DallasNews Corp - Annual Report: 2010 (Form 10-K)

 

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, 2010

 

OR

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

 

Commission file no. 1-33741

 

A. H. Belo Corporation

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (214) 977-8200

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:  Series B Common Stock, $.01 par value

(Title of class)                                             

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes     No   .

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.  o

 

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

 

(Do not check if a smaller reporting company)

 

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

 

The aggregate market value of the registrant’s voting stock held by nonaffiliates on June 30, 2010, 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 $123,136,038.*

 

Shares of Common Stock outstanding at February 28, 2011: 21,509,611 shares. (Consisting of 19,118,076 shares of Series A Common Stock and 2,391,535 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:

 

Selected designated portions of the registrant’s definitive proxy statement, relating to the Annual Meeting of Stockholders to be held on May 18, 2011, are incorporated by reference into Parts II and III of this Annual Report.

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 1 

 

 

A. H. BELO CORPORATION
FORM 10-K
TABLE OF CONTENTS

 

 

 

PAGE 2  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

 

 

A. H. Belo Corporation (“A. H. Belo” or the “Company”), headquartered in Dallas, Texas, is a distinguished newspaper publishing and local news and information company that owns and operates four metropolitan daily newspapers and several associated Web sites, with publishing roots that trace to The Galveston Daily News, which began publication in 1842. A. H. Belo publishes The Dallas Morning News (www.dallasnews.com), Texas’ leading newspaper and winner of nine Pulitzer Prizes; The Providence Journal (www.projo.com), the oldest continuously-published daily newspaper in the U.S. and winner of four Pulitzer Prizes; and The Press-Enterprise (www.pe.com) (Riverside, CA), serving the Inland Southern California region and winner of one Pulitzer Prize; and The Denton Record-Chronicle (www.dentonrc.com). The Company publishes various niche publications targeting specific audiences, and its partnerships and/or investments include the Yahoo! Inc. (“Yahoo!”) Newspaper Consortium and Classified Ventures, LLC, owner of cars.com. A. H. Belo also owns and operates commercial printing, distribution and direct mail service businesses. Unless the context requires otherwise, all dollar amounts in the Annual Report on Form 10-K are in thousands, except per share amounts.

 

A. H. Belo Corporation was incorporated under Delaware law on October 1, 2007, as a wholly-owned subsidiary of Belo Corp. (“Belo”), to serve as a holding company in connection with Belo’s spin-off of its newspaper business and related assets and liabilities. The Company spun off from Belo effective February 8, 2008 through a pro-rata stock dividend to Belo shareholders (the “Distribution”). As a result, A. H. Belo became a separate public company on that date. Following the Distribution, Belo does not have any ownership interest in A. H. Belo, but continues to conduct limited business with A. H. Belo pursuant to a separation and distribution agreement and several ancillary agreements. A. H. Belo and Belo also co-own certain downtown Dallas real estate and several investments associated with their respective businesses.

 

The Dallas Morning News’ first edition was published on October 1, 1885. It is one of the leading metropolitan newspapers in America and its success is founded upon the highest standards of journalistic excellence, with an emphasis on comprehensive local news and information and community service. The Dallas Morning News is distributed primarily in Dallas County and 10 surrounding counties. Its nine Pulitzer Prizes were awarded for news reporting, editorial writing and photography with the most recent awarded in April 2010. The Dallas Morning News also publishes Briefing, a condensed newspaper distributed four days per week at no charge to non-subscribers of The Dallas Morning News in select coverage areas; and Al Dia, an award-winning Spanish-language newspaper published on Wednesdays and Saturdays and distributed at no charge in select coverage areas. The Dallas Morning News also publishes other news products targeted at communities in the North Texas area and young adult audiences. The Dallas Morning News’ financial and operating results also include The Denton Record-Chronicle, a daily newspaper operating in Denton, Texas, approximately 40 miles north of Dallas.

 

The Providence Journal, acquired by Belo in February 1997, is the leading newspaper in Rhode Island and southeastern Massachusetts. The Providence Journal is the oldest major daily newspaper of general circulation and continuous publication in the United States. The Press-Enterprise was acquired by Belo in July 1997. The Press-Enterprise is distributed in the Inland Southern California region, which includes Riverside and San Bernardino Counties. The Press-Enterprise also publishes La Prensa, a weekly Spanish-language newspaper distributed at no charge in select coverage areas as well as The Business Press, a weekly paid business publication. The Providence Journal and The Press-Enterprise have long histories of journalistic excellence.

 

The Company’s primary revenues are from advertising sold in published issues of its newspapers and on the Company’s Web sites, circulation revenue from the sale of newspapers to subscribers and single copy customers, and printing and distribution revenue which consists primarily of commercial printing, distribution and direct mail services. The following sets forth the distribution of Company’s revenues in 2010 and 2009 by revenue type:

 

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 3 

 

Advertising

 

The Company has a comprehensive portfolio of print, online and digital advertising products and services. For 2010, advertising revenues accounted for approximately 63.7 percent of total revenues of which 11.8 percent of advertising revenue was generated by the Company’s digital advertising products. A. H. Belo’s strategy is to expand advertising revenue by creating new digital and print products that complement the Company’s core newspapers, including niche and specialty publications, direct mail advertising, total market coverage publications, zoned editions, and event-based publications, all of which enable us to reach new markets and advertisers. These product offerings allow existing advertisers to reach their target audience through integrated advertising campaigns, while also providing us an attractive portfolio of products with which to attract new clients. The combined reach of the Company’s core daily newspapers, digital platforms and niche publications enable us to maintain a position as a leading local media outlet in each of our markets.

 

A. H. Belo’s focus is to offer both mass distribution and targeted products in our markets and this is accomplished in the following ways:

 

Display Advertising:

 

Display advertising revenue consists of sales of advertising space within our newspapers and niche publications to local, regional or national retail and service businesses with local operations, affiliates or resellers.

 

Classified Advertising:

 

Classified advertising revenue comprises sales of advertising space in the classified and other sections of our newspapers which include certain automotive, real estate, employment and other.

 

Preprints:

 

Preprint revenue is earned from sales of preprinted advertisements or circulars inserted into our core newspapers and niche publications, or distributed by mail or third-party distributors to households in targeted areas in order to provide total market coverage for advertisers. The Company has developed capabilities that allow its advertisers to selectively target preprint distribution at the sub-zip code level in order to optimize the coverage for the advertisers’ locations.

 

Digital:

 

Digital advertising revenue consists of sales of display, banner, video, behavioral targeting, search, rich media, directories, classified or other advertising on digital platforms associated and integrated with our print publications and on third party affiliated Web sites, such as Yahoo! and cars.com.

