HEARST ARGYLE TELEVISION INC - 10-Q Quarterly Report

		Page No.
Part I	Financial Information

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001	1
	Condensed Consolidated Statements of Income for the Three and Six Months Ended
	June 30, 2002 and 2001 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended
	June 30, 2002 and 2001 (unaudited)	4
	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15

Part II	Other Information

Item 4.	Submission of Matters to a Vote of Security Holders	15

Item 5.	Other Information	16

Item 6.	Exhibits and Reports on Form 8-K	16

Signatures		17

	June 30, 2002 (Unaudited)		December 31, 2001
	(In thousands)
Assets
Current assets:
Cash and cash equivalents	$	4,359	$	3,260
Accounts receivable, net		141,838		142,146
Program and barter rights		16,180		54,917
Deferred income taxes		4,085		3,733
Other		5,261		5,891

Total current assets		171,723		209,947

Property, plant and equipment, net		320,417		328,257

Goodwill		799,527		799,527
Intangible assets, net		2,357,062		2,357,117
Other assets:
Deferred acquisition and financing costs, net		18,813		20,259
Investments		27,987		30,308
Program and barter rights, noncurrent		2,231		3,272
Other		31,516		31,018

Total other assets		80,547		84,857

Total assets	$	3,729,276	$	3,779,705

	June 30, 2002 (Unaudited)			December 31, 2001
	(In thousands)
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	13,165		$	14,375
Accrued liabilities		64,108			59,565
Program and barter rights payable		15,578			53,930
Payable to The Hearst Corporation		230			2,612
Other		3,245			3,658

Total current liabilities		96,326			134,140


Noncurrent liabilities:
Program and barter rights payable, noncurrent		4,098			5,045
Long-term debt		1,082,152			1,160,205
Deferred income taxes		810,028			792,327
Other liabilities		17,393			21,374

Total noncurrent liabilities		1,913,671			1,978,951

Convertible preferred securities		200,000			200,000


Stockholders’ equity:
Series A preferred stock		1			1
Series B preferred stock		1			1
Series A common stock		541			537
Series B common stock		413			413
Additional paid-in capital		1,279,186			1,270,908
Retained earnings		319,836			275,453
Treasury stock, at cost		(80,699	)		(80,699	)

Total stockholders’ equity		1,519,279			1,466,614

Total liabilities and stockholders’ equity	$	3,729,276		$	3,779,705

	Three Months Ended June 30,				Six Months Ended June 30,
	2002		2001		2002		2001
	(Unaudited) (In thousands, except per share data)
Total revenues	$	182,303	$	176,368	$	337,225	$	324,710

Station operating expenses		79,826		80,824		159,103		160,326
Amortization of program rights		14,650		14,438		29,589		28,454
Depreciation and amortization		10,476		32,849		20,921		65,152

Station operating income		77,351		48,257		127,612		70,778

Corporate general and administrative expenses		4,394		3,837		8,239		7,533

Operating income		72,957		44,420		119,373		63,245

Interest expense, net		18,786		24,974		37,163		53,466
Trust preferred dividends		3,750		—		7,500		—
Other income, net		299		—		299		48,778
Equity in loss of affiliates		1,226		1,477		2,276		3,038


Income before income taxes		49,494		17,969		72,733		55,519

Income taxes		18,715		8,266		27,639		25,539

Net income		30,779		9,703		45,094		29,980

Less preferred stock dividends		355		355		711		711

Income applicable to common stockholders	$	30,424	$	9,348	$	44,383	$	29,269


Income per common share – basic:	$	0.33	$	0.10	$	0.48	$	0.32

Number of common shares used in the calculation		92,099		91,767		91,985		91,815


Income per common share – diluted:	$	0.33	$	0.10	$	0.48	$	0.32

Number of common shares used in the calculation		92,683		91,976		92,401		92,054

	Six Months Ended June 30,
	2002			2001
	(Unaudited)
	(In thousands)
Operating Activities
Net income	$	45,094		$	29,980
Adjustments to reconcile net income to net cash provided by operating activities:
Other income, net		—			(48,778	)
Amortization of intangible assets		55			43,984
Amortization of program rights		29,589			28,454
Program payments		(29,158	)		(28,571	)
Depreciation		20,866			21,168
Deferred income taxes		17,349			9,105
Equity in loss of affiliates		2,276			3,038
Amortization of deferred financing costs		1,456			1,475
Provision for doubtful accounts		2,976			896
Changes in operating assets and liabilities, net		(5,655	)		9,555

Net cash provided by operating activities		84,848			70,306


Investing Activities
Purchases of property, plant, and equipment:
Digital		(8,112	)		(8,026	)
Maintenance		(2,891	)		(6,359	)
Special projects/towers		(2,112	)		(2,498	)
Phoenix/WMUR-TV Swap Transaction		—			(34,019	)
Acquisition of WBOY-TV		—			(20,774	)
Investment in Internet Broadcasting Systems, Inc		—			(6,000	)
Other, net		(1	)		(71	)


Net cash used in investing activities		(13,116	)		(77,747	)


Financing Activities
Credit Facility:
Proceeds		227,000			502,000
Repayment		(305,000	)		(494,000	)
Dividends paid on preferred stock		(711	)		(711	)
Series A common stock repurchases		—			(4,079	)
Proceeds from employee stock purchase plan		844			916
Proceeds from stock option exercises		7,234			—

Net cash (used in) provided by financing activities		(70,633	)		4,126

Increase (decrease) in cash and cash equivalents		1,099			(3,315	)
Cash and cash equivalents at beginning of period		3,260			5,780

Cash and cash equivalents at end of period	$	4,359		$	2,465

	Six Months Ended June 30,
	2002		2001
	(Unaudited)
	(In thousands)
Supplemental Cash Flow Information:
Business acquired in purchase transaction:
Phoenix/WMUR-TV Swap
Fair market value of assets acquired, net			$	225,971
Fair market value of liabilities assumed, net				(35,300	)
Fair market value of assets exchanged, net				(188,383	)
Fair market value of liabilities exchanged, net				31,731

Net cash paid for swap			$	34,019


Acquisition of WBOY-TV
Fair market value of assets acquired, net			$	21,146
Fair market value of liabilities assumed, net				(372	)

Net cash paid for WBOY-TV			$	20,774


Cash paid during the period:
Interest	$	35,929	$	51,344

Trust preferred dividends	$	4,250	$	—

Income taxes, net of refunds	$	5,814	$	6,910

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, 2001, filed with the Securities and Exchange Commission. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2002 and 2001 are not necessarily indicative of the results that may be expected for a full year. Certain reclassifications have been made to the 2001 condensed consolidated financial statements to conform with classifications used as of and for the period ended June 30, 2002.

Phoenix/WMUR Swap. On March 28, 2001, the Company exchanged its radio stations in Phoenix, Arizona (KTAR-AM, KMVP-AM and KKLT-FM) (the “Phoenix Stations”) for WMUR-TV, the ABC affiliate serving the Manchester, NH television market, in a three-party swap (the “Phoenix/WMUR Swap”). The Company sold the Phoenix Stations to Emmis Communications Corporation (“Emmis”) for $160 million, less transaction expenses, and purchased WMUR-TV from WMUR-TV, Inc. for $185 million, plus a working capital adjustment of $3.5 million and transaction expenses. The acquisition of WMUR-TV was accounted for under the purchase method of accounting and accordingly, the purchase price and related transaction expenses were allocated to the acquired assets and liabilities based upon their fair market values. The excess of the purchase price and transaction expenses over the fair market value of the tangible assets acquired less the liabilities assumed was allocated to FCC license. Prior to the Phoenix/WMUR Swap, Emmis had been managing the Phoenix Stations pursuant to a Time Brokerage Agreement (“TBA”) since August 1, 2000, and the Company had been managing WMUR-TV pursuant to a TBA since January 8, 2001 (effective January 1, 2001 for accounting purposes). The purchase price of WMUR-TV was funded through an intermediary by approximately: (i) $160 million from Emmis, and (ii) $28.5 million plus the cost of the transaction expenses from the Company’s revolving credit facility. The Company realized a gain of $72.6 million on the sale of the Phoenix Stations which is recorded in “Other income, net” in the accompanying condensed consolidated statement of income in the six months ended June 30, 2001.

WBOY Acquisition. On April 30, 2001, pursuant to an Asset Purchase Agreement entered into with WBOY-TV, Inc., the Company acquired WBOY-TV, the NBC affiliate serving the Clarksburg-Weston, West Virginia television market for $20 million (the “WBOY Acquisition”) plus a working capital adjustment of $0.7 million and transaction expenses. The WBOY Acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price and related transaction expenses have been allocated to the acquired assets and liabilities based upon their fair market values. The excess of the purchase price and transaction expenses over the fair market value of the tangible assets acquired less the liabilities assumed was allocated to FCC license. The purchase price plus the cost of transaction expenses were funded using the Company’s revolving credit facility. The Company later sold WBOY-TV on December 13, 2001 for $20 million plus a working capital adjustment of $0.8 million less transaction expenses.

