

Total revenue includes:

(i)            cash advertising revenue, net of agency and national representatives’ commissions;

(ii)        retransmission consent revenue;

(iii)    net digital media revenue, which includes primarily Internet advertising revenue and, to a lesser extent, revenue from advertising on multicast weather channels;

(iv)      network compensation; and

(v)          other revenue, primarily barter and trade revenue.

 

 

For the years ended
December 31,

 

 

 

 

 

 

 

2006

 

2005

 

$ Change

 

% Change

 

 

 

(In thousands)

 

 

 

 

 

Net local & national ad revenue (excluding political)

 

$

614,257

 

$

629,837

 

$

(15,580

)

 

-2.5

%

 

Net digital media revenue

 

15,513

 

335

 

15,178

 

 

4530.7

%

 

Net political revenue

 

88,040

 

12,393

 

75,647

 

 

610.5

%

 

Network compensation

 

9,810

 

19,087

 

(9,277

)

 

-48.6

%

 

Retransmission consent revenue

 

17,908

 

6,765

 

11,143

 

 

164.7

%

 

Other revenues

 

39,874

 

38,466

 

1,408

 

 

3.7

%

 

Total revenue

 

$

785,402

 

$

706,883

 

$

78,519

 

 

11.1

%

 

 

37




Total revenue in the year ended December 31, 2006 increased $78.5 million or 11.1%. This increase was primarily attributable to the following factors:

(i)            a $75.6 million increase in net political advertising revenue resulting from the normal, cyclical nature of the television broadcasting business, in which the demand for advertising by candidates running for political office significantly increases in even-numbered election years (such as 2006);

(ii)        a $11.1 million increase in retransmission consent revenue; and

(iii)    $15.2 million increase in net digital media revenue;

(iv)      an increase in the furniture and housewares, attractions, retail and telecommunications categories, advertising associated with the Olympics on our NBC-affiliated stations and the acquisition of WKCF-TV; partially offset by

(v)          a $9.3 million decrease in network compensation; and

(vi)      a decrease in the automotive, pharmaceutical, fast food and beverages categories.

Salaries, benefits and other operating costs.

Salaries, benefits and other operating costs were $397.6 million in the year ended December 31, 2006, as compared to $364.4 million in the year ended December 31, 2005, an increase of $33.2 million or 9.1%. This increase was primarily due to:

(i)            a $10.2 million increase in compensation, pension and employee benefits expense;

(ii)        a $10.0 million increase in digital media expenses;

(iii)    $3.8 million in stock-based compensation expense;

(iv)      an increase in expenses due to the acquisition of WKCF-TV on August 31, 2006; partially offset by

(v)          $2.6 million of insurance proceeds recognized for a portion of the property damages and expenses incurred at our station WDSU-TV in New Orleans, Louisiana as a result of Hurricane Katrina; and

(vi)      a $1.9 million decrease in Trade/Barter Expense.

Amortization of program rights.

Amortization of program rights was $68.6 million in the year ended December 31, 2006, as compared to $60.9 million in the year ended December 31, 2005, an increase of $7.7 million or 12.6%. This increase was primarily due to:

(i)            renewal of popular shows at higher rates; and

(ii)        an increase in amortization due to the purchase of WKCF-TV which has a higher cost of programming due to the number of syndicated programming that air on the station.

Depreciation and amortization.

Depreciation and amortization was $59.2 million in the year ended December 31, 2006, as compared to $51.7 million in the year ended December 31, 2005, an increase of $7.4 million or 14.4%. Depreciation expense was $52.8 million in the year ended December 31, 2006, as compared to $45.7 million in the year ended December 31, 2005, an increase of $7.1 million or 19.7%. This increase was primarily due to higher

38




capital expenditures, additional depreciation from WKCF-TV which we acquired on August 31, 2006 and accelerated depreciation of analog equipment.

Amortization was $6.3 million and $6.0 million for the years ended December 31, 2006 and 2005.

Impairment loss.

The Company recorded a $29.2 million write down of its indefinite lived intangible assets and goodwill for the year ended December 31, 2005 which was comprised of $26.2 million in respect of FCC license and $3.0 million in respect of goodwill. In performing its annual review for impairment the Company reduced its estimates of future cash flows for our station in New Orleans due to the negative impact of Hurricane Katrina on the New Orleans market.

Corporate, general and administrative expenses.

Corporate, general and administrative expenses were $31.3 million in the year ended December 31, 2006, as compared to $23.1 million in the year ended December 31, 2005, an increase of $8.1 million or 35.0%. The increase was primarily due to:

(i)            a $2.0 million increase in salaries and incentive costs, a portion of which is related to our investment in our digital media initiatives;

(ii)        $3.7 million in stock-based compensation expense; and

(iii)    a $1.6 million increase due in large part to the timing of professional services expenses.

Operating income.

Operating income was $228.8 million in the year ended December 31, 2006, as compared to $177.4 million in the year ended December 31, 2005, an increase of $51.3 million or 28.9%. This net increase in operating income was due to the items discussed above.

Interest expense.

Interest expense was $66.1 million in the year ended December 31, 2006, as compared to $66.8 million in the year ended December 31, 2005, a decrease of $0.7 million or 1.0%. This decrease was primarily due to:

(i)            a decrease in interest expense as a result of the repurchase of $10 million and $15 million of our senior notes and the related decrease in the amortization of deferred financing fees, partially offset by;

(ii)        an increase in interest expense due to the borrowing of $100 million on our credit facility in August 2006.

Interest income.

Interest income was $6.2 million in the year ended December 31, 2006, as compared to $3.4 million in the year ended December 31, 2005, an increase of $2.8 million or 83.1%. This increas