HEARST TELEVISION INC. 10-K 2007
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: Not Applicable
Commission file number 1-14776
Hearst-Argyle Television, Inc.
(Exact Name of Registrant as Specified in Its Charter)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company. Yes o No x
The aggregate market value of the registrants voting and non-voting common stock held by non-affiliates on June 30, 2006 based on the closing price for the registrants Series A Common Stock on such date as reported on the New York Stock Exchange (the NYSE), was approximately $327,954,902.
Shares of the registrants Common Stock outstanding as of February 15, 2007: 93,293,318 shares (consisting of 51,994,670 shares of Series A Common Stock and 41,298,648 shares of Series B Common Stock).
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrants Proxy Statement relating to the 2007 Annual Meeting of Stockholders are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14).
This report includes or incorporates forward-looking statements. We base these forward-looking statements on our current expectations and projections about future events. These forward-looking statements generally can be identified by the use of statements that include phrases such as anticipate, will, may, likely, plan, believe, expect, intend, project, forecast or other such similar words and/or phrases. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements contained in this report, concerning, among other things, trends and projections involving revenue, income, earnings, cash flow, liquidity, operating expenses, assets, liabilities, capital expenditures, dividends and capital structure, involve risks and uncertainties, and are subject to change based on various important factors. Those factors include the impact on our operations from
· Changes in Federal regulations that affect us, including changes in Federal communications laws or regulations;
· Local regulatory actions and conditions in the areas in which our stations operate;
· Competition in the broadcast television markets we serve;
· Our ability to obtain quality programming for our television stations;
· Successful integration of television stations we acquire;
· Pricing fluctuations in local and national advertising;
· Changes in national and regional economies;
· Our ability to service and refinance our outstanding debt;
· Changes in advertising trends and our advertisers financial condition; and
· Volatility in programming costs, industry consolidation, technological developments, and major world events.
For a discussion of additional risk factors that are particular to our business, please refer to Part I, Item 1A. Risk Factors beginning on page 17. These and other matters we discuss in this report, or in the documents we incorporate by reference into this report, may cause actual results to differ from those we describe. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
HEARST-ARGYLE TELEVISION, INC.
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Hearst-Argyle Television, Inc. (the Company or we) is one of the countrys largest independent, or non-network-owned, television station groups. Headquartered in New York City, we own or manage 29 television stations reaching approximately 20.2 million, or approximately 18.1%, of television households in the United States. Our 13 ABC-affiliated television stations, which reach 8.3% of U.S. television households, represent the largest ABC affiliate group. Our 10 NBC-affiliated television stations, which reach 7.2% of U.S. television households, represent the second largest NBC affiliate group. We own two CBS-affiliated television stations, one CW station and one MyNetworkTV station, and we also manage one CW station and one independent station for The Hearst Corporation (Hearst). Our primary objective is to maximize the revenue and profits of our media properties by optimizing audience ratings and market share. We believe that local news leadership, the effective showcasing of network and syndicated programs, and serving our local communities, drive market-competitive ratings, revenue share and station and Website profitability. We are a leader in the convergence of local broadcast television and the Internet through our investment in, and operating agreement with, Internet Broadcasting, which operates a nation-wide network of television Websites. Our stations Websites typically provide news, weather, community information, user generated content and entertainment content to our audience. Our stations Websites attracted a combined average of 3.9 million unique viewers and generated 106.9 million average page views per month during 2006. Also, as part of our ongoing initiative to explore additional uses of our digital spectrum, 12 of our stations broadcast additional channels on a multicast stream in addition to their main digital channel. Our NBC-affiliated stations multicast the NBC Weather Plus Network, the first ever 24/7, all digital, local and national broadcast network, and two of our other stations launched similar station-branded multicast weather channels in 2006. We also manage two radio stations which are owned by Hearst.
We provide, through our local television stations, free over-the-air programming to our local communities. Our programming includes three main components:
· programs produced by networks with which we are affiliated, such as ABCs Greys Anatomy, NBCs Law and Order and CBS CSI: Crime Scene Investigation, and special event programs like The Academy Awards, the Olympics and the Super Bowl;
· programs that we produce at our stations, such as local news, weather, sports and entertainment; and
· first-run syndicated programs that we acquire, such as The Oprah Winfrey Show and Entertainment Tonight.
In keeping with our commitment to serve the public interest of the local communities in which we operate, our television stations and Websites also provide public service announcements and political coverage and sponsor community service projects and other public initiatives.
Our primary source of revenue is the sale of advertising to advertisers. We seek to attract advertising customers and increase our advertiser base by delivering mass audiences in key demographics, primarily in the top 75 U.S. television markets as measured by Nielsen Media Research. We also seek to attract our television audience by providing compelling content on multiple media platforms. We provide leading local news programming and popular network and syndicated programs at each of our television stations, 20 of which are in the top 50 U.S. television markets. In addition, we seek to make our content available to our audience as they use additional content platforms, such as the Internet and portable devices, during their day. We stream a portion of our television programming, including our news and weather forecasts, and we
publish community information, user generated content and entertainment content on our stations Websites. In certain markets, we have also established a mobile presence for our stations Websites. We believe that aligning our content offerings with audience media consumption patterns in this manner ultimately benefits our advertisers. Our advertisers benefit from a variety of marketing opportunities, including traditional spot campaigns, community events and sponsorships at our television stations, as well as on our stations Internet and/or mobile Websites, enabling them to reach our audience in multiple ways.
We believe that excellence in news coverage is a key determinant to developing a loyal audience, which is instrumental to a stations competitive, operational and financial success. We focus on the coverage of local and national issues, breaking news, accurate and timely forecasting of local weather conditions and the latest information at times of emergencies, as well as coverage of political issues, candidates, debates, and elections. We typically rank either first or second (in total household ratings and by share of demographic audience, adults aged 25-54) in local morning and evening news programs in at least 19 of the 25 markets where we produce news. In addition, our television stations have been recognized with numerous local, state and national awards for outstanding news coverage. Our stations have received numerous honors in recent years, including three consecutive Walter Cronkite Awards bestowed by the University of Southern Californias Annenberg School for Communication, Edward R. Murrow Awards, George Foster Peabody Awards, Alfred I. duPont Columbia Awards, National Headliner Awards, the NAB Service to America Award, as well as numerous state and local Emmy and Associated Press honors.
We believe that capitalizing on the opportunities afforded the television industry by digital media, such as digital multi-casting, streaming on broadband, video-on-demand and mobile and other portable devices, is important to our future success. We devote substantial energy and resources to integrating such media into our business and seek investment opportunities in companies which we believe are well-positioned for emerging trends in digital media.
For the year ended December 31, 2006, we had revenue of $785.4 million, employed 3,312 full-time and part-time employees and operated in 25 U.S. markets. Information about our financial results is discussed under Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations beginning on page 32, and presented under Item 8 Financial Statements and Supplementary Data beginning on page 50.
Hearst-Argyle is incorporated under the laws of the State of Delaware. Our principal executive offices are located at 300 West 57th Street, New York, New York 10019, and our main telephone number at that address is (212) 887-6800. Our Series A Common Stock is listed on the New York Stock Exchange under the ticker symbol HTV.
Hearst-Argyle Television, Inc. was formed in August 1997 when Hearst combined its television broadcast group and related broadcast operations (the Hearst Broadcast Group) with those of Argyle Television, Inc. (Argyle).