Unaudited Pro Forma Results of Operations. The following unaudited pro forma results of operations are presented as required by applicable accounting rules relating to business acquisitions and other one-time events. These unaudited pro forma results are not necessarily indicative of the actual results that would have been achieved had each of the stations been acquired at the beginning of the periods presented, nor are they indicative of future results.

The unaudited pro forma results include: (i) the combined results of operations of 23 of the Company’s television stations which were owned for the entire periods presented and (ii) the management fees earned by the Company for the entire periods presented (see Note 4). The unaudited pro forma results have been adjusted in order to reflect: (i) the Phoenix/WMUR Swap as if the transaction had occurred on January 1, 2001; (ii) the WBOY acquisition and later disposition as if both events had never occurred; (iii) the exclusion of Other income, net; and (iv) the exclusion of amortization of goodwill and certain other intangible assets resulting from new accounting standards as if the new standards had been effective January 1, 2001 (see Note 5).

	Six Months Ended June 30,
	2002		2001
	(unaudited)
	(In thousands, except per share data)
Total revenues	$	337,225	$	322,369
Net income	$	44,909	$	30,563
Income applicable to common stockholders	$	44,198	$	29,852
Income per common share—basic	$	0.48	$	0.33
—diluted	$	0.48	$	0.32
Pro forma number of shares used in calculations—basic		91,985		91,815
—diluted		92,401		92,054

Investments. In February 2001, the Company wrote-off the remaining $5.1 million of its investment in Geocast Network Systems, Inc. (“Geocast”), after Geocast’s board of directors declined various strategic alternatives and decided to liquidate the company. In March 2001, the Company wrote-down $18.8 million of its investment in ProAct Technologies Corporation (“ProAct”) in order to approximate the investment’s realizable value. The investment write-downs are recorded in “Other income, net” in the accompanying condensed consolidated statement of income in the six months ended June 30, 2001. In May 2001, the Company invested an additional $6 million of cash for a total investment of $26 million in Internet Broadcasting Systems, Inc. (“IBS”). As of June 30, 2002 and 2001, the Company held an equity interest in IBS of approximately 24%.

The Hearst Corporation. The Company recorded revenues of approximately $1.0 million and $1.6 million in the three and six months ended June 30, 2002, respectively, and approximately $0.6 million and $1.1 million in the three and six months ended June 30, 2001, respectively, relating to the Management Agreement with The Hearst Corporation (“Hearst”). Pursuant to the Management Agreement, the Company provides certain management services, such as sales, news, programming, and financial and accounting management services, with respect to certain Hearst owned or operated television and radio stations. The Company recorded expenses of approximately $0.9 million and $1.8 million in the three and six months ended June 30, 2002, respectively, and approximately $1.0 million and $2.0 million in the three and six months ended June 30, 2001, respectively, relating to the Services Agreement. Pursuant to the Services Agreement, Hearst provides the Company certain administrative services such as accounting, financial, legal, insurance, data processing, and employee benefits administration. The Company believes that the terms of these agreements are reasonable to both parties; however, there can be no assurance that more favorable terms would not be available from third parties. In addition, in the six months ended June 30, 2002, the Company recorded net revenues of approximately $0.7 million relating to advertising sales to Hearst on behalf of ESPN Classic, a property of ESPN, Inc., which is owned 20% by an affiliate of Hearst and 80% by ABC.

ProAct Technologies Corporation. The Company recorded no revenues in the three months ended June 30, 2002, and approximately $3.2 million in the six months ended June 30, 2002, relating to advertising sales to ProAct, one of the Company’s equity interest investments (which is accounted for using the cost method). The Company did not receive revenues from ProAct in the three and six months ended June 30, 2001. Bob Marbut, Chairman of the Board of Directors and former Co-Chief Executive Officer of the Company, is a member of the Board of Directors of ProAct, from which he does not receive compensation for his services.

Lifetime Entertainment Services. The Company has recorded revenues of approximately $1.0 million and $1.4 million from Lifetime Entertainment Services (“Lifetime”) in the three and six months ended June 30, 2002, respectively, and approximately $0.3 million and $0.6 million in the three and six months ended June 30, 2001, respectively. The Company has an agreement with Lifetime, an entity owned 50% by an affiliate of Hearst and 50% by ABC, whereby the Company assists Lifetime in securing Lifetime Movie Channel distribution and subscribers and Lifetime provides services to the Company in respect to the negotiation of the Company’s retransmission consent agreements.

On January 1, 2002, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 142 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. SFAS 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long Lived Assets.

The Company has completed its goodwill impairment review as of January 1, 2002 using a fair value approach in accordance with SFAS 142 and found no impairment. In addition, no evidence of impairment was found with regard to the Company’s intangible assets with indefinite lives. The intangible assets with indefinite useful lives, other than goodwill, consist of FCC licenses of approximately $2.3 billion and related network affiliation agreements of approximately $68.6 million as of June 30, 2002 and December 31, 2001. These assets are no longer amortized and are included in “Intangible assets, net” in the accompanying condensed consolidated balance sheets.

Three Months Ended June 30, 2001	Income Applicable to Common Stockholders (in thousands)	Income per Common Share— basic and diluted
	(unaudited)
As reported	$ 9,348	$ 0.10
Amortization of goodwill and certain other intangibles, net of tax effects	15,266	0.17

Adjusted	$ 24,614	$ 0.27


Six Months Ended June 30, 2001

As reported	$ 29,269	$ 0.32
Amortization of goodwill and certain other intangibles, net of tax effects	31,669	0.34

Adjusted	$ 60,938	$ 0.66

On March 28, 2001, the Company exchanged its radio stations in Phoenix, Arizona (KTAR-AM, KMVP-AM and KKLT-FM) (the “Phoenix Stations”) for WMUR-TV, the ABC affiliate serving the Manchester, NH television market, in a three-party swap. The Company sold the Phoenix Stations to Emmis Communications Corporation (“Emmis”) and purchased WMUR-TV from WMUR-TV, Inc. on March 28, 2001. Prior to the swap, Emmis had been managing the Phoenix Stations pursuant to a Time Brokerage Agreement (“TBA”) since August 1, 2000, and the Company had been managing WMUR-TV pursuant to a TBA since January 8, 2001 (effective January 1, 2001 for accounting purposes). See Note 2 of the condensed consolidated financial statements.

The results of operations for the three and six months ended June 30, 2002 include: (i) the results of the Company’s 24 television stations which were owned for the entire periods presented and (ii) the management fees earned by the Company from the Managed Stations for the entire periods presented. The results of operations for the three and six months ended June 30, 2001 include: (i) the results of 23 of the Company’s television stations which were owned for the entire periods presented; (ii) the management fees earned by the Company from the Managed Stations for the entire periods presented; (iii) the TBA for WMUR-TV from January 1 through March 27, 2001; (iv) the results of WMUR-TV after its acquisition by the Company, from March 28 through June 30, 2001; (v) the TBA for the Phoenix Stations from January 1 through March 27, 2001; and (vi) the results of WBOY-TV after its acquisition by the Company, from April 30 to June 30, 2001.

Total revenues. Total revenues includes: (i) cash and barter advertising revenues, net of agency and national representatives’ commissions, (ii) network compensation and (iii) other revenues. Total revenues in the three months ended June 30, 2002 were $182.3 million, as compared to $176.4 million in the three months ended June 30, 2001, an increase of $5.9 million or 3.3%. This increase was primarily attributable to: (i) an increase in net political advertising revenues of approximately $6.6 million and (ii) an increase in the demand for advertising by national and local advertisers principally in the automotive and financial services categories, partially offset by (iii) a decrease in network compensation of approximately $1.0 million.

Depreciation and amortization. Depreciation and amortization was $10.5 million in the three months ended June 30, 2002, as compared to $32.8 million in the three months ended June 30, 2001, a decrease of $22.3 million or 68.0%. This decrease in depreciation and amortization expense was due to the Company’s adoption on January 1, 2002 of the accounting standard SFAS 142. SFAS 142 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. See Note 5 of the condensed consolidated financial statements.

Corporate, general and administrative expenses. Corporate general and administrative expenses were $4.4 million in the three months ended June 30, 2002, as compared to $3.8 million in the three months ended June 30, 2001, an increase of $0.6 million or 15.8 %. This increase was primarily due to: (i) an increase in insurance premiums and (ii) an increase in professional fees in connection with the Company’s filing of a registration statement with the Securities and Exchange Commission in May 2002 (see “Part II – Other Items”) and the Company’s initial goodwill and intangible asset impairment testing under the new accounting standard SFAS 142.

Interest expense, net. Interest expense, net of interest income was $18.8 million in the three months ended June 30, 2002, as compared to $25.0 million in the three months ended June 30, 2001, a decrease of $6.2 million or 24.8%. This decrease in interest expense was primarily due to a lower outstanding debt balance in the second quarter of 2002 than in the second quarter of 2001. The long-term debt balance as of June 30, 2002 was approximately $1,082 million, as compared to approximately $1,456 million as of June 30, 2001. See Note 3 of the condensed consolidated financial statements.

