BLC Belo Corp.

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2007

 

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file no. 1-8598

 

 

 

Registrant’s telephone number, including area code: (214) 977-6606

 

Securities registered pursuant to Section 12(g) of the Act:   Series B Common Stock, $1.67 par value

(Title of class)                                             

 

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Act) Yes   X    No    

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Yes       No   X 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X    No    

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

(Do not check in a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes       No   X 

 

The aggregate market value of the registrant’s voting stock held by nonaffiliates on June 30, 2007, based on the closing price for the registrant’s Series A Common Stock on such date as reported on the New York Stock Exchange, was approximately $1,849,350,952. *

 

Shares of Common Stock outstanding at January 31, 2008: 102,259,979 shares. (Consisting of 88,017,240 shares of Series A Common Stock and 14,242,739 shares of Series B Common Stock.)

 

* For purposes of this calculation, the market value of a share of Series B Common Stock was assumed to be the same as the share of Series A Common Stock into which it is convertible.

 

Documents incorporated by reference:

 

Portions of the registrant’s Proxy Statement, prepared pursuant to Regulation 14A, relating to the Annual Meeting of Shareholders to be held May 13, 2008, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this report.

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 1 

 

 

BELO CORP.
FORM 10-K
TABLE OF CONTENTS

 

 

 

PAGE 2   Belo Corp. 2007 Annual Report on Form 10-K

 

Item 1. Business

 

Belo Corp. (Belo or the Company), a Delaware corporation, began as a Texas newspaper company in 1842. At December 31, 2007, Belo was one of the nation’s largest media companies with a diversified group of market-leading television broadcasting and newspaper publishing operations, including interactive media and cable news operations. Belo operates news and information franchises in some of America’s most dynamic markets and regions. The Company owns 20 television stations (six in the largest 14 U.S. markets) that reach 14 percent of U.S. television households, and manages one television station through a local marketing agreement (LMA). In addition, Belo owns two local and two regional cable news channels and holds ownership interests in two other cable news operations. At December 31, 2007, Belo’s primary daily newspapers were The Dallas Morning News, The Providence Journal and The Press-Enterprise (Riverside, CA) and Belo operated more than 30 news and information Web sites, in addition to participating in several interactive alliances and offering a broad range of Internet-based products.

 

The Company believes the success of its media franchises is built upon providing local and regional news, information and community service of the highest caliber for over 165 years. These principles have built durable relationships with viewers, readers, advertisers and online users and have guided Belo’s success.

 

Financial information for each of the Company’s reportable segments can be found under Item 7–Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements, Note 18–Segment information.

 

Recent Developments

 

On September 28, 2007, the board of directors of Belo authorized management to pursue the distribution of its newspaper businesses and related assets into a separate public company. An important objective of the distribution was to allow each of the Company’s newspaper and television businesses to more efficiently obtain and allocate resources for its distinct business and to allow the management of each of these two businesses to focus on the opportunities and challenges specific to its particular operations. The distribution was completed on February 8, 2008, in the form of a pro-rata, tax-free dividend to Belo’s shareholders of 0.20 shares of A. H. Belo Corporation (A. H. Belo) common stock for each share of the Company’s common stock owned at the close of business on January 25, 2008.

 

In connection with the distribution, the Company undertook the following:

 

 

See “Newspaper Group” below for a discussion of the Company’s newspaper group businesses included in the distribution.

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 3 

 

Television Group

 

The Company’s television broadcasting operations began in 1950 with the acquisition of WFAA-TV in Dallas/Fort Worth, shortly after the station began operations. During the next 52 years, through various transactions, Belo acquired 18 more television stations across the United States, which brought the total to 19 owned television stations in 15 U.S. markets. On February 26, 2007, Belo purchased WUPL-TV in New Orleans, Louisiana, its 20th owned television station. Belo also manages one station through a local marketing agreement (LMA) and has joint marketing and shared services agreements with the owner and operator of KFWD-TV, Channel 52, licensed to Fort Worth, Texas.

 

Belo is the nation’s 4th largest non-network owned television station group based on revenues and U.S. television household coverage. In the 15 U.S. markets in which Belo’s television stations operate, nine of Belo’s stations are ranked number one and four are ranked number two (including stations tied with one or more other stations in the market) in “sign-on/sign-off” audience rating, based on the November 2007 Nielsen Media Research report. Belo has six stations in the 14 largest U.S. markets and 13 stations in the 50 largest U.S. markets.

 

Belo’s stations are concentrated primarily in three high population growth regions: Texas, the Northwest and the Southwest. Six of the Company’s stations are located in the following four major metropolitan areas in the United States:

 

 

Belo’s television stations have been recognized with numerous local, state and national awards for outstanding news coverage. Since 1957, Belo’s television stations have garnered 24 Alfred I. duPont-Columbia Awards, 20 George Foster Peabody Awards, and 31 Edward R. Murrow Awards–the industry’s most prestigious honors.

 

The following table sets forth information for the Company’s television stations (including the station operated through an LMA) and regional cable channels and their markets as of December 31, 2007:

 

 

 

 

PAGE 4   Belo Corp. 2007 Annual Report on Form 10-K

 

 

The principal source of revenue for Belo’s television stations is the sale of airtime to local, regional and national advertisers. Generally, rates for national and local spot advertising sold by the Company are determined by each station, and the station receives all of the revenues, net of agency commissions, for that advertising. Rates are influenced by the demand for advertising time. This demand is influenced by a variety of factors, including the size and demographics of the local population, the concentration of retail stores, local economic conditions in general, and the popularity of the station’s programming. In 2007, approximately 93 percent of total Television Group revenues were derived from advertising spot and Internet revenues with the largest percentage of the advertising spot and Internet revenues generated from the automotive category. Automotive advertising revenues totaled approximately 24 percent of total Television Group spot revenues in 2007.

 

Web sites of each of the Company’s television stations provide consumers with accurate and timely news and information as well as a variety of other products and services. Belo obtains immediate feedback through online communication with its audience, which allows the Company to tailor the way in which it delivers news and information to serve the needs of its audience. According to fourth quarter 2007 comScore Ratings, the Company has eight of the top 50 local television-affiliated Web sites in the U.S. Revenues for the Television Group’s interactive media in 2007 represented 3.7 percent of total Television Group advertising revenues and were derived principally from advertising on the various Television Group Web sites.

 

Pursuant to FCC rules, every three years local television stations must elect to either (1) require cable and/or direct broadcast satellite operators to carry the stations’ signals or (2) enter into retransmission consent negotiations for carriage. At present, Belo has retransmission consent agreements with the majority of cable operators and the primary satellite providers for carriage of its television stations and cable news channels, with some agreements having terms of more than three years. Approximately three percent of total television station revenues were derived from retransmission fees in 2007. The revenue received from retransmission agreements is recorded in the other revenue section of Television Group revenues.

 

The Company has a balanced portfolio of broadcast network-affiliated stations, with four ABC affiliates, four NBC affiliates and five CBS affiliates, and at least one large-market station associated with each network. As such, Belo’s Television Group revenue streams are not significantly affected by which broadcast network leads primetime. Belo also owns two independent (IND) stations, two CW affiliates, two MNTV affiliates and one FOX affiliate, and operates one additional CW affiliate through an LMA.

 

The Company has network affiliation agreements with ABC, CBS, NBC, FOX, CW and MNTV. The Company’s network affiliation agreements generally provide the station with the exclusive right to broadcast over the air in its local service area all programs transmitted by the network with which the station is affiliated. In return, the network has the right to sell most of the advertising time during such broadcasts. In connection with these network affiliation agreements, the Company’s stations may receive network compensation for broadcasting network programming. Each of these agreements has a stated expiration date, often several years after an agreement takes effect. Typically, but not always, negotiations regarding a renewal of an affiliation agreement occur a few months before expiration. In addition, some of the networks with which our stations are affiliated have required us and other broadcast groups, as a condition to the renewal of affiliation agreements, to reduce or eliminate network affiliate compensation and, in some cases, to make certain cash payments to the network, and to accept other material modifications of existing affiliation agreements. Approximately two percent of total Television Group revenues were derived from network compensation in 2007. Over time, network compensation is expected to decline.

 

The Company also owns two regional cable news operations, Texas Cable News (TXCN) in Dallas/Fort Worth, Texas, and Northwest Cable News (NWCN) in Seattle, Washington, and two local cable news operations, 24/7 NewsChannel (24/7) in Boise, Idaho and NewsWatch on Channel 15 in New Orleans, Louisiana. These operations provide news coverage in a comprehensive 24-hour a day format using the news resources of the Company’s television stations in Texas, Washington, Oregon, Idaho and Louisiana. The Company also operates, through joint ventures, two cable news channels in partnership with Cox Communications and other parties that provide local news coverage in Phoenix, Arizona (Arizona NewsChannel) and Hampton/Norfolk, Virginia (Local News on Cable). These cable news channels use the news resources of the television stations owned by the Company in those markets. During 2007, approximately two percent of total Television Group revenues were derived from Belo’s cable news operations and consisted primarily of advertising and subscriber-based fees.

 

Competition for audience share and advertising revenues at Belo’s television stations and cable news operations is primarily related to programming content and advertising rates. The four major national television networks (ABC, NBC, CBS and FOX) are represented in each television market in which Belo has a television station. Competition for advertising sales and local viewers within each market is intense, particularly among the network-affiliated television stations. Belo’s businesses may also compete with each other for national, regional and local advertising. Additionally, the Company’s competitors in the Television Group include other broadcast stations, cable and satellite television channels, local, regional and national newspapers, magazines, radio, direct mail, yellow pages, the Internet, mobile devices and other media. Advertising rates are set based upon a program’s popularity, the size of the market served, the availability of alternative advertising media and the number of advertisers competing for the available time.

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 5 

 

FCC Regulation

 

General.      Belo’s television broadcast operations are subject to the jurisdiction of the Federal Communications Commission, or FCC, under the Communications Act of 1934, as amended. Among other things, the Communications Act empowers the FCC to (1) issue, renew, revoke and modify station licenses; (2) regulate stations’ technical operations and equipment; and (3) impose penalties for violations of the Communications Act or FCC regulations. The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee without prior FCC approval.

 

Station Licenses.      The FCC grants television station licenses for terms of up to eight years. A television license must be renewed if the FCC finds that: (1) the station has served the public interest, convenience, and necessity; (2) there have been no serious violations by the licensee of the Communications Act or the FCC’s rules and regulations; and (3) there have been no other violations by the licensee of the Communications Act or the FCC’s rules and regulations that taken together, constitute a pattern of abuse. License renewal applications for KHOU, WFAA and KSKN are currently pending. Under the FCC’s rules, a license expiration date is automatically extended pending review and grant of the renewal application. The current license expiration dates for each of Belo’s television broadcast stations are listed below.

 

 

 

The licenses for stations KCWX and KFWD, to which the Company provides certain programming and other services, expire August 1, 2014.

 

Programming and Operations.      Rules and policies of the FCC and other federal agencies regulate certain programming practices and other areas affecting the business and operations of broadcast stations.

 

The Children’s Television Act of 1990 limits commercial matter in children’s television programs and requires stations to provide at least three hours of children’s educational programming per week on their analog channels. The FCC has determined that the amount of children’s educational programming a digital television, or DTV, broadcaster must air will increase proportionally with the number of free video programming streams it broadcasts simultaneously or multicasts. The FCC also restricts commercialization of children’s programming, including certain promotions of other programs and displays of Web site addresses during children’s programming.

