| HEARST ARGYLE TELEVISION INC ITEM 1A RISK FACTORS We Depend on Network Affiliation Agreements and Network Programming Each of the television stations we own or manage is a party to a network affiliation agreement giving such station the right to rebroadcast programs transmitted by the network, except WMOR-TV, in Tampa, Florida, which is currently operating as an independent station |
| Each affiliation agreement provides the affiliated station with the right to broadcast programs transmitted by the station’s affiliated network |
| In return, the network has the right to sell a substantial majority of the advertising time during such broadcasts |
| Thirteen of our stations are parties to affiliation agre ements with ABC, 10 with NBC, two with CBS, one with the WB Network and one with UPN Accordingly, ABC and NBC affiliates account 14 ______________________________________________________________________ for most of our advertising revenues |
| Our television viewership levels, and ultimately advertising revenues, for each station are materially dependent upon network programming |
| In particular, if ABC or NBC network programming fails to attract viewers or generate satisfactory ratings, our revenues may be adversely affected because of the number of our stations that are affiliated with those two networks |
| In addition, we may fail to continue to be able to renew our network affiliation agreements with ABC, NBC and CBS, or we may renew them on less favorable terms than we presently have |
| Further, the discontinuation of the WB and UPN networks in connection with the launch of the CW network may have an adverse impact on our current WB and UPN stations |
| The termination or non-renewal, or renewal on less favorable terms, of our stations’ network affiliation agreements could adversely affect the viewership of our stations and affect our ability to sell advertising, which could materially decrease our revenue and operating results |
| A Decline in Advertising Expenditures and Consumer Acceptance of Our Stations’ Programming Could Adversely Affect our Operating Results We rely almost entirely upon sales of advertising for our revenues |
| Our stations compete for advertising revenues with other television stations in their respective markets |
| They also compete with other advertising media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, the Internet and local cable and satellite system operators |
| Our stations are located in highly competitive markets |
| Accordingly, our operating results are and will continue to be dependent upon the ability of each of our stations to compete successfully for advertising revenues in its respective market |
| Our ability to generate advertising revenues is and will continue to be affected by changes in the national economy, as well as by regional economic conditions in each of the markets in which our stations operate |
| The size of advertisers’ bud gets, which are affected by broad economic trends, affect the broadcast industry in general and the revenues of individual broadcast television stations |
| If the economic prospects of advertisers or the economy decline, our current or prospective advertisers may purchase less advertising time from us |
| In addition, if disasters, acts of terrorism, political uncertainty or hostilities occur, our advertisers’ spending priorities may shift to around-the-clock news coverage, which would cause the loss of advertising revenues due to the suspension of advertising-supported commercial programming |
| Further, because our revenues depend upon the public’s acceptance of a station’s programming, a decline in programming popularity and audience ratings, or our inability to retain the rights to popular programming, may adversely affect our ability to generate advertising revenues |
| Increased Competition Due to Technological Innovation May Adversely Impact our Business Technological innovation, and the resulting proliferation of programming alternatives such as cable, satellite television, satellite radio, video-on-demand, pay-per-view, the Internet, home video and entertainment systems, portable entertainment systems, and the availability of television programs on DVD and portable digital devices have fragmented television viewing audiences and subjected television broadcast stations to new types of competition |
| Over the past decade, the aggregate viewership of non-network programming distributed via cable television and satellite systems have increased, while the aggregate viewership of the major television networks has declined |
| New technologies that enable users to view content of their own choosing, in their own time, and to fast-forward or skip advertisements, such as DVRs, portable digital devices, and the Internet, may cause changes in consumer behavior that could affect the attractiveness of our offerings to advertisers |
| If this were to occur, our operating results could be adversely affected |
| Other advances in technology, such as increasing use of local-cable advertising “interconnects,” which allow for easier insertion of advertising on local cable systems, have also increased competition for advertisers |
| In addition, video compression techniques permit greater numbers of channels to be carried within existing bandwidth on cable, satellite and other television distribution systems |
| These compression techniques, as well as other technological developments, are applicable to all video delivery systems, including digital over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences |
| Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized niche programming on cable, satellite and other television distribution systems |
| We expect this ability to reach very narrowly defined audiences to increase competition both for audience and for advertising revenue |
| In addition, the expansion of competition due to technological innovation has increased, and may continue to increase, competitive demand for programming |
| Such increased demand, together with rising production costs, may in the future increase our programming costs or impair our ability to acquire programming, which will in turn impair our ability to generate revenue from the advertisers with which we seek to do business |
| 15 ______________________________________________________________________ Increased Programming Costs Could Adversely Affect Our Business and Operating Results Television programming is one of our most significant operating cost components |
| We may be exposed in the future to increased programming costs |
| Should such an increase in our programming expenses occur, it could have a material adverse effect on our operating results |
| In addition, television networks have been seeking arrangements from their affiliates to share the networks’ programming costs and to change the structure of network compensation |
| If we become party to an arrangement whereby we share our networks’ programming costs, our programming expenses would increase further |
| In addition, we usually acquire syndicated programming rights two or three years in advance and acquiring those rights may require multi-year commitments, making it difficult to predict accurately how a program will perform |
| In some instances, we must replace programs before their costs have been ful ly amortized, resulting in write-offs that increase station operating costs |
| In addition, our stations incur costs for all types of on-air and creative talent, including anchors, reporters, writers and producers |
| An increase in the cost of news programming and content or in the costs for on-air and creative talent may also increase our expenses and therefore adversely affect our business and operating results |
| Our Inability to Secure Carriage of Our Stations by Multi-Channel Video Programming Distributors May Adversely Affect Our Business Cable operators and direct broadcast satellite systems are generally required to carry the analog signal of local commercial television stations pursuant to the FCC’s “must carry” rules |
| However, these multi-channel video programming distributors are prohibited from carrying a broadcast signal without obtaining the station’s consent |
| For each distributor, a local television broadcaster must make a choice once every three years whether to proceed under the “must carry” rules or to waive the right to mandatory but uncompensated carriage and negotiate a grant of retransmission consent to permit the system to carry the station’s signal, in most cases in exchange for some form of consideration from the system operator |
| In 2005, we elected retransmission consent for most of our stations for the three-year period commencing on January 1, 2006 |
| At present, we have retransmission consent agreements with the majority of operators for the period January 1, 2006 to at least December 31, 2008 |
| If our retransmission consent agreements are terminated or not renewed, or if our broadcast signal is distributed on less favorable terms, our ability to distribute our programming could be adversely affected |
| In addition, although cable operators and direct broadcast satellite systems generally will be required, under the FCC’s current “must carry” rules, to retransmit a single programming stream transmitted by each local digital television station at the end of the digital television transition, the FCC has ruled that it will not require cable operators either to carry both a station’s analog and digital signals during the transition period, or after the conversation to digital, to carry more than a station’s primary video programming channel |
| Petitions filed by the broadcast industry requesting the FCC to reconsider that decision are pending |
| The limited carriage rights for our digital stations could require us to make significant expenditures to arrange for carriage by cable and DBS systems of our multicast digital signals or result in some of our multicast digital signals not being carried on cable or DBS systems |
| At present, we have retransmission consent agreements with a number of cable systems operators and satellite providers that require carriage of the analog and certain multicast digital signals of our stations |
| Materiality of a Single Advertising Category Could Adversely Affect Our Business We derive a material portion of our ad revenue from the automotive industry |
| For example, approximately 26dtta6prca of total revenue came from the automotive category in 2004 and 2005 combined |
| If automotive-related advertising revenue decreases, or if revenue from another ad category that constitutes a material portion of our stations’ revenue in a particular period were to decrease, our business and operating results could be adversely affected |
| Our Business is Seasonal and Cyclical and Some Years and Quarters Therefore May Be Less Profitable Than Others Our business has experienced and is expected to continue to experience seasonality due to, among other things, seasonal advertising patterns and seasonal influences on people’s viewing habits |
| The size of advertisers’ budgets, which are affected by broad economic trends, affect the broadcast industry in general and the revenue of individual broadcast television stations |
| The advertising revenue of our stations are generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season |
| Additionally, advertising revenue is cyclical benefiting in even-numbered years from advertising placed by candidates for political offices and issue-oriented advertising, and demand for advertising time in Olympic broadcasts |
| While political and Olympic adver tising cycles have been a normal pattern for our industry for decades, the variability has become more pronounced in recent years as these respective categories of revenue have grown 16 ______________________________________________________________________ significantly in size |
| The seasonality and cyclicality inherent in our business make it difficult to estimate future operating results based on the previous results of any specific quarter |
| The Television Industry is Highly Competitive and Our Competitors May Have Greater Resources Than We Do The television broadcast industry is highly competitive |
| Some of the stations that compete with our stations are owned and operated by large national or regional companies that may have greater resources, including financial resources, than we do |
| Competition in the television industry takes place on several levels: competition for audience, competition for programming (including news) and, as discussed, competition for advertisers |
| Our stations may not be able to maintain or increase their current audience share or revenue share |
| To the extent that certain of our competitors have, or may in the future obtain, greater resources than we have, we may not be able to successfully compete with them |
| We Have a Controlling Stockholder The Hearst Corporation, through its beneficial ownership of our Series A and Series B Common Stock, has voting control of our company |
| Through its beneficial ownership of 100prca of our Series B Common Stock, Hearst also is entitled to elect as a class all but two members of our Board of Directors (currently, 11 of our 13 directors) |
| As a result, Hearst is able to control substantially all actions to be taken by our stockholders, and also is able to maintain control over our operations and business |
| This control, as well as certain provisions of our Certificate of Incorporation and of Delaware law, m ay make us a less attractive target for a takeover than we otherwise might be, or render more difficult or discourage a merger proposal, tender offer or other transaction involving an actual or potential change of control |
| Hearst’s voting control also prevents other stockholders from exercising significant influence over our Company’s business decisions |
| The Interests and Assets of Our Controlling Stockholder May Adversely Impact Our Ability to Make Certain Acquisitions The interests of Hearst, which owns or has significant investments in other businesses, including cable television networks, newspapers, magazines and electronic media, may from time to time be competitive with, or otherwise diverge from, our interests, particularly with respect to new business opportunities and future acquisitions |
| We and Hearst have agreed that, without the prior written consent of the other, neither we nor they will make any acquisition or purchase any assets if such an acquisition or purchase by one party would require the other party to divest or otherwise dispose of any of its assets because of regulatory or other legal prohibitions |
| Under current FCC regulations, given the newspaper and other media interests held by Hearst, we are precluded from acquiring television stations in various markets in the United States |
| While divestiture of a prohibited interest could permit such acquisitions, such a divestiture may not occur or may otherwise adversely impact potential acquisitions |
| Additionally, Hearst is not precluded from purchasing television stations, newspapers or other assets in other markets |
| If Hearst were to make such purchases, the FCC rules would preclude us from owning television stations in those markets in the future |
| We May Encounter Conflicts of Interest with Our Controlling Stockholder We and Hearst also have ongoing relationships that may create situations where the interests of the two parties could conflict |
| For example, we and Hearst are parties to a series of agreements with each other, including • a Management Agreement (whereby we provide certain management services, such as sales, news, programming and financial and accounting management services with respect to certain Hearst-owned or managed television and radio stations); • an Option Agreement (whereby Hearst has granted us an option to acquire certain Hearst-owned or operated television stations, as well as a right of first refusal with respect to another television station if Hearst proposes to sell that station); • a Studio Lease Agreement (whereby Hearst leases space from us for Hearst’s radio broadcast stations); • a Name License Agreement (whereby Hearst permits us to use the Hearst name in connection with our name and operation of our business); and 17 ______________________________________________________________________ • a Services Agreement (whereby Hearst provides us certain administrative services, such as accounting, financial, legal, tax, insurance, data processing and employee benefits) |
| Because we and Hearst are affiliates, it is possible that our interests concerning these agreements may from time to time conflict and that more favorable terms than those we have negotiated with Hearst may be available from third parties |
| Changes in FCC Regulations and Enforcement Policies May Adversely Affect Our Business As discussed more fully in Item 1 “Business; Federal Regulation of Television Broadcasting”, our broadcast operations are subject to extensive regulation by the FCC under the Communications Act |
| If we do not comply with these regulations, in particular the specific regulations discussed below, or if the FCC adopts a rigorous enforcement policy concerning them, our business and operating results could be adversely affected |
| Ownership Rules |
| We must comply with extensive FCC regulations and policies in the ownership of our broadcast stations, which restrict our ability to consummate future transactions and, in certain circumstances, could require us to divest some stations |
| In general, the FCC’s ownership rules limit the number of television and radio stations that we can own in a market, the number of television stations we can own nationwide, and prohibit ownership of stations in markets where Hearst has interests in newspapers |
| During 2003, the FCC conducted a comprehensive review of all of its broadcast ownership rules, including the local radio ownership rule, local television ownership rule, national television ownership rule, newspaper/broadcast cross-ownership rule, and radio/television cross-ownership rule |
| In June 2003, the FCC adopted an order liberalizing most of the ownership rules, which would have permitted us to acquire television stations in certain markets where we are currently prohibited from acquiring new stations |
| Shortly thereafter, however, the FCC’s new ownership regulations were challenged in the courts |
| The US Court of Appeals for the Third Circuit affirmed certain of the rules but rejected those affecting local television ownership and local cross-ownership of newspapers and broadcast stations and remanded the matter to the FCC for further proceedings |
| On June 13, 2005, the United States Supreme Court declined to review the Third Circuit’s decision |
| During the pendency of the FCC’s review of the ownership rules on remand, the FCC’s pre-June 2003 broadcast ownership rules remain in effect |
| The actions Congress or the FCC may take and changes in the FCC’s rules may adversely impact our business |
| Indecency Rules |
| Federal law and the FCC’s rules prohibit the broadcast of obscene material at any time, and the broadcast of indecent or profane material during the period from 6 a |
| In recent years, the FCC has vigorously enforced its indecency prohibition, and Congress is currently considering legislation that would, among other things, raise the maximum amount of existing indecency fines from dlra32cmam500 to dlra500cmam000 |
| The determination of whether content is indecent or profane is inherently subjective, creates uncertainty to our ability to comply with the rules, and impacts our programming decisions |
| Violation of the indecency rules could lead to sanctions which may adversely affect our business and results of operations |
| Fines and Penalties |
| In recent years, the FCC has also vigorously enforced a number of rules, typically in connection with license renewals |
| For example, in 2005, the FCC issued fines and sanctions for violations of its equal employment opportunity rules, public inspection file rules, and children’s programming rules |
| Our stations were not the subject of monetary sanctions in 2005 |
| Possible Acquisitions, Divestitures or Other Strategic Initiatives May Adversely Impact Our Business Our management is evaluating, and will continue to evaluate, the nature and scope of our operations and various short-term and long-term strategic considerations |
| These may include acquisitions or divestitures of, or strategic alliances, joint ventures, mergers or integration or consolidation with, television stations or other businesses, as well as discussions with third parties regarding any of these considerations |
| In the alternative, our management may decide from time to time that such initiatives are not appropriate |
| There are uncertainties and risks relating to each of these strategic initiatives |
| For example, acquisition opportunities may become more limited as a consequence of the consolidation of ownership occurring in the television broadcast industry |
| Also, prospective competitors may have greater financial resources than we do |
| Future acquisitions may not be available on attractive terms, or at all |
| Also, if we do make acquisitions, we may not be able to successfully integrate the acquired stations or businesses |
| With respect to divestitures, we may experience varying success in making such divestitures on favorable terms, if at all, or in reducing fixed costs or transferring liabilities previously associated with the divested television stations or businesses |
| Finally, any such acquisitions or divestitures will be subject to FCC approval and FCC rules and regulations |
| Any of these efforts would require varying levels of management resources, which may divert our attention from other business operations |
| If we do not realize the expected benefits or synergies of such 18 ______________________________________________________________________ transactions, or, conversely, if we do not realize such benefits or synergies because we chose not to pursue any such transaction, there may be an adverse effect on our financial condition and operating results |
| We Could Suffer Losses Due to Asset Impairment Charges for Goodwill and FCC Licenses We test our goodwill and intangible assets, including FCC licenses, for impairment during the fourth quarter of every year, and on an interim date should factors or indicators become apparent that would require an interim test, in accordance with Statement of Financial Accounting Standards Nodtta 142, “Goodwill and Other Intangible Assets |
| ” If the fair value of a reporting unit or an intangible asset is revised downward, an impairment under SFAS 142 could result and a non-cash charge could be required |
| This could materially affect our reported net earnings |
| The Loss of Key Personnel Could Disrupt our Management or Operations and Adversely Affect our Business Our business depends upon the continued efforts, abilities and expertise of our chief executive officer and other key employees |
| We believe that the rare combination of skills and years of broadcast experience possessed by our executive officers would be difficult to replace, and that the loss of our executive officers could have a material adverse effect on our business |
| Additionally, our stations employ several on-air personnel, including anchors and reporters, with significant loyal audiences |
| Our failure to retain these personnel could adverse affect our operating results |
| Strikes and Other Union Activity Could Adversely Affect Our Business Certain employees, such as on-air talent and engineers, at some of our stations are subject to collective bargaining agreements |
| If we are unable to renew expiring collective bargaining agreements, it is possible that the affected unions could take action in the form of strikes or work stoppages |
| Such actions, higher costs in connections with these agreements, or significant labor disputes could adversely affect our business by disrupting our ability to operate our affected stations |
| We have a share repurchase program authorized by our Board of Directors, pursuant to which we may repurchase up to dlra300 million of our Series A Common Stock from time to time, in the open market or in private transactions, subject to market conditions |
| In addition, The Hearst Corporation’s Board of Directors authorized a share purchase program, pursuant to which Hearst or its subsidiaries may purchase on the open market or through private transactions up to 25 million shares of our Series A Common Stock |
| Such repurchases and purchases may increase or decrease the market price of our Series A Common Stock |