Belo 10-K 2006 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file no. 1-8598
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code:
(214) 977-6606
Securities registered pursuant to Section 12(b) of the Act:
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
registrants 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.
[ X ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in
Rule 12b-2 of the
Act). Large accelerated
filer [ X ] Accelerated
filer [ ] Non-accelerated
filer [ ]
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 registrants voting stock
held by nonaffiliates on June 30, 2005, based on the
closing price for the registrants Series A Common
Stock on such date as reported on the New York Stock Exchange,
was approximately $2,379,552,261.*
Shares of Common Stock outstanding at February 28, 2006:
106,183,442 shares. (Consisting of 90,961,132 shares
of Series A Common Stock and 15,222,310 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 registrants Proxy Statement, prepared
pursuant to Regulation 14A, relating to the Annual Meeting
of Shareholders to be held May 9, 2006, are incorporated by
reference into Part III (Items 10, 11, 12, 13 and
14) of this report.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
1
BELO CORP.
FORM 10-K
PAGE 2 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
PART I
Item 1. Business
Belo Corp. (Belo or the Company), a
Delaware corporation, began as a Texas newspaper company in 1842
and today is one of the nations largest media companies
with a diversified group of market-leading television
broadcasting, newspaper publishing, cable news and interactive
media operations. A Fortune 1000 company with
$1.52 billion in 2005 revenues, Belo operates news and
information franchises in some of Americas most dynamic
markets and regions. The Company owns 19 television stations
(six in the largest 15 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 one local and two
regional cable news channels and holds ownership interests in
four others. Belos daily newspapers are The Dallas
Morning News, The Providence Journal, The Press-Enterprise
(Riverside, CA) and the Denton Record-Chronicle
(Denton, TX). Belo operates more than 30 Web sites,
participates in several interactive alliances and offers a broad
range of Internet-based products.
The Company believes the success of its media franchises is
built upon providing local and regional news and information and
community service of the highest caliber for over
163 years. These principles have built durable
relationships with viewers, readers, advertisers and online
users and have guided Belos success.
Financial information for each of the Companys reportable
segments can be found under Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations and under Item 8 Financial
Statements and Supplementary Data, Consolidated Financial
Statements, Note 17 Segment Information in this
Annual Report on
Form 10-K.
The Companys 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 49 years, through various transactions,
Belo acquired 14 more television stations across the United
States. In 2000, Belo acquired
KONG-TV in Seattle/
Tacoma and KASW-TV in
Phoenix. In 2001 and 2002, Belo purchased
KSKN-TV in Spokane and
KTTU-TV in Tucson,
respectively. Belo operated all four of these stations through
LMAs prior to their purchases. These acquisitions brought the
total to 19 owned television stations in 15 U.S. markets.
Belo also manages one station through an LMA. In 2004, Belo
entered into joint marketing and shared services agreements with
HIC Broadcasting, Inc., the owner and operator of
KFWD-TV, Channel 52,
licensed to Fort Worth, Texas. Under these agreements, Belo
provides advertising sales assistance, certain technical
services and facilities to support KFWDs operations, as
well as limited programming.
Belos Television Group is the nations
5th largest non-network owned station group based on
audience share. In the 15 U.S. markets in which the
Television Group operates, 10 of Belos stations are ranked
number one and three are ranked number two (including stations
tied with one or more other stations in the market) in
sign-on/sign-off audience rating, principally based
on the November 2005 Nielsen Media Research report. Belo has six
stations in the largest 15 U.S. markets and 14 stations in
the largest 50 U.S. markets.
Belos stations are primarily concentrated in three
high-growth regions: Texas, the Northwest and the Southwest. Six
of the Companys stations are located in the following four
major metropolitan areas in the United States:
Belos television stations have been recognized with
numerous local, state and national awards for outstanding news
coverage. Since 1957, Belos television stations have
garnered 17 Alfred I. duPont-Columbia Awards,
16 George Foster Peabody Awards and 28 Edward R.
Murrow Awards the industrys most prestigious honors.
Belo Corp. 2005 Annual Report on
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The following table sets forth information for the
Companys television stations (including the station which
it operates through an LMA) and their markets as of
December 31, 2005:
The principal source of revenue for Belos 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 affected by a
variety of factors, including the size and demographics of the
local population, the concentration of retail stores, the local
economic conditions in general, and the popularity of the
stations programming. In 2005, approximately
90 percent of total Television Group revenues were derived
from advertising spot revenues. A large percentage of the
advertising spot revenues are generated from the automotive
industry. Advertising revenues from the automotive industry
totaled approximately 25 percent of total Television Group
revenues in 2005.
The normal operations and revenues of the Companys
television station in New Orleans,
WWL-TV, were disrupted
significantly by Hurricane Katrina, although the station
sustained only minimal damage to its physical property and
equipment. WWL-TV
managed to broadcast throughout the disaster from temporary
facilities and in October 2005 resumed broadcasting from its own
facilities in New Orleans. However, the hurricane adversely
affected the stations revenues due to its effect on a
significant number of New Orleans advertisers. The Company
has estimated its lost revenues from Hurricane Katrina were
approximately $7,200 in 2005. The Company also incurred
approximately $4,100 in incremental expenses related to
Hurricane Katrina in 2005. The Company has insurance coverage,
including business interruption insurance, which is expected to
mitigate a portion of the near-term financial effects of
Hurricane Katrina. The Company has not recorded any potential
recovery from insurance proceeds in its results of operations
for 2005.
On July 8, 2005, the Company announced an agreement to
purchase WUPL-TV, the
UPN affiliate in New Orleans, from Infinity Radio, Inc., a
subsidiary of CBS Corporation, for $14,500 in cash, subject
to FCC approval and other customary closing conditions. On
January 5, 2006, Infinity Radio, Inc., plaintiff, filed a
complaint against Belo Corp. and Belo TV, Inc.,
PAGE 4 Belo
Corp. 2005 Annual Report on
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Table of Contents
a subsidiary of Belo Corp., in the Supreme Court of the State of
New York, County of New York, alleging, among other matters,
that Belo breached obligations under the asset purchase
agreement between Belo and plaintiff to purchase substantially
all of the assets of
WUPL-TV in the
aftermath of Hurricane Katrina. Plaintiff seeks specific
performance directing Belo to deliver the $14,500 purchase price
of the station. On February 21, 2006, Belo filed its
response to the complaint. Belo believes the complaint is
without merit and intends to vigorously defend against it.
Web sites of each of the Companys 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 2005 .comScore Ratings,
the Company has seven of the top 50 local television-affiliated
Web sites in the U.S. During 2005, the Company integrated
its interactive media business and Web sites into their related
operating companies. Revenues for the Television Groups
interactive media in 2005 represented 1.7 percent of the
total Television Group revenues and were derived principally
from advertising on the various Television Group Web sites.
The Company has network affiliation agreements with ABC, CBS,
NBC, FOX, WB and UPN. The Companys 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. Many, but not all,
of the Companys stations may receive network compensation
for broadcasting network programming. Approximately
4 percent of total Television Group revenues were derived
from network compensation in 2005. Over time, network
compensation is expected to decline.
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,
Belos Television Group revenue streams are not
significantly affected by which broadcast network leads
primetime. Belo also owns two independent (IND)
stations, two WB affiliates, one FOX affiliate and one United
Paramount Network (UPN) affiliate, and operates one
additional UPN affiliate through an LMA. In January 2006, it was
announced that the UPN and WB networks will cease operations and
that a new network, The CW, will be formed by merging the WB and
UPN networks. The Company is currently evaluating the impact of
these changes on its operations, but does not expect these
changes to have a material impact on its results of operations.
The Company also owns regional cable news operations including
Texas Cable News (TXCN) in Dallas, Texas, Northwest
Cable News (NWCN) in Seattle, Washington and 24/7
NewsChannel (24/7) in Boise, Idaho, which provide
news coverage in a comprehensive
24-hour a day format
using the news resources of the Companys television
stations and newspapers in Texas and television stations in
Washington, Oregon and Idaho. The Company also operates, through
joint ventures, four cable news channels in partnership with Cox
Communications and others, which channels provide local news
coverage in New Orleans, Louisiana (NewsWatch on Channel 15),
Phoenix, Arizona (Arizona NewsChannel and !Mas! Arizona) 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 2005,
approximately 2 percent of total Television Group revenues
were derived from Belos cable news operations and
consisted primarily of advertising and subscriber-based fees.
Competition for audience share and advertising revenues at
Belos television stations and cable news operations is
based primarily on programming content and advertising rates.
The four major national television networks 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. Belos businesses may also compete
with each other for national, regional and local advertising.
Additionally, the Companys competitors in the Television
Group include other broadcast, cable and satellite television
stations, local, regional and national newspapers, magazines,
radio, direct mail, yellow pages, the Internet and other media.
Advertising rates are set based upon a programs
popularity, the size of the market served, the availability of
alternative advertising media and the amount of advertisers
competing for the available time.
Belos publishing roots began with The Galveston Daily
News, which began publication in 1842. Today, Belos
Newspaper Group includes four daily newspapers, The Dallas
Morning News, The Providence Journal, The Press-Enterprise
and the Denton Record-Chronicle. They provide
extensive local, state, national and international news. In
addition to these four daily newspapers, Belo publishes various
niche products in these same markets. Belo also operates certain
commercial printing businesses.
Belo Corp. 2005 Annual Report on
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The Dallas Morning News was established in 1885 and is
one of the leading newspaper franchises in America. Its success
is founded upon the highest standards of journalistic
excellence, with an emphasis on comprehensive news and
information, and community service. The Dallas Morning News
is distributed primarily in Dallas County and the
11 surrounding counties. It has earned seven Pulitzer
Prizes since 1986 for its news reporting and photography.
The Providence Journal, acquired by Belo in February
1997, is the Companys second-largest publication based on
total circulation. The Providence Journal is the leading
newspaper in Rhode Island and southeastern Massachusetts. The
Providence Journal is Americas oldest major daily
newspaper of general circulation and continuous publication and
has won four Pulitzer Prizes.
The Press-Enterprise, the Companys third-largest
publication, was acquired in July 1997. The Press-Enterprise
is distributed throughout the Inland Empire area of southern
California, which includes Riverside and San Bernardino
counties. It has a long history of journalistic excellence and
has won one Pulitzer Prize.
The following table sets forth information concerning the
Companys primary daily newspaper operations:
Belos Newspaper Group derives its revenues primarily from
the sale of advertising and newspapers and commercial printing.
For the year ended December 31, 2005, advertising revenues
accounted for approximately 84 percent of total Newspaper
Group revenues. A large percentage of the advertising revenues
is generated from the automotive, real estate and employment
categories. Advertising revenues from these sources totaled
approximately 33 percent of total Newspaper Group
advertising revenues for 2005. Circulation revenues accounted
for approximately 12 percent of total Newspaper Group
revenues for 2005. Prices for the Companys newspapers are
established individually for each newspaper. Approximately
74 percent of the weekday and 66 percent of the Sunday
circulation were sold through home delivery in 2005; the
remainder was sold primarily through single copy sales.
Effective April 1, 2006, The Dallas Morning News
will cease distribution to areas approximately
200 miles or more outside of the Dallas/
Fort Worth DMA, with the exception of Austin, the
capital city of Texas. Commercial printing accounted for most of
the remainder of the Newspaper Group revenues.
Interactive editions of Belos newspapers provide consumers
with accurate and timely news and information. The
Companys newspaper-affiliated Web sites for The Dallas
Morning News and The Providence Journal are the
leading local media sites in their respective markets. During
2005, the Company integrated its interactive media business and
Web sites into their related operating companies. Revenues for
the Newspaper Groups interactive media in 2005 represented
approximately 4 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 Belos newspapers is
newsprint. Currently, most of Belos newsprint is 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. Management believes the Companys
sources of newsprint, along with available alternate sources,
are adequate for the Companys current needs.
During 2005, Belos publishing operations consumed
approximately 201,897 metric tons of newsprint at an average
cost of $562 per metric ton. Consumption of newsprint in
the previous year was approximately 211,950 metric tons at an
average cost per metric ton of $509. Newsprint prices increased
approximately 10 percent in 2005. The average price of
newsprint is
PAGE 6 Belo
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expected to be higher in 2006 than in 2005, although the amount
and timing of any increase cannot be predicted with certainty.
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. Belos 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.
On August 5, 2004, the Company announced that an internal
investigation, then ongoing, disclosed practices and procedures
that led to an overstatement of previously reported circulation
figures at The Dallas Morning News, primarily in single
copy sales. In response to the overstatement, the Company
announced a voluntary advertiser plan developed by management.
As a result, the Company recorded a charge of $23,500 in 2004
related to the advertiser plan, of which approximately $19,600,
consisting of cash payments to advertisers, was classified as a
reduction of revenues and approximately $3,900, consisting of
related costs, was included in other operating costs. Payments
under the plan were made without the condition that such
advertisers release The Dallas Morning News from
liability for the circulation overstatement. The plan also
included future advertising credits. To use the credits,
advertisers generally placed advertising in addition to the
terms of the advertisers current contract. Credits earned
were to be used by the end of an advertisers contract
period or February 28, 2005, whichever was later.
Advertisers used approximately $2,873 in credits through
December 31, 2005. There are no unused credits as of
December 31, 2005.
On January 21, 2005, the Audit Bureau of Circulations
(Audit Bureau) advised The Dallas Morning News
that the Audit Bureau would not issue an audit report of the
newspapers circulation for the twelve months ended
March 31, 2004 or the six months ended September 30,
2004. The Audit Bureau concluded not to issue the 2004 audit
reports for The Dallas Morning News due primarily to the
absence of reliable records of independent contractors to
support revised circulation figures for city single copy sales.
The Audit Bureau advised The Dallas Morning News that
sufficient records and data do exist to confirm the accuracy of
circulation figures for the six-month period ended
September 30, 2004 for all areas other than city single
copy sales, and that these figures appear to be materially
accurate. That Audit Bureau conclusion is consistent with the
conclusion reached by the independent investigation conducted
for the Audit Committee of Belos Board of Directors, which
was completed in September 2004. The Audit Bureaus bylaws
require that the Audit Bureaus Board of Directors approve
the release of any Publishers Statement not subject to
subsequent audit, and The Dallas Morning News requested
such approval for the September 2004 Publishers Statement.
The contents of the Publishers Statement were reviewed and
discussed with the Audit Bureau prior to filing, including the
methodologies used to estimate circulation in city single copy
sales where reliable records do not exist for the entire period.
On March 7, 2005, The Dallas Morning News was
advised that the Audit Bureaus Board of Directors declined
the newspapers request to release the September 2004
Publishers Statement.
On May 13, 2005, the Audit Bureau released its audit of
circulation figures filed by The Dallas Morning News in
its Publishers Statement for the six-month period ended
March 31, 2005. The audited circulation figures, as
self-adjusted subsequent to the statements release due to
a system coding error to reflect 1,329 fewer copies daily and
1,435 fewer copies Sunday, showed an average daily circulation
of 476,397 and Sunday circulation of 654,374, decreases of
approximately 50,000 newspapers daily versus March 2004, or
9.8 percent, and approximately 100,000 newspapers Sunday
versus March 2004, or 13.4 percent. The Audit Bureau also
announced that it had recalled The Dallas Morning News
Publishers Statements for the six months ended
September 30, 2003, and March 31, 2004, and has
withdrawn its unqualified opinion of the audit report for the
twelve months ended March 31, 2003, citing the
unavailability of reliable records for those periods.
On February 3, 2006, the Audit Bureau released its audit of
circulation figures filed by The Dallas Morning News in
its Publishers Statement for the six-month period ended
September 30, 2005.
FCC Regulation
General. Belos
television broadcast operations are subject to the jurisdiction
of the Federal Communications Commission (FCC or the
Commission) under the Communications Act of 1934, as
amended (the Communications Act). Among other
things, the Communications Act empowers the FCC to
(1) determine stations operating frequencies,
location and power; (2) issue, renew, revoke and modify
station licenses; (3) regulate equipment used by stations;
(4) impose penalties for violation of the Communications
Act or FCC regulations; and (5) adopt regulations to carry
out the Communications Act. The Communications Act prohibits the
assignment of a broadcast license or the transfer of control of
a broadcast licensee
Belo Corp. 2005 Annual Report on
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without prior FCC approval. Under the Act, the FCC also
regulates certain aspects of the operation of cable television
systems and other electronic media that compete with television
stations.
Station Licenses. The FCC
grants television station licenses for terms of up to eight
years. The Communications Act requires renewal of a television
license 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 either the
Communications Act or the FCCs rules and regulations; and
(3) there have been no other violations by the licensee of
either the Communications Act or the FCCs rules and
regulations which, taken together, constitute a pattern of
abuse. The current license expiration dates for each of
Belos television broadcast stations are as follows:
The licenses for both
KBEJ-TV and
KFWD-TV, the television
stations for which the Company provides certain programming and
other services, expire August 1, 2006.
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 Childrens Television Act of 1990 limits the amount of
commercial matter in childrens television programs and
requires each station to present educational and informational
childrens programming. Pursuant to the FCCs
implementing rules, broadcasters are required to provide a
minimum of three hours of childrens educational
programming per week. In addition, in September 2004, the FCC
issued public interest mandates relating to the
implementation of digital television service (DTV)
(which is discussed in detail below). Among other things, the
FCC determined that the amount of childrens educational
programming a DTV broadcaster must air will increase
proportionally with the number of free video programming streams
broadcast simultaneously (or multicast) by the
broadcaster. The FCC also established restraints designed to
address commercialization of childrens fare on
both analog and digital programming. In late 2005, certain
advocacy groups and entertainment companies challenged these new
rules in federal court. The groups thereafter reached an
agreement on a recommendation to the FCC that, if adopted, would
resolve their concerns with the FCCs rules. The FCC has
stated that it will seek public comment on the parties
recommendation, and Belo cannot predict how the FCC will act.
In July 2004, the FCC released a wide-ranging Notice of Inquiry
into broadcasters localism practices. The notice evaluates
whether additional regulation is necessary to ensure that
licensees satisfy the programming needs and interests of local
audiences. The proceeding remains pending, and Belo cannot
predict its outcome.
The FCCs Equal Employment Opportunity (EEO)
rules impose job information dissemination, recruitment and
reporting requirements. Licensees must retain documentation of
each of the required recruitment activities and file periodic
reports
PAGE 8 Belo
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relating to the EEO requirements. Broadcasters are subject to
random audits to ensure compliance with the EEO rules and could
be sanctioned for noncompliance.
The FCC stepped up its enforcement with respect to broadcast
indecency over the past few years. In doing so, it has stated
its willingness to find licensees liable for repeated violations
during a single program (which can lead to significantly
increased fines) and issued warnings about possible license
revocation proceedings for serious violations. In addition,
Congress is considering legislation that would increase the
penalties for broadcasting indecent material.
Cable and Satellite Transmission of
Local Television Signals. The FCC has adopted
regulations to implement provisions of the Cable Television
Consumer Protection and Competition Act of 1992, as amended,
governing the relationship between broadcasters and cable
operators. Among other matters, these regulations require cable
systems to devote a specified portion of their channel capacity
to the carriage of the signals of local television stations and
permit TV stations to elect between must carry
rights or a right to restrict or prevent cable systems
from carrying the stations signal without the
stations permission (retransmission consent).
In November 1999, Congress enacted the Satellite Home Viewer
Improvement Act of 1999 (SHVIA), which established a
copyright licensing system for limited distribution of
television programming to direct broadcast satellite
(DBS) viewers and directed the FCC to initiate
rulemaking proceedings to implement the new system. SHVIA also
extended the current system of satellite distribution of distant
network signals to unserved households (i.e., those that
do not receive a Grade B signal from a local network affiliate).
The FCC has established a market-specific requirement for
mandatory carriage of local television stations, similar to that
applicable to cable systems, for those markets in which a
satellite carrier chooses to provide any local signal.
The Satellite Home Viewer Extension and Reauthorization Act of
2004 (SHVERA) extends the compulsory copyright
license for carriage of distant signals through
December 31, 2009 and addresses a variety of other issues
related to the carriage of broadcast television signals on DBS
systems. Specifically, SHVERA requires satellite carriers to
phase out the carriage of distant signals in markets where they
offer local broadcast service. The new statute also permits
satellite carriers to deliver the distant signal of a network
station to consumers in unserved digital households (also
referred to as digital white areas), but only if the
local station affiliated with that network misses the FCCs
deadlines for increasing the stations digital signal
power. In February 2005, the FCC adopted rules relating to
station eligibility for satellite carriage and subscriber
eligibility for receiving signals, and which stations are
entitled to significantly viewed status. In March
2005, the FCC adopted rules for carriage elections, unified
retransmission consent negotiation, and a requirement that
satellite carriers notify local broadcasters concerning carriage
of significantly viewed signals.
Digital Television Service.
In 1997, the FCC adopted rules for implementing DTV service,
which will improve the technical quality of television signals
received by viewers and give television broadcasters the ability
to provide new services, including high-definition television.
Broadcasters holding a license or construction permit for a
full-power television station have, with certain limited
exceptions, been temporarily assigned a second channel in order
to provide either separate DTV programming or a simulcast of
their analog programming. All Stations are required to construct
their DTV facilities and be on the air with a digital signal
according to a schedule set by the FCC based on the type of
station and the size of the market in which it is located.
Currently, all full-power stations licensed to Belo are
broadcasting digitally.
At the end of the DTV transition period, analog television
transmissions will cease and DTV channels will be reassigned to
a smaller segment of the broadcasting spectrum comprising
channels 2-51. Congress has set February 17, 2009 as the
date by which television broadcasters must cease analog
broadcasts and surrender their analog spectrum to the government.
When the FCC adopted service rules for the digital television
transition, it stated that it would periodically review the
transitions progress. The FCC initially decided to permit
broadcasters to construct minimal DTV facilities (i.e.,
facilities that cover only their cities of license) while
retaining interference protection for their allotted and
maximized facilities. Five Belo stations are operating their
digital signals at reduced power pursuant to such authority. In
September 2004, the FCC set deadlines by which broadcasters
operating with minimal (e.g., reduced power) DTV facilities must
either provide DTV service to their full authorized coverage
areas or lose interference protection to the unserved areas. In
addition, the decision established a multi-step process by which
broadcasters may select their post-transition DTV channel within
the core DTV spectrum (Channels 2-51). This process began in
November 2004, with a goal of having all channel assignments
finalized by the end of 2006.
In January 2001, the FCC issued a decision regarding the
carriage (must carry) rights of digital broadcasters
on cable and certain DBS systems in which the FCC determined
that (1) digital-only stations are entitled to must carry
rights; and (2) a digital-only station asserting must carry
rights is entitled to carriage only of a single programming
stream and other program-related content, regardless
of the number of programs that it multicasts. In February 2005,
the Commission
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(1) affirmed its prior tentative conclusion not to accord
broadcasters the rights to simultaneous carriage of their analog
and digital signals and (2) affirmed its prior
determination that cable operators need not carry more than a
single digital programming stream from any particular
broadcaster.
Pursuant to the FCCs rules, all new television sets and
all TV interface devices (VCRs, etc.) must include, by 2007, the
capability of tuning and decoding
over-the-air digital
signals. In addition, the FCC has adopted
plug-and-play rules for cable adaptability. Under
these rules, consumers should be able to plug their cable
connection directly into their digital television sets, without
the need for a set-top box. These rules cover one-way
programming only; the cable and electronics industries are
negotiating an agreement on two-way plug-and-play
standards that would eliminate the need for set-top boxes for
advanced services such as video on demand, impulse pay-per-view
and cable operator-enhanced electronic programming guides. Belo
cannot predict the outcome of those negotiations.
In 2003, the FCC adopted anti-piracy protection for digital
television in the form of a broadcast flag. The
broadcast flag is a digital code that can be embedded in a
digital program stream and allows a broadcaster, in its
discretion, to prevent mass distribution of its digital signal
over the Internet, without affecting the ability of consumers to
make limited digital copies. On May 6, 2005, however, the
United States Court of Appeals for the D.C. Circuit struck down
the FCCs broadcast flag requirements as being beyond the
agencys statutory authority. It is possible that Congress
could enact legislation in this area.
Broadcasters may either provide a single DTV signal or multicast
several program streams in lower resolution DTV formats.
Broadcasters also may use some of their digital spectrum to
provide non-broadcast ancillary services
such as subscription video, data transfer or audio
signals provided such services do not interfere with
the mandatory free digital broadcasts. Stations using DTV
spectrum for subscription services must pay the government a fee
of 5 percent of gross revenues received from such use of
the digital spectrum.
The FCC is also considering issues such as whether a
licensees public interest obligations attach to DTV
service as a whole or to each program stream offered by the
licensee; whether the Commission should establish more specific
public interest requirements for digital broadcasters; and the
improvement of political candidates access to television.
Belo cannot predict the outcome of these proceedings.
Ownership Rules. The
FCCs ownership rules affect the number, type and location
of broadcast and newspaper properties that Belo may hold or
acquire in the future. The rules now in effect limit the
aggregate national audience that a broadcaster may reach through
television stations that it owns, operates, or controls, or in
which it has an attributable interest (as described
below). FCC rules also limit the common ownership, operation, or
control of, as well as the acquisition or retention of
attributable interests in:
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 licensees stock from being held
by aliens, foreign governments or their representatives, or
corporations formed under the laws of foreign countries.
The FCC completed a review of its ownership rules in 2003,
relaxing restrictions on the common ownership of television
stations, radio stations and daily newspapers within the same
local market. On June 24, 2004, however, the United States
Court of Appeals for the Third Circuit released a decision
rejecting much of the Commissions 2003 rules. While
affirming the FCC in certain respects, the Third Circuit found
fault with the proposed new limits on media combinations,
remanded them to the agency for further proceedings and extended
a stay on the implementation of the new rules that it had
imposed in September 2003. In January 2005, several parties,
including Belo, filed petitions for Supreme Court review of the
Third Circuits decision, but the Supreme Court declined to
review the decision. As a result, the restrictions in place
prior to the FCCs 2003 rules decision generally continue
to govern media transactions, pending completion of the agency
proceedings on remand and/or possible legislative intervention.
The discussion below reviews the changes contemplated in the
FCCs 2003 rules decision and the Third Circuits
response to the revised ownership rules that the Commission
adopted.
In 2003, the FCC relaxed the local television ownership rule by
eliminating its eight voices test, which barred
co-ownership of two TV stations in a local market unless at
least eight independently owned, full-power television stations,
or
PAGE 10 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
voices, remained. The modified rule would have
permitted a company to own two stations in any market with at
least five voices. In the largest markets
those with at least 18 stationsa company would have been
permitted to own three stations. Under the limit, both duopolies
and triopolies would be subject to the Commissions
top four limitation, meaning that no more than one
of the co-owned stations may be ranked among the top four in
audience ratings. The Third Circuit upheld the top-four rule,
but remanded for further consideration the other numerical
limits applicable to same-market TV station combinations. The
eight voices requirement of the pre-2003 rules
therefore remains in effect.
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.(1)
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, depending on the number of independently
owned media voices that remain. The cross-media limits adopted
by the FCC in 2003 would have supplanted both rules with three
different categories of restrictions based on the number of
commercial and noncommercial full-power television stations in
the market. First, in markets with three or fewer TV stations,
the FCC would have prohibited any cross-ownership among TV
stations, radio stations, and daily newspapers. Second, in
markets with between four and eight TV stations, the agency
would have permitted limited cross-ownership. Finally, in local
markets with nine or more TV stations, the Commission would have
allowed any newspaper and broadcast cross-media combinations, so
long as they comply with the local TV ownership rule and local
radio ownership rule. The Third Circuit remanded the new
cross-media limits to the Commission for further consideration,
and the pre-2003 newspaper/ broadcast cross-ownership
prohibition was left in place.
The national cap on the percentage of U.S. households that
a single owner can reach through commonly owned television
stations is currently set at 39 percent.
Attribution Rules. Pursuant
to FCC rules, the following positions and interests generally
are considered attributable or recognized, for
purposes of applying the agencys broadcast ownership
restrictions in a particular licensee or group situation:
The foregoing does not purport to be a complete summary of the
Communications Act, other applicable statutes or the FCCs
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 court litigation and Belo cannot predict
the outcome of any such litigation or the effect on its business.
As of December 31, 2005, the Company had approximately
6,600 full-time and 1,200 part-time employees,
including approximately 1,300 employees represented by various
employee unions. Approximately 45 percent of these union
employees are located in Providence, Rhode Island; the remaining
union employees work at various television stations and other
properties. Belo believes its relations with its employees are
satisfactory.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
11
Table of Contents
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, its
quarterly reports on
Form 10-Q, its
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.
Item 1A. Risk
Factors
Sections of this Annual Report on
Form 10-K and
managements public comments from time to time may contain
certain forward-looking statements that are subject to risks and
uncertainties. These statements are based on managements
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, war, terrorism, natural disasters or other factors,
could adversely affect our financial condition and results of
operations.
Ninety percent or more of our revenues for the last three years
were generated from the sale of local, regional and national
advertising appearing in our newspapers and for broadcast on our
television stations. 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 revenue tends to decline in times of national or
local crisis because our television stations broadcast more news
coverage and sell less advertising time.
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. Two of
our largest operating units, The Dallas Morning News and
WFAA-TV, are located in
the Dallas/ Fort Worth metropolitan market, from which we
derived between 40 percent and 42 percent of our operating
revenue over the last three years. Adverse conditions in this
local market may be more significant than in other Company
markets.
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, changes in newsprint prices and general
economic factors. Fluctuations in revenues and results of
operations may cause our stock price to be volatile.
Our diversified media businesses operate in highly
competitive markets, and our ability to maintain market share
and general revenues is dependent on how effectively we compare
with existing and new competition.
Our diversified media businesses operate in highly competitive
markets. Our newspapers and television stations compete for
audiences and advertising revenue with other 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 newspaper publications and television stations generate
significant percentages of their advertising revenues from
limited numbers of sources, including the automotive industry
and classified advertising. In recent years, Web sites dedicated
to recruitment, real estate and automobile sales have become
significant competitors of Belos newspapers and Web sites
for classified advertising. As a result, even in the absence of
a recession or economic downturn, technological, industry or
other changes specifically impacting these advertising sources
could reduce advertising revenues and adversely effect our
financial condition and results of operations.
PAGE 12 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
In the Newspaper Group, our revenues primarily consist of
advertising and paid circulation. Competition for advertising
expenditures and paid circulation comes from local, regional and
national newspapers, magazines, broadcast, cable and satellite
television, radio, direct mail, yellow pages, the Internet and
other media. The National Do Not Call Registry has impacted the
way newspapers sell home-delivery circulation, particularly for
the larger newspapers which historically have relied on
telemarketing. Competition for newspaper advertising revenue is
based largely upon advertiser results, advertising rates,
readership, demographics and circulation levels, while
competition for circulation is based largely upon the content of
the newspaper, its price, editorial quality and customer
service. On occasion, our businesses compete with each other for
national, regional and local advertising. Our local and regional
competitors in community newspapers are typically unique to each
market, but we have many competitors for advertising revenues
that may be larger and have greater financial and distribution
resources than do we. Circulation revenues and our ability to
achieve price increases for our print products may be affected
by competition from other publications and other forms of media
available in our various markets, declining consumer spending on
discretionary items like newspapers, decreasing amounts of free
time, and declining frequency of regular newspaper buying among
certain demographics such as people ages 18-35. We may
incur higher costs competing for advertising expenditures and
paid circulation. If we are not able to compete effectively for
advertising expenditures and paid circulation, our revenues may
decline and our financial condition and results of operations
may be adversely affected.
