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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-2700
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.)
888 Seventh Avenue 10106
New York, NY (Zip code)
(Address of principal executive Offices)
Registrant's telephone number, including area code: (212) 887-6800
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 New York Stock Exchange
$.01 per share
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. [ ]
The aggregate market value of the Registrant's voting stock held by
nonaffiliates on March 22, 1999, 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 $859,000,000.
Shares of Common Stock outstanding at March 22, 1999: 89,147,879 shares
(consisting of 47,849,231 shares of Series A Common Stock and 41,298,648
shares of Series B Common Stock).
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's Proxy
Statement relating to the 1999 Annual Meeting of Stockholders are incorporated
by reference into Part III (Items 10, 11, 12 and 13).
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FORWARD-LOOKING STATEMENTS
THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT, CONCERNING, AMONG
OTHER THINGS, INCREASES IN NET REVENUES AND BROADCAST CASH FLOW (AS DEFINED
HEREIN) AND REDUCTIONS IN OPERATING EXPENSES, INVOLVE RISKS AND UNCERTAINTIES,
AND ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS, INCLUDING THE
IMPACT OF CHANGES IN NATIONAL AND REGIONAL ECONOMIES, SUCCESSFUL INTEGRATION
OF ACQUIRED TELEVISION STATIONS (INCLUDING ACHIEVEMENT OF SYNERGIES AND COST
REDUCTIONS), PRICING FLUCTUATIONS IN LOCAL AND NATIONAL ADVERTISING AND
VOLATILITY IN PROGRAMMING COSTS.
PART I
ITEM 1. BUSINESS
As of March 22, 1999, Hearst-Argyle Television, Inc. (the "Company") owns or
manages 26 network-affiliated television stations that reach approximately
17.5% of U.S. television households, and seven radio stations. The Company is
one of the country's largest independent, or non-network-owned, TV station
groups. The Company is also the largest ABC affiliate group and the second
largest NBC affiliate group.
The Company was formed in 1994 as a Delaware corporation under the name
Argyle Television, Inc. ("Argyle"), and its business operations began in
January 1995 with the consummation of its acquisition of three television
stations. Pursuant to a merger transaction that was consummated on August 29,
1997 and effective September 1, 1997 (the "Hearst Transaction"), The Hearst
Corporation ("Hearst") contributed its television broadcast group and related
broadcast operations (the "Hearst Broadcast Group") to Argyle and merged a
wholly owned subsidiary of Hearst with and into Argyle, with Argyle as the
surviving corporation (renamed "Hearst-Argyle Television, Inc.").
Effective June 1, 1998, the Company completed a tax-deferred exchange (the
"STC Swap") with STC Broadcasting, Inc. and certain related entities
(collectively, "STC") whereby the Company exchanged its television stations
WNAC-TV, Providence, Rhode Island, and WDTN-TV, Dayton, Ohio, for STC's
television stations KSBW-TV, Monterey-Salinas, California, and WPTZ-TV/WNNE-
TV, Burlington, Vermont--Plattsburgh, New York. Divestiture of WNAC and WDTN
was required under the order of the Federal Communications Commission (the
"FCC") approving the Hearst Transaction.
On January 5, 1999 (effective January 1, 1999 for accounting purposes) the
Company acquired, through a merger transaction (the "Kelly Transaction") with
Kelly Broadcasting Co., a California limited partnership ("Kelly
Broadcasting"), television broadcast station KCRA-TV, Sacramento, California
and the programming rights under an existing Time Brokerage Agreement with
Channel 58, Inc., a California corporation, with respect to KQCA-TV,
Sacramento, California. In addition, the Company acquired substantially all of
the assets and certain of the liabilities of Kelleproductions, Inc., a
California corporation ("Kelleproductions").
Further, on March 18, 1999, the Company acquired, through a merger
transaction (the "Pulitzer Transaction") with Pulitzer Publishing Company, a
Delaware corporation ("Pulitzer"), television stations WESH-TV, Orlando,
Florida, WYFF-TV, Greenville, South Carolina, WDSU-TV, New Orleans, Louisiana,
WGAL-TV, Lancaster, Pennsylvania, WXII-TV, Greensboro, North Carolina, WLKY-
TV, Louisville, Kentucky, KOAT-TV, Albuquerque, New Mexico, KCCI-TV, Des
Moines, Iowa, and KETV-TV, Omaha, Nebraska; and radio stations KTAR-AM, KMVP-
AM and KKLT-FM, Phoenix, Arizona, WXII-AM, Greensboro, North Carolina, and
WLKY-AM, Louisville, Kentucky.
As of March 22, 1999, Hearst owned through its wholly owned subsidiary,
Hearst Broadcasting, Inc. ("Hearst Broadcasting"), 100% of the issued and
outstanding shares of Series B Common Stock, par value $.01 per share, of the
Company (the "Series B Common Stock," and together with the Series A Common
Stock, par
2
value $.01 per share, of the Company ("Series A Common Stock"), the "Common
Stock") and approximately 10.5% of the issued and outstanding shares of the
Series A Common Stock, representing in the aggregate approximately 51.9% of
the outstanding voting power of the Common Stock. Through its ownership of the
Series B Common Stock, Hearst Broadcasting is entitled to elect as a class all
but two members of the Board of Directors of the Company (the "Board").
Holders of the Series A Common Stock, together with the Company's 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 the
Company Board. In connection with Hearst's contribution of its broadcast group
to Argyle on August 29, 1997, Hearst agreed that, for as long as it held any
shares of Series B Common Stock and to the extent that Hearst during such time
also held any shares of Series A Common Stock, it would vote its shares of
Series A Common Stock with respect to the election of directors only in the
same proportion as the shares of Series A Common Stock not held by Hearst are
so voted. The Series A Common Stock is listed on the NYSE under the symbol
"HTV."
The Company is organized under the laws of the State of Delaware and its
principal executive offices are located at 888 Seventh Avenue, New York, New
York 10106, (212) 887-6800.
The Stations
Of the 26 television stations the Company owns or manages, 19 are in the top
50 of the 211 generally recognized geographic designated market areas ("DMAs")
according to A.C. Nielsen Co. ("Nielsen") estimates for the 1998-1999
television broadcasting season. The Company owns 22 television stations and
five radio stations. In addition, the Company manages two television stations
(WWWB-TV in Tampa, Florida and WPBF-TV in West Palm Beach, Florida) and two
radio stations (WBAL(AM) and WIYY(FM) in Baltimore, Maryland), that are owned
by Hearst. The Company also provides management services to Hearst in order to
allow Hearst to fulfill its obligations under a program service and Time
Brokerage Agreement between Hearst and the permittee of KCWE-TV in Kansas
City, Missouri (the "Missouri LMA"). The Company also programs and sells a
portion of the air time on KQCA (Sacramento, CA) under a Time Brokerage
Agreement with the FCC licensee of KQCA (the "California LMA"). For the year
ended December 31, 1998, on a pro forma basis after giving effect to the
consummation of the Kelly Transaction and the Pulitzer Transaction, the
Company's total revenues and broadcast cash flow were $731.0 million and
$346.3 million, respectively.
Under current FCC rules, the Company will not be able to own both the WBAL-
TV (Baltimore, Maryland) television station and the WGAL-TV (Lancaster,
Pennsylvania) television station and therefore the FCC, as part of its consent
to the Pulitzer Transaction required the Company to file an application to
divest either WBAL-TV or WGAL-TV (or propose such other action that would
result in compliance with such FCC rules) within six months following
consummation of the Pulitzer Transaction, or by September 18, 1999.
3
The following table sets forth certain information for each of the Company's
owned and managed television stations:
Percentage of
U.S.
Market Television Network Television
Market Rank(1) Station Affiliation Channel Households(2)
- ------------------------- ------- ---------- ----------- ------- -------------
Boston, MA............... 6 WCVB ABC 5 2.20%
Tampa, FL(3)............. 14 WWWB WB 32 1.47%
Pittsburgh, PA........... 19 WTAE ABC 4 1.14%
Sacramento, CA........... 20 KCRA NBC 3 1.14%
Sacramento, CA(4)........ 20 KQCA WB 58 --
Orlando, FL.............. 22 WESH NBC 2 1.08%
Baltimore, MD(5)......... 24 WBAL NBC 11 1.00%
Milwaukee, WI............ 31 WISN ABC 12 0.81%
Cincinnati, OH........... 32 WLWT NBC 5 0.81%
Kansas City, MO.......... 33 KMBC ABC 9 0.81%
Kansas City, MO(3)....... 33 KCWE UPN 29 --
Greenville, SC........... 35 WYFF NBC 4 0.74%
New Orleans, LA.......... 41 WDSU NBC 6 0.63%
West Palm Beach, FL(3)... 44 WPBF ABC 25 0.61%
Oklahoma City, OK........ 45 KOCO ABC 5 0.60%
Lancaster, PA(5)......... 46 WGAL NBC 8 0.60%
Greensboro, NC........... 47 WXII NBC 12 0.59%
Louisville, KY........... 48 WLKY CBS 32 0.57%
Albuquerque, NM.......... 49 KOAT ABC 7 0.57%
Des Moines, IA........... 70 KCCI CBS 8 0.39%
Honolulu, HI............. 71 KITV ABC 4 0.38%
Omaha, NE................ 73 KETV ABC 7 0.38%
Jackson, MS.............. 89 WAPT ABC 16 0.30%
Burlington, VT........... 91 WPTZ/WNNE NBC 5/31 0.29%
Ft. Smith/Fayetteville,
AR...................... 117 KHBS/KHOG ABC/ABC 40/29 0.22%
Monterey-Salinas, CA..... 119 KSBW NBC 8 0.22%
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Total................ 17.55%
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(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 211 generally recognized DMAs in the U.S.,
based on Nielsen estimates for the 1998-99 season.
(2) Based on Nielsen estimates for the 1998-99 season.
(3) WWWB-TV and WPBF-TV television stations are managed by the Company under
a management agreement with Hearst. In addition, the Company provides
certain management services to Hearst in order to allow Hearst to fulfill
its obligations under a program services and time brokerage agreement
between Hearst and the permittee of KCWE in Kansas City, Missouri.
(4) Provides programming and other services under a time brokerage agreement
with Channel 58, Inc., the FCC licensee of KQCA.
(5) Under current FCC rules, the Company is not able to continue to own both
the WBAL-TV (Baltimore, Maryland), and the WGAL-TV (Lancaster,
Pennsylvania) television stations. The FCC, as part of its order granting
consent to the transfer of control of Pulitzer, has granted to the
Company a temporary, six-month waiver (from the date of consummation of
the Pulitzer Transaction) of the applicable rule in order to enable it to
divest one of the stations in order to achieve compliance with the rules.
4
The following table sets forth certain information for each of the Company's
owned and managed radio stations:
Market Radio
Market Rank(1) Station Format
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Phoenix, AR................................. 17 KTAR-AM News
KMVP-AM Sports
KKLT-FM Light Rock
Baltimore, MD(2)............................ 19 WBAL-AM News
WIYY-FM Album Oriented Rock
Greensboro, NC0057.......................... 40 WXII-AM News
Louisville, KY.............................. 52 WLKY-AM News
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(1) Market rank is based on BIA Research, Inc.'s Investing in Radio 1998
Market Report.
