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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, 2003

or

|_|	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 (State or other jurisdiction of  incorporation or organization)

74-2717523 (I.R.S. Employer Identification No.)

888 Seventh Avenue  New York, NY 10106 (Address of principal executive Offices)

(212) 887-6800 (Registrant’s telephone number, including area code)

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

Title of Each Class Series A Common Stock, par value    $.01 per share

Name of Each Exchange On Which Registered New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

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 |_|

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 an accelerated filer (as defined in Exchange Act Rule 12-b2). Yes |X| No |_|

The aggregate market value of the registrant’s voting common stock held by non-affiliates on March 1, 2004, 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 $766,581,063.

Shares of the registrant’s Common Stock outstanding as of March 1, 2004: 92,879,146 shares (consisting of 51,580,498 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 2004 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 based these forward-looking statements on our current expectations and projections about future events. The forward-looking statements contained in this report, concerning, among other things, trends involving net revenues, cash flow and operating expenses, involve risks and uncertainties, and are subject to change based on various important factors. Those factors include the impact on our operations from:

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Federal governmental regulation of broadcasting;

•

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;

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Changes in national and regional economies;

•

Our ability to service and refinance our outstanding debt;

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

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

Other matters we discuss in this report, or in the documents we incorporate by reference into this report, may also 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. 2003 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I

	Page
Item 1.	Business		4
Item 2.	Properties		15
Item 3.	Legal Proceedings		17
Item 4.	Submission of Matters to a Vote of Security Holders		17
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		17
Item 6.	Selected Financial Data		19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		35
Item 8.	Financial Statements and Supplementary Data		36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		69
Item 9A.	Controls and Procedures		69
	PART III
Item 10.	Directors and Executive Officers of the Registrant		69
Item 11.	Executive Compensation		69
Item 12.	Security Ownership of Certain Beneficial Owners and Management
	and Related Stockholder Matters		69
Item 13.	Certain Relationships and Related Transactions		69
Item 14.	Principal Accountant Fees and Services		69
	PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		69

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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 27 television stations reaching approximately 17.8% of television households in the United States. Our 12 ABC-affiliated television stations, which cover 8.1% of U.S. television households, comprise the largest ABC affiliate group. Our 10 NBC-affiliated television stations, which cover 7.2% of U.S. television households, comprise the second largest NBC affiliate group. We own two CBS-affiliated television stations and one WB station, and manage one UPN station and one independent station. Our relationships with our affiliated television networks also include several strategic joint ventures in the areas of programming, production, syndication and the Internet. We also manage two radio stations.

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

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programs produced by networks with which we are affiliated, such as ABC and NBC;

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programs that we produce locally, such as news and entertainment; and

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first-run syndicated programs that we acquire, such as the Oprah Winfrey Show and Dr. Phil.

In keeping with our commitment to serve the public interest of the local communities in which we operate, our television stations also provide public service announcements and political coverage and sponsor community service projects and other public initiatives. In addition, each of our stations operates a local Web Site which provides our audience with extended news, weather, sports and informational content.

Our primary source of revenue is the sale of commercial air time to advertisers. Our objective is to meet the needs of our advertising customers and increase our advertiser base by delivering mass audiences in key demographics, primarily in the top 100 U.S. markets. We seek to attract our television audience by providing leading local news programming and compelling network and syndicated programs. In addition to offering advertising customers commercial air time, we offer a variety of marketing programs, including community events, sponsorships and Internet advertising.

We view providing leading local news coverage, both on the air and on the Web, as instrumental to our stations’ success. Our stations and Web sites demonstrate journalistic excellence in the areas of national and local coverage, breaking news, major weather events and political coverage of issues, candidates, debates, and elections. We typically rank either first or second (by share of demographic audience, adults 25-54) in local evening news in 20 of the 23 markets where we produce news and our television stations have been recognized with numerous local, state and national awards for outstanding news coverage. Our stations have received numerous honors, including Alfred I. duPont-Columbia Awards, George Foster Peabody Awards, Edward R. Murrow Awards, National Headliners Awards, as well as numerous local Emmys.

For the period ending December 31, 2003, we had revenues of $686.8 million, employed 3,208 full-time and part-time employees and operated in 24 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 22, and presented under Item 8 “Financial Statements and Supplementary Data” beginning on page 36.

We are incorporated under the laws of the State of Delaware. Our principal executive offices are located at 888 Seventh Avenue, New York, New York 10106, 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 symbol “HTV”.

Company Background

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

Hearst was founded in 1887. In 1928, Hearst entered the broadcasting business with its acquisition of radio station WSOE in Milwaukee, Wisconsin. In 1948, Hearst launched its first television station, WBAL-TV, in Baltimore, Maryland,

 

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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. By 1997, when Hearst and Argyle combined their broadcast operations to form our company, they had a total of 15 television stations and two radio stations.

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 (“Pulitzer”), in which we acquired Pulitzer’s 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 radio stations and acquired WMUR-TV, Manchester, New Hampshire. In January of 2004, we signed an agreement to acquire an additional television station, WMTW-TV, Portland, Maine, which we expect to consummate in the second quarter of 2004. The transaction is conditioned on approval by the Federal Communications Commission and other customary closing conditions.

We also have made strategic equity investments in Internet Broadcasting Systems, Inc. (“IBS”) and NBC/Hearst-Argyle Syndication, LLC. We formed a series of local partnerships with IBS for the development and management of local news/information/entertainment Web sites. NBC/Hearst-Argyle Syndication, LLC is a limited liability company we formed with NBC Enterprises as a joint venture to produce and syndicate first-run broadcast and original-for-cable programming. In addition, we have a minor interest in the Arizona Diamondbacks major league baseball team, which we acquired in the Pulitzer transaction, and have a minority interest in ProAct Technologies Corporation (“ProAct”) (formerly Consumer Financial Network, Inc.), a provider of human resources and benefit management solutions for employers and health plans.

As of March 1, 2004, 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 37.47% of the issued and outstanding shares of our Series A Common Stock, representing in the aggregate approximately 65.28% of the outstanding voting power of our Common Stock (except with respect to the election of directors, which is discussed below). On March 1, 2004, Hearst Broadcasting also owned 300,000 Series A Redeemable Convertible Preferred Securities due 2016 and 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 A Redeemable Convertible Preferred Securities and Series B Redeemable Convertible Preferred Securities into securities that are convertible into 1,587,670 shares of our Series A Common Stock, representing in the aggregate approximately 1.71% of the outstanding voting power of our Common Stock as of March 1, 2004 (except with respect to the election of directors, which is discussed below). 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, voting together with our Series A Preferred Stock, par value $.01 per share, and Series B Preferred Stock, par value $.01 per share, are entitled to elect the remaining two members of our Board. When Hearst contributed its broadcast group to Argyle in August 1997 (the “Hearst Transaction”), 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

Of the 27 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 2003-2004 television broadcasting season. We own 24 television stations. In addition, we manage three television stations (WMOR-TV in the Tampa, Florida market, WPBF-TV in the West Palm Beach, Florida market and KCWE-TV in the Kansas City, Missouri market) and two radio stations (WBAL-AM and WIYY-FM in Baltimore, Maryland), all of which, except KCWE-TV, are owned by Hearst. Our management of KCWE-TV allows Hearst to fulfill its obligations under a Program Service and Time Brokerage Agreement between Hearst and the licensee of KCWE-TV (the “Missouri LMA”).

 

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The following table sets forth certain information for each of our owned and managed television stations as of December 31, 2003:

Station	Market		Market Rank(1)		Network Affiliation(2)		Analog Channel		Digital Channel		Percentage of U.S. Television Households(3)
WCVB	Boston, MA		6		ABC		5		20		2.2	%
WMUR	Manchester, NH(4)		6		ABC		9		59		—
WMOR	Tampa, FL		13		IND		32		19		1.5	%
KCRA	Sacramento, CA		19		NBC		3		35		1.2	%
KQCA	Sacramento, CA(5)		19		WB		58		46		—
WESH	Orlando, FL		20		NBC		2		11		1.2	%
WTAE	Pittsburgh, PA		22		ABC		4		51		1.1	%
WBAL	Baltimore, MD		23		NBC		11		59		1.0	%
WISN	Milwaukee, WI		33		ABC		12		34		0.8	%
WLWT	Cincinnati, OH		32		NBC		5		35		0.8	%
KMBC	Kansas City, MO		31		ABC		9		7		0.8	%
KCWE	Kansas City, MO(6)		31		UPN		29		31		—
WYFF	Greenville, SC		35		NBC		4		59		0.7	%
WPBF	West Palm Beach, FL		39		ABC		25		16		0.7	%
WDSU	New Orleans, LA		42		NBC		6		43		0.6	%
KOCO	Oklahoma City, OK		45		ABC		5		7		0.6	%
WXII	Greensboro, NC		46		NBC		12		31		0.6	%
WGAL	Lancaster, PA		47		NBC		8		58		0.6	%
KOAT	Albuquerque, NM		49		ABC		7		21		0.6	%
WLKY	Louisville, KY		50		CBS		32		26		0.6	%
KITV	Honolulu, HI		72		ABC		4		40		0.4	%
KCCI	Des Moines, IA		73		CBS		8		31		0.4	%
KETV	Omaha, NE		77		ABC		7		20		0.4	%
WAPT	Jackson, MS		90		ABC		16		21		0.3	%
WPTZ/WNNE	Plattsburgh, NY/Burlington, VT		89		NBC		5/31		14/23		0.3	%
KHBS/KHOG	Fort Smith/Fayetteville, AR		108		ABC		40/29		21/15		0.2	%
KSBW	Monterey-Salinas, CA		121		NBC		8		10		0.2	%
	TOTAL										17.8	%

(1)

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 U.S., based on Nielsen estimates for the 2003-2004 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; UPN refers to The United Paramount Network; and WB refers to The WB Television Network.

(3)

Based on Nielsen estimates for the 2003-2004 season.

(4)

The Nielsen estimates group data for Manchester, NH is under the Boston DMA.

(5)

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

(6)

Because KCWE and KMBC are in the same DMA, Nielsen 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:

Market		Market Rank(1)		Station		Format
Baltimore, MD(2)		20		WBAL (AM)		News/Talk
				WIYY (FM)		Rock

(1)

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 Winter 2004 Radio Market Report.

(2)

WBAL (AM) and WIYY (FM) radio stations are managed by us under a management agreement with Hearst.

 

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We have an option to acquire WMOR-TV and Hearst’s interests and option with respect to KCWE-TV, which expires in August 2004. If Hearst elects to sell either station prior to, or during, the option period, we will have a right of first refusal to acquire it at its fair market value as determined by the parties, or by an independent third-party appraisal, subject to certain specified parameters. We will exercise any option or right of first refusal related to these properties by action of our independent directors, and we may withdraw any option exercise after we receive the third-party appraisal. We also have a right of first refusal to purchase WPBF-TV if Hearst proposes to sell the station to a third party. That right of first refusal also expires in August 2004.

Network Affiliations

General. Twenty-six of our 27 owned or managed television stations are affiliated with one of the following networks pursuant to a network affiliation agreement: ABC (12 stations), NBC (ten stations), CBS (two stations), UPN (one station) and WB (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 or rebroadcast all programs transmitted by the applicable network. 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. Although we do not expect our network affiliation agreements to be terminated and expect to continue to be able to renew them, we can give no assurance they will not be terminated or that renewals will be obtained on as favorable terms. Our two radio stations also have an affiliation agreement with a network that provides certain content (i.e., news, sports, etc.) for the stations. However, our radio stations are less dependent on their affiliation agreements for programming.

Network Compensation. Historically, the long-established networks have paid compensation to their affiliates in exchange for the broadcasting of network programming. In recent years, network compensation has been sharply reduced and in the future may be eliminated. Our affiliation agreements with NBC 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, the more recently established networks (FOX, UPN, WB and PAX) generally pay little or no cash compensation for the clearance of network programming. In the future the current cash/barter compensation structure may be modified to take into account a variety of alternatives, including additional commercial inventory that may be made available to us and value that we may derive from new business ventures with our networks.

