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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

OR

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)

        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 twelve 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  |X|        No  |_|  

        As of July 23, 2004, the registrant had 93,173,452 shares of common stock outstanding, consisting of 51,874,804 shares of Series A Common Stock, and 41,298,648 shares of Series B Common Stock.

HEARST-ARGYLE TELEVISION, INC.

Index

PART I

FINANCIAL INFORMATION

Item 1.    Financial Statements

HEARST-ARGYLE TELEVISION, INC.

(Continued)

 

1

HEARST-ARGYLE TELEVISION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)

See notes to condensed consolidated financial statements.

 

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HEARST-ARGYLE TELEVISION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

See notes to condensed consolidated financial statements.

 

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HEARST-ARGYLE TELEVISION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements.

 

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HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2004

1.    BASIS OF PRESENTATION

General 

        The condensed consolidated financial statements include the accounts of Hearst-Argyle Television, Inc. and its wholly-owned subsidiaries (the “Company”), except for the Company’s wholly-owned subsidiary trust which was required to be de-consolidated upon adoption of the Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46(R)”). The Company adopted FIN 46(R) as of December 31, 2003. See “New Accounting Pronouncements” below. With the exception of the unconsolidated subsidiary trust, all significant inter-company accounts have been eliminated in consolidation.

        The accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission, as amended. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are normal and recurring in nature. Operating results for the three and six-month periods ended June 30, 2004 and 2003 are not necessarily indicative of the results that may be expected for a full year.

2.    RECENT ACCOUNTING PRONOUNCEMENTS

        In December 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements No. 87, 88 and 106 (“SFAS 132(R)”). SFAS 132(R) is effective for fiscal years ending after December 15, 2003. Interim disclosure requirements under SFAS 132(R) are effective for interim periods beginning after December 15, 2003, and required disclosures related to estimated benefit payments will be effective for fiscal years ending after June 15, 2004. SFAS 132(R) replaces the disclosure requirements in SFAS No. 87, Employers’ Accounting for Pensions (“SFAS 87”), SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (“SFAS 106”). SFAS 132(R) addresses disclosures only and does not address measurement and recognition accounting for pension and postretirement benefits. SFAS 132(R) requires additional disclosures related to the description of plan assets including investment strategies, plan obligations, cash flows and net periodic benefit cost of defined benefit pension and other defined benefit postretirement plans. Effective December 31, 2003, the Company adopted the disclosure requirements of SFAS 132(R) with the exception of future expected benefit payments, which becomes effective for the Company for year ending December 31, 2004.

        In December 2003, the FASB issued FIN 46(R), which served to clarify the guidance in Financial Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), and provided additional guidance surrounding the application of FIN 46. FIN 46 establishes consolidation criteria for entities for which “control” is not easily discernable under Accounting Research Bulletin 51, Consolidated Financial Statements, which is based on the premise that holders of an entity control the entity by virtue of voting rights. FIN 46(R) provides guidance for identifying the party with a controlling financial interest resulting from arrangements or financial interests rather than from voting interests. FIN 46 established standards for determining the circumstances under which an entity (defined as a variable interest entity) should be consolidated based upon an evaluation of financial interests and other arrangements rather than voting control. FIN 46 also requires disclosure about any variable interest entities that the Company is not required to consolidate, but in which it has a significant variable interest. Application of FIN 46(R) is required for companies that have interests in those entities that are considered to be special-purpose entities, beginning in periods ending after December 15, 2003, and application is required for interests in all other types of entities beginning in periods ending after March 15, 2004.

        The Company adopted and applied the provisions of FIN 46(R) as of December 31, 2003 with respect to its wholly-owned trust subsidiary, the Hearst-Argyle Capital Trust (hereafter the “Capital Trust”), which is considered to be a special-purpose entity. The adoption of FIN 46(R) required the Company to de-consolidate the Capital Trust in its financial statements. In order to present the Capital Trust as an unconsolidated subsidiary, the Company adjusted the presentation in its condensed consolidated balance

 

5

HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
June 30, 2004

sheets as follows, for all periods presented: (i) reclassified the amount of $200.0 million, which was previously classified as “Company obligated redeemable convertible preferred securities of subsidiary trust holding solely parent company debentures” to “Note payable to Capital Trust”; (ii) presented an investment in the Capital Trust of $6.2 million, which is included under “Investments” on the condensed consolidated balance sheets; and (iii) presented a long-term note payable to the Capital Trust of $6.2 million, which is included under “Note payable to Capital Trust,”bringing the total “Note payable to Capital Trust” to $206.2 million on the condensed consolidated balance sheets. Once the redeemable convertible preferred securities have been redeemed or reach maturity, the investment in the Capital Trust of $6.2 million will be offset by the long-term note payable to the Capital Trust of $6.2 million, resulting in no effect to the Company’s consolidated income statement. In addition, the Company adjusted the presentation in its consolidated income statements in all periods presented to reclassify the amounts previously recorded as “Dividends on redeemable convertible preferred securities” to “Interest expense, net –Capital Trust.” These changes required under FIN 46(R) represent financial statement presentation only and are not a result of any changes to the legal, financial, or operating structure of the Capital Trust. Other than the de-consolidation of the Capital Trust, the adoption of FIN 46(R) did not impact the Company’s financial statements.

        In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act provides a federal subsidy to sponsors of retiree healthcare benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D. In May 2004, the FASB staff issued FASB Staff Position No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 which supercedes FASB Staff Position No. 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, and is effective for interim or annual periods beginning after June 15, 2004. We are currently evaluating the effects of the Act on our post-retirement benefit plans and its participants; therefore, the Company’s accumulated post-retirement benefit obligation and net post-retirement benefit cost do not reflect the effects of the Act.

        In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-16, Accounting for Investments in Limited Liability Companies (“EITF No. 03-16”), which requires investments in limited liability companies that have separate ownership accounts for each investor to be accounted for similar to a limited partnership investment under Statement of Position No. 78-9, Accounting for Investments in Real Estate Ventures. Investors are required to apply the equity method of accounting to their investments with any ownership interest greater than 3-5%. EITF No. 03-16 is effective for reporting periods beginning after June 15, 2004. The Company does not believe that adoption of EITF No. 03-16 will have a material effect on the Company’s financial statements.