(2) WBAL-AM and WIYY-FM radio stations are managed by the Company under a
management agreement with Hearst.
The Company has an option to acquire WWWB-TV and Hearst's interests and
option with respect to KCWE-TV (together with WWWB-TV, the "Option
Properties"), as well as a right of first refusal until approximately August
2000 with respect to WPBF-TV (if such station is proposed by Hearst to be sold
to a third party). The option period for each Option Property commenced in
February 1999 and terminates in August 2000 and the purchase price is the fair
market value of the station as determined by the parties, or an independent
third-party appraisal, subject to certain specified parameters. If Hearst
elects to sell an Option Property prior to the commencement of, or during, the
option period, the Company will have a right of first refusal to acquire such
Option Property. The exercise of the option and the right of first refusal
will be by action of the independent directors of the Company, and any option
exercise may be withdrawn by the Company after receipt of the third-party
appraisal.
Network Affiliation Agreements and Relationship
General. Each of the Company's owned or managed television stations
(collectively, the "Stations") is affiliated with one of the following major
networks pursuant to a network affiliation agreement: ABC, NBC, CBS, UPN and
WB (each, a "Network"). Each affiliation agreement provides the affiliated
Station with the right to rebroadcast all programs transmitted by the Network
with which the Station is affiliated. In return, the Network has the right to
sell a substantial majority of the advertising time during such broadcasts.
Generally, in exchange for every hour that a Station broadcasts network
programming, the Network pays the Station a specified network compensation
payment, which varies with the time of day. Typically, prime-time programming
generates the highest hourly network compensation payments. Eleven of the
Stations have network affiliation agreements with ABC, 10 of the Stations have
agreements with NBC, two of the Stations have agreements with CBS, two of the
Stations have agreements with WB and one of the Stations has an agreement with
UPN. In addition, three of the Company's radio stations have affiliation
agreements with networks that provide certain content (i.e., news, sports,
etc.) for such stations. The Company's radio stations are less dependent on
their affiliation agreements for programming. Although the Company does not
expect that its network affiliation agreements will be terminated and expects
to continue to be able to renew its network affiliation agreements (other than
for WWWB), no assurance can be given that such agreements will not be
terminated or that renewals will be obtained on as favorable terms or at all.
ABC. Generally, the term of each affiliation agreement with ABC is two
years, renewable for successive two-year periods, and each affiliation
agreement is subject to cancellation by either party upon six months notice to
the other party. In the case of WTAE, the affiliation agreement is not subject
to cancellation on six months notice, and the term of the affiliation
agreement will be successively renewed unless either party gives the other
notice of non-renewal six months prior to the end of the then current term. In
the case of KITV, the affiliation agreement is not expressly renewable but is
effective through January 2005. In the case of WAPT, the affiliation agreement
is for a term of 10 years (through March 5, 2005). In the case of WPBF, the
affiliation agreement is
5
not subject to successive renewal periods. In the case of KETV and KOAT, the
affiliation agreements are each for a term of 10 years (through November 1,
2004). In 1994 negotiations commenced to renew the ABC affiliation agreements
relating to the ABC affiliates acquired in the Hearst Transaction to provide
for, among other things, 10-year terms and increased compensation. Such
agreements are still in the process of negotiation and documentation has not
yet been finalized, although the Company is receiving its increased
compensation.
NBC. The term of the NBC affiliation agreement with WBAL is a period of
seven years and is subject to successive three-year renewals unless either
party gives the other notice of non-renewal 12 months prior to the end of the
then current term. The NBC affiliation agreement for WLWT is for an initial
term of six years (through August 28, 2000) and is renewable for successive
four-year terms unless either party gives notice of intent not to renew at
least six months prior to the end of the initial or any successive term. The
NBC affiliation agreements for WDSU, WYFF, WXII, WGAL and WESH are for an
initial term of 10 years (commencing January 1, 1995) and are subject to
successive five year renewals unless either party gives notice of intent not
to renew at least 12 months prior to the end of the initial or any successive
term. The NBC affiliation agreement with KCRA is for an initial term of six
years (through January 1, 2001) and is subject to successive five year
renewals unless either party gives notice of intent not to renew at least 12
months prior to the end of the initial or any successive term. The NBC
affiliation agreements with WPTZ and WNNE are for an initial term of seven
years (commencing January 1, 1995) and are subject to successive three year
renewals unless either party gives notice of intent not to renew at least 12
months prior to the end of the initial or any successive term. The term of the
NBC affiliation agreement with KSBW is from January 17, 1996 to December 31,
2005 and is subject to successive five year renewals unless either party gives
notice of intent not to renew at least 12 months prior to the end of the
initial or any successive term.
CBS. The term of the CBS affiliation agreements with KCCI and WLKY are for
an initial term of 10 years (through June 30, 2005) and are subject to
successive five year renewals unless either party gives notice of intent not
to renew at least six months prior to the end of the initial or any successive
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 WWWB
expires on September 30, 1999, and WB has given notice that the affiliation
with WWWB will not be renewed. The WB affiliation agreement with KQCA is for a
term of two years (through January 3, 2000). Unlike affiliates of ABC or NBC,
WB affiliates may be required to pay the network compensation based upon
ratings generated by the station in return for the broadcast rights to the
network's programming. Both UPN and WB have the right to terminate their
affiliation agreements in the event of a material breach of such agreement by
a station and in certain other circumstances.
Recent Developments
Following is a brief description of the developments of the Company's
business since January 1, 1998:
Pulitzer Transaction. On March 18, 1999 in the Pulitzer Transaction, the
Company consummated a merger transaction with Pulitzer pursuant to which: (i)
Pulitzer contributed to Pulitzer Inc., a Delaware corporation and wholly owned
subsidiary of Pulitzer ("New Pulitzer"), all of its assets (other than its
broadcasting assets) and the net proceeds of $700 million of new debt after
the satisfaction of certain liabilities (the "New Debt"), subject to all
liabilities of Pulitzer (other than broadcasting liabilities, the New Debt and
certain other obligations) and distributed shares of capital stock of New
Pulitzer to Pulitzer's stockholders and (ii) Pulitzer with its remaining
television and radio broadcast assets and liabilities, the New Debt and
certain other obligations was merged with and into the Company with the
Company being the surviving corporation in the merger, in exchange for the
issuance to Pulitzer stockholders of 37,096,774 shares of Series A Common
Stock. Immediately after the merger, the Company repaid the New Debt through
borrowings under its existing credit facility. In a related transaction after
the merger, the Company acquired Pulitzer Sports, Inc., which holds a minority
equity interest in the Arizona Diamondbacks baseball team, for a $5 million
cash payment to New Pulitzer.
6
Kelly Transaction. On January 5, 1999 (effective January 1, 1999 for
accounting purposes) in the Kelly Transaction, the Company acquired through a
merger transaction all of the partnership interests in Kelly Broadcasting in
exchange for approximately $520 million in cash, subject to a working capital
adjustment. As a result of the Kelly Transaction, the Company acquired
television broadcast station KCRA-TV, Sacramento, California and the
programming rights under an existing Time Brokerage Agreement with Channel 58,
Inc., a California corporation, with respect to KQCA-TV, Sacramento,
California. In addition, the Company acquired substantially all of the assets
and certain of the liabilities of Kelleproductions, Inc., a California
corporation, for approximately $10 million in cash.
Private Placement Debt. In late December 1998 and early January 1999, the
Company issued $450 million aggregate principal amount of senior notes to
institutional investors. The notes have a maturity of 12 years, with an
average life of 10 years, and bear interest at 7.18% per annum.
Market Share Repurchase. Simultaneously with the public announcement of the
Pulitzer Transaction on May 26, 1998, the Company's Board authorized a market
repurchase program (the "Repurchase Program") pursuant to which the Company
may purchase, at such times and on such terms as it determines appropriate, up
to $300 million of the Series A Common Stock. The Company's Board authorized
the Repurchase Program in order to adjust the capital structure of the Company
in respect of the debt to equity ratio in light of the significant amount of
equity to be issued in the Pulitzer Transaction. As of March 22, 1999, the
Company had, pursuant to the Repurchase Program, purchased 1,835,727 shares of
Series A Common Stock for aggregate consideration of $54.0 million. In
addition, at the time of the public announcement of the Pulitzer Transaction,
Hearst Broadcasting notified the Company of its intention of purchase up to 10
million shares of Series A Common Stock from time to time in the open market,
in private transactions or otherwise. As of March 22, 1999, Hearst
Broadcasting had purchased 5,012,125 shares of the Series A Common Stock for
aggregate consideration of $154.8 million.
NYSE Listing. On July 22, 1998, the Series A Common Stock was listed on the
NYSE under the symbol "HTV." Prior to listing on NYSE, Series A Common Stock
was quoted on the Nasdaq National Market under the symbol "HATV."
The Commercial Television Broadcasting Industry
General. Commercial television broadcasting began in the United States 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 FCC. Television stations
that broadcast over the VHF band (channels 2-13) of the spectrum generally
have some 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 and the expansion of cable television
systems, however, have reduced to some extent the VHF signal advantage.
All television stations in the country are grouped by Nielsen, a national
audience measuring service, into 211 generally recognized television markets
that are ranked in size according to various formulae based upon actual or
potential audience. Each market is designated as an exclusive geographic area
consisting of all counties in which the home-market commercial stations
receive the greatest percentage of total viewing hours. These specific
geographic markets are referred to by Nielsen as "designated market areas"
("DMAs"). Nielsen periodically publishes data on estimated audiences for the
television stations in the various markets throughout the country. The
estimates are expressed in terms of the percentage of the total potential
audience in the market viewing a station (the station's "rating") and of the
percentage of households using television actually viewing the station (the
station's "share"). Nielsen provides such data on the basis of total
television households and selected demographic grouping in the market. Nielsen
uses two methods of determining a station's ability to attract viewers. In
larger geographic markets, ratings are determined by a combination of meters
connected directly to selected television sets and weekly diaries of
television viewing, while in smaller markets only weekly diaries are utilized.
7
Historically, three major broadcast networks--ABC, NBC and CBS--dominated
broadcast television. In recent years, however, Fox effectively has evolved
into the fourth major network, even though it produces seven hours less of
prime time programming than the other major networks. In addition, UPN, The WB
and, more recently, PaxTV have been launched as television networks. Stations
that operate without network affiliations are referred to as "independent"
stations. All of the Stations are affiliated with networks, although one of
the Stations, WWWB, will become an independent station as of October 1, 1999.