 

The following sets forth the distribution of Company’s advertising revenues in 2010 and 2009 by product type:

 

 

In addition to daily newspapers, the Company publishes a number of niche publications such as condensed and weekly newspapers, Spanish-language newspapers, business, fashion or entertainment publications which are targeted at specific demographics or geographies. These niche publications provide a vehicle for delivery of display, classified and preprint advertising, typically to non-subscribers of the Company’s core newspapers and typically at no charge. These niche publications provide unique content, but also leverage the news content from the core newspapers while utilizing the Company’s printing and distribution infrastructure to drive additional advertising revenue at a low incremental cost.

 

 

PAGE 4  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

Circulation

 

Circulation revenues accounted for approximately 28.9 percent of total revenues for 2010 and represent subscription and single copy sales revenue related primarily to the Company’s core newspapers. A. H. Belo’s steadfast commitment to producing superior, unduplicated local content enables the Company’s newspapers to charge premium subscription rates. In 2009, The Dallas Morning News, The Providence Journal and The Press-Enterprise developed and implemented consumer revenue strategies that raised home delivery and single copy prices by up to 50 percent in some markets.

 

The Company’s newspapers also operate Web sites (dallasnews.com, projo.com, pe.com and other related Web sites) offering users comprehensive news information, user-generated content, advertising, e-commerce and other services. Prior to January 2011, the Company did not charge subscription fees for access to news content on each newspaper’s digital platforms, other than for The Dallas Morning News and The Press-Enterprise e-Editions. During the first quarter of 2011, The Dallas Morning News is introducing several initiatives to strengthen its ability to engage readers on digital platforms with relevant, local, customized content and advertising. The Dallas Morning News re-launched its flagship Web site, dallasnews.com, with a greatly improved design, released an upgraded iPhone application and released its first iPad application. Beginning on March 8, 2011, The Dallas Morning News will provide home delivery subscribers with access to all of the high-quality digital local content available on dallasnews.com, on its e-Edition or on its new iPhone and iPad applications as part of their subscription. Digital only customers may subscribe and obtain access to the local content on dallasnews.com or on one or more of the other digital platforms at varying price points. Breaking news, wire stories and classified content will remain free on dallasnews.com. The Providence Journal and Riverside Press-Enterprise expect to introduce iPhone and iPad applications at a later date and the Company is currently exploring other digital platforms for delivery of content and advertising. Additionally, the Company continues to apply new digital tools with many of its journalists using social media such as blogs, Facebook and Twitter to engage our local customers.

 

The following table sets forth average circulation information concerning A. H. Belo’s primary daily newspaper operations and niche publications:

 

 

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 5 

 

 

Printing and Distribution

 

Printing and distribution revenues comprised approximately 7.4 percent of the Company’s 2010 revenue and consists primarily of commercial printing, distribution and direct mail service. The Company provides commercial printing services, primarily for national newspapers such as The Wall Street Journal, The New York Times and USA Today, that require regional printing. Newsprint utilized in the production of large national newspapers is generally provided by the customer. The Company also provides home delivery and retail outlet distribution services for such national newspapers, as well as for regional newspapers delivered into our coverage areas, such as The Boston Globe and the Los Angeles Times. The Company also operates a direct mail service business in Phoenix, Arizona and Las Vegas, Nevada.

 

Raw Materials and Distribution

 

The basic material used in publishing newspapers is newsprint. Currently, most of the Company’s newsprint is obtained through a purchasing consortium. Management believes the Company’s sources of newsprint, along with available alternate sources, are adequate for the Company’s current needs.

 

During 2010 Company operations consumed approximately 69,300 metric tons of newsprint at an average cost of $568 per metric ton. Consumption of newsprint in 2009 was approximately 74,800 metric tons at an average cost of $624 per metric ton. The Company experienced a decline in newsprint consumption in 2010 due to tightening our circulation footprint and declining circulation. During the second half of 2010, the Company’s newsprint consumption increased compared to the first half of 2010 due to increased page counts in both core newspapers and niche publications, as well as a new commercial printing contract. Newsprint purchase price per ton increased approximately 3.6 percent in 2010.

 

The Company’s newspapers and other commercial print products are produced at facilities in each geographic market. Distribution of printed product to subscribers, retailers and newsstands is made under terms of agreements with third-party distributors. The Company believes a sufficient number of third-party distributors exist in each geographic market to allow uninterrupted distribution of the Company’s products.

 

Other Interests

 

In addition to its core newspaper operations, A. H. Belo and Belo, through their subsidiaries, together own 6.6 percent of Classified Ventures, LLC, a joint venture in which the other owners are Gannett Co., Inc., The McClatchy Company, Tribune Company, and The Washington Post Company. The three principal online businesses Classified Ventures, LLC operates are cars.com, apartments.com, and homegain.com. A. H. Belo and Belo, through Belo Lead Management LLC, have also invested in ResponseLogix, Inc. (www.responselogix.com). ResponseLogix provides advanced, Internet-based lead management solutions to auto dealers.

 

A. H. Belo and Belo Corp. also co-own, through Belo Investment, LLC, (“Belo Investment”), various real estate properties including The Belo Building, a 17-story downtown Dallas office building formerly occupied by certain A. H. Belo employees, related parking sites, and other specified downtown Dallas real estate. A. H. Belo and Belo each own 50 percent of Belo Investment and each lease from Belo Investment 50 percent of the available rental space in The Belo Building and related parking sites under long-term leases that are terminable under various conditions. A third party real estate services firm, engaged by Belo Investment, manages The Belo Building and other real estate owned by Belo Investment.

 

Our Competitive Strengths and Challenges

 

Our strengths are:

 

 

 

PAGE 6  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

 

Our newspapers, and the newspaper industry as a whole, have experienced challenges to maintain and grow print revenues and circulation. This results from, among other factors, increased competition from other media, particularly the Internet. In addition to increased competition, the recent economic slowdown in the United States adversely affected our business. A significant decline in circulation could further adversely impact advertising and circulation revenues. The decline in advertising revenues has been particularly realized in the display and classified categories, as advertising budgets have been reduced and advertisers have shifted to other media. In response to these advertising decreases, A. H. Belo has worked to diversify its revenue base by increasing circulation prices and expanding the reach of its printed niche products to wider audiences. The Company has also developed broader digital strategies designed to provide readers with multiple platforms for obtaining online access to local news coverage while protecting the Company’s core print business. The Company has focused efforts on obtaining key demographic data from readers. This allows the Company to provide digital content most desired by readers, and modify marketing and distribution strategies to enable the Company’s newspapers and Web sites to reach potential customers most valued by advertisers. The Company has established strategic relationships with major Internet companies, and invested in certain companies with innovative products and/or technologies. In selected cases, A. H. Belo markets, uses and/or sells products and/or services provided by companies in which it has invested. A. H. Belo has also in recent years focused on neighborhood and other local community and state news, both in print and online. The Company has implemented measures to control or decrease operating expenses. These measures include reducing the Company’s workforce, lowering salaries and benefits, and restructuring the Company’s newspapers through organizational realignments.

 

Strategies and Opportunities

 

A. H. Belo is committed to publishing newspapers and online content of the highest quality and integrity, and creating and developing innovative print and online products addressing the needs of customers and advertisers. Our goal is to have positive earnings before interest, taxes, depreciation and amortization and to generate positive cash flow and create value for shareholders over the long-term through stock price appreciation and dividends, if and when reinstituted by A. H. Belo’s Board of Directors. The Company intends to achieve these objectives through the following strategies:

 

 

Competition

 

The Company faces competition for print and digital advertising, and circulation. The competition for advertising comes from local, regional, and national newspapers, the Internet, magazines, broadcast, cable and satellite television, telecom products and services, radio, direct mail, yellow pages, and other media. Increased competition has come from the Internet, other new media formats, and services other than traditional newspapers, many of which are free to consumers and/or businesses. The Company competes on factors including, but not limited to, its audience size and demographics, the frequency and timeliness of its interaction with audiences, advertising rates, and its ability to target and deliver prospective customers with a return on investment. The Dallas Morning News has one metropolitan daily newspaper competitor in certain areas of Dallas/Fort Worth. The Providence Journal competes with four daily newspapers in Rhode Island and southeastern Massachusetts. The Press-Enterprise competes with seven daily newspapers in the Inland Southern California area.

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 7 

 

Seasonality

 

A. H. Belo’s advertising revenues are subject to moderate seasonality, with advertising revenues typically higher in the fourth calendar quarter of each year because of the holiday shopping season. The level of advertising sales in any period may also be affected by advertisers’ decisions to increase or decrease their advertising expenditures in response to anticipated consumer demand and general economic conditions.

 

Employees

 

As of December 31, 2010, the Company had approximately 2,200 full-time and 280 part-time employees. Approximately 330 employees are represented by various employee unions. All union-represented employees are located in Providence, Rhode Island. The Company believes its relations with its employees are satisfactory.

 

 

PAGE 8  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

Available Information

 

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

 

 

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

 

A. H. Belo may be unable to respond to changing consumer preferences resulting from evolving industry trends and technology changes.

 

Print circulation and readership of A. H. Belo’s newspapers, and the newspaper industry overall, are being affected by the preferences of some consumers to receive all or a portion of their news in new formats and from sources other than traditional newspapers, and by the proliferation of these new media formats and sources. Information delivery and programming alternatives such as the Internet, various mobile devices, cable, direct satellite-to-home services, pay-per-view, and home video and entertainment systems have fractionalized newspaper readership. Over the past decade, the Internet, cable television programming services, and other emerging media distribution platforms have captured increasing market share, while the aggregate print circulation of major newspapers has declined due to the factors cited above as well as conscious decisions by newspaper publishers to reduce distribution to core geographies.

 

A. H. Belo’s businesses operate in highly competitive media markets, and the Company’s ability to maintain market share and generate revenues depends on how effectively the Company competes with existing and new competition.

 

Our businesses operate in highly competitive media markets. A. H. Belo’s newspapers compete for audiences and advertising revenue with other newspapers as well as with the Internet, magazines, broadcast, cable and satellite television, telecom products and services, radio, direct mail, yellow pages and other media. Some of A. H. Belo’s current and potential competitors have greater financial and other resources. A. H. Belo’s newspaper publications generate significant percentages of their advertising revenues from a finite number of sources. In recent years, Web sites dedicated to automotive, employment, real estate, and general classified advertising have become significant competitors of A. H. Belo’s newspapers and Web sites. As a result, even in the absence of a recession or economic downturn, technological, industry, and other changes specific to these advertising sources could reduce advertising revenues and adversely affect A. H. Belo’s financial condition and results of operations.

 

A. H. Belo’s revenues primarily consist of advertising and paid circulation. Competition for advertising expenditures and paid circulation comes from local, regional, and national newspapers (including free daily newspapers), magazines, broadcast, cable and satellite television, telecom products and services, radio, direct mail, yellow pages, the Internet, and other media. The National Do Not Call Registry has affected the way newspapers solicit home-delivery circulation, particularly for larger newspapers that historically have relied on telemarketing. Competition for newspaper advertising revenue is based largely upon advertiser results, advertising rates, readership, demographics, and circulation. Competition for circulation is based largely upon the content of the newspaper, its price, editorial quality, and customer service. A. H. Belo’s local and regional competitors include newspapers that are typically related to each market, but the Company has many competitors for advertising revenues that are larger and have greater financial and distribution resources. Circulation revenues and the Company’s ability to achieve price increases for the Company’s print products may be affected by competition from other publications and other forms of media available in the Company’s various markets, declining consumer spending on discretionary items like newspapers, decreasing amounts of free time, and declining frequency of regular newspaper buying among certain demographics. A. H. Belo may incur higher costs competing for advertising dollars and paid circulation, and if the Company is not able to compete effectively for advertising dollars and paid circulation, revenues may decline and the Company’s financial condition and results of operations may be adversely affected.

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 9 

 

There can be no assurance that the Company’s new consumer-driven revenue initiatives will be successful.

 

During the first quarter of 2011, the Company announced new consumer-driven revenue initiatives, including a relaunch of The Dallas Morning News’ Web site and new digital applications, including a new application for the iPhone and its first application for the iPad. These initiatives include certain increased subscription pricing and new pricing structures. There can be no assurance that these new initiatives will be embraced by existing subscribers or allow the Company to attract new subscribers.

 

The economic slowdown recently experienced in the United States, and national and worldwide financial instability, may continue to adversely affect the Company’s business, financial condition and results of operations.

 

Advertisers generally reduce spending during economic downturns. The recent economic slowdown in the United States has adversely affected the Company’s advertising revenues and may continue to adversely affect its business by reducing demand for local and national advertising. Advertising revenues as a percent of A. H. Belo’s total revenue have steadily declined from approximately 76.0 percent in 2008 to 63.7 percent in 2010. Advertising demand is a factor in determining advertising rates. A prolonged recession and diminished demand could result in a reduction in the advertising rate structure, leading to lower revenues and operating margins. Additionally, the Company’s advertising customers could face liquidity constraints. If such events were to occur, the Company could encounter difficulties in realizing its receivables from advertisers, which could increase the Company’s exposure to loss if these receivables were determined to be uncollectible.

 

Decreases in circulation may adversely affect A. H. Belo’s advertising and circulation revenues.

