**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

----

 

**Form 10-Q**

** **

**(Mark One)**

 

**x****                             ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2007**

 

**or**

 

**o****                                ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from:    NotApplicable        **

 

**Commission file number 1-14776**

 

**Hearst-ArgyleTelevision, Inc.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Delaware**                                                    | ** ** | **74-2717523**                                             |
|-----------------------------------------------------------------|------------|------------------------------------------------------------|
| (State  or other jurisdiction ofincorporation  or organization) | ** ** | (I.R.S. Employer  Identification No.)            |
| ** **                                                      | ** ** | ** **                                                 |
| **300 West  57th St  New York, NY 10019**                       | ** ** | **(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$.01 per share |       | New York  Stock Exchange                                               |

 

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 large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):

 

Large accelerated filer   o                      Acceleratedfiler   x                           Non-acceleratedfiler   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 October 31, 2007: 93,808,916 shares (consistingof 52,510,268 shares of Series A Common Stock and 41,298,648 shares of Series BCommon Stock). 

 

 

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**HEARST-ARGYLETELEVISION, INC.**

 

**Index**

 
| ** **       | ** **                                                                                                                                | **Page  No.** |
|------------------|-------------------------------------------------------------------------------------------------------------------------------------------|---------------|
| **Part I**       | **Financial**Information**                                                                                                                |          |
|             |                                                                                                                                      |          |
| **Item 1.** | **Financial Statements**                                                                                                                  |          |
|             | Condensed Consolidated Balance Sheets as of September  30, 2007 (unaudited) and December 31, 2006 | 1             |
|             | Condensed Consolidated  Statements of Income for the Three and Nine Months Ended September 30,  2007 and 2006 (unaudited)            | 2             |
|             | Condensed Consolidated  Statements of Cash Flows for the Nine Months Ended September 30,  2007 and 2006 (unaudited)                  | 3             |
|             | Notes to Condensed  Consolidated Financial Statements                                                                                     | 5             |
|             |                                                                                                                                      |          |
| **Item 2.** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                           | 14            |
|             |                                                                                                                                      |          |
| **Item 3.** | **Quantitative  and Qualitative Disclosures about Market Risk**                                                                           | 21            |
|             |                                                                                                                                      |          |
| **Item 4.** | **Controls and  Procedures**                                                                                                              | 21            |
|             |                                                                                                                                      |          |
| **Part  II**     | **Other Information**                                                                                                                     |          |
|             |                                                                                                                                      |          |
| **Item 1.** | **Legal Proceedings**                                                                                                                     | 22            |
|             |                                                                                                                                      |          |
| **Item 2.** | **Unregistered  Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity  Securities**                                  | 22            |
|             |                                                                                                                                      |          |
| **Item 6.** | **Exhibits**                                                                                                                              | 23            |
|             |                                                                                                                                      |          |
| **Signatures**   |                                                                                                                                      | 24            |

 

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**PART I** 

**FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements**

** **

**HEARST-ARGYLETELEVISION, INC.**

**CondensedConsolidated Balance Sheets**

** **
| ** **                                       | ** ** | **September 30, 2007** | ** **      | **December 31, 2006** | ** ** |
|--------------------------------------------------|------------|------------------------|-----------------|----------------------------|------------|
| ** **                                       | ** ** | **(Unaudited)**        | ** **      |
| ** **                                       | ** ** | **(In thousands)**     | ** **      |
| **Assets**                                       | ** ** | ** **             | ** **      | ** **                 | ** ** |
| Current assets:                                  |       |                   |            |                       |       |
| Cash and cash  equivalents                       |       | $                      |  55,568    |                       | $          |  18,610 |   |
| Accounts  receivable, net                        |       | 152,984                |            | 161,783                    |       |
| Program and  barter rights                       |       | 87,065                 |            | 67,949                     |       |
| Deferred income  tax asset                       |       | 4,672                  |            | 4,672                      |       |
| Other                                            |       | 6,288                  |            | 5,671                      |       |
| Total current  assets                            |       | 306,577                |            | 258,685                    |       |
| Property, plant  and equipment, net              |       | 300,195                |            | 295,094                    |       |
| Intangible assets,  net                          |       | 2,514,830              |            | 2,520,040                  |       |
| Goodwill                                         |       | 816,728                |            | 816,724                    |       |
| Other assets:                                    |       |                   |            |                       |       |
| Deferred  financing costs, net                   |       | 8,303                  |            | 9,648                      |       |
| Investments                                      |       | 41,157                 |            | 40,454                     |       |
| Program and  barter rights, noncurrent           |       | 9,928                  |            | 15,227                     |       |
| Other assets                                     |       | 1,398                  |            | 2,216                      |       |
| Total other  assets                              |       | 60,786                 |            | 67,545                     |       |
| Total assets                                     |       | $                      |  3,999,116 |                       | $          |  3,958,088 |   |
| ** **                                       | ** ** | ** **             | ** **      | ** **                 | ** ** |
| **Liabilities  and Stockholders’ Equity**   | ** ** | ** **             | ** **      | ** **                 | ** ** |
| Current  liabilities:                            |       |                   |            |                       |       |
| Current portion  of long-term debt               |       | $                      |  90,028    |                       | $          |  90,048 |   |
| Accounts payable                                 |       | 12,570                 |            | 18,208                     |       |
| Accrued  liabilities                             |       | 42,356                 |            | 66,515                     |       |
| Program and  barter rights payable               |       | 86,159                 |            | 65,473                     |       |
| Payable to  Hearst Corporation, net              |       | 5,858                  |            | 7,317                      |       |
| Other                                            |       | 7,759                  |            | 2,693                      |       |
| Total current  liabilities                       |       | 244,730                |            | 250,254                    |       |
| Program and  barter rights payable, noncurrent   |       | 17,573                 |            | 22,411                     |       |
| Long-term debt                                   |       | 777,110                |            | 777,122                    |       |
| Note payable to  Capital Trust                   |       | 134,021                |            | 134,021                    |       |
| Deferred income  tax liability                   |       | 830,496                |            | 838,229                    |       |
| Other  liabilities                               |       | 90,050                 |            | 53,244                     |       |
| Total noncurrent  liabilities                    |       | 1,849,250              |            | 1,825,027                  |       |
| Commitments and  contingencies                   |       |                   |            |                       |       |
| Stockholders’  equity:                      |       |                   |            |                       |       |
| Series A common  stock                           |       | 571                    |            | 563                        |       |
| Series B common  stock                           |       | 413                    |            | 413                        |       |
| Additional  paid-in capital                      |       | 1,334,125              |            | 1,309,578                  |       |
| Retained  earnings                               |       | 716,190                |            | 716,146                    |       |
| Accumulated  other comprehensive loss, net       |       | (33,109                | )               | (33,109                    | )          |
| Treasury stock,  at cost                         |       | (113,054               | )               | (110,784                   | )          |
| Total  stockholders’ equity                 |       | 1,905,136              |            | 1,882,807                  |       |
| Total  liabilities and stockholders’ equity |       | $                      |  3,999,116 |                       | $          |  3,958,088 |   |

 

See notes to condensedconsolidated financial statements.

 

1

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**HEARST-ARGYLETELEVISION, INC.**

** **

**CondensedConsolidated Statements of Income**

** **
| ** **                                         | ** ** | **Three Months Ended September 30,**           | ** **    | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------|---------------|---------------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                                           | ** **    | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(Unaudited)**                                                    | ** **    |
| ** **                                         | ** ** | **(In thousands, except per share data)** | ** **    |
|                                               |       |                                                               |          |                                                    |       |   |   |   |   |
| Total revenue                                      |       | $                                                                  |  176,775 |                                                    | $          |  182,993 |   | $ |  539,177 |   | $ |  550,974 |   |
|                                               |       |                                                               |          |                                                    |       |   |   |   |   |
| Station  operating expenses:                       |       |                                                               |          |                                                    |       |   |   |   |   |
| Salaries,  benefits and other operating costs      |       | 101,831                                                            |          | 99,574                                                  |       | 305,073 |   | 294,016 |   |
| Amortization of  program rights                    |       | 18,679                                                             |          | 17,751                                                  |       | 57,329 |   | 49,034 |   |
| Depreciation and  amortization                     |       | 13,310                                                             |          | 14,634                                                  |       | 42,492 |   | 46,103 |   |
| Corporate,  general and administrative expenses    |       | 12,534                                                             |          | 7,868                                                   |       | 29,201 |   | 22,766 |   |
| Operating income                                   |       | 30,421                                                             |          | 43,166                                                  |       | 105,082 |   | 139,055 |   |
|                                               |       |                                                               |          |                                                    |       |   |   |   |   |
| Interest expense                                   |       | 15,926                                                             |          | 16,427                                                  |       | 47,846 |   | 48,942 |   |
| Interest income                                    |       | (555                                                               | )             | (1,736                                                  | )          | (1,309 | ) | (4,983 | ) |
| Interest  expense, net – Capital Trust        |       | 2,438                                                              |          | 2,438                                                   |       | 7,313 |   | 7,313 |   |
| Other expense                                      |       | —                                                             |          | —                                                  |       | — |   | 2,501 |   |
|                                               |       |                                                               |          |                                                    |       |   |   |   |   |
| Income before  income taxes and equity earnings    |       | 12,612                                                             |          | 26,037                                                  |       | 51,232 |   | 85,282 |   |
|                                               |       |                                                               |          |                                                    |       |   |   |   |   |
| Income tax  expense                                |       | 2,138                                                              |          | 9,531                                                   |       | 18,656 |   | 30,807 |   |
| Equity in loss  (income) of affiliates, net of tax |       | 733                                                                |          | (37                                                     | )          | 1,564 |   | (102 | ) |
| Net income                                         |       | $                                                                  |  9,741   |                                                    | $          |  16,543 |   | $ |  31,012 |   | $ |  54,577 |   |
|                                               |       |                                                               |          |                                                    |       |   |   |   |   |
| Income per  common share – basic              |       | $                                                                  |  0.10    |                                                    | $          |  0.18 |   | $ |  0.33 |   | $ |  0.59 |   |
| Number of common  shares used in the calculation   |       | 93,643                                                             |          | 92,721                                                  |       | 93,459 |   | 92,703 |   |
|                                               |       |                                                               |          |                                                    |       |   |   |   |   |
| Income per  common share – diluted            |       | $                                                                  |  0.10    |                                                    | $          |  0.18 |   | $ |  0.33 |   | $ |  0.59 |   |
| Number of common  shares used in the calculation   |       | 94,172                                                             |          | 93,154                                                  |       | 94,152 |   | 93,177 |   |
|                                               |       |                                                               |          |                                                    |       |   |   |   |   |
| Dividends per  common share declared               |       | $                                                                  |  0.07    |                                                    | $          |  0.07 |   | $ |  0.21 |   | $ |  0.21 |   |

** **

See notes to condensed consolidated financial statements.

 

2

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**HEARST-ARGYLETELEVISION, INC.**

** **

**CondensedConsolidated Statements of Cash Flows**

** **
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** **   |
|------------------------------------------------------------------------------------|------------|-------------------------------------|--------------|
| ** **                                                                         | ** ** | **2007**                            | ** **   | **2006** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**                     | ** **   |
| ** **                                                                         | ** ** | **(In thousands)**                  | ** **   |
| **Operating  Activities**                                                          | ** ** | ** **                          | ** **   | ** ** | ** ** |
| Net income                                                                         |       | $                                   |  31,012 |   | $ |  54,577 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                |         |   |   |
|                                                                               |       |                                |         |   |   |
| Depreciation                                                                       |       | 37,282                              |         | 41,505 |   |
| Amortization of  intangible assets                                                 |       | 5,210                               |         | 4,598 |   |
| Amortization of  deferred financing costs                                          |       | 1,345                               |         | 1,453 |   |
| Amortization of  program rights                                                    |       | 57,329                              |         | 49,034 |   |
| Deferred income  taxes                                                             |       | 9,653                               |         | 10,587 |   |
| Equity in loss  (income) of affiliates, net                                        |       | 1,564                               |         | (102 | ) |
| Provision for  (benefit from) doubtful accounts                                    |       | 1,081                               |         | (593 | ) |
| Stock-based  compensation expense                                                  |       | 6,180                               |         | 5,764 |   |
| Investment  write-off                                                              |       | —                              |         | 2,501 |   |
| (Gain) or loss  on disposition of assets                                           |       | (4                                  | )            | (812 | ) |
| Program payments                                                                   |       | (55,044                             | )            | (48,816 | ) |
| Changes in  operating assets and liabilities:                                      |       |                                |         |   |   |
| Decrease  (increase) in Accounts receivable                                        |       | 6,718                               |         | 13,208 |   |
| Decrease  (increase) in Other assets                                               |       | 9                                   |         | 7,925 |   |
| (Decrease)  increase in Accounts payable and accrued liabilities                   |       | (28,851                             | )            | 4,090 |   |
| (Decrease)  increase in Other liabilities                                          |       | 13,248                              |         | 9,363 |   |
| Net cash  provided by operating activities                                         |       | 86,732                              |         | 154,282 |   |
|                                                                               |       |                                |         |   |   |
| **Investing  Activities**                                                          | ** ** | ** **                          | ** **   | ** ** | ** ** |
| Purchases of  property, plant and equipment, net                                   |       | (42,103                             | )            | (38,288 | ) |
| Acquisition of  WKCF-TV                                                            |       | —                              |         | (217,385 | ) |
| Cash proceeds  from insurance recoveries                                           |       | 1,000                               |         | 1,594 |   |
| Investment in  affiliates and other, net                                           |       | (1,874                              | )            | (10,681 | ) |
| Net cash used in  investing activities                                             |       | (42,977                             | )            | (264,760 | ) |
|                                                                               |       |                                |         |   |   |
| **Financing  Activities**                                                          | ** ** | ** **                          | ** **   | ** ** | ** ** |
| Borrowings on  credit facility                                                     |       | —                              |         | 100,000 |   |
| Dividends paid  on common stock                                                    |       | (19,640                             | )            | (19,464 | ) |
| Series A Common  Stock repurchases                                                 |       | (2,270                              | )            | (2,780 | ) |
| Principal  payments and repurchase of long term debt                               |       | (12                                 | )            | (10,035 | ) |
| Proceeds from  employee stock purchase plan and stock option exercises             |       | 15,125                              |         | 3,496 |   |
| Net cash (used  in) provided by financing activities                               |       | (6,797                              | )            | 71,217 |   |
|                                                                               |       |                                |         |   |   |
| Increase  (decrease) in cash and cash equivalents                                  |       | 36,958                              |         | (39,261 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 18,610                              |         | 120,065 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                   |  55,568 |   | $ |  80,804 |   |

** **

See notes to condensed consolidated financial statements.

 

3

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| ** **                                         | ** ** | **Nine Months Ended September 30,** | ** **   |
|----------------------------------------------------|------------|-------------------------------------|--------------|
| ** **                                         | ** ** | **2007**                            | ** **   | **2006** | ** ** |
| ** **                                         | ** ** | **(Unaudited)**                     | ** **   |
| ** **                                         | ** ** | **(In thousands)**                  | ** **   |
| **Supplemental  Cash Flow Information:**           | ** ** | ** **                          | ** **   | ** ** | ** ** |
| **Business  acquired in purchase transaction:**    | ** ** | ** **                          | ** **   | ** ** | ** ** |
| Acquisition of  WKCF-TV:                           |       |                                |         |   |   |
| Fair market  value of assets acquired              |       | $                                   |  — |   | $ |  244,072 |   |
| Fair market  value of liabilities assumed          |       | $                                   |  — |   | $ |  (26,687 | ) |
| Net cash paid  for WKCF-TV                         |       | $                                   |  — |   | $ |  217,385 |   |
| **Cash  paid during the period for:**              | ** ** | ** **                          | ** **   | ** ** | ** ** |
| Interest                                           |       | $                                   |  37,911 |   | $ |  37,745 |   |
| Interest on Note  payable to Capital Trust         |       | $                                   |  4,875  |   | $ |  7,313 |   |
| Taxes, net of  refunds                             |       | $                                   |  34,963 |   | $ |  26,656 |   |
| **Non-cash  investing and financing activities:**  | ** ** | ** **                          | ** **   | ** ** | ** ** |
| Accrued  property, plant & equipment purchases |       | $                                   |  337    |   | $ |  7,645 |   |

** **

See notes to condensed consolidated financial statements.

 

4

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**Hearst-Argyle Television, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**Tabular amounts in thousands, except per sharedata**

 

**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)”).  With the exception of the unconsolidatedsubsidiary trust, all significant intercompany accounts have been eliminated inconsolidation.

 

The accompanyingunaudited condensed consolidated financial statements do not include all of theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements and should beread in conjunction with the Company’s consolidated financial statementsincluded in the Annual Report on our Form 10-K for the year ended December 31,2006.  In the opinion of management, alladjustments considered necessary for a fair presentation have been included andare normal and recurring in nature. Operating results for the three and nine months ended September 30, 2007are not necessarily indicative of the results that may be expected for the fullyear.

 

**2.****             ****Recent Developments and Accounting Pronouncements**

** **

On August 24, 2007,Hearst Broadcasting, Inc. (“Hearst Broadcasting”), an indirect wholly-ownedsubsidiary of The Hearst Corporation (“Hearst”), announced its intentions tolaunch, and on September 14, 2007, launched, a tender offer to acquire theoutstanding shares of the Company’s Series A Common Stock that it did notalready own for $23.50 per share (the “Offer”). On August 27, 2007, our Board of Directors appointed a special committeeof directors unaffiliated with Hearst to consider the Offer (the “SpecialCommittee”).  The Special Committeeengaged a financial advisor to advise it with respect to the Offer.  On September 27, 2007, the Special Committeedetermined that the Offer was inadequate and recommended that the Company’sshareholders reject the Offer.  OnOctober 12, 2007, the Offer expired and Hearst announced that it would return toshareholders all of the shares that were tendered in the Offer.  For thethree months ended September 30, 2007, the Company recognized approximately$3.6 million of expense related to the Offer.

 

On August 31, 2006, theCompany purchased the assets related to broadcast television station WKCF-TV, aCW affiliate in Orlando, Florida.  Thepro-forma results of operations and related per share information have not beenpresented as the amounts are considered immaterial.

 

In 2006 Sprint Nextel Corporation (“Nextel”) wasgranted the right from the FCC to reclaim from broadcasters in each marketacross the country the 1.9 GHz spectrum to use for anemergency communications system.  In order to reclaim this signal,Nextel must replace all analog equipment currently using this spectrum withdigital equipment.  All broadcasters have agreed to use the digitalsubstitute that Nextel will provide.  The transition will be completed ona market-by-market basis.  As the equipment is exchanged and put into servicein each of our markets beginning in the fourth quarter of 2007, weexpect to record gains to the extent that the fair market value of theequipment we receive exceeds the book value of the analog equipment weexchange.

 

In February 2007, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*(“SFAS 159”), which permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value. SFAS 159 will be effective for theCompany on January 1, 2008. The Company is currently evaluating the impact ofadopting SFAS 159 on its financial position, cash flows, and results ofoperations.

 

In September 2006,the FASB issued SFAS No. 157,*Fair Value Measurements*(“SFAS 157”), which applies whenever other standards require (or permit) assetsor liabilities to be measured at fair value. SFAS 157 establishes a fair value hierarchy that prioritizes the informationused to develop the assumptions that market participants would use when pricingan asset or liability.  SFAS 157 iseffective for fiscal years beginning after November 15, 2007 and interimperiods within those fiscal years. We do not believe the adoption of SFAS 157will have a material impact on our financial position, cash flows or results ofoperations.

 

5

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**Hearst-Argyle Television, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**Tabular amounts in thousands, except per sharedata**

 

 

In September 2006,the FASB issued SFAS No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans* (“SFAS158”), which requires employers to fully recognize the obligations associatedwith single-employer defined benefit pension, retiree healthcare and otherpostretirement plans in their financial statements.  It requires employers to recognize anasset or liability for a plan’s overfunded or underfunded status, measure aplan’s assets and obligations that determine its funded status as of the end ofthe employer’s fiscal year and recognize in comprehensive income changes in thefunded status of a defined benefit postretirement plan in the year in whichchanges occur.  The requirement to recognize the funded status of abenefit plan and the disclosure requirements are effective for fiscalyears ending after December 15, 2006.  We have adopted the requirement torecognize the funded status of a benefit plan as of December 31, 2006.  As a result, Accumulated other comprehensiveloss increased by $26.4 million, net of tax, as of December 31, 2006.  Additionally, the requirement to measureplan assets and benefit obligations as of the date of the employer’sfiscal year end is effective for all years ending after December 15, 2008.

 

In June 2006, the FASBissued Financial Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (“FIN 48”). FIN 48 clarifies the accounting for uncertain tax positions byprescribing a minimum recognition threshold for recognition of tax benefits inthe financial statements. FIN 48 also provides guidance on measurement,derecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. As a result of applying FIN 48, the amountof benefit recognized in the financial statements may differ from the amounttaken or expected to be taken in a tax return. These differences are referredto as unrecognized tax benefits and represent financial statement liabilities.In the event unrecognized tax positions are ultimately allowed (for example,when the matter is settled with taxing authorities or statutes of limitationsexpire), the benefit is recognized, generally resulting in a reduction of taxexpense in the period of recognition.   The adoption ofFIN 48 on January 1, 2007 resulted in a decrease to Retained earnings of $11.3million, a decrease in Deferred income tax liability of $15.8 million and anincrease to Other liabilities of $27.1 million. See Note 7 for further discussion regarding the adoption of FIN 48.

 

**3.****             ****Stock-Based Compensation**

** **

Stock-based compensation expense for thethree and nine months ended September 30, 2007 was $2.1 million and $6.2million, respectively, as compared to $1.9 million and $5.8 million in thethree and nine months ended September 30, 2006, respectively.   The total deferred tax benefitrelated thereto was $0.8 million and $2.4 million for the three and nine months ended September30, 2007, respectively, and $0.7 million and $2.3 million for the three andnine months ended September 30, 2006, respectively.  As of September 30, 2007, there was $10.3million of total unrecognized compensation cost related to unvested share-basedcompensation awards granted under the equity compensation plans, which does notinclude the effect of future grants of equity compensation, if any.  Of the total $10.3 million, we expect torecognize approximately 17.9% in the remaining interim periods of 2007, 55.7%in 2008 and 26.4% in 2009.

 

**4.****              Long-Term Debt**

** **

Long-term debt as of September 30, 2007 and December31, 2006 consisted of the following:

 
| ** **                 | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **(Unaudited)**        | ** ** |
| Revolving credit  facility |       | $                      | 100,000    |                  | $          | 100,000 |   |
| Senior notes               |       | 407,110                |       | 407,110               |       |
| Private placement  debt    |       | 360,000                |       | 360,000               |       |
| Capital lease  obligations |       | 28                     |       | 60                    |       |
| Total debt                 |       | 867,138                |       | 867,170               |       |
| Less: Current  maturities  |       | (90,028                | )          | (90,048               | )          |
|                       |       |                   |       |                  |       |
| Total long-term  debt      |       | $                      | 777,110    |                  | $          | 777,122 |   |

 

The Company has the ability and intent to refinance its$125.0 million 7% senior notes due November 15, 2007 under its existing creditfacility and therefore has continued to classify the debt as a long-termobligation.

 

6

----

 

**Hearst-Argyle Television, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**Tabular amounts in thousands, except per sharedata**

 

 

**5.****              Earnings Per Share**

 

The calculation of basic earnings per share (“EPS”)for each period is based on the weighted average number of common shares outstandingduring the period.  The calculation ofdilutive EPS for each period is based on the weighted average number of commonshares outstanding during the period, including restricted stock issued todate, plus the effect, if any, from the assumed exercise of stock options andconversion of Redeemable Convertible 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 September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                 | ** ** | **(Unaudited)**                      | ** ** |
| Net income  (Basic and Diluted)                            |       | $                                    | 9,741      |                                | $          | 16,543 |   | $ | 31,012 |   | $ | 54,777 |   |
|                                                       |       |                                 |       |                                |       |   |   |   |   |
| Basic shares                                               |       | 93,643                               |       | 92,721                              |       | 93,459 |   | 92,703 |   |
| Basic EPS                                                  |       | $                                    | 0.10       |                                | $          | 0.18 |   | $ | 0.33 |   | $ | 0.59 |   |
| Diluted shares                                             |       | 94,172                               |       | 93,154                              |       | 94,152 |   | 93,177 |   |
| Diluted EPS                                                |       | $                                    | 0.10       |                                | $          | 0.18 |   | $ | 0.33 |   | $ | 0.59 |   |
|                                                       |       |                                 |       |                                |       |   |   |   |   |
| Basic shares                                               |       | 93,643                               |       | 92,721                              |       | 93,459 |   | 92,703 |   |
| Add: Shares  issued upon assumed exercise of stock options |       | 529                                  |       | 433                                 |       | 693 |   | 474 |   |
| Diluted shares                                             |       | 94,172                               |       | 93,154                              |       | 94,152 |   | 93,177 |   |

 

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 nine months ended September30, 2007 and 2006, 5,128,205 shares of Series A Common Stock to be issued uponthe conversion of 2,600,000 shares of Series B 7.5% Redeemable ConvertiblePreferred Securities are not included in the number of common shares used inthe calculation of diluted EPS because to do so would have been anti-dilutive.When the securities related to the Capital Trust are dilutive, the interest,net of tax, related to the Capital Trust is added back to Net income forpurposes of the diluted EPS calculation.

 

Options to purchase 5,595,522 and 6,003,133 sharesof Series A Common Stock (before application of the treasury stock method), forthe three months ended September 30, 2007 and 2006, respectively, were notincluded in the computation of diluted EPS because the exercise price wasgreater than the average market price of $23.34 and $21.92, respectively.

 

Options to purchase 3,422,872 and 5,984,133 sharesof Series A Common Stock (before application of the treasury stock method), forthe nine months ended September 30, 2007 and 2006, respectively, were notincluded in the computation of diluted EPS because the exercise price wasgreater than the average market price of $25.18 and $22.75, respectively.

 

7

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**Hearst-Argyle Television, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**Tabular amounts in thousands, except per sharedata**

 

 

**6.****             ****Goodwill and Intangible Assets**

** **
| ** **                                                         | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **(Unaudited)**        | ** ** |
| Total intangible  assets subject to amortization, net              |       | $                      | 101,573    |                  | $          | 106,783 |   |
| Intangible  assets not subject to amortization – FCC licenses |       | 2,413,257              |       | 2,413,257             |       |
| Total intangible  assets, net                                      |       | $                      | 2,514,830  |                  | $          | 2,520,040 |   |
|                                                               |       |                   |       |                  |       |
| Goodwill                                                           |       | $                      | 816,728    |                  | $          | 816,724 |   |

 

Summarized below are the carrying values ofintangible assets subject to amortization as of September 30, 2007 and December31, 2006:

 
| ** **                                       | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **(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                          |       | $                      | 124,035    |                  | $          | 77,360 |   | $ | 46,675 |   | $ | 124,035 |   | $ | 73,967 |   | $ | 50,068 |   |
| Network  affiliations                            |       | 95,493                 |       | 40,673                |       | 54,820 |   | 95,493 |   | 38,880 |   | 56,613 |   |
| Other                                            |       | 743                    |       | 665                   |       | 78 |   | 743 |   | 641 |   | 102 |   |
| Total intangible  assets subject to amortization |       | $                      | 220,271    |                  | $          | 118,698 |   | $ | 101,573 |   | $ | 220,271 |   | $ | 113,488 |   | $ | 106,783 |   |

 

The Company’s amortization expense for intangibleassets was approximately $1.7 million and $5.2 million for the three and nine monthsended September 30, 2007, respectively, and $1.6 million and $4.6 million forthe three and nine months ended September 30, 2006, respectively.  Annual intangible asset amortization expenseis estimated to be approximately $6.8 million in 2007 and $6.0 million in eachof the next four years.

 

**7.****             ****Income Taxes**

 

The income tax expensefor the three and nine months ended September 30, 2007 was $2.1 million and$18.7 million, respectively, as compared to $9.5 million and $30.8 million forthe three and nine months ended September 30, 2006, respectively.

 

The effective tax ratefor the three and nine months ended September 30, 2007 was 17.0% and 36.4%,respectively, as compared to 36.6% and 36.1% for the three and nine monthsended September 30, 2006, respectively.

 

On January 1, 2007, theCompany adopted FIN 48 which clarifies the accounting for uncertain taxprovisions by prescribing a minimum recognition threshold for recognition oftax benefits in the financial statements. At the date of adoption, the total amount of unrecognized tax benefitswas $35.4 million, and the associated interest and penalties were $8.6million.    If recognized, theseamounts (net of tax impact) would favorably affect the effective income taxrate in future periods.  The adopted provisions of FIN 48 will result in acertain amount of variability in the effective tax rate in interim periods dueto the Company’s recording of associated interest expense, which is classifiedas a component of income taxes, as period costs.  Additionally, the Company’s effective incometax rate in a given financial statement period may be materially impacted by 1)changes in the level of earnings by taxing jurisdiction; 2) changes in theexpected outcome of tax examinations; 3) the normal expiration of statutes oflimitations; or 4) the amount of deductions or changes in the deferred taxvaluation allowance.

 

The amount ofunrecognized tax benefits is expected, on a net basis, to decrease within 12months of the reporting date due to scheduled closings of examinations andnormal expirations of statutes of limitations.

 

8

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**Hearst-Argyle Television, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**Tabular amounts in thousands, except per sharedata**

 

 

**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 beeffected from time to time in the open market or in private transactions,subject to market conditions and management’s discretion. During the ninemonths ended September 30, 2007, the Company repurchased 109,100 shares of itsoutstanding Series A Common Stock for $2.3 million and an average price of$20.81. Between May 1998 and September 30, 2007, the Company repurchasedapproximately 4.6 million shares of Series A Common Stock at a cost ofapproximately $113.1 million and an average price of $24.78.  There can be no assurance that suchrepurchases will occur in the future or, if they do occur, what the terms ofsuch repurchases will be.

 

Hearst and Hearst Broadcasting areauthorized by the Hearst Board of Directors to purchase up to 25 million sharesof the Company’s Series A Common Stock from time to time in the open market, inprivate transactions or otherwise. During the nine months ended September 30, 2007, Hearst Broadcasting didnot purchase any shares of Series A Common Stock.  Between December 2000 (the date of Hearst'sfirst purchase authorization) and September 30, 2007,  Hearst purchased approximately 23.8 millionshares of the Company’s outstanding Series A Common Stock.

 

As of September 30, 2007 and December 31, 2006,Hearst owned 73.4% and 73.8%, respectively, of the Company’s outstanding commonstock.

 

**Common Stock Dividends**

** **

During the nine months ended September 30, 2007, 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** | ** ** |
|---------------------|------------|----------------------|--------------------|-----------------|-----------------|------------------|------------------|--------------------|------------|
| $                   | 0.07       |                 | September 12, 2007 |            | October 5, 2007 |             | October 15, 2007 |               | $          | 6,566 |   |
| $                   | 0.07       |                 | May 3, 2007        |            | July 5, 2007    |             | July 15, 2007    |               | $          | 6,570 |   |
| $                   | 0.07       |                 | March 29, 2007     |            | April 5, 2007   |             | April 15, 2007   |               | $          | 6,546 |   |

 

**9.****             ****Related Party Transactions**

** **

*Hearst*.    As of September 30,2007, Hearst owned approximately 52.4% of our Series A Common Stock and 100% ofour Series B Common Stock, representing in the aggregate approximately 73.4% ofboth the economic interest and outstanding voting power of our common stock,except with regard to the election of directors.  With regard to the election of directors,Hearst’s ownership of our Series B Common Stock entitles Hearst to elect 11 of13 members of our Board of Directors. During the three and nine months endedSeptember 30, 2007 and 2006, we were engaged in the following transactions withHearst or parties related to Hearst:

 

•               *Hearst Tower Lease.  *On May 5, 2006 the Companyentered into a Lease Agreement with Hearst to lease one floor of the newlyconstructed Hearst Tower in Manhattan for our corporate offices.  For the three and nine months ended September30, 2007, we recorded $0.4 million and $1.2 million in rent expense, net of aportion of the $1.9 million tenant improvement allowance, which the Company isamortizing over the lease term.

 

•               *Management Agreement*.   Werecorded revenue of approximately $1.1 million and $4.3 million in the threeand nine months ended September 30, 2007, respectively, and $1.7 million and$4.7 million in the three and nine months ended September 30, 2006,respectively, relating to a management agreement with Hearst (the “ManagementAgreement”). Pursuant to the Management Agreement, we provide certain sales,news, programming, legal, financial, engineering and accounting managementservices for certain Hearst-owned television and radio stations.  Certain employees of these managed stationsare also participants in our equity compensation plans.  We believe the terms of the ManagementAgreement are reasonable to both parties; however, there can be no assurancethat more favorable terms would not be available from third parties.

 

9

----

 

**Hearst-Argyle Television, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**Tabular amounts in thousands, except per sharedata**

 

 

•               *Services Agreement*.    Weincurred expenses of approximately $1.6 million and $5.0 million in the threeand nine months ended September 30, 2007, respectively, and $1.8 million and$4.4 million in the three and nine months ended September 30, 2006,respectively, relating to a services agreement with Hearst (the “ServicesAgreement”). Pursuant to the Services Agreement, Hearst provides the Companycertain administrative services such as accounting, auditing, financial, legal,insurance, data processing, and employee benefits administration. We believethe terms of the Services Agreement are reasonable to both parties; however,there can be no assurance that more favorable terms would not be available fromthird parties.

 

•               *Interest Expense, Net – Capital Trust.*  Weincurred interest expense, net, related to the Subordinated Debentures issuedto our wholly-owned unconsolidated subsidiary, the Capital Trust, of $2.4million and $7.3 million for each of the three and nine months ended September30, 2007 and 2006.  The Capital Trustthen paid comparable amounts to its Redeemable Convertible Preferred Securitiesholders, including Hearst, which received $0.5 million and $1.5 million duringthe three and nine months ended September 30, 2007.

 

•               *Dividends on Common Stock.*    Duringthe nine months ended September 30, 2007 and 2006, we paid the followingdividends to Hearst:

 
| **Dividend Amount** | ** ** | **Payment Date** | ** **       | **Total Dividend** | ** ** | **Hearst Portion** | ** ** |
|---------------------|------------|------------------|------------------|--------------------|------------|--------------------|------------|
| $                   |  0.07 |             | July 15, 2007    |               | $          | 6,570              |       | $ | 4,816 |   |
| $                   |  0.07 |             | April 15, 2007   |               | $          | 6,546              |       | $ | 4,816 |   |
| $                   |  0.07 |             | January 15, 2007 |               | $          | 6,523              |       | $ | 4,816 |   |
| $                   |  0.07 |             | July 15, 2006    |               | $          | 6,493              |       | $ | 4,768 |   |
| $                   |  0.07 |             | April 15, 2006   |               | $          | 6,485              |       | $ | 4,636 |   |
| $                   |  0.07 |             | January 15, 2006 |               | $          | 6,486              |       | $ | 4,575 |   |

 

•               *Radio Facilities Lease.*    Pursuantto a lease agreement, Hearst paid us approximately $0.2 million and $0.6million for each of the three and nine months ended September 30, 2007 and2006. Under this agreement, Hearst leases from the Company premises for WBAL-AMand WIYY-FM, Hearst’s Baltimore, Maryland radio stations.

 

•               *Retransmission Consent Agency Agreement*.    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 Lifetime in securing distribution and subscribers for theLifetime Television, Lifetime Movie Network and/or Lifetime Real Womenprogramming services; and (ii) Lifetime acts as our agent with respect to thenegotiation of certain of our agreements with cable, satellite and certainother multi-channel video programming distributors.  Amounts payable to us by Lifetime depend onthe specific terms of these agreements and may be fixed or variable.  We recorded revenue from the agreements of$5.3 million and $15.6 million in the three and nine months ended September 30,2007, respectively, and $4.7 million and $13.3 million in the three and ninemonths ended September 30, 2006, respectively.

 

•               *Wide Orbit, Inc. *In November 2004, weentered into an agreement to license from Wide Orbit, Inc. (“Wide Orbit”)traffic sales and billing solutions software. Hearst owns approximately 8% of Wide Orbit.  For the three and nine months ended September30, 2007, we paid Wide Orbit approximately $0.4 million and $1.2 million,respectively, and for the three and nine months ended September 30, 2006, wepaid $0.3 and $0.9 million, respectively, under the agreement.

 

•                  *N*ew*England Cable News*. Two of our executive officers, David J. Barrett and Steven A. Hobbs,serve 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.(NECN).  Hearst pays $4,000 per month tothe Company as compensation for their service. In addition, two of our television stations, WPTZ/WNNE and WMTW, provideoffice space to certain of NECN’s reporters in exchange for news gatheringservices.

 

10

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**Hearst-Argyle Television, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**Tabular amounts in thousands, except per sharedata**

 

 

•               *Other Transactions with Hearst*.    Inthe three and nine months ended September 30, 2007 and 2006, we recordedimmaterial net revenue relating to advertising sales from Hearst.

 

*Internet Broadcasting Systems, Inc*.    Asof September 30, 2007, we owned 36.1% of Internet Broadcasting Systems, Inc. (“InternetBroadcasting”).  We also have variousagreements pursuant to which we have paid Internet Broadcasting $3.5 millionand $8.7 million during the three and nine months ended September 30, 2007,respectively, and $2.0 million and $6.0 million during the three and ninemonths ended September 30, 2006, respectively. In addition, Internet Broadcasting hosts our corporate Website for anominal amount.  Harry T. Hawks, TerryMackin and Steven A. Hobbs, three of our executive officers, serve on the Boardof Directors of Internet Broadcasting, from which they do not receivecompensation for their services.

 

*Small Business Television*.   The Company utilizes services of SmallBusiness Television and related companies (“SBTV”) to provide televisionstations with additional revenue through the marketing and sale of commercialtime to smaller businesses that do not traditionally use television advertisingdue to cost concerns. In the three and nine month periods ended September 30,2007, these sales generated revenue of approximately $0.3 million and $1.0million, respectively, of which approximately $0.1 million and $0.5 million,respectively, was distributed to SBTV. In the three and nine month periodsended September 30, 2006, these sales generated revenue of approximately $0.3 millionand $1.1 million, respectively, of which approximately $0.1 million and $0.5million, respectively, was distributed to SBTV. 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”).  We have launched Weather Plus inall of our NBC-affiliated markets.  TerryMackin, one of our executive officers, serves as the past Chairman of the Boardof the NBC Television Affiliates Association, the managing member and the ownerof certain ownership interests in WNAC.  As past NBC Affiliate Chairman, Mr. Mackinserves as chairman of the NBC Affiliates “Futures” committee, which isresponsible for developing strategic projects between NBC and the NBCAffiliates.  Mr. Mackin served asthe Chairman of the NBC Television Affiliates Association Board from May 2004to May 2006.  Additionally, since May2006, Mr. Mackin has served as a member of the Board of Directors of NBCWeather Plus Network LLC.  Mr. Mackin does not receive compensation forhis Board service.

 

*Ripe TV.*On June 29, 2007, the Company made an additional investment of $1.9 million inRipe Digital Entertainment, Inc. (“Ripe TV”), resulting in a total investmentof $11.0 million which represents a 24.7% ownership interest.  In the fourth quarter of 2006 the Companyentered into a lease agreement with Ripe TV to sublet office space commencingJanuary 1, 2007, for approximately $0.1 million a year.   Two of our executive officers, Steven A.Hobbs and Terry Mackin, serve on the Board of Directors of Ripe TV, from whichthey do not receive compensation for their Board service.

 

*USDTV*.  During the year ended December 31, 2006, weand Hearst each owned approximately 6.175% of USDTV.  In addition, our station KOAT-TV inAlbuquerque, New Mexico, had an agreement to lease a portion of its digitalspectrum to USDTV which the Company terminated effective April 15, 2007.  In July 2006, USDTV filed for Chapter 7bankruptcy and the Company wrote off its investment of $2.5 million andincluded the write-off in Other expense in the accompanying condensedconsolidated statements of income.  InSeptember 2006, USDTV sold substantially all its assets to a third party.  From September 23, 2005 to June 20, 2006,Steven A. Hobbs, one of our executive officers, served on the Board ofDirectors of USDTV, from which he did not receive compensation for his Boardservice.

 

*Other*.    In the ordinary courseof business, the Company enters into transactions with related parties, none ofwhich were significant to our financial results in the nine months endedSeptember 30, 2007 and 2006.

 

**10.****      ****Retirement Plans and Other Post-Retirement Benefits**

** **

***Overview***

*** ***

The Company maintains seven defined benefit pensionplans (the “Pension Plans”) and other post-retirement benefit plans (medicaland life insurance) for active, retired and former employees.  In addition, the Company maintains

 

11

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**Hearst-Argyle Television, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**Tabular amounts in thousands, except per sharedata**

 

 

11employee savings plans and participates in three multi-employer union pensionplans that provide retirement benefits to certain union employees.

 

***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 service cost of the Pension Plans iscomputed on the basis of the Project Unit Credit Actuarial Cost Method.  Prior service cost is amortized over theemployees’ expected future service periods.

 

*Net Periodic Pension and Post-Retirement Benefit Cost*

* *

The following schedule presents net periodic pensioncost for the Company’s Pension Plans in the three and nine months endedSeptember 30, 2007 and 2006:

 
|                                     |   | **Pension Benefits**                 |       | **Pension Benefits**                |       |
|------------------------------------------|--------|--------------------------------------|------------|-------------------------------------|------------|
|                                     |   | **Three Months Ended September 30,** |       | **Nine Months Ended September 30,** |       |
|                                     |   | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** |   |
|                                     |   | **(Unaudited)**                      |       | **(Unaudited)**                     |       |
| Service cost                             |   | $                                    | 2,645      |                                | $          | 2,496 |   | $ | 7,935 |   | $ | 7,488 |   |
| Interest cost                            |   | 2,700                                |       | 2,355                               |       | 8,100 |   | 7,065 |   |
| Expected return  on plan assets          |   | (2,911                               | )          | (2,779                              | )          | (8,733 | ) | (8,337 | ) |
| Amortization of  prior service cost      |   | 108                                  |       | 108                                 |       | 324 |   | 324 |   |
| Amortization of  transitional obligation |   | —                               |       | —                              |       | — |   | 1 |   |
| Amortization of  net loss                |   | 924                                  |       | 967                                 |       | 2,772 |   | 2,901 |   |
| Net periodic  pension cost               |   | $                                    | 3,466      |                                | $          | 3,147 |   | $ | 10,398 |   | $ | 9,442 |   |

 

The following schedule presents net periodic benefitcost for the Company’s other post-retirement benefit plans in the three andnine months ended September 30, 2007 and 2006:

 
|                                    |   | **Post-Retirement Benefits**         |       | **Post-Retirement Benefits**        |       |
|-----------------------------------------|--------|--------------------------------------|------------|-------------------------------------|------------|
|                                    |   | **Three Months Ended September 30,** |       | **Nine Months Ended September 30,** |       |
|                                    |   | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** |   |
|                                    |   | **(Unaudited)**                      |       | **(Unaudited)**                     |       |
| Service cost                            |   | $                                    | 41         |                                | $          | 29 |   | $ | 123 |   | $ | 88 |   |
| Interest cost                           |   | 175                                  |       | 122                                 |       | 525 |   | 366 |   |
| Amortization of  prior service cost     |   | 10                                   |       | 7                                   |       | 30 |   | 21 |   |
| Amortization of  initial net obligation |   | 10                                   |       | 7                                   |       | 30 |   | 21 |   |
| Amortization of  net loss               |   | 9                                    |       | 6                                   |       | 27 |   | 18 |   |
| Net periodic  benefit cost              |   | $                                    | 245        |                                | $          | 171 |   | $ | 735 |   | $ | 514 |   |

 

*Contributions*

* *

During the three and nine months ended September 30,2007, we contributed $2.6 million and $4.1 million, respectively, to ourPension Plans and $0.2 million and $0.5 million to our post-retirement benefitplans, respectively.  During the threeand nine months ended September 30, 2006, we did not make any contributions toour Pension Plans and we contributed approximately $0.2 million and $0.6million, respectively, to our post-retirement benefit plans.  During the year ending December 31, 2007, theCompany expects to contribute $5.6 million to the Pension Plans and expects tocontribute approximately $0.6 million to the post-retirement benefit plans.

 

12

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**Hearst-Argyle Television, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**Tabular amounts in thousands, except per sharedata**

 

** **

**11.****       Other Commitments andContingencies**

** **

*Guarantees*

* *

The Company hasguaranteed the payments by its Capital Trust on the Redeemable ConvertiblePreferred Securities in the amount of $134 million.  The guarantee is irrevocable andunconditional, and guarantees the payment in full of all (i) distributions onthe Redeemable Convertible Preferred Securities to the extent of availablefunds of the Capital Trust; (ii) amounts payable upon redemption of theRedeemable Convertible Preferred Securities to the extent of available funds ofthe Capital Trust; and (iii) amounts payable upon dissolution of the CapitalTrust.  The guarantee is unsecured andranks (i) subordinate to all other liabilities of the Company, exceptliabilities that are expressly made *pari passu*;(ii) *pari passu* with the most seniorpreferred stock issued by the Company, and *pari passu* withany guarantee of the Company in respect of any preferred stock of the Companyor any preferred security of any of the Company’s controlled affiliates; and(iii) senior to the Company’s Common Stock.

 

*Legal Matters*

* *

Beginning on August 27, 2007, four putative classactions were filed in New York State Supreme Court and, beginning on September4, 2007, five putative class actions were filed in Delaware State ChanceryCourt, in response to the announcement on August 24, 2007 by HearstBroadcasting that it intended to launch a cash tender offer to acquire the outstandingshares of the Company’s Series A Common Stock that it did not already own for$23.50 per share. 

 

On September 7, 2007, the New York actions wereconsolidated under the caption *In re Hearst-ArgyleTelevision, Inc. Shareholder Litigation*, Index No. 07-602881, and,on September 20, 2007, the New York plaintiffs filed a consolidated amendedcomplaint (the “New York Consolidated Amended Complaint”), purportedly onbehalf of all holders of the Company’s Series A common stock.  On September 19, 2007, the Delawareplaintiffs in three of the Delaware actions filed a consolidated amended classaction complaint (the “Delaware Consolidated Amended Complaint”), purportedlyon behalf of all public stockholders of the Company.  On September 24, 2007, those three Delawareactions were consolidated with the remaining Delaware actions under the caption*In re Hearst-Argyle Television, Inc. ShareholderLitigation*, Civ. A. No. 3205-CC, with the Delaware ConsolidatedAmended Complaint becoming the operative complaint.

 

The New York Consolidated Amended Complaint andDelaware Consolidated Amended Complaint (together, the “Consolidated AmendedComplaints”) each named the Company and members of its Board of Directors, aswell as Hearst and certain of its affiliates, as defendants and alleged, amongother things, that the Offer price was inadequate and unfair to the Company’sshareholders and purported to state claims for, among other things, breach offiduciary duty in connection with the Offer. The Consolidated Amended Complaints sought orders enjoining theconsummation of the Offer, as well as reasonable attorneys’ fees and costs andother equitable relief.  The DelawareConsolidated Amended Complaint also sought damages in an unspecified amount.   On October 12, 2007, Hearst announced thatthe Offer had expired, without Hearst having purchased any shares in theOffer.  Subsequently, plaintiffs’ counselin New York and Delaware agreed that the defendants, including the Company, didnot need to file responses to the Consolidated Amended Complaints and informeddefendants that they intended to file motions to voluntarily dismiss theactions without prejudice.  The Delawareactions were dismissed on November 6, 2007.

 

We believe that thesematters will not have a materially adverse effect on our financial condition.

 

13

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**Item 2.**                **Management’s Discussion and Analysis of FinancialCondition 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 financialstatements.  It includes the followingsections:

 

•                  Forward-Looking Statements

•                  Executive Summary

•                  Results of Operations

•                  Liquidity and Capital Resources

 

**Forward-Looking Statements**

 

This report****includes****or incorporates forward-looking statements.  We base these forward-looking statements onour current expectations and projections about future events.  These forward-looking statements generallycan be identified by the use of statements that include phrases such as “anticipate”,“will”, “may”, “likely”, “plan”, “believe”, “expect”, “intend”, “project”, “forecast”or other such similar words and/or phrases. For these statements, the Companyclaims the protection of the safe harbor for forward-looking statementscontained in the Private Securities Litigation Reform Act of 1995.  The forward-looking statements contained inthis report, concerning, among other things, trends and projections involvingrevenue, income, earnings, cash flow, liquidity, operating expenses, assets,liabilities, capital expenditures, dividends and capital structure, involverisks and uncertainties, and are subject to change based on various importantfactors.  Those factors include theimpact on our operations from

** **

•               Changes in Federalregulations that affect us, 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;

 

•                  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; 

 

•                  Our ability toservice and refinance our outstanding debt;

 

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

 

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

** **

Fora discussion of additional risk factors that are particular to our business,please refer to the Risk Factors section of our Annual Report on Form 10-K forthe fiscal year ended December 31, 2006. These and other matters we discuss in this report, or in the documentswe incorporate by reference into this report, may cause actual results todiffer from those we describe.  Weundertake no obligation to update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.****

** **

**Executive Summary**

 

Hearst-Argyle Television, Inc. and its subsidiaries(hereafter “we” or the “Company”) own and operate 26 network-affiliatedtelevision stations.  Additionally, weprovide management services to two network-affiliated stations and oneindependent television station and two radio stations owned by The HearstCorporation (“Hearst”) in exchange for management fees.  We are a leader in the convergence of localbroadcast television and the Internet through our investment in, and operatingagreement with, Internet Broadcasting, which operates a nation-wide network oftelevision Websites.  Our stations’Websites typically provide news, weather, community information, user-generatedcontent and entertainment content to our audience.  Also, 16 of our stations broadcast additionalchannels on a multicast stream with their main digital channel.  

 

14

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*Trends and Highlights*

* *

•                  Political advertising decreases inodd-numbered years, such as 2007, consistent with the decrease in the number ofcandidates running for political office in the interim national election cycle,as well as select 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. Consequently, our 10 NBC stationsaired the 2006 Winter Olympics in February 2006 and will not record anyadvertising revenue associated with the Olympics in 2007.

 

•                  Thehousing downturn has impacted the Company's largest markets and contributed tothe slowdown in consumer purchases of autos, financial services and homefurnishings, resulting in a reduction of advertising expenditures in thesethree important categories.

 

•                  Results for the three months ended September30, 2007 reflect a $16.5 million decrease in net political advertising revenueresulting from the normal, cyclical nature of the television broadcastingbusiness, partially offset by an increase in advertising revenue resulting fromour acquisition of WKCF-TV on August 31, 2006. Additionally, the results for the quarter ended September 30, 2007 reflectcontinued focus on digital media and the positive impact of retransmissionconsent revenue.

 

•                  On August 24, 2007, Hearst Broadcasting,Inc., an indirect wholly-owned subsidiary of Hearst, announced its intentionsto launch, and on September 14, 2007, launched, a tender offer to acquire theoutstanding shares of the Company’s Series A Common Stock that it did notalready own (the “Offer”).  On October12, 2007, the Offer expired and Hearst announced that it would return toshareholders all of the shares that were tendered in the Offer.  For the three months ended September 30,2007, the Company recognized $3.6 million of expense related to the Offer.

 

**Results of Operations**

** **

Results of operations for the three and nine monthsended September 30, 2007 and 2006 include (i) the results of our 25 televisionstations, which were owned for the entire period presented, and the managementfees derived by the three television and two radio stations managed by us forthe entire period presented; (ii) the results of operations of WKCF-TV, afterour acquisition of the station on August 31, 2006.

 

*ThreeMonths Ended September 30, 2007*

*Comparedto Three Months Ended September 30, 2006*

 
| ** **                                         | ** ** | **For the three months ended September 30,** | ** **    | ** ** | ** ** | ** **        | ** **    |
|----------------------------------------------------|------------|----------------------------------------------------------------------------|---------------|------------|------------|-------------------|---------------|
| ** **                                         | ** ** | **2007**                                                                   | ** **    | **2006**   | ** ** | **$ Change** | ** **    | **% Change** | ** ** |
|                                               |       | **(In thousands)**                                                    |          |       |       |              |          |
| Total revenue                                      |       | $                                                                          |  176,775 |       | $          |  182,993     |          | $ |  (6,218 | ) | -3.4 | % |
| Station  operating expenses:                       |       |                                                                       |          |       |       |              |          |   |   |
| Salaries,  benefits and other operating costs      |       | 101,831                                                                    |          | 99,574     |       | $                 |  2,257   |   | 2.3 | % |
| Amortization of  program rights                    |       | 18,679                                                                     |          | 17,751     |       | $                 |  928     |   | 5.2 | % |
| Depreciation and  amortization                     |       | 13,310                                                                     |          | 14,634     |       | $                 |  (1,324  | ) | -9.0 | % |
| Corporate,  general and administrative expenses    |       | 12,534                                                                     |          | 7,868      |       | $                 |  4,666   |   | 59.3 | % |
| Operating income                                   |       | 30,421                                                                     |          | 43,166     |       | $                 |  (12,745 | ) | -29.5 | % |
|                                               |       |                                                                       |          |       |       |              |          |   |   |
| Interest expense                                   |       | 15,926                                                                     |          | 16,427     |       | $                 |  (501    | ) | -3.0 | % |
| Interest income                                    |       | (555                                                                       | )             | (1,736     | )          | $                 |  1,181   |   | -68.0 | % |
| Interest  expense, net – Capital Trust        |       | 2,438                                                                      |          | 2,438      |       | $                 | —        |   | 0.0 | % |
| Income before  income taxes and equity earnings    |       | 12,612                                                                     |          | 26,037     |       | $                 |  (13,425 | ) | -51.6 | % |
|                                               |       |                                                                       |          |       |       |              |          |   |   |
| Income tax  expense                                |       | 2,138                                                                      |          | 9,531      |       | $                 |  (7,393  | ) | -77.6 | % |
| Equity in loss  (income) of affiliates, net of tax |       | 733                                                                        |          | (37        | )          | $                 |  770     |   | -2081.1 | % |
| Net income                                         |       | $                                                                          |  9,741   |       | $          |  16,543      |          | $ |  (6,802 | ) | -41.1 | % |

 

15

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*Totalrevenue*.    Total revenue includes: 

 

(i)    cashadvertising revenue, net of agency and national representatives’ commissions; 

(ii)   retransmissionconsent revenue; 

(iii)  netdigital media revenue, which includes primarily Internet advertising revenueand, to a lesser extent, revenue from advertising on multicast weatherchannels;

(iv)  networkcompensation; and

(v)   otherrevenue, primarily barter and trade revenue and management fees earned fromHearst.  

 
| ** **                                               | ** ** | **For the three months ended September 30,** | ** **    | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------------------|------------|----------------------------------------------|---------------|------------|------------|-------------------|------------|
| ** **                                               | ** ** | **2007**                                     | ** **    | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                               | ** ** | **(In thousands)**                           | ** **    | ** ** | ** ** | ** **        | ** ** |
| Net local and  national ad revenue (excluding political) |       | $                                            |  146,355 |       | $          |  138,643     |       | $ |  7,712 |   | 5.6 | % |
| Net political  revenue                                   |       | 6,960                                        |          | 23,429     |       | (16,469           | )          | -70.3 | % |
| Retransmission  consent revenue                          |       | 5,561                                        |          | 4,722      |       | 839               |       | 17.8 | % |
| Net digital  media revenue                               |       | 5,246                                        |          | 3,677      |       | 1,569             |       | 42.7 | % |
| Network  compensation                                    |       | 2,144                                        |          | 2,610      |       | (466              | )          | -17.9 | % |
| Other revenue                                            |       | 10,509                                       |          | 9,912      |       | 597               |       | 6.0 | % |
| Total revenue                                            |       | $                                            |  176,775 |       | $          |  182,993     |       | $ |  (6,218 | ) | -3.4 | % |

 

Total revenue in thethree months ended September 30, 2007 was $176.8 million as compared to $183.0million in the three months ended September 30, 2006, a decrease of $6.2million or 3.4%. This decrease was primarily attributable to the followingfactors: 

 

(i)    a$16.5 million decrease in net political advertising revenue; and

(ii)   adecrease in the automotive, movies, and furniture and housewares categories;partially offset by

(iii)  anincrease in net ad revenue due to the inclusion of results of operations fromWKCF-TV; 

(iv)  anincrease in the telecommunications packaged goods and retail categories.

(v)   a$1.6 million increase in net digital media revenue; and

(vi)  a$0.8 million increase in retransmission consent revenue.

 

*Salaries,benefits and other operating costs*.    Duringthe three months ended September 30, 2007, salaries, benefits and otheroperating costs were $101.8 million, as compared to $99.6 million in the threemonths ended September 30, 2006, an increase of $2.3 million or 2.3%.  This increase was primarily due to:

 

(i)    anincrease in expenses due to the inclusion of the results of operations fromWKCF-TV; and

(ii)   a$2.0 million increase in digital media expenses.

 

*Amortizationof program rights*.  Amortization of program rightswas $18.7 million in the three months ended September 30, 2007, as compared to$17.8 million in the three months ended September 30, 2006, an increase of $0.9million or 5.1%. This increase was primarily due to an increase in amortizationdue to the purchase of WKCF-TV. Programming expense is a more significant component of operating expensefor WKCF-TV because the CW network provides fewer hours of programming thanABC, NBC or CBS.

 

*Depreciation and amortization*.  Depreciation and amortization expense was $13.3 million in the three monthsended September 30, 2007, as compared to $14.6 million in the three monthsended September 30, 2006, a decrease of $1.3 million or 8.9%. Depreciationexpense was $11.6 million in the three months ended September 30, 2007, ascompared to $13.0 million in the three months ended September 30, 2006, adecrease of $1.4 million or 10.8%.  Thedecrease in depreciation expense is primarilydue to depreciation in full of certain fixed assets, partially offset byadditional depreciation from WKCF-TV.  

 

*Corporate,general and administrative expenses*.    Corporate,general and administrative expenses were $12.5 million in the three monthsended September 30, 2007, as compared to $7.9 million in the three months endedSeptember 30, 2006, an increase of $4.7 million or 59.5%. This increase wasprimarily due to:

 

(i)    $3.6 million in legal and investment bankingexpenses related to the Offer;

(ii)   a $0.6 million increase in employeecosts and related benefits; and

(iii)  a $0.4 million increase in recruitment andrelocation costs.

 

16

----

 

*Interestexpense. *Interestexpense was $15.9 million in the three months ended September 30, 2007, ascompared to $16.4 million in the three months ended September 30, 2006, adecrease of $0.5 million or 3.0%, due to lower average debt balances.

 

*Interest income.*    Interest income was $0.6 million in the threemonths ended September 30, 2007, as compared to $1.7 million in the threemonths ended September 30, 2006, a decrease of $1.2 million or 70.6%.  This decrease was due to lower cash balances in2007 as compared to the same period in 2006.

 

*Incometax expense.*    We recorded income taxexpense of $2.1 million in the three months ended September 30, 2007, ascompared to $9.5 million in the three months ended September 30, 2006, adecrease of $7.4 million.  This decreasewas primarily due to a decrease in income before income taxes from $26.0million in the three months ended September 30, 2006 to $12.6 million in thethree months ended September 30, 2007.

 

The effective tax ratefor the three months ended September 30, 2007 was 17.0% as compared to 36.6%for the three months ended September 30, 2006. For the three months ended September 30, 2007, the effective tax ratewas primarily affected by the decrease in income before income taxes and areduction in the liability for uncertain tax positions due to the expiration ofstatutes of limitations in certain state and local jurisdictions. 

 

*Equity in loss (income) ofaffiliates, net of tax*.  Equity in loss (income) of affiliates, net oftax was a loss of $0.7 million for the three months ended September 30, 2007,as compared to income of $0.04 million for the three months ended September 30,2006.  For all periods presented,our share of income in InternetBroadcasting Systems, Inc. (“Internet Broadcasting”) was substantiallyoffset by our share of losses in RipeDigital Entertainment, Inc. (“Ripe TV”). 

 

*Netincome*.    Net income was $9.7 million inthe three months ended September 30, 2007, as compared to $16.5 million in thethree months ended September 30, 2006, a decrease of $6.8 million or41.2%.  This decrease was primarily dueto the items described above.

 

*NineMonths Ended September 30, 2007*

*Comparedto Nine Months Ended September 30, 2006*

* *
| ** **                                         | ** ** | **For the nine months ended September 30,** | ** **    | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|---------------|------------|------------|-------------------|------------|
| ** **                                         | ** ** | **2007**                                    | ** **    | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                         | ** ** | **(In thousands)**                          | ** **    | ** ** | ** ** | ** **        | ** ** |
| Total revenue                                      |       | $                                           |  539,177 |       | $          |  550,974     |       | $ |  (11,797 | ) | -2.1 | % |
| Station  operating expenses:                       |       |                                        |          |       |       |              |       |   |   |
| Salaries,  benefits and other operating costs      |       | 305,073                                     |          | 294,016    |       | 11,057            |       | 3.8 | % |
| Amortization of  program rights                    |       | 57,329                                      |          | 49,034     |       | 8,295             |       | 16.9 | % |
| Depreciation and  amortization                     |       | 42,492                                      |          | 46,103     |       | (3,611            | )          | -7.8 | % |
| Corporate,  general and administrative expenses    |       | 29,201                                      |          | 22,766     |       | 6,435             |       | 28.3 | % |
| Operating income                                   |       | 105,082                                     |          | 139,055    |       | (33,973           | )          | -24.4 | % |
|                                               |       |                                        |          |       |       |              |       |   |   |
| Interest expense                                   |       | 47,846                                      |          | 48,942     |       | (1,096            | )          | -2.2 | % |
| Interest income                                    |       | (1,309                                      | )             | (4,983     | )          | 3,674             |       | -73.7 | % |
| Interest  expense, net – Capital Trust        |       | 7,313                                       |          | 7,313      |       | —            |       | 0.0 | % |
| Other expense                                      |       | —                                      |          | 2,501      |       | (2,501            | )          | -100.0 | % |
| Income before  income taxes and equity earnings    |       | 51,232                                      |          | 85,282     |       | (34,050           | )          | -39.9 | % |
|                                               |       |                                        |          |       |       |              |       |   |   |
| Income tax  expense                                |       | 18,656                                      |          | 30,807     |       | (12,151           | )          | -39.4 | % |
| Equity in loss  (income) of affiliates, net of tax |       | 1,564                                       |          | (102       | )          | 1,666             |       | -1633.3 | % |
| Net income                                         |       | $                                           |  31,012  |       | $          |  54,577      |       | $ |  (23,565 | ) | -43.2 | % |

 

17

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| ** **                                               | ** ** | **For the nine months ended September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                               | ** ** | **2007**                                    | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                               | ** ** | **(In thousands)**                          | ** ** | ** ** | ** ** | ** **        | ** ** |
| Net local and  national ad revenue (excluding political) |       | $                                           | 458,222    |       | $          | 453,448           |       | $ | 4,774 |   | 1.1 | % |
| Net political  revenue                                   |       | 13,363                                      |       | 38,490     |       | (25,127           | )          | -65.3 | % |
| Retransmission  consent revenue                          |       | 16,148                                      |       | 13,351     |       | 2,797             |       | 20.9 | % |
| Net digital  media revenue                               |       | 14,282                                      |       | 10,227     |       | 4,055             |       | 39.6 | % |
| Network  compensation                                    |       | 7,258                                       |       | 6,868      |       | 390               |       | 5.7 | % |
| Other revenue                                            |       | 29,904                                      |       | 28,590     |       | 1,314             |       | 4.6 | % |
| Total revenue                                            |       | $                                           | 539,177    |       | $          | 550,974           |       | $ | (11,797 | ) | -2.1 | % |

* *

Total revenue in the ninemonths ended September 30, 2007 was $539.2 million as compared to $551.0million in the nine months ended September 30, 2006, a decrease of $11.8million or 2.1%. This decrease was primarily attributable to the followingfactors: 

 

(i)               a $25.1 milliondecrease of net political advertising revenue; partially offset by

(ii)            the inclusion ofresults of operations from WKCF-TV; 

(iii)         a $4.1 million increasein net digital media revenue; and

(iv)        a $2.8 million increase inretransmission consent revenue.

 

*Salaries,benefits and other operating costs*.    Salaries,benefits and other operating costs were $305.1 million in the nine months endedSeptember 30, 2007, as compared to $294.0 million in the nine months endedSeptember 30, 2006, an increase of $11.1 million or 3.8%.  This increase was primarily due to:

 

(i)             an increase inexpenses due to the inclusion of results of operations from WKCF-TV; and

(ii)          a $4.8 million increaserelated to digital media expenses.

 

*Amortizationof program rights*.  Amortization of program rightswas $57.3 million in the nine months ended September 30, 2007, as compared to$49.0 million in the nine months ended September 30, 2006, an increase of $8.3million or 16.9%. This increase was primarily due to:

 

(i)               an increase inamortization due to the purchase of WKCF-TV; and

(ii)            a $0.7 millionwrite-down of certain off-network syndicated programs. 

 

*Depreciation and amortization*.  Depreciation and amortization was $42.5 million in the nine months endedSeptember 30, 2007, as compared to $46.1 million in the nine months endedSeptember 30, 2006, a decrease of $3.6 million or 7.8%.  Depreciation expense was $37.3 million in thenine months ended September 30, 2007, as compared to $41.5 million in the ninemonths ended September 30, 2006, a decrease of $4.2 million or 10.1%.  The decrease in depreciation expense is primarily due to:

 

(i)             depreciation in fullof certain fixed assets, including leasehold improvements from our previouscorporate office; partially offset by

(ii)          additional depreciationfrom WKCF-TV.  

 

*Corporate,general and administrative expenses*.    Corporate,general and administrative expenses were $29.2 million in the nine months endedSeptember 30, 2007, as compared to $22.8 million in the nine months endedSeptember 30, 2006, an increase of $6.4 million or 28.1%.  This increase was primarily due to:

 

(i)             $3.6 million in legaland investment banking expenses related to the Offer; and

(ii)          a $1.8 million increaserelated to employee compensation, pension and benefit expense, a portion ofwhich is related to our investment in our digital media initiatives.

 

*Interestexpense. *Interestexpense was $47.8 million in the nine months ended September 30, 2007, ascompared to $48.9 million in the nine months ended September 30, 2006, adecrease of $1.1 million or 2.2%.

 

*Interest income.*    Interest income was $1.3 million in the ninemonths ended September 30, 2007, as compared to $5.0 million in the nine monthsended September 30, 2006, a decrease of $3.7 million or 74%. This decrease isdue to lower cash balances in 2007 as compared to the same period in2006.

 

18

----

 

*Otherexpense.  *During thenine months ended September 30, 2006, we recorded a $2.5 million write-off ofour investment in USDTV.

* *

*Incometax expense.*    We recorded income taxexpense of $18.7 million in the nine months ended September 30, 2007, ascompared to $30.8 million in the nine months ended September 30, 2006, adecrease of $12.2 million.  This decreasewas primarily due to a decrease in income before income taxes from $85.3million in the nine months ended September 30, 2006 to $51.2 million in thenine months ended September 30, 2007.

 

The effective tax ratefor the nine months ended September 30, 2007 was 36.4% as compared to 36.1% forthe nine months ended September 30, 2006. The Company’s effective income tax rate in a given financial statementperiod may be impacted by:

 

•                  changesin the level of earnings by taxing jurisdiction; 

•                  changesin the expected outcome of tax examinations;

•                  thenormal expiration of statutes of limitations; or 

•                  theamount of deductions or changes in the deferred tax valuation allowance.  

 

On a full year basis, theCompany estimates its annual effective tax rate to be approximately 37%.  The effective tax rate for 2007 gives effectto the adoption of Financial Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*.

 

*Equity inloss (income) of affiliates, net of tax*.  Equity in loss (income) of affiliates, net oftax was a loss of $1.6 million for the nine months ended September 30, 2007 ascompared to income of $0.1 million for the nine months ended September 30,2006, a change of $1.7 million.  For thenine months ended September 30, 2007, our share of income in Internet Broadcastingwas substantially offset by our share of losses in Ripe TV.

 

*Netincome*.    Net income was $31.0 millionin the nine months ended September 30, 2007, as compared to $54.6 million inthe nine months ended September 30, 2006, a decrease of $23.6 million or43.2%.  This decrease was primarily dueto a the items described above. 

 

**Liquidity and Capital Resources**

 

As of September 30, 2007,the Company’s cash and cash equivalents balance was $55.6 million, as comparedto $18.6 million as of December 31, 2006. The net increase in cash and cash equivalents of $37.0 million duringthe nine months ended September 30, 2007 was due to the factors described belowunder Operating Activities, Investing Activities, and Financing Activities. 

 
| ** **                                           | ** ** | **Nine months ended September 30,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                           | ** ** | **2007**                            | ** ** | **2006**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                           | ** ** | **(In thousands)**                  | ** ** | ** ** | ** ** | ** **        | ** ** |
| Net cash  provided by operating activities           |       | $                                   | 86,732     |       | $          | 154,282           |       | $ | (67,550 | ) | -43.8 | % |
| Net cash used in  investing activities               |       | $                                   | (42,977    | )          | $          | (264,760          | )          | $ | 221,783 |   | 83.8 | % |
| Net cash (used  in) provided by financing activities |       | $                                   | (6,797     | )          | $          | 71,217            |       | $ | (78,014 | ) | NM |   |
|                                                 |       |                                |       |       |       |              |       |   |   |
| Cash paid for:                                       |       |                                |       |       |       |              |       |   |   |
| Interest                                             |       | 37,911                              |       | 37,745     |       | 166               |       | 0.4 | % |
| Interest on Note  payable to Capital Trust           |       | 4,875                               |       | 7,313      |       | (2,438            | )          | -33.3 | % |
| Taxes, net of  refunds                               |       | 34,963                              |       | 26,656     |       | 8,307             |       | 31.2 | % |
| Purchase of  property, plant and equipment, net      |       | 42,103                              |       | 38,288     |       | 3,815             |       | 10.0 | % |
| Dividends paid  on common stock                      |       | 19,640                              |       | 19,464     |       | 176               |       | 0.9 | % |
| Series A Common  Stock repurchases                   |       | 2,270                               |       | 2,780      |       | (510              | )          | -18.3 | % |

 

*OperatingActivities*

* *

Net cash provided by operating activities was $86.7million in the nine months ended September 30, 2007, as compared to $154.3million in the nine months ended September 30, 2006, a decrease of $67.6million or 43.8%. This decrease was primarily due to: 

 

19

----

 

(i)    lower revenue andnet income; and

(ii)   changes in otheroperating assets and liabilities, driven by higher tax and programming paymentsin 2007 as compared to the same period in 2006.

 

*InvestingActivities*

* *

Net cash used in investing activities was $43.0million in the nine months ended September 30, 2007, as compared to $264.8million in the nine months ended September 30, 2006, a decrease of $221.8million or 83.8%.  This decrease isprimarily due to:

 

(i)    the acquisitionof WKCF-TV for $217.4 million in August 2006; and

(ii)   a $1.9 millioninvestment in Ripe TV in the nine months ended September 30, 2007, as comparedto $10.6 million in investments in Internet Broadcasting, Ripe TV and USDTV inthe nine months ended September 30, 2006; partially offset by

(iii)  anincrease in capital expenditures from $38.3 million in the nine months endedSeptember 30, 2006 to $42.1 million the same period in 2007. The increasedlevel of capital investment relates primarily to construction projects atKMBC-TV in Kansas City, Missouri, at WBAL-TV in Baltimore, Maryland, and atKHBS-TV in Fort Smith, Arkansas, and the timing of cash payments.

 

*FinancingActivities*

* *

Net cash used in financing activities was $6.8 millionin the nine months ended September 30, 2007, as compared to net cash providedby financing activities of $71.2 million in the nine months ended September 30,2006, a change of $78.0 million or 109.6%. This change was primarily due to:

 

(i)    Borrowings on ourcredit facility of $100.0 million to fund the acquisition of WKCF-TV in thenine months ended September 30, 2006; partially offset by

(ii)   proceeds fromstock option exercises and employee stock purchases of $15.1 million in thenine months ended September 30, 2007 compared to $3.5 million in the ninemonths ended September 30, 2006; and

(iii)  therepurchase of $10.0 million of our senior notes due 2018 in the nine monthsended September 30, 2006.

 

*Credit Facility and Other Long Term Debt*

* *

In November 2006, we increased our five-yearunsecured revolving credit facility, which matures on April 15, 2010, to $500million. The credit facility can be used for general corporate purposesincluding working capital, investments, acquisitions, debt repayment anddividend payments.  Outstanding principalbalances under the credit facility bear interest at our option at LIBOR or thealternate base rate (“ABR”), plus the applicable margin.  The applicable margin for ABR loans iszero.  The applicable margin for LIBORloans varies between 0.50% and 1.00% depending on the ratio of our total debtto earnings before interest, taxes, depreciation and amortization as defined bythe credit agreement (the “Leverage Ratio”). The ABR is the greater of (i) the prime rate or (ii) the Federal Funds EffectiveRate in effect plus 0.5%.  We arerequired to pay a commitment fee based on the unused portion of the creditfacility.  The commitment fee ranges from0.15% to 0.25% depending on our Leverage Ratio. The credit facility is a general unsecured obligation of theCompany.  We have borrowed $100.0 millionunder the credit facility as of September 30, 2007.  

 

As of September 30, 2007, our long-term debtobligations, exclusive of capital lease obligations, were $777.1 million andour current debt maturities totaled $90 million.  The Company has the ability and intent torefinance its $125 million principal amount of 7% senior notes due November 15,2007 under its credit facility and, therefore, has continued to classify thedebt as a long-term obligation on the consolidated balance sheet.  Our long-term debt obligations bear interestat a fixed rate.  The Company’s creditratings were BBB- by Standard & Poor’s and Fitch Ratings and Baa3 by Moody’sInvestors Service, as of September 30, 2007. Such credit ratings are considered to be investment grade.

 

Our debt obligationscontain certain financial and other covenants and restrictions on theCompany.  Certain of the financialcovenants include credit ratios such as leverage and interest coverage, andthreshold tests such as consolidated net worth, but such covenants do notinclude any triggers explicitly tied to the Company’s credit ratings or stockprice.  We are in compliance with allsuch covenants and restrictions as of September 30, 2007.  

 

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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.

 

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

 

As of September 30, 2007, the Company was not involvedin any derivative financial instruments. However, the Company may consider certain interest-rate risk strategiesin the future.

 

As of September 30, 2007, we have borrowed $100.0million under our credit facility, which loan bears interest at LIBOR plus theapplicable margin.  The applicable marginon LIBOR loans varies between 0.50% and 1.00% depending on the ratio of totaldebt to earnings before interest, taxes, depreciation and amortization asdefined by the credit agreement.

 

**Item 4.    Controls and Procedures**

** **

The Company’s managementperformed an evaluation under the supervision and with the participation of theCompany’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),of the effectiveness of the disclosure controls and procedures (as that term isdefined in Exchange Act Rule 13a-15(e)) as of the end of the fiscal quarterended September 30, 2007.  Based on thatevaluation, and as of the end of the quarter for which this report is made, theCompany’s management, including the CEO and CFO, concluded that the Company’sdisclosure controls and procedures were effective.  Our management, including the CEO and CFO,performed an evaluation of any changes that occurred in our internal controlover financial reporting (as that term is defined in Exchange Act Rule13a-15(f)) during the fiscal quarter ended September 30, 2007.  That evaluation did not identify any changesin the Company’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 1.    LegalProceedings.**

** **

The information presentedin Note 11 of the “Notes to Condensed Consolidated Financial Statements(unaudited)” under the caption “Legal Matters” is incorporated herein byreference, pursuant to Rule 12b-23.

** **

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

** **

*Purchaseof Equity Securities by the Issuer and Affiliated Purchasers. *The following tablereflects purchases of our Series A Common Stock made by Hearst Broadcastingduring the three months ended September 30, 2007:

 
| **Period**                       | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Program** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Program** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| July 1 – July 31            |       | 0                                      |       | $                                  | 0.00       |                                                                          | 0          |                                                                        |       |   |
| August 1 –  August 31       |       | 0                                      |       | $                                  | 0.00       |                                                                          | 0          |                                                                        |       |   |
| September 1 –  September 30 |       | 0                                      |       | $                                  | 0.00       |                                                                          | 0          |                                                                        | 1,184,656  | (1) |
| Total                            |       | 0                                      |       | $                                  | 0.00       |                                                                          | 0          |                                                                        |       |   |

 

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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's initialpurchase authorization was granted in December 2000.)  Hearst may effect such purchases from time totime in the open market or in private transactions, subject to marketconditions and management’s discretion. 

 

As of September 30, 2007,Hearst beneficially owned approximately 52.4% of the Company’s outstandingSeries A Common Stock and 100% of the Company’s Series B Common Stock,representing in the aggregate approximately 73.4% of our common stock.

 

The following tablereflects purchases made by the Company of its Series A Common Stock during thethree months ended September 30, 2007.

 
| **Period**                       | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Program** | ** ** | **Approximate Dollar  Value of Shares that  May Yet Be Purchased  Under the Program** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| July 1 – July 31            |       | 50,200                                 |       | $                                  | 20.88      |                                                                          | 50,200     |                                                                                  | $          | 195,662,220 |   |
| August 1 –  August 31       |       | 58,900                                 |       | $                                  | 20.75      |                                                                          | 58,900     |                                                                                  | $          | 194,439,838 |   |
| September 1 –  September 30 |       | 0                                      |       | $                                  | 0.00       |                                                                          | 0          |                                                                                  | $          | 194,439,838 | (1) |
| Total                            |       | 109,100                                |       | $                                  | 20.81      |                                                                          | 109,100    |                                                                                  |       |   |

 

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(1)          In May 1998, the Company’sBoard of Directors authorized the repurchase of up to $300 million of its outstandingSeries A Common Stock.  Such purchasesmay be effected from time to time in the open market or in privatetransactions, subject to market conditions and management’s discretion.  As of September 30, 2007, the Company hasspent approximately $113.1 million to repurchase approximately 4.6 millionshares of Series A Common Stock at an average price of $24.78. There can be noassurance that such repurchases will occur in the future or, if they do occur,what the terms of such repurchases will be.

 

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**Item 6.    Exhibits**

 

**(a) Exhibits:**

 

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

 

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

 

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

 

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**SIGNATURES**

 

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:                              | November 8, 2007 |
|            |                                     |  |  |

 

 
| **Name**            | ** ** | **Title**                       | ** ** | **Date**         |
|---------------------|------------|---------------------------------|------------|------------------|
|                |       |                            |       |             |
| /S/ HARRY T.  HAWKS |       | Executive Vice  President       |       | November 8, 2007 |
| Harry T. Hawks      |       | and Chief  Financial Officer    |       |             |
|                |       | (Principal  Financial Officer)  |       |             |
|                |       |                            |       |             |
|                |       |                            |       |             |
| /S/ LYDIA G.  BROWN |       | Corporate  Controller           |       | November 8, 2007 |
| Lydia G. Brown      |       | (Principal  Accounting Officer) |       |             |

 

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