 

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HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
June 30, 2004

3.    STOCK-BASED COMPENSATION

        The Company accounts for employee stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, Stock Issued to Employees (“APB 25”) and related interpretations. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, the stock options have no intrinsic value and therefore no compensation expense is recognized. The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting For Stock-Based Compensation (“SFAS 123”). Under SFAS 123, options are valued at their date of grant and then expensed over their vesting period.

        The following table details the effect on net income and earnings per share had compensation expense been recorded based on the fair value method under SFAS 123, as amended, utilizing the Black-Scholes option valuation model:

4.    LONG-TERM DEBT

        Long-term debt as of June 30, 2004 and December 31, 2003 consisted of the following:  

HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
June 30, 2004

5.    EARNINGS PER SHARE

        The calculation of basic earnings per share (“EPS”) for each period is based on the weighted average number of common shares outstanding during the period. The calculation of dilutive EPS for each period is based on the weighted average number of common shares outstanding during the period, plus the effect, if any, of dilutive common stock equivalent shares. The following tables set forth the reconciliation between basic and diluted EPS:

        The following shares were not included in the computation of diluted EPS, because to do so would have been anti-dilutive for the periods presented: (i) 5,781 shares of Series A Preferred Stock, outstanding as of June 30, 2004, and 7,381 shares of Series A Preferred Stock, outstanding as of June 30, 2003, which are convertible into Series A Common Stock; (ii) 10,938 shares of Series B Preferred Stock, outstanding as of June 30, 2004 and 2003, which are convertible into Series A Common Stock.

        The dilution test for the Convertible Preferred Securities related to the Capital Trust is performed for all periods. This test considers only the total number of shares that could be issued if converted and does not consider either the conversion price or the share price of the underlying common shares. For the three months ended June 30, 2004, 7,935,068 shares of Series A common stock to be issued upon the conversion of 1,400,000 shares of Series A 7.5% Redeemable Convertible Preferred Securities and 2,600,000 shares of Series B 7.5% Redeemable Convertible Preferred Securities, related to the Capital Trust, are included in the

 

8

HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
June 30, 2004

number of common shares used in the calculation of diluted EPS. When the securities related to the Capital Trust are dilutive, the interest, net of tax, related to the Capital Trust is added back to Income applicable to common stockholders for purposes of the diluted EPS calculation. For all other periods presented, these shares were not included in the computation of diluted EPS because to do so would have been anti-dilutive.

        Common stock options for 1,274,172 and 2,912,613 shares of Series A Common Stock (before application of the treasury stock method), outstanding as of June 30, 2004 and 2003, respectively, were not included in the computation of diluted EPS because the exercise price was greater than the average market price of the common shares during the calculation period.

        On May 5, 2004, the Company’s stockholders and Board of Directors approved the 2004 Long Term Incentive Compensation Plan (“Incentive Compensation Plan”). Under the Incentive Compensation Plan, the Company may award various forms of incentive compensation to officers, other key employees and non-employee directors of the Company and its subsidiaries. The Company reserved for issuance under the Incentive Compensation Plan 3.6 million shares of Series A Common Stock.

6.    GOODWILL AND INTANGIBLE ASSETS

        On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be assessed for impairment at least annually by applying a fair value-based test. The Company’s intangible assets with indefinite useful lives are licenses to operate its television stations which have been granted by the Federal Communications Commission (“FCC”). SFAS 142 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

        The Company completed its initial goodwill impairment review during the first quarter of 2002 and its annual goodwill impairment review during the fourth quarters of 2003 and 2002 using a fair value approach in accordance with SFAS 142 and found no impairment to the carrying value of the Company’s goodwill or FCC licenses.

        The Company, as an FCC licensee, enjoys an expectancy of continued renewal of its licenses, so long as it continues to provide service in the public interest. The FCC has historically renewed the Company’s licenses in the ordinary course of business, without compelling challenge and at little cost to the Company. Furthermore, management believes that over-the-air broadcasting will continue as a video distribution mode for the foreseeable future. Therefore, the cash flows derived from the Company’s FCC licenses are expected to continue indefinitely and as such, and in accordance with SFAS 142, the life of the FCC license intangible asset is deemed to be indefinite.

        In December 2003, the Company reversed a reclassification it had made in December 2001 related to a separately identified intangible asset, advertiser client base. In December 2001, the Company had reclassified the remaining net book value of the advertiser client base ($66.9 million) to goodwill in the consolidated balance sheet. In December 2003, the Company determined the advertiser client base should continue to be separately identified from goodwill. Accordingly, in December 2003, the Company reversed its previous reclassification made in December 2001 and therefore the classification of the advertiser client base has reverted to the Company’s balance sheet presentation prior to December 2001. Since the advertiser client base is considered to be an intangible asset with a finite useful life under SFAS 142, it is required to be amortized over its estimated useful life. Accordingly, the Company resumed amortization and recorded a catch-up to amortization expense on the advertiser client base of $7.1 million in the fourth quarter of 2003, bringing the net book value of the advertiser client base to approximately $59.8 million as of December 31, 2003. The amortization expense on the advertiser client base was $0.9 million and $1.8 million for the three and six months ended June 30, 2004, respectively, bringing the net book value of the related intangible asset to $58.1 million as of June 30, 2004.

 

9

HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
June 30, 2004

        Summarized below are the carrying value and accumulated amortization of intangible assets that continue to be amortized under SFAS 142, as well as the carrying value of those intangible assets that are no longer amortized and goodwill:

        The Company’s amortization expense for finite-lived intangible assets was approximately $1.5 million and $3.0 million in the three and six months ended June 30, 2004, respectively. Estimated annual amortization expense for the next five years related to these intangible assets is expected to be as follows:

7.    INCOME TAXES

        The provision for income taxes relating to income for the three and six months ended June 30, 2004 and 2003, consists of the following:

        The net deferred income tax liabilities are presented under the following captions on the Company’s condensed consolidated balance sheets:

 

10

HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
June 30, 2004

        The provision for income taxes is computed based on the pretax income included in the condensed consolidated statements of income. The Company provides for federal and state income taxes currently payable, as well as for those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

        The effective tax rate for both the three and six months ended June 30, 2004 was 38.1%. The effective tax rate for both the three and six months ended June 30, 2003 was 38.0%. The Company expects its effective tax rate for the year ending December 31, 2004 to be approximately 38.1%. The Company records reserves for estimates of probable settlements of federal and state audits. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. The Company also records a valuation allowance against its deferred tax assets arising from certain net operating losses when it is more likely than not that some portion or all of such net operating losses will not be realized. The Company’s effective tax rate in a given financial statement period may be materially impacted by changes in the level of earnings by taxing jurisdiction, changes in the expected outcome of tax audits, or changes in the deferred tax valuation allowance.

8.    RELATED PARTY TRANSACTIONS

        The Hearst Corporation. As of June 30, 2004, The Hearst Corporation (“Hearst”) owned approximately 38.1% of the Company’s outstanding Series A common stock and 100% of the Company’s Series B common stock, representing in the aggregate 65.6% of the outstanding voting power of the Company’s common stock, except with regard to the election of directors. With regard to the election of directors, Hearst’s ownership of the Company’s Series B common stock entitles Hearst to elect 11 of the 13 directors of the Company’s Board of Directors. During the three and six months ended June 30, 2004 and 2003, the Company was involved in the following transactions with Hearst or parties related to Hearst:

 

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HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
June 30, 2004

        NBC Universal.    In August 2001, the Company contributed its production-and-distribution unit to NBC/Hearst-Argyle Syndication, LLC, a joint venture with NBC Universal, in exchange for a 20% equity interest in this entity. NBC/Hearst-Argyle Syndication, LLC is a limited liability company formed to produce and syndicate first-run broadcast and original-for-cable programming. This investment is accounted for under the equity method. The Company’s share of the income (loss) in NBC/Hearst-Argyle Syndication, LLC is included in Equity in income of affiliates, net in the accompanying condensed consolidated statements of income. Emerson Coleman, Vice President, Programming of the Company, is a member of the Board of Directors of NBC/Hearst-Argyle Syndication, LLC, from which he does not receive compensation for his services.

        IBS.    In December 1999, the Company invested $20 million of cash in Internet Broadcasting Systems, Inc. (“IBS”) in exchange for an equity interest in IBS. The Company also owns 49.9% of IBS/HATV LLC, the parent company of the group of subsidiaries which own and operate the websites for each of our television stations. In May 2001, the Company invested an additional $6 million of cash for a total investment of $26 million in IBS. This investment is accounted for under the equity method. The Company’s share of the income (loss) of IBS is included in Equity in income of affiliates, net in the accompanying condensed consolidated statements of income. On March 31, 2004 IBS/HATV LLC paid its first dividend of approximately $2.6 million, arising from positive earnings and cash flows earned by the web sites in 2003. Of this amount, $1.3 million was paid to the Company and $1.3 million was paid to IBS. We account for our investment in IBS/HATV LLC under the equity method; accordingly, we reduced the carrying value of our investment by $1.3 million upon receipt of the dividend payment. Since January 2001, Harry T. Hawks, Executive Vice President and Chief Financial Officer of the Company, and since October 2002, Terry Mackin, Executive Vice President of the Company, have both served on the Board of Directors of IBS, from which they do not receive compensation for their services. In addition, IBS also provides hosting services for the Company’s corporate Web site for a nominal amount.

        J.P. Morgan Chase & Co. The lead agent bank under the Company’s $500 million credit facility entered into in April 1999 is J.P. Morgan Chase & Co (“Chase”). The outstanding balance on the credit facility was paid off as of September 2003, and the facility matured on April 12, 2004. Frank A. Bennack, Jr., a Director of the Company, is also a Director of Chase. We expect to enter into a new agreement with Chase, and other parties, before the end of the year.

 

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HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
June 30, 2004

        Small Business Television. The Company utilizes Small Business Television’s (“SBTV”) services to provide television stations with additional revenue through the marketing and sale of commercial time to smaller businesses that do not traditionally use television advertising due to costs. In both the three months ended June 30, 2004 and 2003, these sales generated revenue of approximately $0.3 million, of which approximately $0.1 million was distributed to SBTV and approximately $0.2 million was distributed to the Company. In both the six months ended June 30, 2004 and 2003, these sales generated revenue of approximately $0.5 million, of which approximately $0.2 million was distributed to SBTV and approximately $0.3 million was distributed to the Company. Dean Conomikes, the owner of SBTV, is the son of John G. Conomikes, a member of the Company’s Board of Directors.

        Other Related Parties. In the ordinary course of business, the Company enters into other transactions with related parties, none of which were material to the Company’s financial results during the three and six months ended June 30, 2004 and 2003.

9.    EMPLOYEE BENEFIT PLANS

       Net Periodic Pension and Post-Retirement Costs

        The Company accounts for its defined benefit pension plans under the provisions of SFAS 87, including the enhanced disclosures outlined in SFAS 132(R), as discussed in Note 2 – Recent Accounting Pronouncements.

        The following schedule presents the net periodic pension cost for the Company’s defined benefit pension plans in the three and six months ended June 30, 2004 and 2003:

        The Company accounts for its post-retirement benefit plan under the provisions of SFAS 106, including the enhanced disclosures outlined in SFAS 132(R), as discussed in Note 2 – Recent Accounting Pronouncements.

        The following schedule presents the net periodic post-retirement benefit cost for the Company’s post-retirement benefit plan in the three and six months ended June 30, 2004 and 2003:

 

13

HEARST-ARGYLE TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
June 30, 2004

       Contributions

        In the three months ended June 30, 2004, the Company made contributions of $0.2 million to its defined benefit pension plans, and the Company contributed $0.1 million to the post-retirement benefit plan. In the six months ended June 30, 2004, the Company made contributions of $0.2 million to its defined benefit pension plans, and the Company contributed $0.3 million to the post-retirement benefit plan. During the year ending December 31, 2004, the Company expects to contribute approximately $1.7 million to its defined benefit pension plans and approximately $0.5 million to the post-retirement benefit plan.

10.    PREFERRED STOCK

        On August 12, 2003, the Company exercised its option and notified the holders of its intent to redeem the remaining outstanding shares of Series A and B Preferred Stock. On January 1, 2004, the Company redeemed 1,600 shares of Series A Preferred Stock. As of June 30, 2004, the Company had 5,781 shares outstanding of Series A Preferred Stock and 10,938 shares outstanding of Series B Preferred Stock. The remaining 5,781 shares of Series A Preferred Stock will be redeemed on January 1, 2005. The remaining shares of Series B Preferred Stock will be redeemed as follows: 5,468 shares on December 10, 2004; and 5,470 shares on January 1, 2005. Accordingly, the Company has classified the Series A and B Preferred Stock as temporary equity in the accompanying condensed consolidated June 30, 2004, balance sheet. In addition, the Company reclassified the Series A and B Preferred Stock in the accompanying December 31, 2003, balance sheet to conform to this presentation.

11.    GUARANTEE

        The Company has guaranteed the payments by its wholly-owned unconsolidated subsidiary trust (the "Capital Trust") on the Redeemable Convertible Preferred Securities in the amount of $200.0 million. The guarantee is irrevocable and unconditional, and guarantees the payment in full of all (i) distributions on the Redeemable Convertible Preferred Securities to the extent of available funds of the Capital Trust; (ii) amounts payable upon redemption of the Redeemable Convertible Preferred Securities to the extent of available funds of the Capital Trust; and (iii) amounts payable upon dissolution of the Capital Trust. The guarantee is unsecured and ranks (i) subordinate to all other liabilities of the Company, except liabilities that are expressly made pari passu; (ii) pari passu with the most senior preferred stock issued by the Company, and pari passu with any guarantee of the Company in respect of any preferred stock of the Company or any preferred security of any of the Company's controlled affiliates; and (iii) senior to the Company's Common Stock. The Company made the guarantee to enable the Capital Trust to issue the Redeemable Convertible Preferred Securities in the amount of $200.0 million to the holders.

12.    SUBSEQUENT EVENT

        On July 1, 2004, the Company completed the purchase of the television broadcasting assets of WMTW-TV, Channel 8, the ABC affiliate serving the Portland-Auburn, Maine television market, for approximately $38 million in cash.

 

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HEARST-ARGYLE TELEVISION, INC.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations 

        Hearst-Argyle Television, Inc. and subsidiaries (hereafter “we” or the “Company”), as of June 30, 2004, owned and operated 24 network-affiliated television stations. Additionally, we provided management services to two network-affiliated and one independent television stations and two radio stations (collectively, the “Managed Stations”) in exchange for a management fee. See Note 8 to the condensed consolidated financial statements. The results of operations for the three and six months ended June 30, 2004 and 2003 included: (i) the results of our 24 television stations which were owned for all periods presented and (ii) the management fees earned by us from the Managed Stations for all periods presented.

       Three Months Ended June 30, 2004
       Compared to Three Months Ended June 30, 2003

        Total revenue.    Total revenue primarily included (i) cash and barter advertising revenue, net of agency and national representatives’ commissions; (ii) network compensation; and (iii) other revenue. Network compensation and other revenue represented 5.9% of total revenue for the three months ended June 30, 2004. Total revenue in the three months ended June 30, 2004 was $198.0 million, as compared to $179.6 million in the three months ended June 30, 2003, an increase of $18.4 million or 10.2%. This increase was primarily attributable to the following factors: (i) an increase in net political advertising revenue of $9.3 million, as a result of the normal, cyclical nature of the television broadcasting business, in which the demand for advertising by candidates running for political office significantly increases in even-numbered years (such as 2004); and (ii) an increase in demand by national and local advertisers, particularly in the categories of automotive, retail, furniture and house-wares, telecommunications, and fast foods.

        Salaries, benefits and other operating costs.    Salaries, benefits and other operating costs were $87.2 million in the three months ended June 30, 2004, as compared to $81.0 million in the three months ended June 30, 2003, an increase of $6.2 million or 7.7%. This increase was primarily due to (i) an increase of approximately $2.4 million, resulting from higher sales commissions, overtime pay related to breaking news stories in certain markets, and salary increases; (ii) an increase of approximately $1.5 million in employee benefits and pension expenses; and (iii) an increase of approximately $0.7 million in news gathering and ratings services costs; partially offset by (iv) decreases in bad debt provision, and promotion and other costs.

        Amortization of program rights.    Amortization of program rights was $14.8 million in the three months ended June 30, 2004, as compared to $15.8 million in the three months ended June 30, 2003, a decrease of $1.0 million or 6.3%. This decrease was primarily due to (i) cost savings by replacing certain higher cost first-run programs; and (ii) a declining rate of amortization for certain off-network syndicated programs, primarily at our stations in Kansas City, Missouri and Sacramento, California. We amortize the costs of off-network syndicated programs on an accelerated basis on the future number of showings, contemplating the estimated revenue to be earned per showing.