 

A. H. Belo’s newspapers, and the newspaper industry as a whole, are experiencing challenges to maintain and grow print circulation. A significant decline in circulation could affect the rate and volume of advertising revenues. To maintain the Company’s circulation base, A. H. Belo may incur additional costs, and may not be able to recover these costs through circulation and advertising revenues. The Company may incur increased spending on marketing designed to retain its existing subscriber base and continue or create niche publications targeted at specific market groups. The Company may also incur increased marketing costs to drive traffic to its proprietary Web sites.

 

Access to credit may be adversely affected based on instability in worldwide credit markets and an uncertain outlook for the newspaper industry.

 

On December 3, 2009, the Company entered into the second amendment to the Amended and Restated Credit Agreement (the Amended and Restated Credit Agreement as so amended, the “Credit Agreement”) reducing its available credit from $50 million to $25 million to reduce the costs of unused available credit. The Credit Agreement expires in September 2012. The Company’s ability to access funds under its Credit Agreement, if needed, depends on the Company’s compliance with certain financial covenants in the Credit Agreement. Disruptions in the capital and credit markets, as have been experienced since mid-2008, could adversely affect the Company’s ability to draw on the credit facility under its Credit Agreement. Further, additional uncertainty in the newspaper industry may limit the Company’s ability to renew or obtain credit from other sources when the facility expires or may reduce the amount of credit available or may increase the costs associated with obtaining credit. Any disruption could require the Company to take measures to conserve cash until the markets and industry stabilizes or until alternative credit arrangements or other funding for its business needs can be arranged.

 

The Company’s potential inability to successfully execute cost control measures could result in total operating costs that are greater than expected.

 

The Company has taken steps to lower its costs by reducing staff and employee benefits and implementing general cost-control measures and expects to continue cost control efforts. If revenues continue to decline, the ability to continue cost reduction efforts to match revenue declines could be limited. If the Company does not achieve expected savings, or if operating costs increase due to the creation and development of new products or otherwise, total operating costs may be greater than anticipated.

 

The Company could experience inflationary pressures as suppliers increase prices after experiencing a period of price suppression and the Company may be unable to initiate price increases or additional cost reductions to offset these inflationary pressures. The Company’s inability to offset inflationary pressures could adversely affect its financial condition and results of operations.

 

 

PAGE 10  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

The basic raw material for newspapers is newsprint, the cost of which for the last three years has represented between approximately 8.1 percent and 11.7 percent of A. H. Belo’s revenues. The price of newsprint historically has been volatile. Consolidation in the North American newsprint industry has reduced the number of suppliers and has led to paper mill closures and conversions to other grades of paper, which in turn has decreased overall newsprint capacity and increased the likelihood of higher prices. A. H. Belo currently purchases most of its newsprint through a purchasing consortium. Significant increases in newsprint costs or the Company’s inability to obtain an adequate supply of newsprint in the future could adversely affect its financial condition and results of operations.

 

Recently enacted health care mandates may require the Company to evaluate the scope of health care benefits offered to its workforce and the method in which health care benefits are delivered. These mandates may increase the Company’s cost and the employees’ costs. Higher health care costs may reduce the Company’s earnings, resulting in (i) an inability to reinvest sufficient capital in its operations, (ii) an inability to pay dividends, and (iii) an increase in the cost of capital, all of which could have a negative effect on the Company’s stock price.

 

The Company believes that appropriate steps have been and are being taken to implement cost control efforts. However, if costs are not managed properly, such steps may affect the quality of A. H. Belo’s products, its ability to generate future revenue, and compliance with the financial covenants as outlined in the Credit Agreement. In addition, reductions in staff and employee benefits could adversely affect the Company’s ability to attract and retain key employees.

 

A. H. Belo depends on key personnel and may not be able to operate and grow its business effectively if A. H. Belo loses the services of any of its senior executive officers or key operational employees or is unable to attract and retain qualified personnel in the future.

 

A. H. Belo relies on the efforts of its senior executive officers and other management. The success of the Company’s business depends heavily on its ability to retain current management and to attract and retain qualified personnel in the future. Competition for senior management personnel is intense and A. H. Belo may not be able to retain its key personnel. The Company has not entered into employment agreements with key management personnel, other than a retention and relocation agreement with Mr. John C. McKeon, President and General Manager of The Dallas Morning News, Inc., and does not have “key person” insurance for any of its senior executive officers or other key personnel. To mitigate this risk, A. H. Belo has a change in control severance plan covering key management personnel that is triggered under certain conditions if a change in control occurs.

 

A. H. Belo’s business may be negatively affected by work stoppages, slowdowns, or strikes by its employees.

 

Currently, one of A. H. Belo’s primary newspapers, The Providence Journal, is party to collective bargaining agreements with unions representing approximately 330 of its employees. These agreements expire in 2011, 2012 and 2013, unless extended. A. H. Belo cannot predict the results of negotiation of future collective bargaining agreements, whether future collective bargaining agreements will be negotiated without interruptions in the Company’s business, or what the possible effect of future collective bargaining agreements will be on its business, financial condition, and results of operations. The Company also cannot assume that strikes or work stoppages will not occur in the future in connection with labor negotiations or otherwise. Any prolonged strike or work stoppage could adversely affect the Company’s business, financial condition, and results of operations.

 

The Company has limited experience managing a pension plan.

 

In October 2010, the Company agreed with Belo to split The G. B. Dealey Retirement Pension Plan (“GBD Pension Plan”) which is sponsored by Belo, effective January 1, 2011. Pension assets and obligations for current and former employees of A. H. Belo participating in this plan were transferred to two newly-formed A. H. Belo pension plans (“New Pension Plans”). The New Pension Plans are sponsored solely by the Company and provide participants the same benefits as they had under the GBD Pension Plan. The Company has limited experience managing such plans as these, and, in its new fiduciary role, the Company must develop appropriate investment strategies and establish the appropriate level of internal controls, which risk excess administration costs and lower returns on the plans’ assets. Such events could have an adverse impact on the Company’s financial condition and results of operations.

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 11 

 

The New Pension Plans are currently underfunded and the Company expects it will be required to make significant future contributions to the New Pension Plans. Additionally, if the actuarial assumptions for the New Pension Plans differ significantly from actual results, significant changes could occur to funding requirements.

 

As of December 31, 2010, the estimated unfunded pension liability that transferred to the New Pension Plans, which are frozen to new participants, was approximately $132,346. Unanticipated volatility in equity markets or changes in interest rates, longevity or legislation, such as the Pension Protection Act, in the U.S., could result in significant increases or decreases in the liability recorded and the timing of funding requirements.

 

Adverse results from pending or new litigation or governmental proceedings or investigations could adversely affect A. H. Belo’s financial condition and results of operations.