Trust preferred dividends. Trust preferred dividends were $3.8 million in the three months ended June 30, 2002, as compared to none in the three months ended June 30, 2001. The dividends are paid quarterly in connection with the private placement of convertible trust preferred securities in the amount of $200 million by the Hearst-Argyle Capital Trust, a consolidated subsidiary trust of the Company, in December 2001. The net proceeds from the private placement were utilized by the Company to reduce outstanding borrowings under the credit facility.

Other income, net. Other income, net was $0.3 million in the three months ended June 30, 2002, as compared to none in the three months ended June 30, 2001. The other income, net recorded in the three months ended June 30, 2002 represented an escrow closing fee paid to the Company by Emmis in connection with the Phoenix/WMUR Swap transaction, which occurred in March 2001. See Note 2 of the condensed consolidated financial statements.

Equity in loss of affiliates. Equity in loss of affiliates was $1.2 million in the three months ended June 30, 2002, as compared to $1.5 million in the three months ended June 30, 2001, a decrease of $0.3 million or 20.0%. This loss represents the Company’s equity interests in the operating results of its unconsolidated affiliates, which included Internet Broadcasting Systems, Inc. in the three months ended June 30, 2002 and 2001 and NBC/Hearst-Argyle Syndication, LLC in the three months ended June 30, 2002.

Income taxes. Income tax expense was $18.7 million in the three months ended June 30, 2002, as compared to $8.3 million in the three months ended June 30, 2001, an increase of $10.4 million or 125.3%. This increase was primarily due to the increase in income attributable to the items described above and partially offset by a lower effective tax rate in the three months ended June 30, 2002. The effective tax rate was 37.8% in the three months ended June 30, 2002, as compared to 46.0% in the three months ended June 30, 2001. This decrease in the effective tax rate was attributable to the Company’s adoption of SFAS 142, which discontinues the amortization of goodwill and certain other intangible assets. See Note 5 of the condensed consolidated financial statements. The Company expects its effective tax rate for the year ending December 31, 2002 to be approximately 38%. Income tax expense represents federal and state income taxes as calculated on the Company’s income before income taxes.

Net income. Net income was $30.8 million in the three months ended June 30, 2002, as compared to $9.7 million in the three months ended June 30, 2001, an increase of $21.1 million or 217.5%. This increase was due to the items discussed above, primarily an increase of $29.1 million in station operating income, partially offset by an increase in income tax expense of $10.4 million, in the three months ended June 30, 2002, as compared to the three months ended June 30, 2001.

Broadcast Cash Flow. Broadcast cash flow, as defined below, was $88.0 million in the three months ended June 30, 2002, as compared to $81.3 million in the three months ended June 30, 2001, an increase of $6.7 million or 8.2%. This increase in broadcast cash flow was primarily due to an increase in net advertising revenues in the three months ended June 30, 2002, as discussed above under “total revenues.” Broadcast cash flow margin increased to 48.3% in the three months ended June 30, 2002 from 46.1% in the three months ended June 30, 2001. Broadcast cash flow is defined as operating income, plus depreciation and amortization, plus amortization of program rights, minus program payments. The Company has included broadcast cash flow data because management believes that such data are commonly used as a measure of performance among companies in the broadcast industry. Broadcast cash flow is also frequently used by investors, analysts, valuation firms and lenders as one of the important determinants of underlying asset value. Broadcast cash flow should not be considered in isolation or as an alternative to “Operating income” (as determined in accordance with generally accepted accounting principles) as an indicator of the entity’s operating performance, or to “Net cash provided by operating activities” (as determined in accordance with generally accepted accounting principles) as a measure of liquidity. This measure is believed to be, but may not be, comparable to similarly titled measures used by other companies.

Total revenues. Total revenues includes: (i) cash and barter advertising revenues, net of agency and national representatives’ commissions, (ii) network compensation and (iii) other revenues. Total revenues in the six months ended June 30, 2002 were $337.2 million, as compared to $324.7 million in the six months ended June 30, 2001, an increase of $12.5 million or 3.8%. This increase was primarily attributable to: (i) an increase in net political advertising revenues of approximately $10.6 million; (ii) an increase in the demand for advertising by national and local advertisers principally in the automotive and financial services categories; and (iii) an increase in net advertising revenues resulting from the carriage of the Olympics on the Company’s ten owned NBC affiliates during the first quarter of 2002; partially offset by (iv) a decrease in network compensation of approximately $1.4 million.

Depreciation and amortization. Depreciation and amortization was $20.9 million in the six months ended June 30, 2002, as compared to $65.2 million in the six months ended June 30, 2001, a decrease of $44.3 million or 67.9%. This decrease in depreciation and amortization expense was due to the Company’s adoption on January 1, 2002 of the accounting standard SFAS 142. SFAS 142 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. See Note 5 of the condensed consolidated financial statements.

Corporate general and administrative expenses. Corporate general and administrative expenses were $8.2 million in the six months ended June 30, 2002, as compared to $7.5 million in the six months ended June 30, 2001, an increase of $0.7 million or 9.3%. This increase was primarily due to: (i) an increase in insurance premiums and (ii) an increase in professional fees in connection with the Company’s filing of a registration statement with the Securities and Exchange Commission in May 2002 (see “Part II – Other Items”) and the Company’s initial goodwill and intangible asset impairment testing under the new accounting standard SFAS 142.

Interest expense, net. Interest expense, net of interest income was $37.2 million in the six months ended June 30, 2002, as compared to $53.5 million in the six months ended June 30, 2001, a decrease of $16.3 million or 30.5%. This decrease in interest expense was primarily due to a lower outstanding debt balance in the first and second quarters of 2002 than in 2001. The long-term debt balance as of June 30, 2002 was approximately $1,082 million, as compared to approximately $1,456 million as of June 30, 2001. Interest expense, net included approximately $0.6 million of interest income in the six months ended June 30, 2002 and approximately $0.4 million in the six months ended June 30, 2001. See Note 3 of the condensed consolidated financial statements.

Trust preferred dividends. Trust preferred dividends were $7.5 million in the six months ended June 30, 2002, as compared to none in the six months ended June 30, 2001. The dividends are paid quarterly in the amount of $3.75 million in connection with the private placement of convertible trust preferred securities in the amount of $200 million by the Hearst-Argyle Capital Trust, a consolidated subsidiary trust of the Company, in December 2001. The net proceeds from the private placement were utilized by the Company to reduce outstanding borrowings under the credit facility.

Other income, net. Other income, net was $0.3 million in the six months ended June 30, 2002, as compared to $48.8 million in the six months ended June 30, 2001. The other income, net recorded in the six months ended June 30, 2002 represented an escrow closing fee paid to the Company by Emmis in connection with the Phoenix/WMUR Swap transaction, which occurred in March 2001. The other income, net recorded in the six months ended June 30, 2001 represented a $72.6 million gain from the sale of the Phoenix Stations, which was partially offset by write-downs of $5.1 million and $18.8 million of the carrying value of the Company’s investments in Geocast and ProAct, respectively. See Note 2 of the condensed consolidated financial statements.

Equity in loss of affiliates. Equity in loss of affiliates was $2.3 million in the six months ended June 30, 2002, as compared to $3.0 million in the six months ended June 30, 2001, a decrease of $0.7 million or 23.3%. This loss represents the Company’s equity interests in the operating results of its unconsolidated affiliates, which included Internet Broadcasting Systems, Inc. in the six months ended June 30, 2002 and 2001 and NBC/Hearst-Argyle Syndication, LLC in the six months ended June 30, 2002.

Income taxes. Income tax expense was $27.6 million in the six months ended June 30, 2002, as compared to $25.5 million in the six months ended June 30, 2001, an increase of $2.1 million or 8.2%. This increase was primarily due to the increase in income attributable to the items described above and partially offset by a lower effective tax rate in the six months ended June 30, 2002. The effective tax rate was 38.0% in the six months ended June 30, 2002, as compared to 46.0% in the six months ended June 30, 2001. This decrease in the effective tax rate was attributable to the Company’s adoption of SFAS 142, which discontinues the amortization of goodwill and certain other intangible assets. See Note 5 of the condensed consolidated financial statements. The Company expects its effective tax rate for the year ending December 31, 2002 to be approximately 38%. Income tax expense represents federal and state income taxes as calculated on the Company’s income before income taxes.

Net income. Net income was $45.1 million in the six months ended June 30, 2002, as compared to $30.0 million in the six months ended June 30, 2001, an increase of $15.1 million or 50.3%. This increase was due to the items discussed above, primarily (i) an increase of $56.8 million in station operating income and (ii) a decrease of $16.3 million in interest expense, net; partially offset by (iii) an increase of $7.5 million in trust preferred dividends and (iv) a $48.5 million decrease in other income, net, in the six months ended June 30, 2002, as compared to the six months ended June 30, 2001.

Broadcast Cash Flow. Broadcast cash flow, as defined below, was $149.0 million in the six months ended June 30, 2002, as compared to $135.8 million in the six months ended June 30, 2001, an increase of $13.2 million or 9.7%. The increase in broadcast cash flow was primarily due to an increase in net advertising revenues in the six months ended June 30, 2002, as discussed above under “total revenues.” Broadcast cash flow margin increased to 44.2% in the six months ended June 30, 2002 from 41.8% in the six months ended June 30, 2001. Broadcast cash flow is defined as operating income, plus depreciation and amortization, plus amortization of program rights, minus program payments. The Company has included broadcast cash flow data because management believes that such data are commonly used as a measure of performance among companies in the broadcast industry. Broadcast cash flow is also frequently used by investors, analysts, valuation firms and lenders as one of the important determinants of underlying asset value. Broadcast cash flow should not be considered in isolation or as an alternative to “Operating income” (as determined in accordance with generally accepted accounting principles) as an indicator of the entity’s operating performance, or to “Net cash provided by operating activities” (as determined in accordance with generally accepted accounting principles) as a measure of liquidity. This measure is believed to be, but may not be, comparable to similarly titled measures used by other companies.

On March 28, 2001, the Company exchanged its radio stations in Phoenix, Arizona (KTAR-AM, KMVP-AM, and KKLT-FM) (the “Phoenix Stations”) for WMUR-TV, the ABC affiliate serving the Manchester, NH television market, in a three-party swap (the “Phoenix/WMUR Swap”). The Company sold the Phoenix Stations to Emmis Communications Corporation (“Emmis”) for $160 million, less transaction expenses, and purchased WMUR-TV from WMUR-TV, Inc. for $185 million, plus a working capital adjustment of $3.5 million and transaction expenses. The purchase price of WMUR-TV was funded through an intermediary by approximately (i) $160 million from Emmis and (ii) $28.5 million plus the cost of the transaction expenses from the Company’s revolving credit facility. See Note 2 to the condensed consolidated financial statements.

On April 30, 2001, pursuant to an Asset Purchase Agreement entered into with WBOY-TV, Inc., the Company acquired WBOY-TV, the NBC affiliate serving the Clarksburg-Weston, West Virginia television market for $20 million (the “WBOY Acquisition”) plus a working capital adjustment of $0.7 million and transaction expenses. The purchase price plus the cost of the transaction expenses were funded using the Company’s revolving credit facility. See Note 2 of the condensed consolidated financial statements.

Capital expenditures were $13.1 million and $16.9 million in the six months ended June 30, 2002 and 2001, respectively. For the year ending December 31, 2002, the Company expects to spend approximately $31.0 million, including approximately (i) $20.2 million in FCC-mandated digital conversion; (ii) $4.8 million in maintenance projects; and (iii) $6.0 million in special projects. For the year ended December 31, 2001, capital expenditures were $32.3 million, including approximately (i) $9.9 million in maintenance projects; (ii) $18.6 million in digital conversion, and (iii) $3.8 million in special projects.

Net cash used in financing activities was $70.6 million in the six months ended June 30, 2002, as compared to net cash provided by financing activities of $4.1 million in the six months ended June 30, 2001, an increase in net cash used of $74.7 million. In the six months ended June 30, 2002, the Company used cash provided by operating activities to pay down the credit facility in the net amount of $78.0 million. In the six months ended June 30, 2001, the Company borrowed from the credit facility in the net amount of $8.0 million in connection with the investing activities, as described above.

As of June 30, 2002, the Company’s long-term debt obligations were approximately $1.08 billion, of which approximately 82% matures after 2005. See Note 3 to the condensed consolidated financial statements. Of the Company’s long-term debt obligations as of June 30, 2002, approximately 82% bear interest at a fixed rate and 18% bear interest at a variable rate. The Company’s credit ratings for its long-term debt obligations, respectively, were BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service, as of June 30, 2002. Such credit ratings are considered to be investment grade.

The Company anticipates that its primary sources of cash, which include current cash balances, operating cash flow, and amounts available under the existing credit facility, will be sufficient to finance the operating and working capital requirements of its stations, the Company’s debt service requirements, anticipated capital expenditures, and other obligations of the Company for both the next 12 months and the foreseeable future thereafter.

This report includes or incorporates forward-looking statements. We have 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, increases in net revenues and broadcast cash flow and reductions in operating expenses, involve risks and uncertainties, and are subject to change based on various important factors, including the impact of changes in national and regional economies, our ability to service our outstanding debt, successful integration of acquired television stations (including achievement of synergies and cost reductions), pricing fluctuations in local and national advertising, volatility in programming costs and the effects of governmental regulation of broadcasting. Other matters set forth in this report, or in the documents incorporated herein by reference may also cause actual results in the future to differ materially from those described in the forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.

The proposal to approve the rights of Hearst Broadcasting, Inc. (“Hearst Broadcasting”) to convert certain securities issued by Hearst-Argyle Capital Trust, a wholly-owned subsidiary of the Company, to Hearst Broadcasting in connection with the private placement of $200 million of such securities completed by the Company in December 2001 (the “Conversion Proposal”) was approved at the shareholders’ meeting. The following chart indicates the number of votes cast for and against and the number withheld with respect to the Conversion Proposal:

On May 14, 2002, the Company filed a registration statement on Form S-3 (the “Registration Statement”) relating to an aggregate of up to 11,005,058 shares of Series A common stock, which may be sold from time to time by certain selling security holders (the “Selling Security Holders”). Of these shares, 7,935,058 shares are issuable to holders of convertible preferred securities (the “Trust Security Holders”) upon conversion of an aggregate of 4,000,000 convertible preferred securities of the Company’s subsidiary trust, Hearst-Argyle Capital Trust (the “Trust”). The Trust issued and sold 1,400,000 shares of 7.5% Series A Convertible Preferred Securities and 2,600,000 shares of 7.5% Series B Convertible Preferred Securities to the Trust Security Holders in a private placement on December 20, 2001. The Series A Convertible Preferred Securities are convertible at the option of the holder at any time into shares of our Series A common stock at a conversion price of approximately $24.94 (subject to adjustments in certain circumstances) and the Series B Convertible Preferred Securities are convertible at the option of the holder at any time into shares of the Company’s Series A common stock at a conversion price of approximately $25.35 (subject to adjustments in certain circumstances). In connection with this private placement, the Company entered into a registration rights agreement with the Trust Security Holders which required the Company to file a registration statement covering sales by those holders of the shares of Series A common stock issuable upon conversion of the convertible preferred securities. Under the registration rights agreement, the Trust Security Holders have the right until December 20, 2006, under certain circumstances and subject to certain conditions, to request us to arrange for up to two underwritten offerings of the Series A common stock issuable upon conversion of the convertible preferred securities.

The remaining 3,070,000 shares of Series A common stock covered by the Registration Statement are shares that the Company issued to certain selling security holders in a merger transaction that the Company consummated with Pulitzer Publishing Company in 1999. In connection with this merger, the Company entered into a registration rights agreement with such selling security holders (the “Pulitzer Security Holders”), which among other things gives them the ability to “piggyback” or have their shares included, subject to certain conditions, in registrations of the Company’s common stock, including the registration for resale of the Company’s Series A common stock by the Trust Security Holders. Under the registration rights agreement, the Pulitzer Security Holders also have the right, under certain circumstances and subject to certain conditions, to require the Company to register their shares for sale in the manner specified. These 3,070,000 shares of Series A common stock were included in the Registration Statement pursuant to the exercise by certain Pulitzer Security Holders of their piggyback registration rights with respect to those shares.

Delaware		74-2717523
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

888 Seventh Avenue		(212) 887-6800
New York, NY 10106		(Registrant’s telephone number,
(Address of principal executive offices)		including area code)

	June 30, 2002		December 31, 2001
	(unaudited)
	(In thousands)
Credit Facility		197,000	$	275,000
Senior Notes		432,110		432,110
Private Placement Debt		450,000		450,000
Senior Subordinated Notes		2,596		2,596
Other Debt		446		499

Total long-term debt	$	1,082,152	$	1,160,205

Nominee	For	Against	Withheld

Caroline L. Williams (1)	39,559,295	0	1,064,281
Frank A. Bennack, Jr. (2)	41,298,648	0	0
John G. Conomikes (2)	41,298,648	0	0
George R. Hearst, Jr. (2)	41,298,648	0	0
Bob Marbut (2)	41,298,648	0	0
Gilbert C. Maurer (2)	41,298,648	0	0

For		76,847,136
Against		285,095
Withheld		59,119

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

HEARST-ARGYLE TELEVISION, INC.

By:		/s/ JONATHAN C. MINTZER

		Name: Jonathan C. Mintzer Title: Vice President, Secretary and General Counsel

Dated		August 1, 2002

Name	Title	Date

/s/ HARRY T. HAWKS Harry T. Hawks	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	August 1, 2002

/s/ BRAD HINCKLEY Brad Hinckley	(Principal Accounting Officer)	August 1, 2002