 

In November 2007, the FCC adopted an Order imposing new public file and public interest reporting requirements on broadcasters. Pursuant to these new requirements, which could take effect sometime during the first quarter of 2008, stations with Web sites will be required to make certain portions of their public inspection files available online and broadcast notifications on how to access the public file. Stations also will be required to file quarterly a new, standardized form that will track various types and quantities of local programming. The form will require, among other things, information about programming related to local civic affairs, local electoral affairs, public service announcements, and independently-produced programming. The new standardized form will significantly increase recordkeeping requirements for television broadcasters. The Company expects that station owners and other parties will ask the FCC to reconsider the new reporting requirements and will seek to postpone their implementation.

 

In December 2007, the FCC issued a Report on Broadcast Localism and a Notice of Proposed Rulemaking. The Report tentatively concluded that broadcast licensees should be required to have regular meetings with permanent local advisory boards to ascertain the needs and interests of communities. The Report also tentatively adopted specific renewal application processing guidelines that would require broadcasters to air a minimum amount of local programming. The Report seeks comment on a variety of other issues concerning localism including potential changes to the main studio rule, network affiliation rules, and sponsorship identification rules. Belo cannot predict whether the FCC will codify some or all of the specific localism initiatives discussed in the Report.

 

The FCC’s Equal Employment Opportunity rules impose job information dissemination, recruitment, documentation and reporting requirements. Broadcasters are subject to random audits to ensure compliance with the Equal Employment Opportunity rules and could be sanctioned for noncompliance.

 

 

PAGE 6   Belo Corp. 2007 Annual Report on Form 10-K

 

The FCC has increased its enforcement efforts regarding broadcast indecency and profanity over the past few years. In June 2006, the statutory maximum fine for broadcast indecency material increased from $33 to $325.

 

Digital Television.      In 1997, the FCC adopted rules for implementing DTV service. With certain limited exceptions, broadcasters holding licenses or construction permits for full-power television stations were temporarily assigned a second channel in order to provide DTV programming. Currently, all full-power stations licensed to Belo are broadcasting digitally. At the end of the DTV transition currently scheduled for February 17, 2009, analog television transmissions will cease, television broadcasters will surrender their analog spectrum to the government, and DTV channels will be reassigned to a smaller segment of the broadcast spectrum.

 

Broadcasters may either provide a single DTV signal or “multicast” several lower resolution DTV program streams. Broadcasters also may use some of their digital spectrum to provide non-broadcast “ancillary” services (i.e., subscription video, data transfer or audio signals), provided broadcasters pay the government a fee of five percent of gross revenues received from such services. Under the FCC’s rules relating to must-carry rights of digital broadcasters, which apply to cable and certain DBS systems: (1) broadcasters are not entitled to carriage of both their analog and their digital streams during the transition; (2) digital-only stations are entitled to must-carry rights; and (3) a digital-only station asserting must-carry rights is entitled to carriage of only a single programming stream and other “program related” content, even if the digital-only station multicasts. In November 2007, the FCC decided that after the transition, cable operators will have two options to ensure that all analog cable subscribers will continue to be able to receive the signals of stations electing must-carry status. Cable operators can choose to either broadcast the signal in digital format for digital customers and “down convert” the signal to analog format for analog customers, or the cable operator may deliver the signal in digital format to all subscribers as long as the cable operator has ensured that all subscribers with analog service have set-top boxes that will convert the digital signal to analog format.

 

The FCC is currently considering issues such as whether a licensee’s public interest obligations attach to DTV service as a whole or to individual program streams and the expansion of political candidates’ access to television. Belo cannot predict the outcome of these proceedings. The FCC is in the process of finalizing broadcasters’ post-transition DTV channel assignments and establishing policies to facilitate broadcasters’ construction of their final digital facilities by the transition deadline. The FCC is also considering imposing consumer education requirements on broadcasters. Finally, Congress has charged the National Telecommunications and Information Administration (NTIA) with implementing a $1,500,000 program to provide digital converter boxes to American households that do not have DTV sets or television sets connected to cable or satellite.

 

Cable and Satellite Transmission of Local Television Signals.      Under FCC regulations, cable systems must devote a specified portion of their channel capacity to the carriage of the signals of local television stations. Television stations may elect between “must-carry rights” or a right to restrict or prevent cable systems from carrying the station’s signal without the station’s permission (retransmission consent). The FCC has established a market-specific requirement for mandatory carriage of local television stations by direct broadcast satellite, or DBS, operators, similar to that applicable to cable systems, for those markets in which a DBS carrier provides any local signal. In addition, the FCC has adopted rules relating to station eligibility for DBS carriage and subscriber eligibility for receiving signals. There are also specific statutory requirements relating to satellite distribution of distant network signals to “unserved households” (i.e., households that do not receive at least a Grade B signal from a local network affiliate).

 

Ownership Rules.      The FCC’s ownership rules affect the number, type and location of broadcast and newspaper properties that Belo may hold or acquire. The rules now in effect limit the common ownership, operation, or control of television stations serving the same area; television and radio stations serving the same area; and television stations and daily newspapers serving the same area; as well as the aggregate national audience of commonly-owned television stations. The FCC’s rules also define the types of positions and interests that are considered attributable for purposes of the ownership limits, and thus also apply to certain Belo principals and investors.

 

In addition, the Communications Act prohibits direct or indirect record ownership of a broadcast licensee or the power to vote more than one-fourth of a licensee’s stock from being held by aliens, foreign governments or their representatives, or corporations formed under the laws of foreign countries.

 

In September 2003, the FCC relaxed many of its ownership restrictions. However, on June 24, 2004, the United States Court of Appeals for the Third Circuit rejected many of the FCC’s 2003 rule changes. The court remanded the rules to the FCC for further proceedings and extended a stay on the implementation of the new rules that the court had imposed in September 2003. In December 2007, the FCC adopted a Report and Order that left most of the FCC’s pre-2003 ownership restrictions in place, but made modifications to the newspaper/broadcast cross-ownership restriction.

 

 

The FCC’s December 2007 action left in place the FCC’s current local television ownership rules. Under those rules, one entity may own two commercial television stations in a Designated Market Area (DMA) if no more than one of those stations

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 7 

 

is ranked among the top four stations in the DMA and eight independently owned, full-power stations will remain in the DMA.

 

 

The newspaper/broadcast cross-ownership rule generally prohibits one entity from owning both a commercial broadcast station and a daily newspaper in the same community. For FCC purposes, the common officers, directors and five percent or greater voting shareholders of Belo and A. H. Belo will be deemed to hold attributable interests in each of the companies after the distribution. As a result, the business and conduct of one company may have the effect of limiting the activities or strategic business alternatives available to the other company.

 

The radio/television cross-ownership rule allows a party to own one or two TV stations and a varying number of radio stations within a single market. The FCC’s December 2007 decision leaves the newspaper/broadcast and radio/television cross-ownership prohibitions in place, but provides that the FCC will evaluate newly proposed newspaper/broadcast combinations under a non-exhaustive list of four public interest factors. The FCC will apply a presumption that the combination is in the public interest if it is located in a top 20 DMA and involves the combination of a newspaper and only one television station or radio station. If the combination involves a television station, the presumption will apply only where the station is not among the top 4 in the DMA and at least eight independently owned and operated newspapers and/or full-power commercial television stations remain in the DMA. All other combinations will be presumed not in the public interest. That negative presumption can be reversed if the combination will result in a new local news source that provides at least seven hours of local news programming or if the property being acquired has failed or is failing.

 

 

The maximum percentage of U.S. households that a single owner can reach through commonly owned television stations is 39 percent and is not affected by the FCC’s December 2007 decision.

 

Conclusion.      Belo anticipates that the FCC’s latest actions concerning media ownership will be challenged in court, but cannot predict the outcome of this potential litigation.

 

The foregoing does not purport to be a complete summary of the Communications Act, other applicable statutes or the FCC’s rules, regulations and policies. Proposals for additional or revised regulations and requirements are pending before, and are considered by, Congress and federal regulatory agencies from time to time. Belo cannot predict the effect of existing and proposed federal legislation, regulations and policies on its business. Also, several of the foregoing matters are now, or may become, the subject of litigation and Belo cannot predict the outcome of any such litigation or the effect on its business.

 

Newspaper Group

 

As discussed earlier in Item 1, effective February 8, 2008, Belo distributed its newspaper businesses and related assets to its shareholders through a tax-free stock dividend of all of the common stock of A. H. Belo, a separate publicly-traded company. Belo’s publishing roots began with The Galveston Daily News, which commenced publication in 1842. As of the date of the distribution, Belo’s newspaper and publishing businesses included three primary daily newspapers: The Dallas Morning News, The Providence Journal, and The Press-Enterprise. They provide extensive local, state, national and international news. In addition to these three primary daily newspapers, Belo published various niche products in these same or nearby markets. Belo also operated certain commercial printing businesses.

 

The following table sets forth information concerning the Company’s three primary daily newspaper operations prior to the distribution:

 

 

 

 

PAGE 8   Belo Corp. 2007 Annual Report on Form 10-K

 

 

Belo’s Newspaper Group derived its revenues primarily from the sale of advertising and newspapers and from commercial printing. For the year ended December 31, 2007, advertising revenues accounted for approximately 81.3 percent of total Newspaper Group revenues. Advertising revenues from classified advertising totaled approximately 34.6 percent of total Newspaper Group advertising revenues for 2007. Advertising revenues from general and retail advertising totaled approximately 32.8 percent of total Newspaper Group advertising revenues for 2007. Circulation revenues accounted for approximately 15.2 percent of total Newspaper Group revenues for 2007. Prices for the newspapers were established individually for each newspaper. Commercial printing accounted for most of the remainder of the Newspaper Group revenues.

 

Interactive editions of the newspapers provide consumers with accurate and timely news and information. The newspaper-affiliated Web sites for The Dallas Morning News, The Providence Journal and The Press-Enterprise are leading local media sites in their respective markets. Revenues from the Newspaper Group’s interactive media in 2007 represented approximately seven percent of the total Newspaper Group revenues and were derived principally from advertising on the various Newspaper Group Web sites.

 

The basic material used in publishing the newspapers is newsprint. Most of Belo’s newsprint was obtained through a purchasing consortium of which Belo is a member. The Providence Journal purchases approximately 50 percent of its newsprint from other suppliers under long-term contracts; these contracts provide for certain minimum purchases per year based on use.

 

Competition for the Newspaper Group consists of competition for advertising dollars and circulation. The competition for advertising expenditures comes from local, regional and national newspapers, magazines, broadcast, cable and satellite television, radio, direct mail, yellow pages, the Internet and other media. Belo’s and A. H. Belo’s businesses may also compete with each other for national, regional and local advertising. The Dallas Morning News has one major metropolitan daily newspaper competitor in certain areas of the Dallas/Fort Worth market. The Providence Journal competes with five daily newspapers in the Rhode Island and southeastern Massachusetts markets. The Press-Enterprise competes with seven daily newspapers in the Inland Empire area of southern California.

 

Employees

 

As of December 31, 2007, the Company had approximately 6,400 full-time and 700 part-time employees, including approximately 1,100 employees represented by various employee unions. Approximately 47 percent of these union employees are located in Providence, Rhode Island; the remaining union employees work at various television stations and other properties. Subsequent to the distribution of the Company’s newspaper businesses and related assets, the Company has approximately 2,700 full-time and 300 part-time employees, including approximately 600 employees represented by various unions. Belo believes its relations with its employees are satisfactory.

 

Available Information

 

Belo maintains its corporate Web site at www.belo.com . Belo makes available free of charge on www.belo.com this Annual Report on Form 10-K, the Company’s quarterly reports on Form 10-Q, the Company’s current reports on Form 8-K, and amendments to all those reports, all as filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the reports are electronically filed with or furnished to the Securities and Exchange Commission (SEC).