Founded by William Randolph Hearst in 1887, The Hearst Corporation entered the broadcasting business in 1928 with its acquisition of radio station WSOE in Milwaukee, Wisconsin. In 1948, Hearst launched its first television station, WBAL-TV, in Baltimore, Maryland, which was the nations 19th television station. That same year, WLWT(TV), in Cincinnati, Ohio, later to become an Argyle station, was launched as the nations 20th television station and WDSU(TV), in New Orleans, Louisiana, later to be acquired by the Pulitzer Publishing Company, was launched as the nations 48th television station. By 1997, when Hearst and Argyle combined their broadcast operations to form our company, the two companies had a combined total of 15 owned and managed television stations and two managed radio stations.
Since that time, we have acquired additional television stations through asset purchase, asset exchange or merger transactions, including merger transactions in 1999 with Pulitzer Publishing Company, in which we acquired nine television stations and five radio stations, and with Kelly Broadcasting Company, in which we acquired our television stations in Sacramento, California, and a three-party asset exchange transaction in 2001 pursuant to which we sold three Phoenix, Arizona radio stations and acquired WMUR-TV, Manchester, New Hampshire. In 2004, we purchased an ABC affiliate, WMTW-TV, in Portland, Maine and in 2006, we purchased a CW affiliate, WKCF(TV), in Orlando, Florida.
We also have a strategic equity investment in Internet Broadcasting Systems, Inc. (Internet Broadcasting). Each of our stations has a Website for which certain services and content are produced and managed by Internet Broadcasting. Our stations Websites typically provide news, weather, community information, user generated content and entertainment content. These Websites are part of a nation-wide network of local Websites that we and Internet Broadcasting have built with other television station groups. The Internet Broadcasting network provides local Internet coverage of 57 markets, reaching 65% of U.S. households. We also have a strategic equity investment in Ripe Digital Entertainment, Inc. (Ripe TV), an advertising-supported free digital video-on-demand program service for distribution via multiple platforms, including digital cable, broadband, and cell phones. In addition, we have a minority interest in the Arizona Diamondbacks major league baseball team, which we acquired in the Pulitzer transaction.
As of February 15, 2007, Hearst owned, through its wholly-owned subsidiaries, Hearst Holdings, Inc., a Delaware corporation (Hearst Holdings), and Hearst Broadcasting, Inc., a Delaware corporation (Hearst Broadcasting), 100% of the issued and outstanding shares of our Series B Common Stock, par value $.01 per share, (the Series B Common Stock, and together with our Series A Common Stock, par value $.01 per share, the Series A Common Stock, the Common Stock) and approximately 52.9% of the issued and outstanding shares of our Series A Common Stock, representing in the aggregate approximately 73.75% of the outstanding voting power of our Common Stock (except with regard to the election of directors, which is discussed below). On February 15, 2007, Hearst Broadcasting also owned 500,000 Series B Redeemable Convertible Preferred Securities due 2021 that were issued by Hearst-Argyle Capital Trust, our wholly-owned subsidiary trust. Hearst Broadcasting may convert the Series B Redeemable Convertible Preferred Securities into 986,131 shares of our Series A Common Stock, representing in the aggregate approximately 1.9% of the outstanding voting power of our Common Stock (except with respect to the election of directors, which is discussed below) as of February 15, 2007. Because of Hearsts ownership, we are considered a controlled company under New York Stock Exchange rules.
Hearst Broadcastings ownership of our Series B Common Stock entitles it to elect as a class all but two members of our Board of Directors (the Board). The holders of our Series A Common Stock are entitled to elect the remaining two members of our Board. When Hearst combined the Hearst Broadcast Group with Argyle in August 1997, Hearst agreed that, for purposes of any vote to elect directors and for as long as it held any shares of our Series B Common Stock, it would vote any shares of Series A Common Stock that it owned only in the same proportion as the shares of Series A Common Stock not held by Hearst are voted in the election.
We own 26 television stations. In addition, we manage three television stations (WMOR-TV in Tampa, Florida, WPBF(TV) in West Palm Beach, Florida and KCWE(TV) in Kansas City, Missouri) and two radio stations (WBAL(AM) and WIYY(FM) in Baltimore, Maryland), all of which are owned by Hearst. Of the 29 television stations we own or manage, 20 are in the top 50 of the 210 generally recognized geographic designated market areas (DMAs) according to Nielsen Media Research (Nielsen) estimates for the 2006-2007 television broadcasting season.
The following table sets forth certain information for each of our owned and managed television stations as of December 31, 2006:
(1) Television market rank is based on the relative size of the DMAs (defined by Nielsen as geographic markets for the sale of national spot and local advertising time) among the 210 generally recognized DMAs in the United States, based on Nielsen estimates for the 2006-2007 season.
(2) ABC refers to the ABC Television Network; CBS refers to the CBS Television Network; IND refers to an independent station not affiliated with a network; NBC refers to the NBC Television Network; CW refers to The CW Network, formed by the 2006 merger of the UPN and WB networks; MNT refers to MyNetworkTV, launched in 2006 by the Fox Broadcasting Company.
(3) Our television stations are required to transition from analog television service to digital television service by February 17, 2009. At present, all of our stations are operating both analog and digital channels (with the exception of WDSU, which is in the process of reconstructing its digital
transmission facility due to damage sustained from Hurricane Katrina, and KMAU (satellite of KITV), which is permitted to flash cut to digital on its current analog channel at the end of the digital transition). At the end of the transition, each station must operate with only one digital channel; however, this channel may be subdivided into several sub-channels containing different content. In 2005, each station was required to elect a channel for operation after the digital transition. The elected channel is either the stations current analog channel, current digital channel, or it may be a new channel. The FCC has tentatively approved the channel elections of each of our stations. Notwithstanding a stations ultimate digital channel, during and after the digital transition, stations may maintain their local brand identification associated with their analog channel number through use of the Program and System Information Protocol (PSIP). In general and as required by the FCC, PSIP works in conjunction with digital receivers and associates a stations digital channel with the stations analog channel number. For example, WCVB, which operates on analog channel 5 and digital channel 20, uses channel 5 as its major PSIP channel, and viewers access the stations digital channel by tuning to channel 5 on their digital receivers. Due to PSIP, the fact that WCVBs digital station technically operates on channel 20 is not apparent to the viewer.
(4) Based on Nielsen estimates for the 2006-2007 season.
(5) Because WMUR and WCVB are in the same DMA, the FCC counts audience reach in this DMA only once for the two stations.
(6) Because WESH and WKCF are in the same DMA, the FCC counts audience reach in this DMA only once for the two stations.
(7) Because KQCA and KCRA are in the same DMA, the FCC counts audience reach in this DMA only once for the two stations.
(8) Because KCWE and KMBC are in the same DMA, the FCC counts audience reach in this DMA only once for the two stations.
The following table sets forth certain information for each of our managed radio stations:
(1) Radio market rank is based on the relative size of the Metro Survey Area (defined by Arbitron as generally corresponding to the Metropolitan Statistical Areas, defined by the U.S. Office of Management and Budget) for Arbitrons Fall 2006 Radio Market Report.
(2) We manage WBAL(AM) and WIYY(FM) under a management agreement with Hearst.
We have an option to acquire WMOR-TV and KCWE(TV) from Hearst, at their fair market value as determined by the parties, or by an independent third-party appraisal, subject to certain specified parameters (and we may withdraw any option exercise after we receive the third-party appraisal). However, if Hearst elects to sell either station during the option period, we will have a right of first refusal to acquire that station substantially on the terms agreed upon between Hearst and the potential buyer. We also have a right of first refusal to purchase WPBF(TV) if Hearst proposes to sell the station to a third party We will exercise any option or right of first refusal related to these properties by action of our independent directors. The option periods and the rights of first refusal expire in December 2007.
