Print This Section

DEAR FELLOW SHAREHOLDERS:

Belo delivered solid financial results in 2006 and made significant progress in transforming its businesses to compete in a rapidly-changing media environment. We invested human and financial resources in opportunities that draw on Belo’s long-standing strengths and create new revenue growth opportunities, while diversifying Belo’s traditional business model, expanding our portfolio and further emphasizing interactive media products.

Belo’s financial performance in 2006 was fueled by outstanding revenue performance by the Television Group, diligent expense management, and continued rapid growth in online revenues. Consolidated revenues increased more than four percent to $1.59 billion for the full year, including a 48 percent increase versus the prior year in online advertising revenues associated with the Web sites of Belo’s operating companies.

Throughout its 165-year history, Belo has emerged from every major industry transition in a strong position. As we venture through the current changes in media-usage habits, we are maintaining and expanding Belo’s core competency: delivering distinguished journalistic content to the local communities we serve.

TRANSFORMATIONAL INITIATIVES

Among many accomplishments this year, Belo joined with a consortium of 11 newspaper companies to pursue a wide range of online initiatives with Yahoo!. The first phase involves using a suite of Yahoo! HotJobs recruitment products and services on consortium newspaper sites, resulting in greater functionality and an expanded distribution network for employers and an improved user experience for job seekers. Other initiatives currently being pursued with Yahoo! include content sharing, creation of an advertising network that enables cross-selling opportunities, and using Yahoo!’s technology for ad serving, search and other online tools.

The arrangement with Yahoo! will allow Belo to offer its trusted media brands to a wider audience and will give the Company access to Yahoo!’s superior technology platforms and applications. Initiatives like this are vital to fulfilling the growing demands of Belo’s advertisers and consumers.

Web site redesigns were launched at all Belo television stations and newspapers in 2006. The revamped sites provide more personalized and interactive content online, as well as more robust search capabilities. For advertisers, the redesigned sites are an optimal online solution because they offer a broad mix of customizable options to reach our large online adiences.

In 2006, we completed an in-depth analysis of the Company’s technology capabilities and, in the fourth quarter, IBM assumed responsibility for managing most of Belo’s technology infrastructure. This action allows Belo to utilize the best technology systems available and provides us access to deep technological expertise that will support Belo’s go-to-market requirements. Belo can focus on audiences and advertisers, while IBM applies its expertise to managing the underlying system architecture.

Belo also successfully implemented a Customer Value Management (CVM) initiative at The Dallas Morning News with the goal of growing audiences profitably. CVM will allow the Company to better serve the needs of consumers and advertisers by accumulating more complete customer market intelligence. We see great promise in CVM, which will be implemented at additional Belo operating companies.

In September, The Dallas Morning News completed a voluntary severance program as part of the newspaper’s overall strategic design to reduce expenses and more effectively allocate resources to areas that show the greatest potential for growth. The headcount reduction is expected to result in $10 million in ongoing annualized savings. The newsroom of The Dallas Morning News remains one of the deepest and most capable teams in the nation with about 450 professionals.

Concurrently, The Dallas Morning News formed a strategic team charged with developing a news and editorial model for the future. The refinements, implemented in January 2007, fine-tune content to better satisfy readers and advertisers. This project follows the successful efforts initiated in recent years at The Dallas Morning News with Quick, Al Día, the zoned The Dallas Morning News publications and F!Dluxe, all of which have brought in new local advertisers.

The Press-Enterprise and The Press-Enterprise are similarly focused on efforts to determine the right content and resource allocation for the future. The Press-Enterprise rolled out an enhanced multimedia business plan in May 2006 aimed at being more Internet-focused. The major emphasis of this restructuring is the dissemination of breaking news and information via PE.com, which is resulting in greater innovation and creativity while enhancing the quality of the printed product. In April 2006, The Dallas Morning News instituted a planned circulation reduction, narrowing its distribution perimeter to approximately 200 miles outside the Dallas/Fort Worth designated market area. Further refinements to the distribution perimeter were instituted early in 2007. These actions will result in annual savings of nearly $10 million. This circulation reduction is in line with our continuing strategy to concentrate on acquiring and retaining quality circulation and readership that provides advertisers with the strongest possible return on their investment.

In the fourth quarter, Belo announced the freezing of the Company’s pension plan effective March 31, 2007, with affected employees joining the majority of Belo employees already benefiting from the Company’s enhanced 401(k) plan. These retirement benefit changes will allow Belo to continue offering competitive compensation and benefits and manage ongoing retirement benefits responsibly. The changes are expected to have a neutral impact on earnings per share over the first five years and a positive impact of approximately $0.08 to $0.12 each year thereafter, along with significantly decreasing the Company’s required cash contributions over time.

DISTINGUISHED JOURNALISM AND CONTENT

Again in 2006, the exemplary journalistic efforts of Belo media companies were recognized with some of our industries’ most coveted awards.

• The heroic reporting of Belo’s CBS affiliate in New Orleans, WWL-TV, during Hurricane Katrina earned the station the three most significant awards in broadcast journalism – the duPont-Columbia Award, the George Foster Peabody Award and the national Edward R. Murrow Award, referred to in the industry as the “Triple Crown.”
• Four Belo television stations – KING-TV in Seattle/Tacoma, KHOU-TV in Houston, and KVUE-TV in Austin, along with WWL – were honored with a total of five national Edward R. Murrow Awards, the most national Murrow awards ever won in a single year by a commercial station group.
• The 2006 Pulitzer Prize for breaking news photography was awarded to The Dallas Morning News for its visual narrative of the devastation wrought by Hurricane Katrina. The Press-Enterprise’s Web site, projo.com, won the EPpy Award from Editor & Publisher for the industry’s Best Internet News Service in the under one million visitors category.
• The Dallas Morning News and DallasNews.com received the Associated Press Managing Editors Journalism Excellence Award for Online Convergence, awarded annually for the best story told both in print and online by a large newspaper. This is the second consecutive year that a Belo newspaper and Web site have received this important award.
• The Association of Opinion Page Editors awarded The Dallas Morning News first place for Best Op-Ed Page for the third time in four years.

I am extremely proud of the recognition our television stations, newspapers and Web sites continue to receive. The Company’s ongoing commitment to outstanding content across all media platforms is a distinct competitive advantage.

POLITICAL COVERAGE

In 2006, Belo television stations supported their local communities with comprehensive political coverage. Belo is deeply committed to providing high-quality election coverage that is informative to the electorate. Belo television stations provided more than 13 hours of free airtime to 146 congressional and gubernatorial candidates nationwide through the Company’s “It’s Your Time” program. Belo pioneered this program in 1996 to help viewers understand issues facing their local communities. In addition, Belo broadcast 150 hours of other political coverage on its 15 news-producing television stations in the weeks leading up to the November 2006 elections.

James M. “Jimmy” Moroney, Jr. 1921-2007

On February 18, 2007, Belo lost one of its greatest leaders, James M. “Jimmy” Moroney, Jr., at the age of 85. For more than 60 years, Jimmy helped drive the evolution of Belo into one of the nation’s largest media companies. Jimmy’s forward thinking led Belo’s expansion into broadcast television and new markets outside of Dallas. He exerted a steady and powerful influence on the Company’s transitions and expansions over half a century, and in many instances, he was the pivotal influence. In the 1970s, he played a critical role in converting Belo from a privately-held company founded by his grandfather, George Bannerman Dealey, into a vibrant publicly-traded company.Jimmy began working part-time for the company during summers while he was a student at the University of Texas in Austin. He joined The Dallas Morning News as a reporter in 1946 after serving in the U.S. Navy. He held numerous positions with the Company and in 1951 was named assistant treasurer, followed by his election to the board of directors in 1952. He was named treasurer in 1955, and vice president and treasurer in 1960. In 1970, he was promoted to executive vice president of Belo Corp. and president and CEO of Belo Broadcasting Corp. Four years later, he was named chairman of Belo Broadcasting. In 1980, Jimmy became president and chief executive officer of The Dallas Morning News and president and chief operating officer of Belo. He became chief executive officer of Belo in 1983 and the following year was elected chairman of the board. During his tenure as CEO, Jimmy was instrumental in the purchase of the Corinthian Broadcasting Group from The Dun & Bradstreet Corporation. At the time, the $606 million transaction was the largest ever in U.S. broadcast history. Jimmy retired as chairman of the board and chief executive officer in December 1986 at age 65. From 1987 to 2000, he remained on the board, serving as chairman of the executive committee, and upon retirement from the board, he was named chairman emeritus. Jimmy Moroney will be remembered always for his personal humility and unwavering belief in Belo’s institutional purposes.

OPERATING RESULTS

The Television Group achieved its highest level of spot revenues ever in 2006, both including and excluding political revenues, with an increase in total spot revenue of nearly 10 percent versus 2005. Total political revenues in 2006 were more than $47 million – much higher than initial expectations – and eight of Belo’s 19 television stations posted individual record political revenues. Even more importantly, 10 Belo television stations posted record performance in spot revenues before including political revenues. Television Group online ad revenues increased 55 percent, growing from 1.8 percent of television ad revenue in 2005 to 2.6 percent in 2006.

In most markets, Belo television stations hold a leading position both in ratings and in share of market television revenues. Market revenue audits showed Belo stations further increased their share of market television revenues in 9 of 15 markets in 2006. In the November Nielsens, Belo television stations sustained or improved their market-leading ratings positions in every market, with number one or number two ranked stations in 11 of 14 markets. This does not include the New Orleans market, where Nielsen has not produced rating information since Hurricane Katrina; however, Belo’s WWL-TV in New Orleans has long been the market leader.

Newspapers across the nation faced a challenging advertising environment throughout most of 2006. Still, the Newspaper Group’s advertising revenue finished down less than two percent for the full year. There were several highlights within the Newspaper Group’s full-year financial performance:

• Part-run advertising revenue at The Dallas Morning News increased 40 percent for the full year on the strength of the new zoned Metro editions and Neighbors, a hyper-local community publication.
• Classified real estate revenues at The Press-Enterprise increased 23 percent.
• Newspaper Group online advertising revenues continued to grow at an impressive rate, increasing 46 percent for full-year 2006, growing from 4.4 percent of newspaper ad revenue in 2005 to 6.5 percent in 2006.
• Newsprint expense decreased significantly, benefiting from the Company’s strategic decisions to limit third party circulation and reduce the distribution perimeter of The Dallas Morning News.

Despite widespread speculation to the contrary, newspapers are doing a great job of building and maintaining audiences and delivering strong value to our advertising partners. According to Scarborough Research, 78 percent of all American adults continue to read a newspaper over the course of a week. And, local audiences are expanding with the introduction of a variety of print and digital products. Newspapers have extended their masthead brands to the Web, leveraging their high credibility and successfully monetizing that reach on the Internet.The audience story at all Belo newspapers is one of growth through innovation and cultivating dynamic relationships with our local communities. The total audience reach of each Belo newspaper and its associated Web site has increased by a double-digit percentage over the last five years.

LOOKING AHEAD

The strategic priorities we’ve established for 2007 emphasize maximizing opportunities related to Belo’s legacy products while continuing to reshape the Company’s operations and pursue new revenue growth.• We will drive execution across the Company, with an emphasis on sales force effectiveness and resource reallocation that supports Belo’s overall strategic objectives.

• We will continue our vigilance in cost management across Belo’s legacy businesses.
• We will expand Belo’s Internet businesses and pursue opportunities that create sustainable incremental online revenue. Belo’s interactive media properties are increasing in importance overall, with online revenues growing from 3.1 percent of consolidated ad revenue in 2005 to 4.4 percent in 2006. The Company’s online audiences also grew considerably in 2006 with a 30 percent increase in page views and a 19 percent increase in unique users.
• We will continue to improve Belo’s underlying technology platform on top of the numerous initiatives in 2006, including the decision to outsource much of our technology management to IBM. We believe that improving and maintaining a leading technology platform is critical to our future.
• We will continue to recruit, retain and develop leadership talent throughout the Company. Belo’s greatest catalyst for progress continues to be the exceptionally talented professionals who lead our Company’s operations.

LEADERSHIP CHANGES

In February 2007, the Board of Directors made three promotions that reflect the Board’s and my conviction about how Belo will flourish in an Internet-centric environment. Dunia A. Shive was named president and chief operating officer. Donald F. “Skip” Cass, Jr. moved into a newly-created executive vice president role to oversee the Company’s enterprise-wide Internet and business development activities. And, Wesley A. “Wes” Jackson was promoted to president/General Manager of Belo Interactive Media.

Dunia, Skip and Wes have played key roles in the Company’s success in recent years. As my principal deputy, Dunia has grown in influence on both strategy and operations. These new roles empower Dunia, Skip and Wes to drive the business forward at an accelerated pace to take full advantage of Belo’s strong brands, proprietary content and advertiser relationships.

Jack Sander, Belo’s vice chairman, retired in December 2006. He made great contributions to the Company during a decade of leadership, first in the Television Group and then at the corporate level as president/Media Operations and vice chairman. Jack was an invaluable advisor, mentor and role model both within Belo and throughout the broadcast industry. I am pleased that he will continue his association with Belo by representing the Company within leading industry organizations and working on public policy issues.

Roger A. Enrico will retire from the Company’s Board of Directors at the Annual Meeting in May 2007 after 12 years of distinguished service. On behalf of the entire Board and Management Committee, I express our deep appreciation to Roger for his outstanding leadership, and wish him health and fulfillment in the future. We have benefited greatly from Roger’s insights and marketing genius through the years.

Belo will continue to evolve in 2007 as we work aggressively to move the Company’s businesses forward and shape them to reflect fundamental changes in media usage by consumers and advertisers. I applaud the hard work and dedication of my colleagues across the Company and thank them for their continued dedication to providing our audiences the highest quality journalism. Initiatives successfully executed in 2006 are the springboard for 2007 and beyond.