Our Television Group competes 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 programs popularity among
the advertisers 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 have 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 newspaper and television
businesses may not be able to compete effectively.
New technologies could also adversely affect our newspapers and
television stations. Information delivery and programming
alternatives such as cable, direct
satellite-to-home
services, pay-per-view, the Internet and home video and
entertainment systems have fractionalized newspaper readership
and television viewing audiences. Over the past decade, cable
television programming services and the Internet have captured
an increasing market share, while the aggregate circulation of
the major newspapers and 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 in the future
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 technological changes will have on the
television industry or the future results of our Television
Group businesses.
A significant increase in the cost of newsprint or a
reduction in the availability of newsprint could adversely
impact our publishing business.
The basic raw material for newspapers is newsprint. The cost of
our newsprint consumption related to our publications totaled
approximately $113,388, $107,979 and $101,588 in 2005, 2004 and
2003, respectively, which was between 13 percent and
14 percent of our Newspaper Group revenues for those years.
The price of newsprint historically has been volatile.
Consolidation in the North American newsprint industry has
reduced the number of suppliers. This consolidation has led to
paper mill closures and conversions to other grades of paper,
which in turn have decreased overall newsprint capacity and
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
13
Table of Contents
increased the likelihood of price increases in the future. We
currently purchase most of Belos newsprint through a
purchasing consortium of which Belo is a member. Our inability
to obtain an adequate supply of newsprint in the future or
significant increases in newsprint costs could adversely effect
our financial condition and results of operations.
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 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. The Company has four stations affiliated with ABC,
five stations affiliated with CBS, four stations affiliated with
NBC, two each affiliated with UPN and WB, and one affiliated
with FOX. Each of the networks generally provides our affiliated
stations with 22 hours of prime time programming per week
in the case of the Big-Three networks (ABC, CBS, and NBC) and
13 hours of prime time programming per week in the case of
WB and UPN. Each of these agreements is subject to periodic
renewal. In addition, some of the networks with which our
stations are affiliated have required us and other broadcast
groups, upon 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.
In January 2006, it was announced that the UPN and WB networks
will cease operations and that a new network, The CW, will be
formed. The Company is currently evaluating the impact of these
changes on its operations, but does not expect these changes to
have a material impact on its operations.
Regulatory changes may impact the Companys strategy and
increase competition and operating costs in our media
businesses.
As described in this Annual Report on
Form 10-K under
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
impact the Companys strategy, increase competition and the
Companys 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 televisions, political advertising rates and
childrens 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
impact our financial condition and results of operations.
From time to time the Company and its 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.
PAGE 14 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
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 2004 and 2012 (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, or
renew them with substantial conditions or modifications
(including renewing one or more of our licenses for a term of
fewer than eight years), it could prevent us from operating the
affected stations and generating revenues.
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 executive officers or key
personnel.
Our businesses may be negatively affected by work stoppages,
slowdowns or strikes by our employees.
Currently, there are 23 bargaining agreements with unions
representing approximately 1,300 (or approximately
17 percent) of our total number of full and part-time
employees. All of these agreements will expire within the next
four years, unless extended. We cannot assure investors about
the results of negotiation of future collective bargaining
agreements, whether future collective bargaining agreements will
be negotiated without interruptions in our businesses, or the
possible effect of future collective bargaining agreements on
our financial condition and results of operations. We also
cannot assure investors that strikes will not occur in the
future in connection with labor negotiations or otherwise. Any
prolonged strike or work stoppage could have an adverse effect
on our financial condition and results of operations.
We have a large amount of indebtedness.
We currently use a portion of our operating cash flow for debt
service. At December 31, 2005, we had debt outstanding of
$1,244,875 and shareholders equity of $1,533,481. 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.
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 Managements Discussions and
Analysis of
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
15
Table of Contents
Financial Condition and Results of Operations
Critical Accounting Policies and Estimates and Item 8
Financial Statements and Supplementary Data,
Consolidated Financial Statements, Note 17
Segment Information in this Annual Report on Form 10-K.
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 $2,582,566, or 72 percent, of our total
assets as of December 31, 2005 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, the annual impairment testing of broadcast
licenses and goodwill. If in the future the estimated fair value
of these intangible assets decreased, we would be required to
record an impairment charge that could adversely impact our
financial condition and results of operations.
Item 1B. Unresolved Staff
Comments
None.
At December 31, 2005, 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 Companys 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 Companys other
television stations are wholly-owned by the Company.
TXCNs 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 by its television and newspaper operations for the
gathering and distribution of news from the nations
capital. This facility includes broadcast and production studios
as well as general office space.
The Company owns and operates 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 are housed in a Company-owned, four-story building in
downtown Dallas. The non-production operations of the Denton
Record-Chronicle are housed in a Company-owned, two-story
building in Denton, Texas.
The Company also owns and operates a newspaper printing facility
in Providence, Rhode Island, for The Providence Journal.
The remainder of The Providence Journals operations
is housed in a Company-owned, five-story building in downtown
Providence.
The Company owns and operates 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 are also housed in this facility.
The Company owns an office building in downtown Dallas, Texas
that houses the Companys corporate operations and several
departments of The Dallas Morning News. The Company also
leases space in Irving, Texas for its secondary data center.
PAGE 16 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
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 and are well maintained and that such properties are
adequate for present operations.
On January 5, 2006, Infinity Radio, Inc., a subsidiary of
CBS Corporation, plaintiff, filed a complaint against Belo
Corp. and Belo TV, Inc., a subsidiary of Belo Corp., in the
Supreme Court of the State of New York, County of New York
alleging, among other matters, that Belo breached obligations
under the asset purchase agreement between Belo and plaintiff to
purchase substantially all of the assets of
WUPL-TV in New Orleans,
Louisiana, a UPN affiliate, in the aftermath of Hurricane
Katrina. Plaintiff seeks specific performance directing Belo to
deliver the $14,500 purchase price of the station. On
February 21, 2006, Belo filed its response to the
complaint. The Company believes the complaint is without merit
and intends to vigorously defend against it.
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, Dennis A. Williamson, Dunia A. Shive
and John L. Sander, all of whom are executive officers of the
Company; James M. Moroney III, an executive officer of
The Dallas Morning News; Barry Peckham, a former
executive officer of The Dallas Morning News; 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 announced by the
Company in August 2004. The defendants filed a joint pleading on
August 1, 2005, seeking the lawsuits dismissal based
on the failure of the purported individual shareholder to make
demand on Belo to take action on his claims prior to filing the
lawsuit. On September 9, 2005, the plaintiff filed its
response alleging that demand is legally excused. The defendants
replied to plaintiffs response on September 26, 2005.
On September 30, 2005, discovery in this matter was stayed
by court order pending the federal courts decision on the
motion to dismiss the purported shareholder case described below.
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 Peckham. The
complaints arise out of the circulation overstatement at The
Dallas Morning News, alleging that the overstatement
artificially inflated Belos 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, Dennis A.
Williamson, and James M. Moroney III. On April 8,
2005, plaintiffs filed their unopposed motion for leave to file
a first amended consolidated complaint, which motion was granted
on April 11. On August 1, 2005, defendants filed a motion
to dismiss. On September 30, 2005, plaintiffs filed their
response to defendants motion and on October 31,
2005, defendants filed their reply. 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.
In 2004, the staff of the Securities and Exchange Commission
(the SEC) notified the Company that the staff was
conducting a newspaper industry-wide inquiry into circulation
practices, and inquired specifically about The Dallas Morning
News circulation overstatement. The Company has
briefed the SEC on The Dallas Morning News circulation
situation and related matters. The information voluntarily
provided to the SEC relates to The Dallas Morning News,
as well as The Providence Journal and The
Press-Enterprise. The Company will continue to respond to
additional requests for information that the SEC may have.
The Company has received subpoenas from the Dallas County
District Attorneys office for documents related to the
circulation overstatement at The Dallas Morning News. The
Company has cooperated with the Dallas County District
Attorneys office in responding to the subpoenas and will
continue to respond to any additional information needs of the
District Attorneys office.
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.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
17
Table of Contents
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.
The Companys 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, while the
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 Companys 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 Note 10 of the
Notes to Consolidated Financial Statements.
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 February 28, 2006, the closing price for the
Companys Series A Common Stock as reported on the New
York Stock Exchange was $21.24. 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 592 and
346, respectively.
The following table provides information about the
Companys Series A Common Stock repurchases during the
quarter ended December 31, 2005. The Company did not
repurchase any shares of Series B Common Stock during the
quarter ended December 31, 2005.
PAGE 18 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
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, 2005. 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. Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Item 8. Financial Statements and Supplementary
Data, including the Notes thereto.
Item 7. Managements
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 8-Financial Statements and Supplementary Data and
Item 9A-Controls and Procedures. MD&A 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.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
19
Table of Contents
All references to earnings per share represent diluted earnings
per share.
Belo began as a Texas newspaper company in 1842 and today is one
of the nations largest media companies with a diversified
group of market-leading and award-winning television stations
and newspapers. Belo is a Fortune 1000 company with
$1.52 billion in 2005 revenues. Belo operates news and
information franchises in some of Americas most dynamic
markets and regions. The Company owns 19 television stations,
manages one television station through a LMA, owns three cable
news channels and publishes four daily newspapers. Belo also
operates more than 30 Web sites, several interactive alliances
and a broad range of Internet-based products.
The Company believes the success of its media franchises is
built upon providing local and regional news and information and
community service of the highest caliber. It has applied those
principles for over 163 years. These principles have built
durable relationships with viewers, readers, advertisers and
online users and have guided Belos success.
Effective January 1, 2005, the Company integrated its
interactive media business and Web sites into their legacy
operating companies. Additionally, in 2005, Belo combined the
Other Group information, consisting primarily of the
Companys cable news operations, into the Television Group.
As a result, the Company has reclassified the 2004 and 2003
previously reported segment amounts to conform to the current
year presentation. Belo now operates its business in two primary
segments, the Television Group and the Newspaper Group. The
Television Group consists of the Companys 19 television
stations, one station operated under an LMA, and three cable
news channels, along with its ownership interests in four other
cable news channels. The Newspaper Group consists of the
Companys four daily newspapers, various niche publications
in the same markets and Belos commercial printing
businesses. Both segments operate within the United States and
compete against similar and other types of media on a local
regional and national basis.
The Company intends for the discussion of its financial
condition and results of operations that follows to provide
information that will assist in understanding the Companys
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 Companys
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.
Certain amounts for prior years have been reclassified to
conform to the current year presentation. See Item 8
Financial Statements and Supplementary Data,
Consolidated Financial Statements, Note 17 Segment
Information in this Annual Report on
Form 10-K.
Results of Operations
(Dollars in thousands, except per share
amounts)
Total net operating revenues in 2005 were relatively flat as
compared with 2004 as increases in the Newspaper Group were
almost entirely offset by a decrease in political advertising in
the Television Group. Additionally, in 2004 the Newspaper Group
recorded a $19,629 reduction in revenue associated with The
Dallas Morning News voluntary advertiser plan. See the
Newspaper Group and Other Matters discussions below. These
increases were partially offset by lost revenue of approximately
$7,200 related to Hurricane Katrina and to a lesser extent,
Hurricane Rita. The Company depends on advertising as its
principal source of revenues, including the sale of air time on
its television stations and advertising space in published
issues of its newspapers and on the Companys Web sites.
The Company also derives revenues, to a much lesser
PAGE 20 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
extent, from the sale of daily newspapers, compensation paid by
networks to its television stations for broadcasting network
programming, subscription and data retrieval fees, and amounts
charged to customers for commercial printing.
Total net operating revenues in 2004 increased 5.2 percent
from 2003 as a result of revenue increases in both of the
Companys segments. This increase is primarily due to the
cyclical increases in advertising demand which occur during even
numbered years. During 2004, an even numbered political voting
year, advertising revenues increased due to an increase in
demand for political advertising in the Companys markets.
Also, since NBC has exclusive rights to broadcast the Olympics
through 2012, in 2004, the Companys NBC affiliate stations
experienced increased viewership and revenue during the Olympic
broadcasts. These increases were partially offset by a $19,629
reduction in revenue associated with The Dallas Morning
News voluntary advertiser plan. See the Newspaper
Group and Other Matters discussions below.
Operating costs and expenses increased 2.7 percent in 2005
primarily related to incremental circulation expenses of $14,300
at The Dallas Morning News related to the change in
distribution method of the newspaper as discussed further
below, $9,000 in planned incremental advertising across
both segments and approximately $4,100 in costs related to
Hurricanes Katrina and Rita. These increases were partially
offset by a decrease in compensation and benefits due to the
company-wide reduction in force in the fourth quarter of 2004.
Operating costs and expenses increased 5.6 percent in 2004
as compared to 2003. In 2004, the Company recorded a charge
totaling $7,897 for severance costs and other expenses related
to the reduction in force. In 2004, the Company also recorded
approximately $3,900 in outside services expense related to the
circulation overstatement at The Dallas Morning News.
Additionally, the Company had a $5,523 increase in distribution
expense related to new products introduced in the second half of
2003, and a $7,069 increase in newsprint, ink and other supplies.
Other income (expense), net, decreased 16.4 percent in
2005, primarily due to an $11,528 charge recorded in 2004
related to the discontinuation of the Belo and Time Warner joint
ventures that operated local cable news channels in Charlotte,
North Carolina and Houston and San Antonio, Texas. Other
income (expense), net, increased 5.5 percent in 2004 as
compared to 2003, primarily due to the $11,528 charge related to
the Time Warner joint venture discontinuation.
The effective tax rate for 2005, 2004 and, 2003 was
38.3 percent, 38.6 percent and 38.6 percent,
respectively. The effective tax rate is higher than the
statutory tax rate primarily due to state income taxes.
As a result of the factors discussed above, the Company recorded
net earnings of $127,688 ($1.12 per share) for 2005,
compared with net earnings of $132,496 ($1.13 per share)
for 2004, and net earnings of $128,525 ($1.11 per share)
for 2003.
The Company defines Consolidated EBITDA as net earnings before
interest expense, income taxes, depreciation and amortization.
Consolidated EBITDA is not a measure of financial performance
under GAAP. Management uses Consolidated EBITDA in internal
analyses as a supplemental measure of the financial performance
of the Company to assist it in determining consolidated
performance targets and performance comparisons against its peer
group of companies, as well as capital spending and other
investing decisions. Consolidated EBITDA is also a common
alternative measure of performance used by investors, financial
analysts, and rating agencies to evaluate financial performance.
The Company uses segment EBITDA as the primary measure of
profitability to evaluate operating performance and to allocate
capital resources and bonuses to eligible operating company
employees. Segment EBITDA represents a segments earnings
before interest expense, income taxes, depreciation and
amortization. Other income (expense), net is not allocated to
the Companys operating segments because it consists
primarily of equity earnings (losses) from investments in
partnerships and joint ventures and other non-operating income
(expense).
The following table presents a reconciliation of Consolidated
EBITDA to net earnings for 2005, 2004 and 2003:
Consolidated EBITDA decreased $10,260 or 2.5 percent in
2005 compared to 2004, primarily due to a decrease in the
Television Group segment EBITDA of $36,741 or 11.8 percent,
and an increase in corporate expenses of $887 or
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
21
Table of Contents
1.5 percent. These decreases were partially offset by an
increase in the Newspaper Group segment EBITDA of $9,131 or
5.4 percent, and a decrease in Other income
(expense) net, due to the charge of $11,528, in 2004
related to the discontinuation of the Time Warner joint ventures.
Consolidated EBITDA increased $817 or 0.2 percent in 2004
compared to 2003, primarily due to an increase in the Television
Group segment EBITDA of $45,211 or 17.1%, partially offset by a
decrease in the Newspaper Group segment EBITDA of $25,671 or
13.2 percent, an increase in corporate expenses of $10,621
or 18.9 percent and a charge of $11,528 in 2004, related to
the discontinuation of the Time Warner joint ventures.
The following discussion reviews operating results for the
Companys Television Group, which currently consists of 19
owned stations and one station operated through an LMA, plus
three owned cable news stations and ownership interests in four
others. The Television Groups operating results for the
last three years were as follows:
Television Group revenues decreased 5.1 percent in 2005 and
increased 9.4 percent in 2004. The table below presents the
components of net operating revenues for the last three years:
Non-political advertising revenues increased $6,933 or
1.1 percent in 2005. This increase is a combination of a
$5,116 or 0.8 percent increase in local and national spot
revenue and a $2,891 or 30.8 percent increase in revenue
generated from the Television Groups Web sites as compared
with 2004. Spot revenue increases in the furniture, insurance
and home improvement categories were partially offset by
decreases in the automotive and telecom categories. National
spot revenues increased 1.4 percent in 2005 as compared to
2004 primarily due to increases in the Houston, Dallas and
Hampton/ Norfolk markets. Political advertising revenues
decreased $45,732 or 86.3 percent in 2005 as compared with
2004, as 2004 was a national election year. Political revenues
are generally higher in even number years than in odd numbered
years due to elections for various state and national offices.
The normal operations and revenues of the Companys
television station in New Orleans,
WWL-TV, were disrupted
significantly by Hurricane Katrina, although the station did not
sustain significant damage to its physical property and
equipment. However, the hurricane adversely affected the
stations revenues due to its effect on a significant
number of New Orleans advertisers. The Company has
estimated its lost revenues from Hurricane Katrina were
approximately $7,200 for 2005. The Company has insurance
coverage, including business interruption insurance, which is
expected to mitigate a portion of the near-term financial
effects of Hurricane Katrina; however, the Company has not
recorded any potential recovery from insurance proceeds in its
results of operation for 2005.
Non-political advertising revenues increased $21,176 or
3.4 percent in 2004. This increase is a combination of a
$17,628 or 2.9 percent increase in local and national spot
revenue and a $2,494 or 36.2 percent increase in revenue
generated from the
PAGE 22 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Web sites as compared with 2003. The largest spot revenue
increases in 2004 were reported in the automotive, insurance,
financial services, grocery and telecom categories, while the
largest decrease was in the department store category. Of the
total spot revenues, local spot revenues increased
4.8 percent in 2004 as compared to 2003 primarily due to
increases in the Seattle/ Tacoma, Houston, Hampton/ Norfolk and
Austin markets. Political advertising revenues in 2004 increased
over 2003 by $42,743 or 415.7 percent as 2004 was a
national election year.
The Television Groups major costs and expense categories
are employee compensation and benefits and programming costs.
Employee compensation and benefits represented approximately
47 percent of the Television Groups total operating
costs and expenses in both 2005 and 2004. Programming costs
represented 25.4 percent of the Television Groups
total operating costs and expenses in 2005 and 26.3 percent
in 2004.
Television Group operating costs and expenses decreased $1,326
or 0.3 percent in 2005 when compared to 2004. This decrease
is primarily due to decreases in programming costs, outside
solicitation and employee compensation, which were almost
entirely offset by increases in advertising and promotion and
sales costs and incremental costs of approximately $4,100
related to Hurricanes Katrina and Rita.
Television Group operating costs and expenses for 2004 increased
$17,932 or 3.9 percent as compared with 2003, primarily due
to increases in employee compensation and benefits, outside
services and outside sales costs offset slightly by a decrease
in communication and advertising and promotion costs.
Television Group earnings from operations decreased $36,402 or
13.7 percent for the year ended December 31, 2005
compared to 2004. In 2004, Television Group earnings increased
$45,831 or 20.9 percent compared to 2003. Segment EBITDA
for the Television Group decreased $36,741 or 11.8 percent
for the year ended December 31, 2005 compared to the prior
year, primarily due to the $37,728 decrease in revenues,
partially offset by the $1,326 decrease in operating costs and
expenses discussed above. For 2004, segment EBITDA for the
Television Group increased $45,211 or 17.1 percent compared
to 2003 primarily due to the increase in political revenues.
The following discussion reviews operating results for the
Companys Newspaper Group which consists of four daily
newspapers, various niche publications and commercial printing.
The Newspaper Groups operating results for the last three
years were as follows:
Newspaper Group revenues increased 5.6 percent in 2005 and
increased 1.4 percent in 2004. The table below presents the
components of Newspaper Group net operating revenues for the
last three years:
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
23
Table of Contents
Newspaper volume is measured in column inches. Volume for the
Companys three major newspapers was as follows:
In 2005, advertising revenues accounted for 84.0 percent of
total Newspaper Group revenues compared to 86.5 percent in
2004 and 84.6 percent in 2003. In 2005, circulation revenue
accounted for 12.3 percent of total Newspaper Group
revenues compared to 11.9 percent in 2004 and
11.7 percent in 2003. In all three years, commercial
printing made up most of the remainder of Newspaper Group
revenues except for the $19,629 charge at The Dallas Morning
News in 2004 as described below.
Advertising revenues at The Dallas Morning News decreased
by $874 or 0.2 percent in 2005 when compared to 2004.
Classified advertising revenues declined $5,396 or
4.2 percent in 2005 as compared to the prior year,
primarily due to decreased volumes and rates in the automotive
category. Retail advertising revenues declined $4,091 or
4.1 percent in 2005 as compared to the prior year,
primarily due to decreased linage in the department store
category, decreased rates in the entertainment category and
decreased linage and rates in the grocery store category. These
decreases were partially offset by higher volume in the
professional services category. General advertising revenues
decreased $446 or 0.7 percent in 2005 as compared to the
prior year, primarily due to decreased linage in the
telecommunications category and decreased rates in the travel
category. These decreases were partially offset by higher volume
in the financial category. Additionally, Total Market Coverage
(TMC) and preprints revenue decreased $1,939 or
2.2 percent in 2005 as compared to the prior year. These
declines were partially offset by increases in Internet
advertising revenues of $8,384 or 60.7 percent. At The
Dallas Morning News, circulation revenue increased $10,767
or 23.4 percent in 2005 as compared with 2004. This
increase is primarily the result of a change in arrangements
with distributors of home delivery and single copy sales, from a
buy-sell arrangement to a fee for delivery arrangement similar
to the Companys other newspapers. 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. The operating expenses for the delivery fees paid to
the distributors are recorded as they are incurred. Under the
previous arrangements, The Dallas Morning News recorded
circulation revenue based on the net payment received from
distributors. Advertising revenues were not affected by this
change.
The Dallas Morning News advertising revenues were one
percent lower in 2004 compared to the prior year. Classified
advertising revenues declined 4.6 percent in 2004 as
compared to 2003, primarily due to decreased volumes and rates
in automotive and decreased rates in employment. Retail
advertising revenues declined 3.1 percent in 2004 primarily
due to decreased linage in the department store category,
partially offset by higher rates and increases in volume in
furniture and automotive. General advertising revenues increased
4.0 percent in 2004 primarily due to increased linage in
the automotive and telecom categories, partially offset by lower
rates in both categories. Internet advertising revenues
increased $2,536 or 22.5 percent in 2004 as compared to
2003. TMC and preprints revenue increased 2.2 percent in
2004 as compared to 2003.
PAGE 24 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
The 2004 Newspaper Group revenues include a $19,629 reduction in
revenue related to The Dallas Morning News circulation
overstatement. The reduction was for cash payments made under
The Dallas Morning News voluntary advertiser plan
(see Other Matters below). The plan included a
combination of cash payments and future advertising credits.
There are no unused credits outstanding as of December 31,
2005.
Advertising revenues for The Providence Journal increased
$7,797 or 6.1 percent in 2005 compared to 2004. Classified
advertising revenue increased $7,378 or 19.7 percent in
2005 compared to 2004, primarily due to increases in the real
estate and employment categories. Revenues from preprints and
TMC increased $697 or 2.4 percent year over year, primarily
due to increases in the consumer electronics, sporting goods and
miscellaneous categories. Internet advertising revenues
increased $1,332 or 42.4 percent in 2005 over 2004. These
increases were partially offset by a decrease in retail
advertising revenues of $1,951 or 4.0 percent for 2005 when
compared to 2004. Additionally, general advertising revenues
decreased $1,138 or 20.7 percent in 2005 when compared to
the prior year due to decreases in the automotive and food
categories. Circulation revenues declined $1,931 or
6.4 percent in 2005 primarily due to lower Sunday
circulation volumes, partially offset by a slight increase in
daily circulation volumes.
Advertising revenues for The Providence Journal increased
$7,311 or 6.0 percent in 2004 compared to 2003. General
advertising revenues improved 25.5 percent in 2004 as
compared to 2003 due to increased linage in the automotive,
transportation and financial services categories. Classified
advertising revenue increased 11.1 percent in 2004
primarily due to increases in the real estate and employment
categories. Revenues from preprints and TMC increased
4.5 percent in 2004 primarily due to increases in the
department stores, furniture and home accessories and sporting
goods categories. Internet advertising revenues increased $1,040
or 49.4 percent in 2004 as compared to 2003. Retail
advertising revenues were flat for 2004 as compared to 2003.
Circulation revenues declined 1.2 percent in 2004 primarily
due to lower Sunday circulation volumes, partially offset by a
slight increase in daily circulation volumes.
At The Press-Enterprise, total advertising revenues
increased $10,341 or 8.5 percent in 2005 compared with
2004. Classified advertising revenues increased $9,033 or
18.5 percent, primarily due to gains in the real estate and
employment categories offset slightly by a decrease in the
automotive category. Preprints and TMC revenues increased $1,563
or 8.5 percent primarily due to increases in the consumer
electronics, home improvement and office supply categories.
Internet advertising revenues increased $845 or
31.1 percent in 2005 as compared to 2004. Offsetting these
increases was a slight decrease in retail advertising revenues
of $394 or 1.8 percent in 2005 when compared with 2004.
General advertising revenues were flat in 2005 as compared with
2004. Circulation revenue at The Press-Enterprise
declined $823 or 5.2 percent when comparing 2005 to
2004. This decline was due to a decrease in both home delivery
and single copy sales.
At The Press-Enterprise, total advertising revenues
increased $18,036 or 17.3 percent in 2004 compared with
2003. Classified advertising revenues increased
34.8 percent in 2004 as compared to 2003, primarily due to
gains in the automotive and real estate categories. Retail
advertising revenues increased 6.6 percent in 2004 with the
largest increases in the grocery, electric and home improvement
categories. General advertising revenues increased
4.8 percent in 2004 compared to 2003, primarily due to
gains in the financial services and travel categories. Preprints
and TMC revenues increased 13.3 percent primarily due to
increases in the home improvement, telecom and drug store
categories. Internet advertising revenues increased $1,078 or
65.7 percent in 2004 as compared to 2003. Circulation was
relatively flat for The Press-Enterprise when comparing
2004 to 2003.
Newspaper Group operating costs and expenses increased $31,864
or 4.9 percent in 2005 when compared to the prior year
primarily due to increases in distribution costs, newsprint
expenses, tax expenses and incremental expenses related to
advertising and promotion initiatives. These increases were
partially offset by a decrease in direct compensation and
benefits. Distribution costs increased 24.1 percent
primarily due to the incremental expenses related to the change
in distribution method at The Dallas Morning News
mentioned above. Newsprint expenses were five percent
higher in 2005 due to a 10.2 percent increase in the
average cost per metric ton of newsprint partially offset by a
five percent decrease in volume. Property tax expense increased
primarily due to the favorable settlement between The
Providence Journal and the City of Providence, Rhode Island
recorded in 2004 as discussed below. Salaries and other direct
compensation decreased primarily due to a charge recorded by the
Newspaper Group in 2004 of $3,788 for severance costs and other
expenses related to the reduction in force discussed below.
Newspaper Group operating costs and expenses increased $34,222
or 5.6 percent in 2004 when compared to the prior year
primarily due to increases in salaries and other direct
compensation and newsprint expenses, partially offset by a
decrease in tax expense. Salaries and other direct compensation
increased primarily due to annual merit increases and to an
increase in the number of Newspaper Group employees prior to a
Company-wide reduction in force. In 2004, the Newspaper Group
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
25
Table of Contents
recorded a charge of $3,788 for severance costs and other
expenses related to the reduction in force. Newsprint expenses
were 6.3 percent higher in 2004 due to a 9.9 percent
increase in the average cost per metric ton of newsprint.
Property tax expense decreased primarily due to a $2,450
favorable settlement between The Providence Journal and
the City of Providence, Rhode Island. Operating costs and
expenses in 2004 also included approximately $17,631 in expenses
associated with the new products introduced by the Newspaper
Group in the second half of 2003.
Newspaper Group earnings from operations increased $11,346 or
9.2 percent in 2005 compared to 2004 and decreased $23,276
or 15.8 percent in 2004 as compared to 2003. Segment EBITDA
for the Newspaper Group increased $9,131 or 5.4 percent for
2005, as compared to 2004 and decreased $25,671 or
13.2 percent for 2004 as compared with 2003.
Corporate expenses increased $1,182 or 1.8 percent in 2005
from $66,944 in 2004 to $68,126 in 2005. Corporate expenses
increased $10,621 or 18.9 percent in 2004 from $56,323 in
2003 to $66,944 in 2004 primarily due to increases in employee
compensation and benefits and consulting costs.
Statements in Items 7 and 7A and elsewhere in this Annual
Report on
Form 10-K
concerning Belos business outlook or future economic
performance, anticipated profitability, revenues, expenses,
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, changes in capital market conditions and prospects,
and other factors such as changes in advertising demand,
interest rates and newsprint prices; The Dallas Morning News
circulation matters, including current and future audits of
that newspapers circulation by the Audit Bureau of
Circulations; technological changes, including the transition to
digital television and the development of new systems to
distribute television and other audio-visual content;
development of Internet commerce; industry cycles; changes in
pricing or other actions by competitors and suppliers;
regulatory 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 and
dispositions; general economic conditions; and significant armed
conflict, as well as other risks detailed in Belos other
public disclosures, filings with the Securities and Exchange
Commission and elsewhere in this Annual Report on
Form 10-K.
In this report, financial measures are presented in accordance
with accounting principles generally accepted in the United
States (GAAP) and also on a non-GAAP basis. The
Company defines Consolidated EBITDA as net earnings before
interest expense, income taxes, depreciation and amortization.
Consolidated EBITDA is not a measure of financial performance
under GAAP. Management uses Consolidated EBITDA in internal
analyses as a supplemental measure of the financial performance
of the Company to assist it with determining consolidated
performance targets and performance comparisons against its peer
group of companies, as well as capital spending and other
investment decisions. Consolidated EBITDA is also a common
alternative measure of performance used by investors, financial
analysts, and rating agencies to evaluate financial performance.
