-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FffCAB+qUdnGDjl9q25ysJqFTkR8JiSYh9mueoacrHgjXwZw8WiAta4JJC3RGFek UvaX5nvuJ9oYe0queCwtJA== 0000950134-99-001726.txt : 19990318 0000950134-99-001726.hdr.sgml : 19990318 ACCESSION NUMBER: 0000950134-99-001726 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELO A H CORP CENTRAL INDEX KEY: 0000356080 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 750135890 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-74702 FILM NUMBER: 99566922 BUSINESS ADDRESS: STREET 1: 400 S RECORD ST STREET 2: COMMUNICATIONS CENTER CITY: DALLAS STATE: TX ZIP: 75202 BUSINESS PHONE: 2149776600 MAIL ADDRESS: STREET 1: P O BOX 655237 CITY: DALLAS STATE: TX ZIP: 75265 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 1-8598 A. H. BELO CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 75-0135890 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. BOX 655237 DALLAS, TEXAS 75265-5237 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 977-6606 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- SERIES A COMMON STOCK, $1.67 PAR VALUE NEW YORK STOCK EXCHANGE PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting stock held by nonaffiliates on January 29, 1999, based on the closing price for the registrant's Series A Common Stock on such date as reported on the New York Stock Exchange, was approximately $1,974,221,000. * Shares of Common Stock outstanding at January 29, 1999: 118,343,375 shares. (Consisting of 99,418,699 shares of Series A Common Stock and 18,924,676 shares of Series B Common Stock.) * For purposes of this calculation, the market value of a share of Series B Common Stock was assumed to be the same as the share of Series A Common Stock into which it is convertible. Documents incorporated by reference: Portions of the registrant's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 12, 1999 are incorporated by reference into Part III (Items 10, 11, 12 and 13). 2 A. H. BELO CORPORATION FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.......................................................................................... 1 Item 2. Properties........................................................................................ 7 Item 3. Legal Proceedings................................................................................. 8 Item 4. Submission of Matters to a Vote of Security Holders............................................... 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................. 8 Item 6. Selected Financial Data........................................................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 11 Item 7A. Quantitative and Qualitative Disclosures about Market Risks....................................... 20 Item 8. Financial Statements and Supplementary Data (see Index to Financial Statements below)............. 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 20 PART III Item 10. Directors and Executive Officers of the Registrant................................................ 20 Item 11. Executive Compensation............................................................................ 21 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 21 Item 13. Certain Relationships and Related Transactions.................................................... 21 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 21 Signatures .................................................................................................. 25 INDEX TO FINANCIAL STATEMENTS Report of Independent Auditors............................................................................... 27 Consolidated Statements of Earnings for the Years Ended December 31, 1998, 1997 and 1996..................... 28 Consolidated Balance Sheets as of December 31, 1998 and 1997................................................. 29 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 ........ 31 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996................... 32 Notes to Consolidated Financial Statements................................................................... 33 Management's Responsibility for Financial Statements......................................................... 46
1 3 PART I ITEM 1. BUSINESS A. H. Belo Corporation (the "Company" or "Belo") is one of the nation's largest media companies, with a diversified group of television broadcasting, newspaper publishing and cable news operations. The Company's group of 17 television stations currently reaches 14.3 percent of U.S. television households. In addition, the Company manages four television stations through local marketing agreements ("LMA") and owns four local or regional cable news channels. Three of the Company's television stations are located in major metropolitan areas which are among the fastest growing in the country: WFAA-TV (ABC) in Dallas/Fort Worth, KHOU-TV (CBS) in Houston and KING-TV (NBC) in Seattle/Tacoma. Belo has three stations in the top 12 television markets, seven stations in the top 30 markets, 12 stations in the top 50 markets, and network affiliations as follows: four ABC affiliates, six CBS affiliates, five NBC affiliates and two FOX affiliates. Thirteen of the Company's 17 stations are ranked either number one or two in overall sign-on/sign-off audience delivery. Belo's Publishing Division is headed by The Dallas Morning News, which has the country's eighth-largest Sunday circulation and ninth-largest daily circulation, and The Providence Journal, the leading newspaper in terms of both advertising and circulation in Rhode Island and southeastern Massachusetts. Belo also owns The Press-Enterprise, a daily newspaper serving Riverside, California, and other daily newspapers as follows: the Messenger-Inquirer in Owensboro, Kentucky; The Eagle in Bryan-College Station, Texas; and The Gleaner in Henderson, Kentucky. In addition, the Company publishes the Arlington Morning News and eight community newspapers in the Dallas/Fort Worth suburban area and operates a commercial printing business. The Dallas Morning News is one of the leading newspaper franchises in America. The Dallas Morning News' success is founded upon the highest standards of journalistic excellence, with an emphasis on comprehensive news, information and community service. The newspaper's reporting and photography initiatives have earned six Pulitzer Prizes since 1986. The Providence Journal also has a long history of journalistic excellence and service to its community. It is America's oldest major daily newspaper of general circulation and continuous publication. The Providence Journal has earned four Pulitzer Prizes since 1945. The Company believes the success of its media franchises is built upon providing local and regional news, information and community service of the highest caliber. These principles have attracted and built relationships with viewers, readers and advertisers and have guided Belo's success for 157 years. Note 14 to the Consolidated Financial Statements contains information about the Company's industry segments for the years ended December 31, 1998, 1997 and 1996. TELEVISION BROADCASTING The Company's television broadcasting operations began in 1950 with the acquisition of WFAA-TV shortly after the station commenced operations. In 1984, the Company expanded its television operations with the purchase of stations in Houston, Sacramento, Hampton/Norfolk and Tulsa. In June 1994 and February 1995, the Company acquired stations in New Orleans and Seattle/Tacoma, respectively. The Providence Journal Company ("PJC") acquisition in February 1997 added nine television stations, including NBC-affiliated KING-TV. In accordance with Federal Communications Commission ("FCC" or "Commission") regulations prohibiting ownership of two or more stations in a single market, Belo exchanged its United Paramount Network ("UPN") affiliate, KIRO-TV in Seattle/Tacoma, for CBS affiliate KMOV-TV in St. Louis, Missouri, in June 1997. In October 1997, Belo acquired CBS affiliate KENS-TV in San Antonio, Texas. On February 25, 1999, the Company announced that it has entered into an agreement to acquire KVUE-TV, the ABC affiliate in Austin, Texas in exchange for KXTV, the Company's ABC affiliate in Sacramento, California. 1 4 The following table sets forth information for each of the Company's stations and their markets:
- --------------------------------------------------------------------------------------------------------------------------- Number of Station Commercial Station Audience Market Year Network Stations in Rank in Share in Market Rank(1) Station Acquired Affiliation Channel Market(2) Market(3) Market(4) - --------------------------------------------------------------------------------------------------------------------------- Dallas/Fort Worth 7 WFAA-TV 1950 ABC 8 15 1 19 Houston 11 KHOU-TV 1984 CBS 11 15 1* 15 Seattle/Tacoma 12 KING-TV 1997 NBC 5 10 1* 16 Sacramento(5) 20 KXTV 1984 ABC 10 10 2* 12 St. Louis 21 KMOV-TV 1997 CBS 4 8 2 17 Portland 23 KGW-TV 1997 NBC 8 8 2* 14 Charlotte 28 WCNC-TV 1997 NBC 36 8 3 9 San Antonio 37 KENS-TV 1997 CBS 5 9 2* 13 Hampton/Norfolk 40 WVEC-TV 1984 ABC 13 7 1* 15 New Orleans 41 WWL-TV 1994 CBS 4 9 1 21 Louisville 48 WHAS-TV 1997 ABC 11 7 1* 15 Albuquerque 49 KASA-TV 1997 FOX 2 6 4 9 Tulsa 59 KOTV 1984 CBS 6 9 1 21 Honolulu 71 KHNL-TV 1997 NBC 13 9 4 10 Spokane 72 KREM-TV 1997 CBS 2 5 1* 17 Tucson 78 KMSB-TV 1997 FOX 11 7 4 9 Boise 125 KTVB-TV 1997 NBC 7 5 1 25 - ---------------------------------------------------------------------------------------------------------------------------
* Tied with one or more other stations in the market. (1) Market rank is based on the relative size of the television market, or Designated Market Area ("DMA"), among the 211 generally recognized DMAs in the United States, based on November 1998 Nielsen estimates. (2) Represents the number of television stations (both VHF and UHF) broadcasting in the market, excluding public stations, low power broadcast stations and national cable channels. (3) Station rank is derived from the station's rating, which is based on November 1998 Nielsen estimates of the number of television households tuned to the Company's station for the Sunday-Saturday 7:00 a.m. to 1:00 a.m. period ("sign-on/sign-off") as a percentage of the number of television households in the market. (4) Station audience share is based on November 1998 Nielsen estimates of the number of television households tuned to the Company's station as a percentage of the number of television households with sets in use in the market for the sign-on/sign-off period. (5) The Company has entered into an agreement to exchange KXTV for the ABC affiliate in Austin, Texas (market rank 60). Generally, rates for national and local spot advertising sold by the Company are determined by each station, which receives all of the revenues, net of agency commissions, for that advertising. Rates are influenced by the demand for advertising time, the popularity of the station's programming and market size. Commercial television stations generally fall into one of three categories. The first category of stations includes those affiliated with one of the four major national networks (ABC, CBS, NBC and FOX). The second category is comprised of stations affiliated with newer national networks, such as UPN and the Warner Brothers ("WB") Television Network. The third category includes independent stations ("IND") that are not affiliated with any network and rely principally on local and syndicated programming. Affiliation with a television network can have a significant influence on the revenues of a television station because the audience ratings generated by a network's programming can affect the rates at which a station can sell advertising time. Each of the Company's network affiliation agreements provides the station with the right to broadcast 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. Each station receives a specified amount of network compensation for broadcasting network programming. To the extent that a station's preemptions of network programming exceed a designated amount, that compensation may be reduced. These payments are also subject to decreases by the network during the term of an affiliation agreement under other circumstances, with provisions for advance notice. The Company has long-term network affiliation agreements in place with ABC and CBS, and shorter-term agreements in place with NBC and FOX. Final documentation of the ABC affiliation agreements has not been completed. However, the Company is currently compensated under the terms of the draft agreements with ABC. Three of the Company's LMA's have affiliation agreements with UPN. In addition, two of these LMA's have a secondary affiliation with the WB network. 2 5 NEWSPAPER PUBLISHING The Company's principal newspaper, The Dallas Morning News, was established in 1885. In late 1991, after years of intense competition, The Dallas Morning News' principal newspaper competitor, the Dallas Times Herald, ceased operations, and the Company purchased its assets. In late 1995 and early 1996, the Company expanded its Publishing Division by acquiring daily newspapers serving Bryan-College Station, Texas and Owensboro, Kentucky. The Providence Journal was acquired in February 1997 and The Gleaner, serving Henderson, Kentucky, was acquired in March 1997. In July 1997, Belo completed the acquisition of The Press-Enterprise, a daily newspaper serving Riverside, California. The following table sets forth information concerning the Company's daily newspaper operations:
- ---------------------------------------------------------------------------------------------------------------------------------- 1998 1997 ------------------------------ ------------------------------ Daily Sunday Daily Sunday Newspaper Location Circulation(1) Circulation(1) Circulation(1) Circulation(1) - ---------------------------------------------------------------------------------------------------------------------------------- The Dallas Morning News ("TDMN") Dallas, TX 515,181 780,084 517,215 789,004 The Providence Journal ("PJ") Providence, RI 167,381 239,193 170,292 242,755 The Press-Enterprise ("PE") Riverside, CA 161,612 168,222 162,551 170,478 Messenger-Inquirer Owensboro, KY 31,767 34,991 31,754 34,657 The Eagle Bryan-College Station, TX 22,449 27,219 21,939 27,358 The Gleaner Henderson, KY 11,152 13,167 11,247 13,476 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Average paid circulation for the six months ended September 30, 1998 and 1997, respectively, according to the Audit Bureau of Circulation's FAS-FAX report. Each of Belo's daily newspapers strives to serve community interests by maintaining a strong and independent voice in matters of public concern. It is the policy of the Company to allocate such resources as may be necessary to maintain excellence in news reporting and editorial comment in all of its newspaper publications. The Company's three largest newspapers, The Dallas Morning News, The Providence Journal and The Press-Enterprise, provide coverage of local, state, national and international news. The Dallas Morning News is distributed throughout the Southwest, though its circulation is concentrated primarily in the 12 counties surrounding Dallas. The Providence Journal is the leading newspaper in Rhode Island and southeastern Massachusetts. The Press-Enterprise is distributed throughout Riverside County and the inland southern California area. Riverside County is expected to be among the fastest growing counties in California over the next decade. The basic material used in publishing Belo's newspapers is newsprint. During 1998, the Company's publishing operations consumed approximately 253,000 metric tons of newsprint at an average cost of $566 per metric ton. Consumption of newsprint in the previous year was approximately 254,000 metric tons at an average cost per metric ton of $535. At present, newsprint is generally purchased from eight suppliers. In addition, The Providence Journal and The Press-Enterprise purchased approximately 50 percent and 70 percent, respectively, of their newsprint from other suppliers under pre-existing contracts. These contracts provide for certain minimum purchases per year at rates commonly available throughout the region. Management believes its sources of newsprint, along with alternate sources that are available, are adequate for its current needs. COMPETITION The success of broadcast operations depends on a number of factors, including the general strength of the economy, the ability to provide attractive programming, audience ratings, relative cost efficiency for advertisers in reaching audiences as compared to other advertising media, technical capabilities and governmental regulations and policies. The Company's television stations compete for advertising revenues directly with other media such as newspapers (including those owned and operated by the Company), other television stations, direct satellite distribution, radio stations, cable television systems, outdoor advertising, the Internet, magazines and direct mail advertising. The four major national television networks are represented in each television market in which the Company has a television station. Competition for advertising sales and local viewers within each market is intense, particularly among the network-affiliated television stations. 3 6 The entry of local telephone companies into the market for video programming services, as permitted under the Telecommunications Act of 1996 (the "1996 Act"), can be expected to have an impact on competition in the television industry. The Company is unable to predict the effect that these or other technological and related regulatory changes will have on the television industry or on the future results of the Company's operations. Each of the Company's daily newspapers competes for advertising with television and radio stations (including stations owned and operated by the Company in the same or overlapping markets), magazines, direct mail, cable television, direct satellite distribution, outdoor advertising, the Internet and other newspapers. The Dallas Morning News' primary competitor in certain smaller cities located between Dallas and Fort Worth is the Fort Worth Star-Telegram. The Providence Journal and The Press-Enterprise each has five competing daily newspapers in the Rhode Island and Riverside County markets, respectively. REGULATION OF TELEVISION BROADCASTING The Company's television broadcasting operations are subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the "Act"). Among other things, the Act empowers the FCC to assign frequency bands; determine stations' operating frequencies, location and power; issue, renew, revoke and modify station licenses; regulate equipment used by stations; impose penalties for violation of the Act or of FCC regulations; impose fees for processing applications and other administrative functions; and adopt regulations to carry out the Act's provisions. The Act also prohibits the assignment of a broadcast license or the transfer of control of a broadcast licensee 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. The Act would prohibit the Company's subsidiaries from continuing as broadcast licensees if record ownership or power to vote more than one-fourth of the Company's stock were to be held by aliens, foreign governments or their representatives, or by corporations formed under the laws of foreign countries. The Act previously would have prohibited the Company's subsidiaries from continuing as broadcast licensees if any officer or more than one-fourth of the directors of the Company were aliens. The 1996 Act, however, eliminated the restriction on alien officers and directors. Prior to the passage of the 1996 Act, television station licenses were granted for a period of five years. Renewal applications were granted without a hearing if there were no competing applications or issues raised by petitioners to deny such applications that would cause the FCC to order a hearing. If competing applications were filed, a full comparative hearing was required. Under the 1996 Act, the statutory restriction on the length of a license term was amended to allow the FCC to grant television licenses for terms of up to eight years. In January 1997, the FCC adopted specific procedures to extend television license terms to the eight-year limit. The 1996 Act also 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 of either the Act or the FCC's rules and regulations by the licensee; and (3) there have been no other violations of either the Act or the FCC's rules and regulations by the licensee which, taken together, constitute a pattern of abuse. In making its determination, the FCC cannot consider whether the public interest would be better served by a party other than the renewal applicant. Under the 1996 Act, competing applications for the same frequency may be accepted only after the Commission has denied an incumbent's application for renewal of license. The current license expiration dates for each of the Company's television broadcast stations are as follows: WVEC-TV, October 1, 2004; WCNC-TV, December 1, 2004; WWL-TV, June 1, 2005; WHAS-TV, August 1, 2005; KMOV-TV, February 1, 2006; KOTV, June 1, 2006; KENS-TV, August 1, 2006; KHOU-TV, August 1, 2006; WFAA-TV, August 1, 2006; KASA-TV, October 1, 2006; KMSB-TV, October 1, 2006; KTVB-TV, October 1, 2006; KXTV, December 1, 2006; KING-TV, February 1, 2007; KGW-TV, February 1, 2007; KREM-TV, February 1, 2007; and KHNL-TV, February 1, 2007. FCC ownership rules, as modified pursuant to the 1996 Act, limit the aggregate audience reach of television stations that may be under common ownership, operation and control, or in which a single person or entity may hold office or have more than a specified interest or percentage of voting power, to 35 percent of the total national audience. FCC rules also place certain limits on common ownership, operation and control of, or cognizable 4 7 interests or voting power in, (a) television stations serving the same area, (b) television stations and daily newspapers serving the same area and (c) television stations and cable systems serving the same area. The 1996 Act left in place the FCC rule which prohibits common ownership of two television stations serving the same area, but directed the Commission to conduct a rulemaking proceeding to determine whether the restriction should be eliminated or modified. In addition, the 1996 Act eliminated a statutory prohibition against common ownership of television stations and cable systems serving the same area, but left the FCC rule in place. The 1996 Act stipulates that the FCC should not consider the repeal of this statutory ban in any review of its applicable rules. The 1996 Act also left in place the FCC rule which prohibits common ownership of a broadcast station and a daily newspaper serving the same area, but required the Commission to review this and all other cross-ownership rules biennially, beginning in 1998, to determine if they remain necessary. In early 1998, the FCC announced the beginning of the biennial review process, which will also include a review of a broad range of other rules affecting broadcasters. In late 1998, the Commission announced a number of such changes which, among other things, are directed toward simplifying application and ownership report forms and supplying greater certainty as to construction deadlines for technical facilities modifications. The FCC ownership rules affect the number, type and location of newspaper, broadcast and cable television properties that the Company might acquire in the future. For example, under current FCC rules, the Company generally could not acquire any daily newspaper, broadcast or cable television properties in a market where it now owns or has an interest in a television station deemed attributable under FCC rules. However, the FCC's rules and policies (as modified by the 1996 Act) provide that waivers of these restrictions generally would be available to permit the Company's acquisition of radio stations in most of the markets in which the Company currently owns television stations or of "satellite" television stations located within a parent station's Grade B service contour which rebroadcast all or most of the parent station's programming. The Company's ownership of The Dallas Morning News and WFAA, which are both located in the Dallas/Fort Worth DMA, predates the adoption of the FCC's rules regarding newspaper/broadcast cross-ownership and was "grandfathered" by the FCC. The FCC has instituted proceedings looking toward possible relaxation of certain of its rules regulating television station ownership and changes in the standards used to determine what type of interests are considered to be attributable under its rules. For example, the FCC has initiated proceedings looking toward possible relaxation of its rules regulating the common ownership of two television stations. In addition, other parties have challenged the newspaper/television cross-ownership prohibition in court and in petitions to the FCC, and legislation to repeal that prohibition has been introduced in the U.S. Senate and House of Representatives. The FCC has significantly reduced its regulation of broadcast stations, including elimination of formal ascertainment requirements and guidelines concerning amounts of certain types of programming and commercial matter that may be broadcast. There are, however, FCC rules and policies, and rules and policies of other federal agencies, that regulate matters such as network/affiliate relations, cable systems' carriage of syndicated and network television programming on distant stations, political advertising practices, obscene and indecent programming, application procedures and other areas affecting the business or operations of broadcast stations. The FCC has eliminated its former rules that restricted network participation in program production and syndication. The FCC also eliminated the prime time access rule ("PTAR"), effective August 30, 1996. The PTAR limited the ability of some stations in the 50 largest television markets to broadcast network programming (including syndicated programming previously broadcast over a network) during prime time hours. The elimination of PTAR could increase the amount of network programming televised by a station affiliated with ABC, NBC or CBS. The U.S. Supreme Court refused to review a lower court decision that upheld FCC action invalidating most aspects of the Fairness Doctrine, which required broadcasters to present contrasting views on controversial issues of public importance. The FCC may, however, continue to regulate other aspects of fairness obligations in connection with certain types of broadcasts. The FCC has adopted rules to implement the Children's Television Act of 1990, which, among other provisions, limits the permissible amount of commercial matter in children's television programs and requires each television station to present educational and informational children's programming. The Commission recently adopted stricter children's programming requirements, including a requirement that television broadcasters provide a minimum of three hours of "core" children's educational programming per week. 5 8 In April 1998, the U.S. Court of Appeals for the D.C. Circuit struck down the FCC's Equal Employment Opportunity regulations as being unconstitutional. Recently the Commission commenced a proceeding in which it proposed new rules that it suggests would not share the constitutional flaws of the former rules. It has invited public comment on its proposals. The Company cannot predict whether new rules will be adopted, the form of any such rules, or the impact of the rules on the Company's operations. The FCC also has adopted various regulations to implement certain provisions of the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act") which, among other matters, includes provisions respecting the carriage of television stations' signals by cable systems. In March 1997, the Supreme Court upheld a statutory provision requiring cable systems to devote a specified portion of their channel capacity to the carriage of the signals of local television stations. Moreover, the 1992 Cable Act was amended in certain important respects by the 1996 Act. Most notably, the 1996 Act repealed the cross-ownership ban between cable and telephone entities and the FCC's video dial tone rules. These actions, among other regulatory developments, permit involvement by telephone companies in providing video services. In April 1997, the FCC adopted rules for implementing digital television ("DTV") service in the United States. Implementation of DTV will improve the technical quality of television signals received by viewers and will give television broadcasters the flexibility to provide new services, including high-definition television or multiple programs of standard definition television and data transmission. Under the FCC's DTV rules, each broadcaster who, as of April 3, 1997, held a license to operate a full-power television station or a construction permit for such a station will be assigned, for an eight-year transition period, a second channel on which to initially provide separate DTV programming or simulcast its analog programming. Stations must 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. For example, all ABC, CBS, NBC and FOX network affiliates in the 10 largest markets must be on the air with a digital signal by May 1, 1999. (Several stations in the top 10 markets voluntarily committed in writing to the FCC to build DTV facilities by November 1, 1998. The Company's stations, WFAA, KHOU and KING, made such commitments and subsequently met the accelerated schedule.) Affiliates of the four major networks in the top 30 markets must be transmitting digital signals by November 1999 and all other commercial broadcasters must follow suit by 2002. At the end of the transition period, analog television transmissions will cease, and DTV channels will be reassigned to a smaller segment of the broadcasting spectrum. It is likely that some of the vacated spectrum will be allocated to public safety, while the remainder will be auctioned for use by other telecommunication services. The FCC hopes to complete the full transition to DTV by 2006. Although the FCC has targeted December 31, 2006 as the date by which all television broadcasters must return their analog licenses, the Balanced Budget Act of 1997 allows broadcasters to keep both their analog and digital licenses until at least 85 percent of the television households in their respective markets can receive a digital signal. Local zoning laws and the lack of qualified tall-tower builders to construct the facilities needed for DTV operations, among other factors, may cause delays in this transition. The FCC is currently considering a rule which would set strict time limits within which local zoning authorities must act on zoning petitions by local television stations. The Commission has announced that it will review the progress of DTV every two years and make adjustments to the 2006 target date, if necessary. The Commission is currently considering whether cable television system operators should be required to carry stations' DTV signals in addition to the currently required carriage of stations' analog signals. In July 1998, the Commission issued a Notice of Proposed Rulemaking posing seven different options for the carriage of digital signals and solicited comments from all interested parties. The Commission has yet to issue a decision on this matter. Under their network affiliation agreements and licensing agreements with program syndicators, television stations obtain the valuable right to serve as the exclusive or primary source of certain programming in their local service areas. A recent FCC proposal aimed at rectifying perceived problems in the Satellite Home View Act (which established a copyright license for limited distribution of television network programming to direct broadcast satellite viewers) also could result in significant shrinkage of the area generally considered to be the station's local service area. Whether the FCC will adopt this proposal and how new FCC rules may be affected by related legislative or judicial action cannot be predicted at this time. 6 9 The foregoing does not purport to be a complete summary of all the provisions of the Act or the regulations and policies of the FCC thereunder. Proposals for additional or revised regulations and requirements are pending before and are considered by Congress and federal regulatory agencies from time to time. The Company cannot predict the effect of existing and proposed federal legislation, regulations and policies on its broadcast business. Also, various of the foregoing matters are now, or may become, the subject of court litigation, and the Company cannot predict the outcome of any such litigation or the impact on its broadcast business. EMPLOYEES As of December 31, 1998, the Company had 6,920 full-time employees. The Company has approximately 900 employees who are represented by various employee unions. The majority of these employees are located in Providence, Rhode Island, with the remaining union employees working at various television stations. The Company believes its relations with its employees are satisfactory. ITEM 2. PROPERTIES At December 31, 1998, the Company owned broadcast operating facilities in the following U. S. cities: Dallas, Texas (WFAA); Houston, Texas (KHOU); Seattle, Washington (KING); Sacramento, California (KXTV); Portland, Oregon (KGW); Charlotte, North Carolina (WCNC); San Antonio, Texas (KENS); Norfolk, Virginia (WVEC); New Orleans, Louisiana (WWL); Louisville, Kentucky (WHAS); Albuquerque, New Mexico (KASA); Tulsa, Oklahoma (KOTV); Spokane, Washington (KREM); Tucson, Arizona (KMSB); and Boise, Idaho (KTVB). The Company also leases broadcast facilities for the operations of KMOV in St. Louis, Missouri and KHNL in Honolulu, Hawaii. Four of the Company's broadcast facilities use broadcast towers that are jointly owned with another network-affiliated television station in the same market (WFAA, KXTV, KENS and KOTV). The broadcast towers associated with the Company's other television stations are wholly-owned by the Company. The Company leases a facility in Washington, D.C. that is used by its broadcasting and publishing operations for the gathering and distribution of news from the nation's capital. This facility includes a broadcast studio as well as general office space. The Company owns and operates a newspaper printing facility and distribution center in Plano, Texas where seven high-speed offset presses are housed to print The Dallas Morning News. An eighth press of The Dallas Morning News has been placed with a broker for sale in anticipation of the installation of a replacement press, which will provide improved production capacity and greater flexibility. Certain other operations of The Dallas Morning News are housed in a Company-owned, five-story building in downtown Dallas, which is equipped with computerized input and photocomposition equipment and other equipment that is used in the production of both news and advertising copy. The Company also owns and operates a newspaper printing facility in Providence, Rhode Island, where three high-speed flexographic presses are housed to print The Providence Journal. The remainder of The Providence Journal's operations is housed in a Company-owned, five-story building in downtown Providence. This facility is equipped with computerized input and photocomposition equipment and other equipment that is used in the production of both news and advertising copy. The Company owns and operates a newspaper publishing facility, a commercial printing facility and various other properties in southern California. The newspaper publishing facility is located in downtown Riverside, California and is equipped with three high-speed offset presses to print The Press-Enterprise. This facility also contains computerized input and photocomposition equipment and other equipment that is used in the production of both news and advertising copy. The Company owns other newspaper production facilities in Owensboro and Henderson, Kentucky and Bryan-College Station, Texas. During 1998, the Company converted a former newsprint warehouse in downtown Dallas into a fully-equipped digital television facility for its 24-hour regional cable news operation, Texas Cable News ("TXCN"). TXCN's studios and newsroom, along with its editorial, sales, marketing and administrative offices are located in this facility. TXCN 7 10 began transmitting news and information 24 hours a day on January 1, 1999. TXCN's signal is distributed to cable companies by either fiber or Ku-band satellite. Northwest Cable News ("NWCN"), the Company's regional cable news network in the Pacific Northwest, conducts its operations from the KING facility. The Company's corporate operations, several departments of The Dallas Morning News and certain broadcast administrative functions have offices located in downtown Dallas in a 17-story office building owned by the Company. All of the foregoing operations have additional leasehold and other interests that are used in their respective activities. The Company believes its properties are in satisfactory condition and are well maintained, and that such properties are adequate for present operations. ITEM 3. LEGAL PROCEEDINGS There are legal proceedings pending against the Company, including a number of actions for alleged libel and slander. In the opinion of management, liabilities, if any, arising from these actions would not have a material adverse effect on the consolidated results of operations, liquidity or financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareholders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this Form 10-K. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's authorized common equity consists of 450,000,000 shares of Common Stock, par value $1.67 per share. The Company has two series of Common Stock outstanding, Series A and Series B. Shares of the two series are identical in all respects except that 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. Shares of the Company's Series A Common Stock are traded on the New York Stock Exchange (NYSE symbol: BLC). There is no established public trading market for shares of Series B Common Stock. The Company has also issued certain Preferred Stock Purchase Rights that accompany the outstanding shares of the Company's Common Stock. See Note 9 of the Notes to Consolidated Financial Statements. On June 5, 1998, the Company completed a two-for-one stock split in the form of a stock dividend whereby one additional share of Series A and Series B Common Stock was issued for each share of Series A and Series B Common Stock outstanding on May 22, 1998, the record date for the split. The effect of the stock split was to double the number of shares outstanding and reduce earnings per share amounts by one-half. Total shareholders' equity and the proportionate ownership in the Company of individual shareholders were not affected by the stock split. All earnings and dividends per share, weighted average shares outstanding and share trading prices in this report have been restated to reflect the stock split. 8 11 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.
- -------------------------------------------------------------------------------------- HIGH LOW CLOSE DIVIDENDS - -------------------------------------------------------------------------------------- 1998 Fourth Quarter $19 15/16 $13 15/16 $19 15/16 $.06 Third Quarter $25 5/8 $18 3/8 $20 $.06 Second Quarter $27 3/4 $22 1/8 $24 3/8 $.06 First Quarter $28 15/32 $26 3/16 $27 1/2 $.06 - -------------------------------------------------------------------------------------- 1997 Fourth Quarter $28 1/16 $22 1/2 $28 1/16 $.055 Third Quarter $25 5/8 $20 17/32 $24 1/4 $.055 Second Quarter $21 1/2 $17 1/16 $20 13/16 $.055 First Quarter $19 3/4 $16 5/8 $18 7/16 $.055 - --------------------------------------------------------------------------------------
On January 29, 1999, the closing price for the Company's Series A Common Stock as reported on the New York Stock Exchange was $18.8125. 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 19,483 and 601, respectively. 9 12 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, 1998. For a more complete understanding of this selected financial data, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8. "Financial Statements and Supplementary Data," including the Notes thereto. Certain operations have been reclassified to reflect new requirements under segment reporting standards.
- --------------------------------------------------------------------------------------------------------------------- In thousands, except per share amounts 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Broadcasting revenues (a) $ 609,068 $ 536,737 $ 333,396 $ 322,642 $258,040 Newspaper publishing revenues (b) 787,541 694,495 487,560 409,099 369,366 Other (c) 10,736 17,149 3,352 3,602 719 - --------------------------------------------------------------------------------------------------------------------- Net operating revenues $1,407,345 $1,248,381 $ 824,308 $ 735,343 $628,125 ======================================================================== Net earnings $ 64,902 $ 82,972 $ 87,505 $ 66,576 $ 68,867 ======================================================================== Per share amounts: (d) Basic earnings per share $ .53 $ .72 $ 1.07 $ .85 $ .86 Diluted earnings per share $ .52 $ .71 $ 1.05 $ .84 $ .85 Cash dividends $ .24 $ .22 $ .21 $ .16 $ .15 Other data: Segment operating cash flow: (e) Broadcasting (f) $ 238,745 $ 216,654 $ 122,837 $ 121,716 $106,396 Newspaper publishing (g) $ 207,663 $ 204,898 $ 127,945 $ 90,915 $ 87,284 Segment operating cash flow margins: Broadcasting (f) 39.2% 40.4% 36.8% 37.7% 41.2% Newspaper publishing (g) 26.4% 29.5% 26.2% 22.2% 23.6% - --------------------------------------------------------------------------------------------------------------------- Total assets (a) (b) $3,539,089 $3,622,954 $1,224,072 $1,154,022 $913,791 Long-term debt (h) $1,634,029 $1,614,045 $ 631,857 $ 557,400 $330,400 - ---------------------------------------------------------------------------------------------------------------------
(a) The Company purchased WWL in June 1994, KIRO in February 1995, nine television stations as part of the PJC acquisition in February 1997 and KENS in October 1997. KMOV was acquired in exchange for KIRO in June 1997. (b) The Company purchased The Eagle in December 1995, the Messenger-Inquirer in January 1996, The Providence Journal in February 1997, The Gleaner in March 1997, and increased its ownership in The Press-Enterprise to 100 percent in July 1997. (c) "Other" includes revenues associated with the Company's cable news operations (beginning in March 1997), television production subsidiary and a programming distribution partnership. The Company sold its interest in the partnership in February 1996. From March 1997 through June 1997, "Other" also included a cable network acquired in connection with the PJC acquisition. The cable network was subsequently disposed of and its operations are excluded effective July 1, 1997. (d) Per share amounts have been restated to reflect the two-for-one common stock split effected as a stock dividend on June 5, 1998 and have been rounded to the nearest whole cent. (e) Operating cash flow is defined as segment earnings from operations plus depreciation and amortization. Operating cash flow is used in the broadcasting and publishing industries to analyze and compare companies on the basis of operating performance, leverage and liquidity. However, operating cash flow should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. In 1998, newspaper publishing operating cash flow excludes a non-cash charge of $11,478 for the write-down of a press at TDMN. See Note 14 of the Consolidated Financial Statements. (f) Broadcasting operating cash flow in 1998 includes a non-recurring charge for a voluntary early retirement program and other employee reduction initiatives, totaling $6,996. (g) Newspaper publishing operating cash flow in 1998 includes certain voluntary early retirement charges of $6,344. (h) Long-term debt increased in 1997 due to borrowings of $1,100,545 to finance various acquisitions and in 1998 due to repurchases of 6,727,400 shares of the Company's stock for $129,786. 10 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is an owner and operator of 17 network-affiliated television stations and publisher of six daily newspapers. The following table sets forth the Company's major media assets by segment as of December 31, 1998:
- ------------------------------------------------------------------------------------------------------------------ Television Broadcasting - ------------------------------------------------------------------------------------------------------------------ Network Market Market Rank (a) Station Affiliation Status Acquired - ------------------------------------------------------------------------------------------------------------------ Dallas/Fort Worth 7 WFAA ABC Owned March 1950 Houston 11 KHOU CBS Owned February 1984 Seattle/Tacoma 12 KING NBC Owned February 1997 Seattle/Tacoma 12 KONG IND LMA February 1997 Sacramento(b) 20 KXTV ABC Owned February 1984 St. Louis 21 KMOV CBS Owned June 1997 Portland 23 KGW NBC Owned February 1997 Charlotte 28 WCNC NBC Owned February 1997 San Antonio 37 KENS CBS Owned October 1997 Hampton/Norfolk 40 WVEC ABC Owned February 1984 New Orleans 41 WWL CBS Owned June 1994 Louisville 48 WHAS ABC Owned February 1997 Albuquerque 49 KASA FOX Owned February 1997 Tulsa 59 KOTV CBS Owned February 1984 Honolulu 71 KHNL NBC Owned February 1997 Honolulu(c) 71 KFVE UPN/WB LMA February 1997 Spokane 72 KREM CBS Owned February 1997 Spokane(c) 72 KSKN UPN/WB LMA February 1997 Tucson 78 KMSB FOX Owned February 1997 Tucson 78 KTTU UPN LMA February 1997 Boise 125 KTVB NBC Owned February 1997 - ------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------- Newspaper Publishing - -------------------------------------------------------------------------------------------------------------------------- Daily Sunday Newspaper Location Acquired Circulation(e) Circulation(e) - -------------------------------------------------------------------------------------------------------------------------- The Dallas Morning News("TDMN") Dallas, TX (d) 515,181 780,084 The Providence Journal("PJ") Providence, RI February 1997 167,381 239,193 The Press-Enterprise ("PE") Riverside, CA July 1997 161,612 168,222 Messenger-Inquirer Owensboro, KY January 1996 31,767 34,991 The Eagle Bryan-College Station, TX December 1995 22,449 27,219 The Gleaner Henderson, KY March 1997 11,152 13,167 - --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- Other - --------------------------------------------------------------------------------------------------------------------------- Company Description - --------------------------------------------------------------------------------------------------------------------------- Northwest Cable News Cable news network offering regional news distributed to approximately 2 million ("NWCN") homes in the Pacific Northwest Texas Cable News ("TXCN") Cable news network offering regional news in Texas; operations began January 1, 1999 - ---------------------------------------------------------------------------------------------------------------------------
(a) Market rank is based on the relative size of the television market, or Designated Market Area ("DMA"), among the 211 generally recognized DMAs in the United States, based on November 1998 Nielsen estimates. (b) The Company has entered into an agreement to exchange KXTV for the ABC affiliate in Austin, Texas (market rank 60). See Other Matters. (c) The primary affiliation is with UPN. The WB network is currently a secondary affiliation. (d) The first issue of The Dallas Morning News was published by Belo on October 1, 1885. (e) Average paid circulation for the six months ended September 30, 1998, according to the Audit Bureau of Circulation's FAS-FAX report. The Company depends on advertising as its principal source of revenues. As a result, the Company's operations are sensitive to changes in the economy, particularly in the Dallas/Fort Worth metropolitan area, where its two largest properties are located. The Company also derives revenues, to a much lesser extent, from the daily sale of newspapers and from compensation paid by networks to its television stations for broadcasting network programming. 11 14 All references herein to broadcasting operating cash flow or newspaper publishing operating cash flow refer to segment earnings from operations plus depreciation and amortization, as defined in Item 6. "Selected Financial Data." Operating cash flow as defined should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. All references to earnings per share represent diluted earnings per share. Statements in Items 7. and 7A. and elsewhere in this Annual Report on Form 10-K concerning the Company's business outlook or future economic performance, anticipated profitability, revenues, expenses, capital expenditures or other financial items, together with the discussion regarding Year 2000 impact and other statements that are not historical facts, are "forward-looking statements" as that term is defined under applicable Federal Securities Laws. Forward-looking statements are subject to risks, uncertainties and other 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 advertising demand, interest rates and newsprint prices; technological changes; development of Internet commerce; industry cycles; changes in pricing or other actions by competitors and suppliers; regulatory changes; the effects of Company acquisitions and dispositions; and general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission ("SEC"), including this Annual Report on Form 10-K. RESULTS OF OPERATIONS (dollars in thousands, except per share amounts) 1998 COMPARED WITH 1997 Results for 1998 include a full year's operations for each of the following 1997 acquisitions: The Providence Journal Company ("PJC"), acquired February 28, 1997, The Gleaner, acquired March 31, 1997, The Press-Enterprise, acquired July 25, 1997 and KENS, acquired October 15, 1997. Also in 1997, TVFN, a cable network acquired in connection with PJC, was disposed of as a part of the acquisition of KENS. In addition, KIRO was exchanged for KMOV effective June 2, 1997. Consolidated Results of Operations The Company recorded net earnings of $64,902 or 52 cents per share for 1998, compared with $82,972 or 71 cents per share in 1997. Results for 1998 include non-recurring charges of $26,157, comprised of an $11,478 non-cash charge for the write-down of a press at The Dallas Morning News, separation costs of $14,229 associated with a voluntary early retirement program and other employee reduction initiatives and $450 for severance and asset disposal costs related to the termination of operations of the Company's programming subsidiary. These charges resulted in a reduction in earnings per share of 13 cents in 1998. In addition, the Company realized a net gain of two cents per share related to the disposition of its investment in Peapod, Inc. stock, which was acquired in the PJC acquisition. Excluding these non-recurring items, earnings per share for 1998 were 63 cents compared with 71 cents for 1997. Depreciation and amortization expense for 1998 was $159,442, excluding the $11,478 write-down of a press at TDMN, compared with 1997 depreciation and amortization of $134,993. The increase in 1998 is due to a full year's effect of the 1997 acquisitions. Interest expense in 1998 was $107,638, compared with $90,778 in 1997. Average debt levels in 1998 were up 14.3 percent from 1997 average debt levels, due to a full year's effect of the debt incurred to finance 1997 acquisitions and 1998 share repurchases of $129,786. In addition, the 1998 weighted average interest rate on total debt was 6.7 percent, compared with 6.6 percent in 1997. This increase was due to the conversion of $1 billion of revolving debt to fixed-rate debt during the second and third quarters of 1997. The effective tax rate in 1998 was 50.3 percent compared with 46.2 percent in 1997. The increase for 1998 was due primarily to lower pre-tax earnings and a full year's effect of non-deductible goodwill amortization expense. 12 15 Segment Results of Operations To enhance comparability of the Company's segment results of operations for the years ended December 31, 1998 and 1997, certain information below is presented on an "as adjusted" basis and takes into account the acquisitions of PJC, The Gleaner, The Press-Enterprise and KENS and reflects the KIRO/KMOV exchange as though each had occurred at the beginning of 1997. The "as adjusted" amounts exclude TVFN, which was acquired from PJC but subsequently disposed of in connection with the KENS acquisition. In addition, certain operations have been reclassified to reflect new requirements under Statement of Financial Accounting Standard ("SFAS") No. 131 "Disclosures about Segments of an Enterprise and Related Information."
- ----------------------------------------------------------------------------------------------------------------- % % Year ended December 31, 1998 1997 Change 1998 1997 Change - ----------------------------------------------------------------------------------------------------------------- As Adjusted As Reported ------------------------------------ ------------------------------------- Net Operating Revenues: Broadcasting $ 609,068 $ 580,908 4.8% $ 609,068 $ 536,737 13.5% Newspaper publishing 787,541 770,713 2.2% 787,541 694,495 13.4% Other 10,736 9,185 16.9% 10,736 17,149 (37.4)% Operating Cash Flow: Broadcasting $ 238,745 $ 235,375 1.4% $ 238,745 $ 216,654 10.2% Newspaper publishing (1) 207,663 217,928 (4.7)% 207,663 204,898 1.3% Other (4,182) (2,496) (67.5)% (4,182) (7,672) 45.5% - -----------------------------------------------------------------------------------------------------------------
(1) Both as reported and as adjusted operating cash flow for newspaper publishing in 1998 exclude the effect of the $11,478 non-cash charge to write down a press at TDMN. The discussion that follows compares segment operations on an "as adjusted" basis only. BROADCAST DIVISION Broadcasting revenues in 1998 were $609,068, an increase of 4.8 percent over 1997 revenues of $580,908. Double digit revenue increases were realized by several Belo television stations, including three stations in the top 25 markets (Sacramento, St. Louis and Portland). The majority of these revenue increases were attributable to political advertising revenues. Congressional and gubernatorial races in several states contributed to political advertising revenues of more than $36 million in 1998, compared with 1997 political advertising revenues of just over $7 million. Local advertising revenues in 1998 increased by 1.8 percent over the prior year due to early gains in automotive advertising and broadcast of the Winter Olympics on the Company's six CBS stations. These gains were offset by lower national advertising revenues, which were down 3.8 percent compared with 1997. The decline was attributable to generally weak demand from national advertisers beginning in the second quarter, which continued with the General Motors strike in the third quarter. Belo's Television Group includes four ABC affiliates, five NBC affiliates and six CBS affiliates, with the top three stations by market rank each affiliated with a different network (ABC in Dallas/Fort Worth, CBS in Houston and NBC in Seattle/Tacoma). This balance contributes to more stable revenues despite variations in network ratings performance, caused by factors such as prime time programming preferences and special events like the Olympics and the Super Bowl. Revenue increases by affiliate group in 1998 compared with 1997 were as follows: ABC, 4.6 percent; NBC, 4.2 percent; and CBS, 4.7 percent. Broadcasting operating cash flow increased 1.4 percent to $238,745 during 1998 compared with 1997 broadcasting operating cash flow of $235,375. Broadcasting operating cash flow margin of 39.2 percent was down from the 1997 margin of 40.5 percent. Excluding the effect of the fourth quarter 1998 charge for the voluntary early retirement program and other employee reduction initiatives totaling $6,996, operating cash flow was $245,741 and operating cash flow margin was 40.3 percent. Total cash expenses increased 7.2 percent in 1998, including the fourth quarter non-recurring charge. Excluding this charge, total cash expenses were up 5.1 percent, led by an increase in employee costs of 6 percent due to an increased number of employees (primarily in sales), normal merit adjustments, overtime and higher benefit costs. Programming expenses were higher in 1998 by nearly 10 percent as 13 16 programming content was improved at some of Belo's recently acquired stations. Other expenses were relatively flat when compared with 1997 as higher costs related to Olympic coverage were substantially offset by lower expenditures for advertising and promotion. NEWSPAPER PUBLISHING DIVISION Newspaper publishing revenues of $787,541 increased 2.2 percent in 1998 compared with 1997 revenues of $770,713. Revenues increased at all of the Company's newspapers, including .4 percent at The Dallas Morning News, 4.2 percent at The Providence Journal and 6.4 percent at The Press-Enterprise. Advertising revenues comprised 85 percent of total 1998 newspaper publishing revenues, circulation revenues accounted for 12 percent, and commercial printing contributed to the remainder. Newspaper volume is measured in column inches. Volume for TDMN was as follows (in thousands):
- ------------------------------------------------------------- Year ended December 31, 1998 1997 % Change - ------------------------------------------------------------- Full-run ROP inches (1) Classified 1,989 2,053 (3.1)% Retail 1,376 1,485 (7.3)% General 304 327 (7.0)% ----- ----- Total 3,669 3,865 (5.1)% - -------------------------------------------------------------
(1) Full-run ROP inches refers to the number of column inches of display and classified advertising that is printed and distributed in all editions of the newspaper. While advertising linage decreased in all three major categories at TDMN in 1998 versus 1997, the newspaper instituted rate increases in all categories effective January 1, 1998. These rate increases ranged from 5 percent to 12.75 percent. The decline in classified advertising volume was primarily in the classified employment category. In 1997, TDMN had a year of record performance and classified employment linage reached a five-year high. However, low unemployment levels in North Texas contributed to an 11.1 percent decline in employment classified advertising volume during 1998. Despite the decline in employment classified volume, higher average rates and increased linage in the automotive and real estate categories contributed to an overall year-to-year increase in total classified advertising revenues. Retail volumes declined 7.3 percent while average rates increased 3.9 percent, resulting in a 3.8 percent decrease in retail revenue in 1998 versus 1997. The decrease in retail advertising was primarily due to a decline in department store linage. General advertising revenues were down 8.2 percent due to a volume decline of 7 percent and lower average rates. Circulation revenues were lower by 5 percent due to declines in both daily and Sunday volumes of 1 percent and 1.5 percent, respectively, and higher contractor rates. Revenues for PJ were higher in 1998 versus 1997 due to gains in both retail and classified advertising. Higher rates contributed the majority of the increase in retail advertising revenue, with average rates during 1998 up 6.1 percent over the prior year. The 1998 classified advertising gain over the previous year was largely due to higher rates as volume gains in classified employment were offset by lower linage in automotive, rentals and merchandise classified advertising. General advertising volumes were down at PJ, primarily due to a decline in airline advertising. Circulation revenues were down .9 percent due to declines in daily and Sunday volume of 1.5 percent and 1.4 percent, respectively. Advertising revenue at PE increased 7.5 percent in 1998 compared with 1997, due primarily to increases in classified advertising, which improved 15.8 percent. Classified volumes were up 3.5 percent, most significantly in employment advertising, and average rates were better by 3.9 percent. Advertising revenue improvement was also the result of the expansion of PE's total market coverage program and an increase in preprints. Circulation revenues for PE in 1998 were unchanged relative to 1997 as increased volume in daily circulation was offset by decreased Sunday circulation. Newspaper publishing operating cash flow for 1998 was $207,663, a decrease of 4.7 percent when compared with $217,928 in 1997. Operating cash flow margin was 26.4 percent in 1998 compared to 28.3 percent in 1997. Excluding the effect of a $6,344 non-recurring charge for early retirement costs in the fourth quarter, newspaper 14 17 publishing operating cash flow for 1998 was $214,007 and the margin was 27.2 percent. Total cash expenses for the publishing segment were up $27,095 or 4.9 percent in 1998 compared with 1997, including the fourth quarter charge. Excluding the charge, cash expenses increased 3.8 percent. The largest contributing factor to the increase was newsprint, ink and other supplies expense, which was up 5.8 percent over last year as a result of higher newsprint prices. Employee costs for the publishing segment during 1998, excluding the early retirement charge, increased 2.6 percent over the prior year. Other production, distribution and operating costs were 3.4 percent higher in 1998, due to higher distribution costs and advertising and promotion efforts. OTHER Other revenues comprised the Company's regional cable news operations and programming subsidiary. The improvement in 1998 was due to increased revenues at Northwest Cable News, offset somewhat by slightly lower revenues at the programming subsidiary. Other operating cash flow declined due to start-up costs associated with TXCN, a regional cable news operation that was launched on January 1, 1999. Other operating cash flow also included a $450 non-recurring charge for severance and asset disposition costs related to the termination of operations of the programming subsidiary. 1997 COMPARED WITH 1996 Consolidated Results of Operations The Company recorded net earnings for 1997 of $82,972 or 71 cents per share, compared with $87,505 or $1.05 per share in 1996. Results for 1996 include a net gain of $3,895 (3 cents per share) on the sale of Maxam Entertainment, a programming distribution partnership, to CBS. Net earnings and earnings per share for 1997 were diluted by the amortization of intangibles, increased interest expense and an increase in shares outstanding as a result of the Company's acquisitions during 1997, as described previously. Depreciation and amortization expense in 1997 was $134,993 compared with $65,183 in 1996. The majority of the increase in 1997 was due to the PJC acquisition in February. Amortization of intangibles associated with PJC was approximately $39,024 for the year while additional depreciation expense due to the step-up in fixed asset basis was $4,729 in 1997. Interest expense for 1997 was $90,778 compared with $27,643 in 1996. Total borrowings for 1997 acquisitions were $1,100,545, a significant portion of which related to the PJC acquisition. Also contributing to the increase in 1997 interest expense was the additional debt associated with fourth quarter 1996 share repurchases of $306,146. In addition, during 1997 the Company converted $1 billion in revolving debt to fixed-rate debt to reduce the Company's exposure to interest rate risk. Overall, weighted average interest rates for 1997 increased to 6.6 percent from 5.7 percent in 1996. The effective tax rate for 1997 was 46.2 percent compared with 39.2 percent in 1996. The increase in the effective rate in 1997 was due primarily to the amortization of non-deductible goodwill and higher state taxes, both of which were a result of the PJC acquisition. 15 18 Segment Results of Operations To enhance comparability of Belo's segment results of operations for the years ended December 31, 1997 and 1996, certain information below is presented on an "as adjusted" basis and includes the acquisitions of PJC, The Gleaner, The Press-Enterprise and KENS and reflects the KIRO/KMOV exchange as though each had occurred at the beginning of the respective periods presented. The "as adjusted" amounts exclude TVFN, which was acquired from PJC but subsequently disposed of in connection with the KENS acquisition. In addition, certain operations have been reclassified to reflect new requirements under segment reporting standards.