 

From time to time, A. H. Belo and its subsidiaries are subject to litigation, governmental proceedings, and investigations. Current matters include those described under “Item 3. Legal Proceedings.” Adverse determinations in any of these pending or future matters could require A. H. Belo to make monetary payments or result in other sanctions or findings that could affect adversely the Company’s business, financial condition, and results of operations.

 

A. H. Belo’s directors and executive officers have significant combined voting power and significant influence over its management and affairs.

 

A. H. Belo directors and executive officers hold approximately 54 percent of the voting power of The Company’s outstanding voting stock as of February 28, 2011. A. H. Belo’s Series A common stock has one vote per share and Series B common stock has 10 votes per share. Generally, except for certain extraordinary corporate transactions, all matters to be voted on by A. H. Belo’s shareholders must be approved by a majority of the voting power of the Company’s outstanding voting stock, voting as a single class. Certain extraordinary corporate transactions, such as a merger, consolidation, sale of all or substantially all of the Company’s property and assets, or a dissolution, the alteration, amendment, or repeal of A. H. Belo’s bylaws by shareholders, and certain amendments to A. H. Belo’s certificate of incorporation, require the affirmative vote of the holders of at least two-thirds of the voting power of the outstanding voting stock, voting as a single class. Accordingly, A. H. Belo’s directors and executive officers will have significant influence over the Company’s management and affairs and over all matters requiring shareholder approval, including the election of directors and significant corporate transactions. This ownership may limit other shareholders’ ability to influence corporate matters and, as a result, A. H. Belo may take actions that some shareholders do not view as beneficial.

 

Certain members of management, directors, and shareholders may face actual or potential conflicts of interest.

 

A. H. Belo and Belo Corp. have several directors in common. Robert W. Decherd serves as the Non-Executive Chairman of the Board of Belo and as Chairman of the Board, President and Chief Executive Officer of A. H. Belo. Mr. Decherd and Dealey D. Herndon, his sister, serve as directors of A. H. Belo and Belo. James M. Moroney III, Executive Vice President of A. H. Belo and the Publisher and Chief Executive Officer of The Dallas Morning News, is their second cousin. Mr. Moroney also serves as a director of Belo. In addition, the management and directors of both companies own common stock in both companies. This ownership overlap and these common directors could create, or appear to create, potential conflicts of interest when A. H. Belo’s and Belo’s management and directors face decisions that could have different implications for A. H. Belo and Belo. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between A. H. Belo and Belo regarding the terms of the agreements governing the Distribution and the relationship between, as well as other agreements between, A. H. Belo and Belo.

 

 

None.

 

 

PAGE 12  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

 

The Company owns or leases the following properties:

 

 

 

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

 

 

On October 24, 2006, 18 former employees of The Dallas Morning News filed a lawsuit against various A. H. Belo-related parties in the United States District Court for the Northern District of Texas. The plaintiffs’ lawsuit mainly consists of claims of unlawful discrimination and ERISA violations. In June 2007, the court issued a memorandum order granting in part and denying in part defendants’ motion to dismiss. In August 2007 and in March 2009, the court dismissed certain additional claims. A summary judgment motion seeking dismissal of all remaining claims against the defendants is pending. A trial date, previously set for early 2011, is now set for September 19, 2011. The Company believes the lawsuit is without merit and is defending it vigorously. An estimate as to probability of, as well as amount or range of, potential loss cannot be provided with certainty at this time.

 

On April 13, 2009, four former independent home delivery contractors of The Press-Enterprise filed a purported class action lawsuit against A. H. Belo, Belo Corp., Press-Enterprise Company, and others in The Superior Court of the State of California, Riverside County. Plaintiffs alleged, on behalf of themselves and those similarly situated, that they were improperly classified as independent contractors instead of as employees. Plaintiffs filed a first amended complaint in July 2010 that added a claim under the federal Fair Labor Standards Act. The original and amended complaints seek recovery of allegedly unpaid wages, meal and rest period payments, penalties, expenses, interest, attorneys’ fees, and costs. During the second quarter of 2010, A. H. Belo and the other parties to the lawsuit reached a preliminary agreement to settle the lawsuit. The Court preliminarily approved the agreement on September 16, 2010 and granted final approval on February 25, 2011. A. H. Belo’s liability under the settlement is $2,112, which was fully accrued as of December 31, 2010. The accrual for this settlement is recorded in Other accrued expenses in the consolidated balance sheets and the corresponding expense is included in Other production, distribution and operating costs in the consolidated statements of operations. The Company has made $1,200 in payments to an escrow account per the terms of the preliminary agreement, as of December 31, 2010, and its obligation under the approved settlement was fully funded in the first quarter of 2011.

 

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

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 13 

 

 

 

 

The Company’s authorized common equity consists of 125,000,000 shares of common stock, par value $.01 per share. The Company has two series of common stock outstanding, Series A and Series B. Shares of the two series are identical in all respects except as noted herein. Series B shares are entitled to 10 votes per share on all matters submitted to a vote of shareholders; Series A shares are entitled to one vote per share. Transferability of the Series B shares is limited to family members and affiliated entities of the holder and Series B shares are convertible at any time on a one-for-one basis into Series A shares, and upon a transfer other than as described above, Series B shares automatically convert into Series A shares. Shares of the Company’s Series A common stock are traded on the New York Stock Exchange (NYSE symbol: AHC). There is no established public trading market for shares of Series B common stock. The Company’s shares of Series A common stock began trading on the New York Stock Exchange on February 11, 2008.

 

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 2010 and 2009. No dividends were declared or paid in any of the periods presented.

 

 

The closing price of the Company’s Series A common stock as reported on the New York Stock Exchange on February 28, 2011 was $7.19. The approximate number of shareholders of record of the Company’s Series A and Series B common stock at the close of business on February 28, 2011 was 562 and 232, respectively.

 

The declaration and payment of dividends is subject to the discretion of A. H. Belo’s Board of Directors, and any determination as to the payment of such dividends, as well as the amount and timing of such dividends, will depend on, among other things, A. H. Belo’s results of operations and financial condition, earnings, capital requirements, debt covenants, other contractual restrictions, prospects, applicable law, general economic and business conditions, and other future factors that A. H. Belo’s Board deems relevant. The Company’s Credit Agreement allows the Company to pay dividends when the Company’s fixed charge coverage ratio exceeds 1.2 to 1.0 and the aggregate availability under the credit facility exceeds $15,000. A. H. Belo cannot provide any assurance that any dividends will be declared and paid due to the foregoing factors and the factors discussed in “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.

 

Equity Compensation Plan Information

 

The information set forth under the heading “Equity Compensation Plan Information” contained in the definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 18, 2011 is incorporated herein by reference.

 

Issuer Purchases of Equity Securities

 

The Company did not repurchase any Series A or Series B common stock during the quarter ended December 31, 2010.

 

Sales of Unregistered Securities

 

During 2010 and 2009, 207,806 shares and 260,826 shares of the Company’s Series B common stock were converted, on a one-for-one basis, into shares of Series A common stock, respectively. The Company did not register the issuance of these securities under the Securities Act of 1933 (“Securities Act”) in reliance upon the exemption under Section 3(a)(9) of the Securities Act.

 

 

PAGE 14  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

Performance Graph

 

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

 

The following graph compares the annual cumulative shareholder return on an investment of $100 on February 11, 2008, with a closing price of $14.40 per share, in A. H. Belo’s Series A common stock, based on the market price of the Series A common stock and assuming reinvestment of dividends, with the cumulative total return, assuming reinvestment of dividends, of a similar investment in (1) companies on the Standard & Poor’s 500 Stock Index, and (2) the 2010 group of peer companies selected on a line-of-business basis and weighted for market capitalization. The Company’s peer group includes the following companies: Gannett Co, Inc., The E. W. Scripps Company, Journal Communications, Lee Enterprises, Inc., The McClatchy Company, Media General, Inc. and The New York Times Company. A. H. Belo is not included in the calculation of peer group cumulative total shareholder return on investment.

 

Total Return Performance

 

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 15 

 

 

The following table presents selected financial data of the Company for each of the years 2006 through 2010. For a more complete understanding of this selected financial data, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and the Notes thereto.

 

 

 

 

Forward-Looking Statements

 

The following information should be read in conjunction with the other sections of this Annual Report on Form 10-K. Statements in this Annual Report on Form 10-K concerning A. H. Belo’s business outlook or future economic performance, anticipated profitability, revenues, expenses, dividends, capital expenditures, investments, impairments, business initiatives, pension plan contributions and obligations, real estate sales, future financings, and other financial and non-financial items that are not historical facts, are “forward-looking statements” as the term is defined under applicable federal securities laws. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those statements.

 

Such risks, uncertainties and factors include, but are not limited to, changes in capital market conditions and prospects, and other factors such as changes in advertising demand, interest rates and newsprint prices; newspaper circulation trends and other circulation matters, including changes in readership patterns and demography, and audits and related actions by the Audit Bureau of Circulations; challenges in achieving expense reduction goals in a timely manner, and the resulting potential effect on operations; technological changes; development of Internet commerce; industry cycles; changes in pricing or other actions by competitors and suppliers; consumer acceptance of new products and business initiatives; regulatory, tax and legal changes; adoption of new accounting standards or changes in existing accounting standards by the Financial Accounting Standards Board or other accounting standard-setting bodies or authorities; the effects of Company acquisitions, dispositions and co-owned ventures and investments; returns on pension plan assets; general economic conditions; significant armed conflict; and other factors beyond our control, as well as other risks described elsewhere in this Annual Report on Form 10-K and in the Company’s other public disclosures, and filings with the Securities and Exchange Commission.

 

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

 

Unless the context requires otherwise, all dollar amounts are in thousands, except per share amounts.

 

OVERVIEW

 

A. H. Belo Corporation

 

A. H. Belo Corporation, headquartered in Dallas, Texas, is a distinguished newspaper publishing and local news and information company that owns and operates four daily newspapers several associated Web sites. A. H. Belo publishes The Dallas Morning News (www.dallasnews.com), Texas’ leading newspaper and winner of nine Pulitzer Prizes; The Providence Journal (www.projo.com), the oldest continuously-published daily newspaper in the U.S. and winner of four Pulitzer Prizes; The Press-Enterprise (www.pe.com) (Riverside, CA), serving southern California’s Inland Empire region and winner of one Pulitzer Prize; and The Denton Record-Chronicle (www.dentonrc.com). The Company publishes various specialty publications targeting niche

 

 

PAGE 16  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

audiences, and its partnerships and/or investments include the Yahoo! Newspaper Consortium and Classified Ventures, LLC, owner of cars.com. A. H. Belo also owns and operates commercial printing, distribution and direct mail service businesses.

 

The Company was spun off from Belo Corp. effective February 8, 2008 through a pro-rata stock dividend to Belo shareholders. As a consequence, A. H. Belo became a separate public company on that date. Except as noted herein, Belo has no further ownership interest in A. H. Belo or in any newspaper or related businesses, and A. H. Belo has no ownership interest in Belo or in any television station or related businesses, but continues to conduct limited business with Belo. A. H. Belo’s relationship with Belo is now governed by a separation and distribution agreement and several ancillary agreements. A. H. Belo and Belo also co-own certain downtown Dallas real estate and several investments associated with their respective businesses.

 

A. H. Belo intends for the discussion of its financial condition and results of operations that follows to provide information that will assist in understanding its financial statements, the changes in certain key items in those statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies, and estimates affect its financial statements.

 

Basis of Presentation

 

The consolidated financial statements in this Annual Report on Form 10-K include the accounts of A. H. Belo and its wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions. Operating expenses in the consolidated income statements prior to February 8, 2008 reflect all of the direct expenses of the business together with allocations of certain Belo Corp. corporate expenses that have been charged to the Company based on use or other methodologies which the Company believes were appropriate for such expenses. See Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies. The Company believes these assumptions and allocations have been made on a reasonable and appropriate basis under the circumstances. Certain A. H. Belo and Belo operating units currently share news and information content at no cost to the recipient.

 

The financial information for the periods prior to February 8, 2008 included in this Annual Report may not reflect what A. H. Belo’s results of operations, financial position, and cash flows would have been had it been a separate public company during the periods presented or be indicative of what its results of operations, financial position, and cash flows may be in the future as a separate public company. A. H. Belo’s financial information for the periods prior to February 8, 2008 reflects allocations for services historically provided by Belo, and the Company expects these allocated costs to be different from the actual costs A. H. Belo will incur for these services in the future as a separate public company. Subsequent to February 8, 2008, some of the costs previously allocated to the Company are being provided by Belo under a services agreement and other inter-company agreements. In some instances, the costs incurred for these services as a separate public company may be higher than the share of total Belo expenses allocated to A. H. Belo prior to February 8, 2008. In addition, the financial information for the periods prior to February 8, 2008 does not reflect the increased costs associated with being a separate public company, including expected changes in our cost structure, personnel needs, financing, and operations of our business as a result of the Distribution.

 

Overview of 2010 Significant Transactions

 

The following represent significant transactions and events effecting A. H. Belo’s results of operations and financial position during 2010:

 

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 17 

 

 

RESULTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

 

Consolidated Results of Operations for the Years Ended December 31, 2010, 2009 and 2008

 

						Percentage								Percentage
Years Ended December 31,		2010				Change				2009				Change				2008
Net operating revenues		$	487,308				(6.0	)%		$	518,348				(18.7	)%		$	637,314
Operating costs and expenses			625,377				(1.8	)%			636,659				(9.0	)%			699,271
Other income (expense), net			6,259				(404.0	)%			(2,059	)			(39.8	)%			(3,420	)
Loss before income taxes			(131,810	)			9.5	%			(120,370	)			84.1	%			(65,377	)
Income tax (benefit)			(7,575	)			(39.3	)%			(12,475	)			(21.3	)%			(15,857	)
Net loss		$	(124,235	)			15.1	%		$	(107,895	)			117.9	%		$	(49,520	)

 

The table below presents the components of A. H. Belo’s net operating revenues for the last three years:

 

 

In 2010, 2009 and 2008 the Company’s revenues were adversely affected by economic and operating pressures. Advertisers tend to reduce ad budgets more than other expenses in times of economic uncertainty or recession. The recently experienced economic slowdown and the shift of advertising expenditures to other forms of media adversely affected advertising demand and the Company’s business, financial condition and results of operations. Advertising revenues as a percent of A. H. Belo’s total revenue have steadily declined from approximately 76.0 percent in 2008 to 63.7 percent in 2010. The Company expects newspaper advertising revenues will continue to decrease in 2011, although at a lower rate of decline.

 

In response to the declines in advertising revenues, the Company has begun initiatives to increase other sources of revenue, primarily circulation revenues. The Company’s consumer revenue strategies, based on superior unduplicated local content, have allowed the Company to increase circulation rates resulting in increased revenue from a smaller subscriber base. In 2010 and 2009, circulation revenues increased 3.3 percent and 10.7 percent, respectively, although daily circulation volumes decreased 1.9 percent and 11.6 percent, respectively, and Sunday volumes decreased 8.5 percent and 19.4 percent, respectively. The Company is aggressively positioning its newspapers as a premium product, offering relevant and differentiated local content, and has therefore increased subscription prices in each of its markets. As a result of these factors, circulation revenues as a percent of total revenue account for 28.9 percent of the Company’s total revenues compared to 26.3 percent in 2009 and 19.4 percent in 2008. In 2011 and the foreseeable future, the Company intends to continue the strategy of requiring subscribers to bear a higher portion of the cost of the news and information product.

 

In all three years, commercial printing, distribution and direct mail services comprised most of the remainder of the Company’s revenues. Printing and distribution revenues increased 22.0 percent in 2010 compared to 2009, due primarily to new printing and distribution contracts.

 

The following table summarizes the net operating revenues for each of A. H. Belo’s three daily newspapers for 2010, 2009 and 2008:

 

						Percentage								Percentage
Years Ended December 31,		2010				Change				2009				Change				2008
The Dallas Morning News		$	314,049				(5.5	)%		$	332,183				(17.8	)%		$	404,214
The Providence Journal			99,849				(5.4	)%			105,555				(19.7	)%			131,469
The Press-Enterprise			73,410				(8.9	)%			80,610				(20.7	)%			101,631
Total net operating revenues		$	487,308				(6.0	)%		$	518,348				(18.7	)%		$	637,314

 

 

PAGE 18  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

The table below presents the components of The Dallas Morning News net operating revenues for the last three years:

 

 

Advertising revenues decreased by $21,727, or 9.8 percent, in 2010 and $79,127, or 26.4 percent, in 2009 due to declines in substantially all categories. The Dallas Morning News’ display advertising decreased by $13,562 in 2010 and $32,144 in 2009 as a result of declines in retail and general advertising. Despite the declines in revenues, volumes increased as a result of incentives offered to retain advertising dollars.

 

Classified advertising revenues decreased by $3,153, or 9.2 percent, in 2010 and $28,259, or 45.2 percent, in 2009. These declines are attributable to a reduction in lineage volume of 4.3 percent and 32.7 percent during 2010 and 2009, respectively, primarily due to reduced automotive, employment and general advertisements. Although published advertising rates have remained stable in 2010 and 2009, The Dallas Morning News has discounted its classified advertisements to attract more revenue and compete for classified advertisements against other media.

 

Preprint advertising revenues decreased by $4,345, or 6.7 percent in 2010, and $11,396, or 15.0 percent, in 2009. Preprint advertising revenues are comprised of preprinted newspaper inserts and preprinted mail advertisements. Revenues from preprint newspaper inserts increased in 2010 and 2009, but these increases were partially offset by declines in preprint mail advertisements in each year. The decline in preprint advertisements is consistent with the declines in circulation volumes for inserts and increased competition for advertising dollars for mail advertisements.

 

Digital advertising revenues are primarily comprised of Internet advertising, employment advertising and automotive classified advertising on The Dallas Morning News’ Web sites, including its affiliation with cars.com. Revenues decreased slightly in 2010 and 24.4 percent in 2009 due to reduced volumes in employment and banner advertising.

 

The Dallas Morning News continues to extend the reach of its niche publications, including Briefing, Al Dia and Quick, in order to expand its advertising platform to nonsubscribers of The Dallas Morning News’ core newspaper. In 2010 and 2009, circulation associated with niche publications increased 7.9 percent and 39.7 percent, respectively, and the related display and classified advertising revenues were $12,457 and $9,851, respectively. These revenues are a component of total display, classified, preprint and digital revenues of The Dallas Morning News discussed above.

 

Circulation revenues increased $3,656, or 4.1 percent, and $8,457, or 10.6 percent, in 2010 and 2009, respectively. In 2010, home delivery revenue increased, but was partially offset by a decrease in single copy revenue. In 2009, both home delivery revenue and single copy revenue increased. Daily circulation volumes declined 4.3 percent and 21.9 percent in 2010 and 2009, respectively, and Sunday circulation declined 7.5 percent and 19.0 percent in 2010 and 2009, respectively. During 2009, The Dallas Morning News implemented price increases on various components of its daily and Sunday circulation, allowing the Company to realize an increase in revenues of 10.6 percent in 2009 over 2008. Although volume declines continued in 2010, the 2009 price increases were in effect the entire 2010 fiscal year, resulting in a continued growth in circulation revenue.

 

Printing and distribution revenues comprise commercial printing and distribution services, primarily for large national newspapers and other specialty newspapers. The Company also provides direct mail services.

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 19 

 

The following table presents the components of The Providence Journal net operating revenues for the last three years:

 

 

Advertising revenues decreased by $11,456, or 16.1 percent, in 2010 and $31,690, or 30.9 percent, in 2009 due to declines in substantially all categories. Display advertising decreased by $3,752 in 2010 as a result of declines in retail advertising, partially offset by increases in general advertising and decreased $16,299 in 2009 due to declines in retail and barter advertising revenue.

 

Classified advertising revenues decreased $4,756, or 24.0 percent, in 2010, and $8,891, or 31.0 percent, in 2009. Classified volumes decreased in 2010 in the general category and decreased in 2009 in the real estate and general categories.

 

Preprint advertising revenues decreased by $2,230, or 11.9 percent, and $5,186, or 21.7 percent, in 2010 and 2009, respectively. Preprint advertising revenues are comprised of preprinted inserts and preprinted mail advertisements. The decline in revenues in 2010 and 2009 is attributable to 5.6 percent and 18.3 percent lower insert volumes, respectively.

 

Digital advertising revenue primarily comprises retail display advertising and online classified advertising, including auto, real estate, employment, legal and obituaries as major categories. Reduced volumes in general classified and real estate categories contributed to 2010 revenue declines and lower volumes in real estate and employment categories contributed to 2009 revenue declines.

 

Circulation revenues increased $1,965, or 6.0 percent, in 2010 compared to 2009. Home delivery revenue was the principal driver, as rate increases in both 2009 and 2010 more than offset circulation home delivery volume declines. In 2010, single copy revenue was relatively flat as volumes stabilized and prices were not increased. Single copy revenue increased 2009 as a rate increase offset circulation declines. Other circulation revenue declined in 2010 and 2009, respectively, due to the sale of a local publication.

 

Printing and distribution revenue increased by $3,785, or 238.4 percent, and $588, or 58.8 percent, in 2010 and 2009, respectively, due to The Providence Journal’s continued expansion of both home delivery and single copy distribution services for large national and local newspapers. The Providence Journal continued to grow this revenue base in 2010 and anticipates further growth in 2011. The Providence Journal has also increased its commercial printing services to include a major metro newspaper, which also contributed to the year-over-year growth.

 

The table below presents the components of The Press-Enterprise net operating revenues for the last three years:

 

 

Advertising revenues decreased by $8,877, or 14.7 percent, in 2010 and $21,251, or 26.0 percent, in 2009 due to declines in substantially all categories. Display advertising decreased by $4,421 in 2010 as a result of declines in retail advertising partially offset by an increase in general advertising. In 2009, display advertising revenue decreased by $9,281, which was attributable to declines in retail advertising and general advertising. During 2010 and 2009, price concessions and decreases in display volumes accounted for the remaining declines in revenues these years.

 

 

PAGE 20  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

Classified advertising revenues decreased $3,520, or 17.4 percent, in 2010, and $8,363, or 29.3 percent, in 2009. The decline in 2010 revenue was due to decreased volumes, primarily legal advertisements. In 2009, classified volumes decreased as a result of declines in real estate, automotive and employment advertisements.

 

Preprint advertising revenues decreased by $769, or 5.0 percent, and $4,054, or 21.0 percent, in 2010 and 2009, respectively. The decline in revenues in both 2010 and 2009 is primarily attributable to the loss of department store customers.

 

Circulation revenues decreased $1,078, or 7.2 percent, in 2010, and decreased $478, or 3.1 percent in 2009. Daily circulation volumes decreased 3.0 percent and 22.5 percent, in 2010 and 2009, respectively, and Sunday circulation decreased 8.4 percent and 23.3 percent in 2010 and 2009, respectively. In 2009, The Press-Enterprise, implemented price increases of 17.8 percent in its home delivery market, partially offsetting the declines in circulation volumes.

 

Printing and distribution revenues increased by $2,755, or 53.1 percent, and $708, or 15.8 percent, in 2010 and 2009, respectively, due to The Press-Enterprise’s expansion of its commercial printing and distribution services.

 

Operating Costs and Expenses

 

The table below presents the components of the Company’s operating costs and expenses for the last three years:

 

 

As revenues have decreased, management has taken steps to lower operating costs including decreasing headcount and implementing salary and other benefit reductions, contracting the Company’s circulation footprint, and aggressively minimizing other expenses. These steps have allowed the Company to continue to generate positive cash flows from operations.

 

In 2010, the Company’s operating costs and expenses included a charge of $132,346 related to the withdrawal from the GBD Pension Plan. Excluding the GBD Pension Plan charge, total operating costs decreased $143,628, or 22.6 percent, as compared to the prior year period. Excluding the reduction in asset impairment expense of $102,985 between years, primarily reflecting goodwill and other asset impairments recorded in 2009, total operating expenses decreased $40,643 or 7.7 percent due to reductions in all operating expense categories. Salaries, wages and employee benefits decreased $1,602, or 0.7 percent, in 2010 when compared to the same period in 2009, due to restructuring and cost reduction initiatives undertaken during 2008 and 2009 that included headcount reductions, benefit reductions and salary reductions. Other production, distribution and operation costs decreased $26,310, or 12.6 percent, in 2010 when compared to the same period in 2009. This decrease is related to decreases in outside services, such as consulting fees, bad debt expense, distribution expense and communications expense, such as network access, from continuing cost controls and reduction of each newspaper’s circulation footprint. Newsprint, ink and other supplies decreased $5,515, or 9.0 percent, in 2010, when compared to the same period in 2009. This decrease reflects a decline in newsprint consumed due to a reduction in circulation footprint and lower volume of printed pages. During 2010, the Company’s publishing operations used approximately 69,300 metric tons of newsprint at an average cost per metric ton of $568 compared to 74,800, metric tons at an average cost per metric ton of $624 in 2009. During 2010 and 2009, the average purchase price per metric ton of newsprint was $596 and $575, respectively. Depreciation expense decreased $5,956, or 15.3 percent for 2010 compared to the same period in 2009. This decrease is primarily due to lower depreciable assets in service due to assets reaching their full depreciable life, disposals and impairments. Amortization expense decreased $1,260 or 19.4 percent. This decrease is due to the subscriber lists at The Dallas Morning News being fully amortized at December 31, 2009.

 

In 2009, the Company’s operating costs and expenses decreased $62,612, or 9.0 percent, as compared to the prior year period. This decrease was due to reductions in all operating expense categories, except asset impairment expense. Salaries, wages and employee benefits in 2009 decreased $69,685, or 24.5 percent, when compared to the same period in 2008, due to restructuring and cost reduction initiatives undertaken during 2008 and 2009 that included headcount reductions, benefit

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 21 

 

reductions and salary reductions. Other production, distribution and operation costs decreased $39,096, or 15.7 percent, for 2009, when compared to the same period in 2008. This decrease is related to decreases in distribution expense, outside services and outside solicitation expense from continuing cost controls and reduction of each newspaper’s circulation footprint. Newsprint, ink and other supplies decreased $33,621, or 35.5 percent, for 2009, when compared to the same period in 2008. This decrease is related to a reduction in newsprint consumed, due to a decