** **

** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 
| (Mark One) |                                                                                          |
|------------|-----------------------------------------------------------------------------------------------|
|       |                                                                                          |
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|       |                                                                                          |
|       | **FOR THE QUARTERLY PERIOD ENDED  SEPTEMBER 30, 2005**                                        |
|       |                                                                                          |
|       | **or**                                                                                        |
|       |                                                                                          |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition 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  Identification No.)            |
| incorporation or organization)           |                                                       |
| ** **                               | ** **                                                 |
| **888  Seventh Avenue**                  |                                                       |
| **New  York, NY 10106**                  | **(212)  887-6800**                                        |
| (Address of principal executive offices) | (Registrant’s telephone number, including  area code) |

 

**SECURITIES REGISTERED PURSUANT TOSECTION 12(b) OF THE ACT:**

 

| **Title of  Each Class**          | ** ** | **Name of Each Exchange On Which Registered** |
|-----------------------------------|------------|-----------------------------------------------------------------------------|
| Series A Common  Stock, par value |       | New York  Stock Exchange                                               |
| $.01 per share                    |       |                                                                        |

 

**SECURITIES REGISTERED PURSUANT TOSECTION 12(g) OF THE ACT:**

None

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding twelve months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     Yes  ý        No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  Yes  ý        No  o

 

Shares of the registrant’scommon stock outstanding as of October 21, 2005: 92,920,671 shares (consistingof 51,622,023 shares of Series A Common Stock and 41,298,648 shares of Series BCommon Stock).

 

 

 

 

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**HEARST-ARGYLE TELEVISION, INC.**

 

**Index**

** **
|             |                                                                                                                                                |   |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Part I**       | **Financial Information**                                                                                                                           |   |
|             |                                                                                                                                                |   |
|             |                                                                                                                                                |   |
| **Item 1.** | **Financial Statements**                                                                                                                            |   |
|             | Condensed Consolidated Balance Sheets as of September  30, 2005 (unaudited) and December 31, 2004 |   |
|             | Condensed  Consolidated Statements of Income for the Three and Nine Months Ended  September 30, 2005 and 2004 (unaudited)                           |   |
|             | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2005 and 2004 (unaudited)                                 |   |
|             | Notes to Condensed  Consolidated Financial Statements                                                                                               |   |
|             |                                                                                                                                                |   |
|             |                                                                                                                                                |   |
| **Item 2.** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                     |   |
|             |                                                                                                                                                |   |
|             |                                                                                                                                                |   |
| **Item 3.** | **Quantitative  and Qualitative Disclosures about Market Risk**                                                                                     |   |
|             |                                                                                                                                                |   |
|             |                                                                                                                                                |   |
| **Item 4.** | **Controls and  Procedures**                                                                                                                        |   |
|             |                                                                                                                                                |   |
|             |                                                                                                                                                |   |
| **Part II**      | **Other Information**                                                                                                                               |   |
|             |                                                                                                                                                |   |
|             |                                                                                                                                                |   |
| **Item 2.** | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                    |   |
|             |                                                                                                                                                |   |
| **Item 6.** | **Exhibits**                                                                                                                                        |   |
|             |                                                                                                                                                |   |
| **Signatures**   |                                                                                                                                                |   |

 

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**PARTI**

 

**FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

** HEARST-ARGYLE TELEVISION, INC.**

 

**CondensedConsolidated Balance Sheets**

 
| ** **                                                               | ** ** | **September 30, 2005 (unaudited)** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------|------------|
| ** **                                                               | ** ** | **(In thousands, except share data)**   | ** ** |
| **Assets**                                                               |       |                                    |       |                       |       |
| Current assets:                                                          |       |                                    |       |                       |       |
| Cash and cash equivalents                                                |       | $                                       | 126,694    |                       | $          | 92,208 |   |
| Accounts receivable, net                                                 |       | 142,239                                 |       | 147,536                    |       |
| Program and barter rights                                                |       | 66,339                                  |       | 55,242                     |       |
| Deferred income tax asset                                                |       | 4,979                                   |       | 4,979                      |       |
| Other                                                                    |       | 6,463                                   |       | 6,541                      |       |
| Total current assets                                                     |       | 346,714                                 |       | 306,506                    |       |
|                                                                     |       |                                    |       |                       |       |
| Property, plant and  equipment, net                                      |       | 280,531                                 |       | 291,840                    |       |
|                                                                     |       |                                    |       |                       |       |
| Intangible assets, net                                                   |       | 2,423,760                               |       | 2,428,265                  |       |
| Goodwill                                                                 |       | 734,746                                 |       | 734,746                    |       |
|                                                                     |       |                                    |       |                       |       |
| Other assets:                                                            |       |                                    |       |                       |       |
| Deferred financing costs, net                                            |       | 12,415                                  |       | 12,452                     |       |
| Investments                                                              |       | 31,703                                  |       | 26,362                     |       |
| Program and barter rights, noncurrent                                    |       | 1,936                                   |       | 1,884                      |       |
| Other                                                                    |       | 48,522                                  |       | 40,085                     |       |
| Total other assets                                                       |       | 94,576                                  |       | 80,783                     |       |
| Total assets                                                             |       | $                                       | 3,880,327  |                       | $          | 3,842,140 |   |
|                                                                     |       |                                    |       |                       |       |
| **Liabilities and Stockholders’  Equity**                           |       |                                    |       |                       |       |
| Current liabilities:                                                     |       |                                    |       |                       |       |
| Accounts payable                                                         |       | $                                       | 11,481     |                       | $          | 8,901 |   |
| Accrued liabilities                                                      |       | 53,530                                  |       | 63,640                     |       |
| Program and barter rights payable                                        |       | 67,926                                  |       | 57,056                     |       |
| Payable to The Hearst Corporation, net                                   |       | 4,349                                   |       | 4,846                      |       |
| Other                                                                    |       | 8,353                                   |       | 3,465                      |       |
| Total current liabilities                                                |       | 145,639                                 |       | 137,908                    |       |
|                                                                     |       |                                    |       |                       |       |
| Program and barter rights  payable, noncurrent                           |       | 2,708                                   |       | 3,107                      |       |
| Long-term debt                                                           |       | 882,182                                 |       | 882,221                    |       |
| Note payable to Capital  Trust                                           |       | 134,021                                 |       | 134,021                    |       |
| Deferred income tax  liability                                           |       | 853,486                                 |       | 839,746                    |       |
| Other liabilities                                                        |       | 38,710                                  |       | 80,049                     |       |
| Total noncurrent liabilities                                             |       | 1,911,107                               |       | 1,939,144                  |       |
|                                                                     |       |                                    |       |                       |       |
| Series A and B preferred  stock to be redeemed                           |       | —                                  |       | 11,251                     |       |
|                                                                     |       |                                    |       |                       |       |
| Commitments and  contingencies                                           |       |                                    |       |                       |       |
|                                                                     |       |                                    |       |                       |       |
| Stockholders’ equity:                                               |       |                                    |       |                       |       |
| Preferred stock, par value  $0.01 per share, 1,000,000 shares authorized |       | —                                  |       | —                     |       |
| Series A common stock                                                    |       | 556                                     |       | 552                        |       |
| Series B common stock                                                    |       | 413                                     |       | 413                        |       |
| Additional paid-in capital                                               |       | 1,289,706                               |       | 1,281,474                  |       |
| Retained earnings                                                        |       | 640,047                                 |       | 569,178                    |       |
| Accumulated other  comprehensive loss, net                               |       | (6,161                                  | )          | (6,161                     | )          |
| Treasury stock, at cost                                                  |       | (100,980                                | )          | (91,619                    | )          |
| Total stockholders’ equity                                          |       | 1,823,581                               |       | 1,753,837                  |       |
|                                                                     |       |                                    |       |                       |       |
| Total liabilities and stockholders’ equity                          |       | $                                       | 3,880,327  |                       | $          | 3,842,140 |   |

 

See notes to condensed consolidated financialstatements.

 

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**HEARST-ARGYLE TELEVISION, INC.**

 

**CondensedConsolidated Statements of Income**

** **
| ** **                                       | ** ** | **Three Months  Ended September 30,**                              | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                                           | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(Unaudited)**                                                    | ** ** |
| ** **                                       | ** ** | **(In thousands, except per share data)** | ** ** |
|                                             |       |                                                               |       |                                 |       |   |   |   |   |
| Total revenue                                    |       | $                                                                  | 164,173    |                                 | $          | 194,011 |   | $ | 514,905 |   | $ | 558,833 |   |
|                                             |       |                                                               |       |                                 |       |   |   |   |   |
| Station operating expenses:                      |       |                                                               |       |                                 |       |   |   |   |   |
| Salaries, benefits and other operating costs     |       | 94,050                                                             |       | 89,411                               |       | 273,333 |   | 261,215 |   |
| Amortization of program rights                   |       | 15,155                                                             |       | 15,352                               |       | 45,648 |   | 45,481 |   |
| Depreciation and amortization                    |       | 12,427                                                             |       | 12,464                               |       | 38,861 |   | 37,315 |   |
| Corporate, general and  administrative expenses  |       | 6,003                                                              |       | 6,048                                |       | 17,559 |   | 17,750 |   |
| Operating income                                 |       | 36,538                                                             |       | 70,736                               |       | 139,504 |   | 197,072 |   |
|                                             |       |                                                               |       |                                 |       |   |   |   |   |
| Interest expense, net                            |       | 15,413                                                             |       | 15,832                               |       | 46,876 |   | 48,253 |   |
| Interest expense,  net—Capital Trust        |       | 2,438                                                              |       | 3,750                                |       | 7,313 |   | 11,250 |   |
| Other Expense                                    |       | —                                                             |       | 2,500                                |       | — |   | 2,500 |   |
| Equity in (income) of  affiliates, net           |       | (457                                                               | )          | (503                                 | )          | (1,474 | ) | (1,165 | ) |
|                                             |       |                                                               |       |                                 |       |   |   |   |   |
| Income before income taxes                       |       | 19,144                                                             |       | 49,157                               |       | 86,789 |   | 136,234 |   |
|                                             |       |                                                               |       |                                 |       |   |   |   |   |
| Income tax expense  (benefit)                    |       | 7,466                                                              |       | 18,729                               |       | (3,579 | ) | 51,905 |   |
| Net income                                       |       | 11,678                                                             |       | 30,428                               |       | 90,368 |   | 84,329 |   |
|                                             |       |                                                               |       |                                 |       |   |   |   |   |
| Less preferred stock  dividends                  |       | —                                                             |       | 272                                  |       | 2 |   | 816 |   |
| Income applicable to  common stockholders        |       | $                                                                  | 11,678     |                                 | $          | 30,156 |   | $ | 90,366 |   | $ | 83,513 |   |
|                                             |       |                                                               |       |                                 |       |   |   |   |   |
| Income per common  share—basic              |       | $                                                                  | 0.13       |                                 | $          | 0.32 |   | $ | 0.97 |   | $ | 0.90 |   |
| Number of common shares  used in the calculation |       | 92,867                                                             |       | 92,938                               |       | 92,842 |   | 92,976 |   |
|                                             |       |                                                               |       |                                 |       |   |   |   |   |
| Income per common  share—diluted            |       | $                                                                  | 0.13       |                                 | $          | 0.32 |   | $ | 0.96 |   | $ | 0.89 |   |
| Number of common shares  used in the calculation |       | 93,254                                                             |       | 101,263                              |       | 98,388 |   | 101,471 |   |
|                                             |       |                                                               |       |                                 |       |   |   |   |   |
| Dividends per common share  declared             |       | $                                                                  | 0.07       |                                 | $          | 0.06 |   | $ | 0.21 |   | $ | 0.18 |   |

 

 

See notes to condensed consolidated financialstatements.

 

2

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**HEARST-ARGYLE TELEVISION, INC.**

**CondensedConsolidated Statements of Cash Flows**

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)  (In thousands)**     | ** ** |
| **Operating Activities**                                                           |       |                                |       |   |   |
| Net income                                                                         |       | $                                   | 90,368     |   | $ | 84,329 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                |       |   |   |
| Depreciation                                                                       |       | 34,355                              |       | 32,831 |   |
| Amortization of intangible assets                                                  |       | 4,506                               |       | 4,484 |   |
| Amortization of deferred financing costs                                           |       | 1,286                               |       | 1,553 |   |
| Amortization of program rights                                                     |       | 45,648                              |       | 45,481 |   |
| Program payments                                                                   |       | (47,467                             | )          | (45,848 | ) |
| Deferred income taxes                                                              |       | 13,740                              |       | 5,528 |   |
| Equity in income of affiliates, net                                                |       | (1,474                              | )          | (1,165 | ) |
| Provision for (benefit from) doubtful accounts                                     |       | 1,167                               |       | (283 | ) |
| Loss on disposal of fixed assets                                                   |       | —                              |       | 908 |   |
| Dividends received from affiliates                                                 |       | 2,504                               |       | 1,330 |   |
| Other expense                                                                      |       | —                              |       | 2,500 |   |
| Changes in operating assets and liabilities:                                       |       |                                |       |   |   |
| Decrease (increase) in Accounts receivable                                         |       | 6,552                               |       | (4,520 | ) |
| Decrease (increase) in Other assets                                                |       | (9,608                              | )          | (8,957 | ) |
| (Decrease) increase in Accounts payable and accrued liabilities                    |       | (7,972                              | )          | 20,513 |   |
| (Decrease) increase in Other liabilities                                           |       | (35,799                             | )          | 2,316 |   |
| Net cash provided by  operating activities                                         |       | 97,806                              |       | 141,000 |   |
|                                                                               |       |                                |       |   |   |
| **Investing Activities**                                                           |       |                                |       |   |   |
| Purchases of property,  plant and equipment:                                       |       |                                |       |   |   |
| Digital projects                                                                   |       | (4,922                              | )          | (679 | ) |
| Maintenance projects                                                               |       | (11,377                             | )          | (15,038 | ) |
| Special projects                                                                   |       | (8,715                              | )          | (10,421 | ) |
| Investment in affiliates  and other, net                                           |       | (6,387                              | )          | 95 |   |
| Acquisition of WMTW-TV                                                             |       | —                              |       | (38,074 | ) |
| Net cash used in investing  activities                                             |       | (31,401                             | )          | (64,117 | ) |
|                                                                               |       |                                |       |   |   |
| **Financing Activities**                                                           |       |                                |       |   |   |
| Dividends paid on  preferred stock                                                 |       | (2                                  | )          | (816 | ) |
| Dividends paid on common  stock                                                    |       | (19,505                             | )          | (16,737 | ) |
| Series A Common Stock  repurchases                                                 |       | (9,361                              | )          | (10,920 | ) |
| Redemption of preferred  stock                                                     |       | (11,251                             | )          | (1,600 | ) |
| Principal payments on  capital lease obligations                                   |       | (39                                 | )          | (129 | ) |
| Proceeds from employee  stock purchase plan                                        |       | 1,694                               |       | 1,539 |   |
| Proceeds from stock option  exercises                                              |       | 6,545                               |       | 6,836 |   |
| Net cash used in financing  activities                                             |       | (31,919                             | )          | (21,827 | ) |
|                                                                               |       |                                |       |   |   |
| Increase in cash and cash  equivalents                                             |       | 34,486                              |       | 55,056 |   |
| Cash and cash equivalents  at beginning of period                                  |       | 92,208                              |       | 71,528 |   |
| Cash and cash equivalents  at end of period                                        |       | $                                   | 126,694    |   | $ | 126,584 |   |
|                                                                               |       |                                |       |   |   |
| **Supplemental Cash Flow  Information:**                                           |       |                                |       |   |   |
|                                                                               |       |                                |       |   |   |
| **Business acquired in purchase  transaction—**                               |       |                                |       |   |   |
| Acquisition of WMTW-TV:                                                            |       |                                |       |   |   |
| Fair market value of assets acquired                                               |       | $                                   | —     |   | $ | 38,622 |   |
| Fair market value of liabilities assumed                                           |       | —                              |       | (548 | ) |
|                                                                               |       |                                |       |   |   |
| Net cash paid for WMTW-TV                                                          |       | $                                   | —     |   | $ | 38,074 |   |
|                                                                               |       |                                |       |   |   |
| **Cash paid during the period  for:**                                              |       |                                |       |   |   |
| Interest                                                                           |       | $                                   | 37,859     |   | $ | 38,055 |   |
| Interest on Note payable to Capital Trust                                          |       | $                                   | 7,313      |   | $ | 11,250 |   |
| Income taxes, net of refunds                                                       |       | $                                   | 35,717     |   | $ | 41,073 |   |

 

See notes to condensed consolidated financialstatements.

 

3

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**Hearst-Argyle Television, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**Tabular amounts in thousands,except per share data**

 

**1.    Basisof Presentation**

 

The condensed consolidatedfinancial statements include the accounts of Hearst-Argyle Television, Inc. andits wholly-owned subsidiaries (the “Company” or “we” or “us” or “our”), exceptfor the Company’s wholly-owned subsidiary trust (the “Capital Trust”) whichcannot be consolidated under the Financial Accounting Standards Board (“FASB”)Interpretation No. 46 (revised December 2003), *Consolidationof Variable Interest Entities* (“FIN 46(R)”).  With the exception of the unconsolidatedsubsidiary trust, all significant intercompany accounts have been eliminated inconsolidation.

 

Theaccompanying unaudited condensed consolidated financial statements do notinclude all of the information and notes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements and should be read in conjunction with the Company’s consolidatedfinancial statements included in the Annual Report on our Form 10-K/A for theyear ended December 31, 2004.  In theopinion of management, all adjustments considered necessary for a fairpresentation have been included and are normal and recurring in nature.  Operating results for the three and ninemonths ended September 30, 2005 and 2004 are not necessarily indicative of theresults that may be expected for the full year.

 

**2.    RecentDevelopments**

 

*HurricaneKatrina. *On August 29, 2005,Hurricane Katrina hit land in the Gulf Coast region directly affecting stationWDSU-TV in New Orleans, Louisiana.  Thestation has incurred the loss of its analog and digital transmitters, certainmotor vehicles and other equipment, as well as minor damage to its main studiofacilities. The station has also incurred incremental expenses due to thedamage caused by the hurricane and subsequent flooding.  We believe that our insurance coverage,including business interruption insurance, will mitigate the financial impactof Hurricane Katrina in future periods. The Company has written off $2.4 million, which represents the net bookvalue of the destroyed property, and has recorded a receivable from theinsurance company for this amount as of September 30, 2005.  We have not recorded any anticipated propertyinsurance proceeds in excess of the net book value of the lost equipment or anybusiness interruption insurance proceeds.  The Company has not yet evaluated the long-term effects of HurricaneKatrina on its indefinite-lived intangible assets and goodwill.  WDSU-TV represents 4% of the Company’s totalFCC License intangible assets.    WDSU-TVhas resumed news production at its main studios in New Orleans and is beingbroadcast temporarily in New Orleans on Channel 49 pursuant to an agreementwith Paxson Communications Corporation, and in Baton Rouge on UHF Channel 41pursuant to an agreement with WBTR-TV.

 

*HearstShare Purchase Authorization. *On September 28, 2005, The HearstCorporation (“Hearst”) and its indirect wholly-owned subsidiary HearstBroadcasting, Inc. (“Hearst Broadcasting”), filed an amendment to their reportof beneficial ownership on Schedule 13D with the Securities and ExchangeCommission (“SEC”) to report an increase in Hearst Broadcasting’s authorizationto purchase the Company’s Series A common stock from 20 million to 25 millionshares.