        Depreciation and amortization.    Depreciation and amortization was $12.4 million in the three months ended June 30, 2004, as compared to $13.1 million in the three months ended June 30, 2003, a decrease of $0.7 million or 5.3%. Depreciation expense was $10.9 million in the three months ended June 30, 2004, as compared to $12.5 million in the three months ended June 30, 2003, a decrease of $1.6 million or 12.8%. This decrease was primarily due to the Company’s recording of approximately $2.1 million of accelerated depreciation in the three months ended June 30, 2003 on certain broadcasting equipment which management reevaluated the useful life, partially offset by increased depreciation expense from recent investments in broadcast assets. Management reviews, on a continuing basis, the financial statement carrying value of property, plant and equipment for impairment. If events or changes in circumstances indicate that an asset carrying value may not be recoverable, the carrying value is written down through accelerated depreciation. Amortization was $1.5 million in the three months ended June 30, 2004, as compared to $0.6 million in the three months ended June 30, 2003, an increase of $0.9 million, principally resulting from amortization related to a separately identified intangible asset, advertiser client base. In December 2001, the Company had reclassified the remaining net book value of the advertiser client base to goodwill in the condensed consolidated balance sheet and ceased amortization. In December 2003, the Company determined the advertiser client base should continue to be separately identified from goodwill and, as an intangible asset with a finite useful life under SFAS 142 be amortized over its estimated useful life. Accordingly, the Company recorded a catch-up to amortization expense on the advertiser client base of $7.1 million in the fourth quarter of 2003. See Note 6 to the condensed consolidated financial statements.

 

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HEARST-ARGYLE TELEVISION, INC.

        Corporate, general and administrative expenses.    Corporate, general and administrative expenses were $6.1 million in the three months ended June 30, 2004, as compared to $4.9 million in the three months ended June 30, 2003, an increase of $1.2 million or 24.5%. This increase was primarily due to an increase in: (i) headcount; (ii) accounting and consulting fees to comply with public company compliance requirements; and (iii) incentive compensation expense.

        Operating income.    Operating income was $77.5 million in the three months ended June 30, 2004, as compared to $64.7 million in the three months ended June 30, 2003, an increase of $12.8 million or 19.8%. This net increase in operating income was due to the items discussed above.

        Interest expense, net.    Interest expense, net of interest income, was $16.0 million in the three months ended June 30, 2004, as compared to $17.4 million in the three months ended June 30, 2003, a decrease of $1.4 million or 8.0%. This decrease in interest expense, net, was primarily due to (i) a lower outstanding debt balance in the second quarter of 2004 than in the second quarter of 2003; (ii) the maturity of the credit facility in April 2004 (see Note 8 to the condensed consolidated financial statements); and (iii) an increase in interest income of $0.2 million in the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. The Company’s outstanding debt balance as of June 30, 2004 was $882.5 million, as compared to $925.7 million as of June 30, 2003. See Note 4 of the condensed consolidated financial statements.

        Interest Expense, net – Capital Trust.    Interest expense, net, to our wholly-owned, unconsolidated subsidiary trust (the Hearst-Argyle Capital Trust or “Capital Trust”) was $3.75 million in both the three months ended June 30, 2004 and 2003. Interest expense, net – Capital Trust primarily represented interest expense we incurred on the $206.2 million of subordinated debentures issued by us. Interest paid by us to the Capital Trust was then utilized by the Capital Trust to make dividend payments to the holders of the $200.0 million of redeemable convertible preferred securities issued by the Capital Trust in December 2001. In accordance with FIN 46(R), we do not consolidate the accounts of the Capital Trust in our consolidated financial statements. We use the equity method of accounting to record the Company’s equity interest in the earnings of the Capital Trust and accordingly we have included such earnings of $0.1 million in Interest Expense, net – Capital Trust in both the three months ended June 30, 2004 and 2003. See Notes 2 and 8 to the condensed consolidated financial statements.

        Equity in income of affiliates, net. Equity in income of affiliates, net was $0.5 million in the three months ended June 30, 2004, as compared to $0.4 million in the three months ended June 30, 2003, an increase of $0.1 million or 25.0%. This increase was primarily due to the improved operating results of the operating entities related to Internet Broadcasting Systems, Inc. (“IBS”). Equity in income of affiliates, net represented the Company’s equity interests in the financial results of its unconsolidated affiliates, which included (i) IBS and related entities and (ii) NBC/Hearst-Argyle Syndication, LLC in the three months ended June 30, 2004 and 2003.

        Income taxes.    Income tax expense was $22.2 million in the three months ended June 30, 2004, as compared to $16.7 million in the three months ended June 30, 2003, an increase of $5.5 million or 32.9%. This increase in income tax expense was due to an increase in income before income taxes from $44.0 million in the three months ended June 30, 2003 to $58.2 million in the three months ended June 30, 2004. We expect our effective tax rate for the year ending December 31, 2004 to be approximately 38.1%. The current and deferred portions of our income tax expense were $16.3 million and $5.9 million, respectively, in the three months ended June 30, 2004, compared to $10.4 million and $6.3 million, respectively, in the three months ended June 30, 2003. Our noncurrent deferred tax liability was $891.1 million and $882.1 million as of June 30, 2004 and December 31, 2003, respectively. The deferred tax liability primarily relates to differences between book and tax basis of our FCC licenses. In accordance with the adoption of SFAS 142 on January 1, 2002, we no longer amortize our FCC licenses, but instead test them for impairment annually. As the tax basis in our FCC licenses continues to amortize, our deferred tax liability will increase over time. We do not expect a significant portion of our deferred tax liability to reverse over time unless (i) our FCC licenses become impaired; or (ii) our FCC licenses are sold for cash, which would typically only occur in connection with the sale of the assets of a station or groups of stations or the entire Company in a taxable transaction.

        Net income.    Net income was $36.0 million in the three months ended June 30, 2004, as compared to $27.3 million in the three months ended June 30, 2003, an increase of $8.7 million or 31.9%. This increase was due to the items discussed above, primarily an increase of $12.8 million in operating income; a decrease of $1.4 million in interest expense, net; partially offset by an increase of $5.5 million in income tax expense.

 

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HEARST-ARGYLE TELEVISION, INC.

       Six Months Ended June 30, 2004
       Compared to Six Months Ended June 30, 2003

        Total revenue.    Total revenue primarily included (i) cash and barter advertising revenue, net of agency and national representatives’ commissions; (ii) network compensation; and (iii) other revenue. Network compensation and other revenue represented 6.2% of total revenue for the six months ended June 30, 2004. Total revenue in the six months ended June 30, 2004 was $364.8 million, as compared to $328.9 million in the six months ended June 30, 2003, an increase of $35.9 million or 10.9%. This increase was primarily attributable to the following factors: (i) an increase in net political advertising revenue of $18.8 million, as a result of the normal, cyclical nature of the television broadcasting business, in which the demand for advertising by candidates running for political office significantly increases in even-numbered years (such as 2004); and (ii) an increase in demand by national and local advertisers, particularly in the categories of automotive, retail, furniture and house-wares, financial services, and telecommunications.

        Salaries, benefits and other operating costs.    Salaries, benefits and other operating costs were $171.8 million in the six months ended June 30, 2004, as compared to $160.9 million in the six months ended June 30, 2003, an increase of $10.9 million or 6.8%. This increase was primarily due to (i) an increase of approximately $5.8 million, resulting from higher sales commissions, overtime pay related to breaking news stories in certain markets, and salary increases; (ii) an increase of approximately $2.7 million in employee benefits and pension expenses; and (iii) an increase of approximately $1.4 million in news gathering and ratings services costs; partially offset by (iv) decreases in bad debt expenses and promotion and other costs.

        Amortization of program rights.    Amortization of program rights was $30.1 million in the six months ended June 30, 2004, as compared to $31.9 million in the six months ended June 30, 2003, a decrease of $1.8 million or 5.6%. This decrease was primarily due to (i) cost savings by replacing certain higher cost first-run programs; and (ii) a declining rate of amortization for certain off-network syndicated programs, primarily at our stations in Kansas City, Missouri and Sacramento, California. We amortize the costs of off-network syndicated programs on an accelerated basis on the future number of showings, contemplating the estimated revenue to be earned per showing.

        Depreciation and amortization.    Depreciation and amortization was $24.9 million in the six months ended June 30, 2004, as compared to $24.1 million in the six months ended June 30, 2003, an increase of $0.8 million or 3.3%. Depreciation expense was $21.9 million in the six months ended June 30, 2004, as compared to $22.9 million in the six months ended June 30, 2003, a decrease of $1.0 million or 4.4%. This decrease was primarily due to (i) the Company’s recording of approximately $2.1 million of accelerated depreciation in the six months ended June 30, 2003 on certain broadcasting equipment which management reevaluated the useful life; partially offset by (ii) increased depreciation expense related to recent investments in broadcast assets. Management reviews, on a continuing basis, the financial statement carrying value of property, plant and equipment for impairment. If events or changes in circumstances indicate that an asset carrying value may not be recoverable, the carrying value is written down through accelerated depreciation. Amortization was $3.0 million in the six months ended June 30, 2004, as compared to $1.2 million in the six months ended June 30, 2003, an increase of $1.8 million, principally resulting from amortization related to a separately identified intangible asset, advertiser client base. In December 2001, the Company had reclassified the remaining net book value of the advertiser client base to goodwill in the condensed consolidated balance sheet and ceased amortization. In December 2003, the Company determined the advertiser client base should continue to be separately identified from goodwill and, as an intangible asset with a finite useful life under SFAS 142 be amortized over its estimated useful life. Accordingly, the Company recorded a catch-up to amortization expense on the advertiser client base of $7.1 million in the fourth quarter of 2003. See Note 6 to the condensed consolidated financial statements.

        Corporate, general and administrative expenses.    Corporate, general and administrative expenses were $11.7 million in the six months ended June 30, 2004, as compared to $9.8 million in the six months ended June 30, 2003, an increase of $1.9 million or 19.4%. This increase was primarily due to an increase in: (i) headcount; (ii) accounting and consulting fees to comply with public company compliance requirements; and (iii) incentive compensation.

        Operating income.    Operating income was $126.3 million in the six months ended June 30, 2004, as compared to $102.2 million in the six months ended June 30, 2003, an increase of $24.1 million or 23.6%. This net increase in operating income was due to the items discussed above.

 

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HEARST-ARGYLE TELEVISION, INC.

        Interest expense, net.    Interest expense, net of interest income, was $32.4 million in the six months ended June 30, 2004, as compared to $34.8 million in the six months ended June 30, 2003, a decrease of $2.4 million or 6.9%. This decrease in interest expense, net, was primarily due to (i) a lower outstanding debt balance in the first and second quarters of 2004 than 2003; (ii) the maturity of the credit facility in April 2004 (see Note 8 to the condensed consolidated financial statements); and (iii) an increase in interest income of $0.6 million in the six months ended June 30, 2004 as compared to the six months ended June 30, 2003. The Company’s outstanding debt balance as of June 30, 2004 was $882.5 million, as compared to $925.7 million as of June 30, 2003. See Note 4 of the condensed consolidated financial statements.

        Interest Expense, net – Capital Trust.    Interest expense, net, to our wholly-owned, unconsolidated subsidiary trust (the Hearst-Argyle Capital Trust or “Capital Trust”) was $7.5 million in both the six months ended June 30, 2004 and 2003. Interest expense, net – Capital Trust primarily represented interest expense we incurred on the $206.2 million of subordinated debentures issued by us. Interest paid by us to the Capital Trust was then utilized by the Capital Trust to make dividend payments to the holders of the $200.0 million of redeemable convertible preferred securities issued by the Capital Trust in December 2001. In accordance with FIN 46(R), we do not consolidate the accounts of the Capital Trust in our consolidated financial statements. We use the equity method of accounting to record the Company’s equity interest in the earnings of the Capital Trust and accordingly we have included such earnings of $0.2 million in Interest Expense, net – Capital Trust in both the six months ended June 30, 2004 and 2003. See Notes 2 and 8 to the condensed consolidated financial statements.

        Equity in income of affiliates, net. Equity in income of affiliates, net was $0.7 million in the six months ended June 30, 2004, as compared to $0.2 million in the six months ended June 30, 2003, an increase of $0.5 million or 250.0%. This increase was primarily due to the improved operating results of the operating entities related to IBS. Equity in income of affiliates, net represented the Company’s equity interests in the financial results of its unconsolidated affiliates, which included (i) IBS and related entities and (ii) NBC/Hearst-Argyle Syndication, LLC in the six months ended June 30, 2004 and 2003.