ABC. The terms of the affiliation agreements for our ABC-affiliated stations expire as follows: KMBC, WISN, WCVB, WTAE and WPBF-August 28, 2004; KETV and KOAT-November 1, 2004; WAPT-March 6, 2005; KITV-January 2, 2005; WMUR-August 7, 2005; KHBS/KHOG-August 29, 2004 and KOCO-December 31, 2004. We are in the process of negotiating the renewal of the affiliation agreements with ABC.

NBC. The term of each affiliation agreement for our NBC-affiliated stations—WBAL, WLWT, WYFF, WGAL, WXII, WPTZ/WNNE, KSBW, KCRA, WESH and WDSU—is for a period of nine years, six months, expiring December 31, 2009.

CBS. The initial term of the affiliation agreements for our CBS-affiliated stations KCCI and WLKY is for 10 years (through June 30, 2005) and is subject to successive five-year renewals unless either party notifies the other of its intent not to renew at least six months prior to the end of the term.

UPN and WB. The UPN affiliation agreement with KCWE is for an initial 10-year term (through August 31, 2008). The WB affiliation agreement with KQCA, with an initial term of five years, expires April 5, 2004. We are in the process of negotiating a renewal of the WB affiliation agreement. Unlike affiliates of ABC, CBS or NBC, KQCA may be required to pay compensation to WB (based upon ratings it generates) in exchange for the broadcast rights to WB’s programming. Both UPN and WB have the right to terminate their affiliation agreements in the event of a material breach of the agreement by a station and in certain other circumstances.

Internet

We and IBS have formed a series of local partnerships for the development and management of local news/information/entertainment Internet Web sites to complement our television stations. These Web sites enable our local television stations to provide additional content to viewers. Typically branded with the television station’s call letters or channel number, the Web sites are accessed by our station’s viewers with increasing frequency during the day-time hours, when a sizable portion of the television audience is at work. Our Web sites not only provide additional opportunities to connect with our stations’ viewing

 

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audiences, but provide an additional opportunity to generate additional advertising revenues, as well. Links to each of these Web sites are provided from our corporate Web site, www.hearstargyle.com. In addition, IBS provides Web site development and operating services to the NBC Television Stations Division.

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 broadcasting in any one geographic area, and a license to operate a television station must be granted by the Federal Communications Commission (the “FCC”). All television stations in the country are grouped by Nielsen into 210 generally recognized television markets that are ranked in size according to various formulae 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.

Revenues. Television station revenues are derived primarily from local, regional and national advertising and, to a much lesser extent, from network compensation and other sources. Advertising rates are set based upon a variety of factors, including

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

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the number of advertisers competing for the available time;

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

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the availability of alternative advertising media in the market area.

Rates also are determined by a station’s overall ratings and share in its market, as well as the station’s ratings and share among particular demographic groups that an advertiser may be targeting. Because television stations rely on advertising revenues, they are sensitive to cyclical changes in the economy. 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. The advertising revenues of our stations are 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 revenues in even-numbered years benefit from advertising placed by candidates for political offices, and demand for advertising time in Olympic broadcasts.

Competition

General. The television broadcast industry is highly competitive. Some of the stations that compete with ours are owned and operated by large national or regional companies that may have greater resources, including financial resources, than we do. Competition in the television industry takes place on three primary levels:

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competition for audience;

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competition for programming; and

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competition for advertisers.

Additional factors material to a television station’s competitive position include signal strength and coverage within a geographic area and assigned frequency or channel position. Although 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, the improvement of UHF transmitters and receivers, the complete elimination from the marketplace of VHF-only receivers, the expansion of cable television and satellite delivery systems and the commencement of digital broadcasting have reduced the VHF signal’s competitive advantage.

Audience. We compete for audience on the basis of program popularity, which has a direct effect on the rates we can charge our advertisers. Our stations’ affiliated networks supply a significant portion of our daily programming. Consequently, in time periods in which the network provides programming, our stations are primarily dependent upon the popularity of the network’s programs to attract viewers. Our stations also compete in non-network time periods based on the performance of their

 

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own programming during those periods, using the combination of locally-produced news, public affairs and entertainment programming, including syndicated programs, that the station believes will attract the most viewers.