The affiliation by a station with one of the four major networks has a
significant impact on the composition of the station's programming, revenues,
expenses and operations. A typical affiliate of a major network receives the
majority of each day's programming from the network. This programming, along
with cash payments ("Network Compensation"), is provided to the affiliate by
the network in exchange for a substantial majority of the advertising time
sold during the airing of network programs. The network then sells this
advertising time for its own account. The affiliate retains the revenues from
time sold during breaks in and between network programs and during programs
produced by the affiliate or purchased from non-network sources. In acquiring
programming to supplement programming supplied by the affiliated network,
network affiliates compete primarily with other affiliates and independent
stations in their markets. Cable systems generally do not compete with local
stations for programming, although various national cable networks from time
to time have acquired programs that otherwise would have been offered to local
television stations. In addition, a television station may acquire programming
though barter arrangements. Under barter arrangements, a national program
distributor may receive advertising time in exchange for the programming it
supplies, with the station paying either a reduced fee or no fee for such
programming.
A fully independent station, unlike a network-affiliated station, purchases
or produces all of the programming that it broadcasts, resulting in generally
higher programming costs. The independent station, however, may retain its
entire inventory of advertising time and all of the revenues obtained
therefrom.
Television station revenues are derived primarily from local, regional and
national advertising and, to a much lesser extent, from network compensation
and revenues from studio or tower rental and commercial production activities.
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 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 broadcast 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 the 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. From time to time, proposals have been advanced in the U.S.
Congress and at the FCC to require television broadcast stations to provide
advertising time to political candidates at no or reduced charge, which would
eliminate in whole or in part advertising revenues from political candidates.
Through the 1970s, network television broadcasting enjoyed virtual dominance
in viewership and television advertising revenues, because network-affiliated
stations competed only with each other in local markets. Beginning in the
1980s, this level of dominance began to change, as the FCC authorized more
local stations and marketplace choices expanded with the growth of independent
stations and cable television services. Cable television systems were first
installed in significant numbers in the 1970s and were initially used
primarily to retransmit broadcast television programming to paying subscribers
in areas with poor broadcast signal reception. In the aggregate, cable-
originated programming has emerged as a significant competitor for viewers of
broadcast television programming, although no single cable programming network
regularly attains audience levels equivalent to any of the major broadcast
networks and, collectively, the broadcast originated signals still
8
constitute the majority of viewing in most cable homes. The advertising share
of cable networks has increased during the 1970s, 1980s and 1990s as a result
of the growth in cable penetration (the percentage of television households
that are connected to a cable system). Notwithstanding such increases in cable
viewership and advertising, over-the-air broadcasting remains the dominant
distribution system for mass market television advertising.
Competition. The television broadcast industry is highly competitive. Some
of the stations that compete with the Stations are owned and operated by large
national or regional companies that may have greater resources, including
financial resources, than the Company. Competition in the television industry
takes place on several levels: competition for audience, competition for
programming (including news) and competition for advertisers. Additional
factors material to a television station's competitive position include signal
coverage and assigned frequency.
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now in use with
direct broadcast satellites and in development for 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 alter the competitive dynamics for advertising expenditures. The Company is
unable to predict the effect that technological changes will have on the
broadcast television industry or the future results of the Stations.
The television broadcasting industry continually is faced with such
technological change and innovation, the possible rise in popularity of
competing entertainment and communications media and governmental restrictions
or actions of federal regulatory bodies, including the FCC and the Federal
Trade Commission, any of which could have a material effect on the Stations.
Technological innovation, and the resulting proliferation of programming
alternatives such as cable, direct satellite-to-home services, pay-per-view
and home video and entertainment systems have fractionalized television
viewing audiences and subjected television broadcast stations to new types of
competition. Over the past decade, cable television has captured an increasing
market share, while the aggregate viewership of the major television networks
has declined. In addition, the expansion of cable television and other
industry changes have increased, and may continue to increase, competitive
demand for programming. Such increased demand, together with rising production
costs, may in the future increase the Company's programming costs or impair
its ability to acquire programming. In addition, new television networks such
as UPN and The WB Network have created additional competition.
The Stations compete for audience on the basis of program popularity, which
has a direct effect on advertising rates. A majority of the daily programming
on the Stations is supplied by the network with which each such station is
affiliated. In time periods in which the network provides programming, the
Stations are primarily dependent upon the performance of the network programs
in attracting viewers. Each Station competes in non-network time periods based
on the performance of its programming during such time periods, using a
combination of self-produced news, public affairs and other entertainment
programming, including news and syndicated programs, that such station
believes will be attractive to viewers.
The Stations compete for television viewership share against local network-
affiliated and independent stations, as well as against cable and alternate
methods of television transmission. These other transmission methods can
increase competition for a station by bringing into its market distant
broadcasting signals not otherwise available to the station's audience and
also by serving as a distribution system for non-broadcast programming
originated on the cable system.
Other sources of competition for the Stations include home entertainment
systems (including video cassette recorder and playback systems, videodiscs
and television game devices), the Internet, multipoint distribution
9
systems, multichannel multipoint distribution systems, wireless cable,
satellite master antenna television systems and some low power, in-home
satellite services. The Stations also face competition from high-powered
direct broadcast satellite services, such as EchoStar and DIRECTV, which
transmit programming directly to homes equipped with special receiving
antennas. The Stations 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).
Programming is a significant factor in determining the overall profitability
of any television broadcast station. Competition for non-network programming
involves negotiating with national program distributors or syndicators that
sell first-run and off-network packages of programming. The Stations compete
against in-market broadcast stations for exclusive access to off-network
reruns (such as Home Improvement) and first-run product (such as the Oprah
Winfrey Show). Cable systems generally do not compete with local stations for
programming, although various national cable networks from time to time have
acquired programs that otherwise would have been offered to local television
stations.
Advertising rates are based upon the size of the market in which a station
operates, a program's popularity among the viewers an advertiser wishes to
attract, the number of advertisers competing for the available time, the
demographic makeup of the market served by the station, the availability of
alternative advertising media in the market area, the aggressiveness and
knowledgeability of sales forces and the development of projects, features and
programs that tie advertiser messages to programming. Advertising rates also
are determined by a station's overall ability to attract viewers in its
market, as well as the station's ability to attract viewers among particular
demographic groups that an advertiser may be targeting. Broadcast television
stations compete for advertising revenues with other broadcast television
stations and with the print media, radio stations and cable system operators
serving the same market. Additional competitors for advertising revenues
include a variety of other media, including direct marketing. 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 for advertising dollars.
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"), most
recently amended further by the Telecommunications Act of 1996 (the
"Telecommunications Act"). The Communications Act prohibits the operation of
television broadcasting stations except under a license issued by the FCC and
empowers the FCC, among other actions, to issue, renew, revoke and modify
broadcasting licenses; assign frequency bands; determine stations'
frequencies, locations and power; regulate the equipment used by stations;
adopt other regulations to carry out the provisions of the Communications Act;
impose penalties for violation of such regulations; and, impose fees for
processing applications and other administrative functions. The Communications
Act prohibits the assignment of a license or the transfer of control of a
licensee without prior approval of the FCC. Under the Communications Act, the
FCC also regulates certain aspects of the operation of cable television
systems and other electronic media that compete with broadcast stations.
Pulitzer Transaction. On March 18, 1999, pursuant to authority granted to it
by the FCC, the Company consummated its acquisition of the Pulitzer Stations.
Because the Company's acquisition of certain of the Pulitzer Stations is not
in compliance with the FCC's existing television duopoly rule, which prohibits
the common ownership of television broadcast stations with overlapping Grade B
contours, the FCC's consent to the Pulitzer Transaction was subject to certain
conditions.
Because WGAL-TV, Lancaster, Pennsylvania, and WBAL-TV, Baltimore, Maryland
have overlapping Grade A contours (and thus are not eligible for the
conditional waiver discussed below), the FCC granted the Company a six-month
waiver of the television duopoly rule to allow for the temporary common
ownership of
10
those stations. Accordingly, absent a modification of the rule to permit the
common ownership of those stations or an extension of the temporary waiver
period, the Company will be required to file an application with the FCC by
September 18, 1999 to divest either WBAL-TV or WGAL-TV.
Certain of the other stations acquired pursuant to the Pulitzer transaction
have Grade B, but not Grade A, overlap with other of the Company's stations.
The FCC currently has pending a rulemaking proceeding which, among other
things, contemplates changes to the television duopoly rule to allow common
ownership of television stations with overlapping Grade B contours as long as
there is no overlap of the stations' Grade A contours and the stations are
located in separate DMAs. The FCC has stated that it will grant conditional
waivers of the television duopoly rule in circumstances in which these
criteria are met. Such waivers will be conditioned on the outcome of the
rulemaking. The FCC may require licensees subject to duopoly waivers
conditioned on the outcome of the pending rulemaking proceeding to come into
compliance with the duopoly rule if the rule is not changed to allow permanent
common ownership of the stations. Some commentators, including the Company,
have urged the FCC to eliminate the rule entirely, or to allow common
ownership of stations licensed to communities in separate DMAs regardless of
the amount of signal overlap. If the FCC's television duopoly rule is changed
to allow common ownership of stations licensed to communities in separate
DMAs, regardless of the amount of signal overlap, the Company would be
permitted to continue to own both WBAL-TV and WGAL-TV.
Pursuant to the policy adopted in the rulemaking proceeding, the FCC granted
the Company conditional waivers allowing the common ownership of: (a) WWWB-TV,
Lakeland, Florida, and WESH-TV, Daytona Beach, Florida; and (b) WLWT-TV,
Cincinnati, Ohio, and WLKY-TV, Louisville, Kentucky. In each of those
circumstances, the stations have no Grade A overlap and are located in
separate DMAs. Absent the contemplated modification of the Commission's
television duopoly rule to permit the common ownership of television stations
in separate DMAs with overlapping Grade B (but not Grade A) signal contours,
however, the Company likely will be required to come into compliance with the
television duopoly rule within six months of completion of the rulemaking
proceeding.
Kelly Transaction. The Company consummated its acquisition of KCRA-TV, and
the rights under the KQCA Time Brokerage Agreement, from Kelly on January 5,
1999. Currently, the Grade A contour of KCRA-TV overlaps with the Grade A
contour of the Company's KSBW-TV, Salinas, California. An application seeking
the modification of the facilities of KSBW-TV in a manner that would eliminate
the Grade A (but not the Grade B) contour overlap between KSBW-TV and KCRA-TV
was granted on October 13, 1998.
Because of the signal contour overlap between KCRA and KSBW-TV, the FCC's
consent to the acquisition of KCRA-TV was conditioned on (i) the Company
completing the modification of the KSBW facilities that will eliminate the
Grade A signal contour overlap between the stations by October 5, 1999; and
(ii) the outcome of the pending FCC rulemaking considering changes to the
duopoly rule that would, if adopted, allow the common ownership of KCRA and
the modified KSBW. As noted above, the FCC may require licensees subject to
duopoly waivers conditioned on the outcome of the pending rulemaking
proceeding to come into compliance with the duopoly rule if the rule is not
changed to allow permanent common ownership of the stations.
License Renewals. The process for renewal of broadcast station licenses as
set forth under the Communications Act has undergone significant change as a
result of the Telecommunications Act. Prior to the passage of the
Telecommunications Act, television broadcasting licenses generally were
granted or renewed for a period of five years upon a finding by the FCC that
the "public interest, convenience and necessity" would be served thereby.
Under the Telecommunications Act, the statutory restriction on the length of
broadcast licenses has been amended to allow the FCC to grant broadcast
licenses for terms of up to eight years. The Telecommunications 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
11
consider petitions to deny but cannot consider whether the public interest
would be better served by a person other than the renewal applicant. Under the
Telecommunications Act, 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 main station
licenses of the Company's television stations:
Expiration of
Station FCC License
------- -------------
KMBC February 1, 2006
KCWE *
WISN December 1, 2005
WLWT October 1, 2005
KHBS June 1, 2005
KHOG (satellite station of KHBS) June 1, 2005
WAPT June 1, 2005
WPBF February 1, 2005
WWWB February 1, 2005
WBAL October 1, 2004
WTAE August 1, 1999**
WPTZ June 1, 1999**
WCVB April 1, 1999**
WNNE April 1, 1999**
KITV February 1, 2007
KHVO (satellite station of KITV) February 1, 2007
KMAU (satellite station of KITV) February 1, 1999**
KSBW December 1, 1998**
KOCO June 1, 2006
KCRA December 1, 2006
KQCA December 1, 2006***
WESH February 1, 2005
WYFF December 1, 2004
WDSU June 1, 2005
WGAL August 1, 1999*
WXII December 1, 2004
WLKY August 1, 2005
KOAT October 1, 2006
KOCT (satellite station of KOAT) October 1, 2006
KOVT (satellite station of KOAT) October 1, 2006
KCCI February 1, 2006
KETV June 1, 2006
- --------
* The Company provides certain management services to Hearst pursuant to a
Management Agreement which allows Hearst to fulfill its obligations under
a certain Programming Services and Time Brokerage Agreement between Hearst
and KCWE-TV, Inc., the permittee of KCWE. KCWE, which has not yet been
licensed by the FCC, is operated pursuant to Special Temporary
Authorization ("STA"), which may, in the discretion of the FCC, be renewed
at six-month intervals. An application for extension of the STA is pending
at the FCC. The Company is not aware of any facts or circumstances that
would prevent the renewal of KCWE's STA.
** Applications for renewal of these licenses are pending at the FCC.
Petitions to deny the renewal applications will be due on or before July
1, 1999 for WGAL and WTAE and May 1, 1999 for WPTZ. The deadline for
submission of petitions to deny the WCVB and WNNE renewal application was
March 1, 1999. The deadline for submission of petitions to deny the KSBW
renewal application was November 1, 1998. The
12
Company is not aware of any facts or circumstances that would prevent the
renewal of the licenses or authorizations for these stations.
*** The Company provides substantially all of the programming of, and provides
other services to, KQCA pursuant to a Time Brokerage Agreement with the
station's licensee.
Ownership Regulation. The Communications Act, FCC rules and regulations and
the Telecommunications Act also regulate broadcast ownership. The FCC has
promulgated rules that, among other matters, limit 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 as well as
other specified mass media entities. On a local basis, FCC rules currently
allow an individual entity to have an attributable interest in only one
television station in a market. Furthermore, FCC rules, the Communications Act
or both generally restrict or prohibit the ability of an individual or entity
to have an attributable interest, or cross-ownership, in a television station
and in a radio station, daily newspaper or cable television system that is
located in the same local market area served by the television station. Hearst
has an attributable interest in the Company's broadcast stations and owns
daily newspapers in various local markets which, under current FCC rules,
restrict the Company's ability to acquire television stations in those
markets. The FCC has instituted proceedings for the possible relaxation of
certain of its rules regulating television station ownership, certain types of
cross-ownership and the standards used to determine what types of interests
are considered to be attributable under its rules. Among the proposals under
consideration is whether to deem as attributable certain television local
marketing agreements and, if deemed attributable, the extent to which
currently effective agreements of this type should be exempted from any new
FCC rules. Such attribution could implicate local television ownership rules
that currently prohibit an entity from having an attributable interest in two
stations serving the same market and could have a material effect on the
arrangements between the Company and the licensee of KCWE and between the
Company and licensee of KQCA. If the FCC's ultimate regulatory decision were
to disfavor the continued validity of such joint operation agreements or Local
Marketing Agreements (LMAs), then these agreements, in the worst case
scenario, might be required to be terminated.
The Telecommunications Act did not alter the FCC's newspaper/broadcast
cross-ownership restrictions, but required the Commission to review this and
all other cross-ownership rules biennially, beginning in 1998, to determine if
they remain necessary. Elimination of the newspaper/television cross-ownership
rule could enable the Company to acquire television stations in markets in
which Hearst owns daily newspapers. There can be no assurances that the
biennial review process will result in elimination of the rule. However, the
FCC is presently considering whether to change the policy pursuant to which it
considers waivers of the radio/newspaper cross-ownership rule.
Alien Ownership. The Communications Act restricts the ability of foreign
entities or individuals to own or hold certain interests in broadcast
licenses. The Telecommunications Act, however, eliminated the restrictions on
aliens serving as directors or officers of broadcast licensees or as directors
or officers of entities holding interests in broadcast licensees.
Other Regulations, Legislation and Recent Developments Affecting Broadcast
Stations
General. The FCC has reduced significantly its past regulation of broadcast
stations, including elimination of formal ascertainment requirements and
guidelines concerning amounts of certain types of programming and commercial
matter that may be broadcast. There are, however, FCC rules and policies, and
rules and policies of other federal agencies, that regulate matters such as
network-affiliate relations, cable systems' carriage of syndicated and network
programming on distant stations, political advertising practices, obscene and
indecent programming, application procedures and other areas affecting the
business or operations of broadcast stations.
Children's Television Programming. The FCC has also adopted rules to
implement the Children's Television Act of 1990, which, among other matters,
limits the permissible amount of commercial matter in children's programs and
requires each television station to present "educational and informational"
children's
13
programming. The FCC also has adopted renewal processing guidelines that
effectively require television stations to broadcast an average of three hours
per week of children's educational programming.
Closed Captioning. The FCC has adopted rules requiring closed captioning of
all broadcast television programming. The rules require generally that (i) 95%
of all new programming first published or exhibited on or after January 1,
1998 must be closed captioned within eight years, and (ii) 75% of "old"
programming which first aired prior to January 1, 1998 must be closed
captioned within 10 years, subject to certain exemptions.
Television Violence. The Telecommunications Act contains a number of
provisions relating to television violence. First, pursuant to the
Telecommunications Act, the television industry has developed a ratings system
which the FCC has approved. Furthermore, also pursuant to the
Telecommunications Act, the FCC has adopted rules requiring certain television
sets to include the so-called "V-chip," a computer chip that allows blocking
of rated programming. Under these rules, half of all television receiver
models with picture screens 13 inches or greater will be required to have the
"V-chip" by July 1, 1999, and all such models will be required to have the "V-
chip" by January 1, 2000. In addition, the Telecommunications Act requires
that all television license renewal applications filed after May 1, 1995
contain summaries of written comments and suggestions received by the station
from the public regarding violent programming.
Equal Employment Opportunity. In April 1998, the U.S. Court of Appeals for
the D.C. Circuit struck down the FCC's Equal Employment Opportunity
regulations as unconstitutional. Recently, the FCC commenced a proceeding in
which it proposed new rules that it suggests would not share the
constitutional flaws of the former rules. It has invited public comment on its
proposals. The Company cannot predict whether new rules will be adopted, the
form of any such rules, or the impact of the rules on our operations.
Distribution of Video Services by Telephone Companies. Recent actions by
Congress, the FCC and the courts all presage significant future involvement in
the provision of video services by telephone companies. The Company cannot
predict either the timing or the extent of such involvement. These
developments all relate to a former provision of the Communications Act that
prohibited a local telephone company from providing video programming directly
to subscribers within the company's telephone service areas. As applied by
government regulators historically, the former provision prevented telephone
companies from providing cable service over either the telephone network or a
separate cable system located within the telephone service area. That
provision has now been superseded by the Telecommunications Act, which
provides for telephone company entry into the distribution of video services
either under the laws and rules applicable to cable systems as operators of
so-called "wireless cable systems", as common carriers or under new rules
devised by the FCC for "open video systems" subject to certain common carrier
requirements.
The 1992 Cable Act. On October 5, 1992, Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992, which, among other
matters, includes provisions respecting the carriage of television stations'
signals by cable television systems. The signal carriage, or "must carry,"
provisions of the 1992 Cable Act generally require cable operators to devote
up to one-third of their activated channel capacity to the carriage of local
commercial television stations. The 1992 Cable Act also included a
retransmission consent provision that prohibits cable operators and other
multi-channel video programming distributors from carrying broadcast signals
without obtaining the station's consent in certain circumstances. The "must
carry" and retransmission consent provisions are related in that a local
television broadcaster, on a cable system-by-cable system basis, 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 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. Cable systems and other multi-channel video
programming distributors must obtain retransmission consent to carry all
distant commercial stations other than "super stations" delivered via
satellite.
In March 1997, the U.S. Supreme Court upheld the constitutionality of the
must-carry provisions of the 1992 Cable Act. As a result, the regulatory
scheme promulgated by the FCC to implement the must-carry provisions
14
of the 1992 Cable Act remains in effect. Whether and to what extent such must-
carry rights will extend to the new digital television signals (see below) to
be broadcast by licensed television stations, including those owned by us,
over the next several years is still a matter to be determined in an ongoing
rulemaking proceeding initiated by the FCC in July 1998. The Company's
television stations are highly dependent on their carriage by cable systems in
the areas they serve. Thus, FCC rules that impose no or limited obligations on
cable systems and other multi-channel video programming distributors to carry
the digital signals of television broadcast stations in their local markets
could adversely affect the Company's operations.
Advanced Television Service. The FCC has taken a number of steps to
implement digital television broadcasting service in the United States. The
FCC has adopted a digital television table of allotments that provides all
authorized television stations with a second channel on which to broadcast a
digital television signal. The FCC has attempted to provide digital television
coverage areas that are comparable to stations' existing service areas. The
FCC has ruled that television broadcast licensees may use their digital
channels for a wide variety of services such as high-definition television,
multiple standard definition television programming, audio, data, and other
types of communications, subject to the requirement that each broadcaster
provide at least one free video channel equal in quality to the current
technical standard.
Digital television channels will generally be located in the range of
channels from channel 2 through channel 51. The FCC is requiring that
affiliates of ABC, CBS, Fox and NBC in the top 10 television markets begin
digital broadcasting by May 1, 1999. Many stations, including several of the
Company's stations, have already begun digital broadcasting. Affiliates of the
four major networks in the top 30 markets must begin digital broadcasting by
November 1, 1999, and all other broadcasters must follow suit by May 1, 2002.
15
The Company's digital television implementation schedule is as follows:
FCC Mandated
Timetable
For
Construction
Market Analog DTV of DTV
Station (Affiliation) Rank(1) Channel Channel Facilities
- ------------------------------------------- ------- ------- ------- ------------
WCVB, Boston, MA (ABC)..................... 6 5 20 May 1, 1999
WWWB, Tampa, FL (WB)(2).................... 15 32 19 May 1, 2002
WTAE, Pittsburgh, PA (ABC)................. 19 4 51 Nov. 1, 1999
KCRA, Sacramento, CA (NBC)................. 20 3 35 Nov. 1, 1999
KQCA, Sacramento, CA (WB).................. 20 58 46 May 1, 2002
WESH, Daytona Beach, FL (NBC).............. 22 2 11 Nov. 1, 1999
WBAL, Baltimore, MD (NBC).................. 23 11 59 Nov. 1, 1999
WLWT, Cincinnati, OH (NBC)................. 30 5 35 Nov. 1, 1999
WISN, Milwaukee, WI (ABC).................. 32 12 34 May 1, 2002
KMBC, Kansas City, MO (ABC)................ 31 9 14 May 1, 2002
KCWE, Kansas City, MO (WB)(2).............. 31 29 31 May 1, 2002
WYFF, Greenville, SC (NBC)................. 35 4 59 May 1, 2002
WDSU, New Orleans, LA (NBC)................ 41 6 43 May 1, 2002
KOCO, Oklahoma City, OK (ABC).............. 43 5 16 May 1, 2002
WPBF, W. Palm Bch, FL (ABC)(2)............. 44 25 16 May 1, 2002
WGAL, Lancaster, PA (NBC).................. 45 8 58 May 1, 2002
WXII, Winston-Salem, NC (NBC).............. 46 12 31 May 1, 2002
KOAT, Albuquerque, NM (ABC)................ 48 7 21 May 1, 2002
KOCT, Carlsbad, NM (ABC)................... 48 6 19 May 1, 2002
KOVT, Silver City, NM (ABC)................ 48 10 12 May 1, 2002
KOFT, Farmington, NM (ABC)................. 48 3 8 May 1, 2002
WLKY, Louisville, KY (CBS)................. 50 32 26 May 1, 2002
KCCI, Des Moines, IA (CBS)................. 69 8 31 May 1, 2002
KITV, Honolulu, HI (ABC)................... 71 4 40 May 1, 2002
KMAU, Wailuku, HI (ABC).................... 71 12 29 May 1, 2002
KHVO, Hilo, HI (ABC)....................... 71 13 18 May 1, 2002
KETV, Omaha, NE (ABC)...................... 74 7 20 May 1, 2002
WAPT, Jackson, MS (ABC).................... 90 16 21 May 1, 2002
WPTZ, Plattsburgh, NY (NBC)................ 91 5 14 May 1, 2002
WNNE, Hartford, VT (NBC)................... 91 31 25 May 1, 2002
KHBS, Fort Smith, AR (ABC)................. 116 40 21 May 1, 2002
KHOG, Fayetteville, AR (ABC)............... 116 29 15 May 1, 2002
KSBW, Monterey, CA (NBC)................... 122 8 43 May 1, 2002
- --------
(1) Market rank is based on the relative size of the DMA among the 211
generally recognized DMAs in the U.S., based on Nielsen estimates for the
1997-98 season.
(2) WWWB-TV and WPBF-TV are managed by the Company under the Management
Agreement with Hearst. In addition, the Company provides certain
management services to Hearst in order to allow Hearst to fulfill its
obligations under Program Services and Time Brokerage Agreement with KCWE-
TV, Inc. the permittee of KCWE.
The FCC's plan calls for the digital television transition period to end in
the year 2006, at which time the FCC expects that television broadcasters will
cease non-digital broadcasting and return one of their two channels to the
government, allowing that spectrum to be recovered for other uses. Under the
Balanced Budget Act, however, the FCC is authorized to extend the December 31,
2006 deadline for reclamation of a television station's non-digital channel
if, in any given case:
16
. one or more television stations affiliated with ABC, CBS, NBC or Fox in
a market is not broadcasting digitally, and the FCC determines that such
stations have "exercised due diligence" in attempting to convert to
digital broadcasting; or
. less than 85% of the television households in the station's market
subscribe to a multichannel video service that carries at least one
digital channel from each of the local stations in that market, and less
than 85% of the television households in the market can receive digital
signals off the air using either a set-top converter box for an analog
television set or a new digital television set.
The FCC is currently considering whether cable television system operators
should be required to carry stations' digital television signals in addition
to the currently required carriage of stations' analog signals. In July 1998,
the FCC issued a Notice of Proposed Rulemaking posing several different
options for the carriage of digital signals and solicited comments from all
interested parties. The FCC has yet to issue a decision on this matter.
Implementation of digital television will improve the technical quality of
television signals received by viewers. However, the implementation of digital
television will also impose substantial additional costs on television
stations because of the need to replace equipment and because some stations
will need to operate at higher utility cost. There can be no assurance that
our television stations will be able to increase revenue to offset such costs.
The cost to enable a television station to provide a "pass through" DTV signal
is approximately two to three million dollars, and can be higher if new tower
facilities are required. The FCC is also considering imposing new public
interest requirements on television licensees in exchange for their receipt of
digital television channels. In addition, the Telecommunications Act allows
the FCC to charge a spectrum fee to broadcasters who use the digital spectrum
to offer subscription-based services. The FCC has adopted rules that require
broadcasters to pay a fee of 5% of gross revenues received from ancillary or
supplementary uses of the digital spectrum for which they charge subscription
fees. The Company cannot predict what future actions the FCC might take with
respect to digital television, nor can we predict the effect of the FCC's
present digital television implementation plan or such future actions on the
Company's business. The Company will incur considerable expense in the
conversion of digital television and is unable to predict the extent or timing
of consumer demand for any such digital television services.
Direct Broadcast Satellite Systems. There are currently in operation several
direct broadcast satellite systems that serve the United States. Direct
broadcast satellite systems provide programming on a subscription basis to
those who have purchased and installed a satellite signal receiving dish and
associated decoder equipment. Direct broadcast satellite systems claim to
provide visual picture quality comparable to that found in movie theaters and
aural quality comparable to digital audio compact disks. The Company cannot
predict the impact of direct broadcast satellite systems on the Company's
business.
In 1988, Congress passed the Satellite Home Viewer Act ("SHVA"), which
grants DBS operators the right to provide, for a fee established by the
Copyright Office, network television signals to "unserved households." To be
an unserved household with respect to a particular network, the household must
not be able to receive, using a conventional rooftop antenna, the television
signal of the network's local affiliate at a specified intensity. Recently,
litigation has arisen in several federal district courts concerning the
delivery of network programming to subscribers by satellite pursuant to SHVA.
Two district courts have determined that certain satellite providers were
providing service in violation of the unserved household restrictions and have
ordered the satellite providers to comply with the restriction. In addition,
legislation has been introduced in Congress to amend the SHVA in a manner that
would affect the right of DBS providers to transmit network signals. The
Company cannot predict what the results of any judicial, regulatory, and
legislative efforts will be, or what effect they will have on the Company's
television broadcasting business.
The foregoing does not purport to be a complete summary of all of the
provisions of the Communications Act, the Telecommunications Act, the 1992
Cable Act or the related regulations and policies of the FCC. Proposals for
additional or revised regulations and requirements are pending before and are
being considered by Congress and federal regulatory agencies from time to
time. Also, various of the foregoing matters are now, or may become, the
subject of court litigation, and the Company cannot predict the outcome of any
such litigation or the impact on its business.
17
Employees
As of December 31, 1998, the Company had approximately 1,569 full-time
employees and 209 part-time employees. A total of approximately 545 employees
are represented by four unions (the American Federation of Television and
Radio Artists, the International Brotherhood of Electrical Workers, the
International Alliance of Theatrical Stage Employees, and the Directors Guild
of America). The Company has not experienced any significant labor problems,
and it believes that its relations with its employees are satisfactory.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 888 Seventh Avenue,
New York, New York 10106. Each Station's real properties generally include
owned or leased offices, studios, transmitter sites and antenna sites.
Typically, offices and main studios are located together, while transmitters
and antenna sites are in a separate location that is more suitable for
optimizing signal strength and coverage. Set forth below are the Stations'
principal facilities as of December 31, 1998. In addition to the property
listed below, the Company and the Stations also lease other property primarily
for communications equipment.
Owned or Approximate
Station/Property Location Use Leased Size
- ---------------------------- ---------------------- ----------- --------------
Corporate Washington D.C. Office Leased 3,191 sq. ft.
New York Office Leased 18,075 sq. ft.
San Antonio Office Leased 3,674 sq. ft.
WLWT Office and studio Leased 60,000 sq. ft.
Cincinnati, OH Tower and transmitter Owned 4.2 acres
Office and studio Owned 54,000 sq. ft.
Office and studio Owned 12,585 sq. ft.
KOCO Office and studio Owned 28,000 sq. ft.
Oklahoma City, OK Tower and transmitter Owned 85 acres
KITV Office and studio Owned 35,000 sq. ft.
Honolulu, HI Tower and transmitter Leased 130 sq. ft.
Tower and transmitter Leased 300 sq. ft.
Tower and transmitter Leased 1 acre
WAPT Office and studio Owned 8,600 sq. ft.
Jackson, MS Tower and transmitter Owned 25 acres
KHBS Office and studio Owned 46,031 sq. ft.
Fort Smith/Fayetteville, AR Office and studio Leased 1,110 sq. ft.
Tower and transmitter Leased 2.5 acres
Tower and transmitter Owned 26.7 acres
WCVB Office and studio Leased 90,002 sq. ft.
Boston, MA Office and studio Leased 5,337 sq. ft.
Office and studio Leased 8,628 sq. ft.
WTAE Office and studio Owned 68,033 sq. ft.
Pittsburgh, PA Tower and transmitter Owned 37 acres
WBAL Office and studio Owned 65,000 sq. ft.
Baltimore, MD Tower and transmitter Partnership 3.5 acres
WISN Office and studio Owned 88,000 sq. ft.
Milwaukee, WI Tower and transmitter Owned 5.5 acres
KMBC Office and studio Leased 58,514 sq. ft.
Kansas City, MO Tower and transmitter Owned 11.6 acres
WNNE Office and studio Leased 5,600 sq. ft.
Burlington, VT Tower and transmitter Leased --
WPTZ Office and studio Owned 12,800 sq. ft.
Plattsburgh, NY Office and studio Leased 3,900 sq. ft.
Tower and transmitter Owned 13.25 acres
KSBW Office and studio Owned 85,726 sq. ft.
Monterey-Salinas, CA Tower and transmitter Owned 160.2 acres
18
In addition the Company acquired the following properties as a result of the
Kelly Transaction and the Pulitzer Transaction:
Station/Property Owned or Approximate
Location Use Leased Size
- ------------------ -------------------------- --------- --------------
KCRA/KQCA Office, studio, tower Owned and 82,500 sq. ft.
Sacramento, CA and transmitter Leased 6,000 sq. ft.
KOAT Studio Owned 39,700 sq. ft.
Albuquerque, NM Tower and transmitter Leased 9,200 sq. ft.
KETV Studio and transmitter Owned 38,000 sq. ft.
Omaha, NE Studio and transmitter Leased 600 sq. ft.
WGAL Studio and tower Owned 58,900 sq. ft.
Lancaster, PA Office Leased 2,400 sq. ft.
WXII Office, studio, tower Owned and 41,100 sq. ft.
Winston-Salem, NC and transmitter Leased 600 sq. ft.
WYFF Office, studio and Owned and 53,600 sq. ft.
Greenville, SC transmitter Leased 2,300 sq. ft.
WDSU Studio and transmitter Owned 50,500 sq. ft.
New Orleans, LA
WLKY Office, studio and Owned 41,342 sq. ft.
Louisville, KY transmitter
WESH Studio, transmitter, tower Owned 61,300 sq. ft.
Orlando, FL Office Leased 1,300 sq. ft.
Daytona Beach, FL Studio and office Owned 28,100 sq. ft.
KCCI Studio, tower and Owned 53,350 sq. ft.
Des Moines, IO transmitter
KTAR-AM/KMVP-AM/ Studio and transmitter Owned 23,530 sq. ft.
KKLT-FM
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company becomes involved in various claims and
lawsuits that are incidental to its business. In the opinion of the Company,
there are no legal proceedings pending against the Company or any of its
subsidiaries that are likely to have a material adverse effect on the
Company's consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of July 22, 1998, the Series A Common Stock has been listed on the NYSE
under the symbol "HTV." Prior to listing on NYSE the Series A Common Stock was
quoted on the Nasdaq National Market under the Symbol "HATV." Prior to the
consummation of the Hearst Transaction, shares of Series A Common Stock of
Argyle were traded on the Nasdaq National Market under the Symbol "ARGL."
19
The table below sets forth, for the calendar quarters indicated, the
reported high and low sales prices of the Common Stock of Argyle prior to the
consummation of the Hearst Transaction on August 29, 1997 and of the Series A
Common Stock subsequent to the consummation of the Hearst Transaction, on the
Nasdaq National Market or the NYSE, as the case may be.
High Low
------ ------
1997
First Quarter............................................. 29 1/8 23 7/8
Second Quarter............................................ 25 1/2 22 1/2
Third Quarter............................................. 30 5/8 24 7/8
Fourth Quarter............................................ 32 5/8 26 1/4
1998
First Quarter............................................. 38 27 1/4
Second Quarter............................................ 41 1/4 32 5/8
Third Quarter............................................. 40 1/4 31 5/8
Fourth Quarter............................................ 33 1/4 24
On March 22, 1999, the closing price for the Series A Common Stock on the
NYSE was $24.375, and the approximate number of shareholders of record of the
Series A Common Stock at the close of business on such date was 525.
The Company has not paid any dividends on the Series A Common Stock or the
Series B Common Stock since inception and does not expect to pay any dividends
on either class in the immediate future. The Company's Credit Facility with
The Chase Manhattan Bank limits the ability of the Company to pay dividends
under certain conditions.
The Company issued 100% of the Series B Common Stock to Hearst as part of
the Hearst Transaction and related transactions. Of the shares of the Series B
Common Stock, the Company issued 38,611,002 on August 29, 1997 and 2,687,646
shares on December 30, 1997. The Company issued the Series B Common Stock
pursuant to the exemption from registration contained in Section 4(2) of the
Securities Act of 1933, as amended. The Company issued the Series B Common
Stock to Hearst as consideration for the contribution of the assets and
properties of Hearst's broadcast group and the assumption of $275 million of
Hearst's long-term debt. Each share of Series B Common Stock is immediately
convertible into one share of Series A Common Stock.
All of the outstanding shares of the Series B Common Stock are required to
be held by Hearst or a Permitted Transferee (as defined below). All such
shares are currently held by Hearst Broadcasting, a wholly owned subsidiary of
Hearst. No holder of shares of the Series B Common Stock may transfer any such
shares to any person other than to (i) Hearst; (ii) any corporation into which
Hearst is merged or consolidated or to which all or substantially all of
Hearst's assets are transferred; or, (iii) any entity controlled by Hearst
(each a "Permitted Transferee"). The Series B Common Stock, however, may be
converted at any time into Series A Common Stock and freely transferred,
subject to the terms and conditions of the Company's Amended and Restated
Certificate of Incorporation and to applicable securities laws limitations. If
at any time the Permitted Transferees first hold in the aggregate less than
20% of all shares of the Common Stock that are then issued and outstanding,
then each issued and outstanding share of the Series B Common Stock
automatically will be converted into one fully paid and nonassessable share of
Series A Common Stock, and the Company will not be authorized to issue any
additional shares of Series B Common Stock. Notwithstanding any other
provision to the contrary, no holder of Series B Common Stock shall (i)
transfer any shares of Series B Common Stock; (ii) convert Series B Common
Stock; or, (iii) be entitled to receive any cash, stock, other securities or
other property with respect to or in exchange for any shares of Series B
Common Stock in connection with any merger or consolidation or sale or
conveyance of all or substantially all of the property or business of the
Company as an entity, unless all necessary approvals of the FCC as required by
the Communications Act, and the rules and regulations thereunder have been
obtained or waived.
20
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." As discussed herein and in the notes to the
accompanying consolidated financial statements, on August 29, 1997, effective
September 1, 1997 for accounting purposes, The Hearst Corporation ("Hearst")
contributed its television broadcast group and related broadcast operations,
Hearst Broadcast Group, to Argyle Television, Inc. ("Argyle") and merged the
wholly-owned subsidiary of Hearst with and into Argyle, with Argyle as the
surviving corporation (renamed Hearst-Argyle Television, Inc., "Hearst-Argyle"
or the "Company") (the "Hearst Transaction"). The merger was accounted for as
a purchase of Argyle by Hearst in a reverse acquisition. The presentation of
the historical consolidated financial statements prior to September 1, 1997
reflects the combined financial statements of the Hearst Broadcast Group, the
accounting acquiror. Effective June 1, 1998, the Company exchanged its WDTN
and WNAC stations with STC Broadcasting, Inc. and certain related entities
(collectively "STC") for KSBW, the NBC affiliate serving the Monterey--
Salinas, CA, television market, and WPTZ/WNNE, the NBC affiliates serving the
Plattsburgh, NY--Burlington, VT, television market (the "STC Swap") (see Note
3 of the notes to the consolidated financial statements). On January 5, 1999,
effective January 1, 1999 for accounting purposes, the Company acquired,
through a merger transaction, all of the partnership interests in Kelly
Broadcasting Co. and Kelleproductions, Inc. (the "Kelly Transaction") (see
Note 18 of the notes to the consolidated financial statements). On March 18,
1999, the Company acquired the nine television and five radio stations
("Pulitzer Broadcasting Company") of Pulitzer Publishing Company (the
"Pulitzer Merger") (see Note 18 of the notes to the consolidated financial
statements). The pro forma consolidated financial data for the year ended
December 31, 1998 has been prepared as if the STC Swap, the Kelly Transaction,
the Pulitzer Merger and the financings (the Credit Facility and the Offerings
(see Notes 6 and 9 of the notes to the consolidated financial statements)) had
been completed as of January 1, 1998. Such pro forma data is not necessarily
indicative of the actual results that would have occurred nor of results that
may occur.
21
HEARST-ARGYLE TELEVISION, INC.
(In thousands, except per share data)
Years Ended December 31,
-------------------------------------------------------
Pro
Historical Forma
--------------------------------------------- --------
1994 1995 1996 1997(a) 1998(b) 1998(c)
-------- -------- -------- -------- -------- --------
Statement of income
data:
Total revenues.......... $259,459 $279,340 $283,971 $333,661 $407,313 $731,029
Station operating
expenses............... 106,281 117,535 121,501 142,096 173,880 323,610
Amortization of program
rights................. 40,266 38,619 40,297 40,129 42,344 63,930
Depreciation and
amortization........... 23,071 22,134 16,971 22,924 36,420 127,688
-------- -------- -------- -------- -------- --------
Station operating
income................. 89,841 101,052 105,202 128,512 154,669 215,801
Corporate expenses...... 8,007 7,857 7,658 9,527 12,635 15,800
-------- -------- -------- -------- -------- --------
Operating income........ 81,834 93,195 97,544 118,985 142,034 200,001
Interest expense, net... 22,678 22,218 21,235 32,484 39,555 124,138
-------- -------- -------- -------- -------- --------
Income before income
taxes and extraordinary
item................... 59,156 70,977 76,309 86,501 102,479 75,863
Income taxes............ 25,265 30,182 31,907 35,363 42,796 36,414
-------- -------- -------- -------- -------- --------
Income before
extraordinary item..... 33,891 40,795 44,402 51,138 59,683 39,449
Extraordinary item (d).. -- -- -- (16,212) (10,826) --
-------- -------- -------- -------- -------- --------
Net income.............. 33,891 40,795 44,402 34,926 48,857 39,449
Less preferred stock
dividends (e).......... -- -- -- (711) (1,422) (1,422)
-------- -------- -------- -------- -------- --------
Income applicable to
common stockholders.... $ 33,891 $ 40,795 $ 44,402 $ 34,215 $ 47,435 $ 38,027
======== ======== ======== ======== ======== ========
Income per common
share--basic:
Income before
extraordinary item..... $ 0.82 $ 0.99 $ 1.08 $ 1.13 $ 1.09 $ 0.42
======== ======== ======== ======== ======== ========
Net income.............. $ 0.82 $ 0.99 $ 1.08 $ 0.77 $ 0.89 $ 0.42
======== ======== ======== ======== ======== ========
Number of shares used in
the calculation (f).... 41,299 41,299 41,299 44,632 53,483 90,580
======== ======== ======== ======== ======== ========
Income per common
share--diluted:
Income before
extraordinary item..... $ 0.82 $ 0.99 $ 1.08 $ 1.13 $ 1.08 $ 0.42
======== ======== ======== ======== ======== ========
Net income.............. $ 0.82 $ 0.99 $ 1.08 $ 0.77 $ 0.88 $ 0.42
======== ======== ======== ======== ======== ========
Number of shares used in
the calculation (f).... 41,299 41,299 41,299 44,674 53,699 90,796
======== ======== ======== ======== ======== ========
See notes on the following pages.
22
HEARST-ARGYLE TELEVISION, INC.
