**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-Q**

 

**(Mark One)**
| **x**                                             | ** **                                                                                    | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|
| ** **                                        | ** **                                                                                    | ** **                                                                                   |
| **FOR THE  QUARTERLY PERIOD ENDED JUNE 30, 2006** |
| ** **                                        | ** **                                                                                    | ** **                                                                                   |
| **or**                                            |
| ** **                                        | ** **                                                                                    | ** **                                                                                   |
| **o**                                             | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                              |                                                                                          |                                                                                         |
| ** **                                        | **For  the transition period from:    Not Applicable**                    |

 

**Commission file number 1-14776**

 

**Hearst-ArgyleTelevision, Inc.**

(ExactName 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) |

 

SECURITIESREGISTERED PURSUANT TO SECTION 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                         |       |                                                                        |

 

SECURITIESREGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

**None**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the precedingtwelve months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.     Yes  x        No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer   o | Accelerated filer x | Non-accelerated  filer  o |
|----------------------------------|--------------------------|-------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o No x

 

Shares of the registrant’scommon stock outstanding as of July 21, 2006: 92,770,236 shares (consisting of 51,471,588shares of Series A Common Stock and 41,298,648 shares of Series B CommonStock).

 

 

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**HEARST-ARGYLETELEVISION, INC.**

 

**Index**

 
| ** **       | ** **                                                                                                                                     | ** ** |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Part I**  | **Financial Information**                                                                                                                 | ** ** |
|             |                                                                                                                                           |       |
| **Item 1.** | **Financial Statements**                                                                                                                       |       |
|             | Condensed Consolidated Balance Sheets as of June  30, 2006 (unaudited) and December 31, 2005 |       |
|             | Condensed Consolidated  Statements of Income for the Three and Six Months Ended June 30, 2006 and  2005 (unaudited)                            |       |
|             | Condensed Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005  (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, Use of Proceeds and Issuer Purchases of Equity Securities**                                        |       |
| ** **       | ** **                                                                                                                                     | ** ** |
| **Item 4.**      | **Submission of Matters to a  Vote of Security Holders**                                                                                       |       |
| ** **       | ** **                                                                                                                                     | ** ** |
| **Item 6.** | **Exhibits**                                                                                                                                   |       |
| ** **       | ** **                                                                                                                                     | ** ** |
| **Signatures**   |                                                                                                                                           |       |

 

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**HEARST-ARGYLETELEVISION, INC.**

**Condensed ConsolidatedBalance Sheets**

 
| ** **                                       | ** ** | **June 30, 2006**                               | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**                                           | ** ** | ** **                      | ** ** |
| ** **                                       | ** ** | **(In thousands, except share data)** | ** ** |
| **Assets**                                       |       |                                                      |       |                            |       |
| Current assets:                                  |       |                                                      |       |                            |       |
| Cash and cash  equivalents                       |       | $                                                         | 161,918    |                            | $          | 120,065 |   |
| Accounts  receivable, net                        |       | 153,273                                                   |       | 157,672                         |       |
| Program and  barter rights                       |       | 19,035                                                    |       | 46,807                          |       |
| Deferred income  tax asset                       |       | 4,029                                                     |       | 4,029                           |       |
| Other                                            |       | 8,698                                                     |       | 9,153                           |       |
| Total current  assets                            |       | 346,953                                                   |       | 337,726                         |       |
| Property, plant  and equipment, net              |       | 278,084                                                   |       | 279,239                         |       |
| Intangible  assets, net                          |       | 2,393,101                                                 |       | 2,396,086                       |       |
| Goodwill                                         |       | 731,687                                                   |       | 731,687                         |       |
| Other assets:                                    |       |                                                      |       |                            |       |
| Deferred  financing costs, net                   |       | 10,393                                                    |       | 11,276                          |       |
| Investments                                      |       | 35,379                                                    |       | 31,321                          |       |
| Program and  barter rights, noncurrent           |       | 5,668                                                     |       | 1,312                           |       |
| Pension and  other assets                        |       | 39,682                                                    |       | 43,712                          |       |
| Total other  assets                              |       | 91,122                                                    |       | 87,621                          |       |
| Total assets                                     |       | $                                                         | 3,840,947  |                            | $          | 3,832,359 |   |
|                                             |       |                                                      |       |                            |       |
| **Liabilities  and Stockholders’ Equity**   |       |                                                      |       |                            |       |
| Current  liabilities:                            |       |                                                      |       |                            |       |
| Current portion  of long-term debt               |       | $                                                         | 90,047     |                            | $          | 90,047 |   |
| Accounts payable                                 |       | 12,655                                                    |       | 15,256                          |       |
| Accrued  liabilities                             |       | 55,122                                                    |       | 51,133                          |       |
| Program and  barter rights payable               |       | 17,587                                                    |       | 47,285                          |       |
| Payable to  Hearst Corporation, net              |       | 10,643                                                    |       | 6,981                           |       |
| Other                                            |       | 5,440                                                     |       | 6,868                           |       |
| Total current  liabilities                       |       | 191,494                                                   |       | 217,570                         |       |
| Program and  barter rights payable, noncurrent   |       | 8,151                                                     |       | 1,818                           |       |
| Long-term debt                                   |       | 767,147                                                   |       | 777,170                         |       |
| Note payable to  Capital Trust                   |       | 134,021                                                   |       | 134,021                         |       |
| Deferred income  tax liability                   |       | 850,439                                                   |       | 845,272                         |       |
| Other  liabilities                               |       | 37,345                                                    |       | 35,049                          |       |
| Total noncurrent  liabilities                    |       | 1,797,103                                                 |       | 1,793,330                       |       |
| Commitments and  contingencies                   |       |                                                      |       |                            |       |
| Stockholders’  equity:                      |       |                                                      |       |                            |       |
| Preferred Stock                                  |       | —                                                    |       | —                          |       |
| Series A common  stock                           |       | 558                                                       |       | 557                             |       |
| Series B common  stock                           |       | 413                                                       |       | 413                             |       |
| Additional  paid-in capital                      |       | 1,298,020                                                 |       | 1,291,388                       |       |
| Retained earnings                                |       | 668,470                                                   |       | 643,414                         |       |
| Accumulated  other comprehensive loss, net       |       | (6,309                                                    | )          | (6,309                          | )          |
| Treasury stock,  at cost                         |       | (108,802                                                  | )          | (108,004                        | )          |
| Total  stockholders’ equity                 |       | 1,852,350                                                 |       | 1,821,459                       |       |
| Total  liabilities and stockholders’ equity |       | $                                                         | 3,840,947  |                            | $          | 3,832,359 |   |

 

See notes to condensed consolidated financial statements.

 

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**HEARST-ARGYLETELEVISION, INC.**

 

**Condensed ConsolidatedStatements of Income**

 
| ** **                                       | ** ** | **Three Months Ended June 30,**                | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(Unaudited)**                                                    | ** ** | **(Unaudited)**                                   | ** ** |
| ** **                                       | ** ** | **(In thousands, except per share data)** | ** ** |
|                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Total revenue                                    |       | $                                                                  | 193,964    |                                              | $          | 188,453 |   | $ | 367,981 |   | $ | 350,732 |   |
| Station  operating expenses:                     |       |                                                               |       |                                              |       |   |   |   |   |
| Salaries,  benefits and other operating costs    |       | 97,654                                                             |       | 90,659                                            |       | 194,441 |   | 179,283 |   |
| Amortization of  program rights                  |       | 15,951                                                             |       | 15,160                                            |       | 31,283 |   | 30,493 |   |
| Depreciation and  amortization                   |       | 16,080                                                             |       | 13,294                                            |       | 31,468 |   | 26,432 |   |
| Corporate,  general and administrative expenses  |       | 7,626                                                              |       | 5,640                                             |       | 14,899 |   | 11,556 |   |
| Operating income                                 |       | 56,653                                                             |       | 63,700                                            |       | 95,890 |   | 102,968 |   |
|                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Interest  expense, net                           |       | 14,107                                                             |       | 15,762                                            |       | 29,268 |   | 31,463 |   |
| Interest  expense, net – Capital Trust      |       | 2,438                                                              |       | 2,438                                             |       | 4,875 |   | 4,875 |   |
| Other expense                                    |       | 2,501                                                              |       | —                                            |       | 2,501 |   | — |   |
| Income before  income taxes and equity earnings  |       | 37,607                                                             |       | 45,500                                            |       | 59,246 |   | 66,630 |   |
|                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Income tax  (benefit) expense                    |       | 12,729                                                             |       | (19,681                                           | )          | 21,277 |   | (11,441 | ) |
| Equity in  (income) of affiliates, net of tax    |       | (139                                                               | )          | (433                                              | )          | (65 | ) | (620 | ) |
| Net income                                       |       | 25,017                                                             |       | 65,614                                            |       | 38,034 |   | 78,691 |   |
|                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Less preferred  stock dividends                  |       | —                                                             |       | —                                            |       | — |   | 2 |   |
| Income  applicable to common stockholders        |       | $                                                                  | 25,017     |                                              | $          | 65,614 |   | $ | 38,034 |   | $ | 78,689 |   |
|                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Income per  common share – basic            |       | $                                                                  | 0.27       |                                              | $          | 0.71 |   | $ | 0.41 |   | $ | 0.85 |   |
| Number of common  shares used in the calculation |       | 92,733                                                             |       | 92,810                                            |       | 92,694 |   | 92,830 |   |
|                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Income per  common share – diluted          |       | $                                                                  | 0.27       |                                              | $          | 0.68 |   | $ | 0.41 |   | $ | 0.83 |   |
| Number of common  shares used in the calculation |       | 93,197                                                             |       | 98,334                                            |       | 93,185 |   | 98,391 |   |
|                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Dividends per  common share declared             |       | $                                                                  | 0.07       |                                              | $          | 0.07 |   | 0.14 |   | $ | 0.14 |   |

 

See notes to condensed consolidated financial statements.