In addition, although the commercial television broadcast industry has been dominated by the broadcast networks ABC, NBC, CBS (with which the majority of our stations are affiliated) and FOX, newer networks WB and UPN, as well as cable-originated programming, have become significant competitors for the broadcast television audience. While broadcast-originated signals still constitute the majority of viewing in most cable homes, the percentage of television households that are connected to a cable system has increased, as have made-for-cable programming and the number of cable channels and networks.

Our stations also face competition from direct broadcast satellite services, such as EchoStar (DISH Network) and DIRECTV, which transmit programming directly to homes equipped with special receiving antennas. We compete with these services both on the basis of service and product performance (quality of reception and number of channels that may be offered) and price (the relative cost to utilize these systems compared to broadcast television viewing).

Advances in technology, such as increasing use of local-cable advertising “interconnects,” which allow for easier insertion of advertising on local cable systems, may also increase competition for household audiences and advertisers. Video compression techniques, now in use with direct broadcast satellites and, in growing use with cable and wireless cable, are expected to permit greater numbers of channels to be carried within existing bandwidth. These compression techniques, as well as other technological developments, are applicable to all video delivery systems, including 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. This ability to reach very narrowly defined audiences is expected to increase competition both for audience and for advertising revenues. We cannot predict the effect that technological changes will have on the broadcast television industry or the future results of our stations.

Other sources of competition for audience include

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

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digital video recorders, also known as personal video recorders;

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video-on-demand and television game devices;

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the Internet;

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multipoint distribution systems;

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multichannel multipoint distribution systems or “wireless cable” satellite master antenna television systems; and

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other sources of home entertainment.

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 compete against other local broadcast stations for exclusive local access to first-run product (such as the Oprah Winfrey Show). To a lesser extent, we also compete for exclusive local access to off-network reruns (such as Seinfeld). Cable systems and DBS systems also compete with local stations for programming, and various national cable networks from time to time have acquired programs that otherwise would have been offered to local television stations.

Advertising. Broadcast television stations compete for advertising revenues 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 revenues with a variety of other media, such as radio stations, Internet Web sites, print media, direct marketing and cable system operators serving the same market. Since greater amounts of advertising time are available for sale by independent stations, independent stations typically achieve a greater proportion of television market advertising revenues relative to their share of the market’s audience. Public broadcasting outlets in most communities compete with commercial broadcasters for viewers but not generally for significant advertising revenues.

Federal Regulation of Television Broadcasting

General. Broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended, and most recently amended by the Telecommunications Act of 1996 (the “Communications Act”). The Communications Act requires the FCC to regulate broadcasting so as to serve “the public interest, convenience and necessity.” The Communications

 

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Act prohibits the operation of television broadcasting stations except pursuant to licenses issued by the FCC and empowers the FCC, among other things, to

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issue, renew, revoke and modify broadcasting licenses;

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assign frequency bands; determine stations’ frequencies, locations and power; and

•

regulate the equipment used by stations.

The Communications Act prohibits the assignment of a license or the transfer of control of a licensee without the FCC’s prior approval. The FCC also regulates certain aspects of the operation of cable television systems, DBS systems and other electronic media that compete with broadcast stations. In addition, although the FCC has reduced significantly its regulation of broadcast stations, the FCC continues to regulate matters such as 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.

License Renewals. Under the Communications Act, the FCC may grant broadcast licenses for terms of eight years. The Communications Act requires renewal of 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 renewal of license.

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(1)
WCVB		Boston, MA		April 1, 2007
WMUR		Manchester, NH		April 1, 2007
WMOR		Tampa, FL		February 1, 2005
KCRA		Sacramento, CA		December 1, 2006
KQCA		Sacramento, CA		December 1, 2006
WESH		Orlando, FL		February 1, 2005
WTAE		Pittsburgh, PA		August 1, 2007
WBAL		Baltimore, MD		October 1, 2004*
KMBC		Kansas City, MO		February 1, 2006
KCWE		Kansas City, MO		February 1, 2006
WLWT		Cincinnati, OH		October 1, 2005
WISN		Milwaukee, WI		December 1, 2005
WYFF		Greenville, SC		December 1, 2004*
WPBF		West Palm Beach, FL		February 1, 2005
WDSU		New Orleans, LA		June 1, 2005
WXII		Greensboro, NC		December 1, 2004*
KOCO		Oklahoma City, OK		June 1, 2006
WGAL		Lancaster, PA		August 1, 2007
KOAT		Albuquerque, NM		October 1, 2006
KOCT (satellite station of KOAT)**		Carlsbad, NM		October 1, 2006
KOVT (satellite station of KOAT)**		Silver City, NM		October 1, 2006
KOFT-DT (satellite station of KOAT)** (2)		Farmington, NM		October 1, 2006
WLKY		Louisville, KY		August 1, 2005
KCCI		Des Moines, IA		February 1, 2006
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
KETV		Omaha, NE		June 1, 2006
WAPT		Jackson, MS		June 1, 2005
WPTZ		Plattsburgh, NY		June 1, 2007
WNNE (satellite station of WPTZ)**		Burlington, VT		April 1, 2007

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Station		Market		Expiration of FCC License(1)
KHBS		Fort Smith, AR		June 1, 2005
KHOG (satellite station of KHBS)**		Fayetteville, AR		June 1, 2005
KSBW		Monterey-Salinas, CA		December 1, 2006

*

We will file for renewal of licenses for these stations this year.

**		Satellite stations retransmit the signal of a primary station, and may offer some locally originated programming.
(1)		For more information, please refer to “Digital Television Service” below relating to the transition to digital television.
(2)		Our satellite station KOFT-DT in Farmington, NM operates in digital mode only.

Ownership Regulation. The Communications Act and FCC rules restrict the ownership of broadcast stations. The FCC limits the ability of individuals and entities to own or have an official position or ownership interest above a certain level (an “attributable” interest) in broadcast stations. Both Hearst and Pulitzer have attributable interests in our company that restrict our ability to acquire stations in areas in which they own media properties. On June 2, 2003, the FCC issued an order substantially revising its rules. This order was the culmination of the most comprehensive review of media ownership regulation in the agency’s history, spanning 20 months and encompassing a public record of more than 520,000 comments. Various appeals of this order are currently pending before the United States Court of Appeals for the Third Circuit. During the pendency of the Third Circuit’s review of the FCC’s new rules, the FCC’s prior ownership rules remain in effect. We cannot predict what actions the Third Circuit or the FCC will take in the future or how changes in the rules will impact our business. The FCC’s current ownership rules that are material to our operations are summarized below:

Local Market Television Ownership. Under the currently effective rules, a party may own two television stations without regard to signal contour overlap provided they are located in separate Nielsen DMAs. In addition, the rules permit parties in larger markets to own up to two TV stations in the same DMA so long as at least eight independently owned and operating full-power commercial and non-commercial television stations remain in the market at the time of acquisition and at least one of the two stations is not among the top four-ranked stations in the market based on audience share. 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 certain signal contours of the stations involved do not overlap. “Satellite stations” that rebroadcast the programming of a “parent” station will continue to be exempt from the rule if located in the same DMA as the “parent” station. The FCC may grant a waiver of the local television ownership rule under specified circumstances. We are currently in compliance with the local television ownership rule.

The FCC’s June 2, 2003 rules, which are currently not effective and are pending before the Third Circuit, would permit parties to own two stations in markets with five or more TV stations so long as both of the two stations are not among the top four-ranked stations in the markets based on audience share. Further, in markets with 18 or more TV stations a party would be able to own three stations, but only one of these stations could be among the top-four ranked stations in the market. Under the new rules, the FCC has said that it would also consider, on a case-by-case basis, requests to waive the top four-ranked restriction in markets with 11 or fewer television stations.

National Television Ownership Cap. The national television ownership rule limits the number of television stations one entity may own nationally. Under the FCC’s old rules, no entity may have an attributable interest in television stations whose audience reach, in the aggregate, exceeds 35% of all U.S. television households. The FCC’s June 2, 2003 rules increased the 35% cap to 45%. However, Congress later passed, and the President signed, a bill into law on January 23, 2004 that fixed the cap at 39%. The Third Circuit, in the currently pending case, has announced that it views the challenges to the 45% cap as having been mooted by this recent legislation.

The FCC currently discounts the audience reach of a UHF station by 50%. Further, for entities that have attributable interests in two stations in the same market, the FCC counts the audience reach of the station in that market only once for national cap purposes. The FCC is currently studying the UHF discount. The propriety of the UHF discount is also at issue before the Third Circuit.

Dual Network Rule. The dual network rule prohibits a merger between or among four major broadcast television networks— ABC, CBS, FOX and NBC. The FCC’s June 2003 order retains this prohibition.

Local Radio Ownership. With respect to radio, the maximum allowable number of stations that can be commonly owned in a market varies depending on the number of radio stations within that market, as determined using a contour-overlap method. In markets with more than 45 stations, one company may own, operate or control eight stations, with no more than five in any one service (AM or FM). In markets of 30-44 stations, one company may own seven stations, with no more than four in any one service; in markets of 15-29 stations, one entity may own six stations, with no more than four in any one service. In

 

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markets with 14 commercial stations or less, one company may own up to five stations or 50% of all of the stations, whichever is less, with no more than three in any one service. The FCC’s June 2, 2003 Order changed the radio market definition from the contour-overlap method to a more restrictive definition using Arbitron markets. The new market definition is currently under review by the Third Circuit.

Media Cross-Ownership. The FCC’s currently effective rules prohibit the licensee of an AM, FM, 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. The 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, i.e., markets with at least 20 independently owned media voices, a single entity can own up to one television station and seven radio stations (if 8 full-power television stations would remain in the market post transaction) or, if permissible under the local television ownership rule, two television stations and six radio stations.

The FCC’s June 2, 2003 rules, which are currently not effective and are pending before the Third Circuit, would replace the broadcast-newspaper and the radio-television cross-ownership rules with the following “cross-media limits”:

•

In markets with three or fewer TV stations, no cross-ownership would be permitted among TV, radio, and newspapers. A company could obtain a waiver of that ban if it can show that the television station does not serve the area served by the cross-owned property (i.e., the radio station or the newspaper).

•

In markets with between 4 and 8 TV stations, combinations would be limited to one of the following:

(A) A daily newspaper, one TV station, and up to half of the radio station limit for that market (i.e., if the radio limit in the market is 6, the company can only own 3), or

(B) A daily newspaper; and up to the radio station limit for that market (i.e., no TV stations), or

(C) Two (or three) TV stations (if permissible under local TV ownership rule); and up to the radio station limit for that market (i.e., no daily newspapers).

•

In markets with 9 or more TV stations, the newspaper-broadcast cross-ownership ban and the television-radio cross-ownership ban would be eliminated.

Cable-Television Cross-Ownership. In January 2003, the FCC repealed its rule that had prohibited common control of a television station and a cable television system in the same local market. The elimination of the rule would permit the ownership of a cable system and a television station in the same local market.

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

•

holders of 5% or more of the licensee’s voting stock;

•

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

•

voting stock interests of at least 20%, if the holder is a passive institutional investor (investment companies, banks, insurance companies);

•

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.

All non-conforming interests acquired before November 7, 1996 are permanently grandfathered and thus do not constitute attributable ownership interests. There is also an exemption from attribution for voting stock interests of minority shareholders in a corporation in which a single shareholder owns more than 50% of the voting stock. These minority interests are not attributable unless the minority shareholder’s financial interest amounts to over 33% of the company’s total asset value (equity plus debt) and the majority shareholder is either a major program supplier to the company or a same-market media entity.

 

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Thus, in our case, where Hearst is the single majority shareholder, ownership of minority stock interests of up to 33% would not be attributable absent other factors. A proceeding remains open at the FCC considering the elimination of the single majority shareholder exception.