(In thousands, except per share data)
Years Ended December 31,
-----------------------------------------------------------------
Historical Pro Forma
----------------------------------------------------- ----------
1994 1995 1996 1997(a) 1998(b) 1998(c)
--------- -------- -------- ---------- ---------- ----------
Other data:
Broadcast cash flow
(g).................... $ 113,999 $123,038 $117,947 $ 150,972 $ 190,486 $ 346,271
Broadcast cash flow
margin (h)............. 43.9% 44.0% 41.5% 45.2% 46.8% 47.4%
Operating cash flow
(i).................... $ 108,749 $117,087 $109,457 $ 141,445 $ 177,851 $ 330,471
Operating cash flow
margin (j)............. 41.9% 41.9% 38.5% 42.4% 43.7% 45.2%
After-tax cash flow
(k).................... $ 56,962 $ 62,929 $ 61,373 $ 74,062 $ 96,103 $ 167,137
Cash flow provided by
operating activities... $ 44,460 $ 61,185 $ 65,801 $ 67,689 $ 133,638 $ 208,675
Cash flow used in
investing activities... $ (8,430) $ (8,621) $ (7,764) $ (131,973) $ (47,531) (m)
Cash flow provided by
(used in) financing
activities............. $ (33,584) $(52,020) $(58,145) $ 74,161 $ 282,114 (m)
Capital expenditures.... $ 8,430 $ 8,621 $ 7,764 $ 21,897 $ 22,722 N/A
Program payments........ $ 39,179 $ 38,767 $ 44,523 $ 40,593 $ 42,947 $ 61,148
Balance sheet data (at
year end):
Cash and cash
equivalents............ $ 2,446 $ 2,990 $ 2,882 $ 12,759 $ 380,980 $ 8,215
Total assets............ $ 387,984 $385,406 $366,956 $1,044,482 $1,421,140 $3,920,002
Total debt (including
current portion)....... N/A N/A N/A $ 490,000 $ 842,596 $1,712,596
Divisional/Stockholders'
equity (l)............. $ 283,988 $272,762 $259,020 $ 326,654 $ 324,390 $1,291,132
See notes on the following pages.
23
NOTES TO SELECTED FINANCIAL DATA
(a) The Hearst Transaction was consummated on August 29, 1997. The selected
financial data includes results from (i) WCVB, WTAE, WBAL, WISN, KMBC and
WDTN for the entire period presented; (ii) WAPT, KITV, KHBS/KHOG, WLWT,
KOCO and the Company's share of the 1996 Joint Marketing and Programming
Agreement relating to the television station WNAC/WPRI with the owner of
another television station in the same market (the "Clear Channel
Venture") from September 1 through December 31, 1997; and, (iii)
management fees derived by the Company from WWWB, WPBF, KCWE and WBAL-AM
and WIYY-FM (the "Managed Stations") from September 1 through December 31,
1997.
(b) Includes results from (i) WAPT, KITV, KHBS/KHOG, WLWT, KOCO, WCVB, WTAE,
WBAL, WISN and KMBC for the entire period presented; (ii) fees derived by
the Company from the Managed Stations for the entire period presented;
and, (iii) WDTN and the Company's share of the Clear Channel Venture
(WNAC/WPRI) from January 1, through May 31, 1998 and KSBW and WPTZ/WNNE
from June 1 through December 31, 1998.
(c) Includes the results of operations of Argyle, the Hearst Broadcast Group,
the management fees derived by the Company from the Managed Stations,
Kelly Broadcasting Co., Kelleproductions, Inc. and Pulitzer Broadcasting
Company on a combined pro forma basis as if the STC Swap, the Kelly
Transaction and the Pulitzer Merger had occurred at the beginning of the
period presented.
(d) Represents the write-off of unamortized financing costs and premiums paid
upon early extinguishment of Hearst-Argyle debt.
(e) Gives effect to dividends on the Preferred Stock issued in connection with
the acquisition of KHBS/KHOG.
(f) The number of shares used in the per share calculation reflects
retroactively approximately 41.3 million shares received by Hearst in the
Hearst Transaction for all periods prior to September 1, 1997.
(g) Broadcast cash flow is defined as station operating income, plus
depreciation and amortization and write-down of intangible assets plus
amortization of program rights, minus program payments. The Company has
included broadcast cash flow data because management utilizes and believes
that such data are commonly used as a measure of performance among
companies in the broadcast industry. Broadcast cash flow is also
frequently used by investors, analysts, valuation firms and lenders as one
of the important determinants of underlying asset value. Broadcast cash
flow should not be considered in isolation or as an alternative to
operating income (as determined in accordance with generally accepted
accounting principles) as an indicator of the entity's operating
performance, or to cash flow from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity. This measure is believed to be, but may not be, comparable to
similarly titled measures used by other companies.
(h) Broadcast cash flow margin is broadcast cash flow divided by total
revenues, expressed as a percentage. This measure may not be comparable to
similarly titled measures used by other companies.
(i) Operating cash flow is defined as operating income, plus depreciation and
amortization, write-down of intangible assets and amortization of program
rights, minus program payments, plus non-cash compensation. The Company
has included operating cash flow data, also known as EBITDA, because
management utilizes and believes that such data are commonly used as a
measure of performance among companies in the broadcast industry.
Operating cash flow is also used by investors, analysts, rating agencies
and lenders to measure a company's ability to service debt. Operating cash
flow should not be considered in isolation or as an alternative to
operating income (as determined in accordance with generally accepted
accounting principles) as an indicator of the entity's operating
performance, or to cash flow from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity. This measure is believed to be, but may not be, comparable to
similarly titled measures used by other companies.
(j) Operating cash flow margin is operating cash flow divided by total
revenues, expressed as a percentage. This measure may not be comparable to
similarly titled measures used by other companies.
(k) After-tax cash flow is defined as income before extraordinary item plus
depreciation and amortization. The Company has included after-tax cash
flow data because management utilizes and believes that such data are
commonly used by investors, analysts, rating agencies and lenders to
measure a company's ability to service debt and as an alternative
determinant of enterprise value. After-tax cash flow should not be
considered in isolation or as an alternative to operating income (as
determined in accordance with generally accepted
24
accounting principles) as an indicator of the entity's operating
performance, or to cash flow from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity. This measure is believed to be, but may not be, comparable to
similarly titled measures used by other companies.
(l) Divisional/Stockholders' equity includes net amounts due to Hearst and
affiliates for the periods prior to September 1, 1997. Hearst-Argyle has
not paid any dividends on its common stock since inception.
(m) The cash flow data for investing activities and financing activities is
not determinable for pro forma purposes.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
On August 29, 1997, effective September 1, 1997 for accounting purposes, The
Hearst Corporation ("Hearst") contributed its television broadcast group and
related broadcast operations (the "Hearst Broadcast Group") to Argyle
Television, Inc. ("Argyle") and merged a wholly-owned subsidiary of Hearst
with and into Argyle, with Argyle as the surviving corporation (renamed
"Hearst-Argyle Television, Inc.") (the "Company"). The merger transaction is
referred to as the "Hearst Transaction". The merger was accounted for as a
purchase of Argyle by Hearst in a reverse acquisition. In a reverse
acquisition, the accounting treatment differs from the legal form of the
transaction, as the continuing legal parent company (Argyle), is not assumed
to be the acquiror and the historical financial statements of the entity
become those of the accounting acquiror (Hearst Broadcast Group).
Consequently, the presentation of the Company's consolidated financial
statements prior to September 1, 1997 reflects the combined financial
statements of the Hearst Broadcast Group. In addition, the Company agreed to
provide management services with respect to WWWB, WPBF, KCWE and WBAL-AM and
WIYY-FM (the "Managed Stations"), three of which stations are owned by Hearst
and the other of which Hearst provides certain services to under a local
marketing agreement, in exchange for a management fee. See Note 13 of the
notes to the consolidated financial statements.
Effective June 1, 1998, the Company exchanged its WDTN and WNAC stations
with STC Broadcasting, Inc. and certain related entities (collectively "STC")
for KSBW, the NBC affiliate serving the Monterey--Salinas, CA, television
market, and WPTZ/WNNE, the NBC affiliates serving the Plattsburgh, NY--
Burlington, VT, television market (the "STC Swap"). See Note 3 of the notes to
the consolidated financial statements.
The following discussion of results of operations does not include the full-
year pro forma effects of the Hearst Transaction (for 1996 and 1997) or the
STC Swap (for 1996, 1997 and 1998).
Results of operations for the year ended December 31, 1998 include: (i)
WCVB, WTAE, WBAL, WISN, KMBC, WAPT, KITV, KHBS/KHOG, WLWT, KOCO and management
fees derived by the Company from the Managed Stations for the entire period;
(ii) WDTN and the Company's share of the Clear Channel Venture (WNAC/WPRI)
from January 1 through May 31; and, (iii) KSBW and WPTZ/WNNE from June 1
through December 31. Results of operations for the year ended December 31,
1997 include: (i) the Hearst Broadcast Group for the entire period presented;
and, (ii) WAPT, KITV, KHBS/KHOG, WLWT, KOCO; the Company's share of the Clear
Channel Venture and management fees derived by the Company from the Managed
Stations from September 1 through December 31. Results of operations for the
year ended December 31, 1996 include the Hearst Broadcast Group for the entire
period.
Year Ended December 31, 1998
Compared to Year Ended December 31, 1997
Total revenues. Total revenues in the year ended December 31, 1998 were
$407.3 million, as compared to $333.7 million in the year ended December 31,
1997, an increase of $73.6 million or 22.1%. The increase was primarily
attributable to (i) the Hearst Transaction and the net effect of the STC Swap,
which added $56.6 million and $3.1 million, respectively, to 1998 total
revenues and (ii) an increase in political advertising revenues of $15.6
million, which was offset by a decrease in national advertising revenues of
$3.7 million.
Station operating expenses. Station operating expenses in the year ended
December 31, 1998 were $173.9 million, as compared to $142.1 million in the
year ended December 31, 1997, an increase of $31.8 million or 22.4%. The
increase was primarily attributable to the Hearst Transaction and to the net
effect of the STC Swap, which added $28.4 million and $1.2 million,
respectively, to 1998 station operating expenses.
Amortization of program rights. Amortization of program rights in the year
ended December 31, 1998 was $42.3 million, as compared to $40.1 million in the
year ended December 31, 1997, an increase of $2.2 million or 5.5%. The
increase is primarily attributable to (i) the Hearst Transaction and (ii) new
programs purchased for
26
favorable time-slots (late fringe time periods) in certain central time zone
markets which added $3.3 million and $ 0.4 million, respectively, to
amortization of program rights during 1998. This increase was offset by a
decrease in amortization of program rights of (i) $0.7 million due to the net
effect of the STC Swap and (ii) $1 million due to lower cost replacement
programming in several markets.
Depreciation and amortization. Depreciation and amortization of intangible
assets was $36.4 million in the year ended December 31, 1998, as compared to
$22.9 million in the year ended December 31, 1997, an increase of
approximately $13.5 million or 59%. This increase is primarily attributable to
the Hearst Transaction which added $12.8 million to 1998 depreciation and
amortization expense.
Station operating income. Station operating income in the year ended
December 31, 1998 was $154.7 million, compared to $128.5 million in the year
ended December 31, 1997, an increase of $26.2 million or 20.4%, due to the
items discussed above.
Corporate general and administrative expenses. Corporate general and
administrative expenses were $12.6 million in the year ended December 31,
1998, compared to $9.5 million in the year ended December 31, 1997, an
increase of $3.1 million or 32.6%. The increase was attributable to the
increase in corporate staff following the Hearst Transaction and other costs
associated with the Hearst Transaction.