Belos financial statements are based on the selection and
application of accounting policies which require management to
make significant estimates and assumptions. The Company believes
that the following are some of the more critical accounting
policies currently affecting Belos financial position and
results of operations. See Note 1 to the Consolidated
Financial Statements 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
PAGE 26 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
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 Companys 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, 2005, Belo had investments of $534,112 in
net property, plant and equipment, $1,345,218 in goodwill and
$1,237,348 in intangible assets, primarily FCC licenses.
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.
Goodwill is tested at least annually by reporting unit for
impairment. In 2005, the Company revised the reporting units of
its Television Group as a result of operational management
changes within the Television Group. For the Television Group, a
reporting unit now consists of the television station(s) within
a market. Previously, a reporting unit for this segment
consisted of a cluster of television station markets in a
geographical area. For the Companys Newspaper Group, a
reporting unit consists of the newspaper operations in each
individual market. FCC licenses are tested for impairment at
least annually on a market basis. Based on assessments performed
during the years ended December 31, 2005, 2004 and 2003,
the Company did not record any impairment losses related to
property, plant and equipment, goodwill or intangible assets.
The normal operations and revenues of the Companys
television station in New Orleans,
WWL-TV, were disrupted
significantly by Hurricane Katrina, although the station did not
sustain significant damage to its physical property and
equipment. However, the hurricane adversely affected the
stations revenues due to its effect on a significant
number of New Orleans advertisers. During 2005, the
Company evaluated the effect of lower future revenues on the
carrying value of the assets of WWL, including its FCC license,
and determined that, as of December 31, 2005, these assets
are not impaired. The Companys evaluation is based on its
belief that advertising revenues will return to a level that
supports the current carrying value of the stations
assets, including its FCC license. However, if the
Companys assumptions prove to be incorrect, the assets
could be impaired. As of December 31, 2005, the carrying
value of WWL-TVs
FCC license is approximately $14,300, the carrying value of its
goodwill is approximately $10,494 and the carrying value of its
property and equipment is approximately $22,167.
Prior to January 1, 2002, all of the acquired intangible
assets were classified together as goodwill and intangible
assets in the Companys consolidated financial
statements and were amortized over a composite life of
40 years. Upon the adoption of SFAS 142 on
January 1, 2002, 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. The Company was not able to reclassify any amounts
related to the network affiliation agreements apart from
goodwill, as the accounting records that would allow for
segregation of these assets were not available. Substantially
all of the network affiliation agreements acquired in these
business acquisitions were acquired prior to December 31,
1999, and many of these agreements have been modified or
replaced by new agreements. In addition, the Company believes
that network affiliation agreements currently do not have a
material value that is separable from the related FCC licenses,
because without an FCC license a broadcast company cannot obtain
a network affiliation agreement. Accordingly, the Company
believes that the remaining value of its acquired network
affiliated agreements was not significant upon the adoption of
SFAS 142.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
27
Table of Contents
If the Company had assigned separate values for its acquired
network affiliation agreements and, therefore, less value to its
broadcast licenses, it would have had a significant impact on
the Companys historical operating results. The following
chart reflects the impact of a hypothetical reassignment of
value from broadcast licenses to network affiliation agreements
and the resulting increase in amortization expense assuming a
15-year amortization
period. However, had the Company amortized the values over the
lives of the respective contracts, there would have been no
material impact on the Companys results of operations for
the year ended December 31, 2005, as substantially all of
these agreements have been modified or replaced since
acquisition.
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 Belos 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 the compensation expense related to its stock
options using the intrinsic value method. Because it is
Belos policy to grant stock options at the market price on
the date of grant, the intrinsic value is zero, and therefore no
compensation expense is recorded. The Company records the
compensation expense related to its restricted stock units using
the fair value as of the date of grant. Effective
January 1, 2006, the Company will adopt SFAS 123R. See
Note 2 to the Consolidated Financial Statements for the
effect on the financial statements of this adoption.
Employee Benefits Belo is
effectively self-insured for employee-related health care
benefits. A third-party administrator is used to process all
claims. Belos employee health insurance liability is based
on the Companys historical claims experience and is
developed from actuarial valuations. Belos 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 Belos
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. The assumptions the Company uses include, but
are not limited to, the selection of the discount rate,
long-term rate of return on plan assets, projected salary
increases and mortality rates. In determining the discount rate
assumption of 5.75 percent, the Company used a measurement
date of December 31, 2005 and constructed a portfolio of
bonds to match the benefit payment stream that is projected to
be paid from the Companys 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 Companys pension expense in
the year ended December 31, 2005, the Company used a
discount rate of 6.0 percent, an expected long-term rate of
return on plan assets of 8.75 percent and a rate of
compensation increase of 4.2 percent. To determine the
discount rate assumption of 6.0 percent, the Company used
the measurements date of December 31, 2004 and used the
same methodology to construct a portfolio of bonds to match the
projected benefit payments. The expected long-term rate of
return on plan assets assumption of 8.75 percent is based
on the weighted average expected long-term returns for the
target allocation of plan assets as of the measurement date of
December 31, 2005. Although the Company believes that the
assumptions used are appropriate, differences between assumed
and actual experience may affect the Companys operating
results. See Note 7 to the Consolidated Financial
Statements for additional information regarding the
Companys pension plan.
PAGE 28 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
In December 2004, the FASB issued SFAS 123R,
Share-Based Payment. SFAS 123R is a revision of
SFAS 123, Accounting for Stock Based
Compensation. SFAS 123R supersedes APB 25,
Accounting for Stock Issued to Employees, and amends
SFAS 95, Statement of Cash Flows. Among other
items, SFAS 123R eliminates the use of APB 25 and the
intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for
awards of equity instruments, based on the grant date fair value
of those awards, in the financial statements. Pro forma
disclosure is no longer an alternative. The effective date of
SFAS 123R is the first annual reporting period of the
registrants first fiscal year beginning on or after
June 15, 2005 (or January 1, 2006 for the Company).
The Company adopted SFAS 123R on January 1, 2006.
SFAS 123R permits public companies to adopt its
requirements using either a modified prospective
method or a modified retrospective method. Under the
modified prospective method, compensation cost is
recognized in the financial statements beginning with the
effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the
effective date and (b) is based on the requirements of
SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123R that are unvested as of the
effective date. Under the modified retrospective
method, the requirements are the same as under the
modified prospective method described above, but
also permits entities to restate financial statements of
previous periods based on proforma disclosures made in
accordance with SFAS 123. The Company plans to adopt
Statement 123R using the modified prospective
method.
As permitted by SFAS 123, the company currently accounts
for shared-based payments to employees using APB 25s
intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123Rs fair value method will have a
significant impact on the Companys results of operations,
although it will have no impact on its overall financial
position. The impact of adoption of SFAS 123R cannot be
predicted at this time because it will depend on levels of share
based payments granted in the future. However, had the Company
adopted SFAS 123R in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as
described in the disclosure of pro forma net income and earnings
per share in Note 1 to the Companys consolidated
financial statements for the pro forma effects on net earnings
and net earnings per share of SFAS 123 for the years 2005,
2004 and 2003.
The Company currently utilizes a standard option pricing model
(i.e., Black-Scholes) to measure the fair value of stock options
granted to employees. While SFAS 123R permits entities to
continue to use such a model, the standard also permits the use
of a more complex binomial, or lattice model. Based
upon research done by the Company on the alternative models
available to value option grants, the Company has determined
that it will continue to use the Black-Scholes model to measure
the fair value of awards of equity instruments to employees upon
the adoption of SFAS 123R.
SFAS 123R includes several modifications to the way that
income taxes are recorded in the financial statements. The
expense for certain types of option grants is only deductible
for tax purposes at the time that the taxable event takes place,
which could cause variability in the Companys effective
tax rates recorded through the year. SFAS 123R does not
allow companies to predict when these taxable events
will take place. Furthermore, it requires that the benefits
associated with the tax deductions in excess of recognized
compensation cost be reported as a financing cash flow, rather
than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after the
effective date. These future amounts cannot be estimated,
because they depend on, among other things, when employees
exercise stock options. However, the amount of operating cash
flows recognized for such excess tax deductions for the years
ended December 31, 2005, 2004, and 2003 was not material.
Subject to a complete review of the requirements of
SFAS 123R, based on stock option granted to employees
through December 31, 2005, the Company expects that the
adoption of SFAS 123R on January 1, 2006, will reduce
quarterly net earnings by approximately $2,000 ($.02 per
share). See Note 8 for further information on the
Companys share-based compensation plans.
Liquidity and Capital
Resources
(Dollars in thousands, except per share amounts)
Net cash provided by operations, bank borrowings and term debt
are Belos primary sources of liquidity. Net cash provided
by operations was $227,057 in 2005 compared with $276,936 in
2004 and $257,851 in 2003. The changes in cash flows from
operations are primarily caused by normal changes in our working
capital requirements and the timing of our pension
contributions. The Company used net cash provided by operations
and proceeds from stock option exercises to purchase treasury
shares, fund capital expenditures and dividend payments and pay
debt.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
29
Table of Contents
In 2005, 2004 and 2003, the Company made contributions to its
defined benefit pension plan totaling $15,000, $30,800 and
$27,000, respectively. These contributions exceed the
Companys required minimum contribution for ERISA funding
purposes. The Company expects to make an additional contribution
between $10,000 and $15,000 in the latter half of 2006.
The Company believes its current financial condition and credit
relationships are adequate to fund both its current obligations
as well as near-term growth.
Net cash flows used in investing activities were $83,275,
$88,440 and $84,100 in 2005, 2004 and 2003, respectively. These
cash flows are primarily attributable to capital expenditures
and investments as more fully described below.
Total capital expenditures were $87,268, $79,562 and $76,586 in
2005, 2004 and 2003, respectively. These were primarily for
Television Group and Newspaper Group facilities and equipment.
As of December 31, 2005, projected future payments for
capital projects in 2006 were approximately $66,540. Belo
expects to finance future capital expenditures using cash
generated from operations and, when necessary, borrowings under
the revolving credit agreement.
On May 11, 2005, the Company announced that The Dallas
Morning News plans to build a new distribution and
production center in southern Dallas. The total cost of the
land, building and land improvements, and equipment is projected
to be approximately $75,000 over a five-year period.
On July 25, 2005, the Company announced plans to build a
new broadcast production center in New Orleans for
WWL-TV, its
market-leading CBS affiliate. In the aftermath of Hurricane
Katrina, the Company has postponed the construction until a
design and engineering review of the proposed plans is conducted.
On January 20, 2006, the Company announced plans to build a
state-of-the-art media
center for The Press-Enterprise. The 150,000 square
foot, five-story office building will centralize all news,
editorial, advertising, sales and marketing, technology,
production support and administrative functions for the
organizations operations. The new building will be
adjacent to the newspapers current building. The project
cost of the new building is approximately $40,000. Construction
began in the first quarter 2006 and is scheduled to be completed
and ready for occupation in the first half of 2007.
On July 23, 2004, Belo and Time Warner discontinued their
joint ventures that operated the local cable news channels in
Charlotte, North Carolina and Houston and San Antonio,
Texas. Investments totaling $39,070 ($5,093 of which was
invested in 2004) had been made related to the Time Warner joint
ventures. A charge of $11,678 related to the discontinuation of
the joint ventures was recorded in the third quarter of 2004.
In 2004, Belo entered into joint marketing and shared services
agreements with HIC Broadcasting, Inc. (HIC), the
owner and operator of
KFWD-TV, Channel 52,
licensed to Fort Worth, Texas. These agreements expire
December 31, 2009, but are subject to extension. Belo
provides advertising sales assistance, certain technical
services and facilities to support the operations of
KFWD-TV, as well as
limited programming. In exchange, Belo is reimbursed for its
costs and receives 50 percent of the net profits from the
operations of KFWD-TV. The amounts received under these
agreements were not material to Belos consolidated results
of operations in 2005. In addition, in exchange for $10,375 in
cash, Belo acquired options to acquire undivided interests in
the assets owned, held or leased by HIC, which are used in the
operations of KFWD-TV. The aggregate exercise price of the
options to acquire a 100 percent interest is $31,125,
subject to adjustment. These options expire December 31,
2012. HIC also has the option, through December 31, 2009,
to require Belo to acquire KFWD-TV. The exercise of the options
by either Belo or HIC is dependent on modification of the
Federal Communications Commission media ownership rules and
policies to permit Belos ownership of KFWD-TV.
Net cash flows used in financing activities were $139,149,
$191,812 and $176,524 in 2005, 2004 and 2003, respectively.
These cash flows are primarily attributable to borrowings and
repayments under the Companys revolving credit facility,
dividends on common stock, proceeds from exercises of stock
options and purchases of treasury stock as more fully described
below.
PAGE 30 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Long-term debt consists of the following at December 31,
2005 and 2004:
The weighted average effective interest rate for these debt
instruments is 7.3 percent as of December 31, 2005. On
February 2, 2004, the Company retired $6,400 of Industrial
Revenue Bonds due 2020 using borrowings under its revolving
credit facility.
On May 3, 2005, the Company entered into a $1,000,000
variable-rate five-year revolving credit facility with JPMorgan
Chase Bank, N.A., as Administrative Agent, and other lenders
party thereto (the new facility). The new facility
replaced the Companys $720,000 revolving credit facility,
which terminated on May 3, 2005. All borrowings under the
old facility were repaid by borrowings under the new facility.
Borrowings under the new credit facility mature upon expiration
of the agreement on May 3, 2010. The new facility may be
used for working capital and other general corporate purposes,
including letters of credit. Borrowings under the new facility
are made on a committed revolving credit basis or an uncommitted
competitive advance basis through a bidding process. The new
facility bears interest at a rate determined by reference to the
Companys credit rating and whether the borrowing is based
on LIBOR or a defined alternative base rate, as requested by the
Company. The rate obtained through competitive bidding is either
a LIBOR rate adjusted by a marginal rate of interest or a fixed
rate, in either case as specified by the bidding bank and
accepted by the Company. Commitment fees, depending on the
Companys credit rating, of up to .25 percent per year
of the total unused commitment accrue and are payable under the
new facility. The new facility contains usual and customary
covenants for credit facilities of this type, including
covenants limiting liens, mergers, and substantial asset sales.
The Company is also required to maintain certain leverage and
interest coverage ratios specified in the agreement. As of
December 31, 2005, the Company was in compliance with all
debt covenant requirements. All unused borrowings under the new
facility are available for borrowing. As of December 31,
2005, borrowings of $105,000 were outstanding under the new
credit facility and the weighted average interest rate for
borrowings under the credit facility, which includes a
.125 percent commitment fee, is 5.0 percent.
At December 31, 2004, the Company had a $720,000
variable-rate revolving credit facility. Borrowings under the
credit facility were made on a committed revolving credit basis
or an uncommitted competitive advance basis through a bidding
process. Revolving credit loans bore interest at a rate
determined by reference to LIBOR or a defined alternate base
rate, as requested by the Company. The rate obtained through
competitive bidding was either a LIBOR rate adjusted by a
marginal rate of interest or a fixed rate, in either case as
specified by the bidding bank and accepted by Belo. Commitment
fees of up to .375 percent of the total unused commitment
amount accrue and were payable under the credit facility. At
December 31, 2004, borrowings under the credit facility
were $33,000 and the weighted average interest rate for
borrowings under the credit facility, which included a
.175 percent commitment fee, was 3.9 percent. This
facility was replaced by the new facility discussed above.
In addition, the Company has uncommitted lines of credit of
$60,000, of which $39,875 and $37,150 was outstanding at
December 31, 2005 and 2004, respectively. The uncommitted
line of credit has a variable interest rate. These borrowings
may be converted at the Companys option to revolving debt.
Accordingly, such borrowings are classified as long-term in the
Companys financial statements. As of December 31,
2005 and 2004, the weighted average interest rate for borrowings
under the line of credit was 5.1 percent and
3.1 percent, respectively. All unused borrowings under the
Companys uncommitted line of credit are available for
borrowing as of December 31, 2005.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
31
Table of Contents
The following table presents dividend information for the years
ended December 31, 2005, 2004 and 2003:
The following table presents stock option information for the
years ended December 31, 2005, 2004 and 2003:
In 2005, the Company purchased 7,946,200 shares of its
Series A Common Stock under a stock repurchase program
pursuant to authorization from Belos Board of Directors in
July 2000. On December 9, 2005, the Companys Board of
Directors authorized the repurchase of an additional
15,000,000 shares of common stock. As of December 31,
2005, no shares were repurchased under the December 9, 2005
authorization. The remaining authorization for the repurchase of
shares as of December 31, 2005 under both these authorities
was 21,599,219 shares. In addition, the Company has a stock
repurchase program authorizing the purchase of up to $2,500 of
common stock annually. During 2005, no shares were repurchased
under this program. There is no expiration date for these
repurchase programs. The total cost of the treasury shares
purchased in 2005 and 2004, was $184,011 and $78,148,
respectively. There were no shares repurchased in 2003. All
shares repurchased were retired in the year of purchase. The
Company currently intends to continue to purchase shares of Belo
common stock in 2006.
The table below summarizes the following specified commitments
of the Company as of December 31, 2005:
On July 8, 2005, the Company announced an agreement to
purchase WUPL-TV, the
UPN affiliate in New Orleans, from Infinity Radio, Inc., a
subsidiary of CBS Corporation, for $14,500 in cash. See
Other Matters below for additional discussion of the
status of this transaction.
The Company has various options available to meet its 2006
capital and operating commitments, including cash on hand, short
term investments, internally generated funds and a $1,000,000
revolving line of credit. The Company believes its resources are
adequate to meet its needs.
PAGE 32 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
On January 5, 2006, Infinity Radio, Inc., a subsidiary of
CBS Corporation, plaintiff, filed a complaint against Belo
Corp. and Belo TV, Inc., a subsidiary of Belo Corp., in the
Supreme Court of the State of New York, County of New York
alleging, among other matters, that Belo breached obligations
under the asset purchase agreement between Belo and plaintiff to
purchase substantially all of the assets of
WUPL-TV in New Orleans,
Louisiana, a UPN affiliate, in the aftermath of Hurricane
Katrina. Plaintiff seeks specific performance directing Belo to
deliver the $14,500 purchase price of the station. On
February 21, 2006, Belo filed its response to the
complaint. The Company believes the complaint is without merit
and intends to vigorously defend against it.
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, Dennis A. Williamson, Dunia A. Shive
and John L. Sander, all of whom are executive officers of the
Company; James M. Moroney III, an executive officer of
The Dallas Morning News; Barry Peckham, a former
executive officer of The Dallas Morning News; 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 announced by the
Company in August 2004. The defendants filed a joint pleading on
August 1, 2005, seeking the lawsuits dismissal based
on the failure of the purported individual shareholder to make
demand on Belo to take action on his claims prior to filing the
lawsuit. On September 9, 2005, the plaintiff filed its
response alleging that demand is legally excused. The defendants
replied to plaintiffs response on September 26, 2005.
On September 30, discovery in this matter was stayed by
court order pending the federal courts decision on the
motion to dismiss the purported shareholder case described below.
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 Peckham. The
complaints arise out of the circulation overstatement at The
Dallas Morning News, alleging that the overstatement
artificially inflated Belos 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, Dennis A.
Williamson, and James M. Moroney III. On April 8,
2005, plaintiffs filed their unopposed motion for leave to file
a first amended consolidated complaint, which motion was granted
on April 11. On August 1, 2005, defendants filed a motion
to dismiss. On September 30, 2005, the plaintiffs filed
their response to defendants motion and on
October 31, 2005, defendants filed their reply. 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.
In 2004, the staff of the SEC notified the Company that the
staff was conducting a newspaper industry-wide inquiry into
circulation practices, and inquired specifically about The
Dallas Morning News circulation overstatement. The
Company has briefed the SEC on The Dallas Morning News
circulation situation and related matters. The information
voluntarily provided to the SEC relates to The Dallas Morning
News, as well as The Providence Journal and The
Press-Enterprise. The Company will continue to respond to
additional requests for information that the SEC may have.
In 2004, the Company announced a voluntary advertiser plan
developed by management in response to the circulation
overstatement at The Dallas Morning News. As a result,
the Company recorded a charge of $23,500 in 2004 related to the
advertiser plan, of which approximately $19,629, consisting of
cash payments to advertisers, was classified as a reduction of
revenues and approximately $3,900, consisting of related costs,
was included in other operating costs. Payments under the plan
were made without the condition that such advertisers release
The Dallas Morning News from liability for the
circulation overstatement. The plan also included future
advertising credits. To use the credits, an advertiser generally
placed advertising in addition to the terms of the
advertisers current contract. Credits earned were to be
used by the end of an advertisers contract period or
February 28, 2005, whichever was later. As of
December 31, 2005, advertisers had used or forfeited the
available credits and no credits remain available as of that
date.
The Company has received subpoenas from the Dallas County
District Attorneys office for documents related to the
circulation overstatement at The Dallas Morning News. The
Company has cooperated with the Dallas County District
Attorneys office in responding to the subpoenas and will
continue to respond to any additional information needs of the
District Attorneys office.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
33
Table of Contents
The market risk inherent in the financial instruments issued by
Belo represents the potential loss arising from adverse changes
in interest rates. See Note 5 to the Consolidated Financial
Statements for information concerning the contractual interest
rates of Belos debt. At December 31, 2005 and 2004,
the fair value of Belos fixed-rate debt was estimated to
be $1,159,795 and $1,209,138, respectively, using quoted market
prices and yields obtained through independent pricing sources,
taking into consideration the underlying terms of the debt, such
as the coupon rate and term to maturity. The carrying value of
fixed-rate debt was $1,100,000 at both at December 31, 2005
and 2004.
Various financial instruments issued by Belo are sensitive to
changes in interest rates. Interest rate changes would result in
gains or losses in the market value of Belos fixed-rate
debt due to differences between the current market interest
rates and the rates governing these instruments. A hypothetical
10 percent decrease in interest rates would increase the
fair value of the Companys fixed-rate debt by $33,705 at
December 31, 2005 ($47,644 at December 31, 2004). With
respect to the Companys variable-rate debt, a
10 percent change in interest rates would have resulted in
an immaterial annual change in Belos pretax earnings and
cash flows at December 31, 2005 and 2004.
In addition to interest rate risk, Belo has exposure to changes
in the price of newsprint. The average price of newsprint is
expected to be higher in 2006 than in 2005, although the amount
and the timing of any increase cannot be predicted with
certainty. Belo believes the newsprint environment for 2006,
giving consideration to both cost and supply, to be manageable
through existing relationships and sources.
The Consolidated Financial Statements, together with the Reports
of Independent Registered Public Accounting Firm, are included
elsewhere in this Annual Report on
Form 10-K.
Financial statement schedules have been omitted because the
required information is contained in the Consolidated Financial
Statements or related Notes, or because such information is not
applicable.
Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
None.
During the quarter ended December 31, 2005, there were no
changes in the Companys internal control over financial
reporting that have materially affected, or are reasonably
likely to materially affect, Belos internal control over
financial reporting.
The Company carried out an evaluation under the supervision and
with the participation of the Companys management,
including the Companys Chairman of the Board, President
and Chief Executive Officer and Executive Vice President/ Chief
Financial Officer, of the effectiveness of the Companys
disclosure controls and procedures, as of the end of the period
covered by this Annual Report on
Form 10-K. Based
upon that evaluation, the Chairman of the Board, President and
Chief Executive Officer and Executive Vice President/ Chief
Financial Officer concluded that, as of the end of the period
covered by this report, the Companys disclosure controls
and procedures were effective such that information relating to
the Company (including its consolidated subsidiaries) required
to be disclosed in the Companys SEC reports (i) is
recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms and (ii) is
accumulated and communicated to the Companys management,
including the Chairman of the Board, President and Chief
Executive Officer and Executive Vice President/ Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure.
SEC rules implementing Section 404 of the Sarbanes-Oxley
Act require our 2005 Annual Report on
Form 10-K to
contain a managements report regarding the effectiveness
of internal control and an independent accountants
attestation on managements assessment of our internal
control over financial reporting. As a basis for our report, we
tested and evaluated the design, documentation, and operating
effectiveness of internal control.
PAGE 34 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Management is responsible for establishing and maintaining
effective internal control over financial reporting of Belo
Corp. and subsidiaries (the Company). There are
inherent limitations in the effectiveness of any internal
control, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even
effective internal controls can provide only reasonable
assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of
internal control may vary over time.
Management has evaluated the Companys internal control
over financial reporting as of December 31, 2005. This
assessment was based on criteria for effective internal control
over financial reporting described in the standards promulgated
by PCAOB and in the Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management
believes that Belo maintained effective internal control over
financial reporting as of December 31, 2005.
Ernst & Young LLP, the Companys Independent
Registered Public Accounting Firm, has issued an attestation
report on managements assessment of the Companys
internal control over financial reporting. It appears
immediately following this report.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
35
Table of Contents
The Board of Directors and Shareholders
Belo Corp.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Belo Corp. and subsidiaries maintained
effective internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). The Companys management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Belo Corp. and
subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Belo Corp. and subsidiaries maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Belo Corp. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of earnings, shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2005 and our report dated March 3, 2006
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Dallas, Texas
March 3, 2006
PAGE 36 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
None.
PART III
The information set forth under the headings Stock
Ownership Section 16(a) Beneficial Ownership
Reporting Compliance, Proposal One: Election of
Directors, and Executive Officers contained in
the definitive Proxy Statement for the Companys Annual
Meeting of Shareholders to be held on May 9, 2006 is
incorporated herein by reference.
Belo has a Code of Business Conduct and Ethics that applies to
all directors, officers and employees, which can be found at the
Companys Web site, www.belo.com. The Company will post any
amendments to the Code of Business Conduct and Ethics, as well
as any waivers that are required to be disclosed by the rules of
either the SEC or the New York Stock Exchange, on the
Companys Web site. Information on Belos Web site is
not incorporated by reference into this Annual Report on
Form 10-K.
The Companys Board of Directors has adopted Corporate
Governance Guidelines and charters for the Audit, Compensation,
Executive, and Nominating and Governance Committees of the Board
of Directors. These documents can be found at the Companys
Web site, www.belo.com.
A shareholder can also obtain a printed copy of any of the
materials referred to above by contacting the Company at the
following address:
The information set forth under the headings Executive
CompensationSummary Compensation Table, Options/ SAR
Grants in 2005, Aggregated Option/ SAR Exercises in 2005
and 2005 Year-End Option/ SAR Values Long-term
Incentive Plan Awards in Last Fiscal Year, and
Benefits and Corporate Governance Compensation
of Directors contained in the definitive Proxy Statement
for the Companys Annual Meeting of Shareholders to be held
on May 9, 2006 is incorporated herein by reference.
The information set forth under the heading Stock
Ownership contained in the definitive Proxy Statement for
the Companys Annual Meeting of Shareholders to be held on
May 9, 2006 is incorporated herein by reference.
Information regarding the number of shares of common stock
available under the Companys equity compensation plans is
included under the caption entitled Executive
Compensation Equity Compensation Plan Information
contained in the definitive Proxy Statement for the
Companys Annual Meeting of Shareholders to be held on
May 9, 2006 and is incorporated herein by reference.
The information set forth under the heading Executive
Compensation Certain Relationships contained in the
definitive Proxy Statement for the Companys Annual Meeting
of Shareholders to be held on May 9, 2006 is incorporated
herein by reference.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
37
Table of Contents
The information set forth under the heading
Proposal Two: Ratification of the Appointment of
Independent Registered Public Accounting Firm contained in
the definitive Proxy Statement for the Companys Annual
Meeting of Shareholders to be held on May 9, 2006 is
incorporated herein by reference.
PART IV
Item 15. Exhibits and
Financial Statement Schedules
PAGE 38 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
39
Table of Contents
PAGE 40 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated:
March 6, 2006
The undersigned hereby constitute and appoint Robert W. Decherd,
Dennis A. Williamson and Guy H. Kerr, and each of them and their
substitutes, our true and lawful
attorneys-in-fact with
full power to execute in our name and behalf in the capacities
indicated below any and all amendments to this report and to
file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, and hereby ratify and confirm all that such
attorneys-in-fact, or
any of them, or their substitutes shall lawfully do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities and on the dates
indicated:
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
41
Table of Contents
PAGE 42 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
The Board of Directors and Shareholders
Belo Corp.
We have audited the accompanying consolidated balance sheets of
Belo Corp. and subsidiaries as of December 31, 2005 and
2004, and the related consolidated statements of earnings,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2005. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Belo Corp. and subsidiaries at
December 31, 2005 and 2004, and the consolidated results of
their operations and cash flows for each of the three years in
the period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Belo Corp. and subsidiaries internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated March 3, 2006 expressed an unqualified opinion
thereon.
/s/ ERNST & YOUNG LLP
Dallas, Texas
March 3, 2006
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
43
Table of Contents
Consolidated Statements of
Earnings
See accompanying Notes to Consolidated Financial Statements.
PAGE 44 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
See accompanying Notes to Consolidated Financial Statements.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
45
Table of Contents
CONSOLIDATED BALANCE SHEETS
(continued)
See accompanying Notes to Consolidated Financial Statements.
PAGE 46 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Consolidated Statements of
Shareholders Equity
See accompanying Notes to Consolidated Financial Statements.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
47
Table of Contents
Consolidated Statements of Cash
Flows
See accompanying Notes to Consolidated Financial Statements.
PAGE 48 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Notes to Consolidated Financial
Statements
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
49
Table of Contents
Notes to Consolidated Financial
Statements
PAGE 50 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Notes to Consolidated Financial
Statements
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
51
Table of Contents
Notes to Consolidated Financial
Statements
In December 2004, the FASB issued SFAS 123R,
Share-Based Payment. SFAS 123R is a revision of
SFAS 123, Accounting for Stock Based
Compensation. SFAS 123R supersedes APB 25,
Accounting for Stock Issued to Employees, and amends
SFAS 95, Statement of Cash Flows. Among other
items, SFAS 123R eliminates the use of APB 25 and the
intrinsic value method of accounting, and requires companies to
recognize the cost of employee services received in exchange for
awards of equity instruments, based on the grant date fair value
of those awards, in the financial statements. Pro forma
disclosure is no longer an alternative. The effective date of
SFAS 123R is the first annual reporting period of the
registrants first fiscal year beginning on or after
June 15, 2005 (or January 1, 2006 for the Company).
The Company adopted SFAS 123R on January 1, 2006.
SFAS 123R permits public companies to adopt its
requirements using either a modified prospective
method or a modified retrospective method. Under the
modified prospective method, compensation cost is
recognized in the financial statements beginning with the
effective date (a) based on the requirements of
SFAS 123R for all share-based payments granted after the
effective date and (b) is based on the requirements of
SFAS 123 for all awards granted to employees prior to the
effective date of SFAS 123R that are unvested as of the
effective date. Under the modified retrospective
method, the requirements are the same as under the
modified prospective method described above, but
also permits entities to restate financial statements of
previous periods based on proforma disclosures made in
accordance with SFAS 123. The Company plans to adopt
SFAS 123R using the modified prospective method.
As permitted by SFAS 123, the company currently accounts
for shared-based payments to employees using APB 25s
intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of SFAS 123Rs fair value method will have a
significant impact on our results of operations, although it
will have no impact on our overall financial position. The
impact of adoption of SFAS 123R cannot be predicted at this
time because it will depend on levels of share based payments
granted in the future. However, had the Company adopted
SFAS 123R in prior periods, the impact of that standard
would have approximated the impact of SFAS 123 as described
in the disclosure of pro forma net income and earnings per share
in Note 1 to our consolidated financial statements for the
pro forma effects on net earnings and net earnings per share of
SFAS 123 for the years 2005, 2004 and 2003.
The Company currently utilizes a standard option pricing model
(i.e., Black-Scholes) to measure the fair value of stock options
granted to employees. While SFAS 123R permits entities to
continue to use such a model, the standard also permits the use
of a more complex binomial, or lattice model. Based
upon research done by the Company on the alternative models
available to value option grants, the Company has determined
that it will continue to use the Black-Scholes model to measure
the fair value of awards of equity instruments to employees upon
the adoption of SFAS 123R.
SFAS 123R includes several modifications to the way that
income taxes are recorded in the financial statements. The
expense for certain types of option grants is only deductible
for tax purposes at the time that the taxable event takes place,
which could cause variability in the Companys effective
tax rates recorded through the year. SFAS 123R does not
allow companies to predict when these taxable events
will take place. Furthermore, it requires that the benefits
associated with the tax deductions in excess of recognized
compensation cost be reported as a financing cash flow, rather
than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after the
effective date. These future amounts cannot be estimated,
because they depend on, among other things, when employees
exercise stock options. However, the amount of operating cash
flows recognized for such excess tax deductions for the years
ended December 31, 2005, 2004, and 2003 was not material.
Subject to a complete review of the requirements of
SFAS 123R, based on stock option granted to employees
through December 31, 2005, the Company expects that the
adoption of SFAS 123R on January 1, 2006, will reduce
quarterly net earnings by approximately $2,000 ($.02 per share).
See Note 8 for further information on the Companys
share-based compensation plans.
PAGE 52 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Notes to Consolidated Financial
Statements
In 2004, Belo entered into joint marketing and shared services
agreements with HIC Broadcasting, Inc. (HIC), the
owner and operator of
KFWD-TV, Channel 52,
licensed to Fort Worth, Texas. These agreements expire
December 31, 2009, but are subject to extension. Belo
provides advertising sales assistance, certain technical
services and facilities to support the operations of KFWD-TV, as
well as limited programming. In exchange, Belo is reimbursed for
its costs and receives 50 percent of the net profits from
the operations of
KFWD-TV. The amounts
received under these agreements were not material to Belos
consolidated results of operations in 2005. In addition, in
exchange for $10,375 in cash, Belo acquired options to acquire
undivided interests in the assets owned, held or leased by HIC,
which are used in the operations of
KFWD-TV. The aggregate
exercise price of the options to acquire a 100 percent
interest is $31,125, subject to adjustment. These options expire
December 31, 2012. HIC also has the option, through
December 31, 2009, to require Belo to acquire
KFWD-TV. The exercise
of the options by either Belo or HIC is dependent on
modification of the Federal Communications Commission media
ownership rules and policies to permit Belos ownership of
KFWD-TV.
The following table sets forth the identifiable intangible
assets that continue to be subject to amortization
(definite-lived intangible assets) and the identifiable
intangible assets that are no longer subject to amortization
upon the adoption of SFAS 142 (indefinite-lived intangible
assets):
Amortization expense for intangible assets subject to
amortization was $8,380, $8,476, and $8,444 in 2005, 2004 and
2003, respectively. Amortization expense related to amortizable
intangibles at December 31, 2005 is expected to be $8,348
for 2006, $6,941 for 2007, $6,499 for 2008, $6,499 for 2009 and
$5,239 for 2010.
Goodwill allocated to the Companys operating segments as
of December 31, 2005 and 2004 is as follows:
In the third quarter 2005, the Company reduced Newspaper Group
goodwill by $5,952. The reduction was due to the favorable
resolution of a
pre-acquisition tax
matter relating to the 1997 acquisition of The Providence
Journal.
Based on the results of its annual impairment tests of goodwill
and intangible assets, the Company determined that no impairment
of these assets existed as of December 31, 2005 or 2004,
respectively. The Company must make assumptions regarding
estimated future cash flows and other factors to determine the
fair value of the respective assets in assessing the fair value
of its goodwill and other intangibles. If these estimates or the
related assumptions change, the Company may be required to
record impairment charges for these assets in the future.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
53
Table of Contents
Notes to Consolidated Financial
Statements
The normal operations and revenues of the Companys
television station in
New Orleans, WWL-TV,
were disrupted significantly by Hurricane Katrina, although the
station did not sustain significant damage to its physical
property and equipment. However, the hurricane adversely
affected the stations revenues due to its effect on a
significant number of New Orleans advertisers. The
Companys impairment test as of December 31, 2005
evaluated the effect of lower future revenues on the carrying
value of the assets of WWL, including its FCC license and
determined that these assets are not currently impaired. The
Companys evaluation is based on its belief that
advertising revenues will return to a level that supports the
current carrying value of the stations assets, including
its FCC license. However, if our assumptions prove to be
incorrect, these assets could be impaired. As of
December 31, 2005, the carrying value of
WWL-TVs
FCC license is approximately $14,300, the carrying value of
its goodwill is approximately $10,494 and the carrying value of
its property and equipment is approximately $22,167.
Long-term debt consists of the following at December 31,
2005 and 2004:
The Companys long-term debt maturities are as follows:
The weighted average effective interest rate on the $1,100,000
of fixed-rate debt was 7.5 percent at both
December 31, 2005 and 2004. The fair value was $59,795 and
$109,138 greater than the carrying value at December 31,
2005 and 2004, respectively. The fair values at
December 31, 2005 and 2004 were estimated using quoted
market prices and yields obtained through independent pricing
sources, taking into consideration the underlying terms of the
debt, such as coupon rate and term to maturity. On
February 2, 2004, the Company retired $6,400 of Industrial
Revenue Bonds due 2020 using borrowings under its revolving
credit facility.
On May 3, 2005, the Company entered into a $1,000,000
variable-rate five-year revolving credit facility with JPMorgan
Chase Bank, N.A., as Administrative Agent, and other
lenders party thereto (the new facility). The new
facility replaced the Companys $720,000 revolving credit
facility, which terminated on May 3, 2005. All borrowings
under the old facility were repaid by borrowings under the new
facility. Borrowings under the new credit facility mature upon
expiration of the agreement on May 3, 2010. The new
facility may be used for working capital and other general
corporate purposes, including letters of credit. Borrowings
under the new facility are made on a committed revolving credit
basis or an uncommitted competitive advance basis through a
bidding process. The new facility bears interest at a rate
determined by reference to the Companys credit rating and
whether the borrowing is based on LIBOR or a defined alternative
base rate, as requested by the Company. The rate obtained
through competitive bidding is either a LIBOR rate adjusted by a
marginal rate of interest or a fixed rate, in either case as
specified by the bidding bank and accepted by the Company.
Commitment fees, depending on the Companys credit rating,
of up to .25 percent per year of the total unused
commitment accrue and are payable under the new facility. The
new facility contains usual and customary covenants for credit
facilities of this type, including covenants limiting liens,
mergers, and substantial asset sales. The Company is also
required to maintain certain leverage and interest coverage
ratios specified in the agreement. As of December 31, 2005,
the Company was in compliance
PAGE 54 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Notes to Consolidated Financial
Statements
with all debt covenant requirements. All unused borrowings under
the new facility are available for borrowing. As of
December 31, 2005, borrowings of $105,000 were outstanding
under the new credit facility and the weighted average interest
rate for borrowings under the credit facility (which includes a
.125 percent commitment fee) was 5.0 percent at
December 31, 2005. The carrying value of borrowings under
the revolving credit facility approximates fair value.
At December 31, 2004, the Company had a $720,000 five-year
variable rate revolving credit facility. Borrowings under the
credit facility are made on a committed revolving credit basis
or an uncommitted competitive advance basis through a bidding
process. Revolving credit loans bear interest at a rate
determined by reference to LIBOR or a defined alternate base
rate, as requested by the Company. The rate obtained through
competitive bidding is either a LIBOR rate adjusted by a
marginal rate of interest or a fixed rate, in either case as
specified by the bidding bank and accepted by Belo. Commitment
fees of up to .375 percent of the total unused commitment
amount accrue and are payable under the credit facility.
Borrowings under the credit facility were $33,000 at
December 31, 2004. The weighted average interest rate for
borrowings under the credit facility (which includes a
.175 percent commitment fee) was 3.9 percent at
December 31, 2004. The carrying value of borrowings under
this revolving credit facility approximated fair value at
December 31, 2004. This credit facility was replaced by the
$1,000,000 new credit facility discussed above.
The revolving credit agreement contains certain covenants,
including a requirement to maintain, as of the end of each
quarter and measured over the preceding four quarters,
(1) a Funded Debt to Pro Forma Operating Cash Flow ratio
not exceeding 5.0 to 1.0 and (2) an Interest Coverage ratio
of not less than 3.0 to 1.0, all as such terms are defined in
the agreement. For the four quarters ended December 31,
2005, Belos ratio of Funded Debt to Pro Forma Operating
Cash Flow as defined in the agreement was 3.1 to 1.0.
Belos Interest Coverage ratio for the four quarters ended
December 31, 2005 was 4.4 to 1.0.
In addition, the Company has uncommitted lines of credit of
$60,000, of which $39,875 and $37,150 was outstanding at
December 31, 2005 and 2004, respectively. The weighted
average interest rate on this debt was 5.1 percent and
3.1 percent at December 31, 2005 and 2004,
respectively. These borrowings may be converted at the
Companys option to revolving debt. Accordingly, the
$39,875 and $37,150 outstanding under the uncommitted line of
credit at December 31, 2005 and 2004, respectively, have
been classified as long-term in the accompanying consolidated
balance sheets. All unused borrowings under the Companys
revolving credit facility and uncommitted line of credit are
available for borrowing as of December 31, 2005.
During 2005, 2004 and 2003, cash paid for interest, net of
amounts capitalized, was $91,153, $90,416 and $93,944,
respectively. At December 31, 2005, Belo had outstanding
letters of credit of $12,035 issued in the ordinary course of
business.
Income tax expense for the years ended December 31, 2005,
2004 and 2003 consists of the following:
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
55
Table of Contents
Notes to Consolidated Financial
Statements
Income tax expense for the years ended December 31, 2005,
2004 and 2003 differ from amounts computed by applying the
applicable U.S. federal income tax rate as follows:
Significant components of Belos deferred tax liabilities
and assets as of December 31, 2005 and 2004 are as follows:
During 2005 the Company reversed previously accrued taxes of
$11 million related to contingencies that no longer met the
standards for accrual under FAS 5. The reserves were originally
established through goodwill and, upon the expiration of certain
state statutes of limitation, were subsequently released in the
same manner.
Effective July 1, 2000, Belo amended its defined
contribution plan to increase its contribution and close its
noncontributory defined benefit plan to new participants.
Current employees were given the option of continuing in the
noncontributory defined benefit pension plan (Pension
Plan) and the existing defined contribution plan
(Classic Plan) or selecting the new enhanced defined
contribution plan (Star Plan).
Employees who selected the Star Plan had their years of service
in the Pension Plan frozen as of July 1, 2000. The Star
Plan is a profit sharing plan intended to qualify under
section 401(a) of the Internal Revenue Code of 1986, as
amended (the Code), and to meet the requirements of
Code section 401(k). The Star Plan covers substantially all
employees that meet certain service requirements. Both the plan
participants and Belo contribute to the Star Plan. For each
payroll period beginning July 1, 2000, Belo contributes an
amount equal to two percent of the compensation paid to eligible
employees, subject to limitations, and matches a specified
percentage of employees contributions under the Star Plan.
Under the Classic Plan, Belo matches a percentage of the
employees contribution but does not make the two percent
contribution of the participants compensation.
Belos contributions to its defined contribution plans
totaled $13,788, $14,458 and $13,518 in 2005, 2004 and 2003,
respectively. A portion of this contribution was made in Belo
common stock. The Company issued 395,809, 336,358, and
357,568 shares of Series A common stock in conjunction
with these contributions during the years ended
December 31, 2005, 2004, and 2003, respectively.
PAGE 56 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Notes to Consolidated Financial
Statements
Belos Pension Plan covers individuals who were employees
prior to July 2000. The benefits are based on years of service
and the average of the employees five consecutive years of
highest annual compensation earned during the most recently
completed 10 years of employment. The funding policy is to
contribute annually to the Pension Plan amounts sufficient to
meet minimum funding requirements as set forth in employee
benefit and tax laws, but not in excess of the maximum tax
deductible contribution. During 2005, 2004 and 2003, the Company
made contributions to the Pension Plan totaling $15,000, $30,800
and $27,000, respectively. These contributions exceeded the
Companys required minimum contribution for ERISA funding
purposes.
Belo also sponsors non-qualified retirement plans and
post-retirement benefit plans for certain employees. Expense
recognized in 2005, 2004 and 2003 for the non-qualified
retirement plans was $2,266, $2,180 and $2,285, respectively.
Expense for the post-retirement benefit plans recognized in
2005, 2004 and 2003 was $637, $791, and $1,376, respectively.
The Company uses a December 31 measurement date for its
Pension Plan. The following table sets forth the Pension
Plans funded status and prepaid pension costs at
December 31, 2005 and 2004:
Changes in plan assets for the years ended December 31,
2005 and 2004 were as follows:
Changes in plan benefit obligations for the years ended
December 31, 2005 and 2004 were as follows:
Amounts recognized in the balance sheet as of December 31,
2005 and 2004 consist of:
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
57
Table of Contents
Notes to Consolidated Financial
Statements
The net periodic pension cost for the years ended
December 31, 2005, 2004 and 2003 includes the following
components:
The expected benefit payments, net of administrative expenses,
under the plan are as follows:
Weighted-average assumptions used to determine benefit
obligations for the Pension Plan as of December 31, 2005
and 2004 are as follows:
Weighted-average assumptions used to determine net periodic
benefit cost for years ended December 31, 2005, 2004 and
2003 are as follows:
The expected long-term rate of return on assets was developed
through analysis of historical market returns, current market
conditions and the Pension Plans past experience.
The Pension Plan weighted-average target allocation and asset
allocations at December 31, 2005 and 2004 by asset category
are as follows:
Pension Plan assets do not include any Belo common stock at
December 31, 2005 or December 31, 2004.
The primary investment objective of the Pension Plan is to
ensure, over the long-term life of the plan, an adequate pool of
assets to support the benefit obligations to participants,
retirees and beneficiaries. A secondary objective of the plan is
to achieve a level of investment return consistent with a
prudent level of portfolio risk that will minimize the financial
impact of the Pension Plan on the Company.
PAGE 58 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Notes to Consolidated Financial
Statements
Belos 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. The assumptions the Company uses include, but
are not limited to, the selection of the discount rate,
long-term rate of return on plan assets, projected salary
increases and mortality rates. In determining the discount rate
assumption of 5.75%, the Company used a measurement date of
December 31, 2005 and constructed a portfolio of bonds to
match the benefit payment stream that is projected to be paid
from the Companys 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 Companys pension expense in the
year ended December 31, 2005, the Company used a discount
rate of 6 percent, an expected long-term rate of return on
plan assets of 8.75 percent and a rate of compensation
increase of 4.2 percent. To determine the discount rate
assumption of 6 percent, the Company used the measurements
date of December 31, 2004 and used the same methodology to
construct a portfolio of bonds to match the projected benefit
payments. The expected long-term rate of return on plan assets
assumption of 8.75 percent is based on the weighted average
expected long-term returns for the target allocation of plan
assets as of the measurement date of December 31, 2005.
Although the Company believes that the assumptions used are
appropriate, differences between assumed and actual experience
may affect the Companys operating results.
During 2005, 2004 and 2003 the value of Pension Plan assets
increased. The increases in Pension Plan asset values were
primarily due to improvements in stock market performance and
contributions of $15,000, $30,800 and $27,000 made by the
Company during the years then ended, respectively. The increases
in the value of Pension Plan assets in 2004 and 2003 resulted in
declines in the minimum liability for unfunded accumulated
benefit obligations originally recorded in 2002. In 2005,
although the value of the Pension Plan assets increased, the
minimum liability for an additional unfunded accumulated benefit
obligation recorded at December 31, 2005, increased by
$12,463, net of income taxes of $6,711.
Belo has a long-term incentive plan under which awards may be
granted to employees and outside directors in the form of
non-qualified stock options, incentive stock options, restricted
shares or performance units, the values of which are based on
Belos long-term performance. In addition, options may be
accompanied by stock appreciation rights and limited stock
appreciation rights. Rights and limited rights may also be
issued without accompanying options. Cash-based bonus awards are
also available under the plan.
On December 9, 2005, the Companys Board of Directors
awarded restricted stock units (RSUs). The RSUs have
service and/or performance conditions and vest over a period of
one to three years. Upon vesting, the RSUs will be redeemed with
60 percent in Series A Common Stock and
40 percent in cash. A liability has been established for
the cash portion of the redemption. During the vesting period,
the holder will participate in the Companys dividends
declared by receiving dividend equivalents.
As of December 31, 2005, there were 539,850 granted and
unvested RSUs outstanding with a weighted average grant date
fair value of $21.62 per share. Share-based compensation
expenses are recognized over the life of the vesting period
using the straight-line method. For the year ended
December 31, 2005, the Company recognized $305 in
share-based compensation expense. No share-based compensation
expense was recognized for the years ended December 31,
2004 and 2003.
The non-qualified options granted to employees and outside
directors under Belos long-term incentive plan become
exercisable in cumulative installments over periods of one to
seven years and expire after 10 years. Shares of common
stock reserved for future grants under the plan were 8,308,939,
9,161,049, and 778,135 at December 31, 2005, 2004 and 2003,
respectively. In 2004, Belos shareholders approved the
2004 Executive Compensation Plan. A total of
10,000,000 shares of Series A and/or Series B
Common Stock are authorized under the 2004 Plan.
The Company has adopted the disclosure-only provisions of
SFAS 123, Accounting for Stock-Based
Compensation and SFAS 148, Accounting for
Stock-Based Compensation Transition and Disclosure
an Amendment of SFAS 123 and continues to apply
APB 25 in accounting for its stock-based compensation
plans. Because it is Belos policy to grant stock options
at the market price on the date of grant, the intrinsic value is
zero, and therefore no compensation expense is recorded.
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
59
Table of Contents
Notes to Consolidated Financial
Statements
Stock-based activity in the long-term incentive plan related to
non-qualified stock options is summarized in the following table:
The following table summarizes information about non-qualified
stock options outstanding at December 31, 2005:
On January 5, 2006, Infinity Radio, Inc., a subsidiary of
CBS Corporation, plaintiff, filed a complaint against Belo
Corp. and Belo TV, Inc., a subsidiary of Belo Corp., in the
Supreme Court of the State of New York, County of New York
alleging, among other matters, that Belo breached obligations
under the asset purchase agreement between Belo and plaintiff to
purchase substantially all of the assets of
WUPL-TV in New Orleans,
Louisiana, a UPN affiliate, in the aftermath of Hurricane
Katrina. Plaintiff seeks specific performance directing Belo to
deliver the $14,500 purchase price of the station. On
February 21, 2006, Belo filed its response to the
complaint. The Company believes the complaint is without merit
and intends to vigorously defend against it.
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, Dennis A. Williamson,
Dunia A. Shive and John L. Sander, all of whom are
executive officers of the Company; James M. Moroney III, an
executive officer of The Dallas Morning News; Barry
Peckham, a former executive officer of The Dallas Morning
News; 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
announced by the Company in August 2004. The defendants filed a
joint pleading on August 1, 2005, seeking the
lawsuits dismissal based on the failure of the purported
individual shareholder to make demand on Belo to take action on
his claims prior to filing the lawsuit. On September 9,
2005, the plaintiff filed its response alleging that demand is
legally excused. The defendants replied to plaintiffs
response on September 26, 2005. On September 30, 2005,
discovery in this matter was stayed by court order pending the
federal courts decision on the motion to dismiss the
purported shareholder case described below.
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 Peckham. The complaints
arise out of the circulation overstatement at The Dallas
Morning News, alleging that the overstatement artificially
inflated Belos 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,
PAGE 60 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Notes to Consolidated Financial
Statements
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, Dennis A. Williamson and James M.
Moroney III. On April 8, 2005, plaintiffs filed their
unopposed motion for leave to file a first amended consolidated
complaint, which motion was granted on April 11. On
August 1, 2005, defendants filed a motion to dismiss. On
September 30, 2005, the plaintiffs filed their response to
defendants motion and on October 31, 2005, defendants
filed their reply. 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.
In 2004, the staff of the Securities and Exchange Commission
(the SEC) notified the Company that the staff was
conducting a newspaper industry-wide inquiry into circulation
practices, and inquired specifically about The Dallas Morning
News circulation overstatement. The Company has
briefed the SEC on The Dallas Morning News circulation
situation and related matters. The information voluntarily
provided to the SEC relates to The Dallas Morning News,
as well as The Providence Journal and The
Press-Enterprise. The Company will continue to respond to
additional requests for information that the SEC may have.
The Company received subpoenas from the Dallas County District
Attorneys office for documents related to the circulation
overstatement at The Dallas Morning News. The Company has
cooperated with the Dallas County District Attorneys
office in responding to the subpoenas and will continue to
respond to any additional information needs of the District
Attorneys office.
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.
The Company has entered into commitments for broadcast rights
that are not currently available for broadcast and are therefore
not recorded in the financial statements. At December 31,
2005, commitments for the purchase of these broadcast rights are
as follows:
As of December 31, 2005, contractual obligations for
capital expenditure commitments for 2006, 2007, 2008, 2009 and
2010 are $66,540, $18,421, $20,105, $690, and $694,
respectively. These obligations primarily relate to television
broadcast equipment and newspaper production equipment as well
as contracted construction costs for the new distribution
facility in Dallas and the new media center for The
Press-Enterprise announced January 20, 2006.
Total lease expense for property and equipment was $13,031,
$12,765 and $12,021 in 2005, 2004 and 2003, respectively. Future
minimum rental payments for operating leases at
December 31, 2005 are as follows:
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
61
Table of Contents
Notes to Consolidated Financial
Statements
Belo has two series of common stock authorized, issued and
outstanding, Series A and Series B, each with a par
value of $1.67 per share. The total number of authorized
shares of common stock is 450,000,000 shares. The
Series A and Series B shares are identical except as
noted herein. Series B shares are entitled to 10 votes per
share on all matters submitted to a vote of shareholders, while
the 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. Series B
shares are convertible at any time on a one-for-one basis into
Series A shares but not vice versa, and upon a transfer
other than as described above, Series B shares
automatically convert into Series A shares. Shares of
Belos 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.
Each outstanding share of common stock is accompanied by one
preferred share purchase right, which entitles shareholders to
purchase 1/200 of a share of Series A Junior Participating
Preferred Stock. The rights will not be exercisable until a
party either acquires beneficial ownership of 30 percent of
Belos common stock or makes a tender offer for at least
30 percent of its common stock. At such time, each holder
of a right (other than the acquiring person or group) will have
the right to purchase common stock of Belo with a value equal to
two times the exercise price of the right, which is initially
$75 (subject to adjustment). In addition, if Belo is acquired in
a merger or business combination, each right can be used to
purchase the common stock of the surviving company having a
market value of twice the exercise price of each right. Once a
person or group has acquired 30 percent of the common stock
but before 50 percent of the voting power of the common
stock has been acquired, Belo may exchange each right (other
than those held by the acquiring person or group) for one share
of Company common stock (subject to adjustment). Belo may reduce
the 30 percent threshold or may redeem the rights. The
number of shares of Series A Junior Participating Preferred
Stock reserved for possible conversion of these rights is
equivalent to 1/200 of the number of shares of common stock
issued and outstanding plus the number of shares reserved for
options outstanding and for grant under the 2004 Executive
Compensation Plan and for options outstanding under Belos
predecessor plans. The rights will expire March 20, 2006,
unless extended.
In July 2000, the Companys Board of Directors authorized
the repurchase of up to 25,000,000 shares of common stock.
During 2005 and 2004, Belo purchased 7,946,200 and
2,887,500 shares of its Series A common stock at an
aggregate cost of $184,011 and $78,148, respectively under this
authority. No shares of common stock were repurchased by the
Company in 2003. All shares were retired in the year of
purchase. On December 9, 2005, the Companys Board of
Directors authorized the repurchase of up and additional
15,000,000 shares of common stock. As of December 31,
2005, no shares were repurchased under this program. As of
December 31, 2005, the Company had 21,599,219 remaining
shares under both of these purchase authorities. In addition,
Belo has in place a stock repurchase program authorizing the
purchase of up to $2,500 of Company stock annually. During 2005,
no shares were purchased under this program. There is no
expiration date for these repurchase programs. Pursuant to these
authorizations, on November 21, 2005, Belo adopted a
Rule 10b5-1 stock
repurchase plan to effect open market purchases by the Company
of its Series A common stock for a period that ended in
early 2006. Pursuant to these authorizations, on March 6,
2006, Belo adopted a
Rule 10b5-1 stock
repurchase plan to effect open market purchases by the Company
of its Series A common stock for a period that will end in
the second quarter of 2006.
During the third quarter of 2004, Belo and Time Warner
discontinued their joint ventures that operated the local cable
news channels in Charlotte, North Carolina and Houston and
San Antonio, Texas. The Company had made investments
totaling $39,070 ($5,093 of which was invested in 2004) related
to these ventures through December 31, 2004. Belo recorded
a charge of $11,528 in the third quarter of 2004, which is
included in other income (expense), net, to write down its
investment in the joint ventures to $7,454, the net amount the
Company expects to recover upon liquidation of the joint
ventures assets. The actual amount the Company will
recover depends on the actual amounts received from the sale of
the joint venture assets, as well as costs incurred in the
liquidation, including employee severance expenses. In 2005, the
joint ventures sold their assets. As of December 31, 2005,
the Company had an immaterial adjustment to the original charge
as recorded.
On August 16, 2004, the Company announced a voluntary
advertiser plan developed by management in response to an
overstatement of previously reported circulation figures at
The Dallas Morning News. As a result, the Company
recorded a charge of $23,500 in 2004 related to the advertiser
plan, of which approximately $19,629, consisting of cash
payments to advertisers, was classified as a reduction of
revenues and approximately $3,900, consisting of related costs,
was included in other operating costs. The plan also included
future advertising credits. To utilize the credits, advertisers
generally placed
PAGE 62 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Notes to Consolidated Financial
Statements
advertising in addition to the terms of each advertisers
current contract. Credits earned were to be used by the end of
an advertisers contract period or February 28, 2005,
whichever was later. As of December 31, 2005, advertisers
used or forfeited the available credits and no credits remain
available.
During the fourth quarter of 2003, Belo recorded a gain of
$1,796 on the sale of
KENS-AM, the
Companys former radio station in San Antonio, Texas.
In 2004, Belo announced a Company-wide reduction in workforce of
approximately 250 positions, with the majority coming from
The Dallas Morning News. The Company recorded charges
totaling $7,897 for severance costs and other expenses (included
as a component of salaries, wages and employee benefits in the
Statement of Earnings) related to the reduction in workforce of
which $3,688 was paid in 2004. As of December 31, 2005,
substantially all of the payments have been made.
The following table sets forth the reconciliation between
weighted average shares used for calculating basic and diluted
earnings per share for each of the three years in the period
ended December 31, 2005, (in thousands, except per share
amounts):
For each of the three years in the period ended
December 31, 2005, total comprehensive income was comprised
as follows:
Supplemental cash flow information for each of the three years
in the period ended December 31, 2005 is as follows:
Belo Corp. 2005 Annual Report on
Form 10-K PAGE
63
Table of Contents
Notes to Consolidated Financial
Statements
In December 2005, the Company entered into a construction
contract with Austin Commercial, L.P. relating to the new
Dallas Morning News distribution and production center in
southern Dallas. The contract provides for total payments of
approximately $16,500, of which approximately $556 was paid
during the year ended December 31, 2005. Bill Solomon, a
member of Belos Board of Directors, is Chairman of Austin
Industries, Inc., the parent company of Austin Commercial, L.P.
Effective January 1, 2005, the Company integrated its
interactive media business and Web sites into their legacy
operating companies. Additionally, in 2005 Belo combined the
Other Group operations, consisting primarily of the
Companys cable news operations, into the Television Group.
As a result, the Company has reclassified the 2004 and 2003
previously reported segment amounts to conform to the current
year presentation. Belo now operates its business in two primary
reporting segments, the Television Group and the Newspaper
Group. For the Television Group, Belos operating segments
are defined as its television stations and cable news channels
within a given market. These operating segments are aggregated
into the Television Group. For the Newspaper Group, Belos
operating segments are defined as its newspapers within a given
market. These operating segments are aggregated into the
Newspaper Group. Belos various operating segments share
content at no cost.
Operations in the Television Group involve the sale of air time
for advertising and the broadcast of news, entertainment and
other programming through Belos television stations, cable
news operations and related Web sites. Belos television
stations are located in Dallas/ Fort Worth, Houston,
San Antonio and Austin, Texas; Seattle/ Tacoma and Spokane,
Washington; Phoenix and Tucson, Arizona; St. Louis,
Missouri; Portland, Oregon; Charlotte, North Carolina; New
Orleans, Louisiana; Hampton/ Norfolk, Virginia; Louisville,
Kentucky; and Boise, Idaho. The Companys regional cable
news operations are located in Seattle, Washington and Dallas,
Texas.
Operations in the Newspaper Group involve the sale of
advertising space in published issues and on related Web sites,
the sale of newspapers to distributors and individual
subscribers and commercial printing. The Companys major
newspaper publishing units are The Dallas Morning News,
located in Dallas, Texas; The Providence Journal,
located in Providence, Rhode Island; and The
Press-Enterprise, located in Riverside, California. The
Company also has newspaper operations in Denton, Texas.
Belos management uses segment EBITDA as the primary
measure of profitability to evaluate operating performance and
to allocate capital resources and bonuses to eligible operating
company employees. Segment EBITDA represents a segments
earnings before interest expense, income taxes, depreciation and
amortization. Other income (expense), net is not allocated to
the Companys operating segments because it consists
primarily of equity earnings (losses) from investments in
partnerships and joint ventures and other non-operating income
(expense).
PAGE 64 Belo
Corp. 2005 Annual Report on
Form 10-K
Table of Contents
Notes to Consolidated Financial
Statements
Selected segment data for the years ended December 31,
2005, 2004 and 2003 is as follows. As noted above, certain
previously reported information has been reclassified to conform
to the current year presentation.
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