        Income taxes.    Income tax expense was $33.2 million in the six months ended June 30, 2004, as compared to $22.9 million in the six months ended June 30, 2003, an increase of $10.3 million or 45.0%. This increase in income tax expense was due to an increase in income before income taxes from $60.2 million in the six months ended June 30, 2003 to $87.1 million in the six months ended June 30, 2004. We expect our effective tax rate for the year ending December 31, 2004 to be approximately 38.1%. The current and deferred portions of our income tax expense were $24.2 million and $9.0 million, respectively, in the six months ended June 30, 2004, compared to $14.3 million and $8.6 million, respectively, in the six months ended June 30, 2003. Our noncurrent deferred tax liability was $891.1 million and $882.1 million as of June 30, 2004 and December 31, 2003, respectively. The deferred tax liability primarily relates to differences between book and tax basis of our FCC licenses. In accordance with the adoption of SFAS 142 on January 1, 2002, we no longer amortize our FCC licenses, but instead test them for impairment annually. As the tax basis in our FCC licenses continues to amortize, our deferred tax liability will increase over time. We do not expect a significant portion of our deferred tax liability to reverse over time unless (i) our FCC licenses become impaired; or (ii) our FCC licenses are sold for cash, which would typically only occur in connection with the sale of the assets of a station or groups of stations or the entire Company in a taxable transaction.

        Net income.    Net income was $53.9 million in the six months ended June 30, 2004, as compared to $37.3 million in the six months ended June 30, 2003, an increase of $16.6 million or 44.5%. This increase was due to the items discussed above, primarily an increase of $24.1 million in operating income; a decrease of $2.4 million in interest expense, net; an increase of $0.5 million in equity in income in affiliates; partially offset by an increase of $10.3 million in income tax expense.

 

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HEARST-ARGYLE TELEVISION, INC.

Liquidity and Capital Resources 

        As of June 30, 2004, our cash and cash equivalents balance was $138.1 million, (see “Investing Activities” below concerning the purchase of WMTW-TV on July 1, 2004) as compared to $71.5 million as of December 31, 2003, an increase of $66.6 million. The net increase in cash and cash equivalents was due to the factors described below under Operating Activities, Investing Activities, and Financing Activities.

       Operating Activities

        Net cash provided by operating activities was $89.1 million in the six months ended June 30, 2004, as compared to $63.2 million in the six months ended June 30, 2003, an increase of $25.9 million or 41.0%. This increase was primarily due to (i) the increase in our net revenue and net income compared to the same period in 2003, as discussed above under “Total revenue” and “Net income”; (ii) the dividend payment of $1.3 million we received from the IBS/HATV LLC (see Note 8 to the condensed consolidated financial statements under “IBS” for a discussion of the dividend payment); (iii) changes in working capital, primarily changes in accounts payable and accrued liabilities, partially offset by changes in accounts receivable and other liabilities (see “changes in operating assets and liabilities” in the accompanying condensed consolidated statements of cash flows). See the accompanying condensed consolidated statements of cash flows for a reconciliation of “net income” to “net cash provided by operating activities.”

       Investing Activities

        Net cash used in investing activities was $16.9 million in the six months ended June 30, 2004, as compared to $14.5 million in the six months ended June 30, 2003, an increase of $2.4 million or 16.6%. During both periods, our primary investing activities were equipment purchases related to (i) maintenance; (ii) special projects and towers; and (iii) digital conversions, as mandated by the FCC.

        Investments in property, plant and equipment were $17.0 million and $14.6 million in the six months ended June 30, 2004 and 2003, respectively, and were funded using cash provided by operating activities. For the year ended December 31, 2003, we invested $25.4 million, including (i) $14.5 million in maintenance projects; (ii) $3.8 million in digital conversion; and (iii) $7.1 million in special projects. For the year ending December 31, 2004, we expect to invest approximately $40 million in property, plant and equipment, including approximately (i) $22 million in maintenance projects; (ii) $4 million for the full-power completion of certain digital television build-outs; and (iii) $14 million in special projects, including the initial costs associated with a new facility to be built in Kansas City, Missouri over the next 24 months. We expect to invest approximately $18 million in our new facility in Kansas City. Since 1997 through June 30, 2004, we have invested approximately $60 million related to digital conversions, as mandated by the Federal Communications Commission (“FCC”).

        On July 1, 2004, we completed the purchase of the television broadcasting assets of WMTW-TV, Channel 8, the ABC affiliate serving the Portland-Auburn, Maine television market, for approximately $38 million in cash.

       Financing Activities

        Net cash used in financing activities was $5.6 million in the six months ended June 30, 2004, as compared to $46.1 million in the six months ended June 30, 2003, a decrease of $40.5 million or 87.9%. This decrease was primarily due to (i) net pay-downs to the credit facility from net cash provided by operating activities of $48.0 million in the six months ended June 30, 2003, as compared to none in the six months ended June 30, 2004; (ii) an increase in proceeds from stock option exercises of $5.2 million in the six months ended June 30, 2004; partially offset by (iii) dividend payments on our common stock of $11.1 million; and (iv) a partial redemption of our preferred stock of $1.6 million in January 2004.

 

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HEARST-ARGYLE TELEVISION, INC.

        Certain of our debt obligations contain financial and other covenants and restrictions on the Company. None of these covenants or restrictions include any triggers explicitly tied to the Company’s credit ratings or stock price. We are in compliance with all such covenants and restrictions as of June 30, 2004.

        On February 27, 2003, a holder of our Series A Preferred Stock exercised the right to convert 1,900 shares of Series A Preferred Stock into 89,445 shares of Series A Common Stock. On August 12, 2003, we exercised our option and notified the holders of our intent to redeem the remaining outstanding shares of Series A and B Preferred Stock. On January 1, 2004, we redeemed 1,600 shares of Series A Preferred Stock. As of June 30, 2004, we had 5,781 shares outstanding of Series A Preferred Stock and 10,938 shares outstanding of Series B Preferred Stock. The remaining 5,781 shares of Series A Preferred Stock will be redeemed on January 1, 2005. The remaining shares of Series B Preferred Stock will be redeemed as follows: 5,468 shares on December 10, 2004; and 5,470 shares on January 1, 2005.

