**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**Form 10-K**

 

**(Mark One)**

 

| **ý** | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**      |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
| ** ** | ** ** | ** **                                                                                               | **For the fiscal year ended December 31,  2005** |
| ** ** | ** ** | ** **                                                                                               |
| **or**     |
|       |       |                                                                                                     |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|       |       |                                                                                                     |
| ** ** | ** ** | ** **                                                                                               | **For the transition period  from:    Not Applicable** |

 

**Commission file number1-14776**

 

**Hearst-ArgyleTelevision, Inc.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Delaware**                              | ** ** |                                                       |
|-------------------------------------------|------------|------------------------------------------------------------|
| (State  or other jurisdiction of          |       | **74-2717523**                                             |
| incorporation  or organization)           |       | (I.R.S. Employer  Identification No.)            |
| ** **                                | ** ** | ** **                                                 |
| **888  Seventh Avenue**                   |       |                                                       |
| **New York,  NY 10106**                   | ** ** | **(212)  887-6800**                                        |
| (Address  of principal executive offices) |       | (Registrant’s  telephone number, including area code) |

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:**

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

 

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

**None**

 

Indicate by check mark whether the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o   Noý

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

Yes o   Noý

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12-b2of the Exchange Act.

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

 

Indicate by check mark whether the registrant is ashell company. Yes o   Noý

 

The aggregate market value of the registrant’svoting common stock held by non-affiliates on June 30, 2005 based on theclosing price for the registrant’s Series A Common Stock on such date asreported on the New York Stock Exchange (the “NYSE”), was approximately$482,091,302.

 

Shares of the registrant’s Common Stock outstandingas of February 15, 2006: 92,669,867 shares (consisting of 51,371,219shares of Series A Common Stock and 41,298,648 shares of Series BCommon Stock).

 

**DOCUMENTS INCORPORATED BYREFERENCE:**Portionsof the registrant’s Proxy Statement relating to the 2006 Annual Meeting ofStockholders are incorporated by reference into Part III (Items 10, 11,12, 13 and 14).

 

 

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**FORWARD-LOOKINGSTATEMENTS**

 

This report****includes****or incorporates forward-looking statements. We base theseforward-looking statements on our current expectations and projections aboutfuture events. These forward looking statements generally can be identified bythe use of statements that include phrases such as “anticipate”, “will”, “may”,“likely”, “plan”, “believe”, “expect”, “intend”, “project”, “forecast” or othersuch similar words and/or phrases. For these statements, the Company claims theprotection of the safe harbor for forward-looking statements contained in thePrivate Securities Litigation Reform Act of 1995. The forward-lookingstatements contained in this report, concerning, among other things, trends andprojections involving revenue, income, earnings, cash flow, liquidity,operating expenses, assets, liabilities, capital expenditures, dividends andcapital structure, involve risks and uncertainties, and are subject to changebased on various important factors. Those factors include the impact on ouroperations from

 

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

 

•                  Local regulatoryactions and conditions in the areas in which our stations operate;

 

•                  Competition in thebroadcast television markets we serve;

 

•                  Our ability toobtain quality programming for our television stations;

 

•                  Successfulintegration of television stations we acquire;

 

•                  Pricingfluctuations in local and national advertising;

 

•                  Changes in nationaland regional economies;

 

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

 

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

 

For a discussion of additional risk factors that areparticular to our business, please refer to Part I, Item 1A. “Risk Factors”beginning on page 14. These and other matters we discuss in this report,or in the documents we incorporate by reference into this report, may causeactual results to differ from those we describe. We undertake no obligation toupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

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**HEARST-ARGYLE TELEVISION, INC.**

**2005 ANNUAL REPORT ON FORM 10-K**

**TABLE OF CONTENTS**

 
| ** ** | ** **                                                                                                          | ** ** | **Page**   |
|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** ** | ** **                                                                                                          | ** ** | ** ** |
|       | **PART I**                                                                                                     |       | 4          |
|       |                                                                                                                |       |       |
| Item 1.    | Business                                                                                                            |       | 4          |
| Item 1A.   | Risk Factors                                                                                                        |       | 14         |
| Item  1B.  | Unresolved  Staff Comments                                                                                          |       | 19         |
| Item 2.    | Properties                                                                                                          |       | 19         |
| Item 3.    | Legal  Proceedings                                                                                                  |       | 21         |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                                                |       | 21         |
|       |                                                                                                                |       |       |
|       | **PART II**                                                                                                    |       | 22         |
|       |                                                                                                                |       |       |
| Item  5.   | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       | 22         |
| Item  6.   | Selected  Financial Data                                                                                            |       | 24         |
| Item 7.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 26         |
| Item 7A.   | Quantitative  and Qualitative Disclosures about Market Risk                                                         |       | 39         |
| Item 8.    | Financial  Statements and Supplementary Data                                                                        |       | 40         |
| Item 9.    | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 71         |
| Item 9A.   | Controls  and Procedures                                                                                            |       | 71         |
| Item 9B.   | Other  Information                                                                                                  |       | 72         |
|       |                                                                                                                |       |       |
|       | **PART III**                                                                                                   |       | 72         |
|       |                                                                                                                |       |       |
| Item 10.   | Directors  and Executive Officers of the Registrant                                                                 |       | 72         |
| Item 11.   | Executive  Compensation                                                                                             |       | 72         |
| Item 12.   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       | 72         |
| Item 13.   | Certain  Relationships and Related Transactions                                                                     |       | 73         |
| Item 14.   | Principal  Accountant Fees and Services                                                                             |       | 73         |
|       |                                                                                                                |       |       |
|       | **PART IV**                                                                                                    |       | 73         |
|       |                                                                                                                |       |       |
| Item 15.   | Exhibits  and Financial Statement Schedules                                                                         |       | 73         |

 

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**PART I**

 

**ITEM 1.   BUSINESS**

 

**General**

 

Hearst-Argyle Television, Inc.(the “Company” or “we”) is one of the country’s largest independent, ornon-network-owned, television station groups. Headquartered in New York City,we own or manage 28 television stations reaching approximately 18.2% oftelevision households in the United States. Our 13 ABC-affiliated televisionstations, which reach 8.4% of U.S. television households, comprise the largestABC affiliate group. Our 10 NBC-affiliated television stations, which reach7.3% of U.S. television households, comprise the second largest NBC affiliategroup. We own two CBS-affiliated television stations and one WB station, and wealso manage one UPN station and one independent station for The HearstCorporation (“Hearst”). Our primary corporate objective is to optimize theratings, revenue and profit potential of our stations. We believe that localnews leadership, and the effective showcasing of network and syndicatedprograms, drive market-competitive ratings, revenue share and stationprofitability. In addition, we operate Internet sites at each of our stations,which provide supplemental news, weather, information and entertainmentcontent, and which are part of a nation-wide network of Internet sites wehave built with other companies in the media industry. Also, as part ofour ongoing initiative to explore additional uses of our digital spectrum, weparticipate in the joint venture that launched the NBC Weather Plus Network,the first ever 24/7, all digital, local and national broadcast network,which we currently broadcast in eight of our NBC markets on a multicast streamwith our main digital channel. Wealso manage two radio stations which are owned by Hearst.

 

We provide, through ourlocal television stations, free over-the-air programming to our communities’television viewing audiences. Our programming includes three main components:

 

•                  programs produced by networks with which weare affiliated, such as ABC’s *Grey’s Anatomy*,NBC’s *Law and Order* and CBS’ *CSI:**Crime Scene Investigation*,and special event programs like The Academy Awards, the Olympics and theSuperbowl;

 

•                  programs that we produce at our stations,such as local news, weather, sports and entertainment; and

 

•                  first-run syndicated programs that weacquire, such as *The**OprahWinfrey Show* and *Dr. Phil*.

 

In keeping with ourcommitment to serve the public interest of the local communities in which weoperate, our television stations and Internet sites also provide public serviceannouncements and political coverage and sponsor community service projects andother public initiatives.

 

Our primary source ofrevenue is the sale of commercial air time to advertisers. Our objectives areto meet the needs of our advertising customers and to increase our advertiserbase by delivering mass audiences in key demographics, primarily in the top 75U.S. markets. We seek to attract our television audience by providing leadinglocal news programming and compelling network and syndicated programs at eachof our stations, 20 of which are in the top 50 markets. In addition to offeringadvertising customers commercial air time, we offer a variety of marketingprograms, including community events, sponsorships and advertisingopportunities on our stations’ Internet sites.

 

Excellence in news coverageis a key determinant to a station’s competitive, operational and financialsuccess. We focus on the coverage of local and national issues, breaking news,accurate and timely monitoring of local weather conditions and the latestinformation at times of emergencies, as well as coverage of political issues,candidates, debates, and elections. We typically rank either first or second(in total household ratings and by share of demographic audience, adults aged25-54) in local morning and evening news programs in at least 19 of the 25markets where we produce news. In addition, our television stations have beenrecognized with numerous local, state and national awards for outstanding newscoverage. Our stations have received numerous honors in recent years, includingthree consecutive Walter Cronkite Awards bestowed by the University of SouthernCalifornia’s Annenberg School for Communication, Edward R. Murrow Awards,George Foster Peabody Awards, Alfred I. duPont Columbia Awards, NationalHeadliner Awards, the NAB Service to America Award, as well as numerous stateand local Emmy and Associated Press honors.

 

We also believe thatcapitalizing on the opportunities afforded the television industry by digitalmedia, such as digital multi-casting, streaming on broadband andvideo-on-demand, is important to our future success. We devote substantialenergy and resources to integrating such media into our business and haveinvested in select companies which we believe are well-positioned for emergingtrends in digital media.

 

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For the year ended December 31,2005, we had revenue of $706.9 million, employed 3,380 full-time and part-timeemployees and operated in 25 U.S. markets. Information about our financialresults is discussed under Item 7 “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” beginning on page 23, and presentedunder Item 8 “Financial Statements and Supplementary Data” beginning on page 40.

 

Hearst-Argyle isincorporated under the laws of the State of Delaware. Our principal executiveoffices are located at 888 Seventh Avenue, New York, New York 10106, and ourmain telephone number at that address is (212) 887-6800. Our Series ACommon Stock is listed on the New York Stock Exchange under the ticker symbol “HTV”.

 

**Company Background**

 

Hearst-Argyle Television, Inc.was formed in August 1997 when Hearst combined its television broadcastgroup and related broadcast operations (the “Hearst Broadcast Group”) withthose of Argyle Television, Inc. (“Argyle”).

 

Founded by William RandolphHearst in 1887, The Hearst Corporation entered the broadcasting business in 1928with its acquisition of radio station WSOE in Milwaukee, Wisconsin. In 1948,Hearst launched its first television station, WBAL-TV, in Baltimore, Maryland,which was the nation’s 19th television station. That same year,WLWT-TV, in Cincinnati, Ohio, later to become an Argyle station, was launchedas the nation’s 20th television station and WDSU-TV, in New Orleans,Louisiana, later to become a Pulitzer station, was launched as the nation’s 48thtelevision station. By 1997, when Hearst and Argyle combined their broadcastoperations to form our company, the two companies had a total of 15 ownedand managed television stations and two managed radio stations.

 

Since that time, we haveacquired additional television stations through asset purchase, asset exchangeor merger transactions, including merger transactions in 1999 with PulitzerPublishing Company, in which we acquired nine television stations and fiveradio stations, and with Kelly Broadcasting Company, in which we acquired ourtelevision stations in Sacramento, California, and a three-party asset exchangetransaction in 2001 pursuant to which we sold three Phoenix, Arizona radiostations and acquired WMUR-TV, Manchester, New Hampshire. In 2004, we purchasedan ABC affiliate, WMTW-TV, in Portland, Maine.

 

We also have a strategicequity investment in Internet Broadcasting Systems, Inc. (“InternetBroadcasting”). Each of our stations has a corresponding Internet site producedand managed by Internet Broadcasting which provides supplemental news, weather,information and entertainment content and a state-of-the-art technologyinfrastructure. These Internet sites are part of a nation-wide network oflocal Internet sites that we and Internet Broadcasting have built with otherpartners in the media industry. The Internet Broadcasting network provideslocal Internet coverage of 57 markets, comprising 64% of U.S. households. Inaddition, in 2005 we made strategic equity investments in Ripe DigitalEntertainment, Inc. (“Ripe TV”), an advertising-supported free digitalvideo-on-demand program service, and U.S. Digital Television, LLC (“USDTV”), anational digital television programming distribution service using portions ofthe digital television spectrum. In December 2005, we concluded oursyndicated programming joint venture with NBC Universal, although we expect tocontinue to work together on selected projects. We also have a minorityinterest in the Arizona Diamondbacks major league baseball team, which weacquired in the Pulitzer transaction.

 

As of February 15,2006, Hearst owned, through its wholly-owned subsidiaries, Hearst Holdings, Inc.,a Delaware corporation (“Hearst Holdings”), and Hearst Broadcasting, Inc.,a Delaware corporation (“Hearst Broadcasting”), 100% of the issued andoutstanding shares of our Series B Common Stock, par value $.01 per share,(the “Series B Common Stock,” and together with our Series A CommonStock, par value $.01 per share, the “Series A Common Stock,” the “CommonStock”) and approximately 47.81% of the issued and outstanding shares of our Series ACommon Stock, representing in the aggregate approximately 71.07% of theoutstanding voting power of our Common Stock (except with regard to theelection of directors, which is discussed below). On February 15, 2006,Hearst Broadcasting also owned 500,000 Series B Redeemable ConvertiblePreferred Securities due 2021 that were issued by Hearst-Argyle Capital Trust,our wholly-owned subsidiary trust. Hearst Broadcasting may convert the Series BRedeemable Convertible Preferred Securities into 986,131 shares of our Series ACommon Stock, representing in the aggregate approximately 1.06% of theoutstanding voting power (except with respect to the election of directors,which is discussed below) of our Common Stock as of February 15, 2006. Becauseof Hearst’s ownership, we are considered a “controlled company” under New YorkStock Exchange rules.

 

Hearst Broadcasting’sownership of our Series B Common Stock entitles it to elect as a class allbut two members of our Board of Directors (the “Board”). The holders of our Series ACommon Stock are entitled to elect the remaining two members of our Board. WhenHearst combined the Hearst Broadcast Group with Argyle in August 1997,Hearst agreed that, for purposes of any vote to elect directors and for as longas it held any shares of our Series B Common Stock,

 

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it would vote any shares of Series A CommonStock that it owned only in the same proportion as the shares of Series ACommon Stock not held by Hearst are voted in the election.

 

**The Stations**

 

We own 25 televisionstations. In addition, we manage three television stations (WMOR-TV in Tampa,Florida, WPBF-TV in West Palm Beach, Florida and KCWE-TV in Kansas City,Missouri) and two radio stations (WBAL-AM and WIYY-FM in Baltimore, Maryland),all of which, except KCWE-TV, are owned by Hearst. Of the 28 televisionstations we own or manage, 20 are in the top 50 of the 210 generally recognizedgeographic designated market areas (“DMAs”) according to Nielsen Media Research(“Nielsen”) estimates for the 2005-2006 television broadcasting season. Ourmanagement of KCWE-TV allows Hearst to fulfill its obligations under a ProgramService and Time Brokerage Agreement between Hearst and the licensee of KCWE-TV(the “Missouri LMA”). On August 9, 2005, Hearst entered into an agreementto purchase KCWE-TV; an application requesting consent to the assignment ofKCWE’s license to Hearst is pending with the Federal Communications Commission(the “FCC”).

 

The following table setsforth certain information for each of our owned and managed television stationsas of December 31, 2005:

 
| **Station** | ** ** | **Market**                     | ** ** | **Market  Rank(1)** | ** ** | **Network  Affiliation(2)** | ** ** | **Analog****Channel** | ** ** | **Digital****Channel** | ** ** | **Percentage********Of U.S.****Television  Households(3)** | ** ** |
|-------------|------------|--------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------|------------|------------------------|------------|-----------------------------------------------------------------|------------|
| WCVB        |       | Boston, MA                     |       | 5                   |       | ABC                         |       | 5                     |       | 20                     |       | 2.155                                                           | %          |
| WMUR        |       | Manchester, NH(4)         |       | 5                   |       | ABC                         |       | 9                     |       | 59                     |       | —                                                          |       |
| WMOR        |       | Tampa, FL                      |       | 12                  |       | IND                         |       | 32                    |       | 19                     |       | 1.552                                                           | %          |
| KCRA        |       | Sacramento, CA                 |       | 19                  |       | NBC                         |       | 3                     |       | 35                     |       | 1.221                                                           | %          |
| KQCA        |       | Sacramento, CA(5)              |       | 19                  |       | WB                          |       | 58                    |       | 46                     |       | —                                                          |       |
| WESH        |       | Orlando, FL                    |       | 20                  |       | NBC                         |       | 2                     |       | 11                     |       | 1.221                                                           | %          |
| WTAE        |       | Pittsburgh, PA                 |       | 22                  |       | ABC                         |       | 4                     |       | 51                     |       | 1.061                                                           | %          |
| WBAL        |       | Baltimore, MD                  |       | 24                  |       | NBC                         |       | 11                    |       | 59                     |       | 0.988                                                           | %          |
| KMBC        |       | Kansas City, MO                |       | 31                  |       | ABC                         |       | 9                     |       | 7                      |       | 0.820                                                           | %          |
| KCWE        |       | Kansas City, MO(6)             |       | 31                  |       | UPN                         |       | 29                    |       | 31                     |       | —                                                          |       |
| WISN        |       | Milwaukee, WI                  |       | 33                  |       | ABC                         |       | 12                    |       | 34                     |       | 0.799                                                           | %          |
| WLWT        |       | Cincinnati, OH                 |       | 34                  |       | NBC                         |       | 5                     |       | 35                     |       | 0.799                                                           | %          |
| WYFF        |       | Greenville, SC                 |       | 35                  |       | NBC                         |       | 4                     |       | 59                     |       | 0.740                                                           | %          |
| WPBF        |       | West Palm Beach, FL            |       | 38                  |       | ABC                         |       | 25                    |       | 16                     |       | 0.682                                                           | %          |
| WGAL        |       | Lancaster, PA                  |       | 41                  |       | NBC                         |       | 8                     |       | 58                     |       | 0.641                                                           | %          |
| WDSU        |       | New Orleans, LA                |       | 43                  |       | NBC                         |       | 6                     |       | 43                     |       | 0.610                                                           | %          |
| KOCO        |       | Oklahoma City, OK    |       | 45                  |       | ABC                         |       | 5                     |       | 7                      |       | 0.595                                                           | %          |
| KOAT        |       | Albuquerque, NM                |       | 46                  |       | ABC                         |       | 7                     |       | 21                     |       | 0.593                                                           | %          |
| WXII        |       | Greensboro, NC                 |       | 47                  |       | NBC                         |       | 12                    |       | 31                     |       | 0.592                                                           | %          |
| WLKY        |       | Louisville, KY                 |       | 50                  |       | CBS                         |       | 32                    |       | 26                     |       | 0.584                                                           | %          |
| KITV        |       | Honolulu, HI                   |       | 72                  |       | ABC                         |       | 4                     |       | 40                     |       | 0.377                                                           | %          |
| KCCI        |       | Des Moines, IA                 |       | 73                  |       | CBS                         |       | 8                     |       | 31                     |       | 0.375                                                           | %          |
| WMTW        |       | Portland-Auburn, ME            |       | 74                  |       | ABC                         |       | 8                     |       | 46                     |       | 0.369                                                           | %          |
| KETV        |       | Omaha, NE                      |       | 75                  |       | ABC                         |       | 7                     |       | 20                     |       | 0.363                                                           | %          |
| WAPT        |       | Jackson, MS                    |       | 89                  |       | ABC                         |       | 16                    |       | 21                     |       | 0.298                                                           | %          |
| WPTZ/WNNE   |       | Plattsburgh, NY/Burlington, VT |       | 90                  |       | NBC                         |       | 5/31                  |       | 14/23                  |       | 0.296                                                           | %          |
| KHBS/KHOG   |       | Fort Smith/Fayetteville, AR    |       | 104                 |       | ABC                         |       | 40/29                 |       | 21/15                  |       | 0.248                                                           | %          |
| KSBW        |       | Monterey-Salinas, CA           |       | 125                 |       | NBC                         |       | 8                     |       | 10                     |       | 0.198                                                           | %          |
|        |       | TOTAL                          |       |                |       |                        |       |                  |       |                   |       | 18.177                                                          | %          |

 

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(1)        Television market rank is based on the relative size of the DMAs(defined by Nielsen as geographic markets for the sale of national “spot” andlocal advertising time) among the 210 generally recognized DMAs in the U.S.,based on Nielsen estimates for the 2005-2006 season.

(2)        ABC refers to the ABC Television Network; CBS refers to the CBSTelevision Network; IND refers to an independent station not affiliated with anetwork; NBC refers to the NBC Television Network; UPN refers to The UnitedParamount Network; and WB refers to The WB Television Network.

(3)        Based on Nielsen estimates for the 2005-2006 season.

(4)        Because WMUR and WCVB are bothin the Boston DMA, the FCC counts audience reach in this DMA only once for thetwo stations.

(5)        Because KQCA and KCRA are in thesame DMA, the FCC counts audience reach in this DMA only once for the twostations.

 

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(6)        Because KCWE andKMBC are in the same DMA, the FCC counts audience reach in this DMA only oncefor the two stations.

 

The following table setsforth certain information for each of our managed radio stations:

 
| **Station**    | ** ** | **Market**         | ** ** | **Market****Rank(1)** | ** ** | **Format** | ** ** |
|----------------|------------|--------------------|------------|-----------------------|------------|------------|------------|
| WBAL (AM) |       | Baltimore, MD | (2)        | 21                    |       | News/Talk  |       |
| WIYY (FM)      |       | Baltimore, MD | (2)        | 21                    |       | Rock       |       |

 

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(1)        Radio market rank is based on the relative size of the Metro Survey Area(defined by Arbitron as generally corresponding to the Metropolitan StatisticalAreas, defined by the U.S. Office of Management and Budget) for Arbitron’s Fall2005 Radio Market Report.

(2)        We manage WBAL (AM) and WIYY (FM) under a management agreement withHearst.

 

We have an option to acquireWMOR-TV and Hearst’s interests with respect to KCWE-TV, at their fair marketvalue as determined by the parties, or by an independent third-party appraisal,subject to certain specified parameters (and we may withdraw any optionexercise after we receive the third-party appraisal). However, if Hearst electsto sell either station during the option period, we will have a right of firstrefusal to acquire that station substantially on the terms agreed upon betweenHearst and the potential buyer. We also have a right of first refusal topurchase WPBF-TV if Hearst proposes to sell the station to a third party  We will exercise any option or right of firstrefusal related to these properties by action of our independent directors. Theoption periods and the rights of first refusal expire in December 2006.

 

**Network Affiliations**

 

*General.*  Twenty-seven of our 28 owned ormanaged television stations are affiliated with one of the following networkspursuant to a network affiliation agreement: ABC (13 stations), NBC (10stations), CBS (two stations), UPN (one station) and WB (one station). WMOR-TVin Tampa, Florida currently operates as an independent station.

 

Each affiliation agreementprovides the affiliated station with the right to broadcast all programstransmitted by the applicable network. In return, the network has the right tosell a significant portion of the advertising time during those broadcasts. Theduration of a majority of our stations’ affiliations with their networks hasexceeded 40 years and, for certain stations, has continued for more than 50years. Our two radio stations also have an affiliation agreement with a networkthat provides certain content (e.g., news and sports) for the stations. However,our radio stations are less dependent on their affiliation agreements forprogramming.

 

*Network Compensation.*Historically, the traditional broadcasttelevision networks have paid compensation to their affiliates in exchange forthe broadcasting of network programming. In recent years, network compensationhas been reduced and in the future may be eliminated. Our affiliationagreements with NBC and CBS provide for compensation that is weighted towardthe first part of the term and declines to zero by the end of the term.  In addition, more recently establishednetworks generally have paid little or no cash compensation for the clearanceof network programming or have required payment from their affiliates.

 

*ABC*.   The term of each affiliationagreement for our ABC-affiliated stations—WCVB, WMUR, WTAE, KMBC, WISN, WPBF,KOCO, KOAT, KITV, WMTW, KETV, WAPT and KHBS/KHOG — is for a period of fiveyears, expiring December 31, 2009.

 

*NBC.*  The term of the affiliationagreement for our NBC-affiliated stations—KCRA, WESH, WBAL, WLWT, WYFF, WGAL,WDSU, WXII, WPTZ/WNNE and KSBW—is for a period of nine years, six months,expiring December 31, 2009. In addition, certain of our NBC stations havebecome affiliates of the NBC Weather Plus network. See “Digital MediaInitiatives.”

 

*CBS.*  The term of each affiliationagreement for our CBS-affiliated stations—WLKY and KCCI—is for a period of tenyears, expiring June 30, 2015.

 

*UPN and WB.*  The UPNaffiliation agreement with KCWE is for an initial 10-year term expiring August 31,2008. The WB affiliation agreement with KQCA is for an initial term of threeyears, expiring September 30, 2006. Unlike affiliates of ABC, CBS or NBC,KQCA may be required to pay compensation to WB (based upon ratings itgenerates) in exchange for the broadcast rights to WB’s programming.

 

On January 24, 2006,Warner Brothers and CBS Corp., respective owners of the WB and UPN networks,announced that the WB and UPN networks will be discontinued in the fall of 2006.They also announced that a network

 

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called “CW” would be created. The announcementstated that a competitor of KQCA will become the CW affiliate in Sacramentoand, accordingly, we expect KQCA’s current affiliation will terminate. Noannouncement has been made regarding CW affiliations in Kansas City and,accordingly, we cannot predict at this time the effect the discontinuation ofthe UPN network will have on KCWE.

 

On February22, 2006, News Corporation announced that it was creating a new prime-timenetwork called My Network TV to provide shows to several stations it owns thatare losing programming because of the discontinuation of the WB and UPNnetworks. The announcement also stated that the network’s programming would beoffered to other independent stations around the country.

 

**Digital Media Initiatives**

 

We and other companies inthe media industry have partnered with Internet Broadcasting to build anation-wide network of local Internet sites. The Internet Broadcasting network,which covers 57 markets and reaches 64% of U.S. households, drew on the average11.4 million unique viewers and 303.2 million page views per month during2005. As part of this network we have Internet sites for each of ourstations which are produced and managed by Internet Broadcasting on theirtechnology platform, and which provide news, weather, entertainment and otherinformation that complement our stations’ programming. Our Internet sites drewa combined average 3.8 million unique viewers and 70.4 million page viewsper month during 2005. These Internet sites also serve a crucial communityservice: in the aftermath of Hurricane Katrina, our station WDSU-TV providedcontinuous coverage to the New Orleans community by telecasting over itsInternet site, www.WDSU.com,after the evacuation of our broadcast facilities. In the week after thehurricane alone, our New Orleans Internet site served 12.4 million page viewsand 1.3 million live video streams, and the Internet Broadcasting nation-widenetwork of Internet sites recorded 115.8 million page views and 3.4million live streams. Harry T. Hawks, our Executive Vice President andChief Financial Officer, Steven A. Hobbs, our Executive Vice President andChief Legal and Development Officer and Terry Mackin, our Executive VicePresident, serve on the Board of Directors of Internet Broadcasting.

 

In addition, we and Internet Broadcasting have recently launched anarray of new Internet-based and wireless content services. These servicesinclude mobile Web content delivery via wireless application protocol (“WAP”). Wehave also developed a strategy to offer new features on our stations’ Internetsites, including the following:

 

•                                                Podcastsof local station news and information programs;

 

•                                                Live video streams of breaking newsevents;

 

•                                                Access to news and information videoclips archives;

 

•                                                Timely blogs written by station newstalent; and

 

•                                                Access to a news page wherestation Internet users can obtain content representing their individual  interests.

 

We intend to continue to aggressively expandour on-demand and personalized news content offerings to meet the changingneeds of our viewers.

 

In September 2005 we made an equityinvestment in USDTV. USDTV was formed to provide a national,subscription-based, digital television programming distribution service usingportions of the digital television spectrum. Currently, the program service,which consists of local television station signals combined with the most popularcable networks, is available in Albuquerque, New Mexico, Las Vegas, Nevada,Salt Lake City, Utah and Dallas, Texas. In addition, our station KOAT-TV inAlbuquerque, New Mexico, currently leases a portion of its digital spectrum toUSDTV. Steven A. Hobbs, our Executive Vice President and Chief Legal andDevelopment Officer, serves on the Board of Directors of USDTV.

 

In November 2004NBC Universal and the NBC Television Affiliates Association formed NBC WeatherPlus Network LLC, a 50/50 joint venture which launched the first ever 24/7, alldigital, local and national broadcast network. NBC-affiliated stations may participatein the venture by investing in a limited liability company called WeatherNetwork Affiliates Company, LLC, one of the entities which invested in NBCWeather Plus Network LLC. Stations participating in the venture broadcast24-hour national and local weather and related community information usingtheir digital spectrum (as a multi-cast stream together with their main digitalchannel). We have launched NBC Weather Plus in eight of our NBC markets —Sacramento, Orlando, Baltimore, Cincinnati, Greenville, New Orleans, Lancasterand Winston-Salem — and expect to launch NBC Weather Plus in our two remainingNBC markets in 2006. Terry Mackin, our Executive Vice President, is theChairman of the Board of the NBC Television Affiliates Association, which isthe managing member and the owner of certain ownership interests in WeatherNetwork Affiliates Company, LLC.

 

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In July 2005, we made an equityinvestment in Ripe TV. Ripe TV was formed in 2003 to create anadvertising-supported, free, digital video-on-demand program service. Launchedin October 2005, the program service targets men aged 18-34 and isavailable for distribution via multiple platforms, including digital cable,broadband, and cell phones. Steven A. Hobbs, our Executive Vice President andChief Legal and Development Officer, serves on the Board of Directors of RipeTV.

 

**The Commercial TelevisionBroadcasting Industry**

 

*General.* Commercial television broadcastingbegan on a regular basis in the 1940s. Currently a limited number of channelsare available for over-the-air broadcasting in any one geographic area, and alicense to operate a television station must be granted by the FCC. Alltelevision stations in the country are grouped by Nielsen into 210 generallyrecognized television markets that are ranked in size based upon actual orpotential audience. Each of these markets, called “Designated Market Areas” or “DMAs”,is designated as an exclusive geographic area consisting of all counties whoselargest viewing share is given to stations of that same market area. Nielsenregularly publishes data on estimated audiences for the television stations ineach DMA, which data is a significant factor in determining our advertisingrates.

 

*Revenue*. Television station revenue is derivedprimarily from local, regional and national advertising and, to a much lesserextent, from network compensation, retransmission revenue and other sources. Advertisingrates are set based upon a variety of factors, including

 

•                                                a program’s popularity among the viewers anadvertiser wishes to attract;

 

•                                                the number of advertisers competing for theavailable time;

 

•                                                the size and demographic makeup of the marketserved by the station; and

 

•                                                the availability of alternative advertisingmedia in the market.

 

Also, advertising rates are determined by a station’sratings and audience share among particular demographic groups.

 

**Competition**

 

*General.*  Competition in the televisionindustry takes place on three primary levels:

 

•                                                competition for audience;

 

•                                                competition for programming; and

 

•                                                competition for advertisers.

 

*Competitionfor Audience.*  Wecompete for audience on the basis of program popularity, which consists notonly of our locally-produced news, public affairs and entertainmentprogramming, but syndicated and network programming as well. The popularity ofour programming has a direct effect on the rates we can charge our advertisers.In addition, although the commercial television broadcast industry historicallyhas been dominated by the broadcast networks ABC, NBC, CBS and FOX, other newernetworks and programming originated to air solely via subscription systems,such as cable and satellite systems, have become significant competitors forthe broadcast television audience. Currently, broadcast-originated programmingaccounts for about half of all television viewing.

 

Other sources of competitionfor audience include

 

•                                                home entertainment and recording systems(including VCRs, DVDs, DVRs and playback systems);

 

•                                                video-on-demand and pay-per-view;

 

•                                                television game devices;

 

•                                                the Internet;

 

•                                                portable digital devices (such as video iPodsand cell phones); and

 

•                                                other sources of home entertainment.

 

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*Competitionfor Programming.* Competition for non-network programminginvolves negotiating with national program distributors or syndicators thatsell first-run and off-network packages of programming. Our stations competeagainst other local broadcast stations****for exclusivelocal access to first-run product (such as *The Oprah Winfrey Show*). To a lesserextent, we compete for exclusive local access to off-network reruns (such as *Friends*). Cable and satellite systems alsocompete with local stations for programming, and various national cable andsatellite networks from time to time have acquired programs that otherwisewould have been offered to local television stations.  In addition, networks have recently begun tosell their programming directly to the consumer via portable digital devicessuch as video iPods and cell phones.

 

*Competitionfor Advertisers.*  Broadcasttelevision stations compete for advertising revenue and marketing sponsorshipwith other broadcast television stations, and a station’s competitive edge isin large part determined by the success of its programming. Broadcasttelevision stations also compete for advertising revenue with a variety ofother media, such as newspapers, radio stations, magazines, outdooradvertising, transit advertising, yellow page directories, direct mail,the Internet and local cable and satellite system operators serving the samemarket.

 

Additional factors relevantto a television station’s competitive position include signal strength andcoverage within a geographic area and assigned frequency or channel position. Televisionstations that broadcast over the VHF band (channels 2-13) of the spectrumhistorically have had a competitive advantage over television stations thatbroadcast over the UHF band (channels above 13) of the spectrum because theformer usually  have better signalcoverage and operate at a lower transmission cost. However, the improvement ofUHF transmitters and receivers, the complete elimination from the marketplaceof VHF-only receivers, the expansion of cable television and satellite deliverysystems and the commencement of digital broadcasting have reduced the VHFsignal’s competitive advantage.

 

**Seasonality, Cyclicality and Materiality of Automotive Advertising**

 

Our business has experiencedand is expected to continue to experience seasonality due to, among otherthings, seasonal advertising patterns and seasonal influences on people’sviewing habits.   The advertising revenueof our stations are generally highest in the second and fourth quarters of eachyear, due in part to increases in consumer advertising in the spring andretail advertising in the period leading up to and including the holiday season.Additionally, advertising revenue is cyclical, benefiting in even-numberedyears from advertising placed by candidates for political offices andissue-oriented advertising, and demand for advertising time in Olympicbroadcasts. While political and Olympic advertising cycles have been a normalpattern for our industry for decades, the variability has become morepronounced in recent years as these respective categories of revenue have grownsignificantly in size. The seasonality and cyclicality inherent in our businessmake it difficult to estimate future operating results based on the previousresults of any specific quarter.

 

In addition, the Companyderives a material portion of its ad revenue from the automotive industry. Approximately26.6% of total revenue came from the automotive category in 2004 and 2005combined. An increase or decrease in revenue from this category therefore willdisproportionately impact our operating results.

 

**Federal Regulation of TelevisionBroadcasting**

 

*General.*  Broadcasting is subject to thejurisdiction of the FCC under the Communications Act of 1934, as amended (the “CommunicationsAct”). The Communications Act requires the FCC to regulate broadcasting so asto serve “the public interest, convenience and necessity.” The CommunicationsAct prohibits the operation of broadcast stations except pursuant to licensesissued by the FCC and empowers the FCC, among other things, to

 

•                                          issue, renew, revoke and modify broadcastinglicenses;

 

•                                          assign frequency bands;

 

•                                          determine stations’ frequencies, locationsand power;  and

 

•                                          regulate the equipment used by stations.

 

The Communications Actprohibits the assignment of a license or the transfer of control of a licensewithout the FCC’s prior approval. The FCC also regulates certain aspects of theoperation of cable television systems, direct broadcast satellite (“DBS”)systems and other electronic media that compete with broadcast stations. Inaddition, although the FCC has reduced its regulation of broadcast stations,the FCC continues to regulate matters such as television station ownership,network-affiliate relations, cable and DBS systems’ carriage of televisionstation signals, carriage of syndicated and network programming on distantstations, political advertising practices and obscene and indecent programming.In recent years, the FCC has increased its regulatory focus on indecency, whichmay impact certain of our programming decisions.

 

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The following discussionsummarizes the federal statutes and regulations material to our operations, butdoes not purport to be a complete summary of all the provisions of theCommunications Act or of other current or proposed statutes, regulations, andpolicies affecting our business. The summaries which follow should be read inconjunction with the text of the statutes, rules, regulations, orders, anddecisions described herein.

 

*LicenseRenewals.*  Underthe Communications Act, the FCC generally may grant and renew broadcastlicenses for terms of eight years, though licenses may be renewed for ashorter period under certain circumstances. The Communications Act requires theFCC to renew a broadcast license if the FCC finds that (i) the station hasserved the public interest, convenience and necessity; (ii) there havebeen no serious violations of either the Communications Act or the FCC’s rules andregulations by the licensee; and (iii) there have been no other seriousviolations that taken together constitute a pattern of abuse. In making its determination,the FCC may consider petitions to deny but cannot consider whether thepublic interest would be better served by issuing the license to a person otherthan the renewal applicant. In addition, competing applications for the samefrequency may be accepted only after the FCC has denied an incumbent’sapplication for license renewal.