Interest expense, net. Interest expense, net was $39.6 in the year ended
December 31, 1998, as compared to $32.5 million in the year ended December 31,
1997, an increase of $7.1 million or 21.8%. This increase in interest expense,
net was attributable to a larger outstanding debt balance in 1998 than in
1997, which was the result of the Hearst Transaction. In addition, interest
expense, net was decreased in the year ended December 31, 1998 due to
approximately $0.9 million in interest income recorded relating to the note
receivable from the STC Swap. See Note 3 of the notes to the consolidated
financial statements.
Income taxes. Income tax expense was $42.8 million for the year ended
December 31, 1998, as compared to $35.4 million for the year ended December
31, 1997, an increase of $7.4 million of 20.9%. The effective rate was 41.8%
for the year ended December 31, 1998 as compared to 40.9% for the year ended
December 31, 1997. This represents federal and state income taxes as
calculated on the Company's income before income taxes and extraordinary item
for the years ended December 31, 1998 and 1997. The increase in the effective
rate relates primarily to the non-tax-deductible goodwill amortization related
to the Hearst Transaction and the increase in the state and local income tax
provision.
Extraordinary item. The Company recorded an extraordinary item of $10.8
million net of the related income tax benefit, in 1998. This extraordinary
item resulted from an early repayment of $102.4 million of the Company's
Senior Subordinated Notes. The extraordinary item includes the write-off of
unamortized deferred financing costs associated with the Senior Subordinated
Notes, the payment of a premium for the early repayment and the related
expenses incurred.
Net income. Net income totaled $48.9 million in the year ended December 31,
1998 compared to $34.9 million in the year ended December 31, 1997 an increase
of $14 million or 40.1%, due to the items discussed above.
Broadcast Cash Flow. Broadcast cash flow totaled $190.5 million in the year
ended December 31, 1998 as compared to $151 million in the year ended December
31, 1997, an increase of $39.5 million or 26.2%. The increase in broadcast
cash flow resulted primarily from (i) the Hearst Transaction and the STC Swap
which added $24.7 million and $2.6 million, respectively, to broadcast cash
flow during 1998 and (ii) an increase in political advertising revenues of
$15.6 million period to period which was partially offset by a decrease in
national advertising of $3.7 million period to period. Broadcast cash flow
margin increased to 46.8% in 1998 from 45.2% in 1997. Broadcast cash flow is
defined as station operating income, plus depreciation and amortization and
write-down of intangible assets plus amortization of program rights, and minus
program payments. The Company has included broadcast cash flow data because
management utilizes and believes that such data are commonly
27
used as a measure of performance among companies in the broadcast industry.
Broadcast cash flow is also frequently used by investors, analysts, valuation
firms and lenders as one of the important determinants of underlying asset
value. Broadcast cash flow should not be considered in isolation or as an
alternative to operating income (as determined in accordance with generally
accepted accounting principles) as an indicator of the entity's operating
performance, or to cash flow from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity. This measure is believed to be, but may not be, comparable to
similarly titled measures used by other companies.
Year Ended December 31, 1997
Compared to Year Ended December 31, 1996
Total revenues. Total revenues in the year ended December 31, 1997 were
$333.7 million, as compared to $284 million in the year ended December 31,
1996, an increase of $49.7 million or 17.5%. The increase was primarily
attributable to the Hearst Transaction which added $33.5 million to 1997 total
revenues. In addition, certain Hearst Broadcast Group stations experienced:
(i) an increase in local and to a lesser degree national advertising which
added $13.9 million to the 1997 period and (ii) an increase in trade and
barter revenues, which added $2.4 million to the 1997 period.
Station operating expenses. Station operating expenses in the year ended
December 31, 1997 were $142.1 million, as compared to $121.5 million in the
year ended December 31, 1996, an increase of $20.6 million or 17%. The
increase was primarily attributable to the Hearst Transaction, which added
$17.2 million to station operating expenses during 1997. In addition, the
Hearst Broadcast Group experienced an increase in trade and barter expenses,
which added $2.4 million to the 1997 period.
Amortization of program rights. Amortization of program rights in the year
ended December 31, 1997 was $40.1 million, as compared to $40.3 million in the
year ended December 31, 1996, a decrease of $0.2 million or 0.5%. The decrease
was primarily attributable to a decrease of $1.4 million in Hearst Broadcast
Group amortization of program rights due to: (i) the replacement of certain
programming at lower costs in multiple Hearst Broadcast Group markets and (ii)
the renegotiations of a certain programming contract at a lower rate. This was
offset by the Hearst Transaction, which added $1.3 million to amortization of
program rights during 1997.
Depreciation and amortization. Depreciation and amortization of intangible
assets was $22.9 million in the year ended December 31, 1997, as compared to
$17 million in the year ended December 31, 1996, an increase of $5.9 million
or 34.7%. The increase was primarily attributable to the Hearst Transaction,
which added $7.3 million to depreciation and amortization of intangibles
during 1997. This was offset by a decrease in amortization of $1.3 million due
to a portion of the intangible assets that became fully amortized during 1996.
Station operating income. Station operating income in the year ended
December 31, 1997 was $128.5 million, as compared to $105.2 million in the
year ended December 31, 1996, an increase of $23.3 million or 22.1%. The
station operating income increase was due to the items discussed above.
Corporate general and administrative expenses. Corporate general and
administrative expenses were $9.5 million in the year ended December 31, 1997,
as compared to $7.7 million in the year ended December 31, 1996, an increase
of $1.8 million or 23.4%. The increase was attributable to the increase in
corporate staff following the Hearst Transaction and other costs associated
with the Hearst Transaction.
Interest expense, net. Interest expense, net was $32.5 million in the year
ended December 31, 1997, as compared to $21.2 million in the year ended
December 31, 1996, an increase of $11.3 million or 53.3%. This increase in
interest expense was primarily attributable to a larger outstanding debt
balance in 1997 than in 1996, which was the result of the Hearst Transaction.
Income taxes. Income tax expense was $35.4 million in the year ended
December 31, 1997, as compared to $31.9 million in the year ended December 31,
1996, an increase of $3.5 million or 11%. The effective rate
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was 40.9% in the year ended December 31, 1997 as compared to 41.8% in the year
ended December 31, 1996. This represents federal and state income taxes as
calculated on the Company's income before income taxes and extraordinary item
in the year ended December 31, 1997 and 1996. The decrease in the effective
rate relates primarily to the decrease in non-deductible amortization of
intangible assets described above.
Extraordinary item. The Company recorded an extraordinary item of $16.2
million, net of the related income tax benefit, in 1997. This extraordinary
item resulted from a refinancing of the Company's $275 million private
placement debt (assumed in connection with the Hearst Transaction) and $45
million of the Company's Senior Subordinated Notes in December 1997. The
extraordinary item includes the write-off of the pro rata portion of the
unamortized financing costs associated with the Senior Subordinated Notes and
the payment of a premium for both refinancings.
Net income. Net income was $34.9 million in the year ended December 31,
1997, as compared to $44.4 million in the year ended December 31, 1996, a
decrease of $9.5 million or 21.4%. This decrease was attributable primarily to
the extraordinary item, without which net income would have been $51.1
million, an increase of $6.7 million or 15.1%. This increase was attributable
to the items discussed above.
Broadcast Cash Flow. Broadcast cash flow was $151 million in the year ended
December 31, 1997, as compared to $117.9 million in the year ended December
31, 1996, an increase of $33.1 million or 28.1%. The broadcast cash flow
increase resulted primarily from the Hearst Transaction, which added $14.5
million to broadcast cash flow during 1997. In addition, the increase was due
to an increase, at certain Hearst Broadcast Group stations, in local and to a
lesser degree national advertising. Broadcast cash flow margin increased to
45.2% in 1997 from 41.5% in 1996. Broadcast cash flow is defined as station
operating income, plus depreciation and amortization and write-down of
intangible assets plus amortization of program rights, and minus program
payments. The Company has included broadcast cash flow data because management
utilizes and believes such data are commonly used as a measure of performance
among companies in the broadcast industry. Broadcast cash flow is also
frequently used by investors, analysts, valuation firms and lenders as one of
the important determinants of underlying asset value. Broadcast cash flow
should not be considered in isolation or as an alternative to operating income
(as determined in accordance with generally accepted accounting principles) as
an indicator of the entity's operating performance, or to cash flow from
operating activities (as determined in accordance with generally accepted
accounting principles) as a measure of liquidity. This measure is believed to
be, but may not be, comparable to similarly titled measures used by other
companies.
Liquidity and Capital Resources
Upon completion of the Hearst Transaction on August 29, 1997, the Company
entered into a $1 billion syndicated credit facility with Chase Manhattan Bank
(the "Credit Facility"). As of December 31, 1998, there was no amount
outstanding under the Credit Facility. The Company may borrow amounts under
the Credit Facility from time to time for additional acquisitions, capital
expenditures and working capital, subject to the satisfaction of certain
conditions on the date of borrowing.
On January 5, 1999, effective January 1, 1999 for accounting purposes, the
Company acquired through a merger transaction all of the partnership interests
in Kelly Broadcasting Co. ("Kelly Broadcasting") for approximately $520
million and substantially all of the assets and certain liabilities of
Kelleproductions, Inc. for approximately $10 million. See Note 18 of the notes
to the consolidated financial statements. In connection with this transaction,
the Company issued $340 million and $110 million in senior notes (the "Private
Placement Debt") in December 1998 and January 1999, respectively. The
remainder of the purchase price was funded using a combination of borrowings
under the existing Credit Facility and available cash. See Notes 6 and 18 of
the notes to the consolidated financial statements.
On March 18, 1999, the Company acquired the nine television and five radio
stations ("Pulitzer Broadcasting Company") of Pulitzer Publishing Co.
("Pulitzer") in a merger transaction. In connection with this transaction, the
Company issued 37,096,774 shares of Series A Common Stock to Pulitzer
shareholders and
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assumed $700 million in debt. The Company borrowed approximately $715 million
under the Credit Facility to refinance the assumed debt and pay related
transaction expenses. See Note 18 of the notes to the consolidated financial
statements.
These borrowings will increase the Company's interest expense by
approximately $85 million per year. The Company anticipates that, based upon
1998 earnings levels of Pulitzer Broadcasting Company and Kelly Broadcasting,
the increase in interest expense and amortization of intangible assets will
result in a decrease in the combined income before extraordinary item of the
Company, Pulitzer Broadcasting Company and Kelly Broadcasting of approximately
$20 million. However, such increase in interest expense will be funded from
the increase in cash flow from operations due to the Pulitzer and Kelly
Broadcasting transactions.
The Company will implement an employee stock purchase plan (the "Stock
Purchase Plan") during the second quarter of 1999. The Stock Purchase Plan
will allow employees to purchase shares of the Company's Series A Common Stock
through after-tax payroll deductions. The Company reserved and made available
for issuance and purchase under the Stock Purchase Plan 5,000,000 s