 

*Investmentin Ripe Digital Entertainment, Inc.* On July 27, 2005, theCompany invested approximately $5 million in Ripe Digital Entertainment, Inc. (“RipeTV”) representing a 31.25% interest. Ripe TV was formed in 2003 to start an advertising-supported digitalvideo-on-demand program network. Launched in October 2005, the program service targets men aged 18-34 andis available for distribution via digital cable, broadband, Internet and/orwireless systems.  Since July 27, 2005,Steven A. Hobbs, Senior Vice President and Chief Legal and Development Officer,has served on the Board of Directors of Ripe TV, from which he does not receivecompensation for his services.  Weaccount for this investment using the equity method and in the three-monthperiod ended September 30, 2005, we recorded an immaterial loss.

 

*Investmentin U.S. Digital Television*.  On September 23, 2005, the Company and Hearsteach invested approximately $1.5 million in U.S. Digital Television, LLC (“USDTV”),representing a combined 10% interest.  Weand Hearst have each committed to invest an additional $1 million in 2006 ifUSDTV achieves certain milestones.  USDTVwas formed to provide a national digital television programming distributionservice using portions of the digital television spectrum.  Currently, the program service is availablein Albuquerque, New Mexico, Las Vegas,

 

4

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Nevada and Salt Lake City, Utah. Our station,KOAT-TV in Albuquerque, currently leases a portion of its digital spectrum toUSDTV.  In addition, since September 23,2005, Steven A. Hobbs, Senior Vice President and Chief Legal & DevelopmentOfficer, has served on the Board of Directors of USDTV, from which he does notreceive compensation for his services. We account for this investment using thecost method.

 

*DigitalTelevision Transition.* TheU.S. Congress is currently addressing legislation that would guide thetransition from analog to digital television broadcasting.  A component of this legislation is a deadlinefor completion of the transition of the give back of analog spectrum.  The current deadline is an uncertain datebased on a digital receiver penetration. The House and Senate are contemplating a specific deadline that could beestablished for 2009.  When and if thisor similar legislation is passed by Congress and signed into law by thePresident, the Company plans to reevaluate the estimated useful lives andresidual values of certain equipment such as analog transmitters, which couldaccelerate future depreciation expense. While subject to additional technical and engineering evaluations, theCompany estimates that useful lives and depreciation expense with respect toequipment having a net book value of approximately $22 million as of December31, 2004, is subject to change.  Suchequipment is presently being depreciated over various remaining useful lives,some of which extend to 2014.

 

**3.     Recent Accounting Pronouncements**

 

In May 2005, the FASBissued Statement of Financial Accounting Standards (“SFAS”) No. 154, *Accounting Changes and Error Corrections* (“SFAS 154”).  SFAS 154 provides guidance on accounting forand reporting of accounting changes and error corrections.  It requires changes in accounting principleto be applied retroactively to prior periods as if the principle had alwaysbeen used.  Previously, voluntary changesin accounting principle were required to be recognized cumulatively in netincome in the period of change.  SFAS 154is effective for accounting changes and error corrections made in fiscal yearsbeginning after December 15, 2005.  We donot believe the adoption of SFAS 154 will have a material impact on ourfinancial position or results of operations.

 

In March 2005, the FASBissued Financial Interpretation No. 47, *Accounting for ConditionalAsset Retirement Obligations, an interpretation of FASB Statement No. 143,*(“FIN 47”).  FIN 47 clarifies that anentity must record a liability for a conditional asset retirement obligation ifthe fair value of the obligation can be reasonably estimated.  FIN 47 is effective no later than the end offiscal years ending after December 15, 2005. Therefore, FIN 47 will be effective for the year ending December 31,2005.  We do not believe the adoption ofFIN 47 will have a material impact on our financial position or results ofoperations.

 

In December 2004,the FASB issued SFAS No. 123(R), *Share-Based Payments*(“SFAS 123(R)”), which requires companies to measure and recognize compensationexpense for all stock-based payments at fair value.  SFAS 123(R) was to beeffective for all interim periods beginning after June 15, 2005; however,on April 14, 2005, the Securities and Exchange Commission changed the effectivedate to fiscal years that begin after June 15, 2005.  Therefore, SFAS123(R) will be effective for us on January 1, 2006.  The Company is currently evaluating theimpact of SFAS 123(R) on its financial position and results of operations.

 

In December 2004, theFASB issued SFAS No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29*(“SFAS 153”).  The amendments made by SFAS 153 are based onthe principle that exchanges of nonmonetary assets should be measured based onthe fair value of the assets exchanged. Further, the amendments broaden the exception for exchanges ofnonmonetary assets that do not have commercial substance.  SFAS 153 is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.  Therefore, SFAS 153 was effective for us onJuly 1, 2005.  The adoption of SFAS 153did not have a material impact on our financial position or results ofoperations.

 

**4.    Stock-BasedCompensation**

 

TheCompany accounts for employee stock-based compensation under AccountingPrinciples Board (“APB”) Opinion No. 25, *StockIssued to Employees* (“APB 25”) and related interpretations.  Under APB 25, because the exercise price ofthe Company’s employee stock options equals the market price of the underlyingstock on the date of

 

5

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grant, the stock options have no intrinsicvalue and therefore no compensation expense is recognized.  The Company has adopted the disclosure-onlyprovisions of SFAS No. 123, *Accounting For Stock-BasedCompensation* (“SFAS 123”). Under SFAS 123, options are valued attheir date of grant and expensed over their vesting period.

 

Thefollowing table details the effect on net income and earnings per share hadcompensation expense been recorded based on the fair value method under SFAS123, as amended, utilizing the Black-Scholes option valuation model:

 
| ** **                                                                                                                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **(Unaudited)**                      | ** ** |
| ** **                                                                                                                 | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Reported net income                                                                                                        |       | $                                    | 11,678     |                                | $          | 30,428 |   | $ | 90,368 |   | $ | 84,329 |   |
| Less:                                                                                                                      |       |                                 |       |                                |       |   |   |   |   |
| Total stock-based employee compensation expense determined under the  fair value method for all awards, net of related tax |       | (1,197                               | )          | (1,225                              | )          | (3,625 | ) | (3,657 | ) |
| Preferred stock dividends                                                                                                  |       | —                               |       | (272                                | )          | (2 | ) | (816 | ) |
| Pro forma net income applicable to common stockholders (Basic)                                                             |       | $                                    | 10,481     |                                | $          | 28,931 |   | $ | 86,741 |   | $ | 79,856 |   |
|                                                                                                                       |       |                                 |       |                                |       |   |   |   |   |
| Add: Interest Expense, Net—Capital Trust, net of tax                                                                  |       | —                               |       | 2,321                               |       | 4,461 |   | 6,964 |   |
| Pro forma net income applicable to common stockholders (Diluted)                                                           |       | $                                    | 10,481     |                                | $          | 31,252 |   | $ | 91,202 |   | $ | 86,820 |   |
|                                                                                                                       |       |                                 |       |                                |       |   |   |   |   |
| Earnings per share:                                                                                                        |       |                                 |       |                                |       |   |   |   |   |
| Basic—as reported                                                                                                     |       | $                                    | 0.13       |                                | $          | 0.32 |   | $ | 0.97 |   | $ | 0.90 |   |
| Basic—pro forma                                                                                                       |       | $                                    | 0.11       |                                | $          | 0.31 |   | $ | 0.93 |   | $ | 0.86 |   |
|                                                                                                                       |       |                                 |       |                                |       |   |   |   |   |
| Diluted—as reported                                                                                                   |       | $                                    | 0.13       |                                | $          | 0.32 |   | $ | 0.96 |   | $ | 0.89 |   |
| Diluted—pro forma                                                                                                     |       | $                                    | 0.11       |                                | $          | 0.31 |   | $ | 0.93 |   | $ | 0.86 |   |

 

 

**5.    Long-TermDebt**

 

Long-term debt as ofSeptember 30, 2005 and December 31, 2004 consisted of the following:  

 

| ** **                | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| Senior notes              |       | $                      | 432,110    |                  | $          | 432,110 |   |
| Private placement debt    |       | 450,000                |       | 450,000               |       |
| Capital lease obligations |       | 118                    |       | 291                   |       |
|                      |       | 882,228                |       | 882,401               |       |
| Less current portion      |       | (46                    | )          | (180                  | )          |
|                      |       |                   |       |                  |       |
| Total long-term debt      |       | $                      | 882,182    |                  | $          | 882,221 |   |

 

6

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**6.    EarningsPer Share**

 

The calculation of basicearnings per share (“EPS”) for each period is based on the weighted averagenumber of common shares outstanding during the period.  The calculation of dilutive EPS for eachperiod is based on the weighted average number of common shares outstandingduring the period, plus the effect, if any, from the exercise of stock optionsand conversion of preferred stock.  Thefollowing table sets forth a reconciliation between basic EPS and diluted EPS,in accordance with SFAS No. 128, *EarningsPer Share*.

 
| ** **                                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                  | ** ** | **(Unaudited)**                       | ** ** |
| ** **                                                                                  | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Reported net income                                                                         |       | $                                     | 11,678     |                                 | $          | 30,428 |   | $ | 90,368 |   | $ | 84,329 |   |
| Less: Preferred stock dividends                                                             |       | —                                |       | (272                                 | )          | (2 | ) | (816 | ) |
| Income applicable to common stockholders (Basic)                                            |       | $                                     | 11,678     |                                 | $          | 30,156 |   | $ | 90,366 |   | $ | 83,513 |   |
| Add: Interest Expense, Net—Capital Trust, net of tax                                   |       | —                                |       | 2,321                                |       | 4,461 |   | 6,964 |   |
| Income applicable to common stockholders (Diluted)                                          |       | $                                     | 11,678     |                                 | $          | 32,477 |   | $ | 94,827 |   | $ | 90,477 |   |
| Basic shares                                                                                |       | 92,867                                |       | 92,938                               |       | 92,842 |   | 92,976 |   |
| Basic EPS                                                                                   |       | $                                     | 0.13       |                                 | $          | 0.32 |   | $ | 0.97 |   | $ | 0.90 |   |
| Diluted shares                                                                              |       | 93,254                                |       | 101,263                              |       | 98,388 |   | 101,471 |   |
| Diluted EPS                                                                                 |       | $                                     | 0.13       |                                 | $          | 0.32 |   | $ | 0.96 |   | $ | 0.89 |   |
| Basic shares                                                                                |       | 92,867                                |       | 92,938                               |       | 92,842 |   | 92,976 |   |
| Add: Shares issued upon assumed exercise of stock options                                   |       | 387                                   |       | 390                                  |       | 418 |   | 560 |   |
| Add: Shares issued upon conversion of Series A Redeemable Convertible  Preferred Securities |       | —                                |       | 2,807                                |       | — |   | 2,807 |   |
| Add: Shares issued upon conversion of Series B Redeemable Convertible  Preferred Securities |       | —                                |       | 5,128                                |       | 5,128 |   | 5,128 |   |
| Diluted shares                                                                              |       | 93,254                                |       | 101,263                              |       | 98,388 |   | 101,471 |   |
|                                                                                             |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

A dilution test forconvertible preferred stock is performed for all periods. This test considersonly the total number of shares that could be issued upon conversion ofconvertible preferred stock and does not consider either the conversion priceor the share price of the underlying common shares.  For the three months ended September 30,2005, diluted shares do not include 5,127,882 common shares underlying theSeries B Redeemable Convertible Preferred Securities because to do so wouldhave been antidilutive.  For the ninemonths ended September 30, 2005, diluted shares include 5,127,882 common sharesunderlying the Series B Redeemable Convertible Preferred Securities.  The Series A Convertible Preferred Securitieswere redeemed on December 31, 2004 and therefore had no impact on the 2005periods.   For the three and nine monthsended September 30, 2004, 2,807,186 shares of Series A Convertible PreferredSecurities and 5,127,882 common shares of Series B Redeemable ConvertiblePreferred Securities were included in the calculation of Diluted EPS.  For the three and nine months ended September30, 2004, shares of Series A and B Preferred Stock were excluded from thecomputation of diluted EPS because to include them would have beenantidilutive.  These shares were redeemedin full as of January 1, 2005.  Thedividends for the Series A and B Preferred Stock are deducted from Net Incomefor the calculation of Basic and Diluted EPS.

 

Common stock options topurchase 3,893,078 and 2,898,857shares of Series A Common Stock (before application ofthe treasury stock method), outstanding as of September 30, 2005 and 2004,respectively, were not included in the computation of diluted EPS because theexercise price was greater than the average market price of the common sharesduring the calculation period.

 

7

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**7.    Goodwilland Intangible Assets**

 

Summarizedbelow are the carrying value of intangible assets and goodwill as of September30, 2005 and December 31, 2004:

 
| ** **                                                      | ** ** | **September 30, 2005 (unaudited)** | ** ** | **December 31, 2004**         | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|
| ** **                                                      | ** ** | **Gross  Carrying  Value**         | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** |
| Intangible assets subject to amortization:                      |       |                               |       |                          |       |   |   |   |   |   |   |   |   |
| Advertiser client base                                          |       | $                                  | 122,891    |                          | $          | 69,164 |   | $ | 53,727 |   | $ | 122,891 |   | $ | 66,493 |   | $ | 56,398 |   |
| Network affiliations                                            |       | 95,493                             |       | 35,890                        |       | 59,603 |   | 95,493 |   | 34,098 |   | 61,395 |   |
| Other                                                           |       | 743                                |       | 592                           |       | 151 |   | 743 |   | 550 |   | 193 |   |
| Total intangible assets  subject to amortization                |       | $                                  | 219,127    |                          | $          | 105,646 |   | 113,481 |   | $ | 219,127 |   | $ | 101,141 |   | 117,986 |   |
| Intangible assets not subject to amortization—FCC licenses |       |                               |       |                          |       | 2,310,279 |   |   |   |   |   | 2,310,279 |   |
| **Total intangible assets, net**                                |       |                               |       |                          |       | $ | 2,423,760 |   |   |   |   |   | $ | 2,428,265 |   |
| **Goodwill**                                                    |       |                               |       |                          |       | $ | 734,746 |   |   |   |   |   | $ | 734,746 |   |

 

The Company’samortization expense for intangible assets was approximately $1.5 million and$4.5 million for the three and nine months ended September 30, 2005,respectively.  Estimated annualintangible asset amortization expense for each of the next five years isapproximately $6.0 million.

**8.    IncomeTaxes**

 

The income tax (benefit)expense for the three and nine months ended September 30, 2005 and 2004consisted of the following:

 
| ** **                    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(Unaudited)**                      | ** ** |
| Current                       |       | $                                    | (3,496     | )                                   | $          | 21,670 |   | $ | (17,319 | ) | $ | 46,377 |   |
| Deferred                      |       | 10,962                               |       | (2,941                              | )          | 13,740 |   | 5,528 |   |
| Income tax expense  (benefit) |       | $                                    | 7,466      |                                | $          | 18,729 |   | $ | (3,579 | ) | $ | 51,905 |   |

 

Theeffective tax rate for the three and nine months ended September 30, 2005 was39% and (4.1)%, respectively as compared to 38.1% for the three and nine monthsended September 30, 2004.  The ninemonths ended September 30, 2005 effective tax rate included a credit to the taxprovision of $31.9 million as a result of the settlement of certain tax return examinationsand a deferred tax benefit of $5.5 million as a result of Ohio tax law changesthe impact of which are reflected as of the law’s enactment date (June 30,2005) in accordance with FAS 109.  TheCompany expects its effective tax rate for the remaining interim period for theyear ending December 31, 2005 to be approximately 39.0%.  The Company’s effective tax rate in a givenfinancial statement period may be materially impacted by changes in the levelof earnings by taxing jurisdictions, changes in the expected outcome of taxaudits, or changes in the deferred tax valuation allowance.  The Company records reserves for estimates ofprobable settlements of federal and state audits.  The Company records a valuation allowanceagainst its deferred tax assets arising from certain net operating and capitallosses when it is more likely than not that some portion or all of such losseswill not be realized.

 

The Company’s netdeferred income tax liability is as follows: 

 
| ** **                        | ** ** | **September 30, 2005  (Unaudited)** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
|                              |       |                                |       |                  |       |
| Deferred income tax liability     |       | $                                   | 853,486    |                  | $          | 839,746 |   |
| Deferred income tax asset         |       | 4,979                               |       | 4,979                 |       |
| Net deferred income tax liability |       | $                                   | 848,507    |                  | $          | 834,767 |   |

 

8

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Thedeferred income tax liability primarily relates to differences between the bookand tax basis of our FCC licenses created from the Company’s stock acquisitionof Pulitzer Broadcasting on March 18, 1999. The deferred income tax liabilities will increase over time as theCompany’s FCC licenses continue to amortize for tax purposes, but not for bookpurposes.  We do not expect the portionof our deferred income tax liability related to the FCC licenses to reverseover time unless:

(i)             our FCClicenses become impaired; or

(ii)          our FCClicenses are sold for cash, which would typically only occur in connection withthe sale of the assets of a station or groups of stations or the entire Companyin a taxable transaction.

 

During the fourth quarterof 2004, we reclassified certain income tax liabilities from Deferred incometax liabilities to Other liabilities. For the nine months ended September 30, 2004, we reclassified $0.5million from Deferred income tax provision to Current income tax provision toconform with the current year’s presentation.

 

**9.    CommonStock**

 

**CommonStock Repurchase**

 

In May 1998 the Company’sBoard of Directors authorized the Company to repurchase up to $300 million ofits outstanding Series A Common Stock. Such repurchases may be effected from time to time in the open market orin private transactions, subject to market conditions and management’sdiscretion. During the three months ended September 30, 2005, we repurchased37,118 shares of Series A Common Stock at a cost of $0.9 million and an averageprice per share of $25.01.  During thenine months ended September 30, 2005, we repurchased 374,827 shares of Series ACommon Stock at a cost of $9.4 million and an average per share price of$24.97.  Between May 1998 and September30, 2005, the Company spent approximately $101.0 million to repurchaseapproximately 4.0 million shares of Series A Common Stock at an average priceof $25.05.  There can be no assurancethat such repurchases will occur in the future or, if they do occur, what theterms of such repurchases will be.

 

Also, on September 28,2005, Hearst filed an amended Schedule 13D notifying the Securities andExchange Commission of its authorization to purchase up to 25 million shares ofthe Company’s Series A Common Stock from time to time in the open market, inprivate transactions or otherwise subject to market conditions and management’sdiscretion.  As of September 30, 2005,Hearst purchased approximately 19.5 million shares of the Company’s outstandingSeries A Common Stock.  During the threemonths ended September 30, 2005, Hearst purchased 544,068 shares of Series ACommon Stock at a cost of $13.4 million and an average price per share of$24.61.  During the nine months endedSeptember 30, 2005, Hearst purchased 1,742,101 shares of Series A Common Stockat a cost of $43.6 million and an average per share price of $25.04.  As of September 30, 2005 and December 31,2004, Hearst owned 69.4% and 67.6%, respectively, of the Company’s outstandingcommon stock.

 

**CommonStock Dividends**

 

During the nine monthsended September 30, 2005, the Company’s Board of Directors declared a cashdividend on shares of our Series A and Series B Common Stock as follows:

 
| **Per Share  Dividend  Amount** | ** ** | **Declaration Date** | ** **          | **Record Date** | ** **       | **Payment Date** | ** **        | **Total Dividend** | ** ** | **Hearst Portion** | ** ** |
|---------------------------------|------------|----------------------|---------------------|-----------------|------------------|------------------|-------------------|--------------------|------------|--------------------|------------|
| $                               | 0.07       |                 | March  31, 2005     |            | April  5, 2005   |             | April  15, 2005   |               | $          | 6,496              |       | $ | 4,432 |   |
| $                               | 0.07       |                 | May  4, 2005        |            | July  5, 2005    |             | July  15, 2005    |               | $          | 6,497              |       | $ | 4,478 |   |
| $                               | 0.07       |                 | September  21, 2005 |            | October  5, 2005 |             | October  15, 2005 |               | $          | 6,504              |       | $ | 4,515 |   |

 

9

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**10.    PreferredStock**

 

On January 1, 2005, alloutstanding shares of Preferred Stock were redeemed and cancelled.  On December 31, 2004, there were 5,781 sharesof Series A Preferred Stock and 5,470 shares of Series B Preferred Stockoutstanding.  The Company has authorizedunder its Certificate of Incorporation one million shares of preferred stock,par value $.01 per share.

 

 **11.    RelatedParty Transactions**

 

*TheHearst Corporation*.    Asof September 30, 2005, Hearst owned approximately 45.0% of our Series A CommonStock and 100% of our Series B Common Stock, representing in the aggregateapproximately 69.4% of the outstanding voting power of our common stock, exceptwith regard to the election of directors. With regard to the election of directors, Hearst’s ownership of ourSeries B Common Stock entitles Hearst to elect 11 of the 13 members of ourBoard of Directors. During the nine months ended September 30, 2005 and 2004,we were engaged in the following material transactions with Hearst or partiesrelated to Hearst:

 

•             *ManagementAgreement*.   We recorded revenue ofapproximately $0.9 million and $3.2 million, in the three and nine months endedSeptember 30, 2005, respectively, and $0.9 million and $3.1 million in thethree and nine months ended September 30, 2004, respectively, relating to amanagement agreement with Hearst (the “Management Agreement”). Pursuant to theManagement Agreement, we provide certain management services, such as sales,news, programming, financial and accounting management services, with respectto certain Hearst owned or operated television and radio stations. We believethe terms of the Management Agreement are reasonable to both parties; however,there can be no assurance that more favorable terms would not be available fromthird parties.

 

•             *ServicesAgreement*.    We incurred expenses ofapproximately $1.3 million and $3.8 million in the three and nine months endedSeptember 30, 2005, respectively, and $1.0 million and $3.2 million in thethree and nine months ended September 30, 2004, respectively, relating to aservices agreement with Hearst (the “Services Agreement”). Pursuant to theServices Agreement, Hearst provides the Company certain administrative servicessuch as accounting, auditing, financial, legal, insurance, data processing, andemployee benefits administration. We believe the terms of the ServicesAgreement are reasonable to both parties; however, there can be no assurancethat more favorable terms would not be available from third parties.

 

•             *InterestExpense, Net — Capital Trust.*  We incurred interest expense,net, related to the Subordinated Debentures issued to our wholly-ownedunconsolidated subsidiary, the Capital Trust, of $2.4 million and $7.3 millionin the three and nine months September 30, 2005, respectively and $3.8 millionand $11.3 million in the three and nine months ended September 30, 2004,respectively.  The Capital Trust thenpaid comparable amounts to its Redeemable Convertible Preferred Securities holders,including Hearst, which received $0.5 million and $1.5 million in the three andnine months ended September 30, 2005, respectively.  As of September 30, 2005, Hearst holds $25million of the total $130 million outstanding Series B Redeemable ConvertiblePreferred Securities.

 

•             *Dividendson Common Stock.*    On each of September 21,2005, May 4, 2005 and March 31, 2005, our Board of Directors declared a cashdividend of $0.07 on our Series A and B Common stock for a total amount on eachdate of $6.5 million.  Included in theseamounts were $4.5 million, $4.5 million and $4.4 million payable to Hearst,respectively.  On each of September 22,2004, May 4, 2004 and March 24, 2004, our Board of Directors declared a cashdividend of $0.06 per share on our Series A and B Common stock for a totalamount on each date of $5.6 million. Included in these amounts were $3.7 million, $3.7 million and $3.6million payable to Hearst, respectively.

 

•             *Purchaseof 7% Senior Notes*.   As of September 30, 2005, Hearst,through Hearst Broadcasting, has purchased $3.3 million face amount of our 7%Senior Notes due November 15, 2007 (“7% Senior Notes”).

 

10

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•             *RadioFacilities Lease.*    Pursuant to a leaseagreement, Hearst paid us approximately $0.2 million and $0.6 million for thethree and nine months ended September 30, 2005 and $0.2 million and $0.5million for the three and nine months ended September 30, 2004. Under thisagreement, Hearst leases from the Company premises for WBAL-AM and WIYY-FM,Hearst’s Baltimore, Maryland radio stations.

 

•              *LifetimeEntertainment Services*.    We have agreementswith Lifetime Entertainment Services, an entity owned 50% by an affiliate ofHearst and 50% by ABC Television Network, whereby (i) we assist Lifetime insecuring distribution and subscribers for the Lifetime Television, LifetimeMovie Network and/or Lifetime Real Women programming services; and (ii)Lifetime acts as our agent with respect to the negotiation of our agreementswith cable, satellite and certain other multi-channel video programmingdistributors.  Amounts payable to us byLifetime depend on the specific terms of these agreements and may be fixed orvariable.  Based on the terms ofcompleted agreements, we are entitled to receive a minimum aggregate amount of$3.2 million during the period from January 1, 2005 to June 20, 2009.  We recorded revenue from the agreements of$2.6 million and $5.1 million in the three and nine months ended September 30,2005 and $0.3 million and $1.3 million in the three and nine months endedSeptember 30, 2004, respectively.

 

•             *WideOrbit, Inc.   *In November 2004, we entered into an agreement with Wide Orbit, Inc.for licensing and servicing of Wide Orbit’s Traffic Sales and Billing Solutionssoftware.  Hearst owns approximately 8%of Wide Orbit, Inc.  For the three andnine months ended September 30, 2005, we paid Wide Orbit, Inc. approximately$0.5 and $1.2 million, respectively, under the agreement.

 

•             *OtherTransactions with Hearst*.    From time to time,entities related to or owned by Hearst may purchase advertising on our stationson terms we believe to be reasonable to both parties; however, there can be noassurance that more favorable terms would not be available from third parties.

 

*NBC*.    In August 2001,we contributed our production-and-distribution unit to NBC/Hearst-ArgyleSyndication, LLC in exchange for a 20% equity interest in this entity.  NBC/Hearst-Argyle Syndication, LLC is alimited liability company formed by NBC Enterprises (now NBC Universal) and usto produce and syndicate first-run broadcast and original-for-cableprogramming. We also broadcast programming produced or distributed byNBC/Hearst-Argyle Syndication, LLC.  Thisinvestment is accounted for under the equity method.  Our share of the income or loss inNBC/Hearst-Argyle Syndication, LLC is included in Equity in income ofaffiliates, net in the accompanying Condensed Consolidated Statements ofIncome. Emerson Coleman, our Vice President, Programming, is a member of theBoard of Directors of NBC/Hearst-Argyle Syndication, LLC, from which he doesnot receive compensation for his services.

 

*InternetBroadcasting*.    InDecember 1999, we invested $20 million of cash in Internet BroadcastingSystems, Inc. (“Internet Broadcasting”) in exchange for an equity interest inInternet Broadcasting.  In May 2001, weinvested an additional $6 million of cash for a total investment of $26 millionin Internet Broadcasting, and contributed our Web sites to a subsidiary ofInternet Broadcasting, IBS/HATV, LLC, which operates our station Websites.  Our investment is accounted forunder the equity method.  Our share ofthe income or loss of Internet Broadcasting is included in Equity in income ofaffiliates, net in the accompanying Condensed Consolidated Statements ofIncome. Since January 2001, Harry T. Hawks, our Executive Vice President andChief Financial Officer, and since October 2002, Terry Mackin, our ExecutiveVice President, have both served on the Board of Directors of InternetBroadcasting, from which they do not receive compensation for their services.In addition, Internet Broadcasting also provides hosting services for ourcorporate Web site for a nominal amount.

 

*SmallBusiness Television*.  The Company utilizes Small Business Television’s (“SBTV”) services toprovide television stations with additional revenue through the marketing andsale of commercial time to smaller businesses that do not traditionally usetelevision advertising due to costs. In the three and nine month period endedSeptember 30, 2005 these sales generated revenue of approximately $0.3 millionand $1.0 million, respectively, of which approximately $0.1 and $0.5 millionwas distributed to SBTV, respectively, and approximately $0.2 million and $0.5million was distributed to the Company, respectively.  In the three and nine month period endedSeptember 30, 2004 these sales generated revenue of approximately $0.3 millionand $0.8 million, respectively, of which approximately $0.1 and $0.4 million wasdistributed to SBTV, respectively, and approximately $0.2 million and $0.4million was

 

11

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distributed to theCompany, respectively.  Mr. DeanConomikes, the owner of SBTV, is the son of John G. Conomikes, a member of theCompany’s Board of Directors.

 

*NBC Weather Plus.*  InNovember 2004, NBC Weather Plus Network (“Weather Plus”) was formed to launchthe first digital local and national weather network using a portion of thedigital spectrum of NBC affiliated television stations.  Weather Plus is a 50/50 joint venture betweentwo member limited liability companies: NBC News Bureaus, Inc. and Weather Network Affiliates Company, LLC.  NBC-affiliated stations may participate inthe venture by investing in Weather Network Affiliates Company, LLC.  We have a minority interest in WeatherNetwork Affiliates Company, LLC, and have launched NBC Weather Plus in eight ofour markets—Sacramento, Orlando, Winston-Salem, Greenville, Cincinnati,Baltimore, Lancaster and New Orleans (which is temporarily unavailable due tohurricane disruption).  Terry Mackin, ourExecutive Vice President, is the Chairman of the Board of the NBC TelevisionAffiliates Association, which is the managing member and the owner of certainownership interests in Weather Network Affiliates Company, LLC.  Mr. Mackin does not receive compensation for his Boardservice.  We account for thisinvestment using the cost method.

 

*OtherRelated Parties*.    Inthe ordinary course of business, the Company enters into transactions withother related parties, none of which were significant to our financial resultsin the three and nine months ended September 30, 2005 and 2004.

 

**12.    RetirementPlans and Other Post-Retirement Benefits**

 

***Overview***

The Company maintainsseven defined benefit pension plans, 12 employee savings plans, and otherpost-retirement benefit plans for active, retired and former employees.  In addition, the Company participates in amulti-employer union pension plan that provides retirement benefits to certainunion employees.  The seven definedbenefit pension plans are hereafter collectively referred to as the “PensionPlans.”

 

***PensionPlans and Other Post-Retirement Benefits***

 

Benefits under thePension Plans are generally based on years of credited service, age atretirement and average of the highest five consecutive years’ compensation. Thecost of the Pension Plans is computed on the basis of the Project Unit CreditActuarial Cost Method. Past service cost is amortized over the expected futureservice periods of the employees.

 

*NetPeriodic Pension and Post-Retirement Cost*

 

The following schedulepresents net periodic pension cost for the Company’s Pension Plans in the threeand nine months ended September 30, 2005 and 2004:  
| ** **                                      | ** ** | **Pension Benefits**                 | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **                                      | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                      | ** ** |
| Service cost                                    |       | $                                    | 2,258      |   | $ | 1,844 |   | $ | 6,773 |   | $ | 5,532 |   |
| Interest cost                                   |       | 2,165                                |       | 1,916 |   | 6,496 |   | 5,747 |   |
| Expected return on plan  assets                 |       | (2,447                               | )          | (2,235 | ) | (7,342 | ) | (6,705 | ) |
| Amortization of prior  service cost             |       | 108                                  |       | 124 |   | 324 |   | 370 |   |
| Amortization of transitional (asset) obligation |       | 1                                    |       | (23 | ) | 3 |   | (71 | ) |
| Recognized actuarial loss                       |       | 739                                  |       | 357 |   | 2,216 |   | 1,076 |   |
| Net periodic pension cost                       |       | $                                    | 2,824      |   | $ | 1,983 |   | $ | 8,470 |   | $ | 5,949 |   |

 

 

12

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Thefollowing schedule presents net periodic pension cost for the Company’spost-retirement benefit plan in the three and nine months ended September 30,2005 and 2004:

 
| ** **                              | ** ** | **Post-Retirement Benefits**         | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **                              | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **(Unaudited)**                      | ** ** |
| Service cost                            |       | $                                    | 20         |   | $ | 21 |   | $ | 60 |   | $ | 63 |   |
| Interest cost                           |       | 84                                   |       | 85 |   | 252 |   | 255 |   |
| Amortization of prior  service cost     |       | 5                                    |       | 5 |   | 15 |   | 15 |   |
| Amortization of transitional obligation |       | 5                                    |       | 5 |   | 15 |   | 15 |   |
| Amortization of net loss                |       | 4                                    |       | 6 |   | 12 |   | 18 |   |
| Net periodic pension cost               |       | $                                    | 118        |   | $ | 122 |   | $ | 354 |   | $ | 366 |   |

 

*Contributions*

 

During the three and ninemonths ended September 30, 2005, we made contributions of $17.7 million and$18.9 million, respectively, to our defined benefit plans and $0.1 million and$0.4 million, respectively, to our post-retirement benefit plans.  During the fourth quarter of 2005, theCompany expects to contribute approximately $0.8 million to the Pension Plansand approximately $0.1 million to the post-retirement benefit plan.

 

**13.     OtherCommitments and Contingencies**

 

The Company has guaranteedthe payments by its Capital Trust on the Redeemable Convertible PreferredSecurities.  As of September 30, 2005,$130.0 million of Series B Redeemable Convertible Preferred Securities remainedoutstanding.  The guarantee isirrevocable and unconditional, and guarantees the payment in full of all (i) distributionson the Redeemable Convertible Preferred Securities to the extent of availablefunds of the Capital Trust; (ii) amounts payable upon redemption of theRedeemable Convertible Preferred Securities to the extent of available funds ofthe Capital Trust; and (iii) amounts payable upon dissolution of the CapitalTrust.  The guarantee is unsecured andranks (i) subordinate to all other liabilities of the Company, exceptliabilities that are expressly made *pari passu*;(ii) *pari passu* with the most seniorpreferred stock issued by the Company, and *pari passu* withany guarantee of the Company in respect of any preferred stock of the Companyor any preferred security of any of the Company’s controlled affiliates; and(iii) senior to the Company’s Common Stock.

 

13

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**ITEM 2.**        **Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Organizationof Information**

 

Management’s Discussionand Analysis provides a narrative on our financial performance and conditionthat should be read in conjunction with the accompanying condensed consolidatedfinancial statements.  It includes thefollowing sections:

 

•                  Executive Summary

•                  Results of Operations

•                  Liquidity and Capital Resources

•                  Forward-Looking Statements

 

**ExecutiveSummary**

 

Hearst-Argyle Television,Inc. and subsidiaries (hereafter “we” or “our” or the “Company”) owns andoperates 25 network-affiliated television stations. Additionally, we providemanagement services to two network-affiliated stations, one independenttelevision station, and two radio stations (the “Managed Stations”) in exchangefor a management fee. Results of operations for the three and nine months endedSeptember 30, 2005 and 2004 include (i) the results of our 24 televisionstations, which were owned for all periods presented; (ii) the results ofoperations of WMTW-TV since July 1, 2004; and (iii) the management fees derivedby the three television and two radio stations managed by us for all periodspresented.

 

*QuarterHighlights*

•                  Total revenue decreased 15% primarily due to (i) the decrease inpolitical revenue as a result of the normal, cyclical nature of thetelevision broadcasting business, in which advertising by candidates forpolitical office significantly increases in even-numbered election years suchas 2004 and (ii) a decrease in Olympic revenue. During third quarter 2004, the Company’s ten NBC affiliates broadcastthe summer Olympic games.

•                  During the quarter, the Company was directly affected by HurricaneKatrina.  We own and operate WDSU-TV, theNBC affiliate serving New Orleans, Louisiana, the nation’s 43rdlargest television market.  We estimatethat WDSU lost $1.5 million of revenue during the quarter and our stationsincurred approximately $1.7 million in incremental expenses due to thehurricane.  Also, we wrote off $2.4million of net book value of property, plant and equipment damaged by the stormand recorded a $2.4 million receivable due from our property insurers, whichoffset the impact of the loss in the income statement.

•                  Cash increased to $126.7 million as of September 30, 2005 from $103.2million as of June 30, 2005 and $92.2 million as of December 31, 2004.

 

**Resultsof Operations**

 

*Three Months Ended September 30, 2005*

*Comparedto Three Months Ended September 30, 2004*

 

*Totalrevenue*.    Total revenue includes:

(i)             cash and barter advertisingrevenue, net of agency and national representatives’ commissions;

(ii)          network compensation; and

(iii)       other revenue (includingretransmission revenue).

 

Total revenue in the threemonths ended September 30, 2005 was $164.2 million as compared to $194.0million in the three months ended September 30, 2004, a decrease of $29.8million or 15%. This decrease was primarily attributable to the followingfactors:

 

(i)             a $19.7 million decrease innet political advertising revenue resulting from the normal, cyclical nature ofthe television broadcasting business, in which the demand for advertising bycandidates running for political office significantly increases ineven-numbered election years (such as 2004);

 

 

14

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(ii)          a $19 million decrease innet Olympic revenue;

(iii)       a $2.9 million decrease innetwork compensation;

(iv)      a 10% decrease in ourlargest advertising category, automotive; partially offset by

(v)         an increase in the retail,pharmaceutical, furniture and housewares categories; and

(vi)      a $2.3 million increase inretransmission revenue.

 

*Salaries,benefits and other operating costs*.    Duringthe three months ended September 30, 2005, salaries, benefits and otheroperating costs were $94.1 million, as compared to $89.4 million in the threemonths ended September 30, 2004, an increase of $4.7 million or 5%.  This increase was primarily due to:

(i)             a $1.8 million, or 4%,increase in payroll expense due to news gathering and general andadministrative expense;

(ii)          $1.7 million in incrementalexpenses due to Hurricane Katrina.

(iii)       $1.2 million in musiclicense fee expense in the three months ended September 30, 2005 compared to$0.1 million for the three months ended September 30, 2004.  The $1.0 million increase in music licensefees is due to the settlement of a contract in 2004 that offset the musiclicense fee expense; and

(iv)      a $0.7 increase in pensionexpense.

 

*Amortizationof program rights*.  Amortization of program rights was$15.2 million in the three months ended September 30, 2005, as compared to$15.4 million in the three months ended September 30, 2004, substantiallyunchanged reflecting a stable line-up of syndicated programs.

 

*Depreciationand amortization*.   Depreciation and amortization was$12.4 million in the three months ended September 30, 2005, as compared to$12.5 million in the three months ended September 30, 2004, a decrease of $0.1million.  Depreciation expense was $10.9million in the three months ended September 30, 2005, as compared to $11.0million in the three months ended September 30, 2004, a decrease of $0.1million or 1%.  Amortization was $1.5million in the three months ended September 30, 2005 and 2004, and principallyresults from amortization related to advertiser client base and networkaffiliations.

 

*Corporate,general and administrative expenses*.    Corporate,general and administrative expenses were unchanged at $6.0 million in the threemonths ended September 30, 2005 and September 30, 2004.

 

*Operatingincome.*    Operating income was $36.5 million in the threemonths ended September 30, 2005, as compared to $70.7 million in the threemonths ended September 30, 2004, a decrease of $34.2 million or 48%. This netdecrease in operating income was due to the items discussed above.

 

*Interestexpense, net.*    Interest expense, net ofinterest income, was $15.4 million in the three months ended September 30,2005, as compared to $15.8 million in the three months ended September 30,2004, a decrease of $0.4 million or 3% due to an increase in interest income.

 

*Interestexpense, net—Capital Trust*.    Interestexpense, net, to our wholly-owned, unconsolidated subsidiary trust (theHearst-Argyle Capital Trust or “Capital Trust”) was $2.4 million for the threemonths ended September 30, 2005 compared to $3.8 million for the three monthsended September 30, 2004.  The $1.4million decrease results from the redemption of the $72.2 million Series ADebentures on December 31, 2004.

 

*Otherexpense*. Other expense was zero in the three months ended September 30, 2005,as compared to $2.5 million in the three months ended September 30, 2004. The$2.5 million represented a write down of the carrying value of our investmentin ProAct Technologies Corporation.

 

*Equityin income of affiliates, net*.  Equity in income of affiliates, net was $0.5million in the three months ended September 30, 2005 and September 30,2004.  Increases in net income ofIBS/HATV LLC, which operates our station websites, were offset by our share oflosses from a new investment in a start-up company.   Equity in income of affiliates, netrepresents our equity interests in the financial results of unconsolidatedaffiliates.

 

*Incometaxes.*    We recorded an income tax expense of $7.5million in the three months ended September 30, 2005, as compared to income taxexpense of $18.7 million in the three months ended September 30, 2004, adecrease of $11.2

 

 

15

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million due to a decrease in income beforeincome taxes from $49.2 million in the three months ended September 30, 2004 to$19.1 million in the three months ended September 30, 2005.

 

Theeffective tax rate for the three months ended September 30, 2005 was 39.0% ascompared to 38.1% for the three months ended September 30, 2004.  The Company expects its effective tax ratefor the remaining interim period for the year ending December 31, 2005 to beapproximately 39.0%.

 

*Netincome*.    Net income was $11.7 million in the three monthsended September 30, 2005, as compared to $30.4 million in the three monthsended September 30, 2004, a decrease of $18.7 million or 61%.  This decrease was due to the items discussedabove.

 

* Nine Months Ended September 30, 2005*

*Comparedto Nine Months Ended September 30, 2004*

 

Total revenue in the ninemonths ended September 30, 2005 was $514.9 million as compared to $558.8million in the nine months ended September 30, 2004, a decrease of $43.9million or 8%. This decrease was primarily attributable to the followingfactors:

(i)             a $38.7 milliondecrease in net political advertising revenue resulting from the normal,cyclical nature of the television broadcasting business, in which the demandfor advertising by candidates running for political office significantlyincreases in even-numbered years (such as 2004);

(ii)          a $19.0 milliondecrease in net Olympic revenue;

(iii)       a $7.6 milliondecrease in network compensation;

(iv)      a 3% decrease in our largestadvertising category, automotive; partially offset by

(v)         an increase in advertisingin the categories of retail, pharmaceutical and furniture and housewares; and

(vi)      a $3.8 million increase inretransmission revenue.

 

*Salaries,benefits and other operating costs*.    Salaries,benefits and other operating costs were $273.3 million in the nine months endedSeptember 30, 2005, as compared to $261.2 million in the nine months endedSeptember 30, 2004, an increase of $12.1 million or 5%.  This increase was primarily due to:

(i)             a $4.0 millionincrease in Salaries, benefits and other operating costs resulting from theacquisition of WMTW-TV on July 1, 2004 included in our results for the sixmonths ended June 30, 2005;

(ii)          a $3.2 millionincrease in payroll expense due to news gathering, promotional and salesexpenses;

(iii)       a $1.9 millionincrease in pension and benefit expenses; and

(iv)      $1.7 million in incrementalexpenses due to Hurricane Katrina.

 

*Amortizationof program rights*.  Amortization of program rights was$45.6 million and $45.5 million in the nine months ended September 30, 2005 and2004, respectively.

 

*Depreciationand amortization*.   Depreciation and amortization was$38.9 million in the nine months ended September 30, 2005, as compared to $37.3million in the nine months ended September 30, 2004, an increase of $1.6million or 4%.  Depreciation expense was$34.4 million in the nine months ended September 30, 2005, as compared to $32.8million in the nine months ended September 30, 2004, an increase of $1.6million or 5%.  This increase was primarilydue to increased depreciation expense from recent capital expenditures and theadditional depreciation from WMTW-TV. Amortization was $4.5 million in the nine months ended September 30,2005 and 2004, and principally results from amortization related to separatelyidentified intangible assets, advertiser client base and network affiliations.

 

*Corporate,general and administrative expenses*.    Corporate,general and administrative expenses were $17.6 million in the nine months endedSeptember 30, 2005, as compared to $17.8 million in the nine months endedSeptember 30, 2004, a decrease of $0.2 million or approximately 1%.  This decrease was primarily due to decreasesin professional services expense.

 

*Operatingincome.*    Operating income was $139.5 million in the ninemonths ended September 30, 2005, as compared to $197.1 million in the ninemonths ended September 30, 2004, a decrease of $57.6 million or 29%. This netdecrease in operating income was due to the items discussed above.

 

 

16

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*Interestexpense, net.*    Interest expense, net ofinterest income, was $46.9 million in the nine months ended September 30, 2005,as compared to $48.3 million in the nine months ended September 30, 2004, adecrease of $1.4 million or 3% due to an increase in interest income.

 

*Interestexpense, net — Capital Trust*.    Interestexpense, net, to our wholly-owned, unconsolidated subsidiary trust (theHearst-Argyle Capital Trust or “Capital Trust”) was $7.3 million for the ninemonths ended September 30, 2005 compared to $11.3 million for the nine monthsended September 30, 2004.  The decreaseof $4.0 million results from the redemption of the $72.2 million Series ADebentures on December 31, 2004.

 

*Otherexpense*. Other expense was zero in the nine months ended September 30, 2005,as compared to $2.5 million in the nine months ended September 30, 2004. The$2.5 million represented a write down of the carrying value of our investmentin ProAct Technologies Corporation.

 

*Equity inincome of affiliates, net*. Equity in income of affiliates, net was $1.5 million in the nine monthsended September 30, 2005, as compared to $1.2 million in the nine months endedSeptember 30, 2004, an increase of $0.3 million.  This increase was primarily due to anincrease in net income of IBS/HATV LLC, which operates our station websites,partially offset by our share of losses from a new investment in a start-upcompany.  Equity in income of affiliates,net represents our equity interests in the financial results of unconsolidatedaffiliates.

 

*Incometaxes.*    We recorded an income tax benefit of $3.6million in the nine months ended September 30, 2005, as compared to an incometax expense of $51.9 million in the nine months ended September 30, 2004, adecrease of $55.5 million.  This decreasewas due to (i) a decrease in income before income taxes from $136.2 million inthe nine months ended September 30, 2004 to $86.8 million in the nine monthsended September 30, 2005; (ii) $31.9 million in tax benefits recorded as aresult of the settlement of certain tax return examinations in the period endedJune 30, 2005; and (iii) a deferred tax benefit of $5.5 million as a result ofOhio tax law changes.

 

Theeffective tax rate for the nine months ended September 30, 2005 was (4.1)%, ascompared to 38.1% for the nine months ended September 30, 2004.  The nine months ended September 30, 2005effective tax rate included a credit to the tax provision of $31.9 million as aresult of the settlement of certain tax return examinations and a deferred taxbenefit of $5.5 million as a result of Ohio tax law changes the impact of whichare reflected as of the law’s enactment date (June 30, 2005) in accordance withFAS 109.

 

*Netincome*.    Net income was $90.4 million in the ninemonths ended September 30, 2005, as compared to $84.3 million in the ninemonths ended September 30, 2004, an increase of $6.1 million or 7%.  This increase was due to the items discussedabove.

 

**Liquidityand Capital Resources**

 

Asof September 30, 2005, our cash and cash equivalents balance was $126.7million, as compared to $92.2 million as of December 31, 2004, an increase of$34.5 million as compared to an increase of $55.1 in the comparable period inthe prior year.  The change in cash andcash equivalents  for the nine monthsended September 30, 2005 and September 20, 2004 were as follows:

 
| ** **                                        | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                        | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(Unaudited)  (In thousands)**     | ** ** |
| Cash provided by operating  activities            |       | $                                   | 97,806     |   | $ | 141,000 |   |
| Cash used for investing  activities               |       | (31,401                             | )          | (64,117 | ) |
| Cash used for financing  activities               |       | (31,919                             | )          | (21,827 | ) |
| Increase (decrease) in  cash and cash equivalents |       | $                                   | 34,486     |   | $ | 55,056 |   |

 

 

17

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*OperatingActivities*

 

Net cash provided byoperating activities was $97.8 million in the nine months ended September 30,2005, as compared to $141.0 million in the nine months ended September 30,2004, a decrease of $43.2 million or 31%. This decrease was primarily due to adecrease in our net revenue compared to the same period in 2004.

 

*InvestingActivities*

 

Net cash used ininvesting activities was $31.4 million in the nine months ended September 30,2005, as compared to $64.1 million in the nine months ended September 30, 2004,a decrease of $32.7 million or approximately 51%.  This decrease is primarily due to:

(i)               thepurchase of WMTW-TV on July 1, 2004 for $38 million; partially offset by

(ii)            investmentsin Ripe TV and USDTV in the nine months ended September 30, 2005 for $6.4million.

 

During the nine monthsended September 30, 2005 and 2004, and as projected for the full yearended December 31, 2005, our primary investing activities are equipmentpurchases related to digital, maintenance and special projects as follows (in thousands):

 

| ** **  | ** ** | **Nine Months Ended  September 30,** | ** ** | **Year Ended  December 31,** | ** ** |
|-------------|------------|--------------------------------------|------------|------------------------------|------------|
| ** **  | ** ** | **2005**                             | ** ** | **2004**                     | ** ** | **(Estimated)  2005** | ** ** |
| Digital     |       | $                                    | 4.9        |                         | $          | 0.7 |   | $ | 7.0 |   |
| Maintenance |       | 11.4                                 |       | 15.0                         |       | 18.0 |   |
| Special     |       | 8.7                                  |       | 10.4                         |       | 15.0 |   |
| Total       |       | $                                    | 25.0       |                         | $          | 26.1 |   | $ | 40.0 |   |

 

*FinancingActivities*

 

Net cash used infinancing activities was $31.9 million in the nine months ended September 30,2005, as compared to $21.8 million in the nine months ended September 30, 2004,an increase of $10.1 million. This increase was primarily due to:

(i)             theredemption of our preferred stock of $11.3 million in January 2005 compared toa redemption of $1.6 million in January 2004; and

(ii)          a paymentof $19.5 million in common stock dividends during the nine months endedSeptember 30, 2005 compared to $16.7 million paid in the nine months endedSeptember 30, 2004; partially offset by

(iii)       therepurchase of $9.4 million of Series A common stock during the nine monthsended September 30, 2005 compared to $10.9 million in the nine months endedSeptember 30, 2004; and

(iv)      proceeds fromstock option exercises and employee stock purchases of $8.2 million in the ninemonths ended September 30, 2005 compared to $8.4 million in the nine monthsended September 30, 2004.

 

*NewCredit Facility and Other Long Term Debt*

 

On April 15, 2005, weentered into a five year $250 million credit facility with a consortium ofbanks led by JP Morgan Chase, Bank of America, Wachovia Bank, BNP Paribas andHarris Nesbitt.  The new credit facilitycan be used for general corporate purposes including working capital,investments, acquisitions, debt repayment and dividend payments.  On the same day, we capitalized $1.1 millionof costs related to the credit facility. Outstanding principal balances under the credit facility will bearinterest at our option at either LIBOR or the alternate base rate (“ABR”), plusthe applicable margin.  The applicablemargin for ABR loans is zero.  Theapplicable margin for LIBOR loans varies between 0.50% and 1.00% depending onthe ratio of our total debt to earnings before interest, taxes, depreciationand amortization as defined by the credit agreement (the “Leverage Ratio”).  The ABR is the greater of (i) the prime rateor (ii) the Federal Funds Effective Rate in effect plus 0.5%.  We are required to pay a commitment fee basedon the unused portion of the Credit Facility. The commitment fee ranges from 0.15% to 0.25% depending on our LeverageRatio.  The credit facility is a generalunsecured obligation of the Company.  Wehave not borrowed under this credit facility as of September 30, 2005.

 

As of September 30, 2005,our long-term debt obligations, exclusive of capital lease obligations, were$882.2 million, all of which mature after 2005. All of our long-term debt obligations as of September 30, 2005 bear interestat 

 

 

18

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a fixed rate.  The Company’s credit ratings for itslong-term debt obligations, respectively, were BBB- by Standard & Poor’sand Fitch Ratings and Baa3 by Moody’s Investors Service, as of September 30,2005.  Such credit ratings are consideredto be investment grade.

 

Ourdebt obligations contain certain financial and other covenants and restrictionson the Company.  Certain of the financialcovenants include credit ratios such as leverage, interest coverage andconsolidated net worth, but such covenants do not include any triggersexplicitly tied to the Company’s credit ratings or stock price.  We are in compliance with all such covenantsand restrictions as of September 30, 2005.

 

We anticipate that ourprimary sources of cash, which include current cash balances, cash provided byoperating activities, and amounts available under our new credit facility, willbe sufficient to finance the operating and working capital requirements of ourstations, as well as our debt service requirements, anticipated capitalexpenditures, and other obligations of the Company for both the next 12 monthsand the foreseeable future thereafter.

 

**Forward-LookingStatements**

 

Thisreport****includes****or incorporates forward-lookingstatements.  We based theseforward-looking statements on our current expectations and projections aboutfuture events.  These forward lookingstatements generally can be identified by the use of phrases such as “anticipate”,“will”, “likely”, “plan”, “believe”, “expect”, “intend”, “project” or othersuch similar words and/or phrases. For these statements, the Company claims theprotection of the safe harbor for forward-looking statements contained in thePrivate Securities Litigation Reform Act of 1995.  The forward-looking statements contained inthis report, concerning, among other things, trends and projections involvingrevenue, income, earnings, cash flow, operating expenses, capital expenditures,dividends and capital structure, involve risks and uncertainties, and aresubject to change based on various important factors.  Those factors include the impact on ouroperations from

 

•                  Changes in Federalregulation of broadcasting, including changes in Federal communications laws orregulations;

•                  Local regulatory actions andconditions in the areas in which our stations operate;

•                  Competition in the broadcasttelevision markets we serve;

•                  Our ability to obtainquality programming for our television stations;

•                  Successful integration oftelevision stations we acquire;

•                  Pricing fluctuations inlocal and national advertising;

•                  Changes in national andregional economies;

•                  Our ability to service andrefinance our outstanding debt; and

•                  Volatility in programmingcosts, industry consolidation, technological developments, and major worldevents**.**

 

These and other matters wediscuss in this report, or in the documents we incorporate by reference intothis report, may cause actual results to differ from those we describe.  We undertake no obligation to update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise.

 

 

 

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**Item 3.****    Quantitativeand Qualitative Disclosures About Market Risk**

 

As of September 30, 2005,the Company was not involved in any derivative financial instruments.  However, the Company may consider certaininterest-rate risk strategies in the future.

 

As ofSeptember 30, 2005, we do not have any outstanding floating rate debt.

 

**Item 4.    Controls and Procedures**

 

The Company’s managementperformed an evaluation under the supervision and with the participation of theCompany’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),of the effectiveness of the disclosure controls and procedures (as that term isdefined in Exchange Act Rule 13a-15(e)) as of the end of the fiscal quarterended September 30, 2005. Based on that evaluation, and as of the end of thequarter for which this report is made, the Company’s management, including theCEO and CFO, concluded that the Company’s disclosure controls and procedureswere effective.  Our management,including the CEO and CFO, performed an evaluation of any changes that occurredin our internal control over financial reporting (as that term is defined inExchange Act Rule 13a-15(f)) during the fiscal quarter ended September 30,2005.  That evaluation did not identifyany changes in the Company’s internal control over financial reporting thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

 

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** **

**PARTII**

** OtherInformation**

 

**Item 2.****    UnregisteredSales of Equity Securities and Use of Proceeds.**

 

*Purchase of EquitySecurities by the Issuer and Affiliated Purchasers. *The following table reflectspurchases made by Hearst Broadcasting during the three months ended September30, 2005 of our Series A Common Stock:

 
| **Period**                      | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid  Per Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced  Program** | ** ** | **(d) Maximum  Number of Shares  that May Yet Be  Purchased Under   the Program** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| July 1 — July 31           |       | 330,550                                     |       | $                                      | 24.31      |                                                                               | 330,550    |                                                                              | 692,044    |   |
| August 1 — August 31       |       | 37,118                                      |       | $                                      | 25.01      |                                                                               | 37,118     |                                                                              | 654,926    |   |
| September 1 — September 30 |       | 176,400                                     |       | $                                      | 25.09      |                                                                               | 176,400    |                                                                              | 5,478,526  | (1) |
| Total                           |       | 544,068                                     |       |                                   |       | 544,068                                                                            |       |                                                                              |       |

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(1)          On September28, 2005, The Hearst Corporation (“Hearst”) and its indirect wholly-ownedsubsidiary Hearst Broadcasting, Inc. (“Hearst Broadcasting”), filed anamendment to their report of beneficial ownership on Schedule 13D with theSecurities and Exchange Commission (“SEC”) to report an increase in HearstBroadcasting’s authorization to purchase the Company’s Series A common stockfrom 20 million to 25 million shares.  Such purchases may be effected from time to time in the open market orin private transactions, subject to market conditions and management’sdiscretion. On September 28, 2005 Hearst filed an amendment to its report ofbeneficial ownership on Schedule 13D with the Securities and ExchangeCommission (“SEC”) to reflect this increased purchase authorization.

 

As of September 30, 2005, Hearst ownedapproximately 45% of the Company’s outstanding Series A Common Stock and 100%of the Company’s Series B Common Stock representing in the aggregateapproximately 69.4% of our common stock.

 

Thefollowing table reflects purchases made by the Company of its Series A CommonStock during the three months ended September 30, 2005.

 
| **Period**                      | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid  per Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced  Program** | ** ** | **(d) Approximate  Dollar Value of  Shares that May Yet  Be Purchased Under  the Program** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| July 1 — July 31           |       | —                                      |       | $                                      | —     |                                                                               | —     |                                                                                       |       |   |
| August 1 — August 31       |       | 37,118                                      |       | $                                      | 25.01      |                                                                               | 37,118     |                                                                                       |       |   |
| September 1 — September 30 |       | —                                      |       | $                                      | —     |                                                                               | —     |                                                                                       | $          | 199,019,675 | (1) |
| Total                           |       | 37,118                                      |       |                                   |       | 37,118                                                                             |       |                                                                                       |       |
|                                 |            |                                             |            |                                        |            |                                                                                    |            |                                                                                            |            |  |  |

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(1)          In May 1998, the Company’sBoard of Directors authorized the repurchase of up to $300 million of itsoutstanding Series A Common Stock.  Suchpurchases may be effected from time to time in the open market or in privatetransactions, subject to market conditions and management’s discretion.  As of September 30, 2005, the Company hasspent approximately $101.0 million to repurchase approximately 4.0 millionshares of Series A Common Stock at an average price of $25.05. There can be noassurance that such repurchases will occur in the future or, if they do occur,what the terms of such repurchases will be.

 

 

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**Item 6.****    Exhibits**

 

**(a) Exhibits:**

 

31.1                                                     Certificationof Chief Executive Officer pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934, as amended.

 

31.2                                                     Certificationof Chief Financial Officer pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934, as amended.

 

32.1                                                     Certificationof Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002.

 

 

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** **

**SIGNATURES**

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

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

 
|   |                                                                                 |   |   |
|--------|--------------------------------------------------------------------------------------|--------|--------|
| By:    | /s/    JONATHAN  C. MINTZER                                      |
|   | Name: Jonathan C. Mintzer  Title: Vice President, General Counsel and Secretary |
|   |                                                                                 |   |   |
| Dated: | October 28, 2005                                                                     |

                                                                                                                                                     
| **Name**                                   | ** ** | **Title**                                                   | ** ** | **Date**         |
|--------------------------------------------|------------|-------------------------------------------------------------|------------|------------------|
|                                       |       |                                                        |       |             |
| /s/    HARRY  T. HAWKS |       | Executive  Vice President                                   |       | October 28, 2005 |
| Harry  T. Hawks                            |       | and  Chief Financial Officer  (Principal Financial Officer) |       |             |
|                                       |       |                                                        |       |             |

 

 

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