General. Twenty-eight of our 29 owned or managed television stations are affiliated with one of the following networks pursuant to a network affiliation agreement: ABC (13 stations), NBC (10 stations), CBS (two stations), CW (two stations) and MyNetworkTV (one station). WMOR-TV in Tampa, Florida currently operates as an independent station.
Each affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the network, which constitute approximately 14 hours of programming on a typical weekday on our ABC, NBC and CBS stations. In return, the network has the right to sell a significant portion of the advertising time during those broadcasts. The duration of a majority of our stations affiliations with their networks has exceeded 40 years and, for certain stations, has continued for more than 50 years. Our two radio stations also have an affiliation agreement with a network that provides certain content (e.g., news and sports) for the stations. However, our radio stations are less dependent on their affiliation agreements for programming.
Network Compensation. Historically, broadcast television networks have paid compensation to their affiliates, primarily in exchange for the broadcasting of network programming. In recent years, network compensation has been reduced and in the future may be eliminated. Our affiliation agreements with NBC and CBS provide for compensation that is weighted toward the first part of the term and declines to zero by the end of the term. In addition, more recently established networks generally have paid little or no cash compensation for the clearance of network programming or have required payment from their affiliates.
ABC. The term of each affiliation agreement for our ABC-affiliated stationsWCVB, WMUR, WTAE, KMBC, WISN, WPBF, KOCO, KOAT, KITV, WMTW, KETV, WAPT and KHBS/KHOGis for a period of five years, expiring December 31, 2009.
NBC. The term of the affiliation agreement for our NBC-affiliated stationsKCRA, WESH, WBAL, WLWT, WYFF, WGAL, WDSU, WXII, WPTZ/WNNE and KSBWis for a period of nine years, six months, expiring December 31, 2009. In addition, certain of our NBC stations have become affiliates of the NBC Weather Plus network. See Digital Media Initiatives.
CBS. The term of each affiliation agreement for our CBS-affiliated stationsWLKY and KCCIis for a period of ten years, expiring June 30, 2015.
CW. Warner Brothers and CBS Corp., respective owners of the former WB and UPN networks, discontinued the WB and UPN networks in the fall of 2006. On September 18, 2006, Warner Brothers and CBS Corp., in a joint venture, commenced operation of a new network, The CW. Certain former WB and UPN network affiliates are now affiliated with The CW, including KCWE and WKCF. The term of each affiliation agreement for our CW-affiliated stations is for a period of five years, expiring September 18, 2011.
MyNetworkTV. On September 5, 2006, News Corporation created a new prime-time network called MyNetworkTV. KQCA is affiliated with MyNetworkTV. The term of KQCAs MyNetworkTV affiliation agreement is for a period of 2 years, expiring September 5, 2008.
We and other television station groups have entered into operating agreements with Internet Broadcasting to operate a nation-wide network of local Websites. The Internet Broadcasting network, which covers 57 markets and reaches 65% of U.S. households, attracted on the average 12.2 million monthly unique viewers, according to Nielsen NetRatings, and generated 402.0 million average page views per month during 2006. Our stations local Websites are part of this national network, for which Internet Broadcasting provides content, production and management services on their technology platform. Our
stations Websites typically provide news, weather, community information, user generated content and entertainment content, including live video streams of breaking news events and access to video clip archives. Our stations Websites attracted a combined average of 3.9 million monthly unique viewers, according to Nielsen NetRatings, and generated 106.9 million average page views per month during 2006. Three of our executive officers, Harry T. Hawks, Steven A. Hobbs and Terry Mackin, serve on the Board of Directors of Internet Broadcasting.
In addition to the Internet-based services that we and Internet Broadcasting provide, we deliver various forms of content optimized for wireless devices in 12 of our markets, including Orlando, Sacramento and Boston. We also have launched station-branded multicast weather channels in Omaha and Des Moines. We continually seek to expand and enhance our multicasting, Internet and mobile content offerings to meet the changing needs of our audience and, ultimately, to attract advertisers.
In November 2004 NBC Universal and the NBC Television Affiliates Association formed NBC Weather Plus Network LLC, a 50/50 joint venture which launched the first ever 24/7, all digital, local and national broadcast network. NBC-affiliated stations participated in the venture by investing in a limited liability company called Weather Network Affiliates Company, LLC, one of the entities which invested in NBC Weather Plus Network LLC. Stations participating in the venture broadcast 24-hour national and local weather and related community information using their digital spectrum (as a multi-cast stream which is separate from their main digital channel). We have launched NBC Weather Plus in all of our NBC markets. Terry Mackin, one of our executive officers, serves as the past Chairman of the Board of the NBC Television Affiliates Association, which is the managing member and the owner of certain ownership interests in Weather Network Affiliates Company, LLC. As past NBC Affiliate Chairman, Mr. Mackin serves as chairman of the NBC Affiliates Futures committee, which is responsible for developing strategic projects between NBC and the NBC Affiliates. Mr. Mackin served as the Chairman of the NBC Television Affiliates Association Board from May 2004 to May 2006. Additionally, since May 2006, Mr. Mackin has served as a member of the Board of Directors of NBC Weather Plus Network LLC.
In July 2005, we made an equity investment in Ripe TV. Ripe TV was formed in 2003 to create an advertising-supported, free, digital video-on-demand program service, consisting primarily of short-form entertainment content. Launched in October 2005, the program service targets men aged 18-34 and is available for distribution via multiple platforms, including digital cable, broadband, and cell phones. Ripe TV is currently carried on the video-on-demand tiers of both Comcasts and Time Warners cable services. Two of our executive officers, Steven A. Hobbs and Terry Mackin, serve on the Board of Directors of Ripe TV.
General. Commercial television broadcasting began on a regular basis in the 1940s. Currently a limited number of channels are available for over-the-air broadcasting in any one geographic area, and a license to operate a television station must be granted by the FCC. All television stations in the country are grouped by Nielsen into 210 generally recognized television markets that are ranked in size based upon actual or potential audience. Each of these markets, called Designated Market Areas or DMAs, is designated as an exclusive geographic area consisting of all counties whose largest viewing share is given to stations of that same market area. Nielsen regularly publishes data on estimated audiences for the television stations in each DMA, which data is a significant factor in determining our advertising rates.
Revenue. Television station revenue is derived primarily from local, regional and national advertising and, to a lesser extent, from retransmission revenue (consisting of compensation paid to us by multi-channel, video program distributors (MVPDs) as compensation for retransmitting our stations signals), network compensation and other sources. Advertising rates are set based upon a variety of factors, including
· a programs popularity among the viewers an advertiser wishes to attract;
· the number of advertisers competing for the available time;
· the size and demographic makeup of the market served by the station; and
· the availability of alternative advertising media in the market.
Also, advertising rates are determined by a stations ratings and audience share among particular demographic groups.
General. Competition in the television industry takes place on three primary levels:
· competition for audience;
· competition for programming; and
· competition for advertisers.
Competition for Audience. We compete for audience on the basis of program popularity, which programming consists not only of our locally-produced news, public affairs and entertainment programming, but syndicated and network programming as well. The popularity of our programming has a significant effect on the rates we can charge our advertisers. In addition, although the commercial television broadcast industry historically has been dominated by the broadcast networks ABC, NBC, CBS and FOX, other non-broadcast networks and programming originated to be distributed solely via MVPDs, such as cable and satellite systems, have become significant competitors for the broadcast television audience. Currently, broadcast-originated programming accounts for about half of all television viewing.
In addition, while we stream a portion of our television programming, including our news and weather forecasts, and we publish community information, user generated content and entertainment content, on our stations Websites, and have established a mobile presence in certain of our markets, we increasingly compete for audience with other content providers who operate on these platforms, as well.
Other sources of competition for audience include
· home entertainment and recording systems (including VCRs, DVDs, DVRs and playback systems);
· video-on-demand and pay-per-view;
· television game devices;
· other sources of home entertainment.
Competition for Programming. Competition for non-network programming involves negotiating with national program distributors or syndicators that sell first-run and off-network packages of programming. Our stations predominantly carry first-run syndicated product and compete against other local broadcast stations for exclusive local access to the most popular programs (such as The Oprah Winfrey Show, which we carry in a majority of our markets). To a lesser extent, we compete for exclusive local access to off-network reruns (such as Friends). MVPDs also compete with local stations for programming, and various national cable and satellite networks from time to time have acquired programs that otherwise would have
been offered to local television stations. In addition, networks have recently begun to distribute their programming directly to the consumer via the Internet and portable digital devices such as video iPods and cell phones.
Competition for Advertisers. Broadcast television stations compete for advertising revenue and marketing sponsorship with other broadcast television stations, and a stations competitive edge is in large part determined by the success of its programming. Broadcast television stations also compete for advertising revenue with a variety of other media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, the Internet and MVPDs serving the same market.
Additional factors relevant to a television stations competitive position include signal strength and coverage within a geographic area and assigned frequency or channel position. Television stations that broadcast over the VHF band (channels 2-13) of the spectrum historically have had a competitive advantage over television stations that broadcast over the UHF band (channels above 13) of the spectrum because the former usually have better signal coverage and operate at a lower transmission cost. However, the improvement of UHF transmitters and receivers, the complete elimination from the marketplace of VHF-only receivers, the expansion of MVPD systems (such as cable and satellite) and the commencement of and transition to digital broadcasting have reduced the VHF signals competitive advantage.
Our business has experienced and is expected to continue to experience seasonality due to, among other things, seasonal advertising patterns and seasonal influences on peoples viewing habits. The advertising revenue of our stations is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. Additionally, advertising revenue is cyclical, benefiting in even-numbered years from advertising placed by candidates for political offices and issue-oriented advertising, and demand for advertising time in Olympic broadcasts. While political and Olympic advertising cycles have been a normal pattern for our industry for decades, the variability has become more pronounced in recent years as these respective categories of revenue have grown significantly in size. The seasonality and cyclicality inherent in our business make it difficult to estimate future operating results based on the previous results of any specific quarter.
In addition, the Company derives a material portion of its ad revenue from the automotive industry. Approximately 22% of the Companys total revenue came from the automotive category in 2006. An increase or decrease in revenue from this category therefore may disproportionately impact our operating results.
General. Broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the Communications Act). The Communications Act requires the FCC to regulate broadcasting so as to serve the public interest, convenience and necessity. The Communications Act prohibits the operation of broadcast stations except pursuant to licenses issued by the FCC and empowers the FCC, among other things, to
· issue, renew, revoke and modify broadcasting licenses;
· assign frequency bands;
· determine stations frequencies, locations and power; and
· regulate the equipment used by stations.
The Communications Act prohibits the assignment of a license or the transfer of control of a license without the FCCs prior approval. The FCC also regulates certain aspects of the operation of cable television systems, direct broadcast satellite (DBS) systems and other electronic media that compete with broadcast stations. In addition, although the FCC has reduced its regulation of broadcast stations, the FCC continues to regulate matters such as television station ownership, network-affiliate relations, cable and DBS systems carriage of television station signals, carriage of syndicated and network programming on distant stations, political advertising practices and obscene and indecent programming. In recent years, the FCC and Congress have increased their regulatory focus on indecency, which may impact certain of our programming decisions.
The following discussion summarizes the federal statutes and regulations material to our operations, but does not purport to be a complete summary of all the provisions of the Communications Act or of other current or proposed statutes, regulations, and policies affecting our business. The summaries which follow should be read in conjunction with the text of the statutes, rules, regulations, orders, and decisions described herein.
License Renewals. Under the Communications Act, the FCC generally may grant and renew broadcast licenses for terms of eight years, though licenses may be renewed for a shorter period under certain circumstances. The Communications Act requires the FCC to renew a broadcast license if the FCC finds that (i) the station has served the public interest, convenience and necessity; (ii) there have been no serious violations of either the Communications Act or the FCCs rules and regulations by the licensee; and (iii) there have been no other serious violations that taken together constitute a pattern of abuse. In making its determination, the FCC may consider petitions to deny but cannot consider whether the public interest would be better served by issuing the license to a person other than the renewal applicant. In addition, competing applications for the same frequency may be accepted only after the FCC has denied an incumbents application for license renewal.
The following table provides the expiration dates for the full power station licenses of our owned and managed television stations:
(1) Manchester, New Hampshire is determined by Nielsen to be a part of the Boston DMA.
(2) Our satellite station KOFT-DT in Farmington, NM operates in digital mode only pursuant to a special temporary authority which the FCC must renew periodically.
* We have filed for renewal of licenses for these stations, and those applications are pending. A stations authority to operate is automatically extended while a renewal application is on file and under review.
** Satellite stations generally retransmit the signal of a primary station, and offer some locally originated programming.
Ownership Regulation. The Communications Act and FCC rules limit the ability of individuals and entities to have ownership or other attributable interests in certain combinations of broadcast stations and other media. In June 2006, the FCC launched a rulemaking proceeding to promulgate new media ownership rules. This rulemaking is, in part, a response to the 2004 decision of the Third Circuit Court of Appeals, which stayed and remanded several of the ownership rule changes that the FCC had adopted in 2003. The rules adopted in 2003 would have liberalized most of the ownership rules which would have permitted us to acquire television stations in certain markets where we are currently prohibited from acquiring new stations. During the pendency of the FCCs current rulemaking proceeding, the FCCs pre-June 2003 broadcast ownership rules remain in effect. The FCCs currently effective ownership rules that are material to our operations are summarized below:
· Local Television Ownership. Under the FCCs current local television ownership (or duopoly) rule, a party may own multiple television stations without regard to signal contour overlap provided they are located in separate Nielsen DMAs. In addition, the rules permit parties to own up to two TV stations in the same DMA so long as (1) at least one of the two stations is not among the top four-ranked stations in the market based on audience share at the time an application for approval of the acquisition is filed with the FCC, and (2) at least eight independently owned and operating full-power commercial and non-commercial television stations would remain in the market after the acquisition. In addition, without regard to the number of remaining or independently owned television stations, the FCC will permit television duopolies within the same DMA so long as the Grade B signal contours of the stations involved do not overlap. Stations designated by the FCC as satellite stations, which are full-power stations that typically rebroadcast the programming of a parent station, are exempt from the local television ownership rule. Also, the FCC may grant a waiver of the local television ownership rule if one of the two television stations is a failed or
failing station or if the proposed transaction would result in the construction of a new television station. We are currently in compliance with the local television ownership rule.
· National Television Ownership Cap. The Communications Act, as amended in 2004, limits the number of television stations one entity may own nationally. Under the rule, no entity may have an attributable interest in television stations that reach, in the aggregate, more than 39% of all U.S. television households.
The FCC currently discounts the audience reach of a UHF station by 50% when computing the national television ownership cap. Further, for entities that have attributable interests in two stations in the same market, the FCC counts the audience reach of the stations in that market only once in computing the national ownership cap. The FCC is currently considering whether to retain the UHF discount. The propriety of the UHF discount will be the subject of further administrative proceedings, but the discount currently remains in effect.
· Dual Network Rule. The dual network rule prohibits a merger between or among any of the four major broadcast television networksABC, CBS, FOX and NBC.
· Media Cross-Ownership. The FCCs currently effective rules prohibit the licensee of a radio or TV station from directly or indirectly owning, operating, or controlling a daily newspaper if the stations specified service contour encompasses the entire community where the newspaper is published. While the FCC liberalized this rule in 2003, the new version of the rule remains under review and is not effective. The new rule, if it were adopted, would permit us to acquire stations in certain areas where Hearst, our controlling stockholder, owns newspapers.
The cross-ownership rules also permit cross ownership of radio and television stations under a graduated test based on the number of independently owned media voices in the local market. In large markets, (markets with at least 20 independently owned media voices), a single entity can own up to one television station and seven radio stations or, if permissible under the local television ownership rule (if eight full-power television stations would remain in the market post transaction), two television stations and six radio stations. Our television and radio stations in Baltimore, Maryland, are permanently grandfathered under this rule.
· Attribution of Ownership. Under the FCCs attribution policies, the following relationships and interests generally are attributable for purposes of the FCCs broadcast ownership restrictions:
· holders of 5% or more of the licensees voting stock, unless the holder is a qualified passive investor, in which case the threshold is a 20% or greater voting stock interest;
· all officers and directors of a licensee and its direct or indirect parent(s);
· any equity interest in a limited partnership or limited liability company, unless properly insulated from management activities; and
· equity and/or debt interests which in the aggregate exceed 33% of a licensees total assets, if the interest holder supplies more than 15% of the stations total weekly programming, or is a same-market broadcast company, cable operator or newspaper (the equity/debt plus standard).
All non-conforming interests acquired before November 7, 1996, are permanently grandfathered and thus do not constitute attributable ownership interests.
Under the single majority shareholder exception to the FCCs attribution policies, otherwise attributable interests under 50% are not attributable if a corporate licensee is controlled by a single majority shareholder and the minority interest holder is not otherwise attributable under the equity/debt plus standard. Thus, in our case, where Hearst is the single majority shareholder, ownership
of minority stock interests of up to 33% would not be attributable absent other factors. The FCC is reviewing the single majority shareholder exception, but the exception currently remains in effect.
Digital Television Service. The Communications Act and the FCC require television stations to transition from analog television service to digital television service. In 2006, new legislation was enacted that establishes a hard transition deadline of February 17, 2009. Until the end of the transition, in general, stations are required to operate both analog and digital facilities.
Cable and Satellite Carriage of Local Television Signals. Pursuant to the Cable Television Consumer Protection and Competition Act of 1992 (1992 Cable Act) and the FCCs must carry regulations, cable operators are generally required to devote up to one-third of their activated channel capacity to the carriage of the analog signals of local commercial television stations. The 1992 Cable Act also prohibits cable operators and other MVPDs from retransmitting a broadcast signal without obtaining the stations consent. On a cable system-by-cable system basis, a local television broadcast station must make a choice once every three years whether to proceed under the must carry rules or to waive the right to mandatory, but uncompensated, carriage and, instead, to negotiate a grant of retransmission consent to permit the cable system to carry the stations signal, in most cases in exchange for some form of consideration from the cable operator. In 2005, we made cable carriage elections for the three-year period January 1, 2006 to December 31, 2008. We opted to negotiate retransmission consent with most of the cable systems that carry our stations.
The Satellite Home Viewer Improvement Act of 1999 (SHVIA) established a compulsory copyright licensing system for the distribution of local television station signals by direct broadcast satellite systems to viewers in each DMA. Under SHVIAs carry-one, carry all provision, a direct broadcast satellite system generally is required to retransmit the analog signal of all local television stations in a DMA if the system chooses to retransmit the analog signal of any local television station in that DMA. Television stations located in markets in which satellite carriage of local stations is offered may elect mandatory carriage or retransmission consent once every three years. In 2005, we made satellite carriage elections for the three-year period January 1, 2006 to December 31, 2008. We opted to negotiate retransmission consent for all satellite systems that carry our stations.
To date, the FCC has determined that cable systems generally will be required under the FCCs must carry rules to carry a single programming stream transmitted by each local digital television station at the end of the digital television transition. During the transition period, cable operators are required to carry either a stations analog signal or a single programming stream of the digital signal, but not both. Therefore, the FCC does not require cable operators to carry additional multicast programming streams that we may create using our digital spectrum. Petitions filed by the broadcast industry requesting the FCC to reconsider that decision are pending. Nonetheless, we have retransmission consent agreements with a number of cable operators and satellite carriers that require carriage of the analog and certain digital programming streams of our stations.
The Satellite Home Viewer Extension and Reauthorization Act of 2004 (SHVERA) extended until December 31, 2009, the separate compulsory copyright license that permits satellite carriers to retransmit distant network signals to unserved households (i.e., those households that do not receive a signal of Grade B intensity from a local network affiliate). SHVERA also created a compulsory copyright license that permits satellite carriers to retransmit a stations signal out of its DMA into communities in which the station is significantly viewed (as that term is defined by the FCC).
Indecency Regulation. Federal law and the FCCs rules prohibit the broadcast of obscene material at any time, and the broadcast of indecent or profane material during the period from 6 a.m. through 10 p.m. In recent years, the FCC and its indecency prohibition have received much attention. In 2006, legislation was enacted that raised the maximum monetary penalty for the broadcast of obscene, indecent, or profane language to $325,000 for each violation, with a cap of $3 million for any single act.
As of December 31, 2006, we had approximately 2,938 full-time employees and 374 part-time employees. A total of approximately 923 of our employees are represented by five unions (the American Federation of Television and Radio Artists, the International Brotherhood of Electrical Workers, the International Alliance of Theatrical Stage Employees, the Directors Guild of America, and the National Association of Broadcast Electrical Technicians). We have not experienced any significant labor problems, and believe that our relations with our employees are satisfactory.
We maintain an Internet site at www.hearstargyle.com. We make available, free of charge, on our Internet site, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file those materials with, or furnish them to, the Securities and Exchange Commission (SEC).
Our Code of Business Conduct and Ethics, our Corporate Governance Guidelines, our Audit Committee Charter and our Compensation Committee Charter are also posted to the corporate governance section of our Internet site. In addition, you may obtain a free copy of our Code of Business Conduct and Ethics, our Corporate Governance Guidelines, or our Board committee charters that we file on our Internet site by writing to us at Hearst-Argyle Television, Inc., 300 West 57th St. New York, New York 10019, Attention: Corporate Secretary.
We also make available on our Internet site additional information, including news releases, earnings releases, archived audio Web casts and forthcoming corporate events.
The following discussion of risk factors contains forward-looking statements, as discussed on page 2 of this report. These risk factors may be important to understanding any statement in this report or elsewhere. The following information should be read in conjunction with Managements Discussion and Analysis (MD&A), and the consolidated financial statements and related notes in this report.
Each of the television stations we own or manage is a party to a network affiliation agreement giving such station the right to rebroadcast programs transmitted by the network, except WMOR-TV, in Tampa, Florida, which operates as an independent station. These affiliations are valuable to us because programs provided by the major networks are typically the most popular with audiences, which increases our ability to attract viewers to our programs, including our local newscasts. In exchange for giving us the right to rebroadcast their programs, the networks have the right to sell a substantial majority of the advertising time during such broadcasts. Thirteen of our stations are parties to affiliation agreements with ABC, 10 with NBC, two with CBS, two with CW and one with MyNetworkTV. We may fail to renew these network affiliation agreements, or we may renew them on less favorable terms than we presently have. In addition, because networks increasingly distribute their programming on other platforms, such as the Internet or portable devices, they may become less reliant upon their affiliates to distribute their programming, which could put us at a disadvantage in future contract negotiations. The termination or non-renewal, or renewal on less favorable terms, of our stations network affiliation agreements could adversely affect the viewership of our stations and affect our ability to sell advertising, which could materially decrease our revenue and operating results.
Our viewership levels, and ultimately advertising revenues, for each station are materially dependent upon programming which is either supplied to us by the networks or purchased by us. First, programming which the networks provide to us may not achieve or maintain satisfactory viewership levels. Specifically, because 23 of our 29 owned or managed stations are ABC or NBC affiliates, if ABC or NBC network programming fails to generate satisfactory ratings, our revenues may be adversely affected. Additionally, we purchase syndicated programming to supplement the shows supplied to us by the networks. Generally, however, before we purchase syndicated programming for our stations, this programming must first be cleared in the largest television marketsNew York, Los Angeles and Chicago. Network owned and operated stations in those markets typically determine which syndicated shows will be brought to market, and therefore dictate our options for syndicated programs. If those stations do not launch new shows, or if the shows that they launch, and which in turn we acquire, fail to generate satisfactory ratings, our viewership levels may decrease and our revenues may be adversely affected
Television programming is one of our most significant operating cost components. We may be exposed in the future to increased programming costs. Should such an increase in our programming expenses occur, it could have a material adverse effect on our operating results. In addition, television networks have been seeking arrangements with their affiliates to share the networks programming costs and to change the structure of network compensation. If we become party to an arrangement whereby we share our networks programming costs, our programming expenses would increase further. In addition, we usually acquire syndicated programming rights two or three years in advance and acquiring those rights may require multi-year commitments, making it difficult to predict accurately how a program will perform. In some instances, we must replace programs before their costs have been fully amortized, resulting in write-offs that increase station operating costs. An increase in the cost of news programming and content or in the costs for on-air and creative talent may also increase our expenses, particularly during events requiring extended news coverage, and therefore adversely affect our business and operating results. Finally, cable distributors are increasingly competing with us or the networks with which we are affiliated for the rights to carry popular sports programming, which could increase our costs, or if we were to lose the rights to broadcast such sports programming, could adversely affect our audience share and operating results.
We rely substantially upon sales of advertising for our revenues. Our stations compete for advertising revenues with other television stations in their respective markets. They also compete with other advertising media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, the Internet and local cable and satellite system operators. Our stations are located in highly competitive markets. Accordingly, our operating results are and will continue to be dependent upon the ability of each of our stations to compete successfully for advertising revenues in its respective market. Our ability to generate advertising revenues is and will continue to be affected by changes in the national economy, as well as by regional economic conditions in each of the markets in which our stations operate. The size of advertisers budgets, which are affected by broad economic trends, affect the broadcast industry in general and the revenues of individual broadcast television stations. If the economic prospects of advertisers or the economy decline, our current or prospective advertisers may purchase less advertising time from us. In addition, the occurrence of disasters, acts of terrorism, political uncertainty or hostilities could cause us to lose our ability to broadcast our television signals or, if we are able to broadcast, our broadcast operations may shift to around-the-clock news coverage, which would
cause the loss of advertising revenues due to the suspension of advertising-supported commercial programming.
We derive a material portion of our ad revenue from the automotive industry. For example, approximately 22% of our total revenue came from the automotive category in 2006. If automotive-related advertising revenue decreases, or if revenue from another advertising category that constitutes a material portion of our stations revenue in a particular period were to decrease, our business and operating results could be adversely affected.
Technological innovation, and the resulting proliferation of programming alternatives such as cable, satellite television, video provided by telephone company fiber lines, satellite radio, video-on-demand, pay-per-view, the Internet, home video and entertainment systems, portable entertainment systems, and the availability of television programs on the Internet and portable digital devices have fragmented television viewing audiences and subjected television broadcast stations to new types of competition. Over the past decade, the aggregate viewership of non-network programming distributed via MVPDs such as cable television and satellite systems has increased, while the aggregate viewership of the major television networks has declined. New technologies that enable users to view content of their own choosing, in their own time, and to fast-forward or skip advertisements, such as DVRs, portable digital devices, and the Internet, may cause changes in consumer behavior that could affect the attractiveness of our offerings to advertisers. If this were to occur, our operating results could be adversely affected.
Other advances in technology, such as increasing use of local-cable advertising interconnects, which allow for easier insertion of advertising on local cable systems, have also increased competition for advertisers. In addition, video compression techniques permit greater numbers of channels to be carried within existing bandwidth on cable, satellite and other television distribution systems. These compression techniques, as well as other technological developments, are applicable to all video delivery systems, including digital over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences. Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized niche programming on cable, satellite and other television distribution systems. We expect this ability to reach very narrowly defined audiences to increase competition both for audience and for advertising revenue. In addition, the expansion of competition due to technological innovation has increased, and may continue to increase, competitive demand for programming. Such increased demand, together with rising production costs, may in the future increase our programming costs or impair our ability to acquire programming, which will in turn impair our ability to generate revenue from the advertisers with which we seek to do business.
The Communications Act and the FCCs rules require television stations to transition from analog television service to digital television service by February 17, 2009. After that time, our analog signals will no longer be available. The United States Government Accountability Office estimates that, as of February 2005, approximately 19 percent of all U.S. households, or roughly 20.8 million households, receive television exclusively by means of analog over-the-air transmissions and do not subscribe to cable or satellite services. In addition to these households, many households that subscribe to cable or satellite services also have one or more television sets that rely on over-the-air transmissions. In total, the FCC estimates that, as of February 2005, there were approximately 73 million television sets in U.S. households that relied on over-the-air transmissions. To continue to receive our stations after the conclusion of the
digital television transition, households that rely on over-the-air transmissions will be required to purchase digital televisions, obtain digital to analog converter equipment, or subscribe to satellite or cable service (assuming such services will continue to offer programming for analog televisions). A significant percentage of households with analog over-the-air receivers may not desire or be able to afford to purchase digital televisions. While the federal government has created a subsidy to help such households obtain digital converters, the subsidy may not be large enough to cover all households with over-the-air receivers and some of such households may not take advantage of the subsidy. As a result, the digital transition may cause some households to lose service from our stations. And, to the extent such households elect to subscribe to satellite or cable service, the additional channels available through those services may reduce our viewership from such households. Furthermore, while digital television improves the technical quality of our over-the-air television broadcasts, the digital transition may cause a loss to a portion of our audience because digital over-the-air service areas do not necessarily replicate analog service areas in all respects. While, in many cases, a stations digital signal covers all of the stations analog service area, in some circumstances, conversion to digital may reduce a stations geographical coverage area. We believe that digital television is important to our long-term viability and offers many advantages such as high definition video, multi-channel digital audio and multicast capability. However, we cannot predict the precise effect digital television might have on our stations viewership and our operations.
Cable operators and direct broadcast satellite systems are generally required to carry the analog signal of local commercial television stations pursuant to the FCCs must carry or carry-one, carry-all rules. However, these MVPDs are prohibited from carrying a broadcast signal without obtaining the stations consent. For each distributor, a local television broadcaster must make a choice once every three years whether to proceed under the must carry or carry-one, carry-all rules or to waive the right to mandatory but uncompensated carriage and negotiate a grant of retransmission consent to permit the system to carry the stations signal, in most cases in exchange for some form of consideration from the system operator. In 2005, we elected retransmission consent for most of our stations for the three-year period commencing on January 1, 2006. At present, we have retransmission consent agreements with the majority of operators for the period January 1, 2006, to at least December 31, 2008. If our retransmission consent agreements are terminated or not renewed, or if our broadcast signal is distributed on less favorable terms, our ability to distribute our programming could be adversely affected. In many instances, the negotiation of these agreements involves the payment of compensation to us by the MVPDs as consideration. If we are unable to satisfactorily conclude those negotiations our ability to grow our retransmission consent revenue will be adversely affected.
In addition, although cable operators generally will be required, under the FCCs current must carry rules, to retransmit a single programming stream transmitted by each local digital television station at the end of the digital television transition, to date, the FCC has determined that cable operators are not required to carry both a stations analog signal and digital signal during the transition period. Also, to date and except with respect to stations licensed to Hawaii and Alaska, the FCC has not extended its carry-one, carry-all rule to require satellite systems to carry a stations digital signal. At present, we have retransmission consent agreements with a number of cable systems operators and satellite providers that require carriage of the analog and certain digital signals of our stations.
Our business has experienced and is expected to continue to experience seasonality due to, among other things, seasonal advertising patterns and seasonal influences on peoples viewing habits. The
advertising revenue of our stations is generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. Additionally, advertising revenue is cyclical, benefiting in even-numbered years from advertising placed by candidates for political offices and issue-oriented advertising, and demand for advertising time in Olympic broadcasts. While political and Olympic advertising cycles have been a normal pattern for our industry for decades, the variability has become more pronounced in recent years as these respective categories of revenue have grown significantly in size. The seasonality and cyclicality inherent in our business make it difficult to estimate future operating results based on the previous results of any specific quarter.
The television broadcast industry is highly competitive. Some of our competitors are owned and operated by large national or regional companies that may have greater resources, including financial resources, than we have. Competition in the television industry takes place on several levels: competition for audience, competition for programming and competition for advertisers. Our stations may not be able to maintain or increase their current audience share or revenue share. To the extent that certain of our competitors have, or may in the future obtain, greater resources than we have, we may not be able to successfully compete with them.
The Hearst Corporation, through its beneficial ownership of our Series A and Series B Common Stock, has voting control of our company. Through its beneficial ownership of 100% of our Series B Common Stock, Hearst also is entitled to elect as a class all but two members of our Board of Directors (currently, 11 of our 13 Board seats). As a result, Hearst is able to control substantially all actions to be taken by our stockholders, and also is able to maintain control over our operations and business. In addition, Hearst has the ability to cause the redemption of our Series B Debentures, $134.0 million aggregate principal amount of which were outstanding at December 31, 2006. This control, as well as certain provisions of our Certificate of Incorporation and of Delaware law, may make us a less attractive target for a takeover than we otherwise might be, or render more difficult or discourage a merger proposal, tender offer or other transaction involving an actual or potential change of control. Hearsts voting control also prevents other stockholders from exercising significant influence over our Companys business decisions.
The interests of Hearst, which owns or has significant investments in other businesses, including cable television networks, newspapers, magazines and electronic media, may from time to time be competitive with, or otherwise diverge from, our interests, particularly with respect to new business opportunities and future acquisitions. We and Hearst have agreed that, without the prior written consent of the other, neither we nor they will make any acquisition or purchase any assets if such an acquisition or purchase by one party would require the other party to divest or otherwise dispose of any of its assets because of regulatory or other legal prohibitions.
Under current FCC regulations, given the newspaper and other media interests held by Hearst, we are precluded from acquiring television stations in various markets in the United States. While divestiture of a prohibited interest could permit such acquisitions, such a divestiture may not occur or may otherwise adversely impact potential acquisitions. Additionally, Hearst is not precluded from purchasing television
stations, newspapers or other assets in other markets. If Hearst were to make such purchases, the FCC rules would preclude us from owning television stations in those markets in the future.
We and Hearst also have ongoing relationships that may create situations where the interests of the two parties could conflict. For example, we and Hearst are parties to a series of agreements with each other, including
· a Lease Agreement (whereby we lease one floor of the newly constructed Hearst Tower in Manhattan for our corporate offices
· a Management Agreement (whereby we provide certain management services, such as sales, news, programming and financial and accounting management services with respect to certain Hearst-owned or managed television and radio stations);
· an Option Agreement (whereby Hearst has granted us an option to acquire two television stations it owns (KCWE and WMOR), as well as a right of first refusal with respect to a prospective purchaser if Hearst proposes to sell WPBF);
· a Studio Lease Agreement (whereby Hearst leases space from us for Hearsts radio broadcast stations);
· a Name License Agreement (whereby Hearst permits us to use the Hearst name in connection with our name and operation of our business); and
· a Services Agreement (whereby Hearst provides us certain administrative services, such as accounting, financial, legal, tax, insurance, data processing and employee benefits).
Because we and Hearst are affiliates, it is possible that our interests concerning these agreements may from time to time conflict and that more favorable terms than those we have negotiated with Hearst may be available from third parties.
As discussed more fully in Item 1 Business; Federal Regulation of Television Broadcasting, our broadcast operations are subject to extensive regulation by the FCC under the Communications Act. If we do not comply with these regulations, in particular the specific regulations discussed below, or if the FCC adopts a rigorous enforcement policy concerning them, our business and operating results could be adversely affected.
Ownership Rules. We must comply with extensive FCC regulations and policies in the ownership of our broadcast stations, which restrict our ability to consummate future transactions and, in certain circumstances, could require us to divest some stations. In general, the FCCs ownership rules limit the number of television and radio stations that we can own in a market, the number of television stations we can own nationwide, and prohibit ownership of stations in markets where Hearst has interests in newspapers. As described in Item 1 Business; Federal Regulation of Television Broadcasting, the FCCs ownership rules are currently under review. The actions Congress or the FCC may take and changes in the FCCs ownership rules may adversely impact our business.
Indecency Rules. Federal law and the FCCs rules prohibit the broadcast of obscene material at any time, and the broadcast of indecent or profane material during the period from 6 a.m. through 10 p.m. In recent years, the FCC has vigorously enforced its indecency prohibition, and in 2006, legislation was enacted that raised the maximum monetary penalty for the broadcast of obscene, indecent, or profane language to $325,000 for each violation, with a cap of $3 million for any single act. The determination
of whether content is indecent or profane is inherently subjective, creates uncertainty as to our ability to comply with the rules (in particular during live programming), and impacts our programming decisions. Violation of the indecency rules could lead to sanctions which may adversely affect our business and results of operations.
Monetary Forfeitures and Penalties. In recent years, the FCC has also vigorously enforced a number of other rules, typically in connection with license renewals. For example, in recent years, the FCC issued monetary forfeitures and sanctions for violations of its equal employment opportunity rules, public inspection file rules, childrens programming rules, closed captioning rules, and emergency alert system rules. Our stations were not the subject of monetary sanctions in 2006.
Our management is evaluating, and will continue to evaluate, the nature and scope of our operations and various short-term and long-term strategic considerations. These may include acquisitions or divestitures of, or strategic alliances, joint ventures, mergers or integration or consolidation with, television stations or other businesses, including digital media businesses, as well as discussions with third parties regarding any of these considerations. In the alternative, our management may decide from time to time that such initiatives are not appropriate.
There are uncertainties and risks relating to each of these strategic initiatives. For example, acquisition opportunities may become more limited as a consequence of the consolidation of ownership occurring in the television broadcast industry. Also, prospective competitors may have greater financial resources than we have. Future acquisitions may not be available on attractive terms, or at all. Also, if we do make acquisitions, we may not be able to successfully integrate the acquired stations or businesses. With respect to divestitures, we may experience varying success in making such divestitures on favorable terms, if at all, or in reducing fixed costs or transferring liabilities previously associated with the divested television stations or businesses. In addition, any such acquisitions or divestitures may be subject to FCC approval and FCC rules and regulations. Finally, strategic minority investments we choose to make in digital media projects may ultimately prove unprofitable. Any of these efforts would require varying levels of management resources, which may divert our attention from other business operations. If we do not realize the expected benefits or synergies of such transactions, or, conversely, if we do not realize such benefits or synergies because we chose not to pursue any such transaction, there may be an adverse effect on our financial condition and operating results.
At December 31, 2006, 84% of our total assets consisted of goodwill and intangible assets. We test our goodwill and intangible assets, including FCC licenses, for impairment during the fourth quarter of every year, and on an interim date should factors or indicators become apparent that would require an interim test, in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. If the fair value of a reporting unit or an intangible asset is revised downward below its net carrying value, an impairment under SFAS 142 could result and a non-cash charge could be required. This could materially affect our reported net earnings and our balance sheet.
Our business depends upon the continued efforts, abilities and expertise of our chief executive officer and other key employees. We believe that the rare combination of skills and years of media experience possessed by our executive officers would be difficult to replace, and that the loss of our executive officers could have a material adverse effect on our business. Additionally, our stations employ several on-air personnel, including anchors and reporters, with significant loyal audiences. Our failure to retain these personnel could adversely affect our operating results.
Certain employees, such as on-air talent and engineers, at some of our stations are subject to collective bargaining agreements. If we are unable to renew expiring collective bargaining agreements, it is possible that the affected unions could take action in the form of strikes or work stoppages. Such actions, higher costs in connection with these agreements, or significant labor disputes could adversely affect our business by disrupting our ability to operate our affected stations.
We have a share repurchase program authorized by our Board of Directors, pursuant to which we may repurchase up to $300 million of our Series A Common Stock from time to time, in the open market or in private transactions, subject to market conditions. In addition, The Hearst Corporations Board of Directors authorized a share purchase program, pursuant to which Hearst or its subsidiaries may purchase on the open market or through private transactions up to 25 million shares of our Series A Common Stock. Such repurchases and purchases, or the absence thereof, may increase or decrease the market price of our Series A Common Stock.
Our principal executive offices are located at 300 West 57th Street, New York, New York 10019. The real property of each of our stations generally includes owned or leased offices, studios, transmitters and tower sites. Offices and main studios are typically located together, while transmitters and tower sites are often in separate locations that are more suitable for optimizing signal strength and coverage. Set forth below are our stations principal facilities as of December 31, 2006. In addition to the property listed below, we and the stations also lease other property primarily for communications equipment.
* Owned by the Company in partnership with certain third parties.
(1) We also sublease to third parties 21,789 square feet of space at 888 Seventh Avenue, New York, New York, the previous location of our corporate headquarters.
(2) In 2005 we commenced construction of an office and studio facility for KMBC on land we purchased in 2004. When the facility is completed, we will move our operations to the new facility and terminate this stations office space lease.
From time to time, we become involved in various claims and lawsuits that are incidental to our business. In our opinion, there are no legal proceedings pending against us or any of our subsidiaries that are reasonably expected to have a material adverse effect on our consolidated financial condition or results of operations.
(a) Market Performance of Common Stock and Dividends on Common Stock. Our Series A Common Stock is listed on the New York Stock Exchange (NYSE) under the ticker symbol HTV. All of the outstanding shares of our Series B Common Stock are currently held by Hearst Broadcasting, a wholly-owned subsidiary of Hearst Holdings, which is in turn a wholly-owned subsidiary of Hearst. Our Series B Common Stock is not publicly traded. The table below sets forth, for the calendar quarters indicated, the reported high and low sales prices of our Series A Common Stock on the NYSE and the dividends declared on our Series A and Series B Common Stock:
On February 15, 2007, the closing price for our Series A Common Stock was $26.38.
(b) Holders. On February 15, 2007 there were approximately 816 Series A Common Stock shareholders of record and Hearst Broadcasting was the sole holder of our Series B Common Stock.
(c) Dividends. In December 2006, we declared a quarterly cash dividend of $0.07 per share on our Series A Common Stock and our Series B Common Stock, which we paid on January 15, 2007 to holders of record on January 5, 2007, for a total of $6.5 million. During 2006, we paid a total of $26.0 million in dividends. See Note 10 to the consolidated financial statements.
(1) Includes shares of Series A Common Stock to be issued upon exercise of stock options granted under the Companys Amended and Restated 1997 Stock Option Plan and the Companys 2004 Long Term Incentive Compensation Plan. The Company has also awarded 167,000 shares of restricted stock under the 2004 Long Term Incentive Compensation Plan.
(2) Includes 252,800 shares of Series A Common Stock available for future stock option and restricted stock grants under the Companys 2004 Long Term Incentive Compensation Plan and 4,221,374 shares of Series A Common Stock reserved for future issuance under the Companys Employee Stock Purchase Plan.
(e) Performance Graph. The following graph compares the annual cumulative total stockholder return on an investment of $100 in the Series A Common Stock on December 31, 2001, based on the market price of the Series A Common Stock and assuming reinvestment of dividends, with the cumulative total return of a similar investment in (i) companies on the Standard & Poors 500 Stock Index and (ii) a group of peer companies selected by us on a line-of-business basis and weighted for market capitalization.
The Custom Composite Index consists of Belo Corp., Sinclair Broadcast Group, Inc., Young Broadcasting Inc., Lin TV Corp. (Begin 3Q02), Nexstar Broadcasting Corp, (Begin 1Q04), and Gray Television Inc. (Begin 3Q02).
(f) Purchase of Equity Securities by the Issuer and Affiliated Purchasers. The following table reflects purchases made during the three months ended December 31, 2006, of our Series A Common Stock by Hearst Broadcasting, an indirect wholly-owned subsidiary of Hearst:
(1) On September 28, 2005, Hearst increased Hearst Broadcastings authorization to purchase the Companys Series A Common Stock from 20 million to 25 million shares. Hearst may effect such purchases from time to time in the open market or in private transactions, subject to market conditions and managements discretion. As of December 31, 2006, Hearst has purchased approximately 23.8 million shares of the Companys outstanding Series A Common Stock. As of
December 31, 2006, Hearst owned approximately 53.0% of the Companys outstanding Series A Common Stock and 100% of the Companys Series B Common Stock, representing in the aggregate approximately 73.8% of our outstanding common stock.
The following table reflects purchases made by the Company of its Series A Common Stock during the three months ended December 31, 2006.
(1) In May 1998, the Companys Board of Directors authorized the repurchase of up to $300 million of its outstanding Series A Common Stock. Such purchases may be effected from time to time in the open market or in private transactions, subject to market conditions and managements discretion. As of December 31, 2006, the Company has spent approximately $110.8 million to repurchase approximately 4.5 million shares of Series A Common Stock at an average price of $24.87. There can be no assurance that such repurchases will occur in the future or, if they do occur, what the terms of such repurchases will be.
The selected financial data should be read in conjunction with the historical financial statements and notes thereto included elsewhere herein and in Managements Discussion and Analysis of Financial Condition and Results of Operations.
Hearst-Argyle Television, Inc.