Item 1A. Risk Factors

 

Sections of this Annual Report on Form 10-K and management’s public comments from time to time may contain certain forward-looking statements that are subject to risks and uncertainties. These statements are based on management’s current knowledge and estimates of factors affecting our operations, both known and unknown. Readers are cautioned not to place undue reliance on such forward-looking information as actual results may differ materially from those currently anticipated. The following discussion identifies some of the factors that may cause actual results to differ materially from expectations. In addition, a number of other factors (those identified elsewhere in this document and others, both known and unknown) may cause actual results to differ materially from expectations.

 

Decreases in advertising spending, resulting from economic downturn, natural disasters, war, terrorism or other factors specific to the communities we serve, could adversely affect our financial condition and results of operations. In addition, our revenues are subject to seasonal, cyclical and other fluctuations that could adversely affect our financial condition and results of operations.

 

A majority of our revenues are generated from the sale of local, regional and national advertising. Advertisers generally reduce their advertising spending during economic downturns, so a recession or economic downturn could have an adverse effect on our financial condition and results of operations. Also, our advertising revenues tend to decline in times of national or local crisis because our television stations broadcast more news coverage and sell less advertising time.

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 9 

 

Our advertising revenues depend upon a variety of other factors specific to the communities that we serve. Changes in those factors could negatively affect advertising revenues. These factors include, among others, the size and demographic characteristics of the local population, the concentration of retail stores, and local economic conditions in general. In addition, a substantial portion of our television advertising revenues are generated from the automotive industry.

 

Our revenues and results of operations are subject to seasonal, cyclical and other fluctuations that we expect to continue in future periods. In particular, we experience fluctuations in our revenues between even and odd numbered years. During elections for various state and national offices, which are primarily in even numbered years, advertising revenues fluctuate based on uncertain demand for political advertising in our markets. Also, since NBC has exclusive rights to broadcast the Olympics through 2012, our NBC affiliate stations typically experience increased viewership and revenues during Olympic broadcasts, which also occur in even numbered years. Other seasonal and cyclical factors that affect our revenues and results of operations may be beyond our control, including changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures and general economic factors. Fluctuations in revenues and results of operations may cause our stock price to be volatile.

 

Our television businesses operate in highly competitive markets, and our ability to maintain market share and generate revenues depends on how effectively we compete with existing and new competition.

 

Our television businesses operate in highly competitive markets. Our television stations compete for audiences and advertising revenue with newspapers and other broadcast and cable television stations, as well as with other media such as magazines, satellite television and the Internet. Some of our current and potential competitors may have greater financial, marketing, programming and broadcasting resources than we do.

 

Our television stations compete for audiences and advertising revenues primarily on the basis of programming content and advertising rates. Advertising rates are set based upon a variety of factors, including a program’s popularity among the advertiser’s target audience, the number of advertisers competing for the available time, the size and demographic make-up of the market served and the availability of alternative advertising in the market. Our ability to maintain market share and competitive advertising rates depends in part on audience acceptance of our network, syndicated and local programming. Changes in market demographics, the entry of competitive stations into our markets, the introduction of competitive local news or other programming by cable, satellite or Internet providers, or the adoption of competitive formats by existing stations could result in lower ratings and cause an adverse effect on our financial condition and results of operations.

 

In addition, our operations may be adversely affected by consolidation in the broadcast industry, especially if competing stations in our markets are acquired by competitors who may have a greater national scope and can offer a greater variety of national and syndicated programming for audiences and enhanced opportunities for advertisers to reach broader markets.

 

If we are unable to respond to changes in technology and evolving industry trends, our television businesses may not be able to compete effectively.

 

New technologies could also adversely affect our television stations. Information delivery and programming alternatives such as cable, direct satellite-to-home services, pay-per-view, the Internet, digital video recorders and home video and entertainment systems have fractionalized television viewing audiences. Over the past decade, cable television programming services, other emerging video distribution platforms and the Internet have captured an increasing market share, while the aggregate viewership of the major television networks has declined. In addition, the expansion of cable and satellite television, the Internet and other technological changes have increased, and may continue to increase, the competitive demand for programming. Such increased demand, together with rising production costs, may increase our programming costs or impair our ability to acquire desired programming.

 

In addition, video compression techniques, now in use with direct broadcast satellites and potentially soon for cable and wireless cable, are expected to permit greater numbers of channels to be carried within existing bandwidth. These compression techniques as well as other technological developments are applicable to all video delivery systems, including over-the-air broadcasting, and have the potential to provide vastly expanded programming to highly targeted audiences. Reduction in the cost of creating additional channel capacity could lower entry barriers for new channels and encourage the development of increasingly specialized niche programming. This ability to reach very narrowly defined audiences may alter the competitive dynamics for advertising expenditures. We are unable to predict the effect that these and other technological changes will have on the television industry or the future results of our television businesses.

 

The costs of television programming may increase, which could adversely affect our results of operations.

 

Programming is a significant operating cost in our television operations. We cannot be certain that we will not be exposed in the future to an increase in programming costs. Should such an increase occur, it could have an adverse effect on our results of operations. In addition, television networks have been seeking arrangements from their affiliates to share the networks’ programming costs and to eliminate network compensation traditionally paid to broadcast affiliates. We cannot predict the

 

 

PAGE 10   Belo Corp. 2007 Annual Report on Form 10-K

 

nature or scope of any such potential compensation arrangements or the effect, if any, on our operations. Acquisitions of program rights for syndicated programming are usually made two or three years in advance and may require multi-year commitments, making it difficult to predict accurately how a program will perform. In some instances, programs must be replaced before their costs have been fully amortized, resulting in write-offs that increase station operating costs and decrease station earnings.

 

The loss or modification of network affiliation agreements could adversely affect our results of operations.

 

The non-renewal or termination of network affiliation agreements could have a material adverse effect on our results of operations. We have four stations affiliated with ABC, five stations affiliated with CBS, four stations affiliated with NBC, three affiliated with CW and one each affiliated with FOX and MNTV. Each of the big-three networks (ABC, CBS, and NBC) generally provides our affiliated stations with 22 hours of prime time programming per week. Each of our affiliation agreements has a stated expiration date. In addition, some of the networks with which our stations are affiliated have required us and other broadcast groups, as a condition to the renewal of affiliation agreements, to reduce or eliminate network affiliate compensation and, in some cases, to make cash payments to the network, and to accept other material modifications of existing affiliation agreements. Consequently, our affiliation agreements may not all remain in place and each network may not continue to provide programming or compensation to affiliates on the same basis as it currently provides programming or compensation. If this occurs, we would need to find alternative sources of programming, which may be less attractive and more expensive.

 

If we are unable to secure or maintain carriage of our television stations’ signals over cable and/or direct broadcast satellite systems, our television stations may not be able to compete effectively.

 

Pursuant to the FCC rules, local television stations must elect every three years to either (1) require cable and/or direct broadcast satellite operators to carry the stations’ analog signals or (2) enter into retransmission consent negotiations for carriage. At present, Belo has retransmission consent agreements with the majority of cable operators and both satellite providers. If our retransmission consent agreements are terminated or not renewed, or if our broadcast signals are distributed on less favorable terms than our competitors, our ability to compete effectively may be adversely affected. In addition, cable and direct satellite operators are not required to carry our digital broadcast signals. If we are unable to reach agreements for the carriage of those signals or if those signals are distributed on less favorable terms than our competitors, our ability to compete effectively may be adversely affected.

 

Regulatory changes may affect our strategy and increase competition and operating costs in our media businesses.

 

As described in this Item 1–Business–FCC Regulation, our television business is subject to extensive and changing federal regulation. Changes in current regulations or the adoption of new laws and policies could affect our strategy, increase competition and our operating costs, and adversely affect our financial condition and results of operations. Among other things, the Communications Act and FCC rules and policies govern the term, renewal and transfer of our television broadcasting licenses and limit certain concentrations of broadcasting control and cross-ownerships of newspapers and television stations. Relaxation of ownership restrictions may provide a competitive advantage to those with greater financial and other resources than we possess. Federal law also regulates indecency on broadcast television, political advertising rates and children’s programming. The television industry is transitioning from analog to digital transmissions and Congress has set February 17, 2009, as the date by which broadcasters must cease analog broadcasts and return their analog spectrum to the government.

 

Adverse results from pending or new litigation or governmental proceedings or investigations could adversely affect our financial condition and results of operations.

 

From time to time we and our subsidiaries are subject to litigation and governmental proceedings and investigations. Current matters include those described under Item 3–Legal Proceedings. Adverse determinations in any of these pending or future matters could require us to make monetary payments or result in other sanctions or findings that could adversely affect our businesses, including renewal of our FCC licenses, and financial condition and results of operations.

 

If we cannot renew our FCC broadcast licenses, our broadcast operations will be impaired.

 

Our television business depends upon maintaining our broadcast licenses, which are issued by the FCC. Our broadcast licenses expired or will expire between 2006 and 2015 (although those that have already expired have been extended by the filing of a license renewal application with the FCC) and are renewable. Interested parties may challenge a renewal application. The FCC has the authority to revoke licenses, not renew them, or renew them only with significant qualifications, including renewals for less than a full term. Although we expect to renew all our FCC licenses, we cannot assure investors that our future renewal applications will be approved, or that the renewals will not include conditions or qualifications that could adversely affect our operations. If we fail to renew any of our licenses, it could prevent us from operating the affected stations.

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 11 

 

If we renew our licenses with substantial conditions or modifications (including renewing one or more of our licenses for a term of fewer than eight years), it could have a material adverse effect on the affected station’s revenue generation potential.

 

Belo may incur increased expenses if the services agreement with A. H. Belo is terminated.

 

In connection with the distribution, Belo entered into a services agreement with A. H. Belo. This agreement provides that Belo and A. H. Belo will furnish each other services in such areas as information technology, interactive media, employee benefits administration, claims administration and reporting, tax, legal, payroll, internal audit and other areas where Belo and A. H. Belo may need assistance and support following the distribution. Depending on the particular service being provided, the agreement will extend for up to two years after the distribution, but may be terminated earlier under certain circumstances, including a default. In such case, if the agreement is terminated, Belo may be required to obtain certain services from a third party. This could affect the efficiency of certain operations in the near-term or be more expensive than the compensation that Belo is required to pay under the services agreement.

 

Failure of the distribution to qualify as a tax-free transaction could result in substantial liability.

 

Belo has received a private letter ruling from the Internal Revenue Service (IRS) to the effect that, among other things, the distribution (including certain related transactions) qualifies as tax-free to Belo and Belo shareholders for United States federal income tax purposes under section 355 and related provisions of the Internal Revenue Code (the Code). Although a private letter ruling generally is binding on the IRS, if the factual assumptions or representations made in the private letter ruling request are untrue or incomplete in any material respect, then Belo may not be able to rely on the ruling. Moreover, the IRS will not rule on whether a distribution of shares satisfies certain requirements necessary to obtain tax-free treatment under section 355 of the Code. Rather, the private letter ruling is based upon representations by Belo that those requirements have been satisfied, and any inaccuracy in those representations could invalidate the ruling.

 

In connection with the distribution, Belo received an opinion from Locke Lord Bissell & Liddell LLP, counsel to Belo, to the effect that, with respect to the requirements referred to above on which the IRS will not rule, those requirements have been met. The opinion assumes the effectiveness of the private letter ruling as to matters covered by the ruling. The opinion is based on, among other things, certain assumptions and representations as to facts made by Belo and A. H. Belo which, if untrue or incomplete in any material respect, could jeopardize the conclusions reached by counsel in its opinion. The opinion is not binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion.

 

If the distribution fails to qualify for tax-free treatment, a substantial corporate tax would be payable by Belo, measured by the difference between (1) the aggregate fair market value of the shares of A. H. Belo common stock on the date of the distribution and (2) Belo’s adjusted tax basis in the shares of A. H. Belo common stock on the date of the distribution. The corporate level tax would be payable by Belo. However, A. H. Belo has agreed to indemnify Belo for certain tax liabilities under certain circumstances. In addition, under the applicable Treasury regulations, each member of Belo’s consolidated group at the time of the distribution (including A. H. Belo) is severally liable for such tax liability.

 

Further, if the distribution is not tax-free, each Belo shareholder generally would be taxed as if he or she had received a cash distribution equal to the fair market value of the shares of A. H. Belo common stock on the date of the distribution.

 

Even if the distribution otherwise qualifies as tax-free, Belo nevertheless could incur a substantial corporate tax liability under section 355(e) of the Code if 50 percent or more of the voting power or value of A. H. Belo stock or the stock of Belo were to be acquired as part of a “plan (or a series of related transactions)” that includes the distribution. For this purpose, any acquisitions of the stock of Belo or of A. H. Belo’s stock that occur within two years before or after the distribution are presumed to be part of such a plan, although Belo may be able to rebut that presumption. If such an acquisition of the stock of Belo or of A. H. Belo’s stock triggers the application of section 355(e), Belo would recognize taxable gain as described above, but the distribution would generally remain tax-free to the Belo shareholders.

 

Even if, as expected, the distribution otherwise qualifies for tax-free treatment under section 355 of the Code, Belo (but not its shareholders) will recognize for tax purposes approximately $51,900 of previously deferred intercompany non-cash gains in connection with the distribution, resulting in a federal income tax obligation of approximately $18,000 and a state tax obligation that is not currently estimable and which is not expected to be material. If such gains are adjusted in the future, then Belo and A. H. Belo shall be responsible for paying any additional tax associated with any increase in such gains in the ratio of one-third and two-thirds, respectively.

 

The combined post-distribution value of Belo and A. H. Belo shares may not equal or exceed the pre-distribution value of Belo shares.

 

After the distribution, Belo common stock will continue to be listed and traded on the NYSE under the ticker symbol BLC. The shares of A. H. Belo Series A common stock are now listed on the NYSE under the ticker symbol AHC. We cannot assure you that the combined trading prices of Belo common stock and A. H. Belo common stock after the distribution, as adjusted for any changes in the combined capitalization of both companies, will be equal to or greater than the trading price of Belo

 

 

PAGE 12   Belo Corp. 2007 Annual Report on Form 10-K

 

common stock prior to the distribution. Until the market has fully evaluated the business of Belo without A. H. Belo’s business, the price at which Belo common stock trades may fluctuate significantly. Similarly, until the market has fully evaluated A. H. Belo’s business, the price at which A. H. Belo common stock trades may fluctuate significantly.

 

We depend on key personnel, and we may not be able to operate and grow our businesses effectively if we lose the services of any of our senior executive officers or are unable to attract and retain qualified personnel in the future.

 

We depend on the efforts of our senior executive officers. The success of our business depends heavily on our ability to retain our current management and to attract and retain qualified personnel in the future. Competition for senior management personnel is intense and we may not be able to retain our key personnel. We have not entered into employment agreements with our key management personnel and we do not have “key person” insurance for any of our senior executive officers or other key personnel.

 

We have a large amount of indebtedness.

 

We currently use a portion of our operating cash flow for debt service. At December 31, 2007, we had debt outstanding of $1,168,140. We may continue to borrow funds to finance capital expenditures, share repurchases, acquisitions or to refinance debt, as well as for other purposes.

 

Our level of indebtedness could, for example:

 

 

In addition, our debt instruments require us to comply with covenants. The failure to comply with the covenants in the agreements governing the terms of our indebtedness could be an event of default, which, if not cured or waived, would permit acceleration of our indebtedness and payment obligations. See Item 7–Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources for further discussion on debt service.

 

Changes in accounting standards can significantly impact reported earnings and operating results.

 

Generally accepted accounting principles and accompanying pronouncements and implementation guidelines for many aspects of our business, including those related to intangible assets, pensions, income taxes, share-based compensation, and broadcast rights, are complex and involve significant judgments. Changes in these rules or their interpretation could significantly change our reported earnings and operating results. See Item 7–Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Estimates and the Consolidated Financial Statements, Note 2–Recently Issued Accounting Standards.

 

We have a significant amount of intangible assets, and if we are required to write down intangible assets in future periods it would reduce net income.

 

Approximately $2,205,886, or 69 percent, of our total assets as of December 31, 2007, consisted of intangible assets, principally broadcast licenses and goodwill. Statement of Financial Accounting Standards (SFAS) 142, “Goodwill and Other Intangible Assets,” requires, among other things, an annual impairment testing of broadcast licenses and goodwill. Based on assessments performed for the year ended December 31, 2007, the Company record a non-cash impairment loss related to goodwill of $366,561, of which $242,794 related to The Providence Journal , $101,630 related to The Press-Enterprise in Riverside, California, and $22,137 related to WHAS-TV in Louisville, Kentucky. If in the future the estimated fair value of intangible assets of our television stations decreases further, we could be required to record additional impairment charges that could adversely affect our financial condition and results of operations. See Item 7–Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies for further discussion of the goodwill impairment charge recorded in 2007.

Item 1B. Unresolved Staff Comments

 

None.

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 13 

 

Item 2. Properties

 

Television Group

 

At December 31, 2007, Belo owned broadcast operating facilities in the following U.S. cities: Austin, Dallas, Houston and San Antonio, Texas; Seattle and Spokane, Washington; Phoenix and Tucson, Arizona; Portland, Oregon; Charlotte, North Carolina; New Orleans, Louisiana; Norfolk, Virginia; Louisville, Kentucky and Boise, Idaho. The Company leases broadcast facilities for operations in St. Louis, Missouri. Four of the Company’s broadcast facilities use primary broadcast towers that are jointly owned with another television station in the same market. The Company also leases broadcast towers in Tucson, Arizona for the digital transmission of KMSB-TV and for both the digital and analog transmission of KTTU-TV. The primary broadcast towers associated with the Company’s other television stations are wholly-owned by the Company.

 

TXCN’s operations are conducted from a fully-equipped digital television facility owned by the Company and located in downtown Dallas, Texas. NWCN conducts its regional cable news operations from the Company-owned broadcasting facility in Seattle, Washington.

 

The Company leases a facility in Washington, D.C. that is used for the gathering and distribution of news from the nation’s capital. This facility includes broadcast and production studios as well as general office space.

 

Newspaper Group

 

At December 31, 2007, the Company owned and operated a newspaper printing facility and distribution center in Plano, Texas, to print The Dallas Morning News, the Denton Record-Chronicle and other publications. Additional operations of The Dallas Morning News were housed in a Company-owned, four-story building in downtown Dallas. The non-production operations of the Denton Record-Chronicle were housed in a Company-owned, two-story building in Denton, Texas. The Company had a distribution and production center for The Dallas Morning News in southern Dallas County, Texas. Additionally, the Company owned a one-story printing facility in Arlington, Texas used for commercial printing.

 

At December 31, 2007, the Company also owned and operated a newspaper printing facility in Providence, Rhode Island, for The Providence Journal . The remainder of The Providence Journal’s operations are housed in a Company-owned, five-story building in downtown Providence.

 

At December 31, 2007, the Company owned and operated a newspaper publishing facility and a commercial printing facility in downtown Riverside, California, for The Press-Enterprise and other Company and third party publications. The non-production operations of The Press-Enterprise were also housed in this facility. The Company had a state-of-the-art media center for The Press-Enterprise in Riverside, California. Additionally, the Company owned a printing facility in Riverside, California, used for commercial printing.

 

As discussed in Item 1–Recent Developments, the Company contributed all assets used in the newspaper businesses and related assets to A. H. Belo in connection with the distribution.

 

Corporate

 

At December 31, 2007, the Company owned a 17-story office building in downtown Dallas, Texas that housed the Company’s corporate operations and several departments of The Dallas Morning News. In connection with the distribution, this building and other downtown Dallas, Texas real estate were transferred to a limited liability company that is owned in equal parts by Belo and A. H. Belo. The Company also leased space in Irving, Texas for its secondary data center.

 

The Company has additional leasehold and other interests that are used in its activities, which interests are not material. The Company believes its properties are in satisfactory condition, are well maintained and are adequate for present operations.

Item 3. Legal Proceedings

 

On August 23, 2004, August 26, 2004 and October 5, 2004, respectively, three related lawsuits were filed by purported shareholders of the Company in the United States District Court for the Northern District of Texas against the Company, Robert W. Decherd and Barry T. Peckham, a former executive officer of The Dallas Morning News . The complaints arise out of the circulation overstatement at The Dallas Morning News announced by the Company in 2004, alleging that the overstatement artificially inflated Belo’s financial results and thereby injured investors. The plaintiffs seek to represent a purported class of shareholders who purchased Belo common stock between May 12, 2003, and August 6, 2004. The complaints allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On October 18, 2004, the court ordered the consolidation of all cases arising out of the same facts and presenting the same claims, and on February 7, 2005, plaintiffs filed an amended, consolidated complaint adding as defendants John L. Sander, Dunia A. Shive, and Dennis A. Williamson, all of whom are current or retired executive officers of the Company, and James M. Moroney III, an executive officer of The Dallas Morning News . On May 18, 2007, the court partially granted defendants’ motions to dismiss plaintiffs’ second amended complaint to the extent it dismissed plaintiff’s complaint as to defendants John L. Sander, Dunia A. Shive, and Dennis A.

 

 

PAGE 14   Belo Corp. 2007 Annual Report on Form 10-K

 

Williamson. The motions to dismiss were denied as to the other defendants. On September 19, 2007, plaintiffs filed their motion for class certification; defendants filed their response to this motion on October 26, 2007. Plaintiffs filed their reply to the response on November 16, 2007. On November 26, 2007, the court denied defendants’ motion for reconsideration of the court’s denial of defendants’ motion to dismiss as to the remaining defendants. No class or classes have been certified and no amount of damages has been specified. The Company believes the complaints are without merit and intends to vigorously defend against them.

 

On June 3, 2005, a shareholder derivative lawsuit was filed by a purported individual shareholder of the Company in the 191st Judicial District Court of Dallas County, Texas, against Robert W. Decherd, John L. Sander, Dunia A. Shive, Dennis A. Williamson, and James M. Moroney III; Barry T. Peckham; and Louis E. Caldera, Judith L. Craven, Stephen Hamblett, Dealey D. Herndon, Wayne R. Sanders, France A. Córdova, Laurence E. Hirsch, J. McDonald Williams, Henry P. Becton, Jr., Roger A. Enrico, William T. Solomon, Lloyd D. Ward, M. Anne Szostak and Arturo Madrid, current and former directors of the Company. The lawsuit makes various claims asserting mismanagement and breach of fiduciary duty related to the circulation overstatement at The Dallas Morning News. On May 30, 2007, after a prior discovery stay ended, the court issued an order administratively closing the case. Under the court’s order, the case is stayed and, as a result, no further action can be taken unless the case is reinstated. The court retained jurisdiction and the case is subject to being reinstated by the court or upon motion by any party. The court order was not a dismissal with prejudice.

 

Under the terms of the separation and distribution agreement between the Company and A. H. Belo, they will share equally in any liabilities, net of any applicable insurance, resulting from the circulation-related lawsuits described above.

 

On October 24, 2006, eighteen former employees of The Dallas Morning News filed a lawsuit against the Company in the United States District Court for the Northern District of Texas. The plaintiffs’ lawsuit alleges unlawful discrimination and ERISA violations and includes allegations relating to The Dallas Morning News circulation overstatement (similar to the circulation-related lawsuits described above). In June 2007, the court issued a memorandum order granting in part and denying in part defendants’ motion to dismiss. In August 2007, the court dismissed certain additional claims. A trial date in January 2009 has been set. The Company believes the lawsuit is without merit and intends to vigorously defend against it.

 

In addition to the proceedings disclosed above, a number of other legal proceedings are pending against the Company, including several actions for alleged libel and/or defamation. In the opinion of management, liabilities, if any, arising from these other legal proceedings would not have a material adverse effect on the results of operations, liquidity or financial position of the Company.

 

In 2004, the staff of the SEC notified the Company that it was conducting a newspaper industry-wide inquiry into circulation practices, and inquired specifically about The Dallas Morning News’ circulation overstatement. The Company briefed the SEC on The Dallas Morning News circulation situation and related matters. The information voluntarily provided to the SEC related to The Dallas Morning News , as well as The Providence Journal and The Press-Enterprise . On October 1, 2007, the SEC staff sent counsel for the Company a letter stating that the inquiry has been completed and that the staff does not intend to recommend any enforcement action by the SEC.

Item 4. Submission of Matters to a Vote of Security Holders

 

No matter was submitted to a vote of shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The Company’s authorized common equity consists of 450,000,000 shares of Common Stock, par value $1.67 per share. The Company has two series of Common Stock outstanding, Series A and Series B. Shares of the two series are identical in all respects except as noted herein. Series B shares are entitled to 10 votes per share on all matters submitted to a vote of shareholders; Series A shares are entitled to one vote per share. Transferability of the Series B shares is limited to family members and affiliated entities of the holder and Series B shares are convertible at any time on a one-for-one basis into Series A shares, and upon a transfer other than as described above, Series B shares automatically convert into Series A shares. Shares of the Company’s Series A Common Stock are traded on the New York Stock Exchange (NYSE symbol: BLC). There is no established public trading market for shares of Series B Common Stock. See the Consolidated Financial Statements, Note 9–Common and Preferred Stock.

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 15 

 

The following table lists the high and low trading prices and the closing prices for Series A Common Stock as reported on the New York Stock Exchange for each of the quarterly periods in the last two years, and cash dividends attributable to each quarter for both the Series A and Series B Common Stock.

 

 

On January 31, 2008, the closing price for the Company’s Series A Common Stock as reported on the New York Stock Exchange was $16.59. The approximate number of shareholders of record of the Series A and Series B Common Stock at the close of business on such date was 625 and 305, respectively.

 

On February 11, 2008, the newly distributed Series A common stock of A. H. Belo commenced regular trading on the NYSE under the ticker symbol AHC. The closing prices for the A. H. Belo Series A common stock and the Belo Series A common stock on that date were $14.40 per share and $13.24 per share, respectively.

 

 

PAGE 16   Belo Corp. 2007 Annual Report on Form 10-K

 

Issuer Purchases of Equity Securities

 

The Company did not repurchase any Series A or Series B common stock during the quarter ended December 31, 2007. See Consolidated Financial Statements, Note 9–Common and Preferred Stock for share repurchase plan authorization information.

 

The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

 

The following graph compares (1) the annual cumulative shareholder return on an investment of $100 on December 31, 2002, in Belo’s Series A common stock, based on the market price of the Series A common stock and assuming reinvestment of dividends, with (2) the cumulative total return of a similar investment in companies on the Standard & Poor’s 500 Stock Index and in a group of peer companies selected on a line-of-business basis and weighted for market capitalization. For 2007, the Company’s peer group included the following companies: Gannett Co., Inc.; Hearst-Argyle Television, Inc.; Lee Enterprises, Inc.; LIN TV Corp.; McClatchy Newspapers, Inc.; Media General, Inc.; The New York Times Company; The E.W. Scripps Company; The Washington Post Company; and Young Broadcasting Corporation. Dow Jones & Company, Inc., Knight-Ridder, Inc. and Tribune Company, which were previously included in the peer group, were not publicly-traded companies as of December 31, 2007, and therefore are no longer included in the Company’s peer group. Belo is not included in the calculation of peer group cumulative total shareholder return on investment.

 

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 17 

 

Item 6. Selected Financial Data

 

The following table presents selected financial data of the Company for each of the five years in the period ended December 31, 2007. Certain amounts for the prior years have been reclassified to conform to the current year presentation. For a more complete understanding of this selected financial data, see Item 7–Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto.

 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following information should be read in conjunction with the other sections of the Annual Report on Form 10-K, including Item 1–Business, Item 1A–Risk Factors, Item 6–Selected Financial Data, Item 7A–Quantitative and Qualitative Disclosures about Market Risks, Item 9A–Controls and Procedures and the Consolidated Financial Statements and the notes thereto. Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in Item 1A–Risk Factors.

 

All references to earnings per share represent diluted earnings per share.

 

Overview

 

Belo began as a Texas newspaper company in 1842. At December 31, 2007, Belo was one of the nation’s largest media companies with a diversified group of market-leading television broadcasting and newspaper publishing operations, including interactive media and cable news operations. Belo operates news and information franchises in some of America’s most dynamic markets and regions. The Company owns 20 television stations (six in the largest 14 U.S. markets) that reach 14 percent of U.S. television households, and manages one television station through an LMA. In addition, Belo owns two local and two regional cable news channels and holds ownership interests in two other cable news operations. At December 31, 2007, Belo’s primary daily newspapers were The Dallas Morning News, The Providence Journal, and The Press-Enterprise (Riverside, CA), and Belo operated more than 30 news and information Web sites, in addition to participating in several interactive alliances and offering a broad range of Internet-based products.

 

The Company believes the success of its media franchises is built upon providing local and regional news, information and community service of the highest caliber for over 165 years. These principles have built durable relationships with viewers, readers, advertisers and online users and have guided Belo’s success.

 

On September 28, 2007, the board of directors of Belo authorized management to pursue the distribution of its newspaper businesses and related assets into a separate public company. An important objective of the distribution was to allow each of the newspaper and television businesses to more efficiently obtain and allocate resources for its distinct business and to allow the management of each of these two businesses to focus on the opportunities and challenges specific to its particular operations. The distribution was completed on February 8, 2008, in the form of a pro-rata, tax-free dividend to Belo’s shareholders of 0.20 shares of A. H. Belo common stock for each share of the Company’s common stock owned at the close of business on January 25, 2008. See “Liquidity and Capital Resources” for further discussion on the distribution.

 

 

PAGE 18   Belo Corp. 2007 Annual Report on Form 10-K

 

Prior to completion of the distribution, Belo operated its business in two primary segments, the Television Group and the Newspaper Group. At December 31, 2007, the Television Group consisted of the Company’s 20 television stations, one station operated under an LMA, and four cable news channels. Additionally, through joint ventures the Company also operated two other cable news channels. The Newspaper Group consisted of the Company’s three primary daily newspapers, various niche publications in the same markets and Belo’s commercial printing businesses. Both segments operated within the United States and competed against similar and other types of media on a local, regional, and national basis.

 

The Company intends for the discussion of its 2007 and prior period financial condition and results of operations that follows to provide information that will assist in understanding the Company’s financial statements, the changes in certain key items in those statements from period to period and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect the Company’s financial statements. The discussion of results of operations at the consolidated level is followed by a more detailed discussion of results of operations by segment.

 

 

Newsprint, ink and other supplies decreased $30,315, or 22.7 percent, for the year ended December 31, 2007 as compared to the year ended December 31, 2006, primarily due to a decrease in consumption and to a lesser extent a decrease in cost per metric ton of newsprint.

 

Depreciation expense increased $6,902, or 7.9 percent, for the year ended December 31, 2007, as compared to the year ended December 31, 2006, primarily due to depreciation on the new facilities in Riverside, California and southern Dallas County, Texas. Amortization expense decreased $1,407, or 16.9 percent, for the year ended December 31, 2007, as compared to the year ended December 31, 2006, due to a definite-lived intangible asset becoming fully amortized in the first quarter 2007.

 

Operating costs and expenses increased $70,037, or 5.7 percent, in 2006 compared to 2005. Salaries, wages and employee benefits expense increased $36,710, or 6.7 percent, primarily due to incremental expenses of $16,993 in share-based compensation and an increase in full-time salaries of $6,715 due to merit increases. Additionally, the Company recorded $8,179 in severance costs and other expenses related to the voluntary severance program of newsroom employees at The Dallas Morning News and the technology optimization initiative announced in April 2006. Additionally, in the fourth quarter 2006, the Company announced that it would freeze its pension plan effective March 31, 2007. In connection with that announcement, the Company recognized a curtailment loss of $4,082. These increases were partially offset by a decrease in estimated self-insured medical and workers compensation insurance expense of $7,301 and a decrease in recurring pension expense of approximately $1,778.

 

Other production, distribution and operating costs increased $42,639, or 9.6 percent, for the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily related to an increase of $34,096 in outside services principally attributable to consulting costs related to the technology initiative and circulation matters. Additionally, distribution costs increased $16,756 primarily related to the change in distribution methods at The Dallas Morning News. Newsprint, ink and other supplies decreased $9,153, or 6.4 percent, for the year ended December 31, 2006, as compared to the year ended December 31, 2005, primarily due to the Company’s strategic decisions to limit third-party circulation and to reduce the distribution perimeter of The Dallas Morning News. The 17.4 percent decrease in consumption was partially offset by a 12.4 percent increase in the average cost per metric ton of newsprint.

 

Depreciation and amortization expense remained relatively flat for the year ended December 31, 2006, as compared to the year ended December 31, 2005.

 

Interest expense decreased $1,160, or 1.2 percent, for the year ended December 31, 2007, compared to the year ended December 31, 2006, primarily due to principal reductions on the Company’s credit facility. Interest expense increased $4,650, or 5.1 percent, for the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to interest on the 6 3 / 4 % Senior Notes the Company issued in May 2006.

 

Other income (expense), net, increased $563 or 5.2 percent in 2007, compared to 2006 primarily due to approximately $4,000 in insurance proceeds related to losses incurred during Hurricane Katrina in 2005. Other income (expense), net, increased $8,908 in 2006, compared to 2005 primarily due to a one-time gain of $7,536 in miscellaneous income related to a payment associated with a change-in-control provision in one of Belo’s vendor contracts.

 

Income taxes decreased $12,719, or 17.4 percent, for the year ended December 31, 2007, compared with the year ended December 31, 2006, primarily due to lower taxable income and adjustments related to the implementation of the State of Texas margin tax. The Company’s effective tax rate was (29.9) percent for the year ended December 31, 2007 compared with 35.9 percent for the year ended December 31, 2006. Excluding the charge for goodwill impairment, for which the Company will not receive a tax benefit, the Company’s effective tax rate was 36.8 percent for the year ended December 31, 2007. The increase in the Company’s effective tax rate in 2007 is principally due to increased state taxes related to the implementation of the Texas margin tax discussed below.

 

Income taxes decreased $6,115, or 7.7 percent, for the year ended December 31, 2006, compared with the year ended December 31, 2005, primarily due to a credit of $1,117 resulting from the favorable settlement of certain state tax liabilities and a $3,813 reduction in tax expense related to Texas state tax reforms. In May 2006, the State of Texas enacted legislation replacing its franchise tax with a new margin tax. Despite an effective date of January 1, 2008, the enactment of the Tax Reform Bill represents a change in tax law, and SFAS 109, “Accounting for Income Taxes,” requires that effects of the change be reflected in the financial statements in the quarter in which the new tax is enacted.

 

As a result of the matters discussed above, the Company recorded a net loss of $262,813, or $2.57 per share, for 2007, compared with net earnings of $130,526, or $1.26 per share, for 2006, and net earnings of $127,688, or $1.12, per share for 2005.

 

 

PAGE 20   Belo Corp. 2007 Annual Report on Form 10-K

 

 

 

 

Local and national advertising revenues increased $34,872, or 5.2 percent, in the year ended December 31, 2007 as compared to the year ended December 31, 2006. This increase is a combination of a $24,463, or 3.8 percent, increase in local and national spot revenue and a $7,767, or 40.9 percent, increase in advertising revenue generated from the Television Group’s Web sites as compared with the year ended December 31, 2006. Spot revenue increases in the home improvement, telecommunications, furniture and restaurant categories were partially offset by decreases in the automotive and department store categories. The spot revenue increases were partially offset by a decrease in political advertising revenues. Political advertising revenues decreased $32,435, or 68.9 percent, in the year ended December 31, 2007, as compared with the year ended December 31, 2006. Political revenues are generally higher in even numbered years than in odd numbered years due to elections for various state and national offices. Other revenues increased primarily due to an increase in retransmission revenues.

 

Local and national advertising revenues increased $28,092, or 4.3 percent, in the year ended December 31, 2006, as compared to the year ended December 31, 2005. This increase is a combination of a $21,622, or 3.4 percent, increase in local and national spot revenue partially due to the 2006 Super Bowl and Winter Olympics and a $6,721, or 54.8 percent, increase in revenue generated from the Television Group’s Web sites as compared with the year ended December 31, 2005. Spot revenue increases in the healthcare, automotive, telecommunications, entertainment and home improvement categories were partially offset by decreases in the department store, pharmaceutical and food products categories. Political advertising revenues increased $39,757, or 545.1 percent, in the year ended December 31, 2006, as compared with the year ended December 31, 2005, primarily due to local political advertising in the Seattle/Tacoma, Phoenix, St. Louis, Portland and Hampton/Norfolk markets as well as local political advertising in the New Orleans and Dallas/Fort Worth markets in the first half of 2006. Political advertising revenues generally are higher in even numbered years than in odd numbered years due to elections for various state and national offices. Additionally, other revenue decreased $736, or 1.6 percent, primarily due to a decrease in network compensation of $6,166. In the third quarter 2005, the Company recognized approximately $3,500 of previously deferred network compensation revenues. This net decrease in network compensation was partially offset by an increase in retransmission revenues.

 

Segment Costs and Expenses

 

The Television Group’s major segment costs and expenses categories are employee compensation and benefits and programming costs. Employee compensation and benefits represented approximately 52.1 percent, 52.8 percent and 51.6 percent of the Television Group’s total segment costs and expenses in 2007, 2006, and 2005, respectively. Programming costs represented 17.7 percent of the Television Group’s total segment costs and expenses in 2007, and 17.8 percent and 18.9 percent in 2006 and 2005, respectively.

 

The Television Group’s segment costs and expenses increased $16,896, or 3.8 percent, in the year ended December 31, 2007 when compared to the year ended December 31, 2006. Salaries, wages and employee benefits increased $5,430, or 2.3 percent, primarily due to higher full-time salary, medical and workers compensation expenses partially offset by a decrease in pension

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 21 

 

expense resulting from the Company’s curtailment of its defined benefit pension plan effective March 31, 2007, and an increase in the discount rate applied to future pension obligations. Other production, distribution and operating costs increased $11,507, or 5.5 percent, primarily due to increases in consulting costs related to the technology outsourcing initiative announced in the second quarter 2006, and an increase in programming expense due to scheduled rate increases in syndicated programming.

 

The Television Group’s segment costs and expenses increased $14,960, or 3.5 percent, in the year ended December 31, 2006, when compared to the year ended December 31, 2005. Salaries, wages and employee benefits increased $13,049, or 5.9 percent, primarily due to merit and bonus increases and share-based compensation which was incremental in 2006. These increases were partially offset by a decrease in estimated self-insured medical expense. Other production, distribution and operating costs increased $1,938, or 0.9 percent, with programming expense remaining relatively flat.

 

Goodwill Impairment

 

In the fourth quarter 2007, the Company recorded a non-cash charge for goodwill impairment of $22,137 for WHAS-TV in Louisville, Kentucky, based on assessments performed for the year ended December 31, 2007. The Company is required to test goodwill and its FCC licenses at least annually for impairment.

 

 

 

 

In 2007, advertising revenues accounted for 81.3 percent of total Newspaper Group revenues compared to 82.4 percent in 2006 and 83.6 percent in 2005. In 2007, circulation revenue accounted for 15.2 percent of total Newspaper Group revenues compared to 14.2 percent in 2006 and 12.7 percent in 2005. In all three years, commercial printing made up most of the remainder of Newspaper Group revenues.

 

Net operating revenues for The Dallas Morning News decreased by $40,468, or 8.1 percent, in the year ended December 31, 2007, as compared to the year ended December 31, 2006. Advertising revenues decreased by $39,998, or 9.8 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006. General advertising revenues decreased $17,196, or 27.0 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006, primarily due to decreases in the financial, telecommunications and travel categories. Classified advertising revenues decreased $14,739, or 11.2 percent, primarily due to decreases in the real estate, automotive and employment categories. Retail advertising revenue decreased $6,852, or 7.8 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006, primarily due to a decrease in the furniture category. Circulation revenue remained flat for the year ended December 31, 2007, compared to the year ended December 31, 2006.

 

Net operating revenues for The Dallas Morning News increased by $1,110, or 0.2 percent, in the year ended December 31, 2006, as compared to the year ended December 31, 2005. At The Dallas Morning News, circulation revenue increased $13,570, or 23.9 percent, in the year ended December 31, 2006, as compared with the year ended December 31, 2005, primarily due to an estimated increase of $24,555 related to the change in distribution methods from a buy-sell arrangement to a fee-for-

 

 

PAGE 22   Belo Corp. 2007 Annual Report on Form 10-K

 

delivery arrangement, as discussed below. Circulation revenues attributable to the change in distribution methods are expected to continue at approximately the current level. The Dallas Morning News has experienced a decrease in circulation over the past few years. Efforts to improve the circulation include a promotional campaign involving discounts of approximately $7,795 for the year ended December 31, 2006. The decreases in circulation revenue due to the discounts partially offset the increases in circulation revenue due to the change in distribution methods. The Dallas Morning News is moving to concentrate its circulation efforts on its core readership. The Dallas Morning News expects circulation and circulation revenue to fluctuate during this process. The increases in circulation revenue were partially offset by decreases in advertising revenue. Total advertising revenues decreased $11,552, or 2.8 percent, in the year ended December 31, 2006, when compared to the year ended December 31, 2005. General advertising revenues decreased $2,273, or 3.4 percent, in the year ended December 31, 2006, as compared to the year ended December 31, 2005, primarily due to decreases in the automotive and telecommunications categories. Retail advertising revenue decreased $6,622, or 7.0 percent, in the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to decreases in the department stores, furniture, and general retail categories. Classified advertising revenue, including Internet revenue, decreased $7,681, or 5.5 percent, in the year ended December 31, 2006, as compared to the year ended December 31, 2005, primarily due to decreases in the automotive and real estate categories, partially offset by an increase in the employment category.

 

Net operating revenues for The Providence Journal decreased by $11,082, or 6.8 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006. Advertising revenues decreased $9,315, or 6.9 percent, for the year ended December 31, 2007, compared to the year ended December 31, 2006. Classified advertising revenue decreased $4,027, or 8.1 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006, primarily due to decreases in the automotive, employment and real estate categories. Retail advertising revenues decreased $3,769, or 8.6 percent, due to decreases in the automotive, building and home improvement, furniture and home accessories, and gaming categories for the year ended December 31, 2007, compared to the year ended December 31, 2006. General advertising revenues decreased $1,299, or 44.2 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006, primarily due to decreases in the automotive and travel and transportation categories. Circulation revenue declined $1,528, or 5.7 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006, primarily due to lower overall circulation.

 

Net operating revenues for The Providence Journal decreased $3,279, or 2.0 percent, in the year ended December 31, 2006, as compared to the year ended December 31, 2005. Advertising revenues were relatively flat for the year ended December 31, 2006, compared to the year ended December 31, 2005. Retail advertising revenues decreased $2,821, or 6.0 percent, due to decreases in the automotive, furniture and home accessories and telecommunications categories for the year ended December 31, 2006, compared to the year ended December 31, 2005. General advertising revenues decreased $1,422, or 32.6 percent, for the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to decreases in the automotive, travel and pharmaceutical categories. These decreases in retail and general advertising revenues were partially offset by an increase in classified advertising revenue. Classified advertising revenue increased $1,170, or 2.4 percent, in the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to increases in the real estate and other categories partially offset by decreases in the employment and automotive categories. Circulation revenue declined $1,891, or 6.6 percent, in the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to lower overall circulation and an increase in discounts related to promotional campaigns.

 

Net operating revenues for The Press-Enterprise decreased $27,510, or 17.5 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006. Total advertising revenues decreased $24,493, or 18.5 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006. Classified advertising revenues decreased $18,122, or 28.8 percent, primarily due to decreases in the employment, real estate and automotive categories. Retail advertising revenues decreased $2,638, or 13.3 percent, primarily due to decreases in the department store, home improvement, home furnishings, grocery, and discount categories. Part-run advertising decreased $1,589, or 12.8 percent, primarily due to decreases in the furniture and home improvement categories. General advertising revenues decreased $1,289, or 11.5 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006, primarily due to decreases in the financial and automotive categories. Circulation revenue at The Press-Enterprise decreased $1,899, or 9.9 percent, when comparing the year ended December 31, 2007, compared to the year ended December 31, 2006. Commercial printing and other revenue at The Press-Enterprise declined $1,118, or 20.2 percent, for the year ended December 31, 2007, compared to the year ended December 31, 2006.

 

Net operating revenues for The Press-Enterprise decreased $2,443, or 1.5 percent, in the year ended December 31, 2006, as compared to the year ended December 31, 2005. Total advertising revenues were relatively flat in the year ended December 31, 2006, compared with the year ended December 31, 2005. Classified advertising revenues, including Internet revenues, increased $1,902, or 3.1 percent, primarily due to increases in the real estate category, partially offset by decreases in the automotive and employment categories. Preprints and total market coverage revenues increased $1,064, or 5.3 percent, primarily due to increases in the drug store and home furnishings categories. Offsetting these increases were decreases in retail and general advertising revenues and commercial printing revenue. Retail advertising revenues decreased $1,225, or 5.8 percent, primarily due to decreases in the department store and grocery categories partially offset by an increase in the

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 23 

 

furniture category. General advertising revenues decreased $2,129, or 16.0 percent, in the year ended December 31, 2006, when compared with the year ended December 31, 2005, primarily due to decreases in the telecommunications and automotive categories. Circulation revenue at The Press-Enterprise decreased $205, or 1.0 percent. Commercial printing and other revenue at The Press-Enterprise declined $2,105, or 27.6 percent, for the year ended December 31, 2006, compared to the year ended December 31, 2005.

 

Segment Costs and Expenses

 

Newspaper Group segment costs and expenses decreased $56,341, or 8.5 percent, in the year ended December 31, 2007, as compared to the prior year period primarily due to decreases in salaries, wages and employee benefits and a decrease in newsprint, ink and other supplies. Salaries, wages and employee benefits decreased $26,066, or 8.8 percent, for the year ended December 31, 2007, compared to the year ended December 31, 2006, primarily due to the voluntary severance program for newsroom employees at The Dallas Morning News initiated in the third quarter 2006 which reduced headcount. In addition to the voluntary severance program, the Newspaper Group recognized a reduction in estimated pension expense of approximately $8,488 primarily due to the Company’s curtailment of its defined benefit pension plan effective March 31, 2007, and an increase in the discount rate applied to future pension obligations. These decreases were partially offset by an increase in workers’ compensation expense.