        On January 15 and April 15, 2004, we paid dividends which were declared on December 3, 2003 and March 24, 2004 on our Series A and Series B Common Stock in the amount of $11.1 million. On May 5, 2004, our Board of Directors declared a cash dividend for the second quarter of 2004 of $0.06 per share on our Series A and Series B Common Stock in the amount of $5.6 million. The dividend was paid on July 15, 2004 to all stockholders of record as of July 5, 2004. We did not declare or pay any dividends on Common Stock in the three- and six-month periods ended June 30, 2003.

        In May 1998, our Board of Directors authorized the repurchase of up to $300 million of our outstanding Series A Common Stock. Such repurchases may be effected from time to time in the open market or in private transactions, subject to market conditions and management’s discretion. Between May 1998 and June 30, 2004, we have spent approximately $80.7 million to repurchase approximately 3.2 million shares of Series A Common Stock at an average price of $25.24. We did not repurchase any shares of our Series A Common Stock during the first and second quarters of 2004. There can be no assurance that we will repurchase shares in the future or, if we do, what the terms of such repurchases will be.

        As of June 30, 2004, there was no outstanding balance due under our credit facility, as it was fully paid off in September 2003 and expired on April 12, 2004. The Company is currently negotiating a new credit facility. See Notes 4 and 8 to the condensed consolidated financial statements.

        As of June 30, 2004, our long-term debt obligations, exclusive of capital lease obligations of $0.4 million, were $882.1 million, all of which mature after 2005. All of our long-term debt obligations as of June 30, 2004 bear interest at a fixed rate. The Company’s credit ratings for its long-term debt obligations, respectively, were BBB- by Standard & Poor’s and Fitch Ratings and Baa3 by Moody’s Investors Service, as of June 30, 2004. Such credit ratings are considered to be investment grade. See Note 4 to the condensed consolidated financial statements.

        We anticipate that our primary sources of cash, which include current cash balances, cash provided by operating activities, and amounts we expect to be available under a new credit facility, will be sufficient to finance the operating and working capital requirements of our stations, as well as our debt service requirements, anticipated capital expenditures, and other obligations of the Company for both the next 12 months and the foreseeable future thereafter. We intend to enter into a new credit facility before the end of the year.

Forward-Looking Statements

        This report includes or incorporates forward-looking statements. We based these forward-looking statements on our current expectations and projections about future events. The forward-looking statements contained in this report, concerning, among other things, trends involving net revenue, cash flow and operating expenses, involve risks and uncertainties, and are subject to change based on various important factors. Those factors include the impact on our operations from: federal governmental regulation of broadcasting; competition in the broadcast television markets we serve; our ability to obtain quality programming for our television stations; successful integration of television stations we acquire; pricing fluctuations in local and national advertising; changes in national and regional economies; our ability to service and refinance our outstanding debt; local regulatory actions and conditions in the areas in which our stations operate; and volatility in programming costs, industry consolidation, technological developments, and major world news events. Other matters we discuss in this report, or in the documents we incorporate by reference into this report, may also cause actual results to differ from those we describe. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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HEARST-ARGYLE TELEVISION, INC.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        As of June 30, 2004, the Company was not involved in any derivative financial instruments. However, the Company may consider certain interest-rate risk strategies in the future.

Item 4.    Controls and Procedures

        An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter ended June 30, 2004. Based on that evaluation, and as of the end of the quarter for which this report is made, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective. There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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HEARST-ARGYLE TELEVISION, INC.

PART II

OTHER INFORMATION

Item 2.    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

        The following table reflects purchases made by Hearst Broadcasting, Inc. (“Hearst Broadcasting”), an indirect wholly-owned subsidiary of The Hearst Corporation (“Hearst”), of our Series A Common Stock during the quarter:

As of June 30, 2004, Hearst owned approximately 38.1% of the Company’s outstanding Series A Common Stock and 100% of the Company’s Series B Common Stock.

        The following table reflects purchases made by the Company during the quarter:

 

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HEARST-ARGYLE TELEVISION, INC.

Item 4.    Submission of Matters to a Vote of Security Holders

        All nominees standing for election as directors were elected at our annual shareholders’ meeting, which was held on May 5, 2004. The following chart indicates the number of votes cast for, the number of votes withheld and the number of broker non-votes with respect to each nominee for director:

Proposal One (1)

        The term of office of the following other directors continued after the annual shareholders’ meeting: David Pulver, David J. Barrett, Ken J. Elkins, Victor F. Ganzi, William Randolph Hearst III, Michael E. Pulitzer and Virginia H. Randt.

        The proposal to approve an Incentive Compensation Plan under which the Company may award various forms of incentive compensation to officers and other key employees of the Company and its subsidiaries (the “Incentive Compensation Plan Proposal”) was also approved at the annual shareholders’ meeting. The following chart indicates the number of votes cast for and against, the number of votes withheld and the number of broker non-votes with respect to the Incentive Compensation Plan Proposal:

Proposal Two

        The proposal to ratify the selection of Deloitte & Touche LLP as the Company’s independent external auditors (the “Independent Auditors Ratification Proposal”) was also approved at the annual shareholders’ meeting. The following chart indicates the number of votes cast for and against, the number of votes withheld and the number of broker non-votes with respect to the Independent Auditors Ratification Proposal:

 

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HEARST-ARGYLE TELEVISION, INC.

Proposal Three

Item 6.    Exhibits and Reports on Form 8-K.  

        (a) Exhibits:

        (b) Reports on Form 8-K:

        On April 28, 2004, the Company furnished a Current Report on Form 8-K under Items 9 and 12 reporting the issuance of a press release reporting financial results and earnings for the Company’s quarterly period ended March 31, 2004.

 

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SIGNATURES

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

 

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EXHIBIT INDEX

 

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