- ------------------------------------------------------------------------------------------------------------------------ As Adjusted As Reported ------------------------------------------ ----------------------------------------- Year ended December 31, 1997 1996 % Change 1997 1996 % Change - ------------------------------------------------------------------------------------------------------------------------ Net Operating Revenues: Broadcasting $ 580,908 $ 560,759 3.6% $ 536,737 $ 333,396 61.0% Newspaper publishing 770,713 718,491 7.3% 694,495 487,560 42.4% Other 9,185 6,244 47.1% 17,149 3,352 * Operating Cash Flow: Broadcasting $ 235,375 $ 226,044 4.1% $ 216,654 $ 122,837 76.4% Newspaper publishing 217,928 164,361 32.6% 204,898 127,945 60.1% Other (2,496) (3,754) 33.5% (7,672) (865) * - ------------------------------------------------------------------------------------------------------------------------
*Not meaningful. The discussion that follows compares segment operations on an "as adjusted" basis only. BROADCAST DIVISION Broadcasting revenues in 1997 of $580,908 were $20,149 higher than 1996 broadcasting revenues of $560,759, an increase of 3.6 percent. Local and national spot revenues combined for an increase of $41,011, while political advertising revenues were down $24,636 compared with the prior year. Local revenues were 8.4 percent higher in 1997 compared with 1996, with increases in each of Belo's television markets with the exception of New Orleans and Honolulu, where local economic conditions were generally unfavorable throughout 1997. Of the 15 stations recording local revenue increases, 13 had increases of 5 percent or more and six were up 10 percent or more. The largest local revenue increases were in Seattle/Tacoma, Dallas/Fort Worth, Houston, St. Louis, Sacramento, Portland and Louisville, due largely to strong ratings, market growth and substantial automotive advertising. National revenues in 1997 were 9.1 percent higher than 1996, with 10 of Belo's television stations recording increases ranging from 8.1 percent to 22.6 percent. The most significant growth in national revenues occurred in the Dallas/Fort Worth, Seattle/Tacoma, Portland, Houston, St. Louis and San Antonio markets. Much of this growth was due to automotive, communications and financial advertising. Political revenues in 1997 decreased significantly from those in 1996, a Presidential election year that also included Senate races in Texas and California and several local and state political issues. Year-to-year spot revenue increases by affiliate group were as follows: ABC, 6.1 percent; CBS, 1.1 percent; and NBC, 2.5 percent. Broadcasting operating cash flow for 1997 was $235,375, an increase of 4.1 percent over 1996 broadcasting operating cash flow of $226,044. Operating cash flow margins grew slightly to 40.5 percent in 1997 compared with 40.3 percent in 1996. Revenues increased 3.6 percent, while cash expenses increased 3.2 percent. Salaries, wages and employee benefits expense was up 4.3 percent due to a greater number of employees, normal merit increases and higher bonuses. Programming expenses were 3.6 percent higher in 1997 due to increased rates for certain first-run programming. These increases were offset by savings of 8 percent in advertising and promotion expense, due to several significant advertising campaigns in 1996 that were not repeated in 1997. 16 19 NEWSPAPER PUBLISHING DIVISION Newspaper publishing revenues increased 7.3 percent in 1997. Revenues were up at The Dallas Morning News by 7.5 percent. The Providence Journal revenues improved 7.8 percent while The Press-Enterprise revenues were up 6.7 percent. Advertising revenues comprised 84 percent of total 1997 newspaper publishing revenues while circulation contributed 13 percent. Commercial printing contributed most of the remainder. Newspaper advertising volume is measured in column inches. Volume for TDMN was as follows (in thousands):
- ------------------------------------------------------------------------------ Years ended December 31, 1997 1996 % change - ------------------------------------------------------------------------------ Full-run ROP inches: Classified 2,053 2,057 (.2)% Retail 1,485 1,435 3.5% General 327 296 10.5% ----- ----- Total 3,865 3,788 2.0% - ------------------------------------------------------------------------------
Classified advertising revenue at TDMN increased 11.2 percent despite relatively flat volumes, due to higher average rates. Employment advertising led the improvement in classified over 1996 with increases in both volume and rate, while automotive and real estate advertising had higher rates but lower volumes. Retail advertising revenue at TDMN increased 7.7 percent due to a 3.5 percent increase in volume combined with a 4.1 percent increase in average rates. A 7.9 percent increase in general advertising revenue was driven by a 10.5 percent volume increase, primarily in the technology category, slightly offset by lower average rates. While year-to-year circulation volumes were relatively unchanged, circulation revenue at TDMN was down 3.4 percent due to changes in circulation mix between home delivery and single-copy sales. Advertising revenues at PJ increased 8.1 percent due to across-the-board rate increases effective January 1, 1997, PJ's first rate increases since October 1, 1995. Classified revenues in 1997 increased 12.5 percent over 1996, due primarily to the rate increases in the employment and automotive categories. Volumes were also up 4 percent in classified advertising. Retail advertising revenues were 11.6 percent higher than the prior year, due to the higher rates and increased volumes of 3.3 percent. On average, retail rates were up 9.6 percent over 1996. Contributing to the volume gains in 1997 were improvements in automotive and telecommunication advertising and gains from a new monthly Health & Fitness section. General advertising revenue was down slightly as airline advertising, which was significant in 1996 due to the completion of an airport renovation in Providence, was replaced in 1997 by lower-rate automotive advertising. Circulation revenue for PJ was up slightly due to increases in Sunday prices in February 1996 and daily home delivery prices in January 1997, which were offset by volume declines of 1 percent and 2.4 percent for daily and Sunday, respectively. The majority of PE's 1997 revenue improvement over 1996 was attributable to classified advertising, which was up 11.8 percent due to higher rates, offset somewhat by a reduction in volume. Circulation revenues for PE were up 2.6 percent in 1997 over 1996 due to both rate and volume increases. Newspaper publishing operating cash flow was $217,928 in 1997 and $164,361 in 1996, resulting in operating cash flow margins of 28.3 percent and 22.9 percent, respectively. The 32.6 percent increase in operating cash flow and corresponding improvement in operating cash flow margin were due to the 7.3 percent increase in revenues, while cash expenses were substantially unchanged. Newsprint, ink and other supplies expense was 13.5 percent lower than in 1996, due primarily to lower prices for newsprint, offset somewhat by increased consumption. Salaries, wages and employee benefits expense in 1997 was 4 percent higher due to a greater number of employees and merit increases. Other operating expenses were up 10.5 percent over 1996 due to increases in distribution expenses, outside services, features and news services, solicitation fees, advertising and promotion, and bad debt expense. 17 20 LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share amounts) Net cash provided by operations, bank borrowings and term debt are Belo's primary sources of liquidity. On an as reported basis, 1998 net cash provided by operations was $234,872, compared with $256,418 in 1997. During 1998, increases in cash earnings (defined as net earnings plus depreciation and amortization and other non-cash charges) and receivable collections were more than offset by greater working capital requirements for interest and 1997 bonuses paid in 1998 and the timing of payments for income taxes, including those resulting from acquisition-related transactions. Net cash provided by operations was used to fund capital expenditures, common stock dividends and a substantial portion of 1998 share repurchases of $129,786. As a result, long-term debt increased $19,984 from December 31, 1997 to December 31, 1998. During 1998, the Company recorded non-recurring charges of $26,157 comprising a non-cash charge of $11,478 for the write-down of a press at TDMN, separation costs of $14,229 associated with a voluntary early retirement program and other employee reduction initiatives, and $450 for severance and asset disposal costs related to the termination of operations of Belo's programming subsidiary. The majority of the separation costs were paid in 1998. At December 31, 1998, the Company had $1 billion in fixed-rate debt securities as follows: $250,000 of 6-7/8% Senior Notes due 2002; $300,000 of 7-1/8% Senior Notes due 2007; $200,000 of 7-3/4% Senior Debentures due 2027; and $250,000 of 7-1/4% Senior Debentures due 2027. The weighted average effective interest rate for these debt instruments is 7.3 percent. The Company also has $500,000 of additional debt securities available for issuance under a shelf registration statement filed in April 1997. Future issues of fixed-rate debt may be used to refinance variable-rate debt in whole or in part or for other corporate purposes as determined by management. At December 31, 1998, the Company had a $1 billion variable-rate revolving credit agreement with a syndicate of 26 banks under which borrowings were $580,000. Borrowings under the agreement mature upon expiration of the agreement on August 29, 2002, with one year extensions possible through August 29, 2004, at the request of the Company and with the consent of the participating banks. The Company also had $31,500 of short-term unsecured notes outstanding at December 31, 1998. These borrowings may be converted at the Company's option to revolving debt. Accordingly, such borrowings are classified as long-term in the Company's financial statements. The Company is required to maintain certain financial ratios as of the end of each quarter, as defined in its revolving credit agreement. As of December 31, 1998, the Company was in compliance with all ratio requirements. On June 25, 1998, the Company announced its intention to repurchase shares from time to time under its existing share repurchase authorization. This repurchase authority covered 10,673,744 shares at the time of the announcement. As of December 31, 1998, 6,727,400 shares had been repurchased for an aggregate purchase price of $129,786. These purchases were funded primarily through cash from operations and borrowings under the Company's revolving credit facility. All treasury shares purchased during 1998 have been retired. The remaining authorization for the repurchase of shares as of December 31, 1998 was 3,946,344 shares. During January and February 1999, the Company repurchased an additional 861,200 shares of its stock for an aggregate cost of $15,990. During 1998, the Company paid dividends of $29,694 or 24 cents per share on Series A and Series B Common Stock outstanding, compared with $24,428 or 22 cents per share during 1997. The higher dividends in 1998 were due to the higher dividend rate and the full-year effect of the shares issued in 1997 in connection with the PJC acquisition. In June 1998, the Company completed a two-for-one stock split in the form of a dividend. All record holders of Series A and Series B Common Stock as of May 22, 1998 received an equal number of Series A or Series B shares on June 5, 1998. All earnings and dividends per share, weighted average shares outstanding and share trading prices have been restated to retroactively reflect the stock split. Total capital expenditures for 1998 were $102,927. The Company's television stations spent $55,035, primarily on new broadcast equipment, including $23,328 for equipment to be used in the transmission of digital television ("DTV"). Newspaper publishing capital expenditures were $25,847, and included publishing equipment and amounts for certain system replacements. 1998 capital expenditures for building and equipment installations necessary to commence operations at TXCN were approximately $16 million. Capital spending in 1999 is expected to be approximately $97 million and includes $22.7 million for additional DTV expenditures and $15.7 million toward the purchase of the new press at TDMN. The total cost to purchase and install the new press over the next eighteen months is approximately $36 million. The new press will replace an existing press that, because of 18 21 production limitations, is significantly less efficient than TDMN's other presses. Because the output of the older press can be managed on an interim basis by the other presses, it has been placed with a broker for sale. As of December 31, 1998, required future payments for capital projects in 1999 were $31,810. The Company expects to finance future capital expenditures using cash generated from operations and, when necessary, borrowings under the revolving credit agreement. The Company believes its current financial condition and credit relationships are adequate to fund both its current obligations as well as near-term growth. OTHER MATTERS The Company has announced plans to exchange its ABC affiliate in Sacramento, California plus up to $55 million in cash for the ABC affiliate in Austin, Texas. The Company will report a non-cash gain on the transaction. While the amount of the non-cash gain has not been determined, it is expected to be significant. The Company anticipates closing the transaction in the second quarter of 1999 following FCC and other regulatory approvals. Statement of Position ("SOP") 98-1 requires the capitalization of internally developed software costs beginning January 1, 1999. The Company's 1999 capital plan includes certain system replacements that will be accounted for in accordance with this new accounting guidance. As it has been the Company's practice to capitalize certain system development costs in the past, the adoption of SOP 98-1 is not expected to have a significant effect on future results of operations. YEAR 2000 The Company has performed an enterprise-wide evaluation to assess the ability of its information technology ("IT") and non-IT systems to function properly and execute transactions relating to the year 2000. The program includes the following phases: (1) project identification, (2) estimation of costs and target end dates, (3) system remediation or replacement, (4) testing, (5) integration, and (6) vendor compliance assessment. The Company has substantially completed the first two phases of the program. Active management of projects in all other phases is ongoing. All phases of the program are expected to be completed by December 31, 1999 or sooner. The Company is in the process of replacing systems in the Publishing Division, including certain systems related to advertising, circulation and editorial applications. Remediation and replacement of other systems in both the Publishing and Broadcast Divisions is also underway. The Company expects to remediate or replace the affected systems in a timely manner. The Company's program includes testing of systems that have been corrected, upgraded or replaced and testing of applications and equipment identified as compliant. Once a system has been fully tested, it is integrated into the production environment. While testing provides assurance that individual applications will properly perform required functions in 2000, it is not possible to completely simulate the effect of Year 2000 requirements. The vendor compliance assessment phase includes contacting significant third-party vendors in an effort to determine the state of their Year 2000 readiness. As are all businesses, Belo is dependent upon certain vendors and suppliers whose delivery of product or service is material to the production and distribution of the Company's products. Material vendors include, but are not limited to, utilities providers, telecommunications, news and content providers, television network and programming suppliers, and newsprint suppliers. The Company has initiated formal communications with its significant vendors and is monitoring responses and implementing additional follow-up measures as necessary. However, there can be no assurances that IT and non-IT systems of third parties that the Company may rely upon will be Year 2000 compliant in a timely manner, and therefore the Company could be adversely affected by failure of a significant third party to become Year 2000 compliant. The Company believes the Year 2000 issues associated with its IT and non-IT systems will be mitigated by the implementation of previously planned system replacements. Costs associated with these system replacements have been included in the Company's capital plans and have been funded primarily with cash provided by operations. The 19 22 Company has expensed $3.1 million in connection with its Year 2000 program through December 31, 1998, including $2.8 million expensed in 1997, and does not expect remaining Year 2000 expenses to be significant. The business risks to the Company for failure to achieve Year 2000 compliance vary, and depend upon the system and the business unit affected. While the Company believes its Year 2000 projects will be completed on a timely basis, failure to successfully complete significant portions of its Year 2000 program or failure by significant third parties to be Year 2000 compliant could have a material adverse effect on various phases of the Company's newspaper and broadcasting operations, and therefore, on its operating results and financial condition. Although the Company has not adopted a formal contingency plan, it is in the process of reviewing existing contingency plans and assessing alternatives at the individual project level in the event Year 2000 issues arise. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The market risk inherent in the Company's financial instruments represents the potential loss arising from adverse changes in interest rates. The Company's strategy in managing its exposure to interest rate changes is to maintain a balance of fixed and variable-rate debt instruments. See Note 4 to the Consolidated Financial Statements for information concerning the contractual interest rates of the Company's debt. At December 31, 1998 and 1997, the fair value of the Company's fixed-rate debt was estimated to be $1,035,965 and $1,024,515, 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. Such fair values exceeded the carrying value of fixed-rate debt at December 31, 1998 and 1997 by $35,965 and $24,515, respectively. Various financial instruments issued by the Company are sensitive to changes in interest rates. Interest rate changes would result in gains or losses in the market value of the Company's fixed-rate debt due to differences between the current market interest rates and the rates governing these instruments. With respect to the Company's fixed-rate debt outstanding at December 31, 1998 and 1997, a 10 percent decline in interest rates would have resulted in no material effect on the Company's consolidated financial position, results of operations or cash flows. With respect to the floating-rate debt at December 31, 1998, a 10 percent increase in interest rates would result in a $3,492 annual change in the Company's pre-tax earnings and cash flows. In addition to interest rate risk, the Company has exposure to changes in the price of newsprint. The average price of newsprint is expected to be lower in 1999 than 1998, although future prices for newsprint cannot be predicted with certainty. The Company historically has managed the risk of price increases through a combination of rate increases and expense reductions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, together with the Report of Independent Auditors, are included elsewhere in this document. 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 Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the headings "Outstanding Capital Stock and Stock Ownership of Directors, Certain Executive Officers and Principal Shareholders," "Executive Officers of the Company," "Election of Directors" and "Executive Compensation and Other Matters" contained in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 12, 1999, is incorporated herein by reference. 20 23 ITEM 11. EXECUTIVE COMPENSATION The information set forth under the heading "Executive Compensation and Other Matters" contained in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 12, 1999, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the heading "Outstanding Capital Stock and Stock Ownership of Directors, Certain Executive Officers and Principal Shareholders" contained in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 12, 1999, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the heading "Certain Transactions" contained in the definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 12, 1999, is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The financial statements listed in the Index to Financial Statements included in the Table of Contents are filed as part of this report. (2) The financial schedules required by Regulation S-X are either not applicable or are included in the information provided in the Notes to Consolidated Financial Statements, which are filed as part of this report. (3) Exhibits Exhibits marked with an asterisk (*) are incorporated by reference to documents previously filed by the Company with the Securities and Exchange Commission, as indicated. Exhibits marked with a tilde (~) are management contracts or compensatory plan contracts or arrangements filed pursuant to Item 601 (b)(10)(iii)(A) of Regulation S-K. All other documents are filed with this report.
Exhibit Number Description ------- ----------- 2.1 * Amended and Restated Agreement and Plan of Merger, dated as of September 26, 1996 (Appendix A of the Joint Proxy Statement/Prospectus of Belo and Providence Journal Company included in Belo's Registration Statement on Form S-4 (Registration No. 333-19337) filed with the Commission on January 8, 1997) 3.1 * Certificate of Incorporation of the Company (Exhibit 3.1 to the Company's Amended Annual Report on Form 10-K/A dated April 8, 1996 (the "1995 Form 10-K/A")) 3.2 * Certificate of Correction to Certificate of Incorporation dated May 13, 1987 (Exhibit 3.2 to the 1995 Form 10-K/A) 3.3 * Certificate of Designation of Series A Junior Participating Preferred Stock of the Company dated April 16, 1987 (Exhibit 3.3 to the 1995 Form 10-K/A) 3.4 * Certificate of Amendment of Certificate of Incorporation of the Company dated May 4, 1988 (Exhibit 3.4 to the 1995 Form 10-K/A)
21 24 EXHIBIT NUMBER DESCRIPTION 3.5 * Certificate of Amendment of Certificate of Incorporation of the Company dated May 3, 1995 (Exhibit 3.5 to the Company's Annual Report on Form 10-K dated February 28, 1996 (the "1995 Form 10-K")) 3.6 * Certificate of Amendment of Certificate of Incorporation of the Company dated May 15, 1998 (Exhibit 3.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 (the "2nd Quarter 1998 Form 10-Q")) 3.7 * Amended Certificate of Designation of Series A Junior Participating Preferred Stock of the Company dated May 4, 1988 (Exhibit 3.6 to the 1995 Form 10-K/A) 3.8 * Certificate of Designation of Series B Common Stock of the Company dated May 4, 1988 (Exhibit 3.7 to the 1995 Form 10-K/A) 3.9 * Amended and Restated Bylaws of the Company, effective September 18, 1998 (Exhibit 3.9 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998) 4.1 Certain rights of the holders of the Company's Common Stock are set forth in Exhibits 3.1-3.9 above. 4.2 * Specimen Form of Certificate representing shares of the Company's Series A Common Stock (Exhibit 4.2 to the Company's Annual Report on Form 10-K dated March 18, 1998 (the "1997 Form 10-K")) 4.3 * Specimen Form of Certificate representing shares of the Company's Series B Common Stock (Exhibit 4.3 to the 1997 Form 10-K) 4.4 * Amended and Restated Form of Rights Agreement as of February 28, 1996 between the Company and Chemical Mellon Shareholder Services, L.L.C., a New York banking corporation (Exhibit 4.4 to the 1995 Form 10-K) 4.5 * Supplement No. 1 to Amended and Restated Rights Agreement between the Company and The First National Bank of Boston dated as of November 11, 1996 (Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996) 4.6 Instruments defining rights of debt securities: (1) * Indenture dated as of June 1, 1997 between the Company and The Chase Manhattan Bank, as Trustee (Exhibit 4.6(1) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 (the "2nd Quarter 1997 Form 10-Q")) (2) * (a) $200 million 6-7/8% Senior Note due 2002 (Exhibit 4.6(2)(a) to the 2nd Quarter 1997 Form 10-Q) * (b) $50 million 6-7/8% Senior Note due 2002 (Exhibit 4.6(2)(b) to the 2nd Quarter 1997 Form 10-Q) (3) * (a) $200 million 7-1/8% Senior Note due 2007 (Exhibit 4.6(3)(a) to the 2nd Quarter 1997 Form 10-Q) * (b) $100 million 7-1/8% Senior Note due 2007 (Exhibit 4.6(3)(b) to the 2nd Quarter 1997 Form 10-Q) (4) * $200 million 7-3/4% Senior Debenture due 2027 (Exhibit 4.6(4) to the 2nd Quarter 1997 Form 10-Q) (5) * Officer's Certificate dated June 13, 1997 establishing terms of debt securities pursuant to Section 3.1 of the Indenture (Exhibit 4.6(5) to the 2nd Quarter 1997 Form 10-Q) 22 25 EXHIBIT NUMBER DESCRIPTION (6) * (a) $200 million 7-1/4% Senior Debenture due 2027 (Exhibit 4.6(6)(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997 (the "3rd Quarter 1997 Form 10-Q")) * (b) $50 million 7-1/4% Senior Debenture due 2027 (Exhibit 4.6(6)(b) to the 3rd Quarter 1997 Form 10-Q) (7) * Officer's Certificate dated September 26, 1997 establishing terms of debt securities pursuant to Section 3.1 of the Indenture (Exhibit 4.6(7) to the 3rd Quarter 1997 Form 10-Q) 10.1 Contracts relating to television broadcasting: (1) * Form of Agreement for Affiliation between WFAA-TV in Dallas, Texas and ABC (Exhibit 10.1(1) to the 1995 Form 10-K/A) 10.2 Financing agreements: (1) * Amended and Restated Credit Agreement (Five-year $1,000,000,000 revolving credit and competitive advance facility dated as of August 29, 1997 among the Company and The Chase Manhattan Bank, as Administrative Agent and Competitive Advance Facility Agent, Bank of America National Trust and Savings Association and Bank of Tokyo-Mitsubishi, Ltd., as Co-Syndication Agents, and NationsBank, as Documentation Agent) (Exhibit 10.2(1) to the 3rd Quarter 1997 Form 10-Q) 10.3 Compensatory plans: ~(1) The A. H. Belo Corporation Employee Savings and Investment Plan: * (a) The A. H. Belo Corporation Employee Savings and Investment Plan Amended and Restated January 1, 1998 (Exhibit 10.3(1)(a) to the 1997 Form 10-K) (b) First Amendment to A. H. Belo Corporation Employee Savings and Investment Plan (c) Second Amendment to A. H. Belo Corporation Employee Savings and Investment Plan * (d) Restated Master Trust Agreement between the Company and Fidelity Management Trust Company, as restated and dated March 13, 1998 (Exhibit 10.3(1)(b) to the 1997 Form 10-K) ~(2) The A. H. Belo Corporation 1986 Long-Term Incentive Plan: * (a) The A. H. Belo Corporation 1986 Long-Term Incentive Plan (Effective May 3, 1989, as amended by Amendments 1, 2, 3, 4, and 5) (Exhibit 10.3(2) to the Company's Annual Report on Form 10-K dated March 10, 1997 (the "1996 Form 10-K")) * (b) Amendment No. 6 to 1986 Long-Term Incentive Plan (Exhibit 10.3(2)(b) to the 1997 Form 10-K) * (c) Amendment No. 7 to 1986 Long-Term Incentive Plan (Exhibit 10.3(9) to the 1995 Form 10-K) * (d) Amendment No. 8 to 1986 Long-Term Incentive Plan (Exhibit 10.3(2)(d) to the 2nd Quarter 1998 Form 10-Q) ~(3) * A. H. Belo Corporation 1995 Executive Compensation Plan, as restated to incorporate amendments through December 4, 1997 (Exhibit 10.3(3) to the 1997 Form 10-K) * (a) Amendment to 1995 Executive Compensation Plan, dated July 21, 1998 (Exhibit 10.3 (3)(a) to the 2nd Quarter 1998 Form 10-Q) ~(4) * Management Security Plan (Exhibit 10.3(1) to the 1996 Form 10-K) 23 26 EXHIBIT NUMBER DESCRIPTION ~(5) A. H. Belo Corporation Supplemental Executive Retirement Plan: * (a) A. H. Belo Corporation Supplemental Executive Retirement Plan (Exhibit 10.3(27) to the Company's Annual Report on Form 10-K dated March 18, 1994 (the "1993 Form 10-K")) * (b) Trust Agreement dated February 28, 1994, between the Company and Mellon Bank, N.A. (Exhibit 10.3(28) to the 1993 Form 10-K) 10.4 Agreement with Officers: (1) * Separation Agreement between A. H. Belo Corporation and Michael D. Perry dated June 30, 1998 (Exhibit 10.4 to the 2nd Quarter 1998 Form 10-Q) 12 Ratio of Earnings to Fixed Charges 21 Subsidiaries of the Company 23 Consent of Ernst & Young LLP 27 Financial Data Schedule (filed electronically with the SEC) (b) Reports on Form 8-K. During the last quarter covered by this report, there were no reports on Form 8-K filed. 24 27 SIGNATURES 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. A. H. BELO CORPORATION By: /s/ ------------------------------------- Robert W. Decherd Chairman of the Board, President & Chief Executive Officer Dated: March 17, 1999 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:
SIGNATURE TITLE DATE --------- ----- ---- /s/ Chairman of the Board, President March 17, 1999 - ------------------------------------ & Chief Executive Officer Robert W. Decherd /s/ Vice Chairman of the March 17, 1999 - ------------------------------------ Board and President/ Ward L. Huey, Jr. Broadcast Division /s/ Director, President/Publishing March 17, 1999 - ------------------------------------ Division and Publisher/ Burl Osborne The Dallas Morning News /s/ Director March 17, 1999 - ------------------------------------ John W. Bassett, Jr. /s/ Director March 17, 1999 - ------------------------------------ Henry P. Becton, Jr. /s/ Director March 17, 1999 - ------------------------------------ Fanchon M. Burnham /s/ Director March 17, 1999 - ------------------------------------ Judith L. Craven, M.D., M.P.H. /s/ Director March 17, 1999 - ------------------------------------ Roger A. Enrico /s/ Director March 17, 1999 - ------------------------------------ Stephen Hamblett /s/ Director March 17, 1999 - ------------------------------------ Dealey D. Herndon
25 28
SIGNATURE TITLE DATE --------- ----- ---- /s/ Director March 17, 1999 - ------------------------------------ Arturo Madrid, Ph.D. /s/ Director and Former March 17, 1999 - ------------------------------------ Chairman of the Board James M. Moroney, Jr. /s/ Director March 17, 1999 - ------------------------------------ Hugh G. Robinson /s/ Director March 17, 1999 - ------------------------------------ William T. Solomon /s/ Director March 17, 1999 - ------------------------------------ Thomas B. Walker, Jr. /s/ Director March 17, 1999 - ------------------------------------ J. McDonald Williams /s/ Senior Vice President/ March 17, 1999 - ------------------------------------ Chief Financial Officer Dunia A. Shive
26 29 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders A. H. Belo Corporation We have audited the accompanying consolidated balance sheets of A. H. Belo Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 A. H. Belo Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Dallas, Texas January 27, 1999 27 30 CONSOLIDATED STATEMENTS OF EARNINGS A. H. BELO CORPORATION AND SUBSIDIARIES
Years ended December 31, - ----------------------------------------------------------------------------------------------------------- In thousands, except per share amounts 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- NET OPERATING REVENUES (Note 3) Broadcasting $ 609,068 $ 536,737 $ 333,396 Newspaper publishing 787,541 694,495 487,560 Other 10,736 17,149 3,352 - ----------------------------------------------------------------------------------------------------------- Total net operating revenues 1,407,345 1,248,381 824,308 - ----------------------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES Salaries, wages and employee benefits (Notes 6 and 7) 455,526 391,726 231,856 Other production, distribution and operating costs (Note 8) 359,224 328,719 215,295 Newsprint, ink and other supplies 173,911 152,141 146,325 Depreciation 84,578 73,089 45,408 Amortization (Note 3) 74,864 61,904 19,775 Non-recurring charges (Note 2) 26,157 -- -- - ----------------------------------------------------------------------------------------------------------- Total operating costs and expenses 1,174,260 1,007,579 658,659 - ----------------------------------------------------------------------------------------------------------- Earnings from operations 233,085 240,802 165,649 - ----------------------------------------------------------------------------------------------------------- OTHER INCOME AND EXPENSE Interest expense (Note 4) (107,638) (90,778) (27,643) Other, net (Note 10) 5,013 4,098 6,034 - ----------------------------------------------------------------------------------------------------------- Total other income and expense (102,625) (86,680) (21,609) - ----------------------------------------------------------------------------------------------------------- EARNINGS Earnings before income taxes 130,460 154,122 144,040 Income taxes (Note 5) 65,558 71,150 56,535 - ----------------------------------------------------------------------------------------------------------- Net earnings (Note 12) $ 64,902 $ 82,972 $ 87,505 ======================================= Net earnings per share (Notes 9 and 11): Basic $ .53 $ .72 $ 1.07 Diluted $ .52 $ .71 $ 1.05 Weighted average shares outstanding (Notes 9 and 11): Basic 123,508 115,692 81,780 Diluted 124,836 117,122 83,004 Dividends per share $ .24 $ .22 $ .21 - -----------------------------------------------------------------------------------------------------------
28 31 CONSOLIDATED BALANCE SHEETS A. H. BELO CORPORATION AND SUBSIDIARIES
ASSETS December 31, ============================================================================= In thousands 1998 1997 - ----------------------------------------------------------------------------- Current assets: Cash and temporary cash investments $ 19,451 $ 11,852 Accounts receivable (net of allowance of $7,823 and $8,314 in 1998 and 1997, respectively) 211,428 220,297 Inventories 20,308 20,356 Deferred income taxes (Note 5) 11,742 12,626 Other current assets 12,852 11,865 - ----------------------------------------------------------------------------- Total current assets 275,781 276,996 Property, plant and equipment, at cost: Land 72,904 70,710 Buildings and improvements 266,426 259,594 Broadcast equipment 263,553 222,523 Newspaper publishing equipment (Note 2) 257,732 278,037 Other 132,971 92,222 Advance payments on plant and equipment expenditures (Note 8) 61,921 30,146 - ----------------------------------------------------------------------------- Total property, plant and equipment 1,055,507 953,232 Less accumulated depreciation 428,754 344,914 - ----------------------------------------------------------------------------- Property, plant and equipment, net 626,753 608,318 Intangible assets, net (Note 3) 2,543,143 2,626,953 Other assets (Note 6) 93,412 110,687 - ----------------------------------------------------------------------------- Total assets $3,539,089 $3,622,954 - -----------------------------------------------------------------------------
29 32 CONSOLIDATED BALANCE SHEETS (CONTINUED) A. H. BELO CORPORATION AND SUBSIDIARIES
LIABILITIES AND SHAREHOLDERS' EQUITY December 31, ========================================================================================================== In thousands, except share and per share data 1998 1997 - ---------------------------------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 56,044 $ 43,818 Accrued compensation and benefits 58,861 69,643 Other accrued expenses 32,485 41,374 Income taxes payable (Note 5) -- 29,355 Advance subscription payments 21,538 18,327 Accrued interest payable 11,820 11,945 - ---------------------------------------------------------------------------------------------------------- Total current liabilities 180,748 214,462 Long-term debt (Note 4) 1,634,029 1,614,045 Deferred income taxes (Note 5) 439,240 435,695 Other liabilities 36,972 32,748 Commitments and contingent liabilities (Note 8) Shareholders' equity (Notes 7 and 9): Preferred stock, $1.00 par value. Authorized 5,000,000 shares; none issued Common stock, $1.67 par value. Authorized 450,000,000 shares Series A: Issued 100,028,891 and 52,998,586 shares at December 31, 1998 and 1997, respectively; 167,048 88,508 Series B: Issued 18,896,263 and 9,283,001 shares at December 31, 1998 and 1997, respectively 31,557 15,503 Additional paid-in capital 879,856 1,015,345 Retained earnings 169,639 203,276 Accumulated other comprehensive income (Note 12) -- 4,144 - ---------------------------------------------------------------------------------------------------------- Total 1,248,100 1,326,776 Less deferred compensation - restricted shares (Note 7) -- 772 - ---------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,248,100 1,326,004 - ---------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $3,539,089 $3,622,954 - ----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 30 33 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY A. H. BELO CORPORATION AND SUBSIDIARIES
================================================================================================================== Dollars in thousands - ------------------------------------------------------------------------------------------------------------------ COMMON STOCK Accumulated Additional Other Shares Shares Paid-in Retained Comprehensive Series A Series B Amount Capital Earnings Income - ------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1995 28,961,753 9,280,179 $ 63,864 $ 97,930 $230,203 -- Exercise of stock options 498,302 2,360 835 9,098 Restricted shares 7 Tax benefit from long- term incentive plan 3,589 Employer's matching contribution to Savings and Investment Plan 89,389 150 3,214 Sale of stock 5,750,000 9,603 188,899 Purchase of treasury stock Net earnings 87,505 Cash dividends (16,392) Conversion of Series B to Series A 194,795 (194,795) - ------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1996 35,404,850 9,177,133 $ 74,452 $ 302,737 $301,316 -- Exercise of stock options 416,446 110,239 880 11,046 Stock issued in acquisition of PJC 25,394,564 42,409 827,990 Restricted shares 672 Tax benefit from long- term incentive plan 4,560 Employer's matching contribution to Savings and Investment Plan 100,055 167 4,005 Unrealized holding gains on available-for-sale securities, net of tax 6,505 Reclassification of unrealized gains subsequently recognized in net earnings (2,361) Retirement of treasury stock (8,321,700) (13,897) (135,665) (156,584) Net earnings 82,972 Cash dividends (24,428) Conversion of Series B to Series A 104,426 (104,426) - ------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 52,998,586 9,283,001 $104,011 $1,015,345 $203,276 $4,144 Exercise of stock options 298,185 169,557 781 8,173 Change in valuation of incentive plans 392 Restricted shares (18,540) (31) (528) Tax benefit from long- term incentive plan 3,900 Employer's matching contribution to Savings and Investment Plan 267,824 447 6,912 Reclassification of unrealized gains subsequently recognized in net earnings (4,144) Purchases and subsequent retirement of treasury stock (6,727,400) (11,235) (49,706) (68,845) Two-for-one stock split 53,306,307 9,347,634 104,632 (104,632) Net earnings 64,902 Cash dividends (29,694) Conversion of Series B to Series A 171,753 (171,753) - ------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1998 100,028,891 18,896,263 $198,605 $ 879,856 $169,639 $ -- ====================================================================================== Three years ended December 31, 1998 - -------------------------------------------------------------------------------------- TREASURY STOCK Deferred Compensation Shares Restricted Series A Amount Shares Total - -------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 -- $ -- $(3,533) $ 388,464 Exercise of stock options 9,933 Restricted shares 1,657 1,664 Tax benefit from long- term incentive plan 3,589 Employer's matching contribution to Savings and Investment Plan 3,364 Sale of stock 198,502 Purchase of treasury stock (8,321,700) (306,146) (306,146) Net earnings 87,505 Cash dividends (16,392) Conversion of Series B to Series A -- - -------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 (8,321,700) $(306,146) $(1,876) $ 370,483 Exercise of stock options 11,926 Stock issued in acquisition of PJC 870,399 Restricted shares 1,104 1,776 Tax benefit from long- term incentive plan 4,560 Employer's matching contribution to Savings and Investment Plan 4,172 Unrealized holding gains on available-for-sale securities, net of tax 6,505 Reclassification of unrealized gains subsequently recognized in net earnings (2,361) Retirement of treasury stock 8,321,700 306,146 -- Net earnings 82,972 Cash dividends (24,428) Conversion of Series B to Series A -- - -------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 -- $ -- $ (772) $1,326,004 Exercise of stock options 8,954 Change in valuation of incentive plans 392 Restricted shares 772 213 Tax benefit from long- term incentive plan 3,900 Employer's matching contribution to Savings and Investment Plan 7,359 Reclassification of unrealized gains subsequently recognized in net earnings (4,144) Purchases and subsequent retirement of treasury stock (129,786) Two-for-one stock split -- Net earnings 64,902 Cash dividends (29,694) Conversion of Series B to Series A -- - -------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 -- $ -- $ -- $1,248,100
See accompanying Notes to Consolidated Financial Statements. 31 34 CONSOLIDATED STATEMENTS OF CASH FLOWS A. H. BELO CORPORATION AND SUBSIDIARIES
CASH PROVIDED (USED) Years ended December 31, ======================================================================================================== In thousands 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- OPERATIONS Net earnings $ 64,902 $ 82,972 $ 87,505 Adjustments to reconcile net earnings to net cash provided by operations: Depreciation and amortization 159,442 134,993 65,183 Deferred income taxes 1,705 (4,198) 6,610 Non-cash portion of non-recurring charges (Note 2) 11,764 -- -- Other non-cash expenses (Note 6) 12,303 7,950 5,569 Other, net (2,037) 493 (3,898) Net change in current assets and liabilities: Accounts receivable 9,560 (21,244) (11,867) Inventories and other current assets 575 (3,859) 3,669 Accounts payable 9,026 8,808 (1,003) Accrued compensation and benefits (10,782) 9,931 5,207 Other accrued liabilities (4,080) 12,735 785 Income taxes payable (17,506) 27,837 6,661 - -------------------------------------------------------------------------------------------------------- Net cash provided by operations 234,872 256,418 164,421 - -------------------------------------------------------------------------------------------------------- INVESTMENTS Capital expenditures (102,927) (83,317) (49,800) Acquisitions -- (946,259) (74,091) Sale of investments 7,995 3,045 3,750 Other, net (4,999) 1,124 (3,788) - -------------------------------------------------------------------------------------------------------- Net cash used for investments (99,931) (1,025,407) (123,929) - -------------------------------------------------------------------------------------------------------- FINANCING Net proceeds from sale of stock -- -- 198,502 Borrowings for acquisitions -- 1,100,545 75,180 Refinancing of Providence Journal debt -- (200,000) -- Net proceeds from fixed-rate debt offerings -- 989,994 -- Net proceeds from (payments on) revolving debt 23,184 (1,111,025) (586) Payments of dividends on stock (29,694) (24,428) (16,392) Net proceeds from exercise of stock options 8,954 11,926 9,933 Purchase of treasury stock (129,786) -- (306,146) - -------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing (127,342) 767,012 (39,509) - -------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and temporary cash investments 7,599 (1,977) 983 - -------------------------------------------------------------------------------------------------------- Cash and temporary cash investments at beginning of year 11,852 13,829 12,846 Cash and temporary cash investments at end of year $ 19,451 $ 11,852 $ 13,829 - -------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES (Note 13) - --------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 32 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- A) Principles of Consolidation The consolidated financial statements include the accounts of A. H. Belo Corporation (the "Company" or "Belo") and its wholly-owned subsidiaries after the elimination of all significant intercompany accounts and transactions. All dollar amounts are in thousands except per share amounts, unless otherwise indicated. Certain amounts for prior years have been reclassified to conform to the current year presentation. B) Cash and Temporary Cash Investments The Company considers all highly liquid instruments purchased with a remaining maturity of three months or less to be temporary cash investments. Such temporary cash investments are classified as available-for-sale and are carried at fair value. C) Accounts Receivable Accounts receivable are net of a valuation reserve that represents an estimate of amounts considered uncollectible. Expense for such uncollectible amounts, which is included in other production, distribution and operating costs, was $6,497, $9,273 and $5,647 in 1998, 1997 and 1996, respectively. Accounts written off during these years were $6,988, $9,988 and $4,535, respectively. D) Inventories Inventories, consisting primarily of newsprint, ink and other supplies used in printing newspapers, are stated at the lower of average cost or market value. E) Property, Plant and Equipment Depreciation of property, plant and equipment is provided principally on a straight-line basis over the estimated useful lives of the assets as follows:
-------------------------------------------------------------- ESTIMATED USEFUL LIVES -------------------------------------------------------------- Buildings and improvements 5-30 years Broadcast equipment 5-15 years Newspaper publishing equipment 5-20 years Other 3-10 years --------------------------------------------------------------
F) Intangible Assets, Net Intangible assets, net consists of excess cost over values assigned to tangible assets of purchased subsidiaries and is amortized primarily on a straight-line basis over 40 years. Accumulated amortization of intangible assets was $292,931 and $218,067 at December 31, 1998 and 1997, respectively. The carrying values of all intangible assets are periodically reviewed to determine whether impairment exists, and adjustments to net realizable value are made as needed. No such adjustments were required in 1998. G) Other Assets The Company classifies its investments in equity securities with readily determinable fair values as available-for-sale. At December 31, 1997, these equity securities were included in Other assets and reported at fair value, with unrealized gains and losses excluded from income and reported as a component of shareholders' equity, net of tax. All available-for-sale securities were either sold or donated during 1998. See Notes 10 and 12. H) Stock Options Stock options granted to employees are accounted for using the intrinsic value of the options granted. Because it is the Company's policy to grant stock options at the market price on the date of the grant, the intrinsic value is zero, and therefore no compensation expense is recorded. I) Revenue Recognition The Company's primary sources of revenue are the sale of air time on its television stations, advertising space in published issues of its newspapers, and the sale of newspapers to distributors and individual subscribers. Broadcast 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. Proceeds from subscriptions are deferred and are included in revenue on a pro-rata basis over the term of the subscriptions. 33 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES J) Advertising Expense The cost of advertising is expensed as incurred. The Company incurred $25,858, $25,557 and $14,934 in advertising and promotion costs during 1998, 1997 and 1996, respectively. K) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2: NON-RECURRING CHARGES - -------------------------------------------------------------------------------- Earnings from operations for 1998 include non-recurring charges of $26,157 comprised primarily of an $11,478 non-cash charge for the write-down of a press at The Dallas Morning News ("TDMN") and separation costs of $14,229 associated with 189 employees who accepted a voluntary early retirement offer and 31 employees who were terminated under other employee reduction initiatives. The workforce reduction initiatives were the result of the Company's on-going review of its operations and organizational structure. The press write-down followed a decision by TDMN to replace one of its less productive presses with a new $36 million WIFAG press that offers improved production capacity and greater flexibility. The write-down of the press resulted in a remaining estimated salvage value of $2,000, which is included in Other current assets in the Company's Balance Sheet as of December 31, 1998. The salvage value is based upon a third-party estimate of current market rates for used press equipment. The press has been made available for sale through an independent broker. The press write-down results in lower annual depreciation expense of approximately $900. The $14,229 charge for certain employee related costs includes $12,449 of cash payments made as of December 31, 1998, $946 made in January 1999 and the remaining $834 to be paid in monthly installments through December 31, 2001, under contractual arrangements. The remaining $450 in non-recurring charges was for severance and asset retirements associated with terminating the operations of the Company's programming subsidiary, Belo Productions, Inc., effective December 31, 1998. - -------------------------------------------------------------------------------- NOTE 3: ACQUISITIONS On February 28, 1997, Belo completed the acquisition of The Providence Journal Company ("PJC") by issuing 25,394,564 shares of Series A Common Stock (on a pre-split basis) and paying $587,096 to former shareholders of PJC. Belo also incurred approximately $100,000 in employee and transaction costs and refinanced $200,000 of PJC debt. The acquisition was accounted for as a purchase. The Company's consolidated financial results for the year ended December 31, 1997 include the operations of PJC since March 1, 1997 and exclude the results of the Company's interest in America's Health Network ("AHN"), a cable network acquired as part of the PJC transaction, but subsequently disposed of effective July 31, 1997. The results of the Television Food Network ("TVFN"), also acquired as part of the PJC transaction, are excluded effective July 1, 1997, as a result of the Company's decision in June 1997 to divest its interest in TVFN. The cost of the PJC acquisition was allocated on the basis of the estimated fair market value of the assets acquired and liabilities assumed. Goodwill and intangibles arising from the purchase of PJC are being amortized on a straight-line basis over 40 years, except for the value assigned to the newspaper subscriber list, which is being amortized over 18 years. As a result of the PJC acquisition, the Company initially owned two television stations in the Seattle/Tacoma, Washington market (KIRO and KING). To comply with FCC regulations that required the Company to divest one of these stations, the Company completed an exchange of assets among multiple parties on June 2, 1997, whereby KIRO was exchanged for CBS affiliate KMOV in St. Louis, Missouri. No gain was recorded on this exchange of like-kind assets. On July 25, 1997, the Company completed the acquisition of The Press-Enterprise Company ("PE"), publisher of a daily newspaper serving Riverside County and the inland southern California area. The transaction was accounted for as a purchase. The purchase price allocation was based upon the estimated fair market value of the net assets acquired. The Company previously held a 38.45 percent interest in PE. 34 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES On October 15, 1997, Belo exchanged its partnership interest in TVFN and $75,000 in cash for CBS affiliate KENS in San Antonio, Texas. The transaction was accounted for as a purchase. The purchase price allocation was based on the estimated fair market value of the net assets acquired. The cash portion of each acquisition was financed through the Company's revolving credit facility, a portion of which was converted to fixed-rate debt during 1997. See Note 4. The pro forma financial results of operations that follow assume the PJC, PE and KENS acquisitions, the KIRO/KMOV exchange and the disposition of TVFN were completed as of January 1, 1996 and include adjustments for incremental interest costs, depreciation, amortization and taxes as they relate to the purchase price allocations of the transactions for the years ended December 31, 1997 and 1996.
----------------------------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------------------------- Net operating revenues $ 1,360,233 $ 1,274,738 Net earnings from continuing operations(a) $ 83,910 $ 50,730 Net earnings(b) $ 83,910 $ 48,052 Net earnings per share $ .67 $ .36 -----------------------------------------------------------------------------------------
(a) Net earnings from continuing operations for the year ended December 31, 1997 include a pre-tax gain of $10,672 on the sale of an investment. Net earnings from continuing operations for the year ended December 31, 1996 include pre-tax charges for PJC stock-based compensation of $12,394 and PJC newspaper restructuring of $1,791. All periods exclude the effect of AHN and TVFN. (b) Net earnings for the year ended December 31, 1996 include an after-tax charge of $2,678 representing discontinued operations attributable to PJC's former cable operations. NOTE 4: LONG-TERM DEBT - -------------------------------------------------------------------------------- Long-term debt consists of the following at December 31, 1998 and 1997:
------------------------------------------------------------------------------ 1998 1997 ------------------------------------------------------------------------------ 6-7/8% Senior Notes Due June 1, 2002 $ 250,000 $ 250,000 7-1/8% Senior Notes Due June 1, 2007 300,000 300,000 7-3/4% Senior Debentures Due June 1, 2027 200,000 200,000 7-1/4% Senior Debentures Due September 15, 2027 250,000 250,000 ------------------------------------------------------------------------------ Fixed-rate debt 1,000,000 1,000,000 Revolving credit agreement, including short-term unsecured notes classified as long-term 611,500 588,000 Other 25,839 26,355 Less: current maturities of long-term debt (3,310) (310) ------------------------------------------------------------------------------ Total $ 1,634,029 $ 1,614,045 ------------------------------------------------------------------------------
The Company's long-term debt maturities for the five years following December 31, 1998 are $3,310 in 1999, $6,956 in 2000, $291 in 2001, $861,782 in 2002 and $200 in 2003. Of the amount due in 2002, $580,000 represents revolving debt and $31,500 represents short-term unsecured notes, which could be converted, at the Company's option, to revolving debt. During 1997, the Company issued $1 billion in fixed-rate debt. The net proceeds from these debt offerings were used to retire debt previously outstanding under the Company's revolving credit facility. At December 31, 1998 and 1997, the weighted average effective interest rate on the fixed-rate debt was 7.3 percent and the fair value exceeded the carrying value by $35,965 and $24,515, respectively. The fair value was estimated using quoted market prices for those instruments publicly traded. At the end of 1998, the Company had a revolving credit facility for $1 billion. Loans under the revolving credit agreement bear interest at a rate based, at the option of the Company, on the bank's alternate base rate, certificate of deposit rate, LIBOR or competitive bid. The rate obtained through competitive bid is either a Eurodollar rate or a rate agreed to by the Company and the bank. At December 31, 1998 and 1997, the weighted average interest rates 35 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES for borrowings under the revolving credit agreement, which includes a facility fee of up to 0.15 percent on the total commitment, were 5.7 percent and 6.1 percent, respectively. Borrowings under the agreement mature upon expiration of the agreement on August 29, 2002, with one year extensions possible through August 29, 2004, at the request of the Company and with the consent of the participating banks. The carrying value of borrowings under the Company's revolving credit agreement approximates fair value. 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 5.5 to 1.0, (2) a Funded Debt (excluding subordinated debt) to Pro Forma Operating Cash Flow ratio not exceeding 5.0 to 1.0, and (3) an Interest Coverage ratio of not less than 2.5 to 1.0, all as such terms are defined in the agreement. At December 31, 1998, the Company was in compliance with these requirements. During 1998, the Company used various short-term unsecured notes as an additional source of financing. The weighted average interest rate on this debt was 5.9 percent and 6.5 percent at December 31, 1998 and 1997, respectively. Due to the Company's intent to renew the short-term notes and its continued ability to refinance these borrowings on a long-term basis through its revolving credit agreement, $31,500 and $18,000 of short-term notes outstanding at December 31, 1998 and 1997, respectively, have been classified as long-term. In 1998, 1997 and 1996, the Company incurred interest costs of $109,318, $91,288 and $27,898, respectively, of which $1,680, $510 and $255, respectively, were capitalized as components of construction cost. At December 31, 1998, the Company had outstanding letters of credit of $32,347 issued in the ordinary course of business. NOTE 5: INCOME TAXES - -------------------------------------------------------------------------------- The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income tax expense for the years ended December 31, 1998, 1997 and 1996 consists of the following:
- ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Current Federal $ 53,812 $ 56,792 $ 42,298 State 10,041 18,556 7,627 - ------------------------------------------------------------------------------ Total current 63,853 75,348 49,925 Deferred Federal (2,200) 1,587 6,765 State 3,905 (5,785) (155) - ------------------------------------------------------------------------------ Total deferred 1,705 (4,198) 6,610 Total tax expense $ 65,558 $ 71,150 $ 56,535 - ------------------------------------------------------------------------------ Effective tax rate 50.3% 46.2% 39.2% - ------------------------------------------------------------------------------
The variation in both current and deferred state income taxes between 1997 and 1998 is due to the recognition of a gain in 1997 on the disposition of TVFN, a cable network acquired in connection with PJC and subsequently exchanged for KENS. See Note 3. Income tax provisions for the years ended December 31, 1998, 1997 and 1996 differ from amounts computed by applying the applicable U.S. federal income tax rate as follows:
- -------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------- Computed expected income tax expense $ 45,661 $ 53,943 $ 50,414 Amortization of excess cost 11,533 9,645 2,235 State income taxes 9,065 8,301 4,857 Other (701) (739) (971) - -------------------------------------------------------------------------- $ 65,558 $ 71,150 $ 56,535 - --------------------------------------------------------------------------
36 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES Significant components of the Company's deferred tax liabilities and assets as of December 31, 1998 and 1997, are as follows:
- ----------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------- Deferred tax liabilities: Excess tax depreciation and amortization $458,022 $442,949 Basis differences in investments 20,986 22,769 Deferred compensation -- 10,600 Expenses deductible for tax purposes in a year different from the year accrued 2,584 4,431 Other 4,277 1,328 - ----------------------------------------------------------------------------- Total deferred tax liabilities 485,869 482,077 - ----------------------------------------------------------------------------- Deferred tax assets: Deferred compensation 10,176 11,198 State net operating losses 6,938 8,004 State taxes 6,602 6,179 Expenses deductible for tax purposes in a year different from the year accrued 22,246 21,298 Other 12,409 12,329 - ----------------------------------------------------------------------------- Total deferred tax assets 58,371 59,008 - ----------------------------------------------------------------------------- Net deferred tax liability $427,498 $423,069 - -----------------------------------------------------------------------------
State net operating loss carryforwards are generally associated with entities acquired in the PJC acquisition and have expiration dates ranging from 2000 through 2003. NOTE 6: EMPLOYEE RETIREMENT PLANS - -------------------------------------------------------------------------------- The Company sponsors a noncontributory defined benefit pension plan covering the majority of employees. The benefits are based on years of service and the average of the employee's 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 plan an amount at least equal to the minimum required contribution for a qualified retirement plan, but not in excess of the maximum tax deductible contribution. During 1997, the Company acquired PJC, which had a noncontributory defined benefit pension plan covering substantially all of its employees. Effective December 31, 1997, the PJC plan was merged into the Company's pension plan. The following disclosures reflect these combined pension plans at December 31, 1998 and 1997. The following table sets forth the plan's funded status and prepaid pension costs (included in Other assets on the Consolidated Balance Sheets) at December 31, 1998 and 1997:
- ------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------ Vested benefit obligation $(225,337) $(198,500) Accumulated benefit obligation $(233,963) $(211,052) Projected benefit obligation $(304,375) $(273,534) Estimated fair value of plan assets 302,831 274,903 - ------------------------------------------------------------------ Funded status (1,544) 1,369 Unrecognized net loss 12,494 16,593 Unrecognized net transition asset -- (371) Unrecognized prior service cost 188 (2,114) - ------------------------------------------------------------------ Prepaid pension cost $ 11,138 $ 15,477 - ------------------------------------------------------------------
37 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES Changes in plan assets for the years ended December 31, 1998 and 1997 were as follows:
- ----------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------- Fair value of plan assets at January 1, $ 274,903 $ 108,009 Acquisition of PJC -- 136,083 Actual return on plan assets 39,273 40,678 Benefits paid (11,345) (9,867) --------- --------- Fair value of plan assets at December 31, $ 302,831 $ 274,903 ========= ========= - -----------------------------------------------------------------------
Changes in plan benefit obligation for the years ended December 31, 1998 and 1997 were as follows:
- -------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------- Benefit obligation as of January 1, $ 273,534 $ 116,887 Acquisition of PJC -- 130,555 Actuarial losses 11,693 10,553 Service cost 11,089 8,851 Interest cost 19,404 16,555 Benefits paid (11,345) (9,867) --------- --------- Benefit obligation as of December 31, $ 304,375 $ 273,534 ========= ========= - --------------------------------------------------------------------
The net periodic pension cost for the years ended December 31, 1998, 1997 and 1996 includes the following components:
- ------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------ Service cost - benefits earned during the period $ 11,089 $ 8,851 $ 5,462 Interest cost on projected benefit obligation 19,404 16,555 8,290 Expected return on assets (25,875) (21,552) (9,663) Amortization of: Net asset (371) (1,233) (1,233) Unrecognized prior service cost (220) (376) (376) Unrecognized loss 311 1,723 2,408 - ------------------------------------------------------------------------------------------ Net periodic pension cost $ 4,338 $ 3,968 $ 4,888 - ------------------------------------------------------------------------------------------
Assumptions used in accounting for the defined benefit plan are as follows:
- -------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------- Discount rate in determining benefit obligation 7.00% 7.25% 7.50% Discount rate in determining net periodic pension cost 7.25% 7.50% 7.25% Expected long-term rate of return on assets 10.25% 10.25% 10.25% Rate of increase in future compensation 5.50% 5.50% 5.50% - --------------------------------------------------------------------------------------
The Company sponsors defined contribution plans that cover substantially all of its employees. Subject to certain dollar limits, employees may contribute a percentage of their salaries to these plans, and the Company will match a portion of the employees' contributions with shares of the Company's Series B Common Stock. The Company's contributions totaled $7,359, $6,069 and $3,587 in 1998, 1997 and 1996, respectively. The Company also sponsors non-qualified retirement plans for key employees. Expense for the plans recognized in 1998, 1997 and 1996 was $1,316, $1,138 and $1,150, respectively. 38 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES NOTE 7: LONG-TERM INCENTIVE PLAN - -------------------------------------------------------------------------------- The Company has a long-term incentive plan under which awards may be granted to employees in the form of incentive stock options, non-qualified stock options, restricted shares or performance units, the values of which are based on the long-term performance of the Company. 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. The non-qualified options granted to employees under the Company's long-term incentive plan become exercisable in cumulative installments over periods of three to seven years and expire after 10 years. Shares of common stock reserved for grants under the plan were 3,672,024 and 2,697,816 at December 31, 1998 and 1997, respectively. Stock-based activity in the long-term incentive plan relates to non-qualified stock options and is summarized in the following table. Amounts shown in this table have not been retroactively restated to reflect the June 5, 1998 stock split:
- ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number of Average Number of Average Number of Average Options Price Options Price Options Price - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at January 1, 4,222,341 $ 34.31 3,819,938 $ 28.43 3,097,777 $ 24.16 Two-for-one stock split 3,951,488 $ 17.16 -- -- -- -- Granted 1,882,027 $ 18.16 947,100 $ 51.58 1,237,850 $ 35.63 Exercised (467,742) $ 11.47 (526,685) $ 22.64 (500,662) $ 19.82 Canceled (182,106) $ 19.77 (18,012) $ 35.01 (15,027) $ 28.69 --------- --------- ---------- Outstanding at December 31, 9,406,008 $ 17.78 4,222,341 $ 34.31 3,819,938 $ 28.43 Exercisable at December 31, 5,388,934 2,191,315 1,984,442 - ---------------------------------------------------------------------------------------------------------------------------- Weighted average fair value of options granted $ 4.76 $ 12.95 $ 9.68 - ----------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about non-qualified stock options outstanding at December 31, 1998:
- ------------------------------------------------------------------------------------------------------- Number of Weighted Average Weighted Average Number of Weighted Average Range of Options Remaining Exercise Options Exercise Exercise Prices Outstanding Life (years) Price Exercisable Price - ------------------------------------------------------------------------------------------------------- $ 6-$11 863,784 (a) 3.1 $ 8.88 863,784 $ 8.88 $12-$15 1,544,548 (a) 5.0 $12.97 1,544,548 $12.97 $17-$19 5,212,362 (b) 8.2 $17.75 2,225,902 $17.74 $22-$27 1,785,314 (b) 8.8 $26.36 754,700 $26.38 ---------- --------- $ 6-$27 9,406,008 7.3 $17.78 5,388,934 $16.16 - -------------------------------------------------------------------------------------------------------
(a) Comprised of Series A Shares (b) Comprised of Series B Shares Pro forma information regarding net earnings and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement of Financial Accounting Standards ("SFAS") No. 123. The fair value for those options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1998 and 1997, respectively: risk-free interest rates of 4.62 percent and 5.56 percent, dividend yields of 1.33 percent and .91 percent, volatility factors of the expected market price of the Company's common stock of .243 and .228, and weighted average expected lives of the options of approximately 5 years and 4 years. 39 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. Because options vest over a period of several years and additional awards are generally made each year, the full effect of applying SFAS No. 123 for providing pro forma disclosure is first evident in 1998 upon the completion of one full vesting cycle. The pro forma information presented below is not necessarily indicative of the effects on reported or pro forma net earnings for future years. The Company's pro forma information for the three years ended December 31, 1998 follows:
- ------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------- Pro forma net earnings $ 59,036 $ 79,562 $ 85,731 Pro forma net earnings per share $ .48 $ .68 $ 1.04 - -------------------------------------------------------------------------------------
The Company's long-term incentive plan also provides for the grant of restricted shares of Series A Common Stock. These restricted shares generally vest over a four year period and contain certain performance requirements for a portion of the shares. Restricted stock activity for the three years ended December 31, 1998 is summarized in the following table. Amounts shown in this table have not been retroactively restated to reflect the June 5, 1998 stock split.
- ----------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Price Price Price Shares Per Share Shares Per Share Shares Per Share - ----------------------------------------------------------------------------------------------------------------- Outstanding at January 1, 85,392 $27-$56 212,309 $15-$35 279,096 $15-$35 Two-for-one stock split 84,332 $13-$28 -- -- -- -- Vested (152,246) $13-$28 (126,917) $15-$56 (66,787) $20-$35 Forfeited (17,478) $13-$28 -- -- -- -- ------- ------- -------- ------- ------- ------- Outstanding at December 31, -- -- 85,392 $27-$56 212,309 $15-$35 - -----------------------------------------------------------------------------------------------------------------
A provision for restricted shares is made ratably over the restriction period. Expense recognized under the plan for restricted shares was $167, $1,776 and $1,664 in 1998, 1997 and 1996, respectively. NOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES - -------------------------------------------------------------------------------- The Company 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 the consolidated financial position, liquidity or results of operations of the Company. Commitments for the purchase of broadcast film contract rights totaled approximately $236,519, at December 31, 1998 for broadcasts scheduled through August 2005. Advance payments on plant and equipment expenditures at December 31, 1998 primarily relate to newspaper production equipment, DTV equipment and construction projects. Required future payments for capital expenditures for 1999, 2000, 2001 and 2002 are $31,810, $24,430, $2,251 and $630, respectively. Required future payments for 1999 include $15.7 million toward the purchase of the new press at TDMN. An additional $19.7 million for this press is included in required future payments for 2000. Required future payments for 1999 also include $8.7 million for DTV equipment at seven of the Company's television stations. 40 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES Total lease expense for property and equipment was $8,293, $8,342 and $3,333 in 1998, 1997 and 1996, respectively. Future minimum rental payments for operating leases at December 31, 1998, are as follows:
- ------------------------------------------- Operating Leases - ------------------------------------------- 1999 $ 8,237 2000 6,848 2001 4,565 2002 3,257 2003 1,229 2004 & beyond 2,951 - ------------------------------------------- Total commitments $27,087 - -------------------------------------------
NOTE 9: COMMON AND PREFERRED STOCK - -------------------------------------------------------------------------------- The Company has two series of common stock authorized, issued and outstanding, Series A and Series B. The shares are identical except that 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. 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 the Company's 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 the Company with a value equal to two times the exercise price of the right, which is initially $75 (subject to adjustment). In addition, if the Company 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, the Company may exchange each right (other than those held by the acquiring person or group) for one share of Company common stock (subject to adjustment). The Company 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 1995 Executive Compensation Plan and for options outstanding under the Company's predecessor plan. The rights will expire in 2006, unless extended. On June 5, 1998, the Company completed a two-for-one stock split in the form of a dividend, issuing one additional share of Series A and Series B Common Stock for each corresponding share outstanding as of the May 22, 1998 record date. The effect of the stock split was to double the number of shares outstanding and reduce per share amounts by one-half. All earnings and dividends per share, weighted average shares outstanding and share trading prices in this report have been restated to reflect the stock split. Prior to the split, the Company's shareholders approved a proposal to amend the Company's Certificate of Incorporation to increase the total number of authorized shares of common stock from 150,000,000 to 450,000,000 shares. As discussed in Note 3, on February 28, 1997, in connection with the acquisition of PJC, the Company issued 25,394,564 shares of Series A Common Stock, on a pre-split basis. The Company has in place a stock repurchase program authorizing the purchase of up to $2,500 of Company stock annually and, as of December 31, 1998, the Company has authority to purchase an additional 3,946,344 shares. During 1998, the Company purchased 6,727,400 shares of its Series A Common Stock at an aggregate cost of $129,786. These shares were retired effective December 31, 1998. No shares of stock were purchased during 1997. 41 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES NOTE 10: OTHER INCOME AND EXPENSE - -------------------------------------------------------------------------------- In 1998, the Company sold 982,000 shares of Peapod, Inc. ("Peapod") common stock and donated 827,113 shares of Peapod common stock to The A. H. Belo Corporation Foundation. These transactions increased 1998 net earnings by $2,042 as the $6,244 charge for the charitable contribution was more than offset by the net gain on the disposition of shares and the tax benefit from the charitable contribution. In 1997, the Company sold 220,000 shares of Gemstar International Group Limited ("Gemstar") common stock and donated 208,440 shares of Gemstar common stock to The A. H. Belo Corporation Foundation. These transactions did not have an effect on 1997 net earnings as the $4,560 charge for the charitable contribution was offset by a net gain on the disposition of the shares and the tax benefit from the charitable contribution. NOTE 11: EARNINGS PER SHARE - -------------------------------------------------------------------------------- The following table sets forth the reconciliation between weighted average shares used for calculating basic and diluted earnings per share for the three years ended December 31, 1998 (in thousands, except per share amounts):
- ----------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------- Weighted average shares for basic earnings per share 123,508 115,692 81,780 Effect of employee stock options 1,328 1,430 1,224 ------- ------- ------ Weighted average shares for diluted earnings per share 124,836 117,122 83,004 Options excluded due to exercise price in excess of average market price Number outstanding 1,765 1,728 110 Exercise price $ 26.41 $ 26.38 $19.25 - -----------------------------------------------------------------------------------------
NOTE 12: COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes reporting requirements for comprehensive income and its components, but has no effect on the Company's net earnings or total shareholders' equity. SFAS No. 130, among other things, requires unrealized gains and losses related to available-for-sale securities to be included in other comprehensive income. Previously, these amounts were reported as adjustments to retained earnings. For the years ended December 31, 1998, 1997 and 1996, total comprehensive income was comprised as follows:
- ----------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------- Net earnings $ 64,902 $ 82,972 $87,505 Unrealized holding gains, net of taxes of $596 in 1998 and $3,503 in 1997 1,107 6,505 -- Less reclassification for gains included in Net earnings, net of taxes of $2,827 in 1998 and $1,271 in 1997 (5,251) (2,361) -- -------- -------- ------- Accumulated other comprehensive income (loss) (4,144) 4,144 -- -------- -------- ------- Total comprehensive income $ 60,758 $ 87,116 $87,505 ======== ======== ======= - -----------------------------------------------------------------------------
42 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES NOTE 13: SUPPLEMENTAL CASH FLOW INFORMATION - -------------------------------------------------------------------------------- Supplemental cash flow information and significant non-cash investing and financing activities for the three years ended December 31, 1998, are as follows:
- ---------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Supplemental cash flow information Cash paid during the period for: Interest, net of amounts capitalized $107,763 $ 81,676 $27,201 Income taxes, net of refunds $ 84,407 $ 54,436 $43,344 Supplemental non-cash investing and financing activities: Stock issued for PJC acquisition $ -- $870,399 $ -- KIRO/KMOV asset exchange $ -- $152,000 $ -- Non-cash consideration for KENS $ -- $125,000 $ -- - ----------------------------------------------------------------------------------------------
NOTE 14: INDUSTRY SEGMENT INFORMATION - -------------------------------------------------------------------------------- The Company operates in two primary industries: television broadcasting and newspaper publishing. Operations in the broadcast industry involve the sale of air time for advertising and the broadcast of news, entertainment and other programming. The Company's television stations are located in Dallas, Houston and San Antonio, Texas; Seattle and Spokane, Washington; Sacramento, California; St. Louis, Missouri; Portland, Oregon; Charlotte, North Carolina; Norfolk, Virginia; New Orleans, Louisiana; Louisville, Kentucky; Albuquerque, New Mexico; Tulsa, Oklahoma; Honolulu, Hawaii; Tucson, Arizona; and Boise, Idaho. Operations in the newspaper publishing industry involve the sale of advertising space in published issues, the sale of newspapers to distributors and individual subscribers and commercial printing. The Company's major 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 has other newspaper operations in Owensboro and Henderson, Kentucky and Bryan-College Station, Texas. The Company's other industry segment is comprised primarily of cable news operations, which are located in Seattle, Washington and Dallas, Texas. 43 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES Selected segment data for the years ended December 31, 1998, 1997 and 1996 is as follows. Certain operations have been reclassified to reflect new requirements for reporting under SFAS No. 131:
- -------------------------------------------------------------------------------- 1998 1997(a) 1996 - -------------------------------------------------------------------------------- Net operating revenues Broadcasting (b) $ 609,068 $ 536,737 $ 333,396 Newspaper publishing (c) 787,541 694,495 487,560 Other 10,736 17,149 3,352 - -------------------------------------------------------------------------------- $ 1,407,345 $ 1,248,381 $ 824,308 - -------------------------------------------------------------------------------- Earnings from operations Broadcasting (b)(e) $ 138,679 $ 132,237 $ 83,862 Newspaper publishing (c)(f) 140,584 157,506 102,873 Other (d) (5,212) (9,237) (1,065) Corporate expenses (40,966) (39,704) (20,021) - -------------------------------------------------------------------------------- $ 233,085 $ 240,802 $ 165,649 - -------------------------------------------------------------------------------- Depreciation and amortization Broadcasting (b) $ 100,066 $ 84,417 $ 38,975 Newspaper publishing (c)(g) 67,079 47,392 25,072 Other 1,030 1,565 200 Corporate 2,745 1,619 936 - -------------------------------------------------------------------------------- $ 170,920 $ 134,993 $ 65,183 - -------------------------------------------------------------------------------- Operating cash flow (h) Broadcasting $ 238,745 $ 216,654 $ 122,837 Newspaper publishing 207,663 204,898 127,945 Other (4,182) (7,672) (865) Corporate (38,221) (38,085) (19,085) - -------------------------------------------------------------------------------- $ 404,005 $ 375,795 $ 230,832 - -------------------------------------------------------------------------------- Identifiable assets Broadcasting $ 2,502,839 $ 2,544,323 $ 709,884 Newspaper publishing 870,675 919,379 372,958 Other 23,922 3,412 6,118 Corporate 141,653 155,840 135,112 - -------------------------------------------------------------------------------- $ 3,539,089 $ 3,622,954 $ 1,224,072 - -------------------------------------------------------------------------------- Capital expenditures Broadcasting $ 55,035 $ 48,176 $ 22,814 Newspaper publishing 25,847 23,224 18,268 Other (d) 16,898 1,787 1,338 Corporate 5,147 10,130 7,380 - -------------------------------------------------------------------------------- $ 102,927 $ 83,317 $ 49,800 - --------------------------------------------------------------------------------
(a) Segment results for 1997 include 10 months of operations of PJC, which Belo acquired on February 28, 1997. See Note 3. PJC operations include nine television stations, a daily newspaper, a cable news operation and a cable network. The cable network was subsequently disposed of and its operations are excluded effective July 1, 1997. (b) In 1997, the broadcasting segment also includes two-and-one-half months of operations of KENS, which Belo acquired on October 15, 1997. See Note 3. (c) In 1997, the newspaper publishing segment includes five months of operations of PE, due to Belo increasing its ownership interest from 38 percent to 100 percent on July 25, 1997. See Note 3. (d) In 1998, operations include start-up costs for TXCN, the Company's regional cable news channel in Dallas, Texas, which began broadcasting January 1, 1999. (e) Broadcasting earnings from operations for 1998 include a $6,996 charge for early retirement costs and other employee reduction initiatives. (f) Newspaper publishing earnings from operations for 1998 include a non-cash charge for the write-down of a press at TDMN of $11,478 and a charge of $6,344 for certain early retirement costs. (g) Newspaper publishing depreciation and amortization expense for 1998 includes the $11,478 non-cash charge for the write-down of a press at TDMN. (h) Operating cash flow is defined as segment earnings from operations plus depreciation and amortization. Operating cash flow is used in the broadcasting and publishing industries to analyze and compare companies on the basis of operating performance, leverage and liquidity. 44 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. H. BELO CORPORATION AND SUBSIDIARIES NOTE 15: QUARTERLY RESULTS OF OPERATIONS (unaudited) - -------------------------------------------------------------------------------- Following is a summary of the unaudited quarterly results of operations for the years ended December 31, 1998 and 1997. Certain previously reported data has been reclassified to reflect new requirements under segment reporting standards:
- -------------------------------------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter - -------------------------------------------------------------------------------------------- 1998 Net operating revenues Broadcasting $ 136,708 $ 163,142 $ 137,885 $ 171,333 Newspaper publishing 190,369 200,790 192,276 204,106 Other 2,383 2,338 2,457 3,558 - -------------------------------------------------------------------------------------------- $ 329,460 $ 366,270 $ 332,618 $ 378,997 - -------------------------------------------------------------------------------------------- Earnings from operations Broadcasting $ 23,642 $ 47,991 $ 24,732 $ 42,314(a) Newspaper publishing 39,186 44,043 35,379 21,976(b) Other (1,097) (763) (1,116) (2,236) Corporate expenses (10,138) (8,682) (11,229) (10,917) - -------------------------------------------------------------------------------------------- $ 51,593 $ 82,589 $ 47,766 $ 51,137 - -------------------------------------------------------------------------------------------- Net earnings $ 13,635 $ 29,823 $ 9,707 $ 11,737 - -------------------------------------------------------------------------------------------- Basic earnings per share $ .11 $ .24 $ .08 $ .10 Diluted earnings per share $ .11 $ .24 $ .08 $ .10 - -------------------------------------------------------------------------------------------- 1997 Net operating revenues Broadcasting (c) $ 92,002 $ 152,194 $ 132,957 $ 159,584 Newspaper publishing (d) 137,255 171,651 183,103 202,486 Other (e) 3,445 7,972 2,996 2,736 - -------------------------------------------------------------------------------------------- $ 232,702 $ 331,817 $ 319,056 $ 364,806 - -------------------------------------------------------------------------------------------- Earnings from operations Broadcasting (c) $ 16,869 $ 44,849 $ 26,063 $ 44,456 Newspaper publishing (d) 38,679 40,500 36,932 41,395 Other (e) (1,336) (5,430) (1,162) (1,309) Corporate expenses (6,761) (9,205) (9,725) (14,013) - -------------------------------------------------------------------------------------------- $ 47,451 $ 70,714 $ 52,108 $ 70,529 - -------------------------------------------------------------------------------------------- Net earnings $ 17,627 $ 26,313 $ 14,958 $ 24,074 - -------------------------------------------------------------------------------------------- Basic earnings per share $ .19 $ .21 $ .12 $ .19 Diluted earnings per share $ .19 $ .21 $ .12 $ .19 - --------------------------------------------------------------------------------------------
(a) Broadcasting earnings from operations in fourth quarter 1998 include a $6,996 charge for early retirement costs and other employee reduction initiatives. (b) Newspaper publishing earnings from operations in fourth quarter 1998 include a non-cash charge for the write-down of a press at TDMN of $11,478 and a charge of $6,344 for certain early retirement costs. (c) Broadcasting results include the operations of nine new television stations beginning in March 1997, and KENS beginning in October 1997. See Note 3. (d) Publishing results include the operations of The Providence Journal beginning in March 1997, and The Press-Enterprise beginning in August 1997. See Note 3. (e) Results for TVFN are included from March through June 1997. See Note 3. 45 48 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The Management of A. H. Belo Corporation is responsible for the preparation of the Company's consolidated financial statements, as well as for their integrity and objectivity. Those statements are prepared using generally accepted accounting principles, they include amounts that are based on our best estimates and judgments, and we believe they are not misstated due to material fraud or error. Management has also prepared the other information in the Annual Report and is responsible for its accuracy and its consistency with the financial statements. Management maintains a system of internal control that is designed to provide reasonable assurance of the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. This system of internal control provides for appropriate division of responsibility. Policies and procedures, as they relate to internal control, are updated as necessary and communicated to those employees having a significant role in the financial reporting process. Management continually monitors the system of internal control for compliance. Management believes that as of December 31, 1998, the Company's system of internal control is adequate to accomplish the objectives described above. Management recognizes, however, that no system of internal control can ensure the elimination of all errors and irregularities, and it recognizes that the cost of the internal controls should not exceed the value of the benefits derived. Finally, Management recognizes its responsibility for fostering a strong ethical climate within the Company according to the highest standards of personal and professional conduct, and this responsibility is delineated in the Company's written statement of business conduct. This statement of business conduct addresses, among other things, the necessity for due diligence and integrity, avoidance of potential conflicts of interest, compliance with all applicable laws and regulations, and the confidentiality of proprietary information. /s/ Robert W. Decherd Chairman of the Board, President & Chief Executive Officer /s/ Dunia A. Shive Senior Vice President/Chief Financial Officer 46 49 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------- ----------- ---------- 2.1 Amended and Restated Agreement and Plan of Merger, dated as of September 26, 1996 (Appendix A of the Joint Proxy Statement/Prospectus of Belo and Providence Journal Company included in Belo's Registration Statement on Form S-4 (Registration No. 333-19337) filed with the Commission on January 8, 1997) N/A 3.1 Certificate of Incorporation of the Company (Exhibit 3.1 to the Company's Amended Annual Report on Form 10-K/A dated April 8, 1996 (the "1995 Form 10-K/A")) N/A 3.2 Certificate of Correction to Certificate of Incorporation dated May 13, 1987 (Exhibit 3.2 to the 1995 Form 10-K/A) N/A 3.3 Certificate of Designation of Series A Junior Participating Preferred Stock of the Company dated April 16, 1987 (Exhibit 3.3 to the 1995 Form 10-K/A) N/A 3.4 Certificate of Amendment of Certificate of Incorporation of the Company dated May 4, 1988 (Exhibit 3.4 to the 1995 Form 10-K/A) N/A 3.5 Certificate of Amendment of Certificate of Incorporation of the Company dated May 3, 1995 (Exhibit 3.5 to the Company's Annual Report on Form 10-K dated February 28, 1996 (the "1995 Form 10-K")) N/A 3.6 Certificate of Amendment of Certificate of Incorporation of the Company dated May 15, 1998 (Exhibit 3.6 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 (the "2nd Quarter 1998 Form 10-Q")) N/A 3.7 Amended Certificate of Designation of Series A Junior Participating Preferred Stock of the Company dated May 4, 1988 (Exhibit 3.6 to the 1995 Form 10-K/A) N/A 3.8 Certificate of Designation of Series B Common Stock of the Company dated May 4, 1988 (Exhibit 3.7 to the 1995 Form 10-K/A) N/A 3.9 Amended and Restated Bylaws of the Company, effective September 18, 1998 (Exhibit 3.9 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998) N/A 4.1 Certain rights of the holders of the Company's Common Stock are set forth in Exhibits 3.1- 3.9 above. 4.2 Specimen Form of Certificate representing shares of the Company's Series A Common Stock (Exhibit 4.2 to the Company's Annual Report on Form 10-K dated March 18, 1998 (the "1997 Form 10-K")) N/A 4.3 Specimen Form of Certificate representing shares of the Company's Series B Common Stock (Exhibit 4.3 to the 1997 Form 10-K) N/A 4.4 Amended and Restated Form of Rights Agreement as of February 28, 1996 between the Company and Chemical Mellon Shareholder Services, L.L.C., a New York banking corporation (Exhibit 4.4 to the 1995 Form 10-K) N/A
50 EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NO. - ------- ----------- ---------- 4.5 Supplement No. 1 to Amended and Restated Rights Agreement between the Company and The First National Bank of Boston dated as of November 11, 1996 (Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996) N/A 4.6 Instruments defining rights of debt securities: (1) Indenture dated as of June 1, 1997 between the Company and The Chase Manhattan Bank, as Trustee (Exhibit 4.6(1) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 (the "2nd Quarter 1997 Form 10-Q")) N/A (2) (a) $200 million 6-7/8% Senior Note due 2002 (Exhibit 4.6(2)(a) to the 2nd Quarter 1997 Form 10-Q) N/A (b) $50 million 6-7/8% Senior Note due 2002 (Exhibit 4.6(2)(b) to the 2nd Quarter 1997 Form 10-Q) N/A (3) (a) $200 million 7-1/8% Senior Note due 2007 (Exhibit 4.6(3)(a) to the 2nd Quarter 1997 Form 10-Q) N/A (b) $100 million 7-1/8% Senior Note due 2007 (Exhibit 4.6(3)(b) to the 2nd Quarter 1997 Form 10-Q) N/A (4) $200 million 7-3/4% Senior Debenture due 2027 (Exhibit 4.6(4) to the 2nd Quarter 1997 Form 10-Q) N/A (5) Officer's Certificate dated June 13, 1997 establishing terms of debt securities pursuant to Section 3.1 of the Indenture (Exhibit 4.6(5) to the 2nd Quarter 1997 Form 10-Q) N/A (6) (a) $200 million 7-1/4% Senior Debenture due 2027 (Exhibit 4.6(6)(a) to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997 (the "3rd Quarter 1997 Form 10-Q")) N/A (b) $50 million 7-1/4% Senior Debenture due 2027 (Exhibit 4.6(6)(b) to the 3rd Quarter 1997 Form 10-Q) N/A (7) Officer's Certificate dated September 26, 1997 establishing terms of debt securities pursuant to Section 3.1 of the Indenture (Exhibit 4.6(7) to the 3rd Quarter 1997 Form 10-Q) N/A 10.1 Contracts relating to television broadcasting: (1) Form of Agreement for Affiliation between WFAA-TV in Dallas, Texas and ABC (Exhibit 10.1(1) to the 1995 Form 10-K/A) N/A 10.2 Financing agreements: (1) Amended and Restated Credit Agreement (Five-year $1,000,000,000 revolving credit and competitive advance facility dated as of August 29, 1997 among the Company and The Chase Manhattan Bank, as Administrative Agent and Competitive Advance Facility Agent, Bank of America National Trust and Savings Association and Bank of Tokyo-Mitsubishi, Ltd., as Co-Syndication Agents, and NationsBank, as Documentation Agent) (Exhibit 10.2(1) to the 3rd Quarter 1997 Form 10-Q) N/A
51
10.3 Compensatory plans: (1) The A. H. Belo Corporation Employee Savings and Investment Plan: (a) The A. H. Belo Corporation Employee Savings and Investment Plan Amended and Restated January 1, 1998 (Exhibit 10.3(1)(a) to the 1997 Form 10-K) N/A (b) First Amendment to A. H. Belo Corporation Employee Savings and Investment Plan --- (c) Second Amendment to A. H. Belo Corporation Employee Savings and Investment Plan --- (d) Restated Master Trust Agreement between the Company and Fidelity Management Trust Company, as restated and dated March 13, 1998 (Exhibit 10.3(1)(b) to the 1997 Form 10-K) N/A (2) The A. H. Belo Corporation 1986 Long-Term Incentive Plan: (a) The A. H. Belo Corporation 1986 Long-Term Incentive Plan (Effective May 3, 1989, as amended by Amendments 1, 2, 3, 4, and 5) (Exhibit 10.3(2) to the Company's Annual Report on Form 10-K dated March 10, 1997 (the "1996 Form 10-K")) N/A (b) Amendment No. 6 to 1986 Long-Term Incentive Plan (Exhibit 10.3(2)(b) to the 1997 Form 10-K) N/A (c) Amendment No. 7 to 1986 Long-Term Incentive Plan (Exhibit 10.3(9) to the 1995 Form 10-K) N/A (d) Amendment No. 8 to 1986 Long-Term Incentive Plan (Exhibit 10.3(2)(d) to the 2nd Quarter 1998 Form 10-Q) N/A (3) A. H. Belo Corporation 1995 Executive Compensation Plan, as restated to incorporate amendments through December 4, 1997 (Exhibit 10.3(3) to the 1997 Form 10-K) N/A (a) Amendment to 1995 Executive Compensation Plan, dated July 21, 1998 (Exhibit 10.3(3)(a) to the 2nd Quarter 1998 Form 10-Q) N/A (4) Management Security Plan (Exhibit 10.3(1) to the 1996 Form 10-K) N/A (5) A. H. Belo Corporation Supplemental Executive Retirement Plan: (a) A. H. Belo Corporation Supplemental Executive Retirement Plan (Exhibit 10.3(27) to the Company's Annual Report on Form 10-K dated March 18, 1994 (the "1993 Form 10-K")) N/A (b) Trust Agreement dated February 28, 1994, between the Company and Mellon Bank, N.A. (Exhibit 10.3(28) to the 1993 Form 10-K) N/A 10.4 Agreement with Officers: (1) Separation Agreement between A. H. Belo Corporation and Michael D. Perry dated June 30, 1998 (Exhibit 10.4 to the 2nd Quarter 1998 Form 10-Q) N/A 12 Ratio of Earnings to Fixed Charges --- 21 Subsidiaries of the Company --- 23 Consent of Ernst & Young LLP --- 27 Financial Data Schedule (filed electronically with the SEC) N/A
EX-10.3(1)(B) 2 1ST AMENDMENT TO EMPLOYEE SAVINGS/INVESTMENT PLAN 1 Exhibit 10.3(1)(b) FIRST AMENDMENT TO A. H. BELO CORPORATION EMPLOYEE SAVINGS AND INVESTMENT PLAN (As Restated Effective January 1, 1998) A. H. Belo Corporation, a Delaware corporation (the "Company"), pursuant to authority of the Compensation Committee of the Board of Directors, adopts the following amendments to the A. H. Belo Corporation Employee Savings and Investment Plan (the "Plan"): 1. The first sentence of Section 3.1(b) of the Plan ("Modification and Suspension of Deferral Contributions") is amended in its entirety to read as follows: A Participant may increase or decrease the amount of his Deferral Contributions during the Plan Year, provided that only one such modification may be made during each calendar month of the Plan Year. 2. The first sentence of Section 3.5 of the Plan ("Investment of Contributions") is amended in its entirety to read as follows: Participating Employer matching contributions will be invested by the Trustee pursuant to the Trust Agreement solely in shares of Company Stock, provided, however, that from and after January 1, 1994, a Participant who has attained age 55 may direct the Trustee to transfer all or any portion of his Matching Contribution Account balance to, and to invest all or any portion of the Participating Employer matching contributions made on his behalf after his 55th birthday in, any other investment fund established under the Trust Agreement. 3. Section 6.2 of the Plan is amended in its entirety to read as follows: 6.2 Withdrawals. (a) After Age 59-1/2. A Participant who has not terminated employment may request a distribution from his Accounts if he has reached age 59-1/2. A Participant who is a director, officer or principal stockholder of the Company within the meaning of Section 16 of the Securities Exchange Act of 1934 may exercise the foregoing withdrawal right only in accordance with rules and procedures established from time to time by the Committee. All other Participants may exercise their withdrawal rights at any time or times during the Plan Year. 2 (b) Former Journal Broadcasting Employees. A Participant who, on December 31, 1997, was a participant in the Journal Broadcasting 401(k) Plan may withdraw, in accordance with rules and procedures established from time to time by the Committee, all or any portion of his Transfer Account attributable to his after-tax contributions and rollover contributions that were transferred to the Plan from the Journal Broadcasting 401(k) Plan effective January 1, 1998. 4. Section 6.3(e) of the Plan ("Source of Hardship Distributions") is deleted from the Plan. 5. The second sentence of Section 6.4 of the Plan ("Distribution Procedures") is amended in its entirety to read as follows: Distributions pursuant to Sections 6.2(a) and 6.3 will be made pro rata from each of the Participant's Accounts, provided, however, that in the case of a hardship distribution under Section 6.3, the cumulative amount distributed to a Participant from his Deferral Contribution Account will not exceed the amount of his Deferral Contributions that have not been previously withdrawn (but not the income allocable to his Deferral Contributions). 6. Section 6.5(f) of the Plan is amended in its entirety to read as follows: (f) Source of Loans. All loans will be made pro rata from each of the Participant's Accounts. 7. The amendment set forth in paragraph 3 above will be effective as of January 1, 1998. The remaining amendments will be effective as of July 1, 1998. Executed at Dallas, Texas, this 30 day of July, 1998. A. H. BELO CORPORATION By /s/ Marian Spitzberg --------------------------------- Name: Marian Spitzberg Title: Secretary -2- EX-10.3(1)(C) 3 2ND AMENDMENT TO EMPLOYEE SAVINGS/INVESTMENT PLAN 1 Exhibit 10.3(1)(c ) SECOND AMENDMENT TO A. H. BELO CORPORATION EMPLOYEE SAVINGS AND INVESTMENT PLAN (As Restated Effective January 1, 1998) A. H. Belo Corporation, a Delaware corporation (the "Company"), pursuant to authority of the Compensation Committee of the Board of Directors, adopts the following amendment to the A. H. Belo Corporation Employee Savings and Investment Plan (the "Plan"): 1. Subsection (b)(ii) of Section 6.1 of the Plan ("Form of Distributions") is amended in its entirety, effective as of January 1, 1998, to read as follows: (ii) Optional Forms of Distribution for Journal Plan Participants. The optional forms of distribution described in this paragraph are available for distributions other than withdrawals described in Section 6.2 and hardship distributions described in Section 6.3 only to a Participant whose account balances were transferred to the Plan from the Journal Qualified Compensation Deferral Plan, the Journal Broadcasting 401(k) Plan or the Journal Guild Plan, and whose vested Account balances exceed $3,500 ($5,000 for Plan Years beginning after December 31, 1997). The optional forms of benefit will be (A) periodic installment payments over a period of years not to exceed the life expectancy of the Participant or the joint life expectancy of the Participant and his Beneficiary and (B) a single life annuity or a Qualified Joint and Survivor Annuity (as hereinafter defined) purchased from an insurance company with the amount of the Participant's vested Account balances, provided, however, that the annuity option will be available to a former participant in the Journal Broadcasting 401(k) Plan only if he was a participant in such Plan prior to December 31, 1996. For purposes of this Section, the term "Qualified Joint and Survivor Annuity" means an annuity payable monthly for the life of the Participant with a survivor annuity payable monthly for the life of the Participant's surviving spouse in an amount equal to 50% of the amount of the monthly payment to the Participant during his life. 2. Subsection (a) of Section 6.8 of the Plan ("Direct Rollovers") is amended in its entirety, effective upon the adoption of this Second Amendment, to read as follows: (a) Distributions after 1992. Notwithstanding any other provision of the Plan, for distributions made on or after January 1, 1993, a Distributee (as hereinafter defined) may elect, at any time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover 2 Distribution (as hereinafter defined) paid directly to an Eligible Retirement Plan (as hereinafter defined) specified by the Distributee, except to the extent that the total Eligible Rollover Distributions with respect to the Distributee in any Plan Year are reasonably expected to total less than $200. 3. Section 11.4 of the Plan is amended in its entirety, effective as of January 1, 1998, to read as follows: 11.4 Restrictions on Delay of Distributions. Distribution of a Participant's entire vested and nonforfeitable interest will be made or commence not later than April 1 following (i) the calendar year in which he attains age 70-1/2, or (ii) in which his employment with the Controlled Group terminates, if later, except that a distribution to a Participant who is a 5-percent owner (as such term is defined in Code section 416(i)(1)(B)(i)) with respect to the Plan Year in which he attains age 70-1/2 will be made pursuant to clause (i). 4. Appendix A to the Plan ("Participating Employers") is amended by the addition of the following Participating Employer, effective as of the date indicated: Texas Cable News, Inc. (As of June 25, 1998) Rockwall Success, Inc. (As of January 1, 1999) Executed at Dallas, Texas, this 8th day of December , 1998. A. H. BELO CORPORATION By /s/ Marian Spitzberg ------------------------------- Name: Marian Spitzberg Title: Vice President and Secretary EX-12 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 A. H. Belo Corporation Exhibit 12 Computation of Ratio of Earnings to Fixed Charges (Dollars in thousands)
Year Ended December 31, ------------------------------------------------------------ 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- Earnings: Earnings before income taxes and the cumulative effect of accounting changes $107,897 $111,014 $144,040 $154,122 $130,460 Add: Total fixed charges 17,294 32,089 29,009 94,069 112,082 Less: Interest capitalized 138 957 255 510 1,680 -------- -------- -------- -------- -------- Adjusted earnings $125,053 $142,146 $172,794 $247,681 $240,862 ======== ======== ======== ======== ======== Fixed Charges: Interest $ 16,250 $ 30,944 $ 27,898 $ 91,288 $109,318 Portion of rental expense representative of the interest factor (1) 1,044 1,145 1,111 2,781 2,764 -------- -------- -------- -------- -------- Total fixed charges $ 17,294 $ 32,089 $ 29,009 $ 94,069 $112,082 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 7.23x 4.43x 5.96x 2.63x 2.15x ======== ======== ======== ======== ========
- ---------------------- (1) For purposes of calculating fixed charges, an interest factor of one third was applied to total rent expense for the period indicated. EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY (AS OF DECEMBER 31, 1997)
STATE OF NAME OF CORPORATION INCORPORATION - ------------------- ------------- NEWSPAPER PUBLISHING: The Dallas Morning News, Inc. d/b/a The Dallas Morning News Delaware The Providence Journal Company d/b/a Providence Journal-Bulletin Delaware Press-Enterprise Company d/b/a The Press-Enterprise California Owensboro Messenger-Inquirer, Inc. d/b/a Messenger-Inquirer Delaware Bryan-College Station Eagle, Inc. d/b/a The Eagle Delaware Henderson Gleaner, Inc. d/b/a The Gleaner Delaware DFW Printing Company, Inc. Delaware DFW Suburban Newspapers, Inc. Delaware TELEVISION BROADCASTING: Great Western Broadcasting Corp. d/b/a KXTV, Channel 10 Delaware KHOU-TV, Inc. d/b/a KHOU, Channel 11 Delaware KOTV, Inc. d/b/a KOTV, Channel 6 Delaware WFAA-TV, Inc. d/b/a WFAA, Channel 8 Delaware WVEC Television, Inc. d/b/a WVEC, Channel 13 Delaware WWL-TV, Inc. d/b/a WWL, Channel 4 Delaware KENS-TV, Inc. d/b/a KENS, Channel 5 Delaware KMOV-TV, Inc. d/b/a KMOV, Channel 4 Delaware KASA-TV, Inc. d/b/a KASA, Channel 2 New Mexico KMSB-TV, Inc. d/b/a KMSB, Channel 11 Arizona WCNC-TV, Inc. d/b/a WCNC, Channel 36 North Carolina Belo Kentucky, Inc. d/b/a WHAS, Channel 11 Kentucky King Broadcasting Company d/b/a KING, Channel 5 Washington d/b/a KHNL, Channel 13 d/b/a KREM, Channel 2 d/b/a KTVB, Channel 7 d/b/a KGW, Channel 8 King News Corporation d/b/a Northwest Cable News Washington Texas Cable News, Inc. d/b/a TXCN Delaware Hill Tower, Inc. Texas Transtower, Inc. California Tulsa Tower Joint Venture Oklahoma Texas Tall Tower Texas
Except as noted below, all of the subsidiaries are wholly owned subsidiaries of the Company. The Company through wholly owned subsidiaries owns 50% of the outstanding common stock of Hill Tower, Inc, Tulsa Tower Joint Venture and Texas Tall Tower, and 33 1/3% of the outstanding common stock of Transtower, Inc. EX-23 6 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-30994, Form S-8 No. 33-32526, Form S-8 No. 33-18771, Form S-8 No. 33-61439, and Form S-3 No. 333-25579) pertaining to the Employee Savings and Investment Plan, Long-Term Incentive Plan, 1995 Executive Compensation Plan, and the registration of $1,500,000,000 of debt securities and warrants to purchase debt securities of A. H. Belo Corporation of our report dated January 27, 1999, with respect to the consolidated financial statements of A. H. Belo Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Dallas, Texas March 16, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 19,451 0 219,251 (7,823) 20,308 275,781 1,055,507 (428,754) 3,539,089 180,748 1,634,029 0 0 198,605 1,049,495 3,539,089 0 1,407,345 0 1,014,818 159,442 6,497 (107,638) 130,460 65,558 64,902 0 0 0 64,902 0.53 0.52
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