 

The following table providesthe expiration dates for the full power station licenses of our owned andmanaged television stations:

 
| **Station**                           | ** ** | **Market**           | ** ** | **Expiration of****FCC License** | ** ** |
|---------------------------------------|------------|----------------------|------------|--------------------------------------------|------------|
| WCVB                                  |       | Boston, MA           |       | April 1, 2007                         |       |
| WMUR                                  |       | Manchester, NH(1)    |       | April 1, 2007                         |       |
| WMOR                                  |       | Tampa, Fl            |       | February 1, 2013                      |       |
| KCRA                                  |       | Sacramento, CA       |       | December 1, 2006                      |       |
| KQCA                                  |       | Sacramento, CA       |       | December 1, 2006                      |       |
| WESH                                  |       | Orlando, FL          |       | February 1, 2013                      |       |
| WTAE                                  |       | Pittsburgh, PA       |       | August 1, 2007                        |       |
| WBAL                                  |       | Baltimore, MD        |       | October 1, 2012                       |       |
| KMBC                                  |       | Kansas City, MO      |       | February 1, 2006*                     |       |
| KCWE                                  |       | Kansas City, MO      |       | February 1, 2014                      |       |
| WLWT                                  |       | Cincinnati, OH       |       | October 1, 2013                       |       |
| WISN                                  |       | Milwaukee, WI        |       | December 1, 2005*                     |       |
| WYFF                                  |       | Greenville, SC       |       | December 1, 2004*                     |       |
| WPBF                                  |       | West Palm Beach, FL  |       | February 1, 2013                      |       |
| WDSU                                  |       | New Orleans, LA      |       | June 1, 2013                          |       |
| WXII                                  |       | Greensboro, NC       |       | December 1, 2012                      |       |
| KOCO                                  |       | Oklahoma City, OK    |       | June 1, 2006*                         |       |
| WGAL                                  |       | Lancaster, PA        |       | August 1, 2007                        |       |
| KOAT                                  |       | Albuquerque, NM      |       | October 1, 2006                       |       |
| KOCT (satellite station of KOAT)**    |       | Carlsbad, NM         |       | October 1, 2006                       |       |
| KOVT (satellite station of KOAT)**    |       | Silver City, NM      |       | October 1, 2006                       |       |
| KOFT-DT (satellite station of KOAT)** |       | Farmington, NM       |       | —(1)                                  |       |
| WLKY                                  |       | Louisville, KY       |       | August 1, 2005*                       |       |
| KCCI                                  |       | Des Moines, IA       |       | February 1, 2006*                     |       |
| WMTW                                  |       | Portland-Auburn, ME  |       | April 1, 2007                         |       |
| KITV                                  |       | Honolulu, HI         |       | February 1, 2007                      |       |
| KHVO (satellite station of KITV)**    |       | Hilo, HI             |       | February 1, 2007                      |       |
| KMAU (satellite station of KITV)**    |       | Wailuku, HI          |       | February 1, 2007                      |       |
| KETV                                  |       | Omaha, NE            |       | June 1, 2006*                         |       |
| WAPT                                  |       | Jackson, MS          |       | June 1, 2013                          |       |
| WPTZ                                  |       | Plattsburgh, NY      |       | June 1, 2007                          |       |
| WNNE (satellite station of WPTZ)**    |       | Burlington, VT       |       | April 1, 2007                         |       |
| KHBS                                  |       | Fort Smith, AR       |       | June 1, 2013                          |       |
| KHOG (satellite station of KHBS)**    |       | Fayetteville, AR     |       | June 1, 2013                          |       |
| KSBW                                  |       | Monterey-Salinas, CA |       | December 1, 2006                      |       |

 

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(1)          Manchester, New Hampshire is determined byNielsen to be a part of the Boston DMA.

*                 We have filed for renewal of licensesfor these stations, and those applications are pending. A station’s authorityto operate is automatically extended while a renewal application is on file andunder review.

**          Satellite stations generally retransmit thesignal of a primary station, and offer some locally originated programming.

 

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(1)          Our satellite station KOFT-DT in Farmington,NM operates in digital mode only pursuant to a special temporary authoritywhich the FCC must renew every six months.

 

*OwnershipRegulation.*  TheCommunications Act and FCC rules limit the ability of individuals andentities to have certain ownership or positional interests in certaincombinations of broadcast stations and other media. During 2003, the FCC conducteda comprehensive review of all of its broadcast ownership rules, including thelocal television ownership rule, national television ownership rule, localradio ownership rule, newspaper/broadcast cross-ownership rule, andradio/television cross-ownership rule. In June 2003, the FCC adopted anorder liberalizing most of the ownership rules which would have permittedus to acquire television stations in certain markets where we are currentlyprohibited from acquiring new stations. Shortly thereafter, however, Congressadopted legislation to overturn and modify the FCC’s liberalization of itsnational television ownership rule, and the FCC’s other ownership regulationswere challenged in the courts. The U.S. Court of Appeals for the Third Circuitaffirmed certain of the rules but rejected those affecting localtelevision ownership and local cross-ownership of newspapers and broadcaststations and remanded the matter to the FCC for further proceedings. On June 13,2005, the United States Supreme Court declined to review the Third Circuit’sdecision. During the pendency of the FCC’s review of the ownership rules onremand, the FCC’s pre-June 2003 broadcast ownership rules remain ineffect. The FCC’s current ownership rules that are material to ouroperations are summarized below:

 

•                  *Local Television Ownership.*  Under the FCC’scurrent local television ownership (or “duopoly”) rule, a party may ownmultiple television stations without regard to signal contour overlap providedthey are located in separate Nielsen DMAs. In addition, the rules permitparties to own up to two TV stations in the same DMA so long as (1) atleast one of the two stations is not among the top four-ranked stations in themarket based on audience share at the time an application for approval of theacquisition is filed with the FCC, and (2) at least eight independentlyowned and operating full-power commercial and non-commercial televisionstations would remain in the market after the acquisition. In addition, withoutregard to the number of remaining or independently owned television stations,the FCC will permit television duopolies within the same DMA so long as theGrade B signal contours of the stations involved do not overlap. Stationsdesignated by the FCC as “satellite” stations, which are full-power stationsthat typically rebroadcast the programming of a “parent” station, are exemptfrom the local television ownership rule. Also, the FCC may grant a waiverof the local television ownership rule if one of the two televisionstations is a “failed” or “failing” station or if the proposed transactionwould result in the construction of a new television station. We are currentlyin compliance with the local television ownership rule.

 

•                  *National TelevisionOwnership Cap.*  TheCommunications Act, as amended in 2004, limits the number of televisionstations one entity may own nationally. Under the rule, no entity may havean attributable interest in television stations that reach, in the aggregate,more than 39% of all U.S. television households. Before Congress intervened in2004 and set the cap at 39%, the FCC had increased the cap from 35% to 45%. Weare in compliance with the 39% statutorily-mandated national ownership cap.

 

TheFCC currently discounts the audience reach of a UHF station by 50% whencomputing the national television ownership cap. Further, for entities thathave attributable interests in two stations in the same market, the FCC countsthe audience reach of the stations in that market only once in computing thenational ownership cap.  The FCC iscurrently considering whether to retain the UHF discount. The propriety of theUHF discount will be the subject of further administrative proceedings, but thediscount currently remains in effect.

 

•                  *Dual Network Rule.* The dual network rule prohibits amerger between or among any of the four major broadcast television networks—ABC, CBS, FOX and NBC.

 

•                  *Local Radio Ownership*. With respect to radio, the maximumallowable number of stations that can be commonly owned in a radio market variesdepending on the number of radio stations within that market. In markets withmore than 45 stations, one company may own, operate or control eightstations, with no more than five in any one service (AM or FM). In markets of30-44 stations, one company may own seven stations, with no more than fourin any one service; in markets of 15-29 stations, one entity may own sixstations, with no more than four in any one service. In markets with 14commercial stations or less, one company may own up to five stations or50% of all of the stations, whichever is less, with no more than three in anyone service. The FCC’s 2003 rules changed the radio market definition fromthe contour-overlap method to a generally more restrictive definition using, inmost cases, Arbitron markets. The new market definition rule was affirmedby the Third Circuit and currently remains in effect.

 

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•                  *Media Cross-Ownership*. The FCC’s currently effective rules prohibitthe licensee of a radio or TV station from directly or indirectly owning,operating, or controlling a daily newspaper if the station’s specified servicecontour encompasses the entire community where the newspaper is published. Whilethe FCC liberalized this rule in 2003, the new version of the rule remainsunder review and is not effective. The new rule, if it were adopted, wouldpermit us to acquire stations in certain areas where Hearst, our controllingstockholder, owns newspapers.

 

The cross-ownership rules also permit cross ownership of radio andtelevision stations under a graduated test based on the number of independentlyowned media voices in the local market. In large markets, (markets with atleast 20 independently owned media voices), a single entity can own up to onetelevision station and seven radio stations or, if permissible under the localtelevision ownership rule (if eight full-power television stations wouldremain in the market post transaction), two television stations and six radiostations. Our television and radio stations in Baltimore, Maryland, arepermanently grandfathered under this rule.

 

•                  *Cable-Television Cross-Ownership.*  InJanuary 2003, the FCC repealed its rule that had prohibited commoncontrol of a television station and a cable television system in the same localmarket. Thus, common ownership of a cable system and a television station inthe same local market is permissible.

 

•                  *Attribution of Ownership.*  Under the FCC’s attributionpolicies, the following relationships and interests generally are attributablefor purposes of the FCC’s  broadcastownership restrictions:

 

•                  holdersof 5% or more of the licensee’s voting stock, unless the holder is a qualifiedpassive investor, in which case the threshold is a 20% or greater voting stockinterest;

 

•                  allofficers and directors of a licensee and its direct or indirect parent(s);

 

•                  anyequity interest in a limited partnership or limited liability company, unlessproperly “insulated” from management activities; and

 

•                  equityand/or debt interests which in the aggregate exceed 33% of a licensee’s totalassets, if the interest holder supplies more than 15% of the station’s totalweekly programming, or is a same-market broadcast company, cable operator ornewspaper (the “equity/debt plus” standard).

 

All non-conforming interestsacquired before November 7, 1996, are permanently grandfathered and thusdo not constitute attributable ownership interests.

 

*Cable and Satellite Carriage ofLocal Television Signals***.**Pursuant to the CableTelevision Consumer Protection and Competition Act of 1992 (“1992 Cable Act”)and the FCC’s “must carry” regulations, cable operators are generally requiredto devote up to one-third of their activated channel capacity to the carriageof the analog signals of local commercial television stations. The 1992 CableAct also prohibits cable operators and other multi-channel video programmingdistributors from retransmitting a broadcast signal without obtaining thestation’s consent. On a cable system-by-cable system basis, a local televisionbroadcast station must make a choice once every three years whether to proceedunder the “must carry” rules or to waive the right to mandatory, butuncompensated, carriage and, instead, to negotiate a grant of retransmissionconsent to permit the cable system to carry the station’s signal, in most casesin exchange for some form of consideration from the cable operator. Stationswere required to make cable carriage elections for the period January 1,2006 to December 31, 2008, by October 1, 2005. We opted to negotiateretransmission consent with most of the cable systems with which we dobusiness.

 

The Satellite Home Viewer Improvement Act of1999 (“SHVIA”) established a compulsory copyright licensing system for thedistribution of local television station signals by direct broadcast satellitesystems to viewers in each DMA. Under SHVIA, a direct broadcast satellitesystem generally is required to retransmit the analog signal of all localtelevision stations in a DMA if the system chooses to retransmit the signal ofany local television station in that DMA. Television stations located inmarkets in which satellite carriage of local stations is offered may electmandatory carriage or retransmission consent. Stations were required to makesatellite carriage elections for the period January 1, 2006 to December 31,2008, by October 1, 2005.

 

Cable and satellite systems generally will berequired under the FCC’s “must carry” rules to carry a single programmingstream transmitted by each local digital television station at the end of thedigital television transition. During the transition period, cable operatorsare required to carry either a station’s analog or digital signals, but notboth. After the conversation to digital, cable operators will be required tocarry only a station’s primary video programming channel. Therefore, the FCCdoes not require cable operators to carry additional channels that we may createusing our

 

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digital spectrum. Petitions filed by the broadcast industry requestingthe FCC to reconsider that decision are pending. Nonetheless, we haveretransmission consent agreements with a number of cable operators andsatellite carriers that require carriage of the analog and certain digitalsignals of our stations.

 

In December 2004, Congress enacted the Satellite Home ViewerExtension and Reauthorization Act of 2004 (“SHVERA”). SHVERA extended until December 31,2009, the separate compulsory copyright license that permits satellite carriersto retransmit distant network signals to unserved households (i.e., thosehouseholds that do not receive a signal of Grade B intensity from a localnetwork affiliate). SHVERA also created a compulsory copyright license thatpermits satellite carriers to retransmit a station’s signal out of its DMA intocommunities in which the station is “significantly viewed” (as that term isdefined by the FCC).

 

*DigitalTelevision Service.* TheCommunications Act and the FCC require television stations to transition fromanalog television service to digital television service. Recently, Congresspassed and the President signed new legislation that establishes a hardtransition deadline of February 17, 2009. Until the end of the transition,in general, stations are required to operate both analog and digitalfacilities.

 

*Indecency Regulation.*Federal law and the FCC’s rules prohibitthe broadcast of obscene material at any time, and the broadcast of indecent orprofane material during the period from 6 a.m. through 10 p.m. TheCommission defines “indecent” content as “language that, in context, depicts ordescribes sexual or excretory activities or organs in terms patently offensiveas measured by contemporary community standards for the broadcast medium.”  “Profane” content has been recently definedby the FCC as “vulgar, irreverent, or coarse language” which includes languagethat “denote[s] certain of those personally reviling epithets naturally tendingto provoke violent resentment or denoting language so grossly offensive tomembers of the public who actually hear it as to amount to a nuisance.”  In recent years, the FCC and its indecencyprohibition have received much attention. Congress is currently consideringlegislation that would, among other things, raise the maximum amount ofexisting indecency fines from $32,500 to $500,000.

 

**Employees**

 

As of December 31,2005, we had approximately 2,984 full-time employees and 396 part-timeemployees. A total of approximately 934 of our employees are represented byfive unions (the American Federation of Television and Radio Artists, theInternational Brotherhood of Electrical Workers, the International Alliance ofTheatrical Stage Employees, the Directors Guild of America, and the NationalAssociation of Broadcast Electrical Technicians). We have not experienced anysignificant labor problems, and believe that our relations with our employeesare satisfactory.

 

**Available Information**

 

We maintain an Internet siteat www.hearstargyle.com. We make available, free of charge, on our Internetsite, our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 as soon as reasonably practicable after we electronicallyfile those materials with, or furnish them to, the Securities and ExchangeCommission (“SEC”).

 

Our Code of Business Conductand Ethics, our Corporate Governance Guidelines, our Audit Committee Charterand our Compensation Committee Charter are also posted to the corporategovernance section of our Internet site. In addition, you may obtaina free copy of our Code of Business Conduct and Ethics, our CorporateGovernance Guidelines, or our Board committee charters that we file on ourInternet site by writing to us at Hearst-Argyle Television, Inc., 888Seventh Avenue, New York, New York 10106, Attention: Corporate Secretary.

 

We also make available onour Internet site additional information, including news releases, earningsreleases, archived audio Web casts and forthcoming corporate events.

 

**ITEM 1A.    RISK FACTORS**

 

**We Depend on Network Affiliation Agreements and Network Programming**

 

Each of the television stations we own or manage is a party to a network affiliation agreement giving such station the right to rebroadcast programs transmitted by the network, except WMOR-TV, in Tampa, Florida, which is currently operating as an independent station. Each affiliation agreement provides the affiliated station with the right to broadcast programs transmitted by the station’s affiliated network. In return, the network has the right to sell a substantial majority of the advertising time during such broadcasts. Thirteen of our stations are parties to affiliation agreements with ABC, 10 with NBC, two with CBS, one with the WB Network and one with UPN. Accordingly, ABC and NBC affiliates account 

 

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for most of our advertising revenues. Our television viewership levels, and ultimately advertising revenues, for each station are materially dependent upon network programming. Network programming  may not achieve or maintain satisfactory viewership levels. In particular, if ABC or NBC network programming fails to attract viewers or generate satisfactory ratings, our revenues may be adversely affected because of the number of our stations that are affiliated with those two networks. In addition, we may fail to continue to be able to renew our network affiliation agreements with ABC, NBC and CBS, or we may renew them on less favorable terms than we presently have. Further, the discontinuation of the WB and UPN networks in connection with the launch of the CW network may have an adverse impact on our current WB and UPN stations. The termination or non-renewal, or renewal on less favorable terms, of our stations’ network affiliation agreements could adversely affect the viewership of our stations and affect our ability to sell advertising, which could materially decrease our revenue and operating results.

 

**A Decline in Advertising Expenditures andConsumer Acceptance of Our Stations’ Programming Could Adversely Affect ourOperating Results**

 

We rely almost entirely upon sales of advertising for our revenues. Our stations compete for advertising revenues with other television stations in their respective markets. They also compete with other advertising media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, the Internet and local cable and satellite system operators. Our stations are located in highly competitive markets. Accordingly, our operating results are and will continue to be dependent upon the ability of each of our stations to compete successfully for advertising revenues in its respective market. Our ability to generate advertising revenues is and will continue to be affected by changes in the national economy, as well as by regional economic conditions in each of the markets in which our stations operate. The size of advertisers’ budgets, which are affected by broad economic trends, affect the broadcast industry in general and the revenues of individual broadcast television stations. If the economic prospects of advertisers or the economy decline, our current or prospective advertisers may purchase less advertising time from us. In addition, if disasters, acts of terrorism, political uncertainty or hostilities occur, our advertisers’ spending priorities may shift to around-the-clock news coverage, which would cause the loss of advertising revenues due to the suspension of advertising-supported commercial programming. Further, because our revenues depend upon the public’s acceptance of a station’s programming, a decline in programming popularity and audience ratings, or our inability to retain the rights to popular programming, may adversely affect our ability to generate advertising revenues.

 

**IncreasedCompetition Due to Technological Innovation May Adversely Impact ourBusiness**

 

Technological innovation, and the resulting proliferation ofprogramming alternatives such as cable, satellite television, satellite radio,video-on-demand, pay-per-view, the Internet, home video and entertainmentsystems, portable entertainment systems, and the availability of televisionprograms on DVD and portable digital devices have fragmented television viewingaudiences and subjected television broadcast stations to new types ofcompetition. Over the past decade, the aggregate viewership of non-networkprogramming distributed via cable television and satellite systems haveincreased, while the aggregate viewership of the major television networks hasdeclined. New technologies that enable users to view content of their ownchoosing, in their own time, and to fast-forward or skip advertisements, suchas DVRs, portable digital devices, and the Internet, may cause changes inconsumer behavior that could affect the attractiveness of our offerings toadvertisers. If this were to occur, our operating results could be adverselyaffected.

 

Other advances in technology, such as increasing use of local-cableadvertising “interconnects,” which allow for easier insertion of advertising onlocal cable systems, have also increased competition for advertisers. Inaddition, video compression techniques permit greater numbers of channels to becarried within existing bandwidth on cable, satellite and other televisiondistribution systems. These compression techniques, as well as othertechnological developments, are applicable to all video delivery systems,including digital over-the-air broadcasting, and have the potential to providevastly expanded programming to highly targeted audiences. Reduction in the costof creating additional channel capacity could lower entry barriers for newchannels and encourage the development of increasingly specialized nicheprogramming on cable, satellite and other television distribution systems. Weexpect this ability to reach very narrowly defined audiences to increasecompetition both for audience and for advertising revenue. In addition, theexpansion of competition due to technological innovation has increased, and may continueto increase, competitive demand for programming. Such increased demand,together with rising production costs, may in the future increase ourprogramming costs or impair our ability to acquire programming, which will inturn impair our ability to generate revenue from the advertisers with which weseek to do business.

 

15

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**Increased Programming Costs Could AdverselyAffect Our Business and Operating Results**

 

Television programming is one of our most significant operating cost components. We may be exposed in the future to increased programming costs. Should such an increase in our programming expenses occur, it could have a material adverse effect on our operating results. In addition, television networks have been seeking arrangements from their affiliates to share the networks’ programming costs and to change the structure of network compensation. If we become party to an arrangement whereby we share our networks’ programming costs, our programming expenses would increase further. In addition, we usually acquire syndicated programming rights two or three years in advance and acquiring those rights may require multi-year commitments, making it difficult to predict accurately how a program will perform. In some instances, we must replace programs before their costs have been fully amortized, resulting in write-offs that increase station operating costs. In addition, our stations incur costs for all types of on-air and creative talent, including anchors, reporters, writers and producers. An increase in the cost of news programming and content or in the costs for on-air and creative talent may also increase our expenses and therefore adversely affect our business and operating results.

 

**OurInability to Secure Carriage of Our Stations by Multi-Channel Video ProgrammingDistributors May Adversely Affect Our Business**

 

Cable operators and direct broadcast satellite systems are generallyrequired to carry the analog signal of local commercial television stationspursuant to the FCC’s “must carry” rules. However, these multi-channel videoprogramming distributors are prohibited from carrying a broadcast signalwithout obtaining the station’s consent. For each distributor, a localtelevision broadcaster must make a choice once every three years whether toproceed under the “must carry” rules or to waive the right to mandatorybut uncompensated carriage and negotiate a grant of retransmission consent topermit the system to carry the station’s signal, in most cases in exchange forsome form of consideration from the system operator. In 2005, we electedretransmission consent for most of our stations for the three-year periodcommencing on January 1, 2006. At present, we have retransmission consentagreements with the majority of operators for the period January 1, 2006to at least December 31, 2008. If our retransmission consent agreementsare terminated or not renewed, or if our broadcast signal is distributed onless favorable terms, our ability to distribute our programming could beadversely affected.

 

In addition, although cable operators and direct broadcast satellitesystems generally will be required, under the FCC’s current “must carry” rules,to retransmit a single programming stream transmitted by each local digitaltelevision station at the end of the digital television transition, the FCC hasruled that it will not require cable operators either to carry both a station’sanalog and digital signals during the transition period, or after theconversation to digital, to carry more than a station’s primary videoprogramming channel. Petitions filed by the broadcast industry requesting theFCC to reconsider that decision are pending. The limited carriage rights forour digital stations could require us to make significant expenditures toarrange for carriage by cable and DBS systems of our multicast digital signalsor result in some of our multicast digital signals not being carried on cableor DBS systems. At present, we have retransmission consent agreements with anumber of cable systems operators and satellite providers that require carriageof the analog and certain multicast digital signals of our stations. 

 

**Materiality of a Single Advertising CategoryCould Adversely Affect Our Business**

 

We derive a material portionof our ad revenue from the automotive industry. For example, approximately26.6% of total revenue came from the automotive category in 2004 and 2005combined. If automotive-related advertising revenue decreases, or if revenuefrom another ad category that constitutes a material portion of our stations’revenue in a particular period were to decrease, our business and operatingresults could be adversely affected.

 

**Our Business is Seasonal and Cyclical andSome Years and Quarters Therefore May Be Less Profitable Than Others**

 

Our business has experienced and is expected to continue to experience seasonality due to, among other things, seasonal advertising patterns and seasonal influences on people’s viewing habits. The size of advertisers’ budgets, which are affected by broad economic trends, affect the broadcast industry in general and the revenue of individual broadcast television stations. The advertising revenue of our stations are generally highest in the second and fourth quarters of each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. Additionally, advertising revenue is cyclical benefiting in even-numbered years from advertising placed by candidates for political offices and issue-oriented advertising, and demand for advertising time in Olympic broadcasts. While political and Olympic advertising cycles have been a normal pattern for our industry for decades, the variability has become more pronounced in recent years as these respective categories of revenue have grown 

 

16

 

significantly in size. The seasonality and cyclicality inherent in our business make it difficult to estimate future operating results based on the previous results of any specific quarter.

 

**The Television Industry is Highly Competitiveand Our Competitors May Have Greater Resources Than We Do**

 

The television broadcast industry is highlycompetitive. Some of the stations that compete with our stations are owned andoperated by large national or regional companies that may have greaterresources, including financial resources, than we do. Competition in thetelevision industry takes place on several levels:  competition for audience, competition forprogramming (including news) and, as discussed, competition for advertisers. Ourstations may not be able to maintain or increase their current audience shareor revenue share. To the extent that certain of our competitors have, or may inthe future obtain, greater resources than we have, we may not be able tosuccessfully compete with them.

 

**We Have a Controlling Stockholder**

 

The Hearst Corporation, through its beneficial ownership of our Series A and Series B Common Stock, has voting control of our company. Through its beneficial ownership of 100% of our Series B Common Stock, Hearst also is entitled to elect as a class all but two members of our Board of Directors (currently, 11 of our 13 directors). As a result, Hearst is able to control substantially all actions to be taken by our stockholders, and also is able to maintain control over our operations and business. This control, as well as certain provisions of our Certificate of Incorporation and of Delaware law, may make us a less attractive target for a takeover than we otherwise might be, or render more difficult or discourage a merger proposal, tender offer or other transaction involving an actual or potential change of control. Hearst’s voting control also prevents other stockholders from exercising significant influence over our Company’s business decisions.

 

**TheInterests and Assets of Our Controlling Stockholder May Adversely ImpactOur Ability to Make Certain Acquisitions**

 

The interests of Hearst, which owns or has significant investments inother businesses, including cable television networks, newspapers, magazinesand electronic media, may from time to time be competitive with, orotherwise diverge from, our interests, particularly with respect to newbusiness opportunities and future acquisitions. We and Hearst have agreed that,without the prior written consent of the other, neither we nor they will makeany acquisition or purchase any assets if such an acquisition or purchase byone party would require the other party to divest or otherwise dispose of anyof its assets because of regulatory or other legal prohibitions.

 

Under current FCC regulations, given the newspaper and other mediainterests held by Hearst, we are precluded from acquiring television stationsin various markets in the United States. While divestiture of a prohibitedinterest could permit such acquisitions, such a divestiture may not occuror may otherwise adversely impact potential acquisitions. Additionally,Hearst is not precluded from purchasing television stations, newspapers orother assets in other markets. If Hearst were to make such purchases, the FCC rules wouldpreclude us from owning television stations in those markets in the future.

 

**We May Encounter Conflicts of Interest with Our Controlling Stockholder**

 

We and Hearst also have ongoing relationships that may createsituations where the interests of the two parties could conflict. For example,we and Hearst are parties to a series of agreements with each other,including

 

•                  a ManagementAgreement (whereby we provide certain management services, such as sales, news,programming and financial and accounting management services with respect tocertain Hearst-owned or managed television and radio stations);

 

•                  an OptionAgreement (whereby Hearst has granted us an option to acquire certainHearst-owned or operated television stations, as well as a right of firstrefusal with respect to another television station if Hearst proposes to sellthat station);

 

•                  a Studio LeaseAgreement (whereby Hearst leases space from us for Hearst’s radio broadcaststations);

 

•                  a Name LicenseAgreement (whereby Hearst permits us to use the Hearst name in connection withour name and operation of our business); and

 

17

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•                  a ServicesAgreement (whereby Hearst provides us certain administrative services, such asaccounting, financial, legal, tax, insurance, data processing and employeebenefits).

 

Because we andHearst are affiliates, it is possible that our interests concerning theseagreements may from time to time conflict and that more favorable termsthan those we have negotiated with Hearst may be available from thirdparties.

 

**Changesin FCC Regulations and Enforcement Policies May Adversely Affect OurBusiness**

 

As discussed more fully in Item 1 “Business; Federal Regulation ofTelevision Broadcasting”, our broadcast operations are subject to extensiveregulation by the FCC under the Communications Act. If we do not comply withthese regulations, in particular the specific regulations discussed below, orif the FCC adopts a rigorous enforcement policy concerning them, our businessand operating results could be adversely affected.

 

*Ownership Rules*. We must comply with extensiveFCC regulations and policies in the ownership of our broadcast stations, whichrestrict our ability to consummate future transactions and, in certaincircumstances, could require us to divest some stations. In general, the FCC’sownership rules limit the number of television and radio stations that wecan own in a market, the number of television stations we can own nationwide,and prohibit ownership of stations in markets where Hearst has interests innewspapers. During 2003, the FCC conducted a comprehensive review of all of itsbroadcast ownership rules, including the local radio ownership rule, localtelevision ownership rule, national television ownership rule,newspaper/broadcast cross-ownership rule, and radio/television cross-ownershiprule. In June 2003, the FCC adopted an order liberalizing most of theownership rules, which would have permitted us to acquire television stationsin certain markets where we are currently prohibited from acquiring newstations. Shortly thereafter, however, the FCC’s new ownership regulations werechallenged in the courts. The U.S. Court of Appeals for the Third Circuitaffirmed certain of the rules but rejected those affecting localtelevision ownership and local cross-ownership of newspapers and broadcaststations and remanded the matter to the FCC for further proceedings. On June 13,2005, the United States Supreme Court declined to review the Third Circuit’sdecision. During the pendency of the FCC’s review of the ownership rules onremand, the FCC’s pre-June 2003 broadcast ownership rules remain ineffect. The actions Congress or the FCC may take and changes in the FCC’s rules may adverselyimpact our business.

 

*Indecency Rules*. Federallaw and the FCC’s rules prohibit the broadcast of obscene material at anytime, and the broadcast of indecent or profane material during the period from6 a.m. through 10 p.m. In recent years, the FCC has vigorouslyenforced its indecency prohibition, and Congress is currently consideringlegislation that would, among other things, raise the maximum amount ofexisting indecency fines from $32,500 to $500,000. The determination of whethercontent is indecent or profane is inherently subjective, creates uncertainty toour ability to comply with the rules, and impacts our programming decisions. Violationof the indecency rules could lead to sanctions which may adverselyaffect our business and results of operations.

 

*Fines and Penalties*.In recent years, the FCC has also vigorously enforced a number of rules,typically in connection with license renewals. For example, in 2005, the FCCissued fines and sanctions for violations of its equal employment opportunityrules, public inspection file rules, and children’s programming rules. Ourstations were not the subject of monetary sanctions in 2005.

 

**PossibleAcquisitions, Divestitures or Other Strategic Initiatives May AdverselyImpact Our Business**

 

Our management is evaluating, and will continue to evaluate, the natureand scope of our operations and various short-term and long-term strategicconsiderations. These may include acquisitions or divestitures of, orstrategic alliances, joint ventures, mergers or integration or consolidationwith, television stations or other businesses, as well as discussions withthird parties regarding any of these considerations. In the alternative, ourmanagement may decide from time to time that such initiatives are notappropriate.

 

There are uncertainties and risks relating toeach of these strategic initiatives. For example, acquisition opportunities may becomemore limited as a consequence of the consolidation of ownership occurring inthe television broadcast industry.  Also,prospective competitors may have greater financial resources than we do. Futureacquisitions may not be available on attractive terms, or at all. Also, ifwe do make acquisitions, we may not be able to successfully integrate theacquired stations or businesses. With respect to divestitures, we may experiencevarying success in making such divestitures on favorable terms, if at all, orin reducing fixed costs or transferring liabilities previously associated withthe divested television stations or businesses. Finally, any such acquisitionsor divestitures will be subject to FCC approval and FCC rules andregulations. Any of these efforts would require varying levels of managementresources, which may divert our attention from other business operations. Ifwe do not realize the expected benefits or synergies of such 

 

18

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transactions, or, conversely, if we do not realize such benefits orsynergies because we chose not to pursue any such transaction, there may bean adverse effect on our financial condition and operating results.

 

**We Could Suffer Losses Due to AssetImpairment Charges for Goodwill and FCC Licenses**

 

We test our goodwill and intangible assets,including FCC licenses, for impairment during the fourth quarter of every year,and on an interim date should factors or indicators become apparent that wouldrequire an interim test, in accordance with Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets.”  If the fair value of a reporting unit or anintangible asset is revised downward, an impairment under SFAS 142 could resultand a non-cash charge could be required. This could materially affect ourreported net earnings.

 

**The Loss of Key Personnel Could Disrupt ourManagement or Operations and Adversely Affect our Business**

 

Our business depends upon the continuedefforts, abilities and expertise of our chief executive officer and other keyemployees. We believe that the rare combination of skills and years ofbroadcast experience possessed by our executive officers would be difficult toreplace, and that the loss of our executive officers could have a materialadverse effect on our business. Additionally, our stations employ severalon-air personnel, including anchors and reporters, with significant loyalaudiences. Our failure to retain these personnel could adverse affect ouroperating results.

 

**Strikes and Other Union Activity CouldAdversely Affect Our Business**

 

Certain employees, such as on-air talent andengineers, at some of our stations are subject to collective bargainingagreements. If we are unable to renew expiring collective bargainingagreements, it is possible that the affected unions could take action in the form ofstrikes or work stoppages. Such actions, higher costs in connections with theseagreements, or significant labor disputes could adversely affect our businessby disrupting our ability to operate our affected stations.

 

**Our Share Repurchase Program and Hearst’sShare Purchase Program May Affect the Market Price of Our Series ACommon Stock.**

 

We have a share repurchase program authorizedby our Board of Directors, pursuant to which we may repurchase up to $300million of our Series A Common Stock from time to time, in the open marketor in private transactions, subject to market conditions. In addition, TheHearst Corporation’s Board of Directors authorized a share purchase program,pursuant to which Hearst or its subsidiaries may purchase on the openmarket or through private transactions up to 25 million shares of our Series ACommon Stock. Such repurchases and purchases may increase or decrease themarket price of our Series A Common Stock.

 

**ITEM 1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.    PROPERTIES**

 

Our principal executiveoffices are located at 888 Seventh Avenue, New York, New York 10106. The realproperty of each of our stations generally includes owned or leased offices,studios, transmitters and tower sites. Offices and main studios are typicallylocated together, while transmitters and tower sites are often in separatelocations that are more suitable for optimizing signal strength and coverage. Setforth below are our stations’ principal facilities as of December 31, 2005.In addition to the property listed below, we and the stations also lease otherproperty primarily for communications equipment.

 
| **Station** | ** ** | **Location**    | ** ** | **Use**                          | ** ** | **Ownership** | ** ** | **Approximate  Size**   | ** ** |
|-------------|------------|-----------------|------------|----------------------------------|------------|---------------|------------|-------------------------|------------|
| Corporate   |       | Washington D.C. |       | Washington D.C. Office |       | Leased        |       | 4,007 sq. ft. |       |
|        |       | New York, NY    |       | New York Office(1)               |       | Leased        |       | 39,834 sq.  ft.         |       |
|        |       |            |       |                             |       |          |       |                    |       |
| WCVB        |       | Boston, MA      |       | Office and studio                |       | Owned         |       | 90,002sq.  ft.          |       |
|        |       |            |       | Tower and transmitter            |       | Leased        |       | 1,600 sq.  ft.          |       |
|        |       |            |       |                             |       |          |       |                    |       |
| WMUR        |       | Manchester, NH  |       | Office and studio                |       | Owned         |       | 67,440 sq.  ft.         |       |

 

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| **Station** | ** ** | **Location**                | ** ** | **Use**                              | ** ** | **Ownership** | ** ** | **Approximate  Size**    | ** ** |
|-------------|------------|-----------------------------|------------|--------------------------------------|------------|---------------|------------|--------------------------|------------|
|        |       |                        |       | Tower and transmitter                |       | Owned         |       | 4.5 acres                |       |
|        |       |                        |       | Office                               |       | Leased        |       | 1,963 sq.  ft.           |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| KCRA/KQCA   |       | Sacramento, CA         |       | Office, studio and tower             |       | Owned         |       | 75,000 sq.  ft.          |       |
|        |       |                        |       | Tower and transmitter                |       | Owned         |       | 2,400 sq.  ft.           |       |
|        |       |                        |       | Tower and transmitter                |       | Leased        |       | 1,200 sq.  ft.           |       |
|        |       |                        |       | Office                               |       | Leased        |       | 3,085 sq.  ft.           |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WTAE        |       | Pittsburgh, PA              |       | Office and studio                    |       | Owned         |       | 68,033 sq. ft. |       |
|        |       |                        |       | Tower and transmitter                |       | Owned         |       | 37 acres                 |       |
|        |       |                        |       | Office                               |       | Leased        |       | 609 sq. ft.              |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WESH        |       | Orlando, FL                 |       | Studio, transmitter, tower |       | Owned         |       | 61,300 sq.  ft.          |       |
|        |       | Daytona Beach, FL           |       | Studio and office                    |       | Leased        |       | 1,472 sq.  ft.           |       |
|        |       |                        |       | Office                               |       | Leased        |       | 775 sq. ft.              |       |
|        |       |                        |       | Office                               |       | Leased        |       | 535 sq. ft.              |       |
|        |       |                        |       | Tower                                |       | Partnership*  |       | 190 acres                |       |
|        |       |                        |       | Transmitter                          |       | Partnership*  |       | 8,050 sq.  ft.           |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WBAL        |       | Baltimore, MD               |       | Office and studio                    |       | Owned         |       | 63,000 sq.  ft.          |       |
|        |       |                        |       | Tower                                |       | Partnership*  |       | 0.2 acres                |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| KMBC        |       | Kansas City, MO             |       | Office and studio                    |       | Leased        |       | 58,514 sq.  ft.          |       |
|        |       |                        |       | Tower and transmitter                |       | Owned         |       | 11.6 acres               |       |
|        |       |                        |       | Land(2)                              |       | Owned         |       | 8.4 acres                |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WLWT        |       | Cincinnati, OH              |       | Office and studio                    |       | Owned         |       | 52,000 sq.  ft.          |       |
|        |       |                        |       | Tower and transmitter                |       | Owned         |       | 4.2 acres                |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WISN        |       | Milwaukee, WI               |       | Office and studio                    |       | Owned         |       | 88,000 sq.  ft.          |       |
|        |       |                        |       | Tower and transmitter land           |       | Leased        |       | 5.5 acres                |       |
|        |       |                        |       | Transmitter building                 |       | Owned         |       | 3,192 sq.  ft.           |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WYFF        |       | Greenville, SC              |       | Office and studio                    |       | Owned         |       | 57,500 sq.  ft.          |       |
|        |       |                        |       | Tower and transmitter                |       | Owned         |       | 1.5 acres                |       |
|        |       |                        |       | Office                               |       | Leased        |       | 3,000 sq.  ft.           |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WDSU        |       | New Orleans, LA   |       | Office and studio                    |       | Owned         |       | 50,525 sq.  ft.          |       |
|        |       |                        |       | Transmitter                          |       | Owned         |       | 8.3 acres                |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| KOCO        |       | Oklahoma City, OK |       | Office and studio                    |       | Owned         |       | 28,000 sq. ft. |       |
|        |       |                        |       | Tower and transmitter                |       | Owned         |       | 85 acres                 |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WGAL        |       | Lancaster, PA               |       | Office, studio and tower   |       | Owned         |       | 58,900 sq.  ft.          |       |
|        |       |                        |       | Office                               |       | Leased        |       | 2,380 sq.  ft.           |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WXII        |       | Winston-Salem, NC      |       | Office and studio          |       | Owned         |       | 38,027 sq. ft. |       |
|        |       |                        |       | Tower and transmitter      |       | Owned         |       | 223.6 acres              |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| WLKY        |       | Louisville, KY              |       | Office and studio                    |       | Owned         |       | 37,842 sq.  ft.          |       |
|        |       |                        |       | Tower and transmitter                |       | Owned         |       | 40.0 acres               |       |
|        |       |                        |       | Transmitter                          |       | Leased        |       | 1,350 sq.  ft.           |       |
|        |       |                        |       | Transmitter building                 |       | Owned         |       | 2,000 sq.  ft.           |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| KOAT        |       | Albuquerque, NM             |       | Office and studio                    |       | Owned         |       | 37,315 sq.  ft.          |       |
|        |       |                        |       | Tower and transmitter      |       | Owned         |       | 328.5 acres         |       |
|        |       |                        |       |                                 |       |          |       |                     |       |
| KCCI        |       | Des Moines, IA    |       | Office, studio and transmitter       |       | Owned         |       | 52,000 sq. ft. |       |
|        |       |                        |       | Tower and transmitter                |       | Owned         |       | 119.5 acres              |       |

 

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| **Station** | ** ** | **Location**                          | ** ** | **Use**               | ** ** | **Ownership** | ** ** | **Approximate  Size** | ** ** |
|-------------|------------|---------------------------------------|------------|-----------------------|------------|---------------|------------|-----------------------|------------|
|        |       |                                  |       |                  |       |          |       |                  |       |
| WMTW        |       | Portland-Auburn, ME                   |       | Office and studio     |       | Leased        |       | 11,703 sq.  ft.       |       |
|        |       |                                  |       | Tower and transmitter |       | Owned         |       | 296 acres             |       |
|        |       |                                  |       | Office and studio     |       | Owned         |       | 16,300 sq.  ft.       |       |
|        |       |                                  |       | Transmitter building  |       | Owned         |       | 5,120 sq.  ft.        |       |
|        |       |                                  |       | Office land           |       | Owned         |       | 13.9 acres            |       |
|        |       |                                  |       |                  |       |          |       |                  |       |
| KITV        |       | Honolulu, HI                          |       | Office and studio     |       | Owned         |       | 35,000 sq.  ft.       |       |
|        |       |                                  |       | Tower and transmitter |       | Leased        |       | 130 sq. ft.           |       |
|        |       |                                  |       | Tower and transmitter |       | Leased        |       | 304 sq. ft.           |       |
|        |       |                                  |       | Tower and transmitter |       | Leased        |       | 2.6 acres             |       |
|        |       |                                  |       |                  |       |          |       |                  |       |
| KETV        |       | Omaha, NE                             |       | Office and studio     |       | Owned         |       | 39,204 sq.  ft.       |       |
|        |       |                                  |       | Tower and transmitter |       | Owned         |       | 23.3 acres            |       |
|        |       |                                  |       | Transmitter building  |       | Owned         |       | 30,492 sq.  ft.       |       |
|        |       |                                  |       | Office                |       | Leased        |       | 597 sq. ft.           |       |
|        |       |                                  |       |                  |       |          |       |                  |       |
| WAPT        |       | Jackson, MS                           |       | Office and studio     |       | Owned         |       | 11,600 sq.  ft.       |       |
|        |       |                                  |       | Tower and transmitter |       | Owned         |       | 24 acres              |       |
|        |       |                                  |       |                  |       |          |       |                  |       |
| WPTZ        |       | Plattsburgh, NY                  |       | Office and studio     |       | Owned         |       | 12,800 sq.  ft.       |       |
|        |       |                                  |       | Office                |       | Leased        |       | 5,441 sq.  ft.        |       |
|        |       |                                  |       | Tower and Transmitter |       | Owned         |       | 2,432 sq.  ft.        |       |
|        |       |                                  |       | Tower and transmitter |       | Owned         |       | 13.4 acres            |       |
|        |       |                                  |       |                  |       |          |       |                  |       |
| WNNE        |       | White River Junction, VT              |       | Office and studio     |       | Leased        |       | 5,600 sq.  ft.        |       |
|        |       |                                  |       | Transmitter building  |       | Leased        |       | 540 sq. ft.           |       |
|        |       |                                  |       | Transmitter land      |       | Leased        |       | 3 acres               |       |
|        |       |                                  |       |                  |       |          |       |                  |       |
| KHBS/KHOG   |       | Fort Smith/Fayetteville, AR |       | Office and studio     |       | Owned         |       | 44,904 sq.  ft.       |       |
|        |       |                                  |       | Office and studio     |       | Leased        |       | 1,110 sq.  ft.        |       |
|        |       |                                  |       | Transmitter Building  |       | Owned         |       | 2100 sq. ft.          |       |
|        |       |                                  |       | Tower and transmitter |       | Leased        |       | 2.5 acres             |       |
|        |       |                                  |       | Tower and transmitter |       | Owned         |       | 26.7 acres            |       |
|        |       |                                  |       |                  |       |          |       |                  |       |
| KSBW        |       | Monterey-Salinas, CA                  |       | Office and studio     |       | Owned         |       | 44,000 sq.  ft.       |       |
|        |       |                                  |       | Tower and transmitter |       | Owned         |       | 160.2 acres           |       |
|        |       |                                  |       | Office                |       | Leased        |       | 900 sq. ft.           |       |

 

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*                 Ownedby the Company in partnership with certain third parties.

(1)        Our corporate offices account for 21,789 square feet of this leasedamount; we sublease the remaining square footage to a third party.

(2)        In 2005 we commenced construction of an office and studio facility forKMBC on land we purchased in 2004. When the facility is completed, we will moveour operations to the new facility and terminate this station’s office spacelease.

 

**ITEM 3.   LEGAL PROCEEDINGS**

 

From time to time, we becomeinvolved in various claims and lawsuits that are incidental to our business. Inour opinion, there are no legal proceedings pending against us or any of oursubsidiaries that are reasonably expected to have a material adverse effect onour consolidated financial condition or results of operations.

 

**ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

Not applicable.

 

21

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**PART II**

 

**ITEM 5.** **MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES**

 

(a)  *Market Performance of Common Stock and Dividends on Common Stock*.Our Series A Common Stock is listed on the New York Stock Exchange(“NYSE”) under the ticker symbol “HTV.” All of the outstanding shares of our Series BCommon Stock are currently held by Hearst Broadcasting, a wholly-ownedsubsidiary of Hearst Holdings, which is in turn a wholly-owned subsidiary ofHearst. Our Series B Common Stock is not publicly traded. The table belowsets forth, for the calendar quarters indicated, the reported high and lowsales prices of our Series A Common Stock on the NYSE and the dividendsdeclared on our Series A and Series B Common Stock:

 
| ** **      | ** ** | **High** | ** ** | **Low** | ** ** | **Dividend** | ** ** |
|-----------------|------------|----------|------------|---------|------------|--------------|------------|
| 2005            |       |     |       |    |       |         |       |
| First  Quarter  |       | $        | 26.15      |    | $          | 24.59        |       | $ | 0.07 |   |
| Second  Quarter |       | 25.71    |       | 24.50   |       | 0.07         |       |
| Third  Quarter  |       | 26.20    |       | 23.85   |       | 0.07         |       |
| Fourth  Quarter |       | 25.76    |       | 23.33   |       | 0.07         |       |
|            |       |     |       |    |       |         |       |
| 2004            |       |     |       |    |       |         |       |
| First  Quarter  |       | $        | 28.95      |    | $          | 25.38        |       | $ | 0.06 |   |
| Second  Quarter |       | 27.68    |       | 25.09   |       | 0.06         |       |
| Third  Quarter  |       | 25.79    |       | 22.63   |       | 0.06         |       |
| Fourth  Quarter |       | 26.38    |       | 24.70   |       | 0.07         |       |

 

On February 15, 2006,the closing price for our Series A Common Stock was $23.84, and there wereapproximately 581 Series A Common Stock shareholders of record.

 

In December 2005, wedeclared a quarterly cash dividend of $0.07 per share on our Series ACommon Stock and our Series B Common Stock, which we paid on January 15,2006 to holders of record on January 5, 2006, for a total of $6.5 million.During 2005, we paid a total of $26.0 million in dividends.  See Note 10 to the consolidated financialstatements.

 

(b) *Equity Compensation Plans.*The following tablesummarizes our equity compensation plans as of December 31, 2005:

 
| **Plan category**                                           | ** ** | **Number of securities to be  issued upon exercise of  outstanding options, warrants  and rights  (a)** | ** ** | **Weighted average exercise  price of outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities available  for future issuance under  equity compensation plans  (excluding securities reflected  in column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 8,520,847                                                                                               | (1)        | $                                                                                      | 23.53      |                                                                                                                                           | 5,466,476  | (2) |
| Equity  compensation plans not approved by security holders |       | N/A                                                                                                     |       | N/A                                                                                    |       | N/A                                                                                                                                            |       |
| Total                                                       |       | 8,520,847                                                                                               |       | $                                                                                      | 23.53      |                                                                                                                                           | 5,466,476  |   |

 

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(1)        Includes shares of Series A Common Stock to be issued upon exerciseof stock options granted under the Company’s Amended and Restated 1997 StockOption Plan and the Company’s 2004 Long Term Incentive Compensation Plan.

(2)        Includes 1,138,450 shares of Series A Common Stock available forfuture stock compensation grants under the Company’s 2004 Long Term IncentiveCompensation Plan and 4,328,026 shares of Series A Common Stock reservedfor future issuance under the Company’s Employee Stock Purchase Plan.

 

(c) *Purchase of EquitySecurities by the Issuer and Affiliated Purchasers.*The followingtable reflects purchases made during the quarter of our Series A CommonStock by Hearst Broadcasting, an indirect wholly-owned subsidiary of Hearst:

 
| **Period**                              | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid  Per Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced Program** | ** ** | **(d) Maximum  Number of Shares  that May Yet Be  Purchased Under  the Program** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| October 1 – October 31   |       | 219,300                                          |       | $                                           | 24.30      |                                                                                        | 219,300    |                                                                                       | 5,259,226  |   |
| November 1 – November 30 |       | 294,400                                          |       | $                                           | 23.86      |                                                                                        | 294,400    |                                                                                       | 4,964,826  |   |
| December 1 – December 31 |       | 329,700                                          |       | $                                           | 23.90      |                                                                                        | 329,700    |                                                                                       | 4,635,126  |   |
| Total                                   |       | 843,400                                          |       | $                                           | 23.99      |                                                                                        | 843,400    |                                                                                       |       |   |

 

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(1)          On September 28,2005, Hearst and its indirect wholly-owned subsidiary Hearst Broadcasting filedan amendment to their report of beneficial ownership on Schedule 13D withthe SEC to report an increase in Hearst Broadcasting’s authorization topurchase the Company’s Series A Common Stock from 20 million to 25 millionshares.  Hearst may effect suchpurchases from time to time in the open market or in private transactions, subjectto market conditions and management’s discretion.

 

As of December 31, 2005, Hearst beneficially owned approximately47% of the Company’s outstanding Series A Common Stock and 100% of theCompany’s Series B Common Stock representing in the aggregate approximately70.5% of our common stock.

 

The following table reflects purchases madeby the Company of its Series A Common Stock during the three months ended December 31,2005.

 
| **Period**                              | ** ** | **(a) Total  Number of  Shares   Purchased** | ** ** | **(b) Average  Price Paid per Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced  Program** | ** ** | **(d) Approximate  Dollar Value of  Shares that May Yet  Be Purchased Under  the Program** | ** ** |
|-----------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| October 1 – October 31   |       | —                                            |       | $                                               | —     |                                                                                         | —     |                                                                                                 |       |   |
| November 1 – November 30 |       | 294,400                                           |       | $                                               | 23.86      |                                                                                         | 294,400    |                                                                                                 |       |   |
| December 1 – December 31 |       | —                                            |       | $                                               | —     |                                                                                         | —     |                                                                                                 | $          | 198,725,275 | (1) |
| Total                                   |       | 294,400                                           |       | $                                               | 23.86      |                                                                                         | 294,400    |                                                                                                 |       |   |
|                                         |            |                                                   |            |                                                 |            |                                                                                              |            |                                                                                                      |            |  |  |

 

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(1)          In May 1998, theCompany’s Board of Directors authorized the repurchase of up to $300 million ofits outstanding Series A Common Stock. We may effect such purchasesfrom time to time in the open market or in private transactions, subject tomarket conditions and management’s discretion. As of December 31, 2005,the Company has spent approximately $108.0 million to repurchase approximately4.3 million shares of Series A Common Stock at an average price of $24.97.We cannot assure you that we will make such repurchases in the future or, if wedo, what the terms of such repurchases will be.

 

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**ITEM 6.   SELECTED FINANCIAL DATA**

 

The selected financial datashould be read in conjunction with the historical financial statements andnotes thereto included elsewhere herein and in “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”

 

**Hearst-ArgyleTelevision, Inc.**

**(Inthousands, except per share data)**

 
| ** **                                       | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                       | ** ** | **2005(a)**                       | ** ** | **2004(a)** | ** ** | **2003(b)** | ** ** | **2002(b)** | ** ** | **2001(c)** | ** ** |
| **Statement of income data:**                    |       |                              |       |   |   |   |   |   |   |   |   |
| Total  revenue                                   |       | $                                 | 706,883    |   | $ | 779,879 |   | $ | 686,775 |   | $ | 721,311 |   | $ | 641,876 |   |
|                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Station  operating expenses:                     |       |                              |       |   |   |   |   |   |   |   |   |
| Salaries,  benefits and other operating costs    |       | 364,421                           |       | 355,641 |   | 330,519 |   | 331,643 |   | 323,520 |   |
| Amortization  of program rights                  |       | 60,912                            |       | 63,843 |   | 62,845 |   | 60,821 |   | 57,676 |   |
| Depreciation  and amortization.                  |       | 51,728                            |       | 50,376 |   | 55,467 |   | 43,566 |   | 129,420 |   |
| Impairment  loss (d)                             |       | 29,235                            |       | — |   | — |   | — |   | — |   |
| Corporate,  general and administrative expenses  |       | 23,149                            |       | 25,268 |   | 19,122 |   | 19,650 |   | 15,817 |   |
| Operating  income                                |       | 177,438                           |       | 284,751 |   | 218,822 |   | 265,631 |   | 115,443 |   |
|                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Interest  expense, net                           |       | 63,375                            |       | 63,730 |   | 68,215 |   | 73,443 |   | 98,725 |   |
| Interest  expense, net – Capital Trust(e)   |       | 9,750                             |       | 18,675 |   | 15,000 |   | 15,000 |   | 500 |   |
| Other  (income) expense, net(f)(g)(h)            |       | 2,500                             |       | 3,700 |   | — |   | (299 | ) | (48,778 | ) |
| Equity in  (income) loss of affiliates(i)        |       | (2,321                            | )          | (1,648 | ) | (923 | ) | 3,269 |   | 6,461 |   |
|                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Income  before income taxes                      |       | 104,134                           |       | 200,294 |   | 136,530 |   | 174,218 |   | 58,535 |   |
|                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Income taxes  (l)                                |       | 3,917                             |       | 76,352 |   | 42,309 |   | 66,201 |   | 27,448 |   |
| Net income                                       |       | 100,217                           |       | 123,942 |   | 94,221 |   | 108,017 |   | 31,087 |   |
|                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Less  preferred stock dividends(j)               |       | 2                                 |       | 1,067 |   | 1,211 |   | 1,377 |   | 1,422 |   |
| Income  applicable to common stockholders        |       | $                                 | 100,215    |   | $ | 122,875 |   | $ | 93,010 |   | $ | 106,640 |   | $ | 29,665 |   |
|                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Income per  common share—basic              |       | $                                 | 1.08       |   | $ | 1.32 |   | $ | 1.00 |   | $ | 1.16 |   | $ | 0.32 |   |
| Number of  common shares used in the calculation |       | 92,826                            |       | 92,928 |   | 92,575 |   | 92,148 |   | 91,809 |   |
|                                             |       |                              |       |   |   |   |   |   |   |   |   |
| Income per  common share—diluted            |       | $                                 | 1.08       |   | $ | 1.30 |   | $ | 1.00 |   | $ | 1.15 |   | $ | 0.32 |   |
| Number of  common shares used in the calculation |       | 93,214                            |       | 101,406 |   | 92,990 |   | 92,550 |   | 92,000 |   |
| Dividends  declared per share(k)                 |       | $                                 | 0.28       |   | $ | 0.25 |   | $ | 0.06 |   | $ | — |   | $ | — |   |
|                                             |       |                              |       |   |   |   |   |   |   |   |   |
| **Balance  sheet data (at year-end):**           |       |                              |       |   |   |   |   |   |   |   |   |
| Cash and  cash equivalents                       |       | $                                 | 120,065    |   | $ | 92,208 |   | $ | 71,528 |   | $ | 4,442 |   | $ | 3,260 |   |
| Total assets                                     |       | $                                 | 3,832,359  |   | $ | 3,842,140 |   | $ | 3,799,087 |   | $ | 3,769,111 |   | $ | 3,785,891 |   |
| Long-term  debt                                  |       | $                                 | 777,170    |   | $ | 882,221 |   | $ | 882,409 |   | $ | 973,378 |   | $ | 1,160,205 |   |
| Note payable  to Capital Trust                   |       | $                                 | 134,021    |   | $ | 134,021 |   | $ | 206,186 |   | $ | 206,186 |   | $ | 206,186 |   |
| Stockholders’  equity                       |       | $                                 | 1,821,459  |   | $ | 1,753,837 |   | $ | 1,672,382 |   | $ | 1,579,262 |   | $ | 1,466,614 |   |
|                                             |       |                              |       |   |   |   |   |   |   |   |   |
| **Other  data:**                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Net cash  provided by operating activities       |       | $                                 | 131,293    |   | $ | 195,667 |   | $ | 179,075 |   | $ | 205,452 |   | $ | 165,853 |   |
| Net cash  used in investing activities           |       | $                                 | (43,571    | ) | $ | (74,104 | ) | $ | (25,541 | ) | $ | (25,818 | ) | $ | (72,917 | ) |
| Net cash  used in financing activities           |       | $                                 | (59,865    | ) | $ | (100,883 | ) | $ | (86,448 | ) | $ | (178,452 | ) | $ | (95,456 | ) |
| Capital  expenditures                            |       | $                                 | 35,839     |   | $ | 36,380 |   | $ | 25,392 |   | $ | 25,920 |   | $ | 32,331 |   |
| Program  payments                                |       | $                                 | 64,104     |   | $ | 62,247 |   | $ | 62,039 |   | $ | 59,870 |   | $ | 57,385 |   |
| Dividends  paid on common stock                  |       | $                                 | 25,997     |   | $ | 22,301 |   | $ | — |   | $ | — |   | $ | — |   |
| Series A  Common Stock repurchases          |       | $                                 | 16,385     |   | $ | 10,920 |   | $ | — |   | $ | — |   | $ | 4,079 |   |

 

See accompanying notes.

 

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**Notes toSelected Financial Data**

 

(a)          Includes (i) theresults of our 24 stations which were owned for the entire period presented andthe management fees derived from three television stations (WMOR-TV, WPBF-TVand KCWE-TV) and two radio stations (WBAL-AM and WIYY-FM) managed by us for theentire period presented (the “Managed Stations”) and (ii) the results ofWMTW-TV, after its acquisition by us, from July 1, 2004 through December 31,2005.

(b)         Includes the results ofour 24 television stations which were owned for the entire period presented andthe management fees earned by us from the Managed Stations for the entireperiod presented.

(c)          Includes (i) theresults of 23 (which excludes WMUR-TV and WBOY-TV) of our television stationswhich were owned for the entire period presented and the management fees earnedby us from the Managed Stations for the entire period presented; (ii) theTime Brokerage Agreement (“TBA”) for WMUR-TV from January 1 through March 27,2001; (iii) the results of WMUR-TV, after its acquisition by us, from March 28through December 31, 2001; (iv) the TBA for radio stations inPhoenix, Arizona (KTAR-AM, KMVP-AM and KKLT-FM) from January 1 through March 27,2001; and (v) the results of WBOY-TV after its acquisition by us, from April 30to December 13, 2001, the date of its disposition.

(d)         In December 2005, werecorded an impairment charge of $29.2 million to write down to fair value WDSU’sFCC license and goodwill. Due to Hurricane Katrina, the future cash flows ofour station in New Orleans were negatively impacted resulting in theimpairment.

(e)          Represents interestexpense on the note payable to our wholly-owned unconsolidated subsidiarytrust, which holds solely parent company debentures in the amounts of $134.0million at December 31, 2005 and 2004 and $206.2 million at December 31,2003 and 2002, and a $3.7 million premium paid to redeem the Series ADebentures in the amount of $72.2 million on December 31, 2004, offset byour equity interest in the earnings of the trust. See Note 7 of theconsolidated financial statements.

(f)            In the year ended December 31,2002, Other (income) expense, net represents a supplemental closing fee paid tous in connection with the sale of the Phoenix Stations in March 2001. Inthe year ended December 31, 2001, Other (income) expense, net representsthe $72.6 million pre-tax gain from the sale of the Phoenix Stations, partiallyoffset by a $23.8 million pre-tax write-down of the carrying value of some ofour investments.

(g)         In2004, ProAct Technologies Corporation sold substantially all of its operatingassets to a third party as part of an overall plan of liquidation. TheCompany wrote-down our investment in ProAct to the net realizable value by $3.7million during the year ended December 31, 2004. In addition we wrote down$18.8 million in March 2001. See Note 3 to the consolidated financialstatements.

(h)         In the year ended December 31,2005, we concluded our joint venture with NBC Universal and recorded a loss of$2.5 million. The investment had been accounted for using the equity method.

(i)             Represents our equityinterest in the operating results of: (i) Internet Broadcasting Systems, Inc.from December 2, 1999 through December 31, 2005; (ii) IBS/HATVLLC in the three months ended December 31, 2002 (upon achievement ofyear-to-date profitability) through December 31, 2005; (iii) NBC/Hearst-ArgyleSyndication, LLC from April 1, 2002 through December 31, 2005; and (iv) RipeDigital Entertainment, Inc. from July 27, 2005 through December 31,2005. See Note 3 to the consolidated financial statements.

(j)             Represents dividendson the preferred stock issued in connection with the acquisition ofKHBS-TV/KHOG-TV.

(k)          During 2005, our Boardof Directors declared quarterly cash dividends on our Series A and Series BCommon Stock for a total amount of $26.0 million. Included in this amount was$18.0 million payable to Hearst. During 2004, our Board of Directors declaredquarterly cash dividends on our Series A and Series B Common Stockfor a total amount of $23.2 million. Included in this amount was $15.4 millionpayable to Hearst. On December 3, 2003, our Board of Directors declared acash dividend of $0.06 per share on our Series A and Series B CommonStock in the amount of $5.6 million. We did not declare or pay any dividends onCommon Stock in 2002 and 2001. See Note 10 to the consolidated financialstatements.

(l)             During the year endedDecember 31, 2005, $31.9 million in tax benefits were recorded as a resultof the settlement of certain tax return examinations and $5.5 million in taxbenefits were recorded as a result of a change in Ohio tax law.

 

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**ITEM 7.**                        **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Organization of Information**

 

Management’s Discussion andAnalysis provides a narrative on our financial performance and condition thatshould be read in conjunction with the accompanying consolidated financialstatements. It includes the following sections:

 

•                  Executive Summary

•                  Critical Accounting Policies and Estimates

•                  Results of Operations

•                  Liquidity and Capital Resources

•                  Impact of Inflation

•                  Forward-Looking Statements

•                  New Accounting Pronouncements

 

**Executive Summary**

 

Hearst-Argyle Television, Inc.and its subsidiaries (hereafter “we” or the “Company”) own and operate 25network-affiliated television stations. Additionally, we provide managementservices to two network-affiliated stations and one independent televisionstation and two radio stations (the “Managed Stations”) in exchange for amanagement fee. See Note 14 to the consolidated financial statements.

 

*Events and other factors that have influenced our 2005 results*

 

•                  Total revenue decreased 9.4% primarily due tothe normal, cyclical decrease of political and Olympic revenue.

 

•                  During 2005, the Company was directlyaffected by Hurricane Katrina. We own and operate WDSU-TV, the NBC affiliateserving New Orleans, Louisiana, the nation’s 43rd largest televisionmarket. We estimate that WDSU lost $4.2 million of revenue during the secondhalf of the year and our stations incurred approximately $3.7 million inincremental expenses due to the hurricane. Also, we wrote off $2.4 million ofnet book value of property, plant and equipment damaged by the storm andrecorded a $2.4 million receivable due from our property insurers, which offsetthe impact of the loss in the income statement.

 

•                  We perform our annual review forimpairment of goodwill and other indefinite lived intangible assets in thefourth quarter in connection with the preparation of our annual financialstatements. Due to the negative impact of Hurricane Katrina and the uncertaintyof the future prospects of the New Orleans market, we recorded an impairmentloss of $29.2 million to write down WDSU-TV’s FCC license by $26.2 million andgoodwill by $3.0 million.

 

•                  During the year ended December 31, 2005,$31.9 million in tax benefits were recorded as a result of thesettlement of certain tax return examinations and $5.5 million in tax benefitswere recorded as a result of a change in Ohio tax law.

 

•                  In 2005 cash increased $27.9 million over2004, after capital expenditures, interest and taxes and the funding (with cashon-hand) of a repurchase of $15 million of our 7.5% Senior Notes due 2027, thepayment of $26.0 million of dividends to our holders of Series A and BCommon Stock and the repurchase of $16.4 million of Series A Common Stock.

 

*Industry Trends*

 

•                  Political advertising decreases inodd-numbered years, such as 2005, due to the decrease in the number ofcandidates running for political office.

 

•                  Revenue from Olympic advertising occursexclusively in even-numbered years, such as 2004, with the alternating Winterand Summer Games occurring every two years.

 

•                  TheU.S. Congress passed, and the President signed into law, legislation thatguides the transition from analog to digital television broadcasting. Acomponent of this legislation is a deadline of February 17, 2009 forcompletion of the transition to digital broadcasting and the return of theanalog spectrum to the government. The Company estimates that analog equipmenthaving a net book value of approximately $18.1 million as of December 31,2005 is affected by the digital conversion. Such equipment was beingdepreciated over various remaining useful lives, 

 

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some of which extend to 2014. As a result of the new legislation, the equipmentwill now be depreciated through March 31, 2009.

 

•                  The FCC has permitted broadcast televisionstation licensees to use their digital spectrum for a wide variety of servicessuch as high-definition television programming, audio, data and other types ofcommunication, subject to the requirement that each broadcaster provide atleast one free video channel equal in quality to the current technicalstandards. Our station, KOAT-TV in Albuquerque, New Mexico, currentlyleases a portion of its digital spectrum to U.S. Digital Television, LLC andeight of our NBC stations currently broadcast the NBC Weather Plus Network, a24/7 local and national weather broadcast network, on a multicast stream withtheir main digital channels.

 

•                  The FCC is currently considering reducing therestrictions on ownership including newspaper/television cross ownership. Theseregulations have met opposition from both the public and within the governmentand may not be ratified. The lack of clarity concerning ownership rules canreduce our ability to purchase, sell and/or swap stations in certain markets.

 

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

 

•                  Pursuant to the Cable Television ConsumerProtection and Competition Act of 1992 (“1992 Cable Act”) and the FCC’s “mustcarry” regulations, cable operators are generally required to devote up toone-third of their activated channel capacity to the carriage of the analogsignal of local commercial television stations. We record retransmission incomeresulting from most of our cable and satellite relationships.

 

**Critical Accounting Policies andEstimates**

 

Our management’s discussionand analysis of financial condition and results of operations is based on ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of our consolidated financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenue, and expenses, and related disclosure of contingent assetsand liabilities. On an ongoing basis, we evaluate our estimates, including thoserelated to allowances for doubtful accounts; program rights, barter and tradetransactions; useful lives of property, plant and equipment; intangible assets;carrying value of investments; accrued liabilities; contingent liabilities;income taxes; pension benefits; and fair value of financial instruments andstock options. We base our estimates on historical experience and on variousother assumptions, which we believe to be reasonable under the circumstances.Had we used different assumptions in determining our estimates, our reportedresults may have varied. The different types of estimates that arerequired to be made by us in the preparation of our consolidated financialstatements vary significantly in the level of subjectivity involved in theirdetermination. We have identified the estimates below as those which contain arelatively high level of subjectivity in their determination and thereforecould have a more material effect upon our reported results if differentassumptions were used.

 

*ImpairmentTesting of Intangible Assets—*In performing our annual impairment testing of goodwill and FCClicenses, which are both considered to be intangible assets with indefiniteuseful lives, we must make a significant number of assumptions and estimates indetermining the fair value based on the present value of future cash flows. Toassist in this process, we utilize the services of an independent valuationconsulting firm. See Note 4 to the consolidated financial statements. Theassumptions and estimates required under the impairment testing of goodwill andFCC licenses included future market revenue growth, operating profit margins,cash flow multiples, market revenue share, and weighted-average cost ofcapital, among others. Estimates of future cash flows for our station in NewOrleans declined significantly from prior year due to the negative impact ofHurricane Katrina on the New Orleans market. The aggregate book value of FCClicenses exceeded the estimated fair value by $26.2 million and the Companywrote down the book value of FCC licenses accordingly. After reducing thecarrying value of the FCC license, the Company compared the carrying value ofnet assets to the enterprise value. As a result, the Company wrote down $3.0million of goodwill.

 

*InvestmentCarrying Values*—Wehave investments in unconsolidated affiliates, which are accounted for underthe equity method if our equity interest is from 20% to 50%, and under the costmethod if our equity interest is less than 20% and we do not exercisesignificant influence over operating and financial policies. We review thecarrying value of investments on an ongoing basis and adjust them to reflectnet realizable value, where necessary. See Note 3 to the consolidated financialstatements. As part of our analysis and determination of the netrealizable value of investments, we must make assumptions and estimatesregarding expected future cash flows, which involve assessing the financialresults, forecasts, and strategic direction of the investee companies. In addition,we must make assumptions regarding discount rates, market growth rates,comparable company valuations and other factors, and the types of assumptionswe must make differ according to the type of investment to be valued. Had weutilized different assumptions and estimates in our assessment of the netrealizable value of investments, the carrying values of our investments as of December 31,2005 may 

 

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have been different. We consider the assumptions usedin our determination of investment carrying values to be reasonable. During theyear ended December 31, 2004, the Company recorded a $3.7 millionwrite-down to net realizable value of the Company’s investment in ProActTechnologies Corporation (“ProAct”).

 

*PensionAssumptions*—Incomputing projected benefit obligations and the resulting pension expense, weare required to make a number of assumptions. To assist in this process, we usethe services of an independent consulting firm. See Note 16 to the consolidatedfinancial statements. To compute our projected benefit obligations as of themeasurement date of September 30, 2005, we used the discount rate of 5.75%and a rate of compensation increase of 4.0%. In determining the discount rateassumption of 5.75%, we used a measurement date of September 30, 2005 andconstructed a portfolio of bonds to match the benefit payment stream that isprojected to be paid from the Company’s pension plans. The benefit paymentstream is assumed to be funded from bond coupons and maturities as well asinterest on the excess cash flows from the bond portfolio. To compute ourpension expense in the year ended December 31, 2005, we assumed a discountrate of 6.0%, an expected long-term rate of return on plan assets of 7.75%, anda rate of compensation increase of 4.0%. To determine the discount rateassumption of 6.0%, we used the measurement date of September 30, 2004 andused the same methodology to construct a portfolio of bonds to match theprojected benefit payment. The expected long-term rate of return on plan assetsassumption of 7.75% is based on the weighted average expected long-term returnsfor the target allocation of plan assets as of the measurement date of September 30,2004. See Note 16 to the consolidated financial statements for furtherdiscussion on management’s methodology for developing the expected long-termrate of return assumption. In calculating our pension expense for the yearending December 31, 2006, we anticipate using an assumed expectedlong-term rate of return of 7.75%. We consider the assumptions used in ourdetermination of our projected benefit obligations and pension expense to bereasonable.

 

*PensionAssumptions Sensitivity Analysis*

 

The weighted-averageassumptions used in computing our net pension expense and projected benefitobligation have a significant effect on the amounts reported. A one-percentagepoint change in each of the assumptions below would have the following effectsupon net pension expense and projected benefit obligation, respectively, in theyear ended and as of December 31, 2005:

 
| ** **                    | ** ** | **One Percentage Point Increase** | ** ** | **One Percentage Point Decrease**          | ** ** |
|-------------------------------|------------|-----------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **Discount  Rate**                | ** ** | **Expected long-****term rate of  return** | ** ** | **Rate of  compensation  increase** | ** ** | **Discount  Rate** | ** ** | **Expected long-  term rate of  return** | ** ** | **Rate of  compensation  increase** | ** ** |
| ** **                    | ** ** | **(In thousands)**                | ** ** |
|                          |       |                              |       |                                       |       |   |   |   |   |   |   |   |   |
| Net pension expense           |       | $                                 | (3,578     | )                                          | $          | (1,263 | ) | $ | 872 |   | $ | 4,280 |   | $ | 1,263 |   | $ | (785 | ) |
| Projected  benefit obligation |       | $                                 | (25,344    | )                                          | $          | — |   | $ | 3,450 |   | $ | 30,525 |   | $ | — |   | $ | (3,180 | ) |

 

*IncomeTaxes*—Income taxesare accounted for in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 109, *Accountingfor Income Taxes* (“SFAS 109”), which requires that deferred taxassets and liabilities be recognized for the differences in the book and taxbases of certain assets and liabilities using enacted tax rates. SFAS 109 alsorequires that deferred tax assets be reduced by a valuation allowance if it ismore likely than not, that some portion or all of the deferred tax assets willnot be realized. Income tax expense was $3.9 million or 3.76% of pre-tax incomein our Consolidated Statement of Income for the year ended December 31,2005. Deferred tax assets were approximately $4.0 million and deferred taxliabilities were approximately $845.3 million as of December 31, 2005. Ourestimates of income taxes and the significant items giving rise to the deferredassets and liabilities are set forth in Note 9 to the consolidated financialstatements. These estimates reflect our assessment of future taxes to be paidon items reflected in the consolidated financial statements, givingconsideration to both timing and probability. Actual income taxes could varyfrom such estimates as a result of future changes in income tax law or reviewsby the Internal Revenue Service or other tax authorities.

 

**Results of Operations**

 

Results of operations forthe years ended December 31, 2005, 2004 and 2003 include (i) theresults of our 24 television stations, which were owned for the entire periodpresented, and the management fees derived by the three television and tworadio stations managed by us for the entire period presented; and (ii) theresults of operations of WMTW-TV, after our acquisition of the station, from July 1,2004 through December 31, 2005.

 

28

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*Year Ended December 31, 2005*

*Compared to Year Ended December 31,2004*

 
| ** **                                    | ** ** | **For the years ended December 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                    | ** ** | **2005**                                  | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **(In Thousands)**                   | ** ** | ** ** | ** ** | ** **        | ** ** |
| Revenue                                       |       | $                                         | 706,883    |       | $          | 779,879           |       | $ | (72,996 | ) | (9.4 | )% |
| Station  Operating Expenses:                  |       |                                      |       |       |       |              |       |   |   |
| Salaries,  benefits and other operating costs |       | 364,421                                   |       | 355,641    |       | 8,780             |       | 2.5 | % |
| Amortization  of program rights               |       | 60,912                                    |       | 63,843     |       | (2,931            | )          | (4.6 | )% |
| Depreciation  and amortization                |       | 51,728                                    |       | 50,376     |       | 1,352             |       | 2.7 | % |
| Impairment  Loss                              |       | 29,235                                    |       | —     |       | 29,235            |       | N/A |   |
| Corporate,  general and administrative        |       | 23,149                                    |       | 25,268     |       | (2,119            | )          | (8.4 | )% |
| Operating  income                             |       | 177,438                                   |       | 284,751    |       | (107,313          | )          | (37.7 | )% |
|                                          |       |                                      |       |       |       |              |       |   |   |
| Interest  expense, net                        |       | 63,375                                    |       | 63,730     |       | (355              | )          | (0.6 | )% |
| Interest  expense, net – Capital Trust   |       | 9,750                                     |       | 18,675     |       | (8,925            | )          | (47.8 | )% |
| Other  expense                                |       | 2,500                                     |       | 3,700      |       | (1,200            | )          | (32.4 | )% |
| Equity in  (income) of affiliates, net        |       | (2,321                                    | )          | (1,648     | )          | (673              | )          | 40.8 | % |
|                                          |       |                                      |       |       |       |              |       |   |   |
| Income  before income taxes                   |       | 104,134                                   |       | 200,294    |       | (96,160           | )          | (48.0 | )% |
| Income taxes                                  |       | 3,917                                     |       | 76,352     |       | (72,435           | )          | (94.9 | )% |
| Net income                                    |       | $                                         | 100,217    |       | $          | 123,942           |       | $ | (23,725 | ) | (19.1 | )% |

 

*Total revenue*.

 

Total revenue includes:

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

(ii)          network compensation;and

(iii)       other revenue (includingretransmission revenue).

 

See “Revenue Recognition” under Note 2 to theconsolidated financial statements.

 

Total revenue in the yearended December 31, 2005 was $706.9 million, as compared to $779.9 millionin the year ended December 31, 2004, a decrease of $73.0 million or 9.4%.This decrease was primarily attributable to the following factors:

(i)             a $74.4 milliondecrease in net political advertising revenue resulting from the normal,cyclical nature of the television broadcasting business, in which the demandfor advertising by candidates running for political office significantlyincreases in even-numbered election years (such as 2004);

(ii)          a $19 million decreaserepresenting the absence of Olympic revenue; and

(iii)       a $10.0 million decrease innetwork compensation; partially offset by

(iv)      an increase in theautomotive, financial services, and furniture and housewares categories; and

(v)         a $5.4 million increasein retransmission revenue.

 

*Salaries, benefits and otheroperating costs.*

 

Salaries, benefits and otheroperating costs were $364.4 million in the year ended December 31, 2005,as compared to $355.6 million in the year ended December 31, 2004, anincrease of $8.8 million or 2.5%. This increase was primarily due to:

(i)             a $4.9 millionincrease in payroll expense;

(ii)          a $4.1 million increasein pension and employee benefit expense; and

(iii)       $3.7 million in incrementalexpenses due to Hurricane Katrina; partially offset by

(iv)      a $2.1 million decrease inTrade/Barter Expense; and

(v)         a $2.5 million decreasein property and casualty insurance expense.

 

*Amortization of program rights*.

 

Amortization of programrights was $60.9 million in the year ended December 31, 2005, as comparedto $63.8 million in the year ended December 31, 2004, a decrease of $2.9million or 4.6%. This decrease was primarily due to:

(i)               cost savings byreplacing certain higher cost first-run programs; and

(ii)            a $2.2 millionwrite-down of certain syndicated programs in 2004; partially offset by

(iii)         the additionalprogramming cost for WMTW-TV, which we acquired on July 1, 2004;

 

*Depreciation and amortization*.

 

Depreciation andamortization was $51.7 million in the year ended December 31, 2005, as comparedto $50.4 million in the year ended December 31, 2004, an increase of $1.4million or 2.7%. Depreciation expense was $45.7 million in the year ended December 31,2005, as compared to $44.4 million in the year ended December 31, 2004, anincrease of $1.3 million or 2.9%. This increase was primarily due to additionaldepreciation from WMTW-TV, which we acquired on July 1, 2004.

 

29

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Amortization was $6.0million in each of the years ended December 31, 2005 and 2004.

 

*Impairment loss.*

 

 The Company recorded a $29.2 million writedown of its indefinite lived intangible assets and goodwill for the year ended December 31,2005. In performing its annual review for impairment the Company reduced itsestimates of future cash flows for our station in New Orleans due to thenegative impact of Hurricane Katrina on the New Orleans market. The aggregatebook value of FCC licenses exceeded the estimated fair value by $26.2 millionand the Company wrote down the book value of FCC licenses accordingly. Afterreducing the carrying value of the FCC license, the Company compared thecarrying value of net assets to the enterprise value. As a result, the Companywrote down $3.0 million of goodwill.

 

*Corporate, general and administrativeexpenses*.

 

Corporate, general andadministrative expenses were $23.1 million in the year ended December 31,2005, as compared to $25.3 million in the year ended December 31, 2004, adecrease of $2.1 million or 8.4%. The decrease was primarily due to:

(i)                   a decrease  in salaries andincentive costs; and

(ii)                adecrease in accounting and consulting fees primarily as a result of a reductionof costs associated with Sarbanes-Oxley Section 404 compliance.

 

*Operating income.*

 

Operating income was $177.4million in the year ended December 31, 2005, as compared to $284.8 millionin the year ended December 31, 2004, a decrease of $107.3 million or37.7%. This net decrease in operating income was due to the items discussedabove.

 

*Interest expense, net.*

 

Interest expense, net ofinterest income, was $63.4 million in the year ended December 31, 2005, ascompared to $63.7 million in the year ended December 31, 2004, a decreaseof $0.4 million or 0.6%. This decrease was primarily due to:

(i)                   an increase in interest income of $1.7 million in the year ended December 31,2005 as compared to the year ended December 31, 2004, due in part tohigher cash balances; partially offset by

(ii)                the$0.7 million premium paid in the fourth quarter of 2005 on the repurchase of $15million of our 7.5% Senior Notes due 2027; and

(iii)             theacceleration of $0.7 million of deferred financing costs related to therepurchase of those Senior Notes.

 

*Interest Expense, net – CapitalTrust.*

 

Interest expense, net, tothe Capital Trust, was $9.8 million in the year ended December 31, 2005,compared to $18.7 million in the year ended December 31, 2004, a decreaseof $8.9 million, or 47.8%. The decrease results from $5.4 million in interestsavings due to the redemption of the $72.2 million Series A Debentures in December 2004and the absence of a $3.7 million premium we paid in 2004 for the redemption ofthose Debentures.

 

*Other expense.*

 

Other expensewas $2.5 million in the year ended December 31, 2005, as compared to $3.7million in the year ended December 31, 2004, a decrease of $1.2 million or32.4%. In December 2005, NBC and the Company concluded theNBC/Hearst-Argyle Syndication, LLC joint venture. The Company recorded a lossof $2.5 million. During the year ended December 31, 2004, the Companyrecorded a $3.7 million write-down to net realizable value of the Company’sinvestment in ProAct Technologies Corporation (“ProAct”).

 

*Equity in (income) of affiliates,net*.

 

Equity in (income) ofaffiliates was $2.3 million in the year ended December 31, 2005, ascompared to $1.6 million of income in the year ended December 31, 2004, anincrease of $0.7 million or 40.8%. See Note 3 to the consolidated financialstatements. This increase was primarily due to the improved operating resultsof Internet Broadcasting Systems, Inc. (“Internet Broadcasting”) andrelated Internet sites partially offset by a loss from our 

 

30

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investment in Ripe Digital Entertainment, Inc.(“Ripe TV”). Our share in the financial results of Internet Broadcastingentities was $2.8 million in the year ended December 31, 2005, as comparedto $1.6 million in the year ended December 31, 2004.

 

*Income taxes*.

 

Income tax expense was $3.9million in the year ended December 31, 2005, as compared to $76.4 millionin the year ended December 31, 2004, a decrease of $72.4 million or 94.9%.This decrease in income tax expense was primarily due to

(i)                   a decrease in income before income taxes from $200.3 million for theyear ended December 31, 2004 to $104.1 million for the year ended December 31,2005;

(ii)                $31.9million in tax benefits recorded as a result of the settlement of certain taxreturn examinations in the period ended June 30, 2005; and

(iii)             anet deferred tax benefit of $5.5 million as a result of Ohio tax law changes.

 

We expect our effective taxrate for the year ending December 31, 2006 to be approximately 39.5%.

 

The current and deferredportions of our income tax (benefit) provision were $(2.7) million and $6.6million, respectively, in the year ended December 31, 2005, compared to$56.2 million and $20.1 million, respectively, in the year ended December 31,2004. The decrease in current income taxes in 2005 compared to 2004 was dueprimarily to our agreement in June 2005 with the Internal Revenue Service(“IRS”) to settle certain examination matters for tax years 2001-2002,principally related to deductions of income tax basis associated with certainof our prior acquisitions. The settlement resulted in our recognition of $31.9million of reduced current income tax expense in 2005. The additional decreasein current income tax expense in 2005 compared to 2004 was primarily due tolower income before income tax in 2005 than in 2004. The decrease in deferredincome taxes in 2005 compared to 2004 was due primarily to the deferred taxbenefits received as a result of the book impairment losses recorded to the NewOrleans market’s FCC license and the Ohio tax law changes.

 

*Net income*.

 

Net income was $100.2million in the year ended December 31, 2005, as compared to $123.9 millionin the year ended December 31, 2004, a decrease of $23.7 million or 19.1%.This decrease was due to the items discussed above, primarily:

(i)                   a decrease of $107.3 million inOperating income; and

(ii)                a decrease of $8.9 million in Interestexpense, net – Capital Trust; partially offset by

(iii)             a decrease of $72.4 million in Incometaxes, in the year ended December 31, 2005, as compared to the year ended December 31, 2004.

 

*Year Ended December 31, 2004*

*Compared to Year Ended December 31,2003*

 
| ** **                                    | ** ** | **For the years ended December 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                    | ** ** | **2004**                                  | ** ** | **2003**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **(In Thousands)**                        | ** ** | ** ** | ** ** | ** **        | ** ** |
| Revenue                                       |       | $                                         | 779,879    |       | $          | 686,775           |       | $ | 93,104 |   | 13.6 | % |
| Station  Operating Expenses:                  |       |                                      |       |       |       |              |       |   |   |
| Salaries,  benefits and other operating costs |       | 355,641                                   |       | 330,519    |       | 25,122            |       | 7.6 | % |
| Amortization  of program rights               |       | 63,843                                    |       | 62,845     |       | 998               |       | 1.6 | % |
| Depreciation  and amortization                |       | 50,376                                    |       | 55,467     |       | (5,091            | )          | (9.2 | )% |
| Corporate,  general and administrative        |       | 25,268                                    |       | 19,122     |       | 6,146             |       | 32.1 | % |
| Operating  income                             |       | 284,751                                   |       | 218,822    |       | 65,929            |       | 30.1 | % |
|                                          |       |                                      |       |       |       |              |       |   |   |
| Interest  expense, net                        |       | 63,730                                    |       | 68,215     |       | (4,485            | )          | (6.6 | )% |
| Interest  expense, net – Capital Trust   |       | 18,675                                    |       | 15,000     |       | 3,675             |       | 24.5 | % |
| Other  expense                                |       | 3,700                                     |       | —     |       | 3,700             |       | N/A |   |
| Equity in  (income) loss of affiliates, net   |       | (1,648                                    | )          | (923       | )          | (725              | )          | 78.5 | % |
|                                          |       |                                      |       |       |       |              |       |   |   |
| Income  before income taxes                   |       | 200,294                                   |       | 136,530    |       | 63,764            |       | 46.7 | % |
| Income taxes                                  |       | 76,352                                    |       | 42,309     |       | 34,043            |       | 80.5 | % |
| Net income                                    |       | $                                         | 123,942    |       | $          | 94,221            |       | $ | 29,721 |   | 31.5 | % |

 

31

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*Total revenue*.

 

Total revenue in the yearended December 31, 2004 was $779.9 million, as compared to $686.8 millionin the year ended December 31, 2003, an increase of $93.1 million or13.6%. This increase was primarily attributable to the following factors:

(i)                   an increase in net political advertising revenue of approximately $68.6million, as a result of the cyclical nature of the television broadcastingbusiness, in which the demand for advertising by candidates running forpolitical office significantly increases in even-numbered years (such as 2004);

(ii)                Olympicrevenue of $19.0 million, as a result of the normal, cyclical nature of thetelevision broadcasting business, in which the Olympics occur in even numberedyears (such as 2004);

(iii)             anincrease in demand by national and local advertisers, particularly in thecategories of automotive, retail, furniture and housewares, financial services,telecommunications and pharmaceuticals; and

(iv)            embeddedin the above is the impact of WMTW-TV, which we acquired on July 1, 2004.

 

*Salaries, benefits and otheroperating costs.*

 

Salaries, benefits and otheroperating costs were $355.6 million in the year ended December 31, 2004,as compared to $330.5 million in the year ended December 31, 2003, anincrease of $25.1 million or 7.6%. This increase was primarily due to:

(i)                   an increase of approximately $7.2 million, resulting from salaryincreases and overtime related to the expansion to weekend morning news incertain markets and the coverage of breaking news stories, including hurricanesin the southeast;

(ii)                anincrease of approximately $5.1 million in employee benefits and pensionexpenses;

(iii)             higherexpense of $4.2 million from WMTW-TV which we acquired on July 1, 2004;

(iv)            $4.4million from higher sales commissions and bonuses resulting from increasedrevenue; and

(v)               anincrease of approximately $2.7 million in news gathering costs impacted byOlympic and political coverage, including conventions in Boston and New York.

 

*Amortization of program rights*.

 

Amortization of programrights was $63.8 million in the year ended December 31, 2004, as comparedto $62.8 million in the year ended December 31, 2003, an increase of $1.0million or 1.6%. This increase was primarily due to:

(i)                   a $2.2 million write-down of certain off-net programs; and

(ii)                theadditional programming cost for WMTW-TV, which we acquired on July 1,2004; partially offset by

(iii)             costsavings by replacing certain higher cost first-run programs; and

(iv)            adeclining rate of amortization for certain off-network syndicated programs,primarily at our stations in Kansas City, Missouri and Sacramento, California.

 

*Depreciation and amortization*.

 

Depreciation andamortization was $50.4 million in the year ended December 31, 2004, ascompared to $55.5 million in the year ended December 31, 2003, a decreaseof $5.1 million or 9.2%. Depreciation expense was $44.4 million in the yearended December 31, 2004, as compared to $45.9 million in the year ended December 31,2003, a decrease of $1.5 million or 3.4%. This decrease was primarily due to:

(i)                   the Company’s recording of approximately $4.6 million of accelerateddepreciation in the year ended December 31, 2003 on certain broadcastingequipment for which management re-evaluated the useful life; partially offsetby

(ii)                increaseddepreciation expense from recent investments in broadcast assets and theadditional depreciation from WMTW-TV, which we acquired on July 1, 2004.

 

Amortization was $6.0million in the year ended December 31, 2004, as compared to $9.5 millionin the year ended December 31, 2003, a decrease of $3.5 million,principally resulting from amortization related to a separately identifiedintangible asset, advertiser client base. In December 2001, we hadreclassified the remaining net book value of the advertiser client base togoodwill in the consolidated balance sheet and ceased amortization. In December 2003,we determined the advertiser client base should continue to be separatelyidentified from goodwill and, as an intangible asset with a finite useful lifeunder SFAS 142, be amortized over its estimated useful life. Accordingly, theCompany recorded a catch-up to amortization expense on the advertiser clientbase of $7.1 million in the fourth quarter of 2003. See Note 4 to theconsolidated financial statements.

 

32

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*Corporate, general andadministrative expenses*.

 

Corporate, general andadministrative expenses were $25.3 million in the year ended December 31,2004, as compared to $19.1 million in the year ended December 31, 2003, anincrease of $6.1 million or 32.1%. The increase was primarily due to:

(i)                   an increase in salaries and incentive costs; and

(ii)                anincrease in accounting and consulting fees incurred in connection withincreased public company compliance requirements, particularly Sarbanes-Oxley Section 404compliance.

 

*Operating income.*

 

Operating income was $284.8million in the year ended December 31, 2004, as compared to $218.8 millionin the year ended December 31, 2003, an increase of $65.9 million or30.1%. This net increase in operating income was due to the items discussedabove.

 

*Interest expense, net.*

 

Interest expense, net ofinterest income, was $63.7 million in the year ended December 31, 2004, ascompared to $68.2 million in the year ended December 31, 2003, a decreaseof $4.5 million or 6.6%. This decrease was primarily due to

(i)                   the maturity of the credit facility in April 2004. See Note 6 tothe consolidated financial statements; and

(ii)                anincrease in interest income of $1.2 million in the year ended December 31,2004 as compared to the year ended December 31, 2003.

 

*Interest Expense, net – CapitalTrust.*

 

Interest expense, net, tothe Capital Trust, was $18.7 million in the year ended December 31, 2004,compared to $15.0 million in the year ended December 31, 2003. Theincrease results from a $3.7 million premium paid for the redemption of the$72.2 million Series A Debentures.

 

*Other  expense.*

 

Other expense was $3.7 millionin the year ended December 31, 2004, as compared to zero in the year endedDecember 31, 2003. The $3.7 million represents a write-down to netrealizable value of the Company’s investment in ProAct. In December 2004,ProAct sold its assets to a third party as part of an overall plan ofliquidation.

 

*Equity in (income) of affiliates,net*.

 

Equity in (income) ofaffiliates was $1.6 million in the year ended December 31, 2004, ascompared to $0.9 million of income in the year ended December 31, 2003, anincrease of $0.7 million. See Note 3 to the consolidated financial statements.This increase was primarily due to the improved operating results of InternetBroadcasting and related Internet sites. Our share in the financial results ofInternet Broadcasting entities was $1.6 million in the year ended December 31,2004, as compared to $1.0 million in the year ended December 31, 2003. Ourrecorded share of the loss in the financial results of NBC/Hearst-ArgyleSyndication, LLC was zero in the year ended December 31, 2004, as theCompany has no book basis remaining in the initial investment in the entity,and a net loss of approximately $0.1 million in 2003.

 

*Income taxes*.

 

Income tax expense was $76.4million in the year ended December 31, 2004, as compared to $42.3 millionin the year ended December 31, 2003, an increase of $34.0 million or 80.5%.This increase in income tax expense was primarily due to

(i)             anincrease in income before income taxes from $136.5 million in the year ended December 31,2003 to $200.3 million in the year ended December 31, 2004; and

(ii)          anincrease in our effective tax rate from 31.0% in the year ended December 31,2003 to 38.1% in the year ended December 31, 2004, as our  2003 effective tax rate included

(a)          a taxbenefit of approximately $4.0 million, reflecting the  conclusion of  a  federal tax examination covering our 1998through 2000 tax years in the third quarter of 2003; and

(b)         a taxbenefit of  approximately  $5.4 million, relating to  the  closure of certain state matters in the fourth quarter of 2003.

 

The current and deferredportions of our income tax (benefit) provision were $56.2 million and $20.1million, respectively, in the year ended December 31, 2004, compared to$(0.9) million and $43.2 million, respectively, in the year ended December 31,2003. In the years ended December 31, 2004 and 2003, the current anddeferred portions of our 

 

33

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income tax expense were affected by increases incurrent tax expense and decreases in deferred tax expense of $57.1 million and$23.1 million, respectively, as well as cash tax payments, due to deductions ofincome tax basis associated with certain of our prior acquisitions. We receivedapproval from the Internal Revenue Service regarding the methodology fordetermining these deductions. See Note 9 to the consolidated financialstatements.

 

*Net income*.

 

Net income was $123.9million in the year ended December 31, 2004, as compared to $94.2 millionin the year ended December 31, 2003, an increase of $29.7 million or31.5%. This increase was due to the items discussed above, primarily:

(i)                   an increase of $65.9 million in Operating income; and

(ii)                adecrease of $4.5 million in Interest expense, net; partially offset by

(iii)             anincrease of $3.7 million in Interest expense, net – Capital Trust;

(iv)            anincrease of $3.7 million in Other (income) expense, net; and

(v)               anincrease of $34.0 million in Income taxes, in the year ended December 31,2004, as compared to the year ended December 31, 2003.

 

**Liquidity and Capital Resources**

 
| ** **                                 | ** ** | **For the years ended December 31,** | ** ** | **2005 vs 2004** | ** ** | **2004 vs 2003** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **(Dollars in Thousands)**       | ** ** | **2005**                                                      | ** ** | **2004**                   | ** ** | **2003**                   | ** ** | **$ Change** | ** ** | **$ Change** | ** ** |
| Net cash  provided by operating activities |       | $                                                             | 131,293    |                       | $          | 195,667                    |       | $ | 179,075 |   | $ | (64,374 | ) | $ | 16,592 |   |
| Net cash  used in investing activities     |       | $                                                             | (43,571    | )                          | $          | (74,104                    | )          | $ | (25,541 | ) | $ | 30,533 |   | $ | (48,563 | ) |
| Net cash  used in financing activities     |       | $                                                             | (59,865    | )                          | $          | (100,883                   | )          | $ | (86,448 | ) | $ | 41,018 |   | $ | (14,435 | ) |
|                                       |       |                                                          |       |                       |       |                       |       |   |   |   |   |
| Cash and  cash equivalents                 |       | $                                                             | 120,065    |                       | $          | 92,208                     |       | $ | 71,528 |   | $ | 27,857 |   | $ | 20,680 |   |
| Cash paid  during the year for:            |       |                                                          |       |                       |       |                       |       |   |   |   |   |
| Interest                                   |       | $                                                             | 64,320     |                       | $          | 63,502                     |       | $ | 65,829 |   | $ | 818 |   | $ | (2,327 | ) |
| Interest on  Note payable to Capital Trust |       | $                                                             | 9,750      |                       | $          | 18,675                     |       | $ | 15,000 |   | $ | (8,925 | ) | $ | 3,675 |   |
| Taxes, net  of refunds                     |       | $                                                             | 39,892     |                       | $          | 59,318                     |       | $ | 5,082 |   | $ | (19,426 | ) | $ | 54,236 |   |
| Dividends  paid on common stock            |       | $                                                             | 25,997     |                       | $          | 22,301                     |       | $ | — |   | $ | 3,696 |   | $ | 22,301 |   |
| Series A  Common Stock repurchases    |       | $                                                             | 16,385     |                       | $          | 10,920                     |       | $ | — |   | $ | 5,465 |   | $ | 10,920 |   |

 

As of December 31, 2005, the Company’scash and cash equivalents balance was $120.1 million, as compared to $92.2million as of December 31, 2004 and $71.5 million of December 31,2003. The net increases in cash and cash equivalents of $27.9 million during2005 and $20.7 million during 2004 were due to the factors described belowunder Operating Activities, Investing Activities, and Financing Activities.

 

*Operating Activities*

 

Net cash provided byoperating activities was approximately $131.3 million, $195.7 million and$179.1 million in the years ended December 31, 2005, 2004 and 2003,respectively. The decrease in net cash provided by operating activities of $64.4million in the year ended December 31, 2005 as compared to the year ended December 31,2004 was primarily due to

(i)                   the decrease in our revenue and net income, consistent with cyclicalchanges in revenue, as discussed above under “Total revenue,” and “Net income”;and

(ii)              changes in working capital, primarily changesin other assets, accounts payable and accrued liabilities, and otherliabilities.

 

The increase in net cashprovided by operating activities of $16.6 million in the year ended December 31,2004 as compared to the year ended December 31, 2003 was primarily due to

(i)                   the increase in our revenue and net income, consistent with cyclicalchanges in revenue; and

(ii)              changes in working capital and other assetsand liabilities, primarily due to an increase in accounts receivable resultingfrom the timing of collections and the fact that 2004 fourth quarter revenuewas largely comprised of political advertising which is paid prior to airing; adecrease in accounts payable and accrued liabilities resulting from the timingof payments; and an increase in the pension contribution of approximately $6million reflected in the changes in other assets and other liabilities.

 

*Investing Activities*

 

Net cash used in investingactivities was approximately $43.6 million, $74.1 million and $25.5 million inthe years ended December 31, 2005, 2004 and 2003, respectively. Investingactivities included investments in digital media companies in 2005, theacquisition of WMTW-TV in 2004 and investments in property, plant and equipmentin all periods.

 

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In 2005, we invested an aggregate of $8.5 million inRipe TV, USDTV and to conclude our joint venture with NBC Universal. In 2004,we acquired assets of WMTW-TV, channel 8, the ABC affiliate serving thePortland-Auburn, Maine television market, for approximately $38.1 million incash including acquisition costs. See Note 3 to the consolidated financialstatements.

 

During the years ended December 31, 2005, 2004,and 2003, our primary investing activities are equipment purchases related todigital, maintenance and special projects were as follows (in millions):

 
| ** **  | ** ** | **For the years ended December 31,** | ** ** |
|-------------|------------|-------------------------------------------|------------|
| ** **  | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Digital     |       | $                                         | 6.5        |   | $ | 1.9 |   | $ | 3.8 |   |
| Maintenance |       | 17.0                                      |       | 20.8 |   | 14.5 |   |
| Special     |       | 12.3                                      |       | 13.7 |   | 7.1 |   |
| Total       |       | $                                         | 35.8       |   | $ | 36.4 |   | $ | 25.4 |   |

 

For the year ending December 31, 2006, we have approved projectstotaling approximately $77 million in property, plant and equipment, althoughwe anticipate that actual expenditures in 2006 will be less. While themaintenance expenditures included in this total remain consistent with thehistorical levels, the high level of capital investment relates to severalspecial projects as follows:

(i)                                     $31 million onbuilding projects in Kansas City, Baltimore, Omaha and New York

(ii)                                  $15 million on newsacquisition and editing equipment

(iii)                               $5 million oninformation technology projects

(iv)                              $3 million on repairsrelated to damage caused by Hurricane Katrina

 

Since 1997 through December 31,2005, we have invested approximately $68 million in capital expendituresrelated to digital conversions, as mandated by the FCC.

 

*Financing Activities*

 

Net cash used in financingactivities was approximately $59.9 million, $100.9 million, and $86.4 millionin the years ended December 31, 2005, 2004 and 2003, respectively. In theyear ended December 31, 2005, we used cash provided by operatingactivities primarily to repurchase $15 million of our 7.5% senior notes due2027,  fund $26.0 million of dividends toour holders of Series A and B Common Stock and repurchase $16.4 million ofSeries A Common Stock. In the year ended December 31, 2004 we usedcash provided by operating activities to redeem the $70 million Series ADebentures issued by the Capital Trust (net of the redemption of common stockby the Capital Trust), fund $22.3 million of dividends to our holders of Series Aand B Common Stock, repurchase $10.9 million of Series A Common Stock andredeem $7.1 million of preferred stock. In the year ended December 31,2003, we used cash provided by operating activities to pay off the entire remainingbalance on our Credit Facility of $91.0 million.

 

Long-term debt outstandingas of December 31, 2005 and 2004, and the net decreases to long-term debtin the year ended December 31, 2005 were as follows (in thousands):

 
| **Long Term Debt**                   | ** ** | **Senior  Notes** | ** ** | **Private  Placement  Debt** | ** ** | **Capital Lease  Obligations** | ** ** | **Total** | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------------------|------------|--------------------------------|------------|-----------|------------|
| Balance  12/31/04                    |       | $                 | 432,110    |                         | $          | 450,000                        |       | $         | 111        |   | $ | 882,221 |   |
| Decreases:                           |       |              |       |                         |       |                           |       |      |       |
| Repurchase  of Senior Notes due 2027 |       | (15,000           | )          |                         |       |                           |       | (15,000   | )          |
| Reclassification  to current portion |       | —            |       | (90,000                      | )          | (51                            | )          | (90,051   | )          |
| Balance  12/31/05                    |       | $                 | 417,110    |                         | $          | 360,000                        |       | $         | 60         |   | $ | 777,170 |   |

 

Our private placement debt has sinking fund paymentsof $90 million per year beginning in December 2006.

 

Certain of our debtobligations contain certain financial and other covenants and restrictions onthe Company. None of these covenants or restrictions include any triggersexplicitly tied to the Company’s credit ratings or stock price. We are incompliance with all such covenants and restrictions as of December 31,2005. All of our long-term debt obligations as of December 31, 2005,exclusive of capital lease obligations, bear interest at a fixed rate. Ourcredit ratings for long-term debt obligations, respectively, were BBB- byStandard & Poor’s and Fitch Ratings, and Baa3 by Moody’s Investors Service, as of December 31,2005. Such credit ratings are considered to be investment grade.

 

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On April 15, 2005, weentered into a five year $250 million credit facility with a consortium ofbanks led by JP Morgan Chase, Bank of America, Wachovia Bank, BNP Paribas andHarris Nesbitt. The new credit facility can be used for general corporatepurposes including working capital, investments, acquisitions, debt repaymentand dividend payments. On the same day, we capitalized $1.1 million of costsrelated to the credit facility. Outstanding principal balances under the creditfacility will bear interest at our option at either LIBOR or the alternate baserate (“ABR”), plus the applicable margin. The applicable margin for ABR loansis zero. The applicable margin for LIBOR loans varies between 0.50% and 1.00%depending on the ratio of our total debt to earnings before interest, taxes,depreciation and amortization as defined by the credit agreement (the “LeverageRatio”). The ABR is the greater of (i) the prime rate or (ii) theFederal Funds Effective Rate in effect plus 0.5%. We are required to pay acommitment fee based on the unused portion of the Credit Facility. Thecommitment fee ranges from 0.15% to 0.25% depending on our Leverage Ratio. Thecredit facility is a general unsecured obligation of the Company. We have notborrowed under this credit facility as of December 31, 2005.

 

On December 31,2004, we redeemed a portion of the Series A Debentures. We originallyissued $206.2 million of Series A and Series B Debentures on December 20,2001 to our wholly-owned unconsolidated subsidiary Capital Trust in exchangefor the proceeds of a $200.0 million private placement of Redeemable ConvertiblePreferred Securities which the Capital Trust issued to institutional investors.We redeemed the Series A Debentures in their entirety in the aggregateprincipal amount of $72.2 million, at a price of $52.625 per $50.00 principalamount in accordance with the terms of the indenture. The redemption of the Series ADebentures triggered a simultaneous redemption by the Capital Trust of 1.4million shares of its Series A Securities, as well as the redemption of43,299 shares of the Capital Trust’s common stock, which were held by us. The Series ASecurities were effectively convertible, at the option of the holder, intoshares of our Series A Common Stock at a rate of 2.005133 shares of Series ACommon Stock per $50 principal amount of Series A Debentures (an effectiveconversion price of $24.9360). The redemption of the Series A Debentureswill remove the potential dilution of 2.8 million shares and reduce Interestexpense, net – Capital Trust by $5.3 million per year starting in 2005. We recognized a pre-tax loss of$3.7 million related to the redemption premium, which is included in Interestexpense, net – Capital Trust in the Consolidated Statement of Income for theyear ended December 31, 2004. See Note 7 to the consolidated financialstatements.

 

We redeemed 1,600 shares of Series APreferred Stock on January 1, 2004 and 5,468 shares of Series BPreferred Stock on December 10, 2004 for an aggregate amount of $7.1million. We redeemed 5,781 shares outstanding of Series A Preferred Stockand 5,470 shares outstanding of Series B Preferred Stock for $11.3 millionon January 1, 2005. On February 27, 2003, a holder of our Series APreferred Stock exercised the right to convert 1,900 shares of Series APreferred Stock into 89,445 shares of Series A Common Stock.

 

During 2005,our Board of Directors declared quarterly cash dividends on our Series Aand Series B Common Stock for a total amount of $26.0 million. Included inthis amount was $18.0 million payable to Hearst. During 2004, our Boardof Directors declared quarterly cash dividends on our Series A and Series BCommon Stock for a total amountof $23.2 million. Included in this amount was $15.4 million payable to Hearst. SeeNote 14 to the consolidated financial statements.

 

Between May 1998 and December 31,2005, we have spent $108.0 million to repurchase 4.3 million shares of Series ACommon Stock at an average price of $24.97. During the year ended December 31,2005, we spent $16.4 million to repurchase 669,227 shares of Series ACommon Stock at an average price of $24.48 per share. In May 1998, ourBoard of Directors authorized the repurchase of up to $300 million of itsoutstanding Series A Common Stock. Such repurchases may be effectedfrom time to time in the open market or in private transactions, subject tomarket conditions and management’s discretion. We cannot assure you that wewill make such repurchases in the future or, if we do occur, what the terms ofsuch repurchases will be.

 

*Contractual Obligations*

 

The following tablesummarizes our future cash obligations as of December 31, 2005 underexisting debt repayment schedules, non-cancelable leases, future payments forprogram rights, employment and talent contracts and Note payable to CapitalTrust:

 
| ** **                                      | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| Long-term  debt(1)(2)                           |       | $          | 90,047     |       | $          | 215,052    |       | $          | 90,008     |       | $          | 90,000         |       | $          | 90,000     |   | $ | 292,110 |   | $ | 867,217 |   |
| Net  non-cancelable operating lease obligations |       | 4,911      |       | 3,904      |       | 3,089      |       | 2,538      |       | 2,073      |       | 14,636         |       | 31,151     |       |
| Program  rights                                 |       | 66,641     |       | 55,875     |       | 55,494     |       | 52,555     |       | 44,369     |       | 17,438         |       | 292,372    |       |
| Employee,  talent and other contracts           |       | 71,660     |       | 40,976     |       | 13,022     |       | 2,373      |       | 1,311      |       | 411            |       | 129,753    |       |
| Note payable  to Capital Trust(2)               |       | —     |       | —     |       | —     |       | —     |       | —     |       | 134,021        |       | 134,021    |       |
| Common Stock  Dividend                          |       | 6,486      |       | —     |       | —     |       | —     |       | —     |       | —         |       | 6,486      |       |
|                                            |       | $          | 239,745    |       | $          | 315,807    |       | $          | 161,613    |       | $          | 147,466        |       | $          | 137,753    |   | $ | 458,616 |   | $ | 1,461,000 |   |

 

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(1)          Includes capital leaseobligations.

(2)          Excludesinterest.

 

The above table does notinclude cash requirements for the payment of any dividends that our Board ofDirectors may decide to declare in the future on our Series A and Series BCommon Stock. See Note 10 to the consolidated financial statements.

 

We anticipate that our primarysources of cash, which include current cash balances, net cash provided byoperating activities and our unused $250 million revolver, will be sufficientto finance the operating and working capital requirements of our stations, ourdebt service requirements, sinking fund payment, anticipated capitalexpenditures, dividend payments, and our other obligations for both the next 12months and the foreseeable future thereafter.

 

**Impact of Inflation**

 

The impact of inflation onour operations has not been significant to date. There can be no assurance,however, that a high rate of inflation in the future would not have an adverseimpact on our operating results.

 

**Forward-Looking Statements**

 

Thisreport****includes****or incorporates forward-looking statements.We base these forward-looking statements on our current expectations andprojections about future events. These forward looking statements generally canbe 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. Theforward-looking statements contained in this report, concerning, among otherthings, trends and projections involving revenue, income, earnings, cash flow,liquidity, operating expenses, assets, liabilities, capital expenditures,dividends and capital structure, involve risks and uncertainties, and aresubject to change based on various important factors. Those factors include theimpact on our operations from

 

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

 

•                  Local regulatoryactions and conditions in the areas in which our stations operate;

 

•                  Competition in thebroadcast television markets we serve;

 

•                  Our ability toobtain quality programming for our television stations;

 

•                  Successfulintegration of television stations we acquire;

 

•                  Pricingfluctuations in local and national advertising;

 

•                  Changes in nationaland regional economies;

 

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

 

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

 

For a discussion of additional risk factors that areparticular to our business, please refer to Part I, Item 1A. “Risk Factors”beginning on page 14. These and other matters we discuss in this report,or in the documents we incorporate by reference into this report, may causeactual results to differ from those we describe. We undertake no obligation toupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

**New Accounting Pronouncements**

 

In June 2005, the EITFreached a consensus on EITF No. 05-6, *Determining theAmortization Period for Leasehold Improvements Purchased after Lease Inceptionor Acquired in a Business Combination* (“EITF 05-6”), which wasmodified in September 2005. EITF 05-6 provides guidance on whether a leaseterm should be reevaluated at the time of a purchase business combination orwhen leasehold improvements are purchased after lease inception. EITF 05-6 iseffective for leasehold improvements that are purchased or acquired inreporting periods beginning after June 29, 2005. The adoption of thisstandard did not have a material impact on the Company’s consolidated financialstatements.

 

In June 2005, theEmerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 04-10,*Determining Whether to Aggregate OperatingSegments That Do Not Meet the Quantitative Thresholds,* (“EITF No. 04-10”). EITF 04-10 providesguidance on FAS 131, *Disclosures about Segmentsof an Enterprise and Related Information* and how to determinewhether operating segments which do not meet certain quantitative thresholds may beaggregated 

 

37

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and reported as a single operating segment. The EITFis effective for fiscal years ending after September 15, 2005, andcorresponding information for earlier periods, including interim periods,should be restated unless it is impractical to do so. The Company has adoptedthe guidance as of the year ending December 31, 2005 and the adoption didnot have a material impact on our financial position or results of operations.

 

In May 2005, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 154, *Accounting Changes and Error Corrections* (“SFAS 154”). SFAS154 provides guidance on accounting for and reporting of accounting changes anderror corrections. It requires changes in accounting principle to be appliedretroactively to prior periods as if the principle had always been used. Previously,voluntary changes in accounting principle were required to be recognizedcumulatively in net income in the period of change. SFAS 154 is effective foraccounting changes and error corrections made in fiscal years beginning after December 15,2005 with early adoption encouraged. The Company did not make any accountingchanges or error corrections during the year ended December 31, 2005 andtherefore, the adoption of SFAS 154 did not have any material impact on ourfinancial position or results of operations.

 

In March 2005, the FASBissued Financial Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143,* (“FIN 47”). FIN 47 clarifies that an entitymust record a liability for a conditional asset retirement obligation if thefair value of the obligation can be reasonably estimated. FIN 47 is effectiveno later than the end of fiscal years ending after December 15, 2005. Therefore,FIN 47 is effective for the year ending December 31, 2005. The adoption ofFIN 47 did not have a material impact on our financial position or results ofoperations.

 

In December 2004, theFASB issued Statement No. 123(R), *Share-Based Payment*(“SFAS 123(R)”), which requires companies to measure and recognize compensationexpense for all stock-based payments at fair value. The Company will adopt SFAS123(R) on January 1, 2006 using the modified prospective approach. TheCompany expects the impact to the 2006 results to be approximately $8.1million.

 

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

 

In March 2004, the EITFreached a consensus on EITF Issue No. 03-1, The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments (“EITFNo. 03-1”), which provides guidance on the meaning of the phraseother-than-temporary impairment and its applications to several types ofinvestments including debt securities classified as held-to-maturity andavailable-for-sale as well as cost-method investments. Additional guidance onthe evaluation of whether the impairment on investments not accounted for usingthe equity method is other then temporary and how to measure the investment wasprovided in FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.” we adopted EITF 03-1for the year ended December 31, 2004. HATV has adopted FSP FAS 115-1 andFAS 124-1 as of the year ended December 31, 2005 and evaluated all costmethod investments for any impairment loss that is other than temporary inaccordance with this guidance.

 

In December 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”)was signed into law. The Act provides a federal subsidy to sponsors of retireehealthcare benefit plans that provide a prescription drug benefit that is atleast actuarially equivalent to Medicare Part D. In May 2004, theFASB staff issued FASB Staff Position No. 106-2, *Accounting and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003*which supersedes FASB Staff Position No. 106-1, *Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003,* and iseffective for interim or annual periods beginning after June 15, 2004. TheCompany determined that the Act is not a “significant event” as defined by SFAS106, *Employers’ Accounting forPostretirement Benefits Other Than Pensions*. The effect of this Actdid not have a material effect on our consolidated financial statements.

 

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**ITEM 7A:    QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our long-term debtobligations as of December 31, 2005 are at fixed interest rates andtherefore are not sensitive to fluctuations in interest rates. See Note 6 tothe consolidated financial statements. The following table presents the fairvalue of long-term debt obligations (excluding capital lease obligations) as ofDecember 31, 2005 and 2004 and the future cash flows by expected maturitydates, based upon outstanding principal balances as of December 31, 2004.See Note 17 to the consolidated financial statements.

 
| ** **                     | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **Expected Maturity**      | ** ** | **Fair**                   | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                     | ** ** | **2006**                   | ** ** | **2007**                   | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Value** | ** ** | **Value** | ** ** | **Value** | ** ** |
| **Long-term  debt:**           | ** ** | **(In thousands)**         | ** ** |
| **Fixed rate:**                |       |                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Senior Notes                   |       | —                     |       | $                          | 125,000    |   | — |   | — |   | — |   | $ | 292,110 |   | $ | 417,110 |   | $ | 434,830 |   | $ | 432,110 |   | $ | 479,548 |   |
| Private Placement Debt         |       | $                          | 90,000     |                       | $          | 90,000 |   | $ | 90,000 |   | $ | 90,000 |   | $ | 90,000 |   | — |   | $ | 450,000 |   | $ | 484,676 |   | $ | 450,000 |   | $ | 496,937 |   |
| Note payable to  Capital Trust |       | —                     |       | —                     |       | — |   | — |   | — |   | $ | 134,021 |   | $ | 134,021 |   | $ | 144,546 |   | $ | 134,021 |   | $ | 155,334 |   |
|                                |            |                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The annualized weightedaverage interest rate for long-term debt outstanding is 7.2% for the yearsended December 31, 2005 and 2004. See Note 6 to the consolidated financialstatements. The Note payable to Capital Trust carries a fixed interest rate of7.5%. See Note 7 to the consolidated financial statements.

 

Our debt obligations containcertain financial and other covenants and restrictions on the Company. Suchcovenants and restrictions do not include any triggers of default related toour overall credit rating or stock prices. As of December 31, 2005, wewere in compliance with all such covenants and restrictions.

 

Our Credit Facility providesthat all outstanding balances will become due and payable at such time asHearst’s (and certain of its affiliates’) equity ownership in us becomes lessthan 35% of the total equity, and Hearst and such affiliates no longer have theright to elect a majority of the members of our Board of Directors.

 

As of December 31,2005, we are not involved in any derivative financial instruments. However, we may considercertain interest rate risk strategies in the future.

 

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**ITEM 8.   FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**INDEX TOFINANCIAL STATEMENTS**

 
| ** **                                                                                                                                | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** **                                                                                                                                |       |     |
| **Hearst-Argyle  Television, Inc.**                                                                                                  |       |     |
| Report  of Independent Registered Public Accounting Firm                                                                                  |       | 41       |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                                        |       | 42       |
| Consolidated  Statements of Income for the Years Ended December 31, 2005, 2004 and  2003                                             |       | 43       |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the Years  Ended December 31, 2005, 2004 and 2003 |       | 44       |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and  2003                                         |       | 45       |
| Notes to Consolidated Financial Statements                                                                                                |       | 46       |

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

To the Board ofDirectors and Stockholders ofHearst-Argyle Television, Inc.

 

We have audited theaccompanying consolidated balance sheets of Hearst-Argyle Television, Inc.and its subsidiaries (the “Company”) as of December 31, 2005 and 2004, andthe related consolidated statements of income, stockholders’ equity andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2005. Our audits also included the consolidatedfinancial statement schedule listed in the Index at Item 15. Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on the consolidated financial statements and financial statement schedule basedon our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion,such consolidated financial statements present fairly, in all materialrespects, the financial position of the Company at December 31, 2005 and2004, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2005, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

 

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2005, based on thecriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 23,2006 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

 

 
| /s/  Deloitte & Touche LLP |   |
|--------------------------------|--------|
|                           |   |
| New  York, New York            |
| February 23,  2006        |

 

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**HEARST-ARGYLE TELEVISION, INC.**

 

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                                                                                                                                               | ** ** | **December 31,  2005**           | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                               | ** ** | **(In thousands, except share data)** | ** ** |
| **Assets**                                                                                                                                                                                                                               |       |                                  |       |                        |       |
| Current  assets:                                                                                                                                                                                                                         |       |                                  |       |                        |       |
| Cash and  cash equivalents                                                                                                                                                                                                               |       | $                                     | 120,065    |                        | $          | 92,208 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $2,943 and $3,284 in  2005 and 2004, respectively                                                                                                                        |       | 157,672                               |       | 147,536                     |       |
| Program and  barter rights                                                                                                                                                                                                               |       | 46,807                                |       | 55,242                      |       |
| Deferred  income tax asset                                                                                                                                                                                                               |       | 4,029                                 |       | 4,979                       |       |
| Other                                                                                                                                                                                                                                    |       | 9,153                                 |       | 6,541                       |       |
| Total  current assets                                                                                                                                                                                                                    |       | 337,726                               |       | 306,506                     |       |
| Property,  plant and equipment:                                                                                                                                                                                                          |       |                                  |       |                        |       |
| Land,  building and improvements                                                                                                                                                                                                         |       | 152,480                               |       | 149,720                     |       |
| Broadcasting  equipment                                                                                                                                                                                                                  |       | 373,571                               |       | 355,075                     |       |
| Office  furniture, equipment and other                                                                                                                                                                                                   |       | 42,024                                |       | 36,880                      |       |
| Construction  in progress                                                                                                                                                                                                                |       | 5,580                                 |       | 9,646                       |       |
|                                                                                                                                                                                                                                     |       | 573,655                               |       | 551,321                     |       |
| Less  accumulated depreciation                                                                                                                                                                                                           |       | (294,416                              | )          | (259,481                    | )          |
| Property,  plant and equipment, net                                                                                                                                                                                                      |       | 279,239                               |       | 291,840                     |       |
| Intangible  assets, net                                                                                                                                                                                                                  |       | 2,396,086                             |       | 2,428,265                   |       |
| Goodwill                                                                                                                                                                                                                                 |       | 731,687                               |       | 734,746                     |       |
| Total  intangible assets and goodwill, net                                                                                                                                                                                               |       | 3,127,773                             |       | 3,163,011                   |       |
| Other  assets:                                                                                                                                                                                                                           |       |                                  |       |                        |       |
| Deferred  financing costs, net of accumulated amortization of $16,568 and $14,144 in  2005 and 2004, respectively                                                                                                                        |       | 11,276                                |       | 12,452                      |       |
| Investments                                                                                                                                                                                                                              |       | 31,321                                |       | 26,362                      |       |
| Program and  barter rights, noncurrent                                                                                                                                                                                                   |       | 1,312                                 |       | 1,884                       |       |
| Pension and  other assets                                                                                                                                                                                                                |       | 43,712                                |       | 40,085                      |       |
| Total other  assets                                                                                                                                                                                                                      |       | 87,621                                |       | 80,783                      |       |
| Total assets                                                                                                                                                                                                                             |       | $                                     | 3,832,359  |                        | $          | 3,842,140 |   |
|                                                                                                                                                                                                                                     |       |                                  |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                           |       |                                  |       |                        |       |
| Current  liabilities:                                                                                                                                                                                                                    |       |                                  |       |                        |       |
| Current  portion of long-term debt                                                                                                                                                                                                       |       | $                                     | 90,047     |                        | $          | 180 |   |
| Accounts  payable                                                                                                                                                                                                                        |       | 15,256                                |       | 8,901                       |       |
| Accrued  liabilities                                                                                                                                                                                                                     |       | 51,133                                |       | 63,640                      |       |
| Program and  barter rights payable                                                                                                                                                                                                       |       | 47,285                                |       | 57,056                      |       |
| Payable to  The Hearst Corporation                                                                                                                                                                                                       |       | 6,981                                 |       | 4,846                       |       |
| Other liabilities                                                                                                                                                                                                                        |       | 6,868                                 |       | 3,285                       |       |
| Total  current liabilities                                                                                                                                                                                                               |       | 217,570                               |       | 137,908                     |       |
| Program and  barter rights payable, noncurrent                                                                                                                                                                                           |       | 1,818                                 |       | 3,107                       |       |
| Long-term  debt                                                                                                                                                                                                                          |       | 777,170                               |       | 882,221                     |       |
| Note payable  to Capital Trust                                                                                                                                                                                                           |       | 134,021                               |       | 134,021                     |       |
| Deferred  income tax liability                                                                                                                                                                                                           |       | 845,272                               |       | 839,746                     |       |
| Pension and  other liabilities                                                                                                                                                                                                           |       | 35,049                                |       | 80,049                      |       |
| Total  noncurrent liabilities                                                                                                                                                                                                            |       | 1,793,330                             |       | 1,939,144                   |       |
|                                                                                                                                                                                                                                     |       |                                  |       |                        |       |
| Series A  and B preferred stock to be redeemed                                                                                                                                                                                      |       | —                                |       | 11,251                      |       |
| Commitments  and contingencies                                                                                                                                                                                                           |       |                                  |       |                        |       |
|                                                                                                                                                                                                                                     |       |                                  |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                                              |       |                                  |       |                        |       |
| Preferred  stock, par value $0.01 per share, 1,000,000 shares authorized                                                                                                                                                                 |       | —                                |       | —                      |       |
| Series A  common stock, par value $0.01 per share, 200,000,000 shares authorized at December 31,  2005 and 2004, and 55,677,979 and 55,212,326 shares issued and outstanding at  December 31, 2005 and 2004, respectively |       | 557                                   |       | 552                         |       |
| Series B  common stock, par value $0.01 per share, 100,000,000 shares authorized at December 31,  2005 and 2004, and 41,298,648 shares issued and outstanding at December 31,  2005 and 2004                              |       | 413                                   |       | 413                         |       |
| Additional  paid-in capital                                                                                                                                                                                                              |       | 1,291,388                             |       | 1,281,474                   |       |
| Retained  earnings                                                                                                                                                                                                                       |       | 643,414                               |       | 569,178                     |       |
| Accumulated  other comprehensive loss, net of tax benefit of $4,171 and $4,073 in 2005 and  2004, respectively                                                                                                                           |       | (6,309                                | )          | (6,161                      | )          |
| Treasury  stock, at cost, 4,324,879 and 3,655,652 shares of Series A common stock  at December 31, 2005 and 2004, respectively                                                                                                 |       | (108,004                              | )          | (91,619                     | )          |
| Total  stockholders’ equity                                                                                                                                                                                                         |       | 1,821,459                             |       | 1,753,837                   |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                         |       | $                                     | 3,832,359  |                        | $          | 3,842,140 |   |

 

See notes to consolidatedfinancial statements.

 

42

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**HEARST-ARGYLETELEVISION, INC.**

 

**Consolidated Statements of Income**

 
| ** **                                       | ** ** | **Years Ended December 31,**          | ** ** |
|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                       | ** ** | **(In thousands, except per share  data)** | ** ** |
| Total revenue                                    |       | $                                          | 706,883    |   | $ | 779,879 |   | $ | 686,775 |   |
|                                             |       |                                       |       |   |   |   |   |
| Station operating expenses:                      |       |                                       |       |   |   |   |   |
| Salaries,  benefits and other operating costs    |       | 364,421                                    |       | 355,641 |   | 330,519 |   |
| Amortization  of program rights                  |       | 60,912                                     |       | 63,843 |   | 62,845 |   |
| Depreciation  and amortization                   |       | 51,728                                     |       | 50,376 |   | 55,467 |   |
| Impairment  loss                                 |       | 29,235                                     |       | — |   | — |   |
| Corporate, general and administrative  expenses  |       | 23,149                                     |       | 25,268 |   | 19,122 |   |
| Operating income                                 |       | 177,438                                    |       | 284,751 |   | 218,822 |   |
|                                             |       |                                       |       |   |   |   |   |
| Interest expense, net                            |       | 63,375                                     |       | 63,730 |   | 68,215 |   |
| Interest expense, net – Capital Trust       |       | 9,750                                      |       | 18,675 |   | 15,000 |   |
| Other expense                                    |       | 2,500                                      |       | 3,700 |   | — |   |
| Equity in (income) of affiliates, net            |       | (2,321                                     | )          | (1,648 | ) | (923 | ) |
|                                             |       |                                       |       |   |   |   |   |
| Income before income taxes                       |       | 104,134                                    |       | 200,294 |   | 136,530 |   |
|                                             |       |                                       |       |   |   |   |   |
| Income taxes                                     |       | 3,917                                      |       | 76,352 |   | 42,309 |   |
| Net income                                       |       | 100,217                                    |       | 123,942 |   | 94,221 |   |
|                                             |       |                                       |       |   |   |   |   |
| Less preferred stock dividends                   |       | (2                                         | )          | (1,067 | ) | (1,211 | ) |
| Income applicable to common stockholders         |       | $                                          | 100,215    |   | $ | 122,875 |   | $ | 93,010 |   |
|                                             |       |                                       |       |   |   |   |   |
| Income per common share—basic:              |       | $                                          | 1.08       |   | $ | 1.32 |   | $ | 1.00 |   |
| Number of common shares used in the  calculation |       | 92,826                                     |       | 92,928 |   | 92,575 |   |
|                                             |       |                                       |       |   |   |   |   |
| Income per common share—diluted:            |       | $                                          | 1.08       |   | $ | 1.30 |   | $ | 1.00 |   |
| Number of common shares used in the  calculation |       | 93,214                                     |       | 101,406 |   | 92,990 |   |
|                                             |       |                                       |       |   |   |   |   |
| Dividends per common share—declared         |       | $                                          | 0.28       |   | $ | 0.25 |   | $ | 0.06 |   |

 

See notes to consolidatedfinancial statements.

 

43

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**HEARST-ARGYLETELEVISION, INC.**

 

**Consolidated Statements of Stockholders’ Equity andComprehensive Income**

 
| **(In thousands, except per share data)**            | ** ** | **Series A** | ** ** | **Series B** | ** ** | **Preferred  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated****Other  Comprehensive  (Loss)** | ** ** | **Treasury  Stock** | ** ** | **Total**  | ** ** | **Total  Comprehensive  Income** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|----------------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------------------------|------------|---------------------|------------|------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | ** **        | ** ** | ** **        | ** ** | ** **           | ** ** | ** **                       | ** ** | ** **             | ** ** | ** **                                      | ** ** | ** **          | ** ** | ** ** | ** ** | ** **                       | ** ** |
| **Balances—January 1, 2003**                                        | ** ** | $                 | 543        |              | $          | 413                  |       | $                                | 2          |                   | $          | 1,281,288                                       |       | $                   | 382,093    |       | $          | (4,378                           | )          | $ | (80,699 | ) | $ | 1,579,262 | ** ** | ** ** | ** ** |
| Net income                                                                    |       | —            |       | —            |       | —               |       | —                           |       | 94,221                 |       | —                                          |       | —              |       | 94,221     |       | $                                | 94,221     |   |
| Additional minimum pension liability, net of tax  benefit of $552             |       | —            |       | —            |       | —               |       | —                           |       | —                 |       | (871                                            | )          | —              |       | (871       | )          | (871                             | )          |
| Dividends on preferred stock ($65.00 per share)                               |       | —            |       | —            |       | —               |       | —                           |       | (1,211                 | )          | —                                          |       | —              |       | (1,211     | )          | $                                | 93,350     |   |
| Dividends on common stock ($0.06 per share)                                   |       | —            |       | —            |       | —               |       | —                           |       | (5,566                 | )          | —                                          |       | —              |       | (5,566     | )          |                             |       |
| Redemption of Series A Preferred Stock                                   |       | 1                 |       | —            |       | —               |       | (1                               | )          | —                 |       | —                                          |       | —              |       | —     |       |                             |       |
| Employee stock purchase plan proceeds                                         |       | 1                 |       | —            |       | —               |       | 1,876                            |       | —                 |       | —                                          |       | —              |       | 1,877      |       |                             |       |
| Stock options exercised                                                       |       | 2                 |       | —            |       | —               |       | 4,148                            |       | —                 |       | —                                          |       | —              |       | 4,150      |       |                             |       |
| Tax benefit from stock plans                                                  |       | —            |       | —            |       | —               |       | 520                              |       | —                 |       | —                                          |       | —              |       | 520        |       |                             |       |
| Exercise of option to redeem Series A and Series B  Preferred Stock |       | —            |       | —            |       | (2                   | )          | (18,317                          | )          | —                 |       | —                                          |       | —              |       | (18,319    | )          |                             |       |
| **Balances—December 31, 2003**                                      |       | 547               |       | 413               |       | —               |       | 1,269,514                        |       | 469,537                |       | (5,249                                          | )          | (80,699             | )          | 1,654,063  |       |                             |       |
|                                                                          |       |              |       |              |       |                 |       |                             |       |                   |       |                                            |       |                |       |       |       |                             |       |
| Net income                                                                    |       | —            |       | —            |       | —               |       | —                           |       | 123,942                |       | —                                          |       | —              |       | 123,942    |       | $                                | 123,942    |   |
| Additional minimum pension liability, net of tax  benefit of $602             |       | —            |       | —            |       | —               |       | —                           |       | —                 |       | (912                                            | )          | —              |       | (912       | )          | (912                             | )          |
| Dividends on preferred stock ($65.00 per share)                               |       | —            |       | —            |       | —               |       | —                           |       | (1,067                 | )          | —                                          |       | —              |       | (1,067     | )          | $                                | 123,030    |   |
| Dividends on common stock ($0.25 per share)                                   |       | —            |       | —            |       | —               |       | —                           |       | (23,234                | )          | —                                          |       | —              |       | (23,234    | )          |                             |       |
| Employee stock purchase plan proceeds                                         |       | 1                 |       | —            |       | —               |       | 2,027                            |       | —                 |       | —                                          |       | —              |       | 2,028      |       |                             |       |
| Stock options exercised                                                       |       | 4                 |       | —            |       | —               |       | 8,629                            |       | —                 |       | —                                          |       | —              |       | 8,633      |       |                             |       |
| Tax benefit from stock plans                                                  |       | —            |       | —            |       | —               |       | 1,304                            |       | —                 |       | —                                          |       | —              |       | 1,304      |       |                             |       |
| Treasury stock purchased – Series A Common Stock  (458,500 shares)  |       | —            |       | —            |       | —               |       | —                           |       | —                 |       | —                                          |       | (10,920             | )          | (10,920    | )          |                             |       |
| **Balances—December 31, 2004**                                      |       | 552               |       | 413               |       | —               |       | 1,281,474                        |       | 569,178                |       | (6,161                                          | )          | $                   | (91,619    | )          | $          | 1,753,837                        |       |   |   |
|                                                                          |       |              |       |              |       |                 |       |                             |       |                   |       |                                            |       |                |       |       |       |                             |       |
| Net income                                                                    |       | —            |       | —            |       | —               |       | —                           |       | 100,217                |       | —                                          |       | —              |       | 100,217    |       | $                                | 100,217    |   |
| Additional minimum pension liability, net of tax  benefit of $98              |       | —            |       | —            |       | —               |       | —                           |       | —                 |       | (148                                            | )          | —              |       | (148       | )          | (148                             | )          |
| Dividends on preferred stock ($65.00 per share)                               |       | —            |       | —            |       | —               |       | —                           |       | (2                     | )          | —                                          |       | —              |       | (2         | )          | $                                | 100,069    |   |
| Dividends on common stock ($0.28 per share)                                   |       | —            |       | —            |       | —               |       | —                           |       | (25,979                | )          | —                                          |       | —              |       | (25,979    | )          |                             |       |
| Employee stock purchase plan proceeds                                         |       | 1                 |       | —            |       | —               |       | 2,192                            |       | —                 |       | —                                          |       | —              |       | 2,193      |       |                             |       |
| Stock options exercised                                                       |       | 4                 |       | —            |       | —               |       | 6,757                            |       | —                 |       | —                                          |       | —              |       | 6,761      |       |                             |       |
| Tax benefit from stock plans                                                  |       | —            |       | —            |       | —               |       | 965                              |       | —                 |       | —                                          |       | —              |       | 965        |       |                             |       |
| Treasury stock purchased – Series A Common Stock  (669,227 shares)  |       | —            |       | —            |       | —               |       | —                           |       | —                 |       | —                                          |       | (16,385             | )          | (16,385    | )          |                             |       |
| **Balances—December 31, 2005**                                      |       | $                 | 557        |              | $          | 413                  |       | —                           |       | $                      | 1,291,388  |                                            | $          | 643,414             |       | $          | (6,309     | )                                | $          | (108,004 | ) | $ | 1,821,459 |   |   |   |
|                                                                               |            |                   |            |                   |            |                      |            |                                  |            |                        |            |                                                 |            |                     |            |            |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

See notes to consolidatedfinancial statements.

 

44

----

 

**HEARST-ARGYLETELEVISION, INC.**

 

**Consolidated Statements of Cash Flows**

 
| ** **                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | **(In thousands)**                | ** ** |
| **Operating  Activities**                                                          |       |                              |       |   |   |   |   |
| Net income                                                                         |       | $                                 | 100,217    |   | $ | 123,942 |   | $ | 94,221 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                              |       |   |   |   |   |
| Depreciation                                                                       |       | 45,724                            |       | 44,376 |   | 45,937 |   |
| Amortization  of intangible assets                                                 |       | 6,003                             |       | 6,000 |   | 9,530 |   |
| Amortization  of deferred financing costs                                          |       | 2,424                             |       | 1,943 |   | 2,910 |   |
| Amortization  of program rights                                                    |       | 60,912                            |       | 63,843 |   | 62,845 |   |
| Impairment  loss                                                                   |       | 29,235                            |       | — |   | — |   |
| Program  payments                                                                  |       | (64,104                           | )          | (62,247 | ) | (62,039 | ) |
| Deferred  income taxes                                                             |       | 6,574                             |       | 20,116 |   | 43,172 |   |
| Equity in  (income) of affiliates, net                                             |       | (2,321                            | )          | (1,648 | ) | (923 | ) |
| Provision  for doubtful accounts                                                   |       | 888                               |       | 125 |   | 298 |   |
| (Gain)/loss  on disposal of fixed assets                                           |       | (1,210                            | )          | 977 |   | 86 |   |
| Distributions  from affiliates                                                     |       | 2,030                             |       | 3,376 |   | — |   |
| Other  expense, net                                                                |       | —                            |       | 3,700 |   | — |   |
| Changes in  operating assets and liabilities:                                      |       |                              |       |   |   |   |   |
| Decrease  (increase) in Accounts receivable                                        |       | (7,392                            | )          | (146 | ) | (2,074 | ) |
| Decrease  (increase) in Other assets                                               |       | (4,130                            | )          | (9,179 | ) | 3,044 |   |
| (Decrease)  increase in Accounts payable and accrued liabilities                   |       | (5,054                            | )          | 13,853 |   | (7,873 | ) |
| (Decrease)  increase in Other liabilities                                          |       | (38,503                           | )          | (13,364 | ) | (10,059 | ) |
| Net cash  provided by operating activities                                         |       | 131,293                           |       | 195,667 |   | 179,075 |   |
|                                                                               |       |                              |       |   |   |   |   |
| **Investing  Activities**                                                          |       |                              |       |   |   |   |   |
| Purchases of  property, plant and equipment:                                       |       |                              |       |   |   |   |   |
| Digital                                                                            |       | (6,534                            | )          | (1,860 | ) | (3,776 | ) |
| Maintenance                                                                        |       | (16,969                           | )          | (20,777 | ) | (14,490 | ) |
| Special  projects/towers                                                           |       | (12,336                           | )          | (13,743 | ) | (7,126 | ) |
| Acquisitions  and investments                                                      |       | (8,052                            | )          | (37,967 | ) | (25 | ) |
| Other                                                                              |       | 320                               |       | 243 |   | (124 | ) |
| Net cash  used in investing activities                                             |       | (43,571                           | )          | (74,104 | ) | (25,541 | ) |
|                                                                               |       |                              |       |   |   |   |   |
| **Financing  Activities**                                                          |       |                              |       |   |   |   |   |
| Credit  Facility:                                                                  |       |                              |       |   |   |   |   |
| Proceeds  from issuance of long-term debt                                          |       |                              | —     |   |   | — |   |   | 224,150 |   |
| Repayment of  long-term debt                                                       |       | —                            |       | — |   | (315,150 | ) |
| Dividends  paid on preferred stock                                                 |       | (2                                | )          | (1,067 | ) | (1,211 | ) |
| Dividends  paid on common stock                                                    |       | (25,997                           | )          | (22,301 | ) | — |   |
| Redemption  of Series A Note from Capital Trust, net                          |       | —                            |       | (70,000 | ) | — |   |
| Series A  Common Stock repurchases                                            |       | (16,385                           | )          | (10,920 | ) | — |   |
| Redemption  of preferred stock                                                     |       | (11,251                           | )          | (7,068 | ) | — |   |
| Repurchase  of senior notes due 2027                                               |       | (15,000                           | )          | — |   | — |   |
| Principal  payments on capital lease obligations                                   |       | (184                              | )          | (188 | ) | (154 | ) |
| Proceeds  from employee stock purchase plan and stock option exercises             |       | 8,954                             |       | 10,661 |   | 5,917 |   |
| Net cash  used in financing activities                                             |       | (59,865                           | )          | (100,883 | ) | (86,448 | ) |
|                                                                               |       |                              |       |   |   |   |   |
| Increase in  cash and cash equivalents                                             |       | 27,857                            |       | 20,680 |   | 67,086 |   |
| Cash and  cash equivalents at beginning of period                                  |       | 92,208                            |       | 71,528 |   | 4,442 |   |
| Cash and  cash equivalents at end of period                                        |       | $                                 | 120,065    |   | $ | 92,208 |   | $ | 71,528 |   |
|                                                                               |       |                              |       |   |   |   |   |
| **Supplemental  Cash Flow Information:**                                           |       |                              |       |   |   |   |   |
|                                                                               |       |                              |       |   |   |   |   |
| **Business  acquired in purchase transaction:**                                    |       |                              |       |   |   |   |   |
|                                                                               |       |                              |       |   |   |   |   |
| WMTW-TV:                                                                           |       |                              |       |   |   |   |   |
| Fair market  value of assets acquired, net                                         |       | $                                 | —     |   | $ | 38,716 |   | $ | — |   |
| Fair market  value of liabilities assumed, net                                     |       | —                            |       | (642 | ) | — |   |
| Net cash  paid, including acquisition costs                                        |       | $                                 | —     |   | $ | 38,074 |   | $ | — |   |
|                                                                               |       |                              |       |   |   |   |   |
| **Cash  paid during the year for:**                                                |       |                              |       |   |   |   |   |
| Interest                                                                           |       | $                                 | 64,320     |   | $ | 63,502 |   | $ | 65,829 |   |
| Interest on  Note payable to Capital Trust                                         |       | $                                 | 9,750      |   | $ | 18,675 |   | $ | 15,000 |   |
| Taxes, net  of refunds                                                             |       | $                                 | 39,892     |   | $ | 59,318 |   | $ | 5,082 |   |
|                                                                               |       |                              |       |   |   |   |   |
| **Non-cash  investing and financing activities:**                                  |       |                              |       |   |   |   |   |
| Capital  lease obligations entered into during the period                          |       | $                                 | —     |   | $ | — |   | $ | 229 |   |

 

See notes to consolidatedfinancial statements. 

 

45

----

 

**HEARST-ARGYLETELEVISION, INC.**

 

**Notes to ConsolidatedFinancial Statements**

 

**1.   Nature of Operations**

 

Hearst-Argyle Television, Inc.and its subsidiaries (“we” or the “Company”) own and operate 25network-affiliated television stations in geographically diverse markets in theUnited States. Ten of the stations are affiliates of the National BroadcastingCompany, Inc. (“NBC”), 12 of the stations are affiliates of the AmericanBroadcasting Companies (“ABC”), two of the stations are affiliates of ColumbiaBroadcasting Systems (“CBS”) and one station is affiliated with Warner BrothersTelevision Network (“WB”). Additionally, the Company provides managementservices to two network-affiliated and one independent television stations andtwo radio stations (the “Managed Stations”). The Company has determined thatits single reportable segment is commercial television broadcasting. Theeconomic characteristics, services, production process, customer type anddistribution methods for the Company’s operations are substantially similar andhave therefore been aggregated as one reportable segment.

 

**2.   Summary ofAccounting Policies and Use of Estimates**

 

**General**

 

The consolidated financial statements includethe accounts of the Company and its wholly-owned subsidiaries, except for theCompany’s wholly-owned subsidiary trust which was required to bede-consolidated upon adoption of the Financial Accounting Standards Board (“FASB”)Interpretation No. 46 (revised December 2003), *Consolidationof Variable Interest Entities* (“FIN 46(R)”). The net effect of suchdeconsolidation was to eliminate the Convertible Preferred Securities and showthe Note payable to the Capital Trust in noncurrent liabilities. With theexception of the unconsolidated subsidiary trust, all significant intercompanyaccounts have been eliminated in consolidation.

 

**Use of Estimates**

 

The preparation of theconsolidated financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect amounts reported in the consolidatedfinancial statements and accompanying notes. On an ongoing basis, the Companyevaluates its estimates, including those related to allowances for doubtfulaccounts; program rights, barter and trade transactions; useful lives ofproperty, plant and equipment; intangible assets; carrying value ofinvestments; accrued liabilities; contingent liabilities; income taxes; pensionbenefits; and fair value of financial instruments and stock options. Actualresults could differ from those estimates.

 

**Comprehensive Income**

 

Inaccordance with SFAS No. 130, *Reporting ComprehensiveIncome*, the Company is required to display comprehensive income andits components as part of its complete set of financial statements. Comprehensiveincome represents the change in stockholders’ equity resulting fromtransactions other then stockholder investments and distributions. Included inaccumulated other comprehensive income are changes in equity that are excludedfrom the Company’s net income, specifically, additional minimum pensionliabilities, net of tax.

 

**Cash and Cash Equivalents**

 

All highly liquidinvestments with original maturities of three months or less are considered tobe cash equivalents.

 

**Accounts Receivable**

 

The Company extends creditbased upon its evaluation of a customer’s credit worthiness and financialcondition. For certain advertisers, the Company does not extend credit andrequires cash payment in advance. The Company monitors the collection ofreceivables and maintains an allowance for estimated losses based upon theaging of such receivables and specific collection issues that may beidentified. Concentration of credit risk with respect to accounts receivable isgenerally limited due to the large number of geographically diverse customers,individually small balances, and short payment terms.

 

**Program Rights**

 

Program rights and thecorresponding contractual obligations are recorded when the license periodbegins and the programs are available for use. Program rights are carried atthe lower of unamortized cost or estimated net realizable value on a program byprogram basis. Any reduction in unamortized costs to net realizable value isincluded in amortization of program rights in the accompanying ConsolidatedStatements of Income. Such reductions in unamortized costs were $2.2 million inthe year ended December 31, 2004, and were negligible in the years ended December 31,2005 and 2003. Programming rights are amortized over the license period. Themajority of the Company’s programming rights are for first-run programmingwhich is 

 

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generally amortized over one year. Rights foroff-network syndicated products, feature films and cartoons are amortized basedon the projected number of airings on an accelerated basis contemplating theestimated revenue to be earned per showing, but generally not exceeding fiveyears. Program rights and the corresponding contractual obligations areclassified as current or long-term based on estimated usage and payment terms.

 

**Barter and Trade Transactions**

 

Barter transactionsrepresent the exchange of commercial air time for programming. Tradetransactions represent the exchange of commercial air time for merchandise orservices. Barter transactions are recorded at the fair market value of thecommercial air time relinquished. Trade transactions are generally recorded atthe fair market value of the merchandise or services received. Barter programrights and payables are recorded for barter transactions based upon theavailability of the broadcast property. Revenue is recognized on barter andtrade transactions when the commercials are broadcast; expenses are recordedwhen the programming airs or when the merchandise or service is utilized.Barter and trade revenue are included in total revenue on the ConsolidatedStatements of Income and were approximately $25.0 million, $27.0 million and$27.8 million for the years ended December 31, 2005, 2004 and 2003,respectively. Of these amounts, trade revenue represented less than 20% in eachof the years. Barter and trade expenses are included in Salaries, benefits andother operating costs under Station operating expenses on the ConsolidatedStatements of Income and were approximately $25.1 million, $27.2 million and$27.7 million for the years ended December 31, 2005, 2004 and 2003,respectively. Of these amounts, trade expense represented less than 15% in eachof the years.

 

**Property, Plant and Equipment**

 

Property, plant andequipment are recorded at cost. Depreciation is calculated on the straight-linemethod over the estimated useful lives as follows: buildings—40 years; towersand transmitters—15 to 20 years; other broadcasting equipment—five to eightyears; office furniture, computers, equipment and other—three to eight years.Leasehold improvements are amortized on the straight-line method over theshorter of the lease term or the estimated useful life of the asset. Managementreviews, on a continuing basis, the financial statement carrying value ofproperty, plant and equipment for impairment. If events or changes incircumstances were to indicate that an asset carrying value may not berecoverable utilizing related undiscounted cash flows, a write-down of theasset would be recorded through a charge to operations. Management also reviewsthe continuing appropriateness of the useful lives assigned to property, plantand equipment. Prospective adjustments to such lives are made when warranted.

 

**Intangible Assets**

 

Intangible assets are recorded at cost and include FederalCommunications Commission (“FCC”) licenses, network affiliations, goodwill, andother intangible assets such as advertiser client base and favorable leases.The Company performs a review for impairment of its recorded goodwill and FCClicense, which are its only intangible assets with indefinite useful lives,annually in the fourth quarter or earlier if indicators of potential impairmentexist.  The impairment test for FCClicense consists of a comparison of its carrying value with its fair value,determined using a discounted cash flow analysis. If the carrying value of theintangible asset exceeds its fair value, an impairment loss is recognized in anamount equal to that excess.

 

Goodwill impairment is determined using a two-step process. The firststep of the goodwill impairment test is used to identify potential impairmentby comparing carrying value of  thereporting unit to its fair value, estimated using a discounted cash flowanalysis. If the fair value of a reporting unit exceeds its carrying amount,goodwill of the reporting unit is considered not impaired and the second stepof the impairment test is unnecessary. If the carrying amount of a reportingunit exceeds its fair value, the second step of the goodwill impairment test isperformed to measure the amount of impairment loss, if any. The second step ofthe goodwill impairment test compares the implied fair value of the reportingunit’s goodwill with the carrying amount of that goodwill. If the carryingamount exceeds the implied fair value, an impairment loss is recognized in anamount equal to that excess.

 

Various judgmental assumptions about cash flows, growth rates anddiscount rates are used in developing a discounted cash flow analysis. Discountrate assumptions are based on the weighted average cost of capital of industryparticipants. The Company considers the assumptions used in its estimates to bereasonable, however, had the Company used different assumptions, the Company’sreported results may have varied.

 

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The Company amortizes intangible assets with determinable useful livesover their respective estimated useful lives as follows: network affiliationintangible assets - 28.5 years, advertiser client base -19 years, otherintangible assets - 5-10 years. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, **Accounting forthe Impairment or Disposal of Long-Lived Assets**, theCompany evaluates the remaining useful life of its intangible assets withdeterminable lives each reporting period to determine whether events orcircumstances warrant a revision to the remaining period of amortization.

 

**Investments**

 

The Company has investmentsin non-consolidated affiliates, which are accounted for under the equity methodif the Company’s equity interest is from 20% to 50%, and under the cost methodif the Company’s equity interest is less than 20% and the Company does notexercise significant influence over operating and financial policies. Inaddition, the Company has a wholly-owned unconsolidated subsidiary trust whichis accounted for under the equity method. See Note 7. The Company evaluates itsinvestments to determine if an impairment has occurred. Carrying values areadjusted to reflect realizable value, where necessary. See Note 3.

 

**Revenue Recognition**

 

The Company’s primary sourceof revenue is television advertising. Other sources include networkcompensation and other revenue. Advertising revenue and network compensationtogether represented approximately 98% of the Company’s total revenue in eachof the years ended December 31, 2005, 2004 and 2003.

 

•                  *Advertising Revenue*.   Advertisingrevenue is recognized net of agency and national representatives’ commissionsand in the period when the commercials are broadcast. Barter and trade revenueare included in advertising revenue and are also recognized when thecommercials are broadcast. See “Barter and Trade Transactions” above.

 

•                  *Network Compensation.*  Twelveof the Company’s stations have network compensation agreements with ABC, tenhave agreements with NBC, and two have agreements with CBS. In connection withthe ABC and CBS agreements, revenue is recognized when the Company’s stationbroadcasts specific network television programs based upon a negotiated valuefor each program. In connection with the NBC agreements, revenue is recognizedon a straight-line basis, based upon the cash compensation to be paid to theCompany’s stations by NBC each year. Unlike the ABC and CBS agreements, the NBCnetwork compensation is an annual amount and is not specifically assigned toindividual network television programs.

 

•                  *Other Revenue.*  The Companygenerates revenue from other sources, which include the following types oftransactions and activities: (i) management fees earned from The HearstCorporation (“Hearst”) (see Note 14); (ii) services revenue from LifetimeEntertainment Services (see Note 14); (iii) services revenue from theproduction of commercials for advertising customers or from the production ofprograms to be sold in syndication; (iv) rental income pursuant to towerlease agreements with third parties providing for attachment of antennas to theCompany’s towers; and (v) other miscellaneous revenue, such as licensesand royalties.

 

**Income Taxes**

 

The provision for incometaxes is computed based on the pretax income included in the ConsolidatedStatements of Income. The Company provides for federal and state income taxescurrently payable, as well as for those deferred because of timing differencesbetween reporting income and expenses for financial statement purposes versustax purposes. Deferred tax assets and liabilities are recognized for the futuretax consequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.

 

The Company records reservesfor estimates of probable settlements of federal and state audits. The resultsof these audits and negotiations with taxing authorities may affect theultimate settlement of these issues. The timing of any payments related to suchsettlements cannot be determined but the Company expects that these paymentswill not be made within one year and, as such, these tax reserves are includedin Other Liabilities (noncurrent). The Company also records a valuationallowance against its deferred tax assets arising from certain net operatingand capital losses when it is more likely than not that some portion or all ofsuch losses will not be realized. The Company’s effective tax rate in a givenfinancial statement period may be materially impacted by changes in thelevel of earnings by taxing jurisdiction, changes in the expected outcome oftax audits, or changes in the deferred tax valuation allowance.

 

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**Earnings Per Share (“EPS”)**

 

Basic EPS is calculated bydividing net income less preferred stock dividends by the weighted averagecommon shares outstanding (see Note 8). Diluted EPS is calculated similarly,except that it includes the dilutive effect, if any, of shares issuable underthe Company’s stock option plan (see Note 12), the conversion of the Company’sPreferred Stock (see Note 11), or the conversion of the Redeemable ConvertiblePreferred Securities held by the Company’s wholly-owned unconsolidatedsubsidiary trust (see Note 7).

 

**Off-Balance Sheet Financings andLiabilities**

 

Other than contractualcommitments and other legal contingencies incurred in the normal course ofbusiness, agreements for future barter and program rights not yet available forbroadcast as of December 31, 2005, and employment contracts for keyemployees, which are disclosed in Note 15, the Company does not have anyoff-balance sheet financings or liabilities. Other than its wholly-ownedunconsolidated subsidiary trust, which is reflected in the Consolidated BalanceSheet as Note payable to Capital Trust, the Company does not have anymajority-owned subsidiaries that are not included in the consolidated financialstatements, nor does the Company have any interests in, or relationships with,any special-purpose entities that are not reflected in the consolidatedfinancial statements.

 

**Purchase Accounting**

 

When allocating the purchaseprice to the acquired assets (tangible and intangible) and assumed liabilities,it is necessary to develop estimates of fair value. The Company utilizes theservices of an independent valuation consulting firm for the purpose ofestimating fair values. The specialized tangible assets in use at abroadcasting business are typically valued on the basis of the replacement costof a new asset less observed depreciation. The appraisal of other fixed assets,such as furnishings, vehicles, and office machines, is based upon a comparablemarket approach. Identified intangible assets, including FCC licenses, arevalued at estimated fair value. FCC licenses are valued using a directapproach. The direct approach measures the future economic benefits that theFCC license brings to its holder and discounts them to the present. The fairmarket value of the FCC license is determined by discounting these futurebenefits utilizing discounted cash flows. The key assumptions used in thediscounted cash flow analysis include initial and subsequent capital costs,network affiliation, VHF or UHF status, market revenue growth and stationmarket share projections, operating profit margins, discount rates and terminalvalue estimates.

 

**Stock-Based Compensation**

 

The Company accounts for employee stock-basedcompensation under Accounting Principles Board Opinion No. 25, *Stock Issued to Employees* (“APB 25”) and relatedinterpretations. Under APB 25, because the exercise price of the Company’semployee stock options equals the market price of the underlying stock on the dateof grant, the stock options have no intrinsic value and therefore nocompensation expense is recognized. The Company has adopted the disclosure-onlyprovisions of SFAS No. 123, *Accounting For Stock-BasedCompensation* (“SFAS 123”). Under SFAS 123, options are valued attheir date of grant and then expensed over their vesting period. See Note 12and the “New Accounting Pronouncements” disclosure regarding SFAS 123(R).

 

The following table details the effect on netincome and earnings per share had compensation expense been recorded based onthe fair value method under SFAS 123, as amended, utilizing the Black-Scholesoption valuation model:

 
| ** **                                                                                                                  | ** ** | **Years Ended December 31,**                                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                  | ** ** | **(In thousands, except per share data)** | ** ** |
| Reported net  income                                                                                                        |       | $                                                                  | 100,217    |   | $ | 123,942 |   | $ | 94,221 |   |
| Less:                                                                                                                       |       |                                                               |       |   |   |   |   |
| Total  stock-based employee compensation expense determined under the fair value  method for all awards, net of related tax |       | (4,823                                                             | )          | (4,875 | ) | (6,706 | ) |
| Pro forma  net income                                                                                                       |       | 95,394                                                             |       | 199,067 |   | 87,515 |   |
| Less:  Preferred stock dividends                                                                                            |       | (2                                                                 | )          | (1,067 | ) | (1,211 | ) |
| Pro forma  net income applicable to common stockholders (Basic)                                                             |       | $                                                                  | 95,392     |   | $ | 118,000 |   | $ | 86,304 |   |
|                                                                                                                        |       |                                                               |       |   |   |   |   |
| Add:  Interest Expense, Net – Capital Trust, net of tax                                                                |       | —                                                             |       | 9,285 |   | — |   |
|                                                                                                                        |       |                                                               |       |   |   |   |   |
| Pro forma  net income applicable to common stockholders (Diluted)                                                           |       | $                                                                  | 95,392     |   | $ | 127,285 |   | $ | 86,304 |   |
|                                                                                                                        |       |                                                               |       |   |   |   |   |
| Earnings per  share:                                                                                                        |       |                                                               |       |   |   |   |   |
| Basic – as  reported                                                                                                   |       | $                                                                  | 1.08       |   | $ | 1.32 |   | $ | 1.00 |   |
| Basic – pro  forma                                                                                                     |       | $                                                                  | 1.03       |   | $ | 1.27 |   | $ | 0.93 |   |
|                                                                                                                        |       |                                                               |       |   |   |   |   |
| Diluted – as  reported                                                                                                 |       | $                                                                  | 1.08       |   | $ | 1.30 |   | $ | 1.00 |   |
| Diluted –  pro forma                                                                                                   |       | $                                                                  | 1.02       |   | $ | 1.26 |   | $ | 0.93 |   |

 

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The Company accounts for theincome tax benefit resulting from the deduction triggered by the exercise ofemployee stock options as a credit to stockholders’ equity (additional paid-incapital) on the Consolidated Balance Sheets and Consolidated Statements ofStockholders’ Equity. In accordance with Emerging Issues Task Force (“EITF”)Issue No. 00-15, *Classification in theStatement of Cash Flows of the Income Tax Benefit Received by a Company uponExercise of a Non-Qualified Employee Stock Option,* the Companyclassifies the reduction of income taxes payable, as a result of the deductiontriggered by the exercise of employee stock options, as an increase inoperating cash flow on the Consolidated Statements of Cash Flows.

 

**Reclassifications**

 

For comparability, certainimmaterial prior year amounts have been reclassified in the consolidatedstatements of cash flows to conform to the 2005 presentation. Such amountswere within the investing section and are immaterial.

 

**New Accounting Pronouncements**

 

In June 2005, the EITFreached a consensus on EITF No. 05-6, *Determining theAmortization Period for Leasehold Improvements Purchased after Lease Inceptionor Acquired in a Business Combination* (“EITF 05-6”), which wasmodified in September 2005. EITF 05-6 provides guidance on whether a leaseterm should be reevaluated at the time of a purchase business combination orwhen leasehold improvements are purchased after lease inception. EITF 05-6 iseffective for leasehold improvements that are purchased or acquired inreporting periods beginning after June 29, 2005. The adoption of thisstandard did not have a material impact on the Company’s consolidated financialstatements.

 

In June 2005, theEmerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 04-10,*Determining Whether to Aggregate OperatingSegments That Do Not Meet the Quantitative Thresholds,*(“EITF No. 04-10”).EITF 04-10 provides guidance on FAS 131, *Disclosures about Segmentsof an Enterprise and Related Information* and how to determinewhether operating segments which do not meet certain quantitative thresholds may beaggregated and reported as a single operating segment. The EITF is effectivefor fiscal years ending after September 15, 2005, and correspondinginformation for earlier periods, including interim periods, should be restatedunless it is impractical to do so. The Company has adopted the guidance as ofthe year ending December 31, 2005 and the adoption did not have a materialimpact on our financial position or results of operations.

 

In May 2005, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 154, *Accounting Changes and Error Corrections* (“SFAS 154”). SFAS154 provides guidance on accounting for and reporting of accounting changes anderror corrections. It requires changes in accounting principle to be appliedretroactively to prior periods as if the principle had always been used. Previously,voluntary changes in accounting principle were required to be recognizedcumulatively in net income in the period of change. SFAS 154 is effective foraccounting changes and error corrections made in fiscal years beginning after December 15,2005 with early adoption encouraged. The Company did not make any accountingchanges or error corrections during the year ended December 31, 2005 andtherefore, the adoption of SFAS 154 did not have any material impact on ourfinancial position or results of operations.

 

In March 2005, the FASBissued Financial Interpretation No. 47, *Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143,* (“FIN 47”). FIN 47 clarifies that an entitymust record a liability for a conditional asset retirement obligation if thefair value of the obligation can be reasonably estimated. FIN 47 is effectiveno later than the end of fiscal years ending after December 15, 2005. Therefore,FIN 47 is effective for the year ending December 31, 2005. The adoption ofFIN 47 did not have a material impact on our financial position or results ofoperations.

 

In December 2004, theFASB issued Statement No. 123(R), *Share-Based Payment*(“SFAS 123(R)”), which requires companies to measure and recognize compensationexpense for all stock-based payments at fair value. The Company will adopt SFAS123(R) on January 1, 2006 using the modified prospective approach. TheCompany expects to record approximately $8.1 million of stock-basedcompensation during the year ending December 31, 2006 as a result of thisadoption.

 

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

 

In March 2004, the EITFreached a consensus on EITF Issue No. 03-1, *The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments*(“EITF No. 03-1”), which provides guidance on the meaning of the phraseother-than-temporary impairment and its applications to several types ofinvestments including debt securities classified as held-to-maturity andavailable-for-sale as well as cost-method investments. Additional guidance onthe evaluation of whether the impairment on investments not accounted for usingthe equity method is other then temporary and how to measure the investment wasprovided in FSP FAS 115-1 / FAS 124-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.” The Company adoptedEITF 03-1 for the year ended December 31, 2004. The Company has adoptedFSP FAS 115-1 / FAS 124-1 for the year ended December 31, 2005 andevaluated all cost method investments for any impairment loss that is otherthan temporary in accordance with this guidance. The adoption of FSP FAS 115-1/ FAS 124-1 did not have any impact on our financial position or results ofoperations.

 

In December 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”)was signed into law. The Act provides a federal subsidy to sponsors of retireehealthcare benefit plans that provide a prescription drug benefit that is atleast actuarially equivalent to Medicare Part D. In May 2004, theFASB staff issued FASB Staff Position No. 106-2, *Accounting and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003*which supersedes FASB Staff Position No. 106-1, *Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003,* and iseffective for interim or annual periods beginning after June 15, 2004. TheCompany determined that the Act is not a “significant event” as defined by SFAS106, *Employers’ Accounting forPostretirement Benefits Other Than Pensions*. The Act did not have amaterial effect on our consolidated financial statements.

 

**3.    Acquisitions,Dispositions and Investments**

 

Investments as of December 31,2005 and 2004 consisted of the following:

 
| ** **                      | ** ** | **2005**           | ** ** | **2004** | ** ** |
|---------------------------------|------------|--------------------|------------|----------|------------|
| ** **                      | ** ** | **(In thousands)** | ** ** |
| Internet Broadcasting Companies |       | $                  | 11,308     |     | $          | 13,856 |   |
| Ripe TV                         |       | 4,479              |       | —   |       |
| USDTV                           |       | 1,529              |       | —   |       |
| Arizona Diamondbacks            |       | 5,982              |       | 5,982    |       |
| Capital Trust                   |       | 4,021              |       | 4,021    |       |
| ProAct                          |       | 60                 |       | 534      |       |
| Other                           |       | 3,942              |       | 1,969    |       |
| Total investments               |       | $                  | 31,321     |     | $          | 26,362 |   |

 

*Investment in Internet Broadcasting Systems, Inc.*  During the periods presented the Company had investment in InternetBroadcasting Systems, Inc. (“Internet Broadcasting”) and, during theperiods presented through December 22, 2005, the Company had an investmentin IBS/HATV LLC, the parent company of 26 wholly-owned subsidiary limitedliability companies. Internet Broadcasting operates a national network ofstation Internet sites and designs, develops and operates station Internetsites under operating agreements. IBS/HATV LLC owned the Internet sites foreach of the Company’s television stations. The initial $20 million investmentin exchange for shares of preferred stock representing an approximately 24%equity interest in Internet Broadcasting was made in December 1999,followed by an additional $6 million investment in bridge loans issued byInternet Broadcasting in May 2001.

 

On December 22,2005, the investment in Internet Broadcasting and the IBS/HATV LLC relationshipwere strategically restructured to provide for new content initiatives, newsales opportunities and enhanced capital resources for Internet Broadcasting. Underthe new arrangement, Internet Broadcasting will continue to manage a nationalnetwork of station Internet sites and design, develop and operate the Internetsites under an operating agreement. However, IBS/HATV LLC and its 

 

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subsidiaries will be dissolved resulting inthe recognition of local website operating results directly on the books of theCompany’s television stations commencing in January 2006.

 

•                  *Investment in Internet Broadcasting*.   As a result of the restructuring on December 22, 2005, the Company’sinvestment in preferred stock and bridge loans was converted into shares ofInternet Broadcasting common stock, increasing the Company’s ownershippercentage from 24% to 31.1%. Subsequently, in January 2006, the Companypurchased Internet Broadcasting common stock from an existing InternetBroadcasting investor for $5.5 million, increasing its ownership percentage to38%. We will continue to account for our investment in Internet Broadcastingusing the equity method.

 

•                  *IBS/HATV LLC (Limited Liability Company)*. Asdescribed above, a component of the restructuring was the dissolution ofIBS/HATV LLC, effective December 31, 2005. The Company expects to receiveits share of the LLC’s assets within the next several months and as such, theinvestment balance of $3.4 million has been reclassified to Other CurrentAssets as of December 31, 2005. IBS/HATV LLC was owned 49.9% by HTV and50.1% by Internet Broadcasting. Controlled and managed by InternetBroadcasting, IBS/HATV LLC was the parent company of 26 wholly-owned subsidiarylimited liability companies established to own and operate the Internet sitesfor each of the Company’s television stations.  As a result of the restructuring, those 26subsidiaries were also dissolved and their assets are being transferred to theCompany. Prior to the restructuring, we accounted for our investment inIBS/HATV LLC using the equity method.

 

*Investment in Ripe Digital Entertainment, Inc.*On July 27, 2005, the Company invested approximately $5 million in RipeDigital Entertainment, Inc. (“Ripe TV”) representing a 31.25% interest. RipeTV was formed in 2003 to start an advertising-supported free digitalvideo-on-demand program service. Launched in October 2005, the programservice targets men aged 18-34 and is available for distribution via multipleplatforms, including digital cable, broadband and cell phones. We account forthis investment using the equity method.

 

*Investment in USDTV*.On September 23, 2005, the Company and Hearst each invested approximately$1.5 million in USDTV, representing a combined 10% interest. In addition, on January 27,2006, the Company and Hearst each invested approximately $1 million in USDTVrepresenting a total combined 12.35% interest. USDTV was formed to provide anational digital subscription-based television programming distribution serviceusing portions of the digital television spectrum. Currently, the programservice which consists of local television signals combined with the mostpopular cable networks, is available in Albuquerque, New Mexico, Las Vegas,Nevada, Salt Lake City, Utah and Dallas, Texas. We account for this investmentusing the cost method.

 

*Investmentin NBC/Hearst-Argyle Syndication, LLC*.    Effective December 31, 2005, NBC and the Companyconcluded the NBC/Hearst-Argyle syndication venture and the Company recorded aloss of $2.5 million within Other expense. The Company’s 20% share in theresults of NBC/Hearst-Argyle Syndication, LLC is included in Equity in (income)loss of affiliates, net in the accompanying Consolidated Statements of Incomefor the years ended December 31, 2004 and 2003. We accounted for thisinvestment using the equity method.

 

*Investmentin ProAct Technologies Corporation*.    During the year ended December 31, 2004, theCompany recorded a $3.7 million write-down to net realizable value of theCompany’s investment in ProAct Technologies Corporation (“ProAct”). In December 2004,ProAct sold its assets to a third party as part of an overall plan ofliquidation. The Company received $0.5 million in distributions from ProActduring the year ended December 31, 2005.

 

*Investmentin Capital Trust.* On December 20,2001, the Company purchased all of the Capital Trust’s common stock (valued at$6.2 million) as part of the initial capitalization of the Capital Trust,and the Company received $200.0 million in connection with the issuance of theSubordinated Debentures (valued at $206.2 million) to the Capital Trust. TheSubordinated Debentures are presented as Note payable to Capital Trust in theCompany’s Consolidated Balance Sheets. The Capital Trust does not hold anyother significant assets other than note receivable from the Company for the Subordinated Debentures. Inaccordance with the provisions of FIN 46(R), the Company does not consolidatethe accounts of its wholly-owned subsidiary, the Capital Trust, in itsconsolidated financial statements. Therefore, we account for this investmentusing the equity method. The only earnings attributable to this investment arethe Company’s interest payments made on $6.2 million portion of the SubordinatedDebentures. The Company has recorded its share in the earnings of the CapitalTrust as an offset to the interest expense that the Company pays on theSubordinated Debentures (see Note 7). OnDecember 31, 2004, the Company redeemed a portion of the subordinateddebentures (valued at $72.2 million) and the Capital Trust concurrentlyredeemed $2.2 million of its common stock and $70.0 million of preferredsecurities.

 

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*Acquisitionof WMTW.*    On July 1, 2004, theCompany acquired the television broadcast assets of WMTW-TV, Channel 8, the ABCaffiliate serving the Portland-Auburn, Maine television market, forapproximately $38.1 million in cash, inclusive of acquisition costs.  Thisacquisition has been accounted for as a purchase business combination and thepro-forma results of operations and related per share information have not beenpresented as the amounts are considered immaterial.

 

*Investmentin NBC Weather Plus.*  In November 2004, NBC Weather PlusNetwork (“Weather Plus”) was formed to launch the first digital local andnational weather network using a portion of the digital spectrum ofNBC-affiliated television stations. Weather Plus is a 50/50 joint venture between two member limitedliability companies:  NBC News Bureaus, Inc.and Weather Network Affiliates Company, LLC. NBC-affiliated stations may participate in the venture by investing inWeather Network Affiliates Company, LLC. We have a minority interest in Weather Network Affiliates Company, LLC,and have launched NBC Weather Plus in eight of our markets – Sacramento,Orlando, Winston-Salem, Greenville, Cincinnati, Baltimore, Lancaster and NewOrleans – and expect to launch Weather Plus in our two remaining NBC markets in2006.  We account for this investmentusing the cost method.

 

*OtherInvestments.*  Themajority of the other investments are broadcast tower partnerships.

 

**4.****             ****Goodwill and IntangibleAssets**

 

The carrying value ofgoodwill and intangible assets as of December 31, 2005 and 2004 consistedof the following:

 

| ** **                                                         | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                         | ** ** | **(In thousands)**         | ** ** |
| Total intangible assets subject to  amortization                   |       | $                          | 111,983    |                       | $          | 117,986 |   |
| Intangible  assets not subject to amortization – FCC licenses |       | 2,284,103                  |       | 2,310,279                  |       |
| Total intangible assets, net                                       |       | $                          | 2,396,086  |                       | $          | 2,428,265 |   |
|                                                               |       |                       |       |                       |       |
| Goodwill                                                           |       | $                          | 731,687    |                       | $          | 734,746 |   |

 

In accordance with SFAS 142,*Goodwill and Intangible Assets,* (“SFAS142”) the Company assesses its goodwill and intangible assets with indefiniteuseful lives at least annually by applying a fair value-based test.  The Company’s intangible assets withindefinite useful lives are licenses to operate its television stations whichhave been granted by the FCC.  SFAS 142also requires that intangible assets with determinable useful lives beamortized over their respective estimated useful lives to their estimatedresidual values, and reviewed for impairment in accordance with SFAS 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets.*

 

In performing the annualimpairment test, the estimated fair value of each station’s FCC license andenterprise value is determined based on the present value of future cashflows.  When performing the annualimpairment test in 2005, we determined that at our station, WDSU-TV in NewOrleans, Lousiana, the aggregate book value of FCC licenses exceeded theestimated fair value by $26.2 million and the Company wrote down the book valueof FCC licenses accordingly.  Afterreducing the carrying value of the FCC license, the Company compared thecarrying value of WDSU-TV’s net assets to its enterprise value.  As a result, the Company wrote down $3.0million of goodwill.  Estimates of futurecash flows reflected the negative impact of Hurricane Katrina on the NewOrleans market.

 

The Company, as an FCClicensee, enjoys an expectancy of continued renewal of its licenses, so long asit continues to provide service in the public interest.  The FCC has historically renewed the Company’slicenses in the ordinary course of business, without compelling challenge andat little cost to the Company. Furthermore, the Company believes that over-the-air broadcasting willcontinue as a video distribution mode for the foreseeable future.  Therefore, the cash flows derived from theCompany’s FCC licenses are expected to continue indefinitely and as such, andin accordance with SFAS 142, the life of the FCC license intangible asset isdeemed to be indefinite.

 

53

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Summarized below are thecarrying value and accumulated amortization of intangible assets that continueto be amortized under SFAS 142, as well as the carrying value of thoseintangible assets that are no longer amortized and goodwill as of December 31,2005 and 2004:

 
| ** **                                       | ** ** | **December 31, 2005** | ** ** | **December 31, 2004**    | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** | **Gross  Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** |
| ** **                                       | ** ** | **(In thousands)**         | ** ** |
| Intangible  assets subject to amortization:      |       |                       |       |                          |       |   |   |   |   |   |   |   |   |
| Advertiser  client base                          |       | $                          | 122,891    |                          | $          | 70,050 |   | $ | 52,841 |   | $ | 122,891 |   | $ | 66,493 |   | $ | 56,398 |   |
| Network  affiliations                            |       | 95,493                     |       | 36,489                        |       | 59,004 |   | 95,493 |   | 34,098 |   | 61,395 |   |
| Other                                            |       | 743                        |       | 605                           |       | 138 |   | 743 |   | 550 |   | 193 |   |
| Total  intangible assets subject to amortization |       | $                          | 219,127    |                          | $          | 107,144 |   | $ | 111,983 |   | $ | 219,127 |   | $ | 101,141 |   | $ | 117,986 |   |

 
| ** **                                      | ** ** | **As of December 31,  2004** | ** ** | **Impairment  Charge** | ** ** | **As of December 31,  2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|------------------------|------------|-----------------------------------|------------|
| Intangible assets not subject to  amortization: |       |                              |       |                   |       |                              |       |
| FCC licenses                                    |       | $                                 | 2,310,279  |                   | $          | 26,176                            |       | $ | 2,284,103 |   |
|                                            |       |                              |       |                   |       |                              |       |
| Goodwill                                        |       | $                                 | 734,746    |                   | $          | 3,059                             |       | $ | 731,687 |   |

 

The Company’s amortizationexpense for definite-lived intangible assets was approximately $6.0 million inthe year ended December 31, 2005. Estimated annual amortization expense for the next five years related tothese intangible assets is expected to be approximately $6.0 million for thenext five years.

 

**5.****             ****Accrued Liabilities**

 

Accrued liabilities as of December 31,2005 and 2004 consisted of the following:

 

| ** **                          | ** ** | **2005**           | ** ** | **2004** | ** ** |
|-------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Payroll, benefits and related costs |       | $                  | 17,075     |     | $          | 20,801 |   |
| Accrued income taxes                |       | 10,307             |       | 14,639   |       |
| Accrued interest                    |       | 9,462              |       | 9,492    |       |
| Accrued vacation                    |       | 5,438              |       | 5,279    |       |
| Accrued payables                    |       | 3,111              |       | 4,019    |       |
| Other taxes payable                 |       | 1,777              |       | 1,335    |       |
| Other accrued liabilities           |       | 3,963              |       | 8,075    |       |
| Total accrued liabilities           |       | $                  | 51,133     |     | $          | 63,640 |   |

 

**6.****             ****Long-Term Debt**

 

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

 

| ** **                | ** ** | **2005**           | ** ** | **2004** | ** ** |
|---------------------------|------------|--------------------|------------|----------|------------|
| ** **                | ** ** | **(In thousands)** | ** ** |
| Senior Notes              |       | $                  | 417,110    |     | $          | 432,110 |   |
| Private Placement Debt    |       | 450,000            |       | 450,000  |       |
| Capital Lease Obligations |       | 107                |       | 291      |       |
|                      |       | $                  | 867,217    |     | $          | 882,401 |   |
| Less: Current maturities  |       | (90,047            | )          | (180     | )          |
| Total long-term debt      |       | $                  | 777,170    |     | $          | 882,221 |   |

 

**Credit Facility**

 

On April 15, 2005, weentered into a five year $250 million credit facility with a consortium ofbanks led by JP Morgan Chase, Bank of America, Wachovia Bank, BNP Paribas andHarris Nesbitt.  The new credit facilitycan be used for general corporate purposes including working capital,investments, acquisitions, debt repayment and dividend payments.  On the same day, we capitalized $1.1 millionof costs related to the credit facility. Outstanding principal balances under the credit facility will

 

54

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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) theFederal Funds Effective Rate in effect plus 0.5%.  We are required to pay a commitment fee basedon the unused portion of the Credit Facility. The commitment fee ranges from 0.15% to 0.25% depending on our LeverageRatio.  The credit facility is a generalunsecured obligation of the Company.  Wehave not borrowed under this credit facility as of December 31, 2005.

 

During 2003, we repaid, in full, $91 millionoutstanding under our then $750 million senior credit facility which had aneffective interest rate of 3.8%.

 

**Senior Notes**

 

At December 31,2005, the Senior Notes, which are unsecured obligations, consisted of $125million principal amount of 7.0% senior notes due 2007; $176 million principalamount of 7.0% senior notes due 2018 and $116.1 million principal amount of7.5% senior notes due 2027. At December 31, 2004, the Senior Notes, whichare unsecured obligations, consisted of $125 million principal amount of 7.0%senior notes due 2007; $176 million principal amount of 7.0% senior notes due2018 and $131.1 million principal amount of 7.5% senior notes due 2027.Initially issued in November 1997 and January 1998, proceeds from thesenior notes were used to repay then existing debt.  On December 13, 2005, werepurchased at a premium $15 million of our 7.5% senior notes due 2027.

 

**Private Placement Debt**

 

The PrivatePlacement Debt consists of $450 million in senior, unsecured notes, which bearinterest at 7.18% per year.  The notesare repayable in five mandatory $90 million annual installments beginning on December 1,2006.  The Notes were initially issued inconnection with the January 1, 1999 acquisition of KCRA-TV in Sacramento,California.

 

**Capital Lease Obligations**

 

We have capitalized thefuture minimum lease payments of equipment under leases that qualify as capitalleases. We had capital lease obligations of approximately $0.1 million and $0.3million as of December 31, 2005 and 2004, respectively.  The capital leases have terms which expire invarious years through 2008.

 

**Aggregate Maturities of Total Debt**

 

Approximate aggregate annualmaturities of total debt (including capital lease obligations) are as follows(in thousands): 

 

| **2006**       |   | 90,047  |    |
|----------------|--------|---------|---------|
| **2007**       |   | 215,052 |    |
| **2008**       |   | 90,008  |    |
| **2009**       |   | 90,000  |    |
| **2010**       |   | 90,000  |    |
| **Thereafter** |   | 292,110 |    |
| **Total**      |   | $       | 867,217 |   |
|                |        |         |         |  |

 

**Debt Covenants and Restrictions**

 

The Company’s debtobligations contain certain financial and other covenants and restrictions onthe Company. None of these covenants or restrictions include any triggersexplicitly tied to the Company’s credit ratings or stock price.  The Company is in compliance with all suchcovenants and restrictions as of December 31, 2005.

 

**Interest Rate Risk Management**

 

The Company is not involvedin any derivative financial instruments. However, we may consider certaininterest rate risk strategies in the future. We may also consider in the futurecertain interest rate swap arrangements or debt-for-debt exchanges.

 

55

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**Interest Expense, net**

 

Interest expense, net forthe years ended December 31, 2005, 2004 and 2003 consisted of thefollowing: 

 
| ** **                                           | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                           | ** ** | **(In thousands)** | ** ** |
| Interest on borrowings:                              |       |               |       |     |       |     |       |
| Credit  Facility                                     |       | $                  | 465        |     | $          | 289      |       | $ | 2,572 |   |
| Senior Notes                                         |       | 31,578             |       | 30,903   |       | 30,934   |       |
| Private  Placement Debt                              |       | 32,310             |       | 32,310   |       | 32,310   |       |
| Amortization  of deferred financings costs and other |       | 2,424              |       | 1,943    |       | 2,910    |       |
| Total  interest expense                              |       | 66,777             |       | 65,445   |       | 68,726   |       |
| Interest income                                      |       | (3,402             | )          | (1,715   | )          | (511     | )          |
| Total interest expense, net                          |       | $                  | 63,375     |     | $          | 63,730   |       | $ | 68,215 |   |

 

**7.****             ****Note Payable to CapitalTrust**

 

On December 20, 2001,our wholly-owned unconsolidated subsidiary trust, the Capital Trust, completeda $200.0 million private placement of Redeemable Convertible PreferredSecurities with institutional investors. We then issued subordinated debentures of $206.2 million (the “SubordinatedDebentures”) to the Capital Trust in exchange for $200.0 million in netproceeds from the private placement and 100% of the Capital Trust’s commonstock, valued at $6.2 million. The Subordinated Debentures are presented asNote payable to Capital Trust in our Consolidated Balance Sheets. We paid theCapital Trust’s issuance costs of $5.2 million, resulting in net proceeds to usof $194.8 million. We utilized the net proceeds to reduce outstandingborrowings under the Credit Facility.

 

In connection with theprivate placement, the Capital Trust issued 1,400,000 shares of Series ARedeemable Convertible Preferred Securities due 2016 (liquidation preference$50 per redeemable convertible preferred security) for an aggregate of $70,000,000,and 2,600,000 shares of Series B Redeemable Convertible PreferredSecurities due 2021 (liquidation preference $50 per redeemable convertiblepreferred security) for an aggregate of $130,000,000, to institutionalinvestors. (Hereafter, the Series A and the Series B RedeemableConvertible Preferred Securities are together referred to as the “RedeemableConvertible Preferred Securities.”) The investor group included HearstBroadcasting, Inc., a wholly-owned subsidiary of Hearst. HearstBroadcasting, Inc. purchased an aggregate of 300,000 shares of the Series ARedeemable Convertible Preferred Securities and an aggregate of 500,000 sharesof the Series B Redeemable Convertible Preferred Securities for a total of$40 million, or 20% of the Redeemable Convertible Preferred Securities.  As the parent company of the Capital Trust,we have made a full and unconditional guarantee of the Capital Trust’s paymentson the Redeemable Convertible Preferred Securities (see Note 15).

 

As part of the transaction,we issued and sold to the Capital Trust, in exchange for the proceeds from thesale of the Redeemable Convertible Preferred Securities, $72,164,960 inaggregate principal amount of 7.5% convertible junior subordinated deferrableinterest debentures Series A, due 2016 (the “Series A Debentures”)and $134,020,640 in aggregate principal amount of 7.5% convertible juniorsubordinated deferrable interest debentures Series B, due 2021 (the “Series BDebentures”). (Hereafter, the Series A and the Series B Debenturesare together referred to as the “Debentures.”) The Debentures issued to the Capital Trust by us, in the combinedaggregate principal amount of $206,185,600 were issued in exchange for (i) thereceipt of the proceeds of $200.0 million from the issuance of the RedeemableConvertible Preferred Securities; and (ii) $6,185,600 which was owed by usto the Capital Trust for our purchase of $6,185,600 of the Capital Trust’scommon stock, as part of the initial capitalization of the Capital Trust (seeNote 3).

 

The Redeemable ConvertiblePreferred Securities issued by the Capital Trust are effectively convertible,at the option of the holder at any time, into shares of the Company’s Series ACommon Stock, par value $.0l per share through an exchange of such Redeemable ConvertiblePreferred Securities for a portion of the Debentures of the correspondingseries held by the Capital Trust. The conversion terms are identical for allholders of the Redeemable Convertible Preferred Securities, including Hearst.The Series A Debentures are convertible into the Company’s Common Stock atan initial rate of 2.005133 shares of the Company’s Common Stock per $50principal amount of Series A Debentures (equivalent to a conversion priceof $24.9360 per share of the Company’s Common Stock) and the Series BDebentures are convertible into the Company’s Common Stock at an initial rateof 1.972262 shares of the Company’s Common Stock per $50 principal amount of Series BDebentures (equivalent to a conversion price of $25.3516 per share of theCompany’s Common Stock). When the Debentures are repaid or redeemed, the sameamount of Redeemable Convertible Preferred Securities will simultaneously beredeemed with the proceeds from the repayment or redemption of the Debentures.The Series A Redeemable Convertible Preferred Securities mature on December 31,2016 with distributions payable thereon at a rate of 7.5% per year. The Series BRedeemable Convertible Preferred Securities mature on December 31, 2021with distributions payable thereon at a rate of 7.5% per year.

 

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The Series A Debenturesmature on December 31, 2016 and bear interest at a rate of 7.5% per year.The Series B Debentures mature on December 31, 2021 and bear interestat a rate of 7.5% per year. The Company has the right to defer interest on theDebentures (and therefore distributions on the Redeemable Convertible PreferredSecurities) by extending the interest payment period from time to time inaccordance with and subject to the terms of the Redeemable ConvertiblePreferred Securities. Further, the Series A Debentures may be redeemed atthe option of the Company (or at the direction of Hearst) at any time on orafter December 31, 2004 and the Series B Debentures may be redeemedat the option of the Company (or at the direction of Hearst) at any time on orafter December 31, 2006. The redemption prices (per $50 principal amount)of the Series A Debentures range from $52.625 in 2005, declining to$50.375 in 2011 and $50 thereafter to maturity. The redemption prices (per $50principal amount) of the Series B Debentures range from $51.875 in 2007,declining to $50.375 in 2011 and $50 thereafter to maturity.

 

The Company redeemed all ofits outstanding Series A Debentures on December 31, 2004 (the “RedemptionDate”), at a price of $52.625 per $50.00 principal amount of the Series ADebentures in accordance with the terms of the indenture. The redemption of theSeries A Debentures triggered a simultaneous redemption by the CapitalTrust of 1.4 million shares of its Series A Redeemable ConvertiblePreferred Securities.  Also, the CapitalTrust redeemed 43,299 shares of its common stock, held by the Company.  As a result of the redemption, Notes payableto Capital Trust was reduced by $72.2 million and Investments was reduced by$2.2 million.

 

**Interest Expense, net – CapitalTrust**

 

During the year ended December 31,2005, Interest expense, net – Capital Trust represents interest expenseincurred by the Company on $134.0 million of Debentures issued by its whollyowned unconsolidated subsidiary trust (the “Capital Trust”).  For the years ended December 31, 2004and 2003, the Company incurred interest expense on $206.2 million of Debenturesissued by the Capital Trust. Interest expense, net in 2004 includes a $3.7million premium paid for the redemption of the Series A Debentures.  Interest paid by the Company to the CapitalTrust was then utilized by the Capital Trust to make dividend payments to theholders of the $200.0 million of Redeemable Convertible Preferred Securitiesissued by the Capital Trust in December 2001. In accordance with FIN46(R), the Company does not consolidate the accounts of the Capital Trust inits consolidated financial statements. The Company uses the equity method ofaccounting to record the parent company’s equity interest in the earnings ofthe Capital Trust and accordingly has included such earnings of $0.3 million,$0.5 million, and $0.5 million in Interest Expense, net – Capital Trust in theaccompanying Consolidated Statements of Income for the years ended December 31,2005, 2004 and 2003, respectively.

 
| ** **                                                           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                           | ** ** | **(In thousands)**                | ** ** |
| Interest on Subordinated Debentures:                                 |       |                              |       |   |   |   |   |
| Series A  Subordinated Debentures                               |       | $                                 | —     |   | $ | 5,412 |   | $ | 5,412 |   |
| Series B  Subordinated Debentures                               |       | 10,052                            |       | 10,052 |   | 10,052 |   |
| Premium paid  on redemption of Series A Subordinated Debentures |       | —                            |       | 3,789 |   | — |   |
| Gain on  redemption of Capital Trust common stock                    |       | —                            |       | (114 | ) | — |   |
| Total interest expense                                               |       | 10,052                            |       | 19,139 |   | 15,464 |   |
| Equity in  earnings of Capital Trust                                 |       | (302                              | )          | (464 | ) | (464 | ) |
| Total interest expense, net – Capital Trust                     |       | $                                 | 9,750      |   | $ | 18,675 |   | $ | 15,000 |   |

 

**8.****             ****Earnings Per Share**

 

The calculation of basic EPSfor each period is based on the weighted average number of common sharesoutstanding during the period.  Thecalculation of dilutive EPS for each period is based on the weighted averagenumber of common shares outstanding during the period, plus the effect, if any,of dilutive common stock equivalent shares. The following tables set forth a reconciliation between basic EPS anddiluted EPS, in accordance with SFAS 128, *EarningsPer Share*. See Note 2 under “Earnings Per Share (“EPS”)”.

 

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| ** **                                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                        | ** ** | **(In thousands)**               | ** ** |
| Reported net income                                                                               |       | $                                | 100,217    |   | $ | 123,942 |   | $ | 94,221 |   |
| Less: Preferred stock dividends                                                                   |       | (2                               | )          | (1,067 | ) | (1,211 | ) |
| Income applicable to common stockholders  (Basic)                                                 |       | $                                | 100,215    |   | $ | 122,875 |   | $ | 93,010 |   |
|                                                                                              |       |                             |       |   |   |   |   |
| Add: Interest Expense, Net – Capital Trust,  net of tax                                      |       | —                           |       | 9,285 |   | — |   |
| Income applicable to common stockholders  (Diluted)                                               |       | $                                | 100,215    |   | $ | 132,160 |   | $ | 93,010 |   |
|                                                                                              |       |                             |       |   |   |   |   |
| Basic shares                                                                                      |       | 92,826                           |       | 92,928 |   | 92,575 |   |
| Basic EPS                                                                                         |       | $                                | 1.08       |   | $ | 1.32 |   | $ | 1.00 |   |
|                                                                                              |       |                             |       |   |   |   |   |
| Diluted shares                                                                                    |       | 93,214                           |       | 101,406 |   | 92,990 |   |
| Diluted EPS                                                                                       |       | $                                | 1.08       |   | $ | 1.30 |   | $ | 1.00 |   |
|                                                                                              |       |                             |       |   |   |   |   |
| Basic shares                                                                                      |       | 92,826                           |       | 92,928 |   | 92,575 |   |
| Add: Shares issued upon assumed exercise of  stock options                                        |       | 388                              |       | 543 |   | 415 |   |
| Add: Shares  issued upon conversion of Series A Redeemable Convertible Preferred  Securities |       | —                           |       | 2,807 |   | — |   |
| Add: Shares  issued upon conversion of Series B Redeemable Convertible Preferred  Securities |       | —                           |       | 5,128 |   | — |   |
| Diluted shares                                                                                    |       | 93,214                           |       | 101,406 |   | 92,990 |   |

 

The following shares werenot included in the computation of diluted EPS, because to do so would havebeen anti-dilutive for the periods presented: (i) 5,781 shares of Series APreferred Stock, outstanding as of December 31, 2004, and 7,381 shares of Series APreferred Stock, outstanding as of December 31, 2003, which areconvertible into Series A Common Stock (see Note 11); and (ii) 5,470shares of Series B Preferred Stock, outstanding as of December 31,2004, and 10,938 shares of Series B Preferred Stock, outstanding as of December 31,2003, which are convertible into Series A Common Stock (see Note 11). Thedividends for the Series A and B Preferred Stock were deducted from Netincome for the calculation of Basic and Diluted EPS. These shares were redeemedin full as of January 1, 2005.

 

The dilution test for theRedeemable Convertible Preferred Securities related to the Capital Trust isperformed for all periods. This test considers only the total number of sharesthat could be issued if converted and does not consider either the conversionprice or the share price of the underlying common shares. For the year ended December 31,2005, 5,128,205 shares of Series A Common Stock to be issued upon theconversion of 2,600,000 shares of Series B 7.5% Redeemable Convertible PreferredSecurities, related to the Capital Trust, are not included in the number ofcommon shares used in the calculation of diluted EPS because to do so wouldhave been anti-dilutive. The Series A Convertible Preferred Securitieswere redeemed on December 31, 2004 and therefore had no impact on the 2005periods. When the securities related to the Capital Trust are dilutive, theinterest, net of tax, related to the Capital Trust is added back to Incomeapplicable to common stockholders for purposes of the diluted EPS calculation.For the year ended December 31, 2004, 7,935,068 shares of Series ACommon Stock to be issued upon the conversion of 1,400,000 shares of Series A7.5% Redeemable Convertible Preferred Securities and 2,600,000 shares of Series B7.5% Redeemable Convertible Preferred Securities, related to the Capital Trust,are included in the number of common shares used in the calculation of dilutedEPS. For the year ended December 31, 2003, these shares were not includedin the computation of diluted EPS because to do so would have beenanti-dilutive.

 

Common stock options for3,657,174, 2,916,270 and 2,902,456 shares of Series A Common Stock (beforeapplication of the treasury stock method), outstanding as of December 31,2005, 2004 and 2003, respectively, were not included in the computation ofdiluted EPS because the exercise price was greater than the average marketprice of the common shares during the calculation period.

 

**9.****             ****Income Taxes**

 

The (benefit) provision forincome taxes relating to income for the years ended December 31, 2005,2004 and 2003, consisted of the following:

 

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| ** **                 | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                 | ** ** | **(In thousands)**                | ** ** |
| Current:                   |       |                              |       |   |   |   |   |
| State and  local           |       | $                                 | 5,671      |   | $ | 6,761 |   | $ | 2,414 |   |
| Federal                    |       | (8,328                            | )          | 49,475 |   | (3,277 | ) |
|                       |       | (2,657                            | )          | 56,236 |   | (863 | ) |
| Deferred:                  |       |                              |       |   |   |   |   |
| State and  local           |       | (7,096                            | )          | 1,976 |   | 1,712 |   |
| Federal                    |       | 13,670                            |       | 18,140 |   | 41,460 |   |
|                       |       | 6,574                             |       | 20,116 |   | 43,172 |   |
| Provision for income taxes |       | $                                 | 3,917      |   | $ | 76,352 |   | $ | 42,309 |   |

 

The Company’s effectiveincome tax rate in a given financial statement period may be materiallyimpacted by changes in the level of earnings by taxing jurisdiction, changes inthe expected outcome of tax examinations, amount of deductions or changes inthe deferred tax valuation allowance. The effective income tax rate for theyears ended December 31, 2005, 2004 and 2003 varied from the statutoryU.S. Federal income tax rate due to the following:

 
| ** **                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory U. S. Federal income tax                  |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| State income taxes, net of Federal tax  benefit     |       | (0.9     | )          | 2.9      |       | 2.0      |       |
| Other non-deductible business expenses              |       | 1.3      |       | 0.3      |       | (0.1     | )          |
| Change in valuation allowances and other  estimates |       | (31.6    | )          | —   |       | (5.8     | )          |
| Other                                               |       | —   |       | (0.1     | )          | (0.1     | )          |
| Effective income tax rate                           |       | 3.8      | %          | 38.1     | %          | 31.0     | %          |

 

The decrease in our Federalcurrent tax expense and effective tax rate for the year ended December 31,2005, primarily relates to our agreement in June 2005 with the InternalRevenue Service (IRS) to settle certain examination matters for tax years 2001-2002,principally related to deductions of income tax basis associated with certainof our prior acquisitions. The settlement resulted in our recognition of $31.9million of reduced current income tax expense in 2005.  The decrease in our State deferred taxexpense and effective tax rate for the year ended December 31, 2005,primarily relates to the change in Ohio tax law in June 2005, which amongnumerous other provisions calls for the phase-out of the corporate income taxin Ohio, resulting in the Company’s reversal of $8.4 million (net $5.5 million)in previously recorded State deferred tax liabilities.  The increase in other non-deductible businessexpenses is primarily related to the goodwill write-down associated with theNew Orleans market impairment charge, which provided no tax benefit.

 

Deferred income taxliabilities and assets at December 31, 2005 and 2004 consisted of thefollowing:

 
| ** **                                                              | ** ** | **2005**           | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                              | ** ** | **(In thousands)** | ** ** |
| Deferred income tax liabilities:                                        |       |               |       |     |       |
| Difference  between book and tax basis of property, plant and equipment |       | $                  | 26,994     |     | $          | 40,114 |   |
| Accelerated  funding of pension benefit obligation                      |       | 13,352             |       | 10,421   |       |
| Difference  between book and tax basis of intangible assets             |       | 804,926            |       | 789,211  |       |
| Total deferred income tax liabilities                                   |       | $                  | 845,272    |     | $          | 839,746 |   |
| Deferred income tax assets:                                             |       |               |       |     |       |
| Accrued  expenses and other                                             |       | 4,029              |       | 4,979    |       |
| Operating  and Capital loss carryforwards                               |       | 33,265             |       | 20,689   |       |
|                                                                    |       | 37,394             |       | 25,668   |       |
| Less: Valuation allowance                                               |       | (33,265            | )          | (20,689  | )          |
| Total deferred income tax assets                                        |       | 4,029              |       | 4,979    |       |
| Net deferred income tax liabilities                                     |       | $                  | 841,243    |     | $          | 834,767 |   |

 

The net deferred income taxliabilities are presented under the following captions on the Company’sconsolidated balance sheets:

 
| ** **                          | ** ** | **2005**           | ** ** | **2004** | ** ** |
|-------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Deferred income tax liability       |       | $                  | 845,272    |     | $          | 839,746 |   |
| Deferred income tax asset (current) |       | 4,029              |       | 4,979    |       |
| Net deferred income tax liability   |       | $                  | 841,243    |     | $          | 834,767 |   |

 

The deferred tax liabilitiesprimarily relate to differences between book and tax basis of the Company’s FCClicenses. In accordance with the adoption of SFAS 142 on January 1, 2002,the Company no longer amortizes its FCC licenses, but instead tests them forimpairment annually.  As the tax basis inthe Company’s FCC licenses continues to amortize, the deferred tax liabilitieswill increase over time.

 

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The valuation allowancerepresents the uncertainty associated with the realization of the tax benefitsof certain state net operating loss carryforwards totaling approximately $319million, which expire between 2006 and 2025, and other capital losscarryforwards totaling approximately $22 million, which expire in 2009.  The 2005 change in the valuation allowance isprimarily the result of the valuation allowance associated with the capitalloss carryforwards.

 

**10.****      ****Common Stock**

 

**General**

 

The Company has authorized300 million common shares, par value $0.01 per share, which includes 200million of Series A Common Stock and 100 million Series B CommonStock.  Except as otherwise describedbelow, the issued and outstanding shares of Series A Common Stock and Series BCommon Stock vote together as a single class on all matters submitted to a voteof stockholders, with each issued and outstanding share of Series A CommonStock and Series B Common Stock entitling the holder thereof to one voteon all such matters. With respect to any election of directors, (i) theholders of the shares of Series A Common Stock are entitled to voteseparately as a class to elect two members of the Company’s Board of Directors(the Series A Directors) and (ii) the holders of the shares of theCompany’s Series B Common Stock are entitled to vote separately as a classto elect the balance of the Company’s Board of Directors (the Series BDirectors); provided, however, that the number of Series B Directors shallnot constitute less than a majority of the Company’s Board of Directors.

 

All of the outstandingshares of Series B Common Stock are held by a subsidiary of Hearst.  No holder of shares of Series B CommonStock may transfer any such shares to any person other than to (i) Hearst;(ii) any corporation into which Hearst is merged or consolidated; (iii) anyentity to which all or substantially all of Hearst’s assets are transferred; or(iv) any entity controlled by Hearst (each a “Permitted Transferee”).  Series B Common Stock, however, may beconverted at any time into Series A Common Stock and freely transferred,subject to the terms and conditions of the Company’s Certificate ofIncorporation and to applicable securities laws limitations.

 

**Common Stock Repurchase**

 

In May 1998 the Company’sBoard of Directors authorized the repurchase of up to $300 million of itsoutstanding Series A Common Stock. Such repurchases may be effected from time to time in the open market orin private transactions, subject to market conditions and management’sdiscretion. During 2005, the Company repurchased 669,227 shares of Series ACommon Stock at a cost of $16.4 million and an average per share price of$24.48.  Between May 1998 and December 31,2005, the Company repurchased approximately 4.3 million shares of Series ACommon Stock at a cost of approximately $108.0 million and an average price of$24.97.  There can be no assurance thatsuch repurchases will occur in the future or, if they do occur, what the termsof such repurchases will be.

 

Hearst and itsindirect wholly-owned subsidiary Hearst Broadcasting, Inc. (“HearstBroadcasting”) is authorized to purchase up to 25 million shares of theCompany’s Series A Common Stock from time to time in the open market, inprivate transactions or otherwise. As of December 31, 2005, under thisplan Hearst had purchased approximately 20.4 million shares of the Company’soutstanding Series A Common Stock. Hearst’s ownership in the Company was70.5% and 67.6% as of December 31, 2005 and 2004, respectively.

 

**Common Stock Dividends**

 

During the year ended December 31,2005, the Company’s Board of Directors declared and/or paid cash dividends asfollows:

 
| **Dividend  Amount** | ** ** | **Declaration Date** | ** **               | **Record Date** | ** **            | **Payment Date** | ** **             | **Total  Dividend** | ** ** | **Hearst  Portion** | ** ** |
|----------------------|------------|----------------------|--------------------------|-----------------|-----------------------|------------------|------------------------|---------------------|------------|---------------------|------------|
| ** **           | ** ** | ** **           | ** **               | ** **      | ** **            | ** **       | ** **             | **(In thousands)**  | ** ** |
| $                    | 0.07       |                 | December 1,  2004   |            | January 5,  2005 |             | January 15,  2005 |                | $          | 6,500               |       | $ | 4,394 |   |
| $                    | 0.07       |                 | March 31,  2005     |            | April 5,  2005   |             | April 15,  2005   |                | $          | 6,496               |       | $ | 4,432 |   |
| $                    | 0.07       |                 | May 4,  2005        |            | July 5,  2005    |             | July 15,  2005    |                | $          | 6,497               |       | $ | 4,478 |   |
| $                    | 0.07       |                 | September 21,  2005 |            | October 5,  2005 |             | October 15,  2005 |                | $          | 6,504               |       | $ | 4,515 |   |
| $                    | 0.07       |                 | December 6,  2005   |            | January 5,  2006 |             | January 15,  2006 |                | $          | 6,486               |       | $ | 4,575 |   |
|                      |            |                      |                          |                 |                       |                  |                        |                     |            |                     |            |  |  |  |  |  |

 

**11.****      ****Preferred Stock**

 

The Company has one millionshares of authorized preferred stock, par value $.01 per share. Under theCompany’s Certificate of Incorporation, the Company has two authorized seriesof preferred stock, Series A Preferred Stock and Series B

 

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Preferred Stock (collectively, the “Preferred Stock”).  At December 31, 2005, there is noPreferred Stock outstanding. There were 5,470 shares of Series B PreferredStock and 5,781 shares of Series A Preferred Stock issued and outstandingas of December 31, 2004. The Preferred Stock had a cash dividend featurewhereby each share accrued $65 per share annually, to be paid quarterly.

 

On January 1, 2004, theCompany redeemed 1,600 shares of Series A Preferred Stock and on December 10,2004, the Company redeemed 5,468 shares of Series B Preferred Stock.  On January 1, 2005, 5,781 shares of Series APreferred Stock and 5,470 shares of Series B Preferred Stock wereredeemed.

 

**12.****      ****Employee Stock Plans**

 

On May 5, 2004, theCompany’s stockholders and Board of Directors approved the 2004 Long TermIncentive Compensation Plan (“Incentive Compensation Plan”).  The Incentive Compensation Plan is intended toreplace the Amended and Restated 1997 Stock Option Plan (the “Stock Option Plan”)and all grants made after May 5, 2004 are made under the new IncentiveCompensation Plan.  Under the IncentiveCompensation Plan the Company may award various forms of incentive compensationto officers, other key employees and non-employee directors of the Company andits subsidiaries.  The Company reservedfor issuance under the Incentive Compensation Plan 3.6 million shares of Series ACommon Stock.  Generally, under theIncentive Compensation Plan stock options are granted with exercise pricesequal to the market price of the underlying stock on the date of grant.  Each option is exercisable after the periodor periods specified in the applicable option agreement, but no option can beexercised after the expiration of 10 years from the date of grant.  Generally, options we have granted toemployees under the Incentive Compensation Plan cliff-vest after three yearscommencing on the effective date of the grant.

 

Under the Stock Option Plan,8.7 million shares of Series A Common Stock were reserved forissuance.  Under the Stock Option Plan,stock options were granted with exercise prices equal to the market price ofthe underlying stock on the date of grant. Generally, options granted prior to December 2000 either (i) cliff-vestafter three years commencing on the effective date of the grant or (ii) vesteither after nine years or in one-third increments upon attainment of certainmarket price goals of the Company’s stock. Options granted in December 2000vest in one-third increments per year commencing one year from the date of thegrant.  Generally, options granted after December 2000cliff-vest after three years commencing on the effective date of thegrant.   All options granted pursuant tothe Stock Option Plan will expire no later than ten years from the date ofgrant.

 

A summary of the status ofthe Company’s Stock Option Plan and Incentive Compensation Plan, and changesfor the years ended December 31, 2005, 2004 and 2003 is presented below:  

 

| ** **                            | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------|------------|-------------|------------|-------------------------------------------|------------|
| Outstanding at December 31, 2002 |       | 6,610,498   |       | $                                         | 22.16      |   |
| Granted                               |       | 1,179,450   |       | 25.22                                     |       |
| Exercised                             |       | (218,755    | )          | 18.97                                     |       |
| Forfeited                             |       | (146,721    | )          | 22.49                                     |       |
| Outstanding at December 31, 2003 |       | 7,424,472   |       | 22.71                                     |       |
| Granted                               |       | 1,272,900   |       | 25.63                                     |       |
| Exercised                             |       | (455,056    | )          | 18.97                                     |       |
| Forfeited                             |       | (181,887    | )          | 24.06                                     |       |
| Outstanding at December 31, 2004 |       | 8,060,429   |       | 23.36                                     |       |
| Granted                               |       | 1,273,400   |       | 24.14                                     |       |
| Exercised                             |       | (362,719    | )          | 18.64                                     |       |
| Forfeited                             |       | (450,263    | )          | 26.02                                     |       |
| Outstanding at December 31, 2005 |       | 8,520,847   |       | $                                         | 23.53      |   |
|                                  |       |        |       |                                      |       |
| Exercisable at December 31, 2003 |       | 3,804,590   |       | $                                         | 21.54      |   |
| Exercisable at December 31, 2004 |       | 4,392,112   |       | $                                         | 21.84      |   |
| Exercisable at December 31, 2005 |       | 4,720,837   |       | $                                         | 22.25      |   |

 

The following tablesummarizes information about stock options outstanding and exercisable at December 31,2005:

 

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| **Options Outstanding**       | ** ** | **Options Exercisable**                   | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number  Outstanding  at 12/31/05** | ** ** | **Weighted  Average****Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable  At 12/31/05** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $18.56-$21.59                 |       | 2,539,162                                 |       | 5.3 years |   | $ | 19.50 |   | 2,539,162 |   | $ | 19.50 |   |
| $22.08-$24.89                 |       | 2,371,511                                 |       | 8.5 years |   | $ | 24.09 |   | 1,074,111 |   | $ | 24.07 |   |
| $25.13-$26.81                 |       | 3,446,560                                 |       | 6.2 years |   | $ | 25.82 |   | 960,450 |   | $ | 26.36 |   |
| $27.75-$29.00                 |       | 149,614                                   |       | 2.2 years |   | $ | 28.87 |   | 133,114 |   | $ | 28.92 |   |
| $36.44                        |       | 14,000                                    |       | 2.6 years |   | $ | 36.44 |   | 14,000 |   | $ | 36.44 |   |
|                          |       | 8,520,847                                 |       | 6.5 years |   | $ | 23.53 |   | 4,720,837 |   | $ | 22.25 |   |

 

As of December 31,2005, the Company has reserved 1,138,450 shares of Series A Common Stockfor future grants under the Incentive Compensation Plan.

 

The Company accounts foremployee stock-based compensation under APB 25 and related interpretations.Under APB 25, because the exercise price of the Company’s employee stockoptions equals the market price of the underlying stock on the date of grant,no compensation expense is recognized.

 

Pro forma informationregarding Net income and earnings per share is required by SFAS No. 123and has been determined as if the Company had recognized compensation expensefor its employee stock options.  UnderSFAS No. 123, options are valued at their date of grant and then expensedover their vesting period.  The value ofthe Company’s options was calculated at the date of grant using theBlack-Scholes option-pricing model for options granted in 2005, 2004 and 2003.The weighted average value of options granted was $7.63, $7.81 and $8.71 for2005, 2004 and 2003, respectively. The following assumptions were used for theyears ended December 31, 2005, 2004 and 2003:

 

| ** **              | ** ** | **2005**       | ** ** | **2004**       | ** ** | **2003**       | ** ** |
|-------------------------|------------|----------------|------------|----------------|------------|----------------|------------|
| Risk-free interest rate |       | 4.43           | %          | 3.72           | %          | 3.25           | %          |
| Dividend yield          |       | 1.12           | %          | 0.94           | %          | 0.25           | %          |
| Volatility factor       |       | 27.71          | %          | 30.14          | %          | 33.90          | %          |
| Expected life           |       | 5.9 years |       | 5.0 years |       | 5.0 years |       |

 

See Note 2 under “Stock-BasedCompensation” for the pro forma effect on Net income and earnings per share hadcompensation expense been recorded under SFAS No. 123, as amended.

 

**13.****      ****Stock Purchase Plan**

 

In April 1999, weimplemented a non-compensatory employee stock purchase plan (“ESPP”) inaccordance with Internal Revenue Code Section 423.  The ESPP allows employees to purchase sharesof our Series A Common Stock, at 85% of its market price, throughafter-tax payroll deductions.  Wereserved and made available for issuance and purchases under the Stock PurchasePlan 5,000,000 shares of Series A Common Stock.  Employees purchased 102,934 and 92,259 sharesfor aggregate proceeds of approximately $2.2 million and $2.0 million in theyears ended December 31, 2005 and 2004, respectively.

 

**14.****      ****Related Party Transactions**

 

*The HearstCorporation*.    Asof December 31, 2005, Hearst beneficially owned approximately 46.8% of ourSeries A Common Stock and 100% of our Series B Common Stock,representing in the aggregate approximately 70.5% of the outstanding votingpower of our common stock, except with regard to the election ofdirectors.  With regard to the electionof directors, Hearst’s beneficial ownership of our Series B Common Stockentitles Hearst to elect as a class 11 of the 13 directors of our Board ofDirectors. During the years ended December 31, 2005, 2004 and 2003, weentered into the following transactions with Hearst or parties related toHearst:

 

•                  *Management Agreement*.    Werecorded revenue of approximately $4.6 million, $4.2 million, and $3.6 millionin the years ended December 31, 2005, 2004 and 2003, respectively,relating to a management agreement with Hearst (the “Management Agreement”).Pursuant to the Management Agreement, we provide certain management services,such as sales, news, programming, and financial and accounting managementservices, with respect to certain Hearst owned or operated television and radiostations. We believe that the terms of the Management Agreement are reasonableto both parties; however, there can be no assurance that more favorable termswould not be available from third parties.

 

•                  *Services Agreement*.    Weincurred expenses of approximately $4.8 million, $3.8 million and $3.7 millionin the years ended December 31, 2005, 2004 and 2003, respectively,relating to a services agreement with Hearst (the “Services Agreement”).Pursuant to the Services Agreement, Hearst provides the Company certain administrativeservices such as accounting, financial, legal, insurance, data processing, andemployee benefits administration. We believe that the terms

 

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of the Services Agreement are reasonable toboth parties; however, there can be no assurance that more favorable termswould not be available from third parties.

 

•                  *Interest Expense, Net – Capital Trust.*  Weincurred interest expense, net, relating to the Subordinated Debentures issuedto our wholly-owned unconsolidated subsidiary, the Capital Trust, of $9.8million, $18.7 million and $15.0 million in the years ended December 31,2005, 2004 and 2003, respectively.  TheCapital Trust then paid comparable amounts to its Redeemable ConvertiblePreferred Securities holders of which $1.9 million, $3.7 million and $3.0million in the years ended December 31, 2005, 2004 and 2003, respectively,was paid to Hearst.

 

•                  *Dividend on Common Stock.*    OurBoard of Directors declared quarterly cash dividends of $0.07 per share on our Series Aand Series B Common Stock, respectively, for a total amount of $26.0million.  Included in this amount was$18.0 million payable to Hearst.  On December 6,2005, our Board declared a cash dividend of $0.07 per share on our Series Aand Series B Common Stock for a total of $6.5 million.  Included in this amount was $4.6 millionpayable to Hearst.  In the year ended December 31,2004, the Company paid cash dividends of $22.3 million. Included in this amountwas $14.7 million payable to Hearst. See Note 10.

 

•                  *Radio Facilities Lease.*    Pursuantto a lease agreement, Hearst paid us approximately $0.9 million in the yearended December 31, 2005 and $0.7 million per year in the years ended December 31,2004 and 2003, respectively. Under this agreement, Hearst leases from theCompany premises for WBAL-AM and WIYY-FM, Hearst’s Baltimore, Maryland radiostations.

 

•                  *Hearst**Tower**Lease*. In October 2005, the Audit Committee of the Board of Directorsapproved the Company’s entry into a lease with Hearst of office space in theHearst Tower in New York City, which is currently under construction andscheduled to be completed in mid-2006. We expect to enter into that lease agreement in the first quarter of2006.  We expect to incur capitalexpenditures of approximately $6 million in 2006 in connection with ourrelocation to the Hearst Tower and expect to incur approximately $0.8 millionin rent expense in 2006.

 

•                  *Lifetime Entertainment Services*.    We have 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 tothe negotiation of our agreements with cable, satellite and certain othermulti-channel video programming distributors. Amounts payable to us by Lifetime depend on the specific terms of theseagreements and may be fixed or variable. Based on the terms of completed agreements, we are entitled to receive aminimum aggregate amount of $2.5 million during the period from January 1,2006 to June 20, 2009.  We haverecorded revenue from the agreements of $6.7 million, $1.8 million and $1.9million in the years ended December 31, 2005, 2004 and 2003, respectively.

 

•                  *Wide Orbit, Inc.   *In November 2004, we entered into an agreement with Wide Orbit, Inc.(“Wide Orbit”) for licensing and servicing of Wide Orbit’s Traffic Sales andBilling Solutions software.  Hearst ownsapproximately 8% of Wide Orbit, Inc. In the years ended December 31, 2005 and 2004, we paid Wide Orbitapproximately $1.7 million and $0.9 million, respectively, under the agreement.

 

•                  *Other Transactions with Hearst*.    Inthe year ended December 31, 2005, we recorded net revenue of approximately$0.1 million relating to advertising sales to Hearst on behalf of GoodHousekeeping, which is owned by Hearst. In the years ended December 31,2005 and 2004, we did not receive advertising revenue from Hearst.

 

*InternetBroadcasting*.    Asof December 31, 2005, we owned 31.1% of Internet Broadcasting.  Our share of the loss of InternetBroadcasting included in Equity in (income) loss of affiliates, net was $0.3million and $0.6 million for the years ended December 31, 2005 and 2004,respectively.  Our share of income forIBS/HATV LLC included in Equity in (income) loss of affiliates, net was $3.1million and $2.2 million for the years ended December 31, 2005 and 2004,respectively.  We also have an agreementwith Internet Broadcasting pursuant to which they provide hosting services forour corporate Internet site for a nominal amount.  Since January 2001, Harry T. Hawks, ourExecutive Vice President and Chief Financial Officer, since October 2002,Terry Mackin, our Executive Vice President, and since December 2005, StevenA. Hobbs, our Executive Vice President and Chief Legal and Development Officer,have served on the Board of Directorsof Internet Broadcasting, from which they do not receive compensation for theirservices.

 

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*Small Business Television*.   The Company utilizes Small BusinessTelevision’s (“SBTV”) services to provide television stations with additionalrevenue through the marketing and sale of commercial time to smaller businessesthat do not traditionally use television advertising due to costs.  In the year ended December 31, 2005these sales generated revenue of approximately $1.4 million, of whichapproximately $0.8 million was distributed to the Company.  In the year ended December 31, 2004these sales generated revenue of approximately $1.2 million, of whichapproximately $0.7 million was distributed to the Company.  In the year ended December 31, 2003these sales generated revenue of approximately $1.2 million, of whichapproximately $0.7 million was distributed to the Company.  Mr. Dean Conomikes, the owner of SBTV,is the son of John G. Conomikes, a member of the Company’s Board of Directors.

 

*NBC WeatherPlus.*  In 2004,we invested in Weather Network Affiliates Company, LLC, the company which ownsthe NBC Weather Plus Network.  Since November 2004we have launched NBC Weather Plus in eight of our markets – Sacramento, Orlando,Winston-Salem, Greenville, Cincinnati, Baltimore, Lancaster and New Orleans –and expect to launch Weather Plus in our two remaining NBC markets in2006.  Terry Mackin, our Executive VicePresident, is the Chairman of the Board of the NBC Television AffiliatesAssociation, which is the managing member and the owner of certain ownershipinterests in Weather Network Affiliates Company, LLC.  Mr. Mackindoes not receive compensation for his Board service.

 

*USDTV*.  Currently, we and Hearst each own approximately6.175% of USDTV.  Our station, KOAT-TV inAlbuquerque, New Mexico, currently leases a portion of its digital spectrum toUSDTV.  Since September 23, 2005,Steven A. Hobbs, our Executive Vice President and Chief Legal and DevelopmentOfficer, has served on the Board of Directors of USDTV, from which he does notreceive compensation for his services.

 

*OtherRelated Parties*.    Inthe ordinary course of business, the Company enters into transactions withother related parties, none of which were significant to our financial resultsin the years ended December 31, 2005, 2004 and 2003.

 

**15.****      ****Other Commitments andContingencies**

 

We have obligations tovarious program syndicators and distributors in accordance with currentcontracts for the rights to broadcast programs. Future payments and barterobligations as of December 31, 2005, scheduled under contracts forprograms which are currently available are as follows (in thousands):

 

| ** ** | ** ** | **Program Rights** | ** ** | **Barter Rights** | ** ** |
|------------|------------|-------------------------|------------|------------------------|------------|
| 2006       |       | $                       | 34,421     |                   | $          | 12,864 |   |
| 2007       |       | 1,224                   |       | 271                    |       |
| 2008       |       | 193                     |       | 4                      |       |
| 2009       |       | 122                     |       | 2                      |       |
| 2010       |       | —                  |       | 1                      |       |
| Thereafter |       | —                  |       | 1                      |       |
|       |       | $                       | 35,960     |                   | $          | 13,143 |   |

 

The Company has variousagreements relating to non-cancelable operating leases with an initial term ofone year or more (some of which contain renewal options), future barter andprogram rights not available for broadcast at December 31, 2005, andemployment contracts for key employees. Future minimum cash payments (andbarter obligations) under the terms of these agreements as of December 31,2005 are as follows: 

 
| ** ** | ** ** | **Operating  Leases** | ** ** | **Deduct  Operating  Sublease** | ** ** | **Net  Operating  Lease  Commitments** | ** ** | **Program****Rights** | ** ** | **Barter****Rights** | ** ** | **Employment  and Talent Contracts** | ** ** |
|------------|------------|-----------------------|------------|---------------------------------|------------|----------------------------------------|------------|-----------------------|------------|----------------------|------------|--------------------------------------|------------|
|       |       |                  |       |                            |       |                                   |       |                  |       |                 |       |                                 |       |
| 2006       |       | $                     | 4,971      |                            | $          | (60                                    | )          | $                     | 4,911      |                 | $          | 32,220                               |       | $ | 7,324 |   | $ | 71,660 |   |
| 2007       |       | 3,904                 |       | —                          |       | 3,904                                  |       | 54,651                |       | 13,229               |       | 40,976                               |       |
| 2008       |       | 3,089                 |       | —                          |       | 3,089                                  |       | 55,301                |       | 12,012               |       | 13,022                               |       |
| 2009       |       | 2,538                 |       | —                          |       | 2,538                                  |       | 52,433                |       | 10,965               |       | 2,373                                |       |
| 2010       |       | 2,073                 |       | —                          |       | 2,073                                  |       | 44,369                |       | 9,934                |       | 1,311                                |       |
| Thereafter |       | 14,636                |       | —                          |       | 14,636                                 |       | 17,439                |       | 3,614                |       | 411                                  |       |
|       |       | $                     | 31,211     |                            | $          | (60                                    | )          | $                     | 31,151     |                 | $          | 256,413                              |       | $ | 57,078 |   | $ | 129,753 |   |

 

Rent expense, net, foroperating leases was approximately $10.4 million, $9.4 million and $8.6 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.

 

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From time to time, theCompany becomes involved in various claims and lawsuits that are incidental toits business. In the opinion of the Company, there are no legal proceedingspending against the Company or any of its subsidiaries that are likely to havea material adverse effect on the Company’s consolidated financial condition orresults of operations.

 

The Company has guaranteedthe payments by its wholly-owned unconsolidated subsidiary trust (the CapitalTrust) on the Redeemable Convertible Preferred Securities in the amount of$134.0 million (see Note 7). The guarantee is irrevocable and unconditional,and guarantees the payment in full of all (i) distributions on theRedeemable Convertible Preferred Securities to the extent of available funds ofthe Capital Trust; (ii) amounts payable upon redemption of the RedeemableConvertible Preferred Securities to the extent of available funds of theCapital Trust; and (iii) amounts payable upon a dissolution of the CapitalTrust. The guarantee is unsecured and ranks (i) subordinate to all otherliabilities of the Company, except liabilities that are expressly made *pari passu*; (ii) *pari passu* with the most senior preferredstock issued by the Company, and *pari passu*with any guarantee of the Company in respect of any preferred stock of theCompany or any preferred security of any of the Company’s controlledaffiliates; and (iii) senior to the Company’s Common Stock. The Company madethe guarantee in 2001 to enable the Capital Trust to issue the RedeemableConvertible Preferred Securities in the amount of $200.0 million to theholders, of which $70 million par amount was redeemed in 2004.

 

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

 

***Overview***

 

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

 

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

 

Benefits under the PensionPlans are generally based on years of credited service, age at retirement andaverage of the highest five consecutive years’ compensation. The cost of thePension Plans is computed on the basis of the Project Unit Credit ActuarialCost Method. Past service cost is amortized over the expected future serviceperiods of the employees.

 

*Pension Plan Assets*

 

The Pension Plans’ weightedaverage asset allocations as of the measurement dates September 30, 2005and 2004, by asset category, are as follows:

 
| ** **         | ** ** | **Percentage of Plan  Assets as of September 30,** | ** ** |
|--------------------|------------|---------------------------------------------------------|------------|
| **Asset Category** | ** ** | **2005**                                                | ** ** | **2004** | ** ** |
| Equity             |       | 69.3                                                    | %          | 69.5 | % |
| Fixed income       |       | 25.2                                                    | %          | 27.4 | % |
| Real estate        |       | 2.3                                                     | %          | 1.8 | % |
| Other              |       | 3.2                                                     | %          | 1.3 | % |
| Total              |       | 100                                                     | %          | 100.0 | % |

 

The assets of the PensionPlans are invested with the objective of being able to meet current and futurebenefit payment needs while controlling pension expense volatility.  Plan assets are invested with a number ofinvestment managers and are diversified among equities, fixed income, realestate and other investments, as shown in the table above. Approximately 80% ofthe assets of the Pension Plans are invested in a master trust, which has atarget allocation of approximately 70% equities and 30% fixed income.  When adding the remaining 20% of the assetsof the Pension Plans which are outside of the master trust, the aggregateallocation is comparable to that of the master trust, but with a slightlyhigher allocation percentage for fixed income investments.  Each of the Pension Plans employs activeinvestment management programs, and each has an Investment Committee whichreviews the respective plan’s asset allocation on a periodic basis anddetermines when and how to re-balance the portfolio when appropriate. None ofthe Pension Plans has any dedicated target allocation to the Company’s CommonStock.

 

*Net Periodic Pension andPost-Retirement Cost*

 

The following schedule presentsnet periodic pension cost for the Company’s Pension Plans in the years ended December 31,2005, 2004 and 2003:

 

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| ** **                         | ** ** | **Pension Benefits** | ** ** |
|------------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2005**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands)**   | ** ** |
| Service cost                       |       | $                    | 9,031      |   | $ | 7,376 |   | $ | 6,085 |   |
| Interest cost                      |       | 8,660                |       | 7,663 |   | 6,893 |   |
| Expected return on plan assets     |       | (9,789               | )          | (8,940 | ) | (9,346 | ) |
| Amortization of prior service cost |       | 432                  |       | 493 |   | 497 |   |
| Amortization of transitional asset |       | 5                    |       | (95 | ) | (113 | ) |
| Recognized actuarial (gain) loss   |       | 2,955                |       | 1,435 |   | (40 | ) |
| Net periodic  pension cost         |       | $                    | 11,294     |   | $ | 7,932 |   | $ | 3,976 |   |

 

The following schedule presentsnet periodic pension cost for the Company’s post-retirement benefit plan in theyears ended December 31, 2005, 2004 and 2003:

 
| ** **                              | ** ** | **Post-Retirement Benefits** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                              | ** ** | **(In thousands)**           | ** ** |
| Service cost                            |       | $                            | 94         |   | $ | 55 |   | $ | 58 |   |
| Interest cost                           |       | 374                          |       | 307 |   | 315 |   |
| Amortization of prior service cost      |       | 18                           |       | 17 |   | 17 |   |
| Amortization of transitional obligation |       | 18                           |       | 18 |   | 18 |   |
| Amortization of net loss                |       | 120                          |       | 15 |   | — |   |
| Net periodic  pension cost              |       | $                            | 624        |   | $ | 412 |   | $ | 408 |   |

 

In December 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”)was signed into law.  For the year ended December 31,2005, the Company has included the impact of the subsidy.  As a result, the Net periodic pension costwas reduced by $0.1 million and Accumulated benefit obligation was reduced by$0.8 million.  For the years ended December 31,2004 and 2003, the Company determined that the Act is not a “significant event”as defined by SFAS 106.

 

*Summary Disclosure Schedule*

 

The following schedule presentsthe change in benefit obligation, change in plan assets, a reconciliation ofthe funded status, amounts recognized in the Consolidated Balance Sheet, andadditional year-end information for the Company’s Pension Plans. Themeasurement dates for the determination of the benefit obligation, plan assets,and assumptions were September 30, 2005 and 2004. 

 
| ** **                                                                                                             | ** ** | **Pension Benefits** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                             | ** ** | **2005**             | ** ** | **2004** | ** ** |
| ** **                                                                                                             | ** ** | **(In thousands)**   | ** ** |
| **Change in benefit obligation:**                                                                                      |       |                 |       |   |   |
| Benefit  obligation at beginning of year                                                                               |       | $                    | 146,398    |   | $ | 124,477 |   |
| Service cost                                                                                                           |       | 9,031                |       | 7,376 |   |
| Interest  cost                                                                                                         |       | 8,660                |       | 7,663 |   |
| Participant  contributions                                                                                             |       | 8                    |       | 6 |   |
| Benefits and  administrative expenses paid                                                                             |       | (4,334               | )          | (4,182 | ) |
| Actuarial  loss                                                                                                        |       | 6,284                |       | 11,058 |   |
| Benefit  obligation at end of year                                                                                     |       | $                    | 166,047    |   | $ | 146,398 |   |
| **Change in plan assets:**                                                                                             |       |                 |       |   |   |
| Fair value  of plan assets at beginning of year                                                                        |       | $                    | 117,633    |   | $ | 97,210 |   |
| Actual gain  on plan assets, net                                                                                       |       | 15,589               |       | 10,607 |   |
| Employer  contributions                                                                                                |       | 19,562               |       | 13,992 |   |
| Participant  contributions                                                                                             |       | 8                    |       | 6 |   |
| Benefits and  administrative expenses paid                                                                             |       | (4,334               | )          | (4,182 | ) |
| Fair value  of plan assets at end of year                                                                              |       | $                    | 148,458    |   | $ | 117,633 |   |
| **Reconciliation of funded status:**                                                                                   |       |                 |       |   |   |
| Funded  status                                                                                                         |       | $                    | (17,589    | ) | $ | (28,765 | ) |
| Contributions  paid during the fourth quarter                                                                          |       | 787                  |       | 435 |   |
| Unrecognized  actuarial loss                                                                                           |       | 53,014               |       | 55,486 |   |
| Unrecognized  prior service cost                                                                                       |       | 2,033                |       | 2,464 |   |
| Unrecognized  transition asset                                                                                         |       | 1                    |       | 6 |   |
| Net amount  recognized at end of year                                                                                  |       | $                    | 38,246     |   | $ | 29,626 |   |
| **Amounts recognized in the Consolidated  Balance Sheet (as of December 31):**                                    |       |                 |       |   |   |
| Other assets                                                                                                           |       | $                    | 42,204     |   | $ | 38,107 |   |
| Other  liabilities                                                                                                     |       | (14,438              | )          | (18,716 | ) |
| Accumulated  other comprehensive loss                                                                                  |       | 10,480               |       | 10,235 |   |
| Net amount  recognized at end of year                                                                                  |       | $                    | 38,246     |   | $ | 29,626 |   |
|                                                                                                                   |       |                 |       |   |   |
| Increase in  minimum liability included in other comprehensive income                                                  |       | $                    | 245        |   | $ | 1,515 |   |
|                                                                                                                   |       |                 |       |   |   |
| **Additional year-end information for all  defined benefit plans**                                                     |       |                 |       |   |   |
| Accumulated  benefit obligation                                                                                        |       | $                    | 147,662    |   | $ | 127,349 |   |
|                                                                                                                   |       |                 |       |   |   |
| **Additional  year-end information for pension plans with accumulated benefit obligations  in excess of plan assets:** |       |                 |       |   |   |
| Projected  benefit obligation                                                                                          |       | $                    | 62,349     |   | $ | 58,981 |   |
| Accumulated  benefit obligation                                                                                        |       | $                    | 54,758     |   | $ | 49,033 |   |
| Fair value  of plan assets                                                                                             |       | $                    | 40,958     |   | $ | 30,737 |   |

 

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The following schedule presentsthe change in benefit obligation, change in plan assets, a reconciliation ofthe funded status, and amounts recognized in the Consolidated Balance Sheet forthe Company’s post-retirement benefit plan. The measurement dates for thedetermination of the benefit obligation and assumptions were September 30,2005 and 2004.

 
| ** **                                                                          | ** ** | **Post-Retirement  Benefits** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                          | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                                                          | ** ** | **(In thousands)**            | ** ** |
| **Change in benefit obligation:**                                                   |       |                          |       |   |   |
| Benefit  obligation at beginning of year                                            |       | $                             | 5,137      |   | $ | 5,063 |   |
| Service cost                                                                        |       | 94                            |       | 55 |   |
| Interest  cost                                                                      |       | 373                           |       | 307 |   |
| Plan  Amendments                                                                    |       | 8                             |       | 4 |   |
| Benefits and  administrative expenses paid                                          |       | (502                          | )          | (493 | ) |
| Actuarial  loss                                                                     |       | 1,467                         |       | 201 |   |
| Benefit  obligation at end of year                                                  |       | $                             | 6,577      |   | $ | 5,137 |   |
| **Change in plan assets:**                                                          |       |                          |       |   |   |
| Fair value  of plan assets at beginning of year                                     |       | —                        |       | $ | — |   |
| Employer  contributions                                                             |       | 502                           |       | 493 |   |
| Benefits and  administrative expenses paid                                          |       | (502                          | )          | (493 | ) |
| Fair value  of plan assets at end of year                                           |       | —                        |       | $ | — |   |
|                                                                                |       |                          |       |   |   |
| **Reconciliation of funded status:**                                                |       |                          |       |   |   |
| Funded  status                                                                      |       | $                             | (6,577     | ) | $ | (5,137 | ) |
| Contributions  paid during the fourth quarter                                       |       | 110                           |       | 139 |   |
| Unrecognized  actuarial loss                                                        |       | 2,262                         |       | 915 |   |
| Unrecognized  prior service cost                                                    |       | 106                           |       | 116 |   |
| Unrecognized  transition obligation                                                 |       | 111                           |       | 129 |   |
| Net amount  recognized at end of year                                               |       | $                             | (3,988     | ) | $ | (3,838 | ) |
| **Amounts recognized in the Consolidated  Balance Sheet (as of December 31):** |       |                          |       |   |   |
| Other assets                                                                        |       | $                             | —     |   | $ | — |   |
| Other  liabilities                                                                  |       | (3,988                        | )          | (3,838 | ) |
| Net amount  recognized at end of year                                               |       | $                             | (3,988     | ) | $ | (3,838 | ) |

 

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*Contributions*

 

During the year 2006, theCompany expects to contribute approximately $0.5 million to the Pension Plansand approximately $0.6 million to the post-retirement benefit plan.

 

*Expected Benefit Payments*

 

Benefit payments for thepension plans for the next 10 years are expected to be as follows (inthousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2006                              |       | 4,424      |       |
| 2007                              |       | 4,900      |       |
| 2008                              |       | 5,311      |       |
| 2009                              |       | 5,961      |       |
| 2010                              |       | 6,820      |       |
| Next 5 years                      |       | 46,935     |       |

 

Benefit payments for thepost-retirement benefit plan for the next 10 years are expected to be asfollows (in thousands):

 
| **Year ending December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2006                              |       | 552        |       |
| 2007                              |       | 536        |       |
| 2008                              |       | 476        |       |
| 2009                              |       | 451        |       |
| 2010                              |       | 452        |       |
| Next 5 years                      |       | 2,095      |       |

 

*Assumptions*

 

The weighted-averageassumptions used for computing the projected benefit obligation for the Company’sPension Plans as of the measurement dates of September 30, 2005 and 2004were as follows: 

 
| ** **                    | ** ** | **Pension Benefits** | ** ** |
|-------------------------------|------------|---------------------------|------------|
| ** **                    | ** ** | **2005**                  | ** ** | **2004** | ** ** |
| Discount rate                 |       | 5.75                      | %          | 6.00 | % |
| Rate of compensation increase |       | 4.00                      | %          | 4.00 | % |

 

The weighted-average assumptionsused for computing the net periodic pension cost for the Company’s PensionPlans in the years ended December 31, 2005, 2004 and 2003 were as follows:

 
| ** **                                        | ** ** | **Pension Benefits** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **2005**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate                                     |       | 6.00                 | %          | 6.25 | % | 6.88 | % |
| Expected long-term rate of return on plan  assets |       | 7.75                 | %          | 7.75 | % | 8.00 | % |
| Rate of compensation increase                     |       | 4.00                 | %          | 4.00 | % | 4.00 | % |

 

To develop the expectedlong-term rate of return on assets assumptions, the Company considered thecurrent level of expected returns on risk free investments (primarilygovernment bonds), the historical level of the risk premium associated with theother asset classes in which the portfolio is invested, and the expectationsfor future returns of each asset class. The expected return for each asset class was then weighted based on theaggregate target asset allocation to develop the expected long-term rate ofreturn on assets assumption for the portfolio. The expected rate of return assumption is then adjusted to reflectinvestment and trading expenses.  Sincethe Company’s investment policy is to actively manage certain asset classeswhere the potential exists to outperform the broader market, the expectedreturns for those asset classes were adjusted to reflect the expectedadditional returns.  The Company reviewsthe expected long-term rate of return on an annual basis and revises it asappropriate.

 

The weighted-averageassumptions used for computing the projected benefit obligation for the Company’spost-retirement benefit plan as of the measurement dates of September 30,2005 and 2004 are as follows:

 
| ** **    | ** ** | **Post-Retirement Benefits** | ** ** |
|---------------|------------|------------------------------|------------|
| ** **    | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| Discount rate |       | 5.75                         | %          | 6.00 | % |

 

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The weighted-averageassumptions used for computing the net periodic benefit cost for the Company’spost-retirement benefit plan in the years ended December 31, 2005, 2004and 2003 are as follows:

 
| ** **    | ** ** | **Post-Retirement Benefits** | ** ** |
|---------------|------------|------------------------------|------------|
| ** **    | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Discount rate |       | 6.00                         | %          | 6.25 | % | 6.88 | % |

 

For measurement purposes,the Company assumed a per capita health care benefit cost trend rate of 10.3%and 11.0% for persons retiring before and after age 65, respectively.  These rates are assumed to decrease graduallyto 5% in 2013 and remain level thereafter. A Part D Subsidy trend rate of 12% was assumed for theCompany.  These rates are assumed todecrease gradually to 5% in 2013 and remain level thereafter.  Previously, a trend rate of 12.0% in percapita cost of covered health care benefits was assumed for 2004.  These rates are assumed to decrease graduallyto 5% by 2013 and remain at that level thereafter.

 

The assumed health care costtrend rates have a significant effect on the amounts reported for the healthcare plan. A one-percentage-point change in assumed health care cost trend rateswould have the following effects:

 
| ** **                                                    | ** ** | **One-  Percentage-Point Increase** | ** ** | **One-  Percentage-Point Decrease** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                    | ** ** | **(In thousands)**                       | ** ** |
| Effect on total of service cost and  interest cost components |       | $                                        | 50         |                                     | $          | (41 | ) |
| Effect on postretirement benefit obligation                   |       | $                                        | 636        |                                     | $          | (537 | ) |

 

**Savings Plans**

 

The Company’s qualifiedemployees may contribute from 2% to 16% of their compensation up to certaindollar limits to self-directed 401(k) savings plans. In certain of the Company’s(but not all) 401(k) savings plans, the Company matches in cash, one-half ofthe employee contribution up to 6% (i.e. the Company matches up to 3%) of theemployee’s compensation. The assets in the 401(k) savings plans are invested ina variety of diversified mutual funds. The Company contributions to the 401(k)savings plans in the years ended December 31, 2005, 2004 and 2003 wereapproximately $2.7 million, $2.5 million and $2.4 million, respectively.

 

**Multi-Employer Pension Plan**

 

The Company participates ina multi-employer pension plan for providing retirement benefits to certainunion employees.  The Company’scontributions to the multiemployer union pension plan in the year ended December 31,2005, was $0.8 million, $0.8 million and $0.7 million in the years ended December 31,2004 and 2003.  No information isavailable for each of the other contributing employers for this plan.

 

**17.****      ****Fair Value of FinancialInstruments**

 

The carrying amounts and theestimated fair values of the Company’s financial instruments for which it ispracticable to estimate fair value are as follows (in thousands):

 

| ** **                    | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|-------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **Carrying  Value**        | ** ** | **Fair Value**             | ** ** | **Carrying  Value** | ** ** | **Fair Value** | ** ** |
| Senior Notes                  |       | $                          | 417,110    |                       | $          | 434,830 |   | $ | 432,110 |   | $ | 479,548 |   |
| Private Placement Debt        |       | $                          | 450,000    |                       | $          | 484,676 |   | $ | 450,000 |   | $ | 496,937 |   |
| Note Payable to Capital Trust |       | $                          | 134,021    |                       | $          | 144,546 |   | $ | 134,021 |   | $ | 155,334 |   |

 

The fair values of theSenior Notes were determined based on the quoted market prices and the fairvalues of the Private Placement Debt and the Note Payable to Capital Trust weredetermined using quoted market prices on comparable debt instruments.

 

For instruments includingcash and cash equivalents, accounts receivable, accounts payable and other debtthe carrying amount approximates fair value because of the short maturity ofthese instruments. In accordance with the requirements of SFAS No. 107,*Disclosures About Fair Value of FinancialInstruments*, the Company believes it is not practicable to estimatethe current fair value of the related party receivables and related partypayables because of the related party nature of the transactions.

 

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**18.****      ****Quarterly Information(unaudited)**

 
| ** **                                       | ** ** | **1st Quarter**                           | ** ** | **2nd Quarter** | ** ** | **3rd Quarter** | ** ** | **4th Quarter** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                                       | ** ** | **2005**                                  | ** ** | **2004**        | ** ** | **2005 (c)**    | ** ** | **2004**        | ** ** | **2005** | ** ** | **2004** | ** ** | **2005 (d)** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(In thousands, except per share data)** | ** ** |
| Total revenue                                    |       | $                                         | 162,279    |            | $          | 166,864         |       | $               | 188,453    |   | $ | 197,958 |   | $ | 164,173 |   | $ | 194,011 |   | $ | 191,978 |   | $ | 221,046 |   |
| Operating income                                 |       | $                                         | 39,268     |            | $          | 48,875          |       | $               | 63,700     |   | $ | 77,461 |   | $ | 36,538 |   | $ | 70,736 |   | $ | 37,935 |   | $ | 87,679 |   |
| Net income                                       |       | $                                         | 13,075     |            | $          | 17,894          |       | $               | 65,614     |   | $ | 36,007 |   | $ | 11,678 |   | $ | 30,428 |   | $ | 9,850 |   | $ | 39,613 |   |
| Income applicable  to common stockholders (a)    |       | $                                         | 13,073     |            | $          | 17,622          |       | $               | 65,614     |   | $ | 35,735 |   | $ | 11,678 |   | $ | 30,156 |   | $ | 9,850 |   | $ | 39,362 |   |
| **Income  per common share basic: (b)**          |       |                                      |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |
| Net income                                       |       | $                                         | 0.14       |            | $          | 0.19            |       | $               | 0.71       |   | $ | 0.38 |   | $ | 0.13 |   | $ | 0.32 |   | $ | 0.11 |   | $ | 0.42 |   |
| Number of common  shares used in the calculation |       | 92,849                                    |       | 92,902          |       | 92,810          |       | 93,087          |       | 92,867 |   | 92,938 |   | 92,777 |   | 92,788 |   |
| **Income  per common share diluted: (b)**        |       |                                      |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |
| Net income                                       |       | $                                         | 0.14       |            | $          | 0.19            |       | $               | 0.68       |   | $ | 0.37 |   | $ | 0.13 |   | $ | 0.32 |   | $ | 0.11 |   | $ | 0.41 |   |
| Number of common  shares used in the calculation |       | 93,319                                    |       | 93,615          |       | 98,334          |       | 101,601         |       | 93,254 |   | 101,263 |   | 93,076 |   | 101,210 |   |
|                                             |       |                                      |       |            |       |            |       |            |       |   |   |   |   |   |   |   |   |
| Dividends  declared per share                    |       | $                                         | 0.07       |            | $          | 0.06            |       | $               | 0.07       |   | $ | 0.06 |   | $ | 0.07 |   | $ | 0.06 |   | $ | 0.07 |   | $ | 0.07 |   |

 

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(a)                Net income applicable to common stockholdersgives effect to dividends on the Preferred Stock issued in connection with theacquisition of KHBS-TV/KHOG-TV.

(b)               Per common share amounts for the quarters andthe full years have each been calculated separately. Accordingly, quarterlyamounts may not add to the annual amounts because of differences in the averagecommon shares outstanding during each period and, with regard to diluted percommon share amounts only, because of the inclusion of the effect ofpotentially dilutive securities only in the periods in which such effect wouldhave been dilutive.

(c)                During the second quarter of 2005, $31.9million in tax benefits were recorded as a result of the settlement of certaintax return examinations and $5.5 million in tax benefits were recorded as aresult of a change in Ohio tax law.

(d)               In December 2005, we recorded animpairment charge of $29.2 million to write down to fair value WDSU’s FCClicense and goodwill.

 

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**ITEM 9.****          CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

 

**ITEM9A.****      ****CONTROLS AND PROCEDURES**

 

(a) *   Evaluation of Disclosure Controlsand Procedures.*    Our management performed anevaluation under the supervision and with the participation of the ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”) of theeffectiveness of the design and operation of our disclosure controls andprocedures (as that term is defined in Exchange Act Rule 13a-15(e)) asof  December 31, 2005.   Based on that evaluation, our management,including the CEO and CFO, concluded that our disclosure controls andprocedures were effective as of December 31, 2005.

 

(b) * Management’s Annual Report on Internal ControlOver Financial Reporting. *Our management is responsible forestablishing and maintaining adequate internal control over financial reporting(as that term is defined in Exchange Act Rule 13a-15(f)).   To evaluate theeffectiveness of our internal control over financial reporting, the Companyuses the framework in *Internal Control –Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (the “COSO Framework”).  Using the COSO Framework our management,including the CEO and CFO, evaluated the Company’s internal control overfinancial reporting and concluded that our internal control over financialreporting was effective as of December 31, 2005.  Deloitte & Touche LLP, theindependent registered public accounting firm that audits our consolidatedfinancial statements included in this annual report, has issued an attestationreport on our management’s assessment of internal control over financialreporting, which is included below.

 

(c)    *Attestation Report of the Independent RegisteredPublic Accounting Firm.*

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Hearst-Argyle Television, Inc.

 

We have auditedmanagement’s assessment, included in the accompanying Management’s AnnualReport on Internal Control over Financial Reporting, that Hearst-ArgyleTelevision, Inc. and subsidiaries (the “Company”) maintained effectiveinternal control over financial reporting as of December 31, 2005, basedon the**criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting.  Our responsibility is toexpress an opinion on management’s assessment and an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

 

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances.  We believe that our audit provides a reasonable basis forour opinions.

 

A company’sinternal control over financial reporting is a process designed by, or underthe supervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by the company’sboard of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely

 

71

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detection ofunauthorized acquisition, use, or disposition of the company’s assets thatcould have a material effect on the financial statements.

 

Because of theinherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detectedon a timely basis.  Also, projections of any evaluation of the effectivenessof the internal control over financial reporting to future periods are subjectto the risk that the controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

In our opinion,management’s assessment that the Company maintained effective internal controlover financial reporting as of December 31, 2005, is fairly stated, in allmaterial respects, based on the criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2005, based on the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have alsoaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated financial statements andfinancial statement schedule as of and for the year ended December 31,2005 of the Company and our report dated February 23, 2006 expressed anunqualified opinion on those consolidated financial statements andfinancial statement schedule.

 
| /s/ DELOITTE & TOUCHE LLP |   |
|------------------------------------|--------|
|                               |
| New York, New York                 |
| February 23, 2006             |

 

(d) *Changes in Internal Control Over Financial Reporting.*   Our management, includingthe CEO and CFO, performed an evaluation of any changes that occurred in ourinternal control over financial reporting during the fiscal quarter ended December 31,2005.  That evaluation did not identifyany changes in our internal control over financial reporting that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**ITEM 9B.****      ****OTHER INFORMATION**

 

Notapplicable.

 

**PART III**

 

**ITEM 10.****       ****DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

Information called for byItem 10 is set forth under the headings “Executive Officers of the Company,” “Electionof Directors Proposal” and “Board of Directors—General Information” in ourProxy Statement relating to the 2006 Annual Meeting of Stockholders (the “2006Proxy Statement”), which information we incorporate by reference into thisreport.

 

**ITEM 11.****       ****EXECUTIVE COMPENSATION**

 

Information called for byItem 11 is set forth under the heading “Executive Compensation and OtherMatters” in the 2006 Proxy Statement, which information we incorporate byreference into this report.

 

**ITEM 12.**        **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Information called for byItem 12 is set forth under the headings “Equity Compensation Plans” and “PrincipalStockholders” in our 2006 Proxy Statement, which information we incorporate byreference into this report.

 

72

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**ITEM 13.****                      ****CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

Information called for byItem 13 is set forth under the heading “Certain Relationships and RelatedTransactions” in our 2006 Proxy Statement, which information we incorporate byreference into this report.

 

**ITEM 14.****                      ****PRINCIPAL ACCOUNTANT FEESAND SERVICES**

 

Information called for byItem 14 is set forth under the heading “Independent Auditors Fees” in the 2006Proxy Statement, which information we incorporate by reference into thisreport.

 

**PART IV**

 

**ITEM 15.****                      ****EXHIBITS AND FINANCIALSTATEMENT SCHEDULES**

 

**(a)****         ****Financial Statements,Schedules and Exhibits**

 

(1)          The financial statementslisted in the Index for Item 8 hereof are filed as part of this report.

 

(2)          The financial statementschedules required by Regulation S-X are included as part of this report or areincluded in the information provided in the Notes to Consolidated FinancialStatements, which are filed as part of this report.

 

**SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS**

 

**HEARST-ARGYLETELEVISION, INC.**

 
| **Description**                       | ** ** | **Balance at  Beginning of  Year** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Deductions (1)** | ** ** | **Balance at  End of  Year** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|------------------------------------------------|------------|--------------------|------------|------------------------------|------------|
| Year Ended December 31, 2003:    |       |                               |       |                                           |       |               |       |                         |       |
| Allowance  for uncollectible accounts |       | $                                  | 4,702,000  |                                           | $          | 298,000            |       | $                            | (891,000   | ) | $ | 4,109,000 |   |
| Year Ended December 31, 2004:    |       |                               |       |                                           |       |               |       |                         |       |
| Allowance  for uncollectible accounts |       | $                                  | 4,109,000  |                                           | $          | 125,000            |       | $                            | (950,000   | ) | $ | 3,284,000 |   |
| Year Ended December 31, 2005:    |       |                               |       |                                           |       |               |       |                         |       |
| Allowance  for uncollectible accounts |       | $                                  | 3,284,000  |                                           | $          | 888,000            |       | $                            | (1,229,000 | ) | $ | 2,943,000 |   |

 

----

(1)    Net write-off of accounts receivable.

 

(3)          Thefollowing exhibits are filed as a part of this report:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                             |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                        |
| 10.2             |       | Affiliation Agreement, dated as of December 4,  2005, between the ABC Television Network and the Company.*                                             |
|             |       |                                                                                                                                                        |
| 10.5             |       | Amendment No. 8 to Services Agreement, dated as January  1, 2006, between the Company and The Hearst Corporation,                                           |
|             |       |                                                                                                                                                        |
| 10.6             |       | Third Extension of the Amended and Renewed Option  Agreement, dated as of January 1, 2006, between the Company and The Hearst  Corporation,                 |
|             |       |                                                                                                                                                        |
| 10.7             |       | Third Extension of the Amended Studio Lease  Agreement, dated as of January 1, 2006, between the Company and The Hearst  Corporation,                       |
|             |       |                                                                                                                                                        |
| 10.8             |       | Amended and Restated Retransmission Rights Agency  Agreement, dated as of January 31, 2006, between Lifetime Entertainment  Services and the Company.* |

 

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*                 Portions of this agreement have been redactedpursuant to a request for confidential treatment submitted to the SEC February27, 2006.  We have filed the redactedmaterial separately with the SEC.

 

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| 21.1   |   | List of Subsidiaries of the Company.                                                                                                                                                                                   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                   |
| 23.1   |   | Consent of Independent Registered Public  Accounting Firm.                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                   |
| 24.1   |   | Powers of Attorney (contained on signature  page).                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                   |
| 31.1   |   | Certification by David J. Barrett,  President and Chief Executive Officer, pursuant to Section 302 of the  Sarbanes Oxley Act of 2002.                                                                            |
|   |   |                                                                                                                                                                                                                   |
| 31.2   |   | Certification by Harry T. Hawks, Executive  Vice President and Chief Financial Officer, pursuant to Section 302 of  the Sarbanes Oxley Act of 2002.                                                               |
|   |   |                                                                                                                                                                                                                   |
| 32.1   |   | Certification by David J. Barrett,  President and Chief Executive Officer, and Harry T. Hawks, Executive Vice  President and Chief Financial Officer, pursuant to Section 906 of the  Sarbanes Oxley Act of 2002. |

 

**(b)****                                 ****Exhibits**

 

The following documents arefiled or incorporated by reference as exhibits to this report.

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                            |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Amended and Restated Agreement and Plan of Merger,  dated as of March 26, 1997, among The Hearst Corporation, HAT Merger Sub, Inc.,  HAT Contribution Sub, Inc. and Argyle (incorporated by reference to  Appendix A of the proxy statement/prospectus included in our Registration  Statement on Form S-4 (File No. 333-32487)). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                       |
| 2.2                  |       | Amended and Restated Agreement and Plan of  Merger, dated as of May 25, 1998, by and among Pulitzer Publishing  Company, Pulitzer Inc. and the Company (incorporated by reference to Annex I  to our Registration Statement on Form S-4 (File No. 333-72207)).                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                       |
| 3.1                  |       | Amended and Restated Certificate of  Incorporation of the Company (incorporated by reference to Appendix C the  proxy statement/prospectus included in our Registration Statement on Form S-4  (File No. 333-32487)).                                                                                                                            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                       |
| 3.2                  |       | Amendment No. 1 to the Amended and Restated  Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.3  of our Annual Report on Form 10-K for the fiscal year ended December 31,  1998).                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                       |
| 3.3                  |       | Amended and Restated Bylaws of the Company  (incorporated by reference to Exhibit 3.2 of our Registration Statement  on Form S-4 (File No. 333-72207)).                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                       |
| 4.1                  |       | Indenture, dated as of November 13, 1997,  between the Company and Bank of Montreal Trust Company, as trustee  (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K  dated November 12, 1997 (File   No. 000-27000)).                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                       |
| 4.2                  |       | First Supplemental Indenture, dated as of November 13,  1997, between the Company and Bank of Montreal Trust Company, as trustee  (incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K  dated November 12, 1997 (File No. 000-27000)).                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                       |
| 4.3                  |       | Global Note representing $125,000,000 of 7% Senior  Notes Due November 15, 2007 (incorporated by reference to Exhibit 4.3  of our Current Report on Form 8-K dated November 12, 1997 (File No. 000-27000)).                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                       |
| 4.4                  |       | Global Note representing $175,000,000 of 71⁄2%  Debentures Due November 15, 2027 (incorporated by reference to Exhibit 4.4  of our Current Report on Form 8-K dated November 12, 1997 (File No. 000-27000)).                                                                                                                   |

 

74

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| 4.5    |   | Second Supplemental Indenture, dated as of January 13,  1998, between the Company and Bank of Montreal Trust Company, as trustee  (incorporated by reference to Exhibit 4.3 of our Current Report on Form 8-K  dated January 13, 1998 (File No. 000-27000)).                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 4.6    |   | Specimen of the stock certificate for the Company’s  Series A Common Stock, $.01 par value per share (incorporated by reference  to Exhibit 4.11 of our Annual Report on Form 10-K for the fiscal  year ended December 31, 1998).                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 4.7    |   | Form of Registration Rights Agreement among  the Company and the Holders (incorporated by reference to Exhibit B to Exhibit 2.1  of our Schedule 13D/A, filed on September 5, 1997 (File No. 005-45627)).                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 4.8    |   | Form of Note Purchase Agreement, dated December 1,  1998, by and among the Company, as issuer of the notes, and the note  purchasers named therein (including form of note attached as an exhibit  thereto) (incorporated by reference to Exhibit 4.13 of our Registration  Statement on Form S-4 (File No. 333-72207)). |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 4.9    |   | Amended and Restated Declaration of Trust of  Hearst-Argyle Capital Trust (incorporated by reference to Exhibit 99.1  of our Current Report on Form 8-K dated December 20, 2001).                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 4.10   |   | Terms of 7.5% Series B Convertible Preferred  Securities and 7.5% Series B Convertible Common Securities (incorporated  by reference to Exhibit 99.2 of our Current Report on Form 8-K  dated December 20, 2001).                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 4.11   |   | Indenture, dated as of December 20, 2001, by  Hearst-Argyle Television, Inc. to Wilmington Trust Company, as Trustee  (incorporated by reference to Exhibit 99.3 of our Current Report on Form 8-K  dated December 20, 2001).                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 4.12   |   | Registration Rights Agreement, by and among  Hearst-Argyle Television, Inc. and the purchasers of the Trust Preferred  Securities (incorporated by reference to Exhibit 99.4 of our Current  Report on Form 8-K dated December 20, 2001).                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | Letter Agreement between the Company and NBC  Television Network dated June 30, 2000 (incorporated by reference to Exhibit 10.2  of our Quarterly Report for the fiscal quarter ended September 30,  2000).                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Affiliation Agreement, dated as of December 4,  2005, between the ABC Television Network and the Company.*                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Affiliation Agreement, dated as of November 28,  2005, between Hearst-Argyle Properties, Inc. and CBS Broadcasting, Inc.  (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K  filed November 29, 2005).                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Affiliation Agreement, dated as of November 28,  2005, between the Company and CBS Broadcasting, Inc. (incorporated by  reference to Exhibit 10.2 of our Current Report on Form 8-K filed November 29,  2005).                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | Amendment No. 8 to Services Agreement, dated as of  January 1, 2006, between the Company and The Hearst Corporation,                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.6   |   | Third Extension of the Amended and Renewed Option  Agreement, dated as of January 1, 2006, between the Company and The Hearst  Corporation,                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.7   |   | Third Extension of the Amended Studio Lease  Agreement, dated as of January 1, 2006, between the Company and The Hearst  Corporation,                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                              |
| 10.8   |   | Amended and Restated Retransmission Rights  Agency Agreement, dated as of January 31, 2006, between Lifetime  Entertainment Services and the Company.*                                                                                                                                                                                       |

 

75

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| 10.9   |   | Five-Year Credit Agreement dated April 15,  2005, among the Company, the Lenders party thereto, JPMorgan Chase Bank, N.A.  as Administrative Agent, Bank of America, N.A., and Wachovia Bank, National  Association as Co-Syndication Agents, and Harris Nesbitt and BNP Paribas as  Co-Documentation Agents (incorporated by reference to Exhibit 10.1 of  our Current Report on Form 8-K filed April 21, 2005). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.10  |   | Amended and Restated 1997 Stock Option Plan  (incorporated by reference to Exhibit 10.21 of our Annual Report on Form 10-K  for the fiscal year ended December 31, 2002).                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.11  |   | 2003 Incentive Compensation Plan (incorporated by  reference to Exhibit 10.22 of our Annual Report on Form 10-K for  the fiscal year ended December 31, 2002).                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.12  |   | 2004 Long Term Incentive Compensation Plan  (incorporated by reference to Exhibit 99.2 of our Current Report on Form 8-K  filed October 28, 2004).                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.13  |   | Employment Agreement, dated as of December 22,  2005, between the Company and David J. Barrett (incorporated by reference to Exhibit 10.1  of our Current Report on Form 8-K filed December 22, 2005).                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.14  |   | Employment Agreement, dated as of January 1,  2005, between the Company and Harry T. Hawks (incorporated by reference to Exhibit 10.1  of our Current Report on Form 8-K filed October 6, 2005).                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.15  |   | Employment Agreement, dated as of January 1,  2006, between the Company and Steven A. Hobbs (incorporated by reference to Exhibit 10.1  of our Current Report on Form 8-K filed February 10, 2006).                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.16  |   | Employment Agreement, dated as of January 1,  2006, between the Company and Terry Mackin (incorporated by reference to Exhibit 10.2  of our Current Report on Form 8-K filed February 10, 2006).                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.17  |   | Employment Agreement, dated as of January 1,  2005, between the Company and Philip M. Stolz (incorporated by reference to Exhibit 10.7  of our Current Report on Form 8-K filed April 1, 2005).                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 21.1   |   | List of Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 23.1   |   | Consent of Independent Registered Public  Accounting Firm.                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 24.1   |   | Powers of Attorney (contained on signature page).                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1   |   | Certification by David J. Barrett, President and  Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley  Act of 2002.                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2   |   | Certification by Harry T. Hawks, Executive Vice  President and Chief Financial Officer, pursuant to Section 302 of the  Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 32.1   |   | Certification by David J. Barrett, President and  Chief Executive Officer, and Harry T. Hawks, Executive Vice President and  Chief Financial Officer, pursuant to Section 906 of the Sarbanes Oxley  Act of 2002.                                                                                                                                                                                                                |

 

----

*                 Portions of this agreement have been redactedpursuant to a request for confidential treatment submitted to the SEC February27, 2006.  We have filed the redactedmaterial separately with the SEC.

 

76

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|       | HEARST-ARGYLE TELEVISION, INC. |
|------------|--------------------------------|
|       |                           |   |
|       | By:                            | /s/   JONATHAN C. MINTZER |
| ** ** |                           | **Name: Jonathan C. Mintzer** |
|       |                           | **Title: Vice President, Secretary  and General  Counsel** |
|       |                           |   |
|       | Dated:                         | February 24, 2006 |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Company in the capacities indicated.

 
| **Signatures**                  | ** ** | **Title**                                   | ** ** | **Date**               |
|---------------------------------|------------|---------------------------------------------|------------|------------------------|
|                            |       |                                        |       |                   |
| /S/ DAVID J. BARRETT            |       | President, Chief Executive                  |       | February 24, 2006 |
| **David J.  Barrett**           |       | Officer and Director                   |       |                   |
|                            |       | (Principal Executive  Officer)         |       |                   |
|                            |       |                                        |       |                   |
| /S/ HARRY T. HAWKS              |       | Executive Vice President and |       | February 24, 2006 |
| **Harry T.  Hawks**             |       | Chief Financial Officer                     |       |                   |
|                            |       | (Principal Financial  Officer)              |       |                   |
|                            |       |                                        |       |                   |
| /S/ LYDIA G. BROWN              |       | Corporate Controller                        |       | February 24, 2006 |
| **Lydia G.  Brown**             |       | (Principal Accounting  Officer)             |       |                   |
|                            |       |                                        |       |                   |
| /S/ VICTOR F. GANZI             |       | Chairman of the Board                       |       | February 24, 2006 |
| **Victor F.  Ganzi**            |       |                                        |       |                   |
|                            |       |                                        |       |                   |
|                            |       | Director                                    |       | February 24, 2006 |
| **Frank A.  Bennack, Jr.** |       |                                        |       |                   |
|                            |       |                                        |       |                   |
| /S/ JOHN G. CONOMIKES           |       | Director                                    |       | February 24, 2006 |
| **John G.  Conomikes**          |       |                                        |       |                   |
|                            |       |                                        |       |                   |
| /S/ KEN J. ELKINS               |       | Director                                    |       | February 24, 2006 |
| **Ken J.  Elkins**              |       |                                        |       |                   |
|                            |       |                                        |       |                   |
| /S/ GEORGE R. HEARST, JR.  |       | Director                                    |       | February 24, 2006 |
| **George R.  Hearst, Jr.** |       |                                        |       |                   |
|                            |       |                                        |       |                   |
| /S / WILLIAM R. HEARST III      |       | Director                                    |       | February 24, 2006 |
| **William R.  Hearst III**      |       |                                        |       |                   |
|                            |       |                                        |       |                   |
| /S/ BOB MARBUT                  |       | Director                                    |       | February 24, 2006 |
| **Bob Marbut**                  |       |                                        |       |                   |
|                            |       |                                        |       |                   |
| /S/ GILBERT C. MAURER           |       | Director                                    |       | February 24, 2006 |
| **Gilbert C.  Maurer**          |       |                                        |       |                   |
|                            |       |                                        |       |                   |
| /S/ MICHAEL E. PULITZER         |       | Director                                    |       | February 24, 2006 |
| **Michael E.  Pulitzer**        |       |                                        |       |                   |
|                            |       |                                        |       |                   |
| /S/ DAVID PULVER                |       | Director                                    |       | February 24, 2006 |
| **David  Pulver**               |       |                                        |       |                   |
|                            |       |                                        |       |                   |
| /S/ CAROLINE L. WILLIAMS        |       | Director                                    |       | February 24, 2006 |
| **Caroline  L. Williams**       |       |                                        |       |                   |

 

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