 

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**HEARST-ARGYLETELEVISION, INC.**

 

**CondensedConsolidated Statements of Cash Flows**

** **
| ** **                                                                         | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                                   | ** ** |
| ** **                                                                         | ** ** | **(In thousands)**                           | ** ** |
| **Operating  Activities**                                                          |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 38,034     |   | $ | 78,691 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                              |       |   |   |
| Depreciation                                                                       |       | 28,483                                            |       | 23,424 |   |
| Amortization of  intangible assets                                                 |       | 2,985                                             |       | 3,008 |   |
| Amortization of  deferred financing costs                                          |       | 884                                               |       | 828 |   |
| Amortization of  program rights                                                    |       | 31,283                                            |       | 30,493 |   |
| Deferred income  taxes                                                             |       | 5,125                                             |       | 2,381 |   |
| Equity in  (income) of affiliates, net                                             |       | (65                                               | )          | (620 | ) |
| Provision for  doubtful accounts                                                   |       | (37                                               | )          | 59 |   |
| Stock-based  compensation expense                                                  |       | 3,905                                             |       | — |   |
| Investment write  down                                                             |       | 2,501                                             |       | — |   |
| (Gain) on  disposition of assets                                                   |       | (609                                              | )          | — |   |
| Dividends  received from affiliates                                                |       | —                                            |       | 2,303 |   |
| Program payments                                                                   |       | (31,230                                           | )          | (31,746 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                              |       |   |   |
| Decrease  (increase) in Accounts receivable                                        |       | 3,654                                             |       | (9,669 | ) |
| Decrease  (increase) in Other assets                                               |       | 4,485                                             |       | 1,657 |   |
| (Decrease)  increase in Accounts payable and accrued liabilities                   |       | (608                                              | )          | (10,429 | ) |
| (Decrease)  increase in Other liabilities                                          |       | 39                                                |       | (35,737 | ) |
| Net cash  provided by operating activities                                         |       | 88,829                                            |       | 54,643 |   |
| **Investing  Activities**                                                          |       |                                              |       |   |   |
| Purchases of  property, plant and equipment                                        |       | (20,599                                           | )          | (16,567 | ) |
| Cash proceeds  from insurance recoveries                                           |       | 1,391                                             |       | — |   |
| Investment in  affiliates and other, net                                           |       | (6,705                                            | )          | (4 | ) |
| Net cash used in  investing activities                                             |       | (25,913                                           | )          | (16,571 | ) |
| **Financing  Activities**                                                          |       |                                              |       |   |   |
| Dividends paid  on preferred stock                                                 |       | —                                            |       | (2 | ) |
| Dividends paid  on common stock                                                    |       | (12,971                                           | )          | (13,003 | ) |
| Series A Common  Stock repurchases                                                 |       | (798                                              | )          | (8,433 | ) |
| Redemption of  preferred stock                                                     |       | —                                            |       | (11,251 | ) |
| Principal  payments & repurchase of long term debt                             |       | (10,023                                           | )          | (27 | ) |
| Proceeds from  employee stock purchase plan & stock option exercises           |       | 2,729                                             |       | 5,683 |   |
| Net cash used in  financing activities                                             |       | (21,063                                           | )          | (27,033 | ) |
| Increase in cash  and cash equivalents                                             |       | 41,853                                            |       | 11,039 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 120,065                                           |       | 92,208 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                 | 161,918    |   | $ | 103,247 |   |
|                                                                               |       |                                              |       |   |   |
| **Supplemental  Cash Flow Information:**                                           |       |                                              |       |   |   |
| **Cash  paid during the period for:**                                              |       |                                              |       |   |   |
| Interest                                                                           |       | $                                                 | 31,935     |   | $ | 31,756 |   |
| Interest on Note  payable to Capital Trust                                         |       | $                                                 | 4,875      |   | $ | 4,875 |   |
| Taxes, net of  refunds                                                             |       | $                                                 | 12,896     |   | $ | 27,887 |   |
| **Non-cash  investing and financing activities:**                                  |       |                                              |       |   |   |
| Accrued  property, plant & equipment purchases                                 |       | $                                                 | 6,496      |   | $ | 227 |   |

 

See notes to condensedconsolidated financialstatements.

 

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**Hearst-Argyle Television, Inc.**

**Notes toCondensed Consolidated Financial Statements**

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

 

**1.    Basis of Presentation**

 

The condensedconsolidated financial statements include the accounts of Hearst-ArgyleTelevision, Inc. and its wholly-owned subsidiaries (the “Company” or “we” or “us”or “our”), except for the Company’s wholly-owned subsidiary trust (the “CapitalTrust”) which cannot be consolidated under the Financial Accounting StandardsBoard (“FASB”) Interpretation No. 46 (revised December 2003), *Consolidation of Variable Interest Entities* (“FIN 46(R)”). Withthe exception of the unconsolidated subsidiary trust, all significantintercompany accounts have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidatedfinancial statements do not include all of the information and notes required byaccounting principles generally accepted in the United States of America forcomplete financial statements and should be read in conjunction with theCompany’s consolidated financial statements included in the Annual Report onour Form 10-K for the year ended December 31, 2005. In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included and are normal and recurring in nature. Operating results for thethree and six months ended June 30, 2006 and 2005 are not necessarilyindicative of the results that may be expected for the full year.

 

For comparability,certain immaterial prior year amounts have been reclassified in the condensed consolidatedstatements of cash flows to conform to the 2006 presentation. Additionally, onthe condensed consolidated statements of income, we have reclassified Equity inincome of affiliates, net of tax from Income before income taxes to belowIncome tax (benefit) expense. As a result, we have reclassified amounts from2005 to conform to this presentation. These reclassifications had no impact onreported net income.

 

**2.    Recent Developments andAccounting Pronouncements**

 

*WKCF-TVClermont, Florida (“WKCF-TV”)  *OnMay 5, 2006, the Company entered into an Asset Purchase Agreement withEmmis Television Broadcasting, L.P., Emmis Television License, LLC and EmmisOperating Company to purchase the assets related to broadcast televisionstation WKCF-TV for $217.5 million in cash funded with the combination of cashon hand and an advance under the Company’s $250 million Senior Credit Facility.The Company anticipates that the closing of the transaction will occur in thethird quarter of 2006.

 

*USDTVImpairment*  On January27, 2006, the Company invested approximately $1 million in USDTV, bringing itstotal ownership interest to $2.5 million or 6.175%. USDTV was formed to providea national digital subscription-based television programming distributionservice using portions of the digital television spectrum. In July 2006, USDTVfiled for Chapter 7 bankruptcy and as a result, the Company wrote off itsinvestment of $2.5 million and included the write off in Other Expense in theaccompanying condensed consolidated statements of income.

 

*HearstLease *On May 5, 2006,the Company entered into a Lease Agreement with Hearst Corporation (“Hearst”).Under the Lease Agreement, the Company will lease a floor of the newlyconstructed Hearst Tower in Manhattan located at 300 W. 57th Street,New York, NY for its corporate offices. The term of the lease is 11 yearscommencing on August 1, 2006. The Company expects to record approximately $1.6million in rent expense annually under the terms of the Lease Agreement withHearst.

 

*Investmentin Internet Broadcasting Systems, Inc.**   *During all periods presented theCompany had an investment in Internet Broadcasting Systems, Inc. (“InternetBroadcasting”) and, during the six months ended June 30, 2005, the Company hadan investment in IBS/HATV LLC, the parent company of 26 wholly-owned subsidiarylimited liability companies each associated with local television websites. InternetBroadcasting operates a national network of station Internet sites and designs,develops and operates station Internet sites under operating agreements. IBS/HATVLLC owned the Internet sites for each of the Company’s television stations. OnDecember 22, 2005, the Company restructured its investment in InternetBroadcasting and the IBS/HATV LLC relationship. As part of the restructuring,IBS/HATV LLC and its subsidiaries were dissolved resulting in the recognitionof local website operating results directly on the books of the Company’stelevision stations while the operating results of the network component ofthese websites is recognized on the books of Internet Broadcasting commencing inJanuary 2006. The Company has 

 

4

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received a portion of its share of the dissolved LLC’s assets duringthe three months ended March 31, 2006 and expects to receive the remainder ofthe assets within the next 12 months.  In addition, the Company purchasedInternet Broadcasting common stock from an existing Internet Broadcastinginvestor for $5.5 million in January 2006, increasing its ownership percentageto 38%. The Company continues to account for its investment in InternetBroadcasting using the equity method.

 

*DigitalTelevision Transition.    *The U.S. Congress passed,and the President signed into law, legislation that guides the transition fromanalog to digital television broadcasting. A component of this legislation is adeadline of February 17, 2009 for completion of the transition to digitalbroadcasting and the return of the analog spectrum to the government. As aresult, the Company accelerated the depreciation of certain equipment that isaffected by the digital conversion.

 

*Financial Interpretation No. 48, Accounting forUncertainty in Income Taxes,* (“FIN 48”)      In June 2006, the Financial AccountingStandards Board (“FASB”) issued FIN 48, which clarifies the accounting foruncertainty in income taxes by prescribing a recognition threshold for taxpositions taken or expected to be taken in a tax return. FIN 48 is effectivefor fiscal years beginning after December 31, 2006. We are currently evaluatingthe impact FIN 48 will have on our financial position or results of operations.

 

**3.    Stock-Based Compensation**

 

On January 1, 2006, theCompany adopted FASB Statement No. 123(R), *Share-Based Payment*(“SFAS 123(R)”) using a modified prospective transition method. Accordingly,because we have adopted a prospective method prior periods have not beenrestated. For the three and six months of 2006, the adoption of SFAS 123(R)resulted in incremental stock-based compensation expense of $2.0 million and $3.9million, respectively. The incremental stock-based compensation expense causedincome before income taxes to decrease by $2.0 million and $3.9 million, netincome to decrease by $1.2 million and $2.4 million and basic and dilutedearnings per share to decrease by $0.01 for the three months ended June 30,2006, and by $0.03 and $0.02 for the six months ended June 30, 2006.

 

Prior to the adoption of SFAS123(R), the Company applied Accounting Principles Board Opinion No. 25, *Stock Issued to Employees*(“APB 25”), to account for itsstock-based awards, and the disclosure-only provisions of FASB Statement No.123, *Accounting for Stock-Based Compensation*,as amended (“SFAS 123”), to present stock-based compensation disclosure. UnderAPB 25, because the exercise price of the Company’s employee stock options equaledthe market price of the underlying stock on the date of grant, the stockoptions had no intrinsic value and therefore no compensation expense wasrecognized. The following table details the pro forma effects on net income andearnings per share for the three and six months ended June 30, 2005 hadcompensation expense been recorded based on the fair value method under SFAS123, utilizing the Black-Scholes option valuation model:

 

5

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| ** **                                                                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                  | ** ** | **June 30, 2005**      | ** ** | **June 30, 2005**    | ** ** |
| Net income                                                                                                                  |       | $                                | 65,614     |                           | $          | 78,691 |   |
| Less:                                                                                                                       |       |                             |       |                           |       |
| Total  stock-based employee compensation expense determined under the fair value  method for all awards, net of related tax |       | (1,214                           | )          | (2,428                         | )          |
| Pro forma net  income                                                                                                       |       | $                                | 64,400     |                           | $          | 76,263 |   |
| Less: Preferred  stock dividends                                                                                            |       | —                           |       | (2                             | )          |
| Pro forma net  income applicable to common stockholders                                                                     |       | $                                | 64,400     |                           | $          | 76,261 |   |
|                                                                                                                        |       |                             |       |                           |       |
| Earnings per  share:                                                                                                        |       |                             |       |                           |       |
| Basic – as  reported                                                                                                   |       | $                                | 0.71       |                           | $          | 0.85 |   |
| Basic – pro  forma                                                                                                     |       | $                                | 0.69       |                           | $          | 0.82 |   |
|                                                                                                                        |       |                             |       |                           |       |
| Diluted – as  reported                                                                                                 |       | $                                | 0.68       |                           | $          | 0.83 |   |
| Diluted – pro  forma                                                                                                   |       | $                                | 0.65       |                           | $          | 0.78 |   |

 

On May 5, 2004, the Company’s stockholders and Boardof Directors approved the 2004 Long Term Incentive Compensation Plan, which theBoard further amended in July 2006 (as amended, the “Incentive CompensationPlan”). The Incentive Compensation Plan is intended to replace the Amended andRestated 1997 Stock Option Plan (the “Stock Option Plan”) and all grants madeafter May 5, 2004 are made under the new Incentive Compensation Plan. Under theIncentive Compensation Plan the Company may award various forms of incentivecompensation, including stock options and restricted stock, to officers, otherkey employees and non-employee directors of the Company and its subsidiaries. TheCompany reserved for issuance under the Incentive Compensation Plan 3.6 millionshares of Series A Common Stock. As of June 30, 2006, under the Incentive CompensationPlan stock options were granted with exercise prices equal to the market priceof the underlying stock as of the date of grant. Each option is exercisableafter the period or periods specified in the applicable option agreement, butno option can be exercised after the expiration of 10 years from the date ofgrant. Options we have granted to employees under the Incentive CompensationPlan cliff-vest after three years commencing on the effective date of thegrant.

 

Under the Stock Option Plan, 8.7 million shares ofSeries A Common Stock were reserved for issuance. Under the Stock Option Plan,stock options were granted with exercise prices equal to the market price ofthe underlying stock on the date of grant. Generally, options granted prior toDecember 2000 either (i) cliff-vest after three years commencing on theeffective date of the grant or (ii) vest either after nine years or inone-third increments upon attainment of certain market price goals of theCompany’s Series A Common Stock. Options granted in December 2000 vest inone-third increments per year commencing one year from the date of the grant. Generally,options granted after December 2000 cliff-vest after three years commencing onthe effective date of the grant. All options granted pursuant to the StockOption Plan will expire no later than ten years from the date of grant.

 

A summary of the status of the Company’s StockOption Plan and Incentive Compensation Plan, and changes for the three and six monthsended June 30, 2006 and for the year ended December 31, 2005 is presented below(not in thousands):  

 

6

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| ** **                        | ** ** | ** **  | ** ** | **Weighted Average** | ** ** |
|-----------------------------------|------------|-------------|------------|---------------------------|------------|
| ** **                        | ** ** | **Options** | ** ** | **Exercise Price**   | ** ** |
| Outstanding at  December 31, 2004 |       | 8,060,429   |       | $                         | 23.36      |   |
| Granted                           |       | 1,273,400   |       | 24.14                     |       |
| Exercised                         |       | (362,719    | )          | 18.64                     |       |
| Forfeited                         |       | (450,263    | )          | 26.02                     |       |
| Outstanding at  December 31, 2005 |       | 8,520,847   |       | $                         | 23.53      |   |
| Granted                           |       | 80,000      |       | 25.08                     |       |
| Exercised                         |       | (4,600      | )          | 19.76                     |       |
| Forfeited                         |       | (5,500      | )          | 25.00                     |       |
| Outstanding at  March 31, 2006    |       | 8,590,747   |       | $                         | 23.54      |   |
| Granted                           |       | 8,800       |       | 22.92                     |       |
| Exercised                         |       | (78,400     | )          | 18.58                     |       |
| Forfeited                         |       | (2,400      | )          | 24.89                     |       |
| Outstanding at  June 30, 2006     |       | 8,518,747   |       | $                         | 23.59      |   |
|                              |       |        |       |                      |       |
| Exercisable at  December 31, 2004 |       | 4,392,112   |       | $                         | 21.84      |   |
| Exercisable at  December 31, 2005 |       | 4,720,837   |       | $                         | 22.25      |   |
| Exercisable at  June 30, 2006     |       | 4,685,531   |       | $                         | 22.36      |   |

 

The following table summarizes information aboutstock options outstanding and exercisable at June 30, 2006 (not in thousands):

 
| ** **                              | ** ** | **Options Outstanding**                                   | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number   Outstanding  at June 30, 2006** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Intrinsic Value of In  the money options at  June 30, 2006** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| $18.56-$21.59                           |       | 2,456,162                                                      |       | 4.80 |   | $ | 6,205,722 |   | $ | 19.53 |   |
| $22.08-$24.89                           |       | 2,417,111                                                      |       | 8.04 |   | — |   | $ | 24.08 |   |
| $25.13-$26.81                           |       | 3,481,860                                                      |       | 5.77 |   | — |   | $ | 25.83 |   |
| $27.75-$29.00                           |       | 149,614                                                        |       | 1.70 |   | — |   | $ | 28.87 |   |
| $36.44                                  |       | 14,000                                                         |       | 2.11 |   | — |   | $ | 36.44 |   |
|                                    |       | 8,518,747                                                      |       | 6.06 |   | $ | 6,205,722 |   | $ | 23.59 |   |

 
| ** **                              | ** ** | **Options Exercisable**                             | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number  Exercisable At  June 30, 2006** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Intrinsic Value of In  the money options at  June 30, 2006** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| ** **                              | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $18.56-$21.59                           |       | 2,456,162                                                |       | 4.80 |   | $ | 6,205,722 |   | $ | 19.53 |   |
| $22.08-$24.89                           |       | 1,074,111                                                |       | 6.36 |   | — |   | $ | 24.07 |   |
| $25.13-$26.81                           |       | 1,008,144                                                |       | 2.09 |   | — |   | $ | 26.36 |   |
| $27.75-$29.00                           |       | 133,114                                                  |       | 1.59 |   | — |   | $ | 28.92 |   |
| $36.44                                  |       | 14,000                                                   |       | 2.11 |   | — |   | $ | 36.44 |   |
|                                    |       | 4,685,531                                                |       | 4.47 |   | $ | 6,205,722 |   | $ | 22.36 |   |

 

7

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Under SFAS No. 123, options are valued at their dateof grant and then expensed over their vesting period. The values of theCompany’s options were calculated at the date of grant using the Black-Scholesoption-pricing model for options granted in 2006 and 2005. The weighted averagegrant date fair value of options granted was $7.46 and $7.83 for each of thethree and six months ended June 30, 2006 and 2005, respectively. The totalintrinsic value (the difference between market price and exercise price) ofoptions exercised during the three and six months ended June 30, 2006 was $0.3million and $0.4 million, respectively. The total intrinsic value (thedifference between market price and exercise price) of options exercised duringthe three and six months ended June 30, 2005 was $1.1 million and $1.7 million,respectively. The total fair value of shares vested during the three and sixmonth period ended June 30, 2006 was $0.1 million and $0.4 million,respectively. The total fair value of shares vested during the three and sixmonth period ended June 30, 2005 was $0 and $0.06 million, respectively.

 

The following assumptions were used in the BlackScholes option-pricing model to value options granted during the three and sixmonths ended June 30, 2006 and 2005:

 
| ** **               | ** ** | **2006**       | ** ** | **2005**       | ** ** |
|--------------------------|------------|----------------|------------|----------------|------------|
| Expected life            |       | 5.9 years |       | 5.0 years |       |
| Volatility  factor       |       | 27.71          | %          | 30.14          | %          |
| Risk-free  interest rate |       | 4.43           | %          | 3.72           | %          |
| Dividend yield           |       | 1.12           | %          | 0.94           | %          |

 

The expected life of options granted was estimated basedon the historical exercise behavior of employees. The expected volatility factorwas based on historical volatility for a period equal to the stock option’sexpected life. The risk-free interest rate is based on the U.S. treasury yieldcurve in effect at the time of the grant.

 

The total compensation cost recognized for the threeand six months ended June 30, 2006 was $2.0 million and $3.9 million,respectively. The total tax benefit related thereto was $0.8 million and $1.5million for the three and six months ended June 30, 2006, respectively. As of June30, 2006, there was $11.3 million of total unrecognized compensation costrelated to unvested share-based compensation awards granted under the stockoption plans which does not include the effect of future grants of equitycompensation, if any. Of the total $11.3 million, we expect to recognizeapproximately 31% in the remainder of 2006, 45% in 2007, and 24% in 2008,assuming average forfeitures. We received $1.5 million due to the exercise ofstock options during the six month period ended June 30, 2006, and we received$3.2 million and $4.4 million due to the exercise of stock options during thethree and six month period ending June 30, 2005, respectively.

 

**4.    Long-TermDebt**

 

Long-term debt as of June 30, 2006 and December 31,2005 consisted of the following:  

 
| ** **                 | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Senior notes               |       | $                           | 407,110    |                            | $          | 417,110 |   |
| Private  placement debt    |       | 450,000                     |       | 450,000                         |       |
| Capital lease  obligations |       | 84                          |       | 107                             |       |
|                       |       | 857,194                     |       | 867,217                         |       |
| Less current  portion      |       | (90,047                     | )          | (90,047                         | )          |
|                       |       |                        |       |                            |       |
| Total long-term  debt      |       | $                           | 767,147    |                            | $          | 777,170 |   |

 

During the six months ended June 30, 2006, theCompany purchased $10 million of 7.00% senior notes due 2018.

 

8

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**5.    EarningsPer Share**

 

The calculation of basic earnings per share (“EPS”) foreach period is based on the weighted average number of common sharesoutstanding during the period. The calculation of dilutive EPS for each periodis based on the weighted average number of common shares outstanding during theperiod, plus the effect, if any, from the exercise of stock options andconversion of preferred securities. The following table sets forth areconciliation between basic EPS and diluted EPS, in accordance with SFAS No. 128,*Earnings Per Share*. 

 
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                   | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                   | ** ** | **(Unaudited)**                  | ** ** |
| ** **                                                                                   | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Reported net  income                                                                         |       | $                                | 25,017     |                           | $          | 65,614 |   | $ | 38,034 |   | $ | 78,691 |   |
| Less: Preferred  stock dividends                                                             |       | —                           |       | —                         |       | — |   | (2 | ) |
| Income  applicable to common stockholders (Basic)                                            |       | $                                | 25,017     |                           | $          | 65,614 |   | $ | 38,034 |   | $ | 78,689 |   |
|                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Add: Interest  Expense, Net- Capital Trust, net of tax                                       |       | $                                | —     |                           | 1,487      |   | $ | — |   | $ | 2,974 |   |
| Income  applicable to common stockholders (Diluted)                                          |       | $                                | 25,017     |                           | $          | 67,101 |   | $ | 38,034 |   | $ | 81,663 |   |
|                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Basic shares                                                                                 |       | 92,733                           |       | 92,810                         |       | 92,694 |   | 92,830 |   |
| Basic EPS                                                                                    |       | $                                | 0.27       |                           | $          | 0.71 |   | $ | 0.41 |   | $ | 0.85 |   |
|                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Diluted shares                                                                               |       | 93,197                           |       | 98,334                         |       | 93,185 |   | 98,391 |   |
| Diluted EPS                                                                                  |       | $                                | 0.27       |                           | $          | 0.68 |   | $ | 0.41 |   | $ | 0.83 |   |
|                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Basic shares                                                                                 |       | 92,733                           |       | 92,810                         |       | 92,694 |   | 92,830 |   |
| Add: Shares  issued upon assumed exercise of stock options                                   |       | 464                              |       | 396                            |       | 491 |   | 433 |   |
| Add: Shares  issued upon conversion of Series B Redeemable Convertible Preferred  Securities |       | —                           |       | 5,128                          |       | — |   | 5,128 |   |
| Diluted shares                                                                               |       | 93,197                           |       | 98,334                         |       | 93,185 |   | 98,391 |   |

 

There were no shares of Series A or B Preferred Stockoutstanding as of June 30, 2006 and 2005 and therefore no shares were includedin the computation of diluted EPS. The dividends for the Series A and BPreferred Stock were deducted from Net income for the calculation of Basic andDiluted EPS. These shares were redeemed in full as of January 1, 2005 andtherefore, one day of dividends was recorded for the three and six months endedJune 30, 2005.

 

The dilution test for the Redeemable ConvertiblePreferred Securities related to the Capital Trust is performed for all periods.This test considers only the total number of shares that could be issued ifconverted and does not consider either the conversion price or the share priceof the underlying common shares. For the three and six months ended June 30,2006, 5,128,205 shares of Series A Common Stock to be issued upon theconversion of 2,600,000 shares of Series B 7.5% Redeemable ConvertiblePreferred Securities, related to the Capital Trust, are not included in thenumber of common shares used in the calculation of diluted EPS because to do sowould have been anti-dilutive. For the three and six months ended June 30,2005, diluted shares include 5,128,205 common shares underlying the Series BRedeemable Convertible Preferred Securities. When the securities related to theCapital Trust are dilutive, the interest, net of tax, related to the CapitalTrust is added back to Income applicable to common stockholders for purposes ofthe diluted EPS calculation.

 

Common stock options for 6,029,785 and 3,932,079shares of Series A Common Stock (before application of the treasury stockmethod), outstanding as of June 30, 2006 and 2005, respectively, were notincluded in the computation of diluted EPS because the exercise price wasgreater than the average market price of the common shares during thecalculation period.

 

9

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**6.    Goodwill and IntangibleAssets**

 

Summarized below are the carrying value of intangibleassets and goodwill as of June 30, 2006 and December 31, 2005:

 
| ** **                                       | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Gross**                   | ** ** | ** **                      | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                       | ** ** | **Carrying**                | ** ** | **Accumulated**                 | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                                       | ** ** | **Value**                   | ** ** | **Amortization**                | ** ** | **Value** | ** ** | **Value** | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Intangible  assets subject to amortization:      |       |                        |       |                            |       |   |   |   |   |   |   |   |   |
| Advertiser  client base                          |       | $                           | 122,891    |                            | $          | 71,832 |   | $ | 51,059 |   | $ | 122,891 |   | $ | 70,050 |   | $ | 52,841 |   |
| Network  affiliations                            |       | 95,493                      |       | 37,666                          |       | 57,827 |   | 95,493 |   | 36,489 |   | 59,004 |   |
| Other                                            |       | 743                         |       | 631                             |       | 112 |   | 743 |   | 605 |   | 138 |   |
| Total intangible  assets subject to amortization |       | $                           | 219,127    |                            | $          | 110,129 |   | $ | 108,998 |   | $ | 219,127 |   | $ | 107,144 |   | $ | 111,983 |   |
| Intangible  assets not subject to amortization:  |       |                        |       |                            |       |   |   |   |   |   |   |   |   |
| FCC licenses                                     |       |                        |       |                            |       | 2,284,103 |   |   |   |   |   | 2,284,103 |   |
| **Total  intangible assets, net**                |       |                        |       |                            |       | $ | 2,393,101 |   |   |   |   |   | $ | 2,396,086 |   |
| **Goodwill**                                     |       |                        |       |                            |       | $ | 731,687 |   |   |   |   |   | $ | 731,687 |   |

 

The Company’s amortization expense for intangibleassets was approximately $1.5 million and $3.0 million for each of the threeand six months, respectively, ended June 30, 2006 and 2005. Estimated annualintangible asset amortization expense for each of the next five years isapproximately $6.0 million.

 

**7.    Income Taxes**

 

The income tax expense for the three and six monthsended June 30, 2006 and 2005 consisted of the following:

 
| ** **          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **          | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| Current .           |       | $                                                   | 10,069     |                                              | $          | (19,451 | ) | $ | 16,152 |   | $ | (13,822 | ) |
| Deferred            |       | 2,660                                               |       | (230                                              | )          | 5,125 |   | 2,381 |   |
| Income tax  expense |       | $                                                   | 12,729     |                                              | $          | (19,681 | ) | $ | 21,277 |   | $ | (11,441 | ) |

 

The effective tax rate for the three and six monthsended June 30, 2006 was 33.8% and 35.9%, as compared to (43.3)% and (17.2)%, forthe three and six months ended June 30, 2005, respectively. The Company expectsits effective tax rate for the remaining periods of 2006 to be approximately39.5%. The Company’s effective tax rate in a given financial statement periodmay be materially impacted by changes in the level of earnings by taxingjurisdictions, changes in the expected outcome of tax audits, or changes in thedeferred tax valuation allowance. The Company records reserves for estimates ofprobable settlements of federal and state audits. The Company records avaluation allowance against its deferred tax assets arising from certain netoperating and capital losses when it is more likely than not that some portionor all of such losses will not be realized.

 

10

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The Company’s net deferred income tax liability isas follows:

 
| ** **                         | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Deferred income  tax liability     |       | $                           | 850,439    |                            | $          | 845,272 |   |
| Deferred income  tax asset         |       | 4,029                       |       | 4,029                           |       |
| Net deferred  income tax liability |       | $                           | 846,410    |                            | $          | 841,243 |   |

 

The deferred tax liabilities primarily relate todifferences between book and tax basis of the Company’s FCC licenses. Inaccordance with the adoption of FASB No. 142, *Goodwill andIntangible Assets*, on January 1, 2002, the Company no longeramortizes its FCC licenses for book purposes, but instead tests them forimpairment annually. For tax purposes, the FCC licenses continue to beamortized and as a result, the deferred tax liabilities will increase overtime.

 

**8.    Common Stock**

 

**Common Stock Repurchase**

 

In May 1998 the Company’s Board of Directorsauthorized the repurchase of up to $300 million of its outstanding Series ACommon Stock. Such repurchases may be effected from time to time in the openmarket or in private transactions, subject to market conditions and management’sdiscretion. During the three months ended June 30, 2006, the Company did notrepurchase any shares of Series A Common Stock. During the six months endedJune 30, 2006, the Company repurchased 33,450 shares of Series A Common Stockat a cost of $0.8 million and an average per share price of $23.86. Between May1998 and June 30, 2006, the Company repurchased approximately 4.4 millionshares of Series A Common Stock at a cost of approximately $108.8 million andan average price of $24.96. There can be no assurance that such repurchaseswill occur in the future or, if they do occur, what the terms of suchrepurchases will be.

 

Hearst and its indirect wholly-ownedsubsidiary, Hearst Broadcasting, Inc. (“Hearst Broadcasting”), areauthorized to purchase up to 25 million shares of the Company’s Series A CommonStock from time to time in the open market, in private transactions orotherwise. As of June 30, 2006, under this plan Hearst purchased approximately 23.1million shares of the Company’s outstanding Series A Common Stock.

 

As of June 30, 2006 and December 31, 2005, Hearst’sownership of the Company’s outstanding common stock was 73.4% and 70.5%,respectively.

 

**Common Stock Dividends**

 

During the six months ended June 30, 2006, theCompany’s Board of Directors declared a cash dividend on shares of our Series Aand Series B Common Stock as follows:

 
| **Dividend Amount** | ** ** | **Declaration Date** | ** **     | **Record Date** | ** **    | **Payment Date** | ** **     | **Total Dividend** | ** ** | **Hearst Portion** | ** ** |
|--------------------------|------------|---------------------------|----------------|----------------------|---------------|-----------------------|----------------|-------------------------|------------|-------------------------|------------|
| $                        | 0.07       |                      | March 31, 2006 |                 | April 5, 2006 |                  | April 15, 2006 |                    | $          | 6,485                   |       | $ | 4,636 |   |
| $                        | 0.07       |                      | May 4, 2006    |                 | July 5, 2006  |                  | July 15, 2006  |                    | $          | 6,493                   |       | $ | 4,768 |   |

 

**9.    Preferred Stock**

 

The Company has one million authorized shares ofpreferred stock, par value $.01 per share. Under the Company’s Certificate ofIncorporation, the Company has two authorized series of preferred stock, SeriesA Preferred Stock and Series B Preferred Stock (collectively, the “PreferredStock”). At June 30, 2006, there was no Preferred Stock outstanding. On January1, 2005, 5,781 shares of Series A Preferred Stock and 5,470 shares of Series BPreferred Stock were redeemed. The Preferred Stock had a cash dividend featurewhereby each share accrued $65 per share annually, to be paid quarterly.

 

11

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**10.    Related Party Transactions**

 

*The Hearst Corporation.*    As of June 30, 2006, Hearst ownedapproximately 52.1% of our Series A Common Stock and 100% of our Series BCommon Stock, representing in the aggregate approximately 73.4% of theoutstanding voting power of our common stock, except with regard to theelection of directors. With regard to the election of directors, Hearst’sownership of our Series B Common Stock entitles Hearst to elect 11 of the 13members of our Board of Directors. During the six months ended June 30, 2006and 2005, we were engaged in the following transactions with Hearst or partiesrelated to Hearst:

 

•      *Hearst Lease  *On May 5, 2006, we entered into aLease Agreement with Hearst, pursuant to which we will lease a floor of thenewly constructed Hearst Tower in Manhattan for our corporate offices. Weexpect to record approximately $1.6 million in rent expense annually under theterms of the Lease Agreement with Hearst.

 

•      *ManagementAgreement*.   We recorded revenue of approximately $1.7million and $3.1 million in the three and six months ended June 30, 2006,respectively, and $1.3 million and $2.4 million in the three and six months endedJune 2005, respectively, relating to a management agreement with Hearst (the “ManagementAgreement”). Pursuant to the Management Agreement, we provide certainmanagement services, such as sales, news, programming, financial and accountingmanagement services, with respect to certain Hearst owned or operated televisionand radio stations. We believe the terms of the Management Agreement arereasonable to both parties; however, there can be no assurance that morefavorable terms would not be available from third parties.

 

•      *ServicesAgreement*.    We incurred expenses ofapproximately $1.3 million and $2.6 million in the three and six months ended June30, 2006, respectively, and $1.3 million and $2.6 million in the three and sixmonths ended June 30, 2005, respectively, relating to a services agreement withHearst (the “Services Agreement”). Pursuant to the Services Agreement, Hearstprovides the Company certain administrative services such as accounting, auditing,financial, legal, insurance, data processing, and employee benefitsadministration. We believe the terms of the Services Agreement are reasonableto both parties; however, there can be no assurance that more favorable termswould not be available from third parties.

 

•     *Interest Expense, 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 $4.9 millionfor each of the three and six months ended June 30, 2006 and 2005,respectively. The Capital Trust then paid comparable amounts to its RedeemableConvertible Preferred Securities holders, including Hearst, which received $0.5million and $0.9 million for each of the three and six months ended June 30,2006, respectively.

 

•      *Dividends onCommon Stock.*    On each of May 4, 2006 andMarch 31, 2006, our Board of Directors declared a cash dividend of $0.07 on ourSeries A and Series B Common Stock for $6.5 million. Included in these amountswere $4.6 million and $4.8 million payable to Hearst. On each of May 4, 2005and March 31, 2005, our Board of Directors declared a cash dividend of $0.07 onour Series A and Series B Common Stock for $6.5 million. Included in theseamounts were $4.5 million and $4.4 million payable to Hearst.

 

•     *Radio Facilities Lease.*    Pursuant to a lease agreement, Hearst paidus approximately $0.2 and $0.4 million for each of the three and six monthsended June 30, 2006 and 2005, respectively. Under this agreement, Hearst leasesfrom the Company premises for WBAL-AM and WIYY-FM, Hearst’s Baltimore, Marylandradio stations.

 

•      *Lifetime Entertainment Services*.    Wehave agreements with Lifetime Entertainment Services (“Lifetime”), an entityowned 50% by an affiliate of Hearst and 50% by The Walt Disney Company, whereby(i) we assist 

 

12

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Lifetime in securing distribution and subscribers forthe Lifetime Television, Lifetime Movie Network and/or Lifetime Real Womenprogramming services; and (ii) Lifetime acts as our agent with respect to thenegotiation of our agreements with cable, satellite and certain othermulti-channel video programming distributors. Amounts payable to us by Lifetimedepend on the specific terms of these agreements and may be fixed or variable. Werecorded revenue from the agreements of $4.0 million and $8.6 million in thethree and six months ended June 30, 2006 and $1.2 million and $2.2 million inthe three and six months ended June 30 2005, respectively.

 

•     *Wide Orbit, Inc.*In November 2004, we entered into an agreement to license Wide Orbit Inc.’s(“Wide Orbit”) Traffic Sales and Billing Solutions software. Hearst ownsapproximately 8% of Wide Orbit. For the each of the three and six months endedJune 30, 2006 and 2005, we paid Wide Orbit approximately $0.4 and $0.7 millionunder the agreement.

 

•      *N*ew*England Cable News*.   Two of our executive officers, David J. Barrett and Steven A. Hobbsserve as Hearst’s representatives on the management board of New England CableNews, a regional cable channel, jointly owned by Hearst Cable News, Inc., anindirect wholly-owned subsidiary of Hearst, and Comcast MO Cable News, Inc. Hearstpays $4,000 per month to the Company as compensation for their service.

 

•     *Other Transactions withHearst.*    In the three andsix months ended June 30, 2006 and 2005, we recorded immaterial net revenuerelating to advertising sales from Hearst.

 

*Internet Broadcasting.*    As of June 30, 2006, we owned 38% ofInternet Broadcasting. Our share of the (income) or loss of InternetBroadcasting included in Equity in loss (income) of affiliates, net of tax was$0.2 million of income and $0.03 million of loss for the three months endedJune 30, 2006 and 2005, respectively. Our share of the (income) or loss ofInternet Broadcasting was $0.5 million of income and $0.1 million of loss forthe six months ended June 30, 2006 and 2005, respectively. Our share of incomefor IBS/HATV LLC included in Equity in loss (income) of affiliates, net of taxwas $0.5 million and $0.7 million of income for the three and six months endedJune 30, 2005, respectively. Since January 2001, Harry T. Hawks, our ExecutiveVice President and Chief Financial Officer, since October 2002, Terry Mackin,our Executive Vice President, and since December 2005, Steven A. Hobbs, ourExecutive Vice President and Chief Legal and Development Officer, have servedon the Board of Directors of Internet Broadcasting, from which they do notreceive compensation for their services. In the three and six months ended June30, 2006, the Company paid $1.9 million and $3.8 million, respectively, toInternet Broadcasting under an operating agreement pursuant to which InternetBroadcasting manages a national network of station Internet sites and designs,develops and operates the Internet sites under an operating agreement. We alsohave an agreement with Internet Broadcasting pursuant to which they providehosting services for our corporate Internet site for a nominal amount.

 

*Small Business Television*.   The Company utilizes Small BusinessTelevision’s (“SBTV”) services to provide television stations with additionalrevenue through the marketing and sale of commercial time to smaller businessesthat do not traditionally use television advertising due to costs. In the threeand six month period ended June 30, 2006, these sales generated revenue ofapproximately $0.4 and $0.6 million, respectively, of which approximately $0.2 millionand $0.3 million was distributed to SBTV, respectively. In the three and sixmonth period ended June 30, 2005, these sales generated revenue of approximately$0.3 and $0.7 million, respectively, of which approximately $0.1 and $0.3million was distributed to SBTV, respectively. Mr. Dean Conomikes, the owner ofSBTV, is the son of John G. Conomikes, a member of the Company’s Board ofDirectors.

 

*NBC Weather Plus.*    In 2004, we invested in Weather NetworkAffiliates Company, LLC (“WNAC”), which owns the NBC Weather Plus Network (“WeatherPlus”). Since November 2004 we have launched Weather Plus in nine of our 10 markets– Sacramento, Orlando, Winston-Salem, Greenville, Cincinnati, Baltimore,Lancaster, New Orleans and Plattsburgh – and cable carriage is presentlyavailable in eight of those markets. We expect to launch Weather Plus in ourremaining NBC market in 2006. Terry Mackin, our Executive Vice President, currentlyserves as the Past Chairman of the Board of the NBC Television AffiliatesAssociation, which is the managing member and the owner of certain ownershipinterests in WNAC. Mr. Mackin served as the Chairman of the NBC TelevisionAffiliates Association Board from May 2004 to May 2006. Additionally, since May2006, Mr. 

 

13

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Mackin hasserved as a member of the Board of Directors of NBC Weather Plus Network LLCand as Chairman of the Futures Committee of NBC. Mr. Mackin does notreceive compensation for his Board service.

 

*USDTV*.    Currently,we and Hearst each own approximately 6.175% of USDTV. In addition, our stationKOAT-TV in Albuquerque, New Mexico, has an agreement to lease a portion of itsdigital spectrum to USDTV. In July 2006, USDTV filed for Chapter 7 bankruptcyand the Company wrote-off its investment. From September 23, 2005 to June 20,2006, Steven A. Hobbs, our Executive Vice President and Chief Legal andDevelopment Officer, served on the Board of Directors of USDTV, from which hedid not receive compensation for his services.

 

*Other Related Parties.*    In the ordinary course of business, theCompany enters into transactions with other related parties, none of which weresignificant to our financial results in the six months ended June 30, 2006 and2005.

 

**11.    Retirement Plans and OtherPost-Retirement Benefits**

 

***Overview***

 

The Company maintains seven defined benefit pensionplans, 12 employee savings plans, and other post-retirement benefit plans foractive, retired and former employees. In addition, the Company participates ina multi-employer union pension plan that provides retirement benefits tocertain union employees. The seven defined benefit pension plans are hereaftercollectively referred to as the “Pension Plans.”

 

***Pension Plans and OtherPost-Retirement Benefits***

 

Benefits under the Pension Plans are generally basedon years of credited service, age at retirement and average of the highest fiveconsecutive years’ compensation. The cost of the Pension Plans is computed onthe basis of the Project Unit Credit Actuarial Cost Method. Past service costis amortized over the expected future service periods of the employees.

 

*Net Periodic Pension and Post-Retirement Cost*

 

The following schedule presents net periodic pensioncost for the Company’s Pension Plans in the three and six months ended June 30,2006 and 2005:

 
| ** **                               | ** ** | **Pension Benefits**                           | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                               | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)** | ** ** |
| Service cost                             |       | $                                                   | 2,496      |   | $ | 2,258 |   | $ | 4,993 |   | $ | 4,516 |   |
| Interest cost                            |       | 2,355                                               |       | 2,165 |   | 4,709 |   | 4,330 |   |
| Expected return  on plan assets          |       | (2,779                                              | )          | (2,447 | ) | (5,558 | ) | (4,894 | ) |
| Amortization of  prior service cost      |       | 108                                                 |       | 108 |   | 216 |   | 216 |   |
| Amortization of  transitional obligation |       | —                                              |       | 1 |   | 1 |   | 2 |   |
| Recognized  actuarial loss               |       | 967                                                 |       | 739 |   | 1,934 |   | 1,478 |   |
| Net periodic  pension cost               |       | $                                                   | 3,147      |   | $ | 2,824 |   | $ | 6,295 |   | $ | 5,648 |   |

 

14

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The following schedule presents net periodic pensioncost for the Company’s post-retirement benefit plan in the three and six monthsended June 30, 2006 and 2005:

 
| ** **                                       | ** ** | **Post-Retirement Benefits**                   | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                                       | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)** | ** ** |
| Service cost                                     |       | $                                                   | 29         |   | $ | 20 |   | $ | 59 |   | $ | 40 |   |
| Interest cost                                    |       | 122                                                 |       | 84 |   | 244 |   | 168 |   |
| Amortization of  prior service cost              |       | 7                                                   |       | 5 |   | 14 |   | 10 |   |
| Amortization of  transitional (asset) obligation |       | 7                                                   |       | 5 |   | 14 |   | 10 |   |
| Recognized actuarial  loss                       |       | 6                                                   |       | 4 |   | 12 |   | 8 |   |
| Net periodic  pension cost                       |       | $                                                   | 171        |   | $ | 118 |   | $ | 343 |   | $ | 236 |   |

 

*Contributions*

 

During the three and six months ended June 30, 2006,we did not make any contributions to our defined benefit plans and wecontributed approximately $0.2 million and $0.4 million, respectively, to ourpost-retirement benefit plans. During the year ending December 31, 2006, theCompany is not required to contribute to the Pension Plans, but may choose todo so voluntarily, and expects to contribute approximately $0.7 million to thepost-retirement benefit plan.

 

**12.     Other Commitmentsand Contingencies**

 

The Company hasguaranteed the payments by its Capital Trust on the Redeemable ConvertiblePreferred Securities in the amount of $134 million. The guarantee isirrevocable and unconditional, and guarantees the payment in full of all (i)distributions on the Redeemable Convertible Preferred Securities to the extentof available funds of the Capital Trust; (ii) amounts payable upon redemptionof the Redeemable Convertible Preferred Securities to the extent of availablefunds of the Capital Trust; and (iii) amounts payable upon dissolution of theCapital Trust. The guarantee is unsecured and ranks (i) subordinate to allother liabilities of the Company, except liabilities that are expressly made *pari passu*; (ii) *pari passu* withthe most senior preferred stock issued by the Company, and *pari passu*with any guarantee of the Company in respect of any preferred stock of theCompany or any preferred security of any of the Company’s controlledaffiliates; and (iii) senior to the Company’s Common Stock.

 

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

 

**Organization of Information**

 

Management’s Discussion and Analysis provides anarrative on our financial performance and condition that should be read inconjunction with the accompanying condensed consolidated financial statements. Itincludes the following sections:

 

•      Executive Summary

•      Results of Operations

•      Liquidity and Capital Resources

•      Forward-Looking Statements

 

**Executive Summary**

 

Hearst-Argyle Television, Inc. and its subsidiaries(hereafter “we” or the “Company”) own and operate 25 network-affiliated televisionstations. Additionally, we provide management services to twonetwork-affiliated stations and one independent television station and tworadio stations (the “Managed Stations”) in exchange for a management fee.

 

*Quarter Highlights*

 

•      Resultsfor the quarter ended June 30, 2006 reflect the positive impact of strategicdevelopments including the successful completion of certain retransmissionconsent negotiations and continued focus on digital media. In addition, resultsreflect political revenue in an election year and the dampening impact of weakautomotive advertising.

 

•      In 2006, the Company’s cash balance increased$41.8 million from December 31, 2005 to $161.9 million at June 30, 2006, aftercapital expenditures, interest and taxes, the funding (with cash on-hand) of arepurchase of $10 million of our 7.00% Senior Notes due 2018, the payment of$13.0 million of dividends to our holders of Series A and B Common Stock, therepurchase of $0.8 million of Series A Common Stock, and an additional $6.4million investment in Internet Broadcasting and USDTV in January.

 

•      Forthe three months ended June 30, 2006, the Company recorded Internet advertisingrevenue and associated expenses, as digital media revenue and expenses of $3.4 millionand $2.2 million, respectively, in our income statement. The Company hasrecognized these local website operating results since January 1, 2006 dueto the restructuring of our relationship with Internet Broadcasting on December22, 2005.

 

•      As a result of the adoption of the fair valuerecognition provisions of SFAS 123(R), the Company recognized new stock-basedcompensation expense of $2.0 million in the three months ended June 30, 2006.

 

•      In the three months ended June 30, 2006, theCompany recorded a $2.1 million tax benefit associated with the utilization ofcapital loss carryforwards.

 

•      InJune 2006, the Company wrote off its investment $2.5 million in USDTV and includedthe write off in Other Expense in the accompanying condensed consolidatedstatements of income.

 

*Industry Trends*

 

•      Political advertising increases in even-numberedyears, such as 2006, consistent with the increase in the number of candidatesrunning for political office in the interim national election cycle, as well asselect state and local elections.

 

•      Revenue from Olympic advertising occursexclusively in even-numbered years, such as 2006, with the alternating Winterand Summer Games occurring every two years. Our 10 NBC stations aired the 2006 WinterOlympics in February 2006.

 

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•      The Federal Communications Commission haspermitted broadcast television station licensees to use their digital spectrumfor a wide variety of services such as high-definition television programming,audio, data and other types of communication, subject to the requirement thateach broadcaster provide at least one free video channel equal in quality tothe current technical standards. Eight of our NBC stations currentlybroadcast the Weather Plus network, a 24/7 local and national weather broadcastnetwork, on a multicast stream with their main digital channels. In addition,our stations in Omaha, Nebraska and Des Moines, Iowa have launched digitalweather channels.

 

•      Compensation from networks to theiraffiliates in exchange for broadcasting of network programming has been sharplyreduced in recent years and may be eliminated in the future.

 

•      Pursuant to the Cable Television ConsumerProtection and Competition Act of 1992 (“1992 Cable Act”) and the FCC’s “mustcarry” regulations, cable operators are generally required to devote up toone-third of their activated channel capacity to the carriage of the analogsignal of local commercial television stations. On a cable system-by-cablesystem basis, a local television broadcast station must choose once every threeyears whether to waive the right to mandatory, but uncompensated, carriage and,instead, to negotiate a grant of retransmission consent. We opted to negotiateretransmission consent with most of the cable systems with which we do businessand we record income from most of these relationships.

 

•      The U.S. Congress passed, and the Presidentsigned into law, legislation that guides the transition from analog to digitaltelevision broadcasting. A component of this legislation is a deadline ofFebruary 17, 2009 for completion of the transition to digital broadcasting andthe return of the analog spectrum to the government. As a result, the Companyaccelerated the depreciation of certain equipment that may have a shorteruseful life as a result of the digital conversion.

 

**Results of Operations**

 

Results of operations for the three and six monthsended June 30, 2006 and 2005 include the results of our 25 television stations,which were owned for the entire period presented, and the management feesderived by the three television and two radio stations managed by us for theentire period presented.

 

*ThreeMonths Ended June 30, 2006*

*Comparedto Three Months Ended June 30, 2005*

 

*Totalrevenue*.    Total revenue includes:

 

(i)    cashand barter advertising revenue, net of agency and national representatives’commissions;

(ii)   networkcompensation;

(iii)  retransmissionrevenue;

(iv)  digitalmedia revenue, which includes primarily Internet advertising revenue and, to alesser extent, revenue from multicasting, such as Weather Plus; and

(v)   otherrevenue.

 

Total revenue in thethree months ended June 30, 2006 was $194.0 million as compared to $188.5million in the three months ended June 30, 2005, an increase of $5.5 million or2.9%. This increase was primarily attributable to the following factors:

 

(i)    a$10.6 million increase to $12.9 million of net political advertising revenue resultingfrom the normal, cyclical nature of the television broadcasting business, inwhich the demand for advertising by candidates running for political officesignificantly increases in even-numbered election years (such as 2006);

(ii)   a$3.3 million increase in net digital revenue;

(iii)  a$2.5 million increase in retransmission revenue;

(iv)  anincrease in the retail, telecommunications, financial, attractions andfurniture categories; partially offset by

(v)   a10.6% decrease in our largest advertising category, automotive; and

(vi)  a$2.6 million decrease in network compensation.

 

*Salaries,benefits and other operating costs*.    Duringthe three months ended June 30, 2006, salaries, benefits and other operatingcosts were $97.7 million, as compared to $90.7 million in the three monthsended June 30, 2005, an increase of $7.0 million or 7.7%. This increase was primarilydue to:

 

(i)    a$2.3 million increase in compensation, pension and employee benefits expense;

(ii)   a$2.2 million increase related to digital media expenses;

 

17

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(iii)       a $1.1 million increase innews, transmitter power, utility and closed-captioning expense; and

(iv)  a$1.0 million increase related to stock-based compensation expense.

 

 

*Amortizationof program rights*.  Amortization of program rightswas $16.0 million in the three months ended June 30, 2006, as compared to $15.2million in the three months ended June 30, 2005, an increase of $0.8 million or5.3%. This increase was related to the higher cost of programming.

 

*Depreciationand amortization*.   Depreciation and amortization expensewas $16.1 million in the three months ended June 30, 2006, as compared to $13.3million in the three months ended June 30, 2005, an increase of $2.8 million or21.1%. Depreciation expense was $14.6 million in the three months ended June 30,2006, as compared to $11.8 million in the three months ended June 30, 2005, anincrease of $2.8 million or 23.7%. The increase in depreciation expense is primarilydue to the accelerated depreciation of analog equipment and leaseholdimprovements at our corporate headquarters in anticipation of the move to theHearst Tower in New York City in August, and higher capital expenditures.

 

*Corporate,general and administrative expenses*.    Corporate,general and administrative expenses were $7.6 million in the three months endedJune 30, 2006, as compared to $5.6 million in the three months ended June 30,2005, an increase of $2.0 million or 35.7%. This increase was primarily due to:

 

(i)             $1.0 million increaserelated to stock-based compensation expense; and

(ii)          $0.5 million increasedue to the timing of professional services expenses.

 

*Interestexpense, net.*    Interest expense, net ofinterest income, was $14.1 million in the three months ended June 30, 2006, ascompared to $15.8 million in the three months ended June 30, 2005, a decreaseof $1.7 million or 10.8% due to an increase in interest income resulting fromincreased cash balances and higher interest rates in the second quarter of 2006as compared to the same period in 2005, and the repayment of $10.0 millionsenior notes due 2018.

 

*Other Expense.    *Other expense increased$2.5 million in the three months ended June 30, 2006 from zero in the threemonths ended June 30, 2005. The expense is associated with the write off of ourinvestment in USDTV.

 

*Incometaxes.*    We recorded income tax expenseof $12.7 million in the three months ended June 30, 2006, compared to a taxbenefit of $19.7 million in the three months ended June 30, 2005, an increasein income tax expense of $32.4 million. The change is a result of:

 

(i)    $37.4million in tax benefits recorded in the three months ended June 30, 2005;  and

(ii)   adecrease in income before income taxes from $45.5 million in the three monthsended June 30, 2005 to $37.6 million in the three months ended June 30, 2006; partiallyoffset by

(iii)  a$2.1 million tax benefit associated with the utilization of capital losscarryforwards in the three months ended June 30, 2006.

 

The effective tax ratefor the three months ended June 30, 2006 was 33.8% as compared to (43.3)% forthe three months ended June 30, 2005. The Company expects its effective taxrate for the remaining interim periods for the year ending December 31, 2006 tobe approximately 39.5%.

 

*Equity inincome of affiliates, net of tax*. Equity in income ofaffiliates, net of tax was $0.1 million in the three months ended June 30, 2006as compared to $0.4 million in the three months ended June 30, 2005, a decreaseof $0.3 million. For the three months ended June 30, 2006, our share of incomein Internet Broadcasting was offset by our share of losses in Ripe DigitalEntertainment. For the three months ended June 30, 2005, our equity representedour share of income in IBS/HATV LLC.

 

*Netincome*.    Net income was $25.0 millionin the three months ended June 30, 2006, as compared to $65.6 million in thethree months ended June 30, 2005, a decrease of $40.6 million or 61.9%. Thisdecrease was primarily due to a $32.4 million increase in tax expense.

 

*SixMonths Ended June 30, 2006*

*Compared to Six Months Ended June30, 2005*

18

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* *

 

 

Total revenue in the sixmonths ended June 30, 2006 was $368.0 million as compared to $350.7 million inthe six months ended June 30, 2005, an increase of $17.3 million or 4.9%. This increasewas primarily attributable to the following factors:

 

(i)     a$12.0 million increase to $15.1 million of net political advertising revenueresulting from the normal, cyclical nature of the television broadcastingbusiness, in which the demand for advertising by candidates running forpolitical office significantly increases in even-numbered election years (suchas 2006);

(ii)    a$6.5 million increase in net digital revenue;

(iii)   a$6.0 million increase in retransmission revenue;

(iv)   anincrease in the retail, financial, and telecommunication categories; partiallyoffset by

(v)    a7.1% decrease in our largest advertising category, automotive; and

(vi)   a$5.6 million decrease in network compensation.

 

*Salaries,benefits and other operating costs*.    Salaries,benefits and other operating costs were $194.4 million in the six months endedJune 30, 2006, as compared to $179.3 million in the six months ended June 30,2005, an increase of $15.1 million or 8.4%. This increase was primarily due to:

 

(i)    a$6.2 million increase in compensation, pension, and employee benefits expense;

(ii)   a$4.4 million increase related to digital media expenses;

(iii)  a$2.9 million increase in news, transmitter power, utility and closed-captioningexpense; and

(iv)  a$2.0 million increase related to stock-based compensation expense.

* *

*Amortizationof program rights*.  Amortization of program rightswas $31.3 million in the six months ended June 30, 2006, as compared to $30.5million in the six months ended June 30, 2005, an increase of $0.8 million or2.6%. The increase was due to higher cost of programming.

 

*Depreciationand amortization*.   Depreciation and amortizationwas $31.5 million in the six months ended June 30, 2006, as compared to $26.4million in the six months ended June 30, 2005, an increase of $5.1 million or 19.3%.Depreciation expense was $28.5 million in the six months ended June 30, 2006,as compared to $23.4 million in the six months ended June 30, 2005, an increaseof $5.1 million or 21.8%. Increase in depreciation expense is primarily due tothe accelerated depreciation of analog equipment and leasehold improvements atour corporate headquarters in anticipation of the move to the Hearst Tower inNew York City in August, and higher capital expenditures.

 

*Corporate,general and administrative expenses*.    Corporate,general and administrative expenses were $14.9 million in the six months endedJune 30, 2006, as compared to $11.6 million in the six months ended June 30,2005, an increase of $3.3 million or 28.5%. This increase was primarily due to:

 

(i)    a$1.9 million increase related to stock-based compensation expense; and

(ii)   a$1.0 million increase due to the timing of professional services expenses.

 

*Interestexpense, net.*    Interest expense, net ofinterest income, was $29.3 million in the six months ended June 30, 2006, ascompared to $31.5 million in the six months ended June 30, 2005, a decrease of$2.2 million or 7.0% due to an increase in interest income resulting fromincreased cash balances and higher interest rates in the six months of 2006 ascompared to the same period in 2005, and the repayment of $10.0 million seniornotes due 2018.

 

*Otherexpense.*Other expense increased $2.5 million in the sixmonths ended June 30, 2006 from zero in the six months ended June 30, 2005. Theexpense is associated with the write off of our investment in USDTV.

 

*Incometaxes.*    We recorded income tax expenseof $21.3 million in the six months ended June 30, 2006, as compared to anincome tax benefit of $11.4 million in the six months ended June 30, 2005, anincrease of income tax expense of $32.7 million. This change was due to:

 

(i)    $37.4million in tax benefits recorded in the six months ended June 30, 2005;  and

(ii)   adecrease in income before income taxes from $66.6 million in the six monthsended June 30, 2005 to $59.2 million in the six months ended June 30, 2006; partiallyoffset by

(iii)  a$2.1 million tax benefit associated with the utilization of capital losscarryforwards in the six months ended June 30, 2006.

 

The effective tax ratefor the six months ended June 30, 2006 was 35.9% as compared to (17.2)% for thesix months ended June 30, 2005.

 

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*Equity inincome of affiliates, net of tax*. Equity in income ofaffiliates, net of tax was $0.1 million in the six months ended June 30, 2006,as compared to $0.6 million in the six months ended June 30, 2005, a decreaseof $0.5 million. For the six months ended June 30, 2006, our share of income inInternet Broadcasting was offset by our share of losses in Ripe DigitalEntertainment. For the six months ended June 30, 2005, our equity representedour share of income in IBS/HATV LLC.

 

*Netincome*.    Net income was $38.0 millionin the six months ended June 30, 2006, as compared to $78.7 million in the sixmonths ended June 30, 2005, a decrease of $40.7 million or 51.7%. This decreasewas primarily due to a $32.7 million increase in tax expense.

 

**Liquidity and Capital Resources**

 

As of June 30, 2006, our cash and cash equivalentsbalance was $161.9 million, as compared to $120.1 million as of December 31,2005, an increase of $41.8 million as compared to an increase of $11.0 millionin the comparable period in the prior year. The change in cash and cashequivalents for the six months ended June 30, 2006 and 2005 were as follows:

 
| ** **                                 | ** ** | **Six months ended June,** | ** ** | **2006 v. 2005 $** | ** ** | **2006 v. 2005 %** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **2006**                                  | ** ** | **2005**                          | ** ** | **Change**                        | ** ** | **Change** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**                           | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| ** **                                 | ** ** | **(In thousands)**                   | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| Net cash  provided by operating activities |       | $                                         | 88,829     |                              | $          | 54,643                            |       | $ | 34,186 |   | 62.6 | % |
| Net cash used  for investing activities    |       | $                                         | (25,913    | )                                 | $          | (16,571                           | )          | $ | (9,342 | ) | -56.4 | % |
| Net cash used  for financing activities    |       | $                                         | (21,063    | )                                 | $          | (27,033                           | )          | $ | 5,970 |   | 22.1 | % |
|                                       |       |                                      |       |                              |       |                              |       |   |   |
| Cash paid for:                             |       |                                      |       |                              |       |                              |       |   |   |
| Interest                                   |       | 31,935                                    |       | 31,756                            |       | 179                               |       | 0.6 | % |
| Interest on Note  payable to Capital Trust |       | 4,875                                     |       | 4,875                             |       | 0                                 |       | 0.0 | % |
| Taxes, net of  refunds                     |       | 12,896                                    |       | 27,887                            |       | (14,991                           | )          | -53.8 | % |
| Dividends paid  on common stock            |       | 12,971                                    |       | 13,003                            |       | (32                               | )          | -0.2 | % |
| Series A Common  Stock repurchases         |       | 798                                       |       | 8,433                             |       | (7,635                            | )          | -90.5 | % |
|                                            |            |                                           |            |                                   |            |                                   |            |  |  |  |  |  |  |

 

*OperatingActivities*

 

Net cash provided by operating activities was $88.8million in the six months ended June 30, 2006, as compared to $54.6 million inthe six months ended June 30, 2005, an increase of 34.2 million or 62.6%. This increasewas primarily due to an increase in our net revenue compared to the same periodin 2005 and the timing of tax payments.

 

*InvestingActivities*

 

Net cash used in investing activities was $25.9million in the six months ended June 30, 2006, as compared to $16.6 million inthe three months ended June 30, 2005, an increase of $9.3 million or approximately56.4%. This increase is primarily due to an additional $6.4 million investmentin Internet Broadcasting and USDTV as well as an increase of $4.0 million incapital expenditures.

 

For the year ending December 31, 2006, we haveapproved capital expenditures totaling approximately $77 million in property,plant and equipment, although we expect actual expenditures in 2006 to be less.While the maintenance expenditures included in this total remain consistentwith the historical levels, the high level of capital investment relates toseveral special projects as follows:

 

(i)    $31million on building projects in Kansas City, Missouri; Baltimore, Maryland;Omaha, Nebraska; and New York City, New York;

(ii)   $15million on news acquisition and editing equipment;

 

20

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(iii)  $4million on information technology projects; and

(iv)  $3million for capital expenditures related to damage caused by Hurricane Katrinaat our New Orleans, Louisiana station.

 

*FinancingActivities*

 

Net cash used in financing activities was $21.1million in the six months ended June 30, 2006, as compared to $27.0 million inthe six months ended June 30, 2005, a decrease of $5.9 million. This decreasewas primarily due to:

 

(i)    the redemption of$11.3 million of our preferred stock in January 2005; and

(ii)   the repurchase of$0.8 million of Series A common stock during the six months ended June 30, 2006compared to $8.4 million in the three months ended June 30, 2005; offset by

(iii)  proceedsfrom stock option exercises and employee stock purchases of $2.7 million in thesix months ended June 30, 2006 compared to $5.7 million in the six months endedJune 30, 2005; and

(iv)  the repurchase of$10.0 million of our senior notes due 2018 in the six months ended June 30,2006.

 

*Credit Facility and Other Long Term Debt*

 

On April 15, 2005, we entered into a five year $250million credit facility with a consortium of banks led by JP Morgan Chase, Bankof America, Wachovia Bank, BNP Paribas and Harris Nesbitt (the “Credit Facility”).The Credit Facility can be used for general corporate purposes includingworking capital, investments, acquisitions, debt repayment and dividendpayments. The Credit Facility is a general unsecured obligation of the Company.We have not borrowed under the Credit Facility as of June 30, 2006.

 

As of June 30, 2006, our long-term debt obligations,exclusive of capital lease obligations, were $767.1 million and our currentmaturities totaled $90 million. Our long-term debt obligations bear interest ata fixed rate. The Company’s credit ratings were BBB- by Standard & Poor’sand Fitch Ratings and Baa3 by Moody’s Investors Service, as of June 30, 2006. Suchcredit ratings are considered to be investment grade.

 

Our debt obligationscontain certain financial and other covenants and restrictions on the Company. Certainof the financial covenants include credit ratios such as leverage and interestcoverage and threshold tests such as consolidated net worth, but such covenantsdo not include any triggers explicitly tied to the Company’s credit ratings orstock price. We are in compliance with all such covenants and restrictions asof June 30, 2006.

 

We anticipate that our primary sources of cash, whichinclude current cash balances, cash provided by operating activities, andamounts available under our Credit Facility, will be sufficient to finance theoperating and working capital requirements of our stations, as well as our debtservice requirements, anticipated capital expenditures, and other obligationsof the Company for the next 12 months and the foreseeable future thereafter.

 

**Forward-Looking Statements**

 

This report****includes****or incorporates forward-looking statements. We base theseforward-looking statements on our current expectations and projections aboutfuture events. These forward-looking statements generally can be identified bythe use of words or phrases such as “anticipate”, “will”, “may”, “likely”, “plan”,“believe”, “expect”, “intend”, “project”, “forecast” or other such similarwords and/or phrases. For these statements, the Company claims the protectionof the safe harbor for forward-looking statements contained in the PrivateSecurities Litigation Reform Act of 1995. The forward-looking statementscontained in this report, concerning, among other things, trends andprojections involving revenue, income, earnings, cash flow, liquidity,operating expenses, assets, liabilities, capital expenditures, dividends andcapital structure, involve risks and uncertainties, and are subject to changebased 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 regulatoryactions and conditions in the areas in which our stations operate;

 

•                  Competition in thebroadcast television markets we serve;

 

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•                  Our ability toobtain quality programming for our television stations;

 

•                  Successfulintegration of television stations we acquire;

 

•                  Pricingfluctuations in local and national advertising;

 

•                  Changes in nationaland regional economies;

 

•                  Changes inadvertising trends and our advertisers’ financial condition; and

 

•                  Volatility inprogramming costs, industry consolidation, technological developments, andmajor world events**.**

 

For a discussion ofadditional risk factors that are particular to our business, please refer tothe Risk Factors section of our Annual Report on Form 10-K for the fiscal yearended December 31, 2005. These and other matters we discuss in this report, orin the documents we incorporate by reference into this report, may cause actualresults to differ from those we describe. We undertake no obligation to updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

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

 

As of June 30, 2006, the Company was not involved inany derivative financial instruments. However, the Company may consider certaininterest-rate risk strategies in the future.

 

As of June 30, 2006, we do not have any outstandingfloating 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 June 30, 2006. Based on that evaluation, and as of the end of the quarterfor which this report is made, the Company’s management, including the CEO andCFO, concluded that the Company’s disclosure controls and procedures wereeffective. Our management, including the CEO and CFO, performed an evaluationof any changes that occurred in our internal control over financial reporting (asthat term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarterended June 30, 2006. That evaluation did not identify any changes in theCompany’s internal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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**PART II**

** OtherInformation**

 

 **Item 2.    UnregisteredSales of Equity Securities, Use of Proceeds and Issuer Purchases of EquitySecurities.**

 

*Purchaseof Equity Securities by the Issuer and Affiliated Purchasers.*Thefollowing table reflects purchases of our Series A Common Stock made by HearstBroadcasting during the three months ended June 30, 2006:

 
| **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 (1)** | ** ** |
|--------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1- April  30 |       | 423,200                                               |       | $                                                     | 23.24      |                                                                                                                      | 423,200    |                                                                                                                                  | 3,333,376  |   |
| May 1- May 31      |       | 31,700                                                |       | $                                                     | 22.42      |                                                                                                                      | 31,700     |                                                                                                                                  | 3,301,676  |   |
| June 1-June 30     |       | 1,432,170                                             |       | $                                                     | 21.52      |                                                                                                                      | 1,432,170  |                                                                                                                                  | 1,869,506  |   |
| Total              |       | 1,887,070                                             |       | $                                                     | 21.92      |                                                                                                                      | 1,887,070  |                                                                                                                                  |       |   |

 

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(1)          On September 28, 2005,Hearst increased Hearst Broadcasting’s authorization to purchase the Company’sSeries A Common Stock from 20 million to 25 million shares. Hearst may effectsuch purchases from time to time in the open market or in private transactions,subject to market conditions and management’s discretion.

 

As of June 30, 2006,Hearst owned approximately 52.1% of the Company’s outstanding Series A CommonStock and 100% of the Company’s Series B Common Stock representing in theaggregate approximately 73.4% of our common stock.

 

The following tablereflects purchases made by the Company of its Series A Common Stock during the threemonths ended June 30, 2006.

 
| **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 (1)** | ** **  |
|--------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
| April 1- April  30 |       | —                                                |       | —                                                |       | —                                                                                                                    |       |                                                                                                                                             |        |
| Mary 1- May 31     |       | —                                                |       | —                                                |       | —                                                                                                                    |       |                                                                                                                                             |        |
| June 1- June 30    |       | —                                                |       | —                                                |       | —                                                                                                                    |       |                                                                                                                                             |        |
| Total              |       | —                                                |       | —                                                |       | —                                                                                                                    |       | $                                                                                                                                                | 198,691,825 |   |
|                    |            |                                                       |            |                                                       |            |                                                                                                                           |            |                                                                                                                                                  |             |  |

 

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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. Such purchases may be effected from time totime in the open market or in private transactions, subject to marketconditions and management’s discretion. As of June 30, 2006, the Company hasspent approximately $108.8 million to repurchase approximately 4.4 millionshares of Series A Common Stock at an average price of $24.96. 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 4.**    **Submissionof Matters to a Vote of Security Holders**

 

All nominees standing forelection as directors were elected at our annual shareholders’ meeting, whichwas held on May 4, 2006. The following chart indicates the number of votes castfor, the number of votes withheld and the number of broker non-votes withrespect to each nominee for director:

 

**ProposalOne (1)**

 
| **Nominee**                | ** ** | **For**    | ** ** | **Withheld** | ** ** | **Broker Non-Votes** | ** ** |
|----------------------------|------------|------------|------------|--------------|------------|---------------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** **   | ** ** | ** **                | ** ** |
| Caroline L. Williams  (2)  |       | 48,603,811 |       | 837,631      |       | 0                         |       |
|                       |       |       |       |         |       |                      |       |
| Frank A.  Bennack, Jr. (3) |       | 41,298,648 |       | 0            |       | 0                         |       |
|                       |       |       |       |         |       |                      |       |
| John G.  Conomikes(3)      |       | 41,298,648 |       | 0            |       | 0                         |       |
|                       |       |       |       |         |       |                      |       |
| George R.  Hearst, Jr.(3)  |       | 41,298,648 |       | 0            |       | 0                         |       |
|                       |       |       |       |         |       |                      |       |
| Bob Marbut (3)             |       | 41,298,648 |       | 0            |       | 0                         |       |
|                       |       |       |       |         |       |                      |       |
| Gilbert C.  Maurer (3)     |       | 41,298,648 |       | 0            |       | 0                         |       |

 

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(1)   Abstentionswere not counted in the election of the directors. 

(2)   Series A Director. Elected by the holders ofSeries A Common Stock. 

(3)   Series B Director. Elected by the holders ofSeries B Common Stock. 

 

The term of office of thefollowing other directors continued after the annual shareholders’ meeting:David Pulver, David J. Barrett, Ken J. Elkins, Victor F. Ganzi, WilliamRandolph Hearst III, and Michael E. Pulitzer.

 

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

 

**ProposalTwo**

 
| **For**                   |   | 90,576,753 |   |
|---------------------------|--------|------------|--------|
| ** **                |   |       |   |
| **Against (1)**      |   | 124,467    |   |
| ** **                |   |       |   |
| **Withheld**              |   | 38,870     |   |
| ** **                |   |       |   |
| **Broker Non-Votes** |   | 0          |   |

 

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(1)   Abstentionswere counted as a vote against the Independent Auditors Ratification Proposal.

 

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**Item 6.    Exhibits**

 

**(a) Exhibits:**

 
| 10.1   |   | Asset Purchase  Agreement dated May 5, 2006, between the Company, Emmis Television  Broadcasting, L.P., Emmis Television License, LLC and Emmis Operating  Company.              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                             |
| 10.2   |   | Lease Agreement dated  May 5, 2006, between the Company and Hearst Corporation.                                                                                                  |
|   |   |                                                                                                                                                                             |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange  Act of 1934, as amended.                                                     |
|   |   |                                                                                                                                                                             |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange  Act of 1934, as amended.                                                     |
|   |   |                                                                                                                                                                             |
| 32.1   |   | Certification of 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 of 2002. |

 

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**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | **HEARST-ARGYLE TELEVISION, INC.** |
|--------|------------------------------------|
|   |                               |
|   |                               |
|   |                               | By: | /s/  JONATHAN  C. MINTZER |
|   |                               |   | Name: Jonathan C.  Mintzer |
|   |                               |   | Title: Vice President,  General Counsel and Secretary |
|   |                               |   |   |   |
|   |                               |   |   |
|   |                               | Dated: | July  28, 2006 |

 

 
| **Name**                       | ** ** | **Title**                       | ** ** | **Date**      |
|--------------------------------|------------|---------------------------------|------------|---------------|
|                           |       |                            |       |          |
| /s/  HARRY T.  HAWKS |       | Executive Vice  President       |       | July 28, 2006 |
| Harry T. Hawks                 |       | and Chief Financial  Officer    |       |          |
|                           |       | (Principal Financial  Officer)  |       |          |
|                           |       |                            |       |          |
|                           |       |                            |       |          |
| /s/  LYDIA G.  BROWN |       | Corporate Controller            |       | July 28, 2006 |
| Lydia G. Brown                 |       | (Principal Accounting  Officer) |       |          |

 

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