 

Newsprint, ink and other supplies decreased $30,278, or 22.8 percent, for the year ended December 31, 2007, compared to the year ended December 31, 2006, with decreases in newsprint consumption and the average cost per metric ton. During 2007, Belo’s publishing operations consumed approximately 136,546 metric tons of newsprint at an average cost of $586 per metric ton. Consumption of newsprint in the previous year was approximately 166,756 metric tons at an average cost per metric ton of $631.

 

Newspaper Group segment costs and expenses increased $15,188, or 2.4 percent, in the year ended December 31, 2006, as compared to the prior year period primarily due to increases in salaries, wages and employee benefits and other production, distribution and operating costs partially offset by a decrease in newsprint, ink and other supplies. Salaries, wages and employee benefits increased primarily due to severance costs, incremental share-based compensation expenses and increased pension expense due to the announced pension curtailment. These increases were partially offset by decreases in sales commissions, estimated self-insured medical and workers’ compensation insurance costs. Other production, distribution and operating costs increased primarily due to increased distribution and outside services costs. The increase in distribution costs is due to approximately $19,550 in additional costs related to the change in distribution methods at The Dallas Morning News. Belo expects this increased level of distribution costs at The Dallas Morning News to continue. Outside services increased primarily due to increased consulting expenses primarily related to readership and sales initiatives. Newsprint, ink and other supplies decreased $9,115, or 6.4 percent, for the year ended December 31, 2006, as compared to the year ended December 31, 2005, due to the Company’s strategic decisions to limit third-party circulation and to reduce the distribution area of The Dallas Morning News and lower volumes. The 17.4 percent decrease in consumption was partially offset by an increase in the average cost per metric ton of newsprint of 12.4 percent.

 

Goodwill Impairment

 

In the fourth quarter 2007, the Company recorded a non-cash charge for goodwill impairment of $344,424, of which $242,794 related to The Providence Journal and $101,630 related to The Press-Enterprise in Riverside, California based on assessments performed for the year ended December 31, 2007. The Company is required to test goodwill and other intangible assets at least annually for impairment.

 

Corporate

 

Corporate costs and expenses increased $2,523, or 2.5 percent, in the year ended December 31, 2007, compared to the year ended December 31, 2006. This increase was primarily due to a $2,770 increase in share-based compensation, a $1,562 increase in supplemental retirement expense related to plans that were suspended and distributed to the participants in the first quarter 2008, a $2,625 increase in charitable contributions resulting primarily from the donation of a tract of land to benefit the City of Dallas, Texas, and costs related to the distribution of A. H. Belo. These increases were partially offset by a decrease in outside services that includes a decrease in consulting fees related to technology initiatives.

 

Corporate costs and expenses increased $40,048, or 66.7 percent, in the year ended December 31, 2006, compared to the year ended December 31, 2005, primarily due to incremental expenses of $25,724 in consulting fees principally related to the technology initiatives and $10,664 in incremental share-based compensation.

 

During the year ended December 31, 2006, the Company recorded a one-time gain of $7,536 in miscellaneous income related to a payment associated with a change-in-control provision in one of Belo’s vendor contracts. Additionally, Belo recorded a one-time net reduction of $3,813 in tax expense related to the enactment of the new State of Texas margin tax and a credit of $1,117 resulting from the favorable settlement of certain state tax liabilities as discussed above.

 

 

PAGE 24   Belo Corp. 2007 Annual Report on Form 10-K

 

Forward-Looking Statements

 

Statements in Items 7 and 7A and elsewhere in this Annual Report on Form 10-K concerning Belo’s business outlook or future economic performance, anticipated profitability, revenues, expenses, dividends, capital expenditures, investments, future financings or other financial and non-financial items that are not historical facts, are “forward-looking statements” as the term is defined under applicable federal securities laws. Forward-looking statements are subject to risks, uncertainties and other factors described throughout this filing, and particularly in Item 1A–Risk Factors, that could cause actual results to differ materially from those statements.

 

Such risks, uncertainties and factors include, but are not limited to, uncertainties regarding the costs, consequences (including tax consequences) and other effects of the distribution of the newspaper businesses and related assets of Belo; changes in capital market conditions and prospects, and other factors such as changes in advertising demand, interest rates and programming and production costs; changes in viewership patterns and demography, and actions by Nielsen; changes in the network-affiliate business model for broadcast television; technological changes, including the transition to digital television and the development of new systems to distribute television and other audio-visual content; changes in the ability to secure, and in the terms of, carriage of Belo programming on cable, satellite, and other program distribution methods; development of Internet commerce; industry cycles; changes in pricing or other actions by competitors and suppliers; Federal Communications Commission and other regulatory, tax and legal changes; adoption of new accounting standards or changes in existing accounting standards by the Financial Accounting Standards Board or other accounting standard-setting bodies or authorities; the effects of Company acquisitions, dispositions and co-owned ventures; general economic conditions; and significant armed conflict, as well as other risks detailed in Belo’s other public disclosures, filings with the SEC and elsewhere in this Annual Report on Form 10-K.

 

Critical Accounting Policies and Estimates

 

Belo’s financial statements are based on the selection and application of accounting policies that require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical accounting policies currently affecting Belo’s financial position and results of operations. See the Consolidated Financial Statements, Note 1–Summary of Significant Accounting Policies, for additional information concerning significant accounting policies.

 

Revenue Recognition      Broadcast advertising revenue is recorded, net of agency commissions, when commercials are aired. Newspaper advertising revenue is recorded, net of agency commissions, when the advertisements are published in the newspaper. Advertising revenues for Internet Web sites are recorded, net of agency fees, ratably over the period of time the advertisement is placed on Web sites. Proceeds from subscriptions are deferred and are included in revenue on a pro-rata basis over the term of the subscriptions. Subscription revenues under buy-sell arrangements with distributors are recorded based on the net amount received from the distributor, whereas subscription revenues under fee-based delivery arrangements with distributors are recorded based on the amount received from the subscriber. Commercial printing revenue is recorded when the product is shipped.

 

Program Rights      Program rights represent the right to air various forms of first-run and existing second-run programming. Program rights and the corresponding contractual obligations are recorded when the license period begins and the programs are available for use. Program rights are carried at the lower of unamortized cost or estimated net realizable value on a program-by-program basis. Program rights and the corresponding contractual obligations are classified as current or long-term based on estimated usage and payment terms, respectively. Costs of off-network syndicated programs, first-run programming and feature films are amortized on a straight-line basis over the future number of showings allowed in the contract.

 

Impairment of Property, Plant and Equipment, Goodwill and Intangible Assets      In assessing the recoverability of the Company’s property, plant and equipment, goodwill and intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges not previously recorded for these assets.

 

At December 31, 2007, Belo had net investments of $540,484 in property, plant and equipment and $1,333,943 in intangible assets, primarily FCC licenses, and recorded goodwill of $871,943.

 

The Company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of property and equipment is measured by comparison of the carrying amount to the future net cash flows the property and equipment is expected to generate. Based on assessments performed during the years ended December 31, 2007, 2006 and 2005, the Company did not record any impairment losses related to property, plant and equipment.

 

Prior to January 1, 2002, all of the acquired intangible assets were classified together as “goodwill and intangible assets” in the Company’s consolidated financial statements and were amortized over a composite life of 40 years. On January 1, 2002, upon

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 25 

 

adoption of SFAS 142, “Goodwill and Other Intangible Assets”, the Company reclassified the FCC licenses apart from goodwill as separate indefinite-lived intangible assets and ceased amortization of both goodwill and the FCC licenses. FCC licenses are tested for impairment at least annually on an individual market basis.

 

Goodwill is tested at least annually by reporting unit for impairment. For the Television Group, a reporting unit consists of the television station(s) within a market. For the Newspaper Group, a reporting unit consists of the newspaper operations in each individual market. Based on assessments performed for the year ended December 31, 2007, the Company recorded a non-cash impairment charge related to goodwill of $366,561. Of the total recorded, $242,794 related to The Providence Journal , $101,630 related to The Press-Enterprise in Riverside, California, and $22,137 related to WHAS-TV in Louisville, Kentucky. The non-cash goodwill impairment charges resulted from a decline in the estimated fair value of the individual businesses due primarily to lower estimated market growth rates versus previous year estimates and also, in the case of the newspapers, projected increases in newsprint costs. There were no impairments of these assets as of December 31, 2006 or 2005.

 

Contingencies      Belo is involved in certain claims and litigation related to its operations. In the opinion of management, liabilities, if any, arising from these claims and litigation would not have a material adverse effect on Belo’s consolidated financial position, liquidity or results of operations. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual matter. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

 

Share-Based Compensation      The Company records compensation expense related to its stock options according to SFAS 123R, as adopted on January 1, 2006. The Company records compensation expense related to its options using the fair value as of the date of grant as calculated using the Black-Scholes-Merton method. The Company records the compensation expense related to its restricted stock units using the fair value as of the date of grant.

 

Employee Benefits      Belo is in effect self-insured for employee-related health care benefits. A third-party administrator is used to process all claims. Belo’s employee health insurance liability is based on the Company’s historical claims experience and is developed from actuarial valuations. Belo’s reserves associated with the exposure to the self-insured liabilities are monitored by management for adequacy. However, actual amounts could vary significantly from such estimates.

 

Pension Benefits      Belo’s pension costs and obligations are calculated using various actuarial assumptions and methodologies as prescribed under SFAS 87, “Employers’ Accounting for Pensions.” To assist in developing these assumptions and methodologies, Belo uses the services of an independent consulting firm. To determine the benefit obligations, the assumptions the Company uses include, but are not limited to, the selection of the discount rate and projected salary increases. In determining the discount rate assumption of 6.85 percent, the Company used a measurement date of December 31, 2007 and constructed a portfolio of bonds to match the benefit payment stream that is projected to be paid from the Company’s pension plans. The benefit payment stream is assumed to be funded from bond coupons and maturities as well as interest on the excess cash flows from the bond portfolio.

 

To compute the Company’s pension expense in the year ended December 31, 2007, the Company used actuarial assumptions that include a discount rate and an expected long-term rate of return on plan assets. The discount rate of 6.00 percent used in this calculation is the rate used in computing the benefit obligation as December 31, 2006. The expected long-term rate of return on plan assets of 8.50 percent is based on the weighted average expected long-term returns for the target allocation of plan assets as of the measurement dates of December 31, 2007 and 2006. Although the Company believes that the assumptions used are appropriate, differences between assumed and actual experience may affect the Company’s operating results. See the Consolidated Financial Statements, Note 6–Defined Benefit Pension and Other Post Retirement Plans, for additional information regarding the Company’s pension plan.

 

Recent Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157, “Fair Value Measurements.” SFAS 157 establishes, among other items, a framework for fair value measurements in the financial statements by providing a single definition of fair value, provides guidance on the methods used to estimate fair value, and increases disclosures about estimates of fair value. SFAS 157 will be effective for financial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2007 and will be effective for non-financial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2008. The Company is evaluating the effect of the adoption of this standard.

 

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Liabilities.” This statement permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is evaluating the effects of this

 

 

PAGE 26   Belo Corp. 2007 Annual Report on Form 10-K

 

new standard, but currently believes that adoption will not have a material effect on our financial position or results of operations.

 

In December 2007, the FASB issued SFAS 141R, “Business Combinations.” SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations Belo engages in will be recorded and disclosed following existing accounting principles until January 1, 2009. The Company expects SFAS 141R will affect Belo’s consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions, if any, Belo consummates after the effective date.

 

 

 

The weighted average effective interest rate for these debt instruments is 7.3 percent and 7.4 percent as of December 31, 2007 and 2006, respectively. In 2007, the Company redeemed the 7 1 / 8 % Senior Notes due June 1, 2007. The Company expects to repay the outstanding balance of the 8% Senior Notes due November 1, 2008 with borrowings under long-term facilities including funds drawn from its revolving credit facility.

 

In May 2006, Belo issued $250,000 of 6 3 / 4 % Senior Notes due May 30, 2013 at a premium of approximately $1,118. Interest on these 6 3 / 4 % Senior Notes is due semi-annually on November 30 and May 30 of each year. The 6 3 / 4 % Senior Notes are unsubordinated and unsecured obligations ranking equally with all of the Company’s existing and future unsubordinated and unsecured obligations. The Company may redeem the 6 3 / 4 % Senior Notes at its option at any time in whole or from time to time in part at a redemption price calculated in accordance with the indenture under which the notes were issued. The net proceeds were used to repay debt previously outstanding under Belo’s revolving credit facility, with the remaining proceeds invested in cash and temporary cash investments for working capital needs at December 31, 2007. The $1,118 premium associated with the issuance of these 6 3 / 4 % Senior Notes is being amortized over the term of the 6 3 / 4 % Senior Notes using the effective interest rate method. As of December 31, 2007, the unamortized premium was $910.

 

On February 8, 2008, the date of the distribution of A. H. Belo as discussed in “Distribution of A. H. Belo” below, the Company entered into an Amended and Restated $600,000 Five-Year Competitive Advance and Revolving Credit Facility Agreement with JPMorgan Chase Bank, N.A., J.P. Morgan Securities Inc., Banc of America Securities LLC, Bank of America, N.A. and other lenders (the 2008 Credit Agreement). The Credit Agreement amended the Company’s existing Amended and Restated $1,000,000 Five-Year Competitive Advance and Revolving Credit Facility Agreement (the 2006 Credit Agreement). The amendment reduced the total amount of the Credit Agreement and modified certain other terms and conditions. The facility may be used for working capital and other general corporate purposes, including letters of credit. Revolving credit borrowings under the 2008 Credit Agreement bear interest at a variable interest rate based on either LIBOR or a base rate, in either case plus an applicable margin that varies depending upon the rating of the Company’s senior unsecured long-term, non-credit enhanced debt. Competitive advance borrowings bear interest at a rate obtained from bids selected in accordance with JPMorgan Chase Bank’s standard competitive advance procedures. Commitment fees which depend on the Company’s credit rating, of up to 0.225 percent per year of the total unused commitment, accrue and are payable under the facility. The 2008 Credit Agreement contains usual and customary covenants for credit facilities of this type, including covenants limiting liens, mergers and substantial asset sales. The Company is required to maintain certain leverage and interest coverage ratios specified in the agreement.

 

On June 7, 2006, the Company entered into the 2006 Credit Agreement with JPMorgan Chase Bank, N.A., J.P. Morgan Securities Inc., Banc of America Securities LLC, Bank of America, N.A. and other lenders. The 2006 Credit Agreement amended and restated the Company’s existing $1,000,000 Five-Year Credit Agreement (the 2005 Credit Agreement) by, among other things, extending the term of the existing facility to June 2011. The Company is required to maintain certain leverage and interest coverage ratios specified in the agreement. As of December 31, 2007, the Company was in compliance with all debt covenant requirements. As of December 31, 2007, the balance outstanding under the 2006 Credit Agreement was $118,000. As of December 31, 2006, there were no borrowings outstanding under the 2006 Credit Agreement. At December 31, 2007, all unused borrowings were available for borrowing. This 2006 Credit Agreement was amended and restated in 2008, as discussed above.

 

On May 3, 2005, the Company entered into the 2005 Credit Agreement. The 2005 Credit Agreement was a $1,000,000 variable-rate five-year revolving credit facility. The 2005 Credit Agreement replaced the Company’s $720,000 revolving credit facility, which would have terminated on May 3, 2006. All borrowings under the old facility were repaid by borrowings under the 2005 Credit Agreement. The 2005 Credit Agreement was used for working capital and other general corporate purposes, including letters of credit. This 2005 Credit Agreement was amended and restated in 2006, as discussed above.

 

 

PAGE 28   Belo Corp. 2007 Annual Report on Form 10-K

 

In addition, the Company has uncommitted lines of credit currently available for borrowing of $10,000, with another $50,000 currently unavailable due to current debt ratings. At December 31, 2007, there was $1,050 outstanding under the $10,000 line of credit. There was no outstanding balance under either line of credit at December 31, 2006. The uncommitted lines of credit have a variable interest rate. These borrowings may be converted at the Company’s option to revolving debt. Accordingly, such borrowings are classified as long-term in the Company’s financial statements. As of December 31, 2007 and 2006, the weighted average interest rate for borrowings under the line of credit was 7.1 percent and 5.1 percent, respectively. All unused borrowings under the Company’s $10,000 uncommitted line of credit were available for borrowing as of December 31, 2007.

 

 

 

Share Repurchase Program

 

On December 9, 2005, the Company’s Board of Directors authorized the repurchase of up to 15,000,000 shares of common stock. As of December 31, 2007, the Company had 13,221,716 remaining shares under this purchase authority. In addition, Belo has in place a stock repurchase program authorizing the purchase of up to $2,500 of Company stock annually. During 2007, no shares were purchased under this program. There is no expiration date for either of these repurchase programs. The total cost of the treasury shares purchased in 2007, 2006 and 2005, was $17,152, $144,429 and $184,011, respectively. All shares repurchased were retired in the year of purchase.

 

 

Distribution of A. H. Belo

 

On September 28, 2007, the board of directors of Belo authorized management to pursue the distribution of its newspaper businesses and related assets into a separate public company. An important objective of the distribution was to allow each of the Company’s newspaper and television businesses to more efficiently obtain and allocate resources for its distinct business and allow the management of each of these two businesses to focus on the opportunities and challenges specific to its particular operations. The distribution was completed on February 8, 2008, in the form of a pro-rata, tax-free dividend to Belo’s shareholders of 0.20 shares of A. H. Belo common stock for each share of the Company’s common stock owned at the close of business on January 25, 2008.

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 29 

 

In connection with the distribution, the Company undertook the following:

 

 

In connection with the Company’s distribution of A. H. Belo, the Company entered into a separation and distribution agreement, a services agreement, a tax matters agreement, an employee matters agreement, and other agreements with A. H. Belo. In the separation and distribution agreement, effective as of the distribution date, A. H. Belo and Belo will indemnify each other and certain related parties, from all liabilities existing or arising from acts and events occurring, or failing to occur (or alleged to have occurred or to have failed to occur) regarding each other’s businesses, whether occurring before, at or after the effective time of the distribution; provided, however, that under the terms of the separation and distribution agreement, the Company and A. H. Belo will share equally in any liabilities, net of any applicable insurance, resulting from the circulation-related lawsuits described in the Consolidated Financial Statements, Note 13–Contingent Liabilities.

 

Under the services agreement, the Company (or its subsidiaries) will provide the following services and/or support to A. H. Belo: legal and government affairs; employee benefit plan administration; and payroll and other specified financial management activities. Similarly, A. H. Belo (or its subsidiaries) will provide the following services and/or support to the Company: information technology; interactive media; real estate management; and other specified operations activities. The services will generally be provided for a term beginning on the distribution date and expiring on the earlier of the second anniversary of the distribution date or the date of termination of a particular service pursuant to the agreement. The party receiving a service can generally terminate provision of that service upon 90 days advance notice to the party providing the service. Payments made or other consideration provided in connection with all continuing transactions between the Company and A. H. Belo will be on a basis arrived at by the parties bargaining at arms-length or with respect to services not inconsistent with the business purpose of the parties.

 

The tax matters agreement sets out each party’s rights and obligations with respect to deficiencies and refunds, if any, of federal, state, local, or foreign taxes for periods before and after the distribution and related matters such as the filing of tax returns and the conduct of IRS and other audits. Under this agreement, the Company will be responsible for all income taxes prior to the distribution, except that A. H. Belo will be responsible for its share of income taxes paid on a consolidated basis for the period of January 1, 2008 through February 8, 2008. A. H. Belo will also be responsible for its income taxes for 2008 not paid on a consolidated basis. In addition, even though the distribution otherwise qualifies for tax-free treatment to shareholders, the Company (but not its shareholders) will recognize for tax purposes approximately $51,900 of previously deferred intercompany gains in connection with the distribution, resulting in a federal income tax obligation of approximately $18,000, and a state tax which is not currently estimable and is not expected to be material. If such gains are adjusted in the future, then the Company and A. H. Belo shall be responsible for paying the additional tax associated with any increase in such gains in the ratio of one-third and two-thirds, respectively. With respect to all other taxes, the Company

 

 

PAGE 30   Belo Corp. 2007 Annual Report on Form 10-K

 

will be responsible for taxes attributable to the television business and related businesses, and A. H. Belo will be responsible for taxes attributable to the newspaper businesses and related assets. In addition, the Company will indemnify A. H. Belo and A. H. Belo will indemnify the Company, for all taxes and liabilities incurred as a result of post-distribution actions or omissions by the indemnifying party that affect the tax consequences of the distribution, subject to certain exceptions.

 

The employee matters agreement allocates liabilities and responsibilities relating to employee compensation and benefits plans and programs and other related matters in connection with the distribution, including, without limitation, the treatment of outstanding Belo equity awards, certain outstanding annual and long-term incentive awards, existing deferred compensation obligations, and certain retirement and welfare benefit obligations.

 

The Company’s Dallas/Fort Worth television station, WFAA-TV, and The Dallas Morning News, owned by A. H. Belo, entered into an agreement whereby each agrees to provide media content, cross-promotion, and other services to the other on a mutually agreed upon basis. The Dallas Morning News and WFAA-TV currently share media content at no cost, as do other media operating companies of Belo and A. H. Belo, and that sharing is expected to continue for the foreseeable future.

 

Unaudited Pro Forma Financial Information

 

On February 8, 2008, Belo completed the distribution of its newspaper businesses and related assets into a separate public company, A. H. Belo. The unaudited pro forma consolidated condensed financial statements presented below consist of the unaudited pro forma consolidated condensed balance sheet as of December 31, 2007 and the unaudited pro forma consolidated condensed statement of operations for the year ended December 31, 2007. The unaudited pro forma consolidated condensed balance sheet has been prepared giving effect to the distribution of the newspaper businesses and related assets and related transactions described in “Overview” above as if they occurred on the balance sheet date. The unaudited pro forma consolidated condensed statement of operations has been prepared giving effect to the distribution of the newspaper businesses and related assets and related transactions described in the “Overview” above as if they occurred as of the beginning of the period presented.

 

The unaudited pro forma consolidated condensed balance sheet and unaudited pro forma consolidated condensed statement of operations have been derived from our financial statements included in Item 8 and do not purport to represent what our financial position and results of operations actually would have been had the transactions occurred on the dates indicated or to project our financial performance for any future period. We did not account for the newspapers and related businesses as a separate, stand-alone entity for the periods presented.

 

 

Belo Corp. 2007 Annual Report on Form 10-K  PAGE 31 

 

 

 

 

PAGE 32   Belo Corp. 2007 Annual Report on Form 10-K

 

Unaudited Pro Forma Consolidated Condensed Statement of Operations for the year ended December 31, 2007

 

 

Notes to Unaudited Pro Forma Consolidated Condensed Financial Statements

 

The unaudited pro forma consolidated condensed balance sheet reflects the following adjustments: