|  |
|--|

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

|  |
|--|

**FORM 10-Q**

 (Mark one)  

| |X| |   | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE        SECURITIES EXCHANGE ACT OF 1934 |
|-----|--------|------------------------------------------------------------------------------------------------|

**FOR THE QUARTERLY  PERIOD ENDED****MARCH  31, 2004** 

OR  

| |_| |   | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE        SECURITIES EXCHANGE ACT OF 1934 |
|-----|--------|-------------------------------------------------------------------------------------------------|

FOR THE TRANSITION PERIOD FROM:  NOT APPLICABLE 

**COMMISSION FILE  NUMBER: 1-14776**

|  |
|--|

**HEARST-ARGYLE  TELEVISION, INC.**(Exact name of registrant as specified in its charter)   

| **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,            including area code) |
| (Address of principal executive            offices) |   |                                                                 |

|  |
|--|

          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 April 27, 2004, the registrant had 93,035,226  shares of common stock outstanding, consisting of 51,736,578 shares of Series  A Common Stock, and 41,298,648 shares of Series B Common Stock.  

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**HEARST-ARGYLE    TELEVISION, INC.** 

**Index** 

|                                     |    |                                                                                                                                                                              |      |                    |
|------------------------------------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|-------------------------|
| **Part I**                               |    | Financial Information                                                                                                                                                             |      |  **Page No.** |
|                                     |         |                                                                                                                                                                              |                     |                    |
|                                     |         |                                                                                                                                                                              |                     |                    |
| **    Item 1.** |    | **Financial Statements**                                                                                                                                                          |      |                    |
|                                     |    | Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited)      and December 31, 2003 |      | 1                       |
|                                     |    | Condensed            Consolidated Statements of Income for the Three Months Ended                                                                                                 |      |                    |
|                                     |    |     March 31, 2004 and 2003 (unaudited)                                                                                                                       |      | 3                       |
|                                     |    | Condensed            Consolidated Statements of Cash Flows for the Three Months Ended                                                                                             |      |                    |
|                                     |    | March            31, 2004 and 2003 (unaudited)                                                                                                                                    |      | 4                       |
|                                     |    | Notes to Condensed Consolidated            Financial Statements                                                                                                                   |      | 5                       |
|                                     |         |                                                                                                                                                                              |                     |                    |
|                                     |         |                                                                                                                                                                              |                     |                    |
| **    Item 2.** |    | **Management’s Discussion and Analysis of Financial            Condition                 and Results of Operations**                                     |      | 14                      |
|                                     |         |                                                                                                                                                                              |                     |                    |
|                                     |         |                                                                                                                                                                              |                     |                    |
| **    Item 3.** |    | **Quantitative and Qualitative            Disclosures about Market Risk**                                                                                                         |      | 18                      |
|                                     |         |                                                                                                                                                                              |                     |                    |
|                                     |         |                                                                                                                                                                              |                     |                    |
| **    Item 4.** |    | **Controls and Procedures**                                                                                                                                                       |      | 18                      |
|                                     |         |                                                                                                                                                                              |                     |                    |
|  

                            |         |                                                                                                                                                                              |                     |                    |
| **Part            II**                   |    | **Other Information**                                                                                                                                                             |      |                    |
|                                     |         |                                                                                                                                                                              |                     |                    |
|                                     |         |                                                                                                                                                                              |                     |                    |
| **    Item 6.** |    | **Exhibits and Reports on            Form 8-K**                                                                                                                                   |      | 19                      |
| ** **                               |         |                                                                                                                                                                              |                     |                    |
| **Signatures**                           |    |                                                                                                                                                                              |      | 20                      |

| **Exhibit            Index** |    |   |      | 21     |
|------------------------------|--------------|--------|--------------------------|--------|
| ** **                   |         |   |                     |   |
| **Certifications**           |    |   |      | 22     |

 

|  |
|--|

**PART I** 

**FINANCIAL INFORMATION** 

**Item 1.    Financial Statements**

**HEARST-ARGYLE    TELEVISION, INC.** 

**CONDENSED CONSOLIDATED    BALANCE SHEETS** 

|   |   | **March 31,  2004********(Unaudited)**
    

**December 31, 2003**
 

 

**(In thousands)**

**Assets**

 

 

    

 

Current assets:

 

 

 

    

 

 

         
Cash and cash equivalents 

 

 

$     116,704

    

 

$      71,528

         
Accounts receivable, net 

 

 

129,518

    

 

147,455

         
Program and barter rights 

 

 

35,808

    

 

54,725

         
Deferred income taxes 

 

 

5,178

    

 

5,178

         
Other 

 

 

       6,493

    

 

 5,786
      
         
             Total            current assets 

 

 

   293,701

    

 

 284,672
      
         
 

 

 

 

 

 

 

Property, plant and equipment, net 
 

 

     283,858

    

 

 288,290
      
         
 

 

 

 

 

 

 

Intangible assets, net 
 

 

   2,410,572

    

 

 2,412,071
      
Goodwill 
 

 

      732,217

    

 

 732,217
      
         
 

 

 

 

 

 

 

Other noncurrent assets:
 

 

 

    

 

 

         
Deferred financing and acquisition costs, net 

 

 

13,973

    

 

14,592

         
Investments 

 

 

32,925

    

 

34,059

         
Program and barter rights 

 

 

1,644

    

 

2,562

         
Other 

 

 

 29,306

    

 

 30,624
      
         
             Total            other noncurrent assets 

 

 

 77,848

    

 

 81,837
      
         
 

 

 

 

 

 

 

         
             Total            assets 

 

$ 3,798,196

    

 

$ 3,799,087
      
   

(continued)

** **
 1  
   
  
**HEARST-ARGYLE  TELEVISION, INC.** 

**CONDENSEDCONSOLIDATEDBALANCESHEETS—(Continued)**

 

 

**March 31, 2004****(Unaudited)**
  
**December 31,      2003**
 

 

**(In thousands)**

 

**Liabilities and Stockholders’ Equity**

 

 

 

  

 

 

Current liabilities:

 

 

 

 

  

 

 

 

     Accounts payable 

 

 

$      10,028

 

  

 

$               9,834

 

      Accrued liabilities 

 

 

54,259

 

  

 

50,833

 

     Program and barter rights        payable 

 

 

37,058

 

  

 

55,741

 

     Payable to The Hearst Corporation        

 

 

 3,432

 

  

 

5,925

 

     Other 

 

 

 7,046

 

  

 

 8,085

 
       
          Total        current liabilities 

 

 

 111,823

 

  

 

 130,418

 
       
 

 

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

  

 

 

 

     Program and barter rights        payable 

 

 

2,978

 

  

 

4,141

 

     Long-term debt 

 

 

882,369

 

  

 

882,409

 

     Note payable to Capital        Trust 

 

 

206,186

 

  

 

206,186

 

     Deferred income taxes 

 

 

885,214

 

  

 

882,098

 

     Other liabilities

 

 

 21,985

 

  

 

 21,453

 
       
          Total        noncurrent liabilities 

 

 

 1,998,732

 

  

 

 1,996,287

 
       
 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

  

 

 

 

     Series A preferred stock        

 

 

1

 

  

 

1

 

     Series B preferred stock

 

 

1

 

  

 

1

 

     Series A common stock 

 

 

549

 

  

 

547

 

     Series B common stock 

 

 

413

 

  

 

413

 

     Additional paid-in capital        

 

 

1,291,047

 

  

 

1,287,831

 

     Retained earnings 

 

 

481,578

 

  

 

469,537

 

     Accumulated other comprehensive        loss, net 

 

 

(5,249

) 

  

 

(5,249

) 

     Treasury stock, at cost        

 

 

 (80,699

)

  

 

 (80,699

)
       
          Total        stockholders’ equity 

 

 

 1,687,641

 

  

 

 1,672,382

 
       
 

 

 

 

 

 

 

 

 

          Total        liabilities and stockholders’ equity 

 

 

$ 3,798,196

 

  

 

$ 3,799,087

 
       
 See notes to condensed  consolidated financial statements. 

** **
 2 
 
  ******HEARST-ARGYLE    TELEVISION, INC.**
**CONDENSED CONSOLIDATED    STATEMENTSOF INCOME** 

 

 

**Three Months Ended March 31,**
       
 

 

**2004**
**2003**
       
 

 

**(Unaudited)**

       
 

 

**(In thousands, except per share data)**

       
 

 

 

 

       Total revenues  $  166,864$  149,276
           
       Station operating expenses:   
             Salaries,        benefits and other operating costs  84,59479,833
             Amortization        of program rights  15,31116,092
             Depreciation        and amortization   12,495 10,960
       Corporate, general and administrative        expenses   5,589 4,874
          Operating income  48,87537,517
           
       Interest expense, net  16,41617,409
       Interest expense, net – Capital        Trust  3,7503,750
       Equity in income (loss) of affiliates          199 (136)
              
       Income before income taxes  28,90816,222
           
       Income taxes   11,014 6,165
          Net income  17,89410,057
           
       Less preferred stock dividends          272 318
          Income applicable to common stockholders         $           17,622$              9,739
              
       Income per common share – basic           $               0.19  $                0.11
          Number of common shares used in        the calculation   92,902 92,436
              
       Income per common share – diluted          $               0.19  $                0.11 
          Number of common shares used in        the calculation   93,615 92,750
              
       Dividends per common share declared  $               0.06  $          —  
 
   
 

See notes to condensed consolidated financial    statements.

 
 3 
   
  
**HEARST-ARGYLE      TELEVISION, INC.**
**CONDENSED CONSOLIDATED    STATEMENTSOF CASH    FLOWS** 

 

 

**Three Months Ended March            31,**
 

 

 

**2004**
 

**2003**
 

 

 

**(Unaudited)**

 

 

 

**(In thousands)**

 

**Operating Activities**

 

 

 

 

 

Net income 

 

$   17,894

 

$  10,057

 

Adjustments to reconcile net income to net cash provided            by               operating activities:

 

 

 

 

 

     Depreciation 

 

10,996

 

10,343

 

     Amortization of program            rights 

 

15,311

 

16,092

 

     Program payments 

 

(15,320

)

(15,638

)

     Amortization of intangible            assets 

 

1,499

 

617

 

     Amortization of deferred            financing costs 

 

728

 

728

 

     Deferred income taxes            

 

3,116 

 

2,320

 

     Provision for doubtful            accounts 

 

(467

)

143

 

     Dividends received from            affiliates 

 

 1,330

 

 —  

 

     Equity in (income) loss            of affiliates 

 

(199

)

136

 

     (Gain) on disposal of            fixed assets 

 

 —  

 

(83

) 

     Changes in operating            assets and liabilities:

 

 

 

 

 

           Accounts            receivable 

 

18,294

 

16,688

 

           Other            assets 

 

611

 

(19

)

           Accounts            payable and accrued liabilities 

 

3,475

 

(4,591

)

           Other            liabilities 

 

 (3,015

)

 (1,355 

)
    
Net cash provided by operating activities 

 

 54,253

 

 35,438

 
    
 

 

 

 

 

 

**Investing Activities**

 

 

 

 

 

Purchases of property, plant, and equipment:

 

 

 

 

 

     Maintenance 

 

(3,204

)

(1,572

)

     Special projects and            towers 

 

(3,117

)

(2,572

)

     Digital 

 

(209

)

(1,961

)

 

 

 

 

 

 

Other, net 

 

 4

 

 38

 
    
Net cash used in investing activities 

 

 (6,526

)

 (6,067

)
    
 

 

 

 

 

 

**Financing Activities**

 

 

 

 

 

Dividends paid on common stock 

 

(5,566

)

 —  

 

Dividends paid on preferred stock 

 

(272

)

(318

)

Redemption of preferred stock 

 

(1,600

)

 —  

 

Proceeds from stock option exercises 

 

4,446

 

783

 

Proceeds from employee stock purchase plan 

 

481

 

585

 

Borrowings from Credit Facility 

 

 —  

 

91,000

 

Repayments to Credit Facility 

 

 —  

 

(120,000

)

Principal payments on capital lease obligations 

 

 (40

)

 (29

)
    
Net cash used in financing activities 

 

 (2,551

)

 (27,979

)
    
Increase in cash and cash equivalents 

 

45,176

 

1,392

Cash and cash equivalents at beginning of period 

 

 71,528

 

 4,442

 
    
Cash and cash equivalents at end of period 

 

$ 116,704

 

$   5,834 

 
          **Supplemental Cash Flow Information:**       
Cash paid during the period:
     
 
     
     Interest 
 
$     6,413
 
$    6,701
     
     Interest on Note payable            to Capital Trust 
 
$     3,750
 
$   3,750 
     
     Income taxes, net of            refunds of $1,218 and $0 in the                       three months ended            March 31, 2004 and 2003,                       respectively            
 
$   14,964
 
$  10,335
     
 

See notes to condensed consolidated financial    statements.
 4 
     
  
**HEARST-ARGYLE        TELEVISION, INC.**
**NOTES TO CONDENSED    CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)****March 31, 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.    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-month periods ended March 31, 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 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 fiscal years ending after June 15, 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.
 5 
   
  
 
**HEARST-ARGYLE        TELEVISION, INC.**
**NOTES TO CONDENSED    CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)****March 31, 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 consolidated balance 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    January 2004, the FASB issued FASB Staff Position (FSP) 106-1, *Accounting    and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement    and Modernization Act of 2003* (“FSP 106-1”), which allowed companies to    elect a one-time deferral of the recognition of the effects of the Medicare    Prescription Drug Act in accounting for their plans under SFAS 106 and in    providing disclosures related to the plan required by SFAS 132(R). The FASB    allowed the one-time deferral due to the accounting issues raised by the Medicare    Prescription Drug Act - in particular, the accounting for the federal subsidy    that is not explicitly addressed in SFAS 106 - and due to uncertainties regarding    the direct effects of the Medicare Prescription Drug Act and its ancillary    effects on plan participants. For companies electing the one-time deferral,    such deferral remains in effect until authoritative guidance on the accounting    for the federal subsidy is issued, or until certain other events, such as    a plan amendment, settlement or curtailment, occur. We are currently evaluating    the effects of the Medicare Prescription Drug Act on our other postretirement    benefit plans and its participants, and have elected the one-time deferral.    The Company’s accumulated post-retirement benefit obligation and net post-retirement    benefit cost do not reflect the effects of the Medicare Prescription Drug    Act. Additionally, once the specific authoritative guidance on the accounting    for the federal subsidy is issued, it could result in a change to previously    reported information.
 6 
   
  
 
**HEARST-ARGYLE        TELEVISION, INC.**
**NOTES TO CONDENSED    CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)****March 31, 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: 

 

 

**Three Months Ended March 31,**
 

 

**(Unaudited)**

** **

 

**(In thousands, except per share data)**

** **

 

**2004** 
**2003** 
 

 

 
 
 
 Reported net income  $   17,894 $  10,057 Deduct –          Total stock-based          employee compensation expense                      determined          under the fair value method for all awards,                     net of          related tax effects   (1,203) (1,713)    Pro forma net income  $  16,691 $   8,344     Pro forma net income applicable to common          stockholders  $  16,419 $   8,026           Earnings per share:         Basic – as reported             $              0.19   $    0.11                    Basic – pro forma             $              0.18   $    0.09                         Diluted – as reported             $              0.19   $    0.11                   Diluted – pro forma             $              0.18   $    0.09               
**4.    LONG-TERM    DEBT**           Long-term    debt as of March 31, 2004    and December 31, 2003    consisted of the following:  
** **

**  **

**March 31,           2004**
**  **

**December 31,           2003**
** **

** **

**(Unaudited)**

** **

**(Audited)**

** **

**  **

**(In thousands)**

** **

 

 

 

 

 

 

 

Senior notes 

  

$ 432,110

 

  

$432,110

 

Private placement debt 

  

450,000

 

  

450,000

 

Capital lease obligations 

  

 425

 

  

 465

 

 

  
      882,538  882,575 
Less current portion 

 

 (166

)

 

 (166

)

 

  
    
 

 

 

 

 

 

 

Total long-term debt 

  

$ 882,369

 

  

$ 882,409

 

 

  
     7 
     
  
 
**HEARST-ARGYLE          TELEVISION, INC.**
**NOTES TO CONDENSED      CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)****March 31, 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 a reconciliation between basic and diluted EPS: 

 

  

**Three Months Ended March 31, 2004****(Unaudited)**
 

  

**Income (Numerator)**
     

**Shares            (Denominator)**
   

**Per-Share Amount**
 

  

**(In thousands, except per share data)**

Net Income 

  

$

17,894

 

    

 

   

 

 

Less: Preferred stock dividends 

  

 

(272

)

    

 

  

 

 

 

  

 

    
  
  
  
**Basic EPS**

  

 

 

 

    

 

  

 

 

Income applicable to common stockholders

  

 

17,622

 

    

92,902

  

$

0.19

**Effect of Dilutive Securities**

  

 

 

 

    

 

  

 

 

Assumed exercise of outstanding stock options

 

 

—  

 

    

713

  

 

 

 

  

 

    

  

**Diluted EPS**

 

 

 

 

 

 

 

 

 

Income applicable to common stockholders plus assumed            conversions

  

$

17,622

 

    

93,615

  

$

 0.19

 

  

 

    

  
      
 

  

**Three Months Ended March 31, 2004****(Unaudited)**
**Income (Numerator)**
     

**Shares            (Denominator)**
   

**Per-Share Amount**
 

  

**(In thousands, except per share data)**

Net Income 
 $
10,057

 
     
Less: Preferred stock dividends 
  
(318

)
     
 

  

 

    
  
  
  
**Basic EPS**
  
 

 
     
Income applicable to common stockholders
  
9,739

 
 
92,436

  

$

0.11

**Effect of Dilutive Securities**
  
 

 
 
 

  

 

 

Assumed exercise of outstanding stock options
  
—  

 
 
314

  

 

 

 

  

 

    

  

**Diluted EPS**
  
 

 
 
 

  

 

 
Income applicable to common          stockholders plus assumed conversions $
9,739

 
 
92,750

  

$

 0.11

 

  

 

    

  

          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 March 31, 2004, and    7,381 shares of Series A Preferred Stock, outstanding as of March 31, 2003,    which are convertible into Series A Common Stock; (ii) 10,938 shares of Series    B Preferred Stock, outstanding as of March 31, 2004 and 2003, which are convertible    into Series A Common Stock; and (iii) 1,400,000 shares of Series A Redeemable    Convertible Preferred Securities and 2,600,000 shares of Series B Redeemable    Convertible Preferred Securities, outstanding as of March 31, 2004 and 2003,    which are convertible into Series A Common Stock. 

          Common    stock options for 174,905 and 2,914,335 shares of Series A Common Stock (before    application of the treasury stock method), outstanding as of March 31, 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. 

 
 8 
     
  
 
**HEARST-ARGYLE          TELEVISION, INC.**
**NOTES TO CONDENSED      CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)****March 31, 2004** 
**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. In addition, no evidence of impairment was found with regard    to the Company’s 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.

         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:

** **

**March 31, 2004**
** **

**December 31, 2003**
** **

**(Unaudited)**

** **

**(Audited)**

** **

**Gross           Carrying           Value**
**  **

**Accumulated           Amortization**
**  **

**Net           Carrying           Value**
**  **

**Gross           Carrying           Value**
**  **

**Accumulated           Amortization**
**  **

**Net           Carrying           Value**
** **

**(In thousands)**

Intangible assets subject to amortization:

 

 

 

 

 

 

  

 

 

  

 

 

  

 

 

 

 

 

     Advertiser client base 

 

$122,828

  

 

$63,826

 

  

 

$    59,002

  

 

$122,828

  

 

$62,938

  

 

$    59,890

     Network affiliations 

 

95,493

  

 

32,306

 

  

 

 63,187

  

 

95,493

  

 

31,708

  

 

 63,785

     Favorable leases 

 

 723

  

 

 508

 

  

 

 215

  

 

 723

  

 

 495

  

 

 228
             
Total intangible assets subject to amortization 

 

$219,044

  

 

$96,640

 

  

 

 122,404

  

 

$219,044

  

 

$95,141

  

 

 123,903
               
Intangible assets not subject to amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     FCC licenses 

 

 

  

 

 

 

  

 

 2,288,168

  

 

 

  

 

 

  

 

 2,288,168
                 
**Total intangible assets, net**

 

 

  

 

 

 

  

 

$2,410,572

  

 

 

  

 

 

  

 

$2,412,071

 

 

 

 

 

 

 

 

 
 
 

 

 

 

 

 

 

 
 
**Goodwill**

 

 

  

 

 

 

 

 

$  732,217

 

 

 

 

 

 

 

 

$  732,217
                 
 
 9 
     
  
 
**HEARST-ARGYLE          TELEVISION, INC.**
**NOTES TO CONDENSED      CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)****March 31, 2004**

          The    Company’s amortization expense for finite-lived intangible assets was approximately    $1.5 million in the three months ended March 31, 2004.    Estimated annual amortization expense for the next five years related to these    intangible assets is expected to be as follows:  

 

**(In thousands)** 

**2004 (April 1 through December 31)**

 $ 4,478

  

**2005**

 $ 5,971

  

**2006**

$ 5,952

  

**2007**

$ 5,941

  

**2008**

$ 5,941

  

**7.    INCOME TAXES**
           The    provision for income taxes relating to income for the three months ended March 31, 2004 and 2003, consists of    the following: 

 

 

**Three Months Ended March 31,**
 

 

**(Unaudited)****(In thousands)**

** **

 

**2004**   
**2003**
 

 

 
 
 
Current   $   7,898 $  3,845Deferred   3,116  2,320          Provision          for income taxes  $ 11,014 $ 6,165            The net deferred income  tax liabilities are presented under the following captions on the Company’s  condensed consolidated balance sheets:
** **

**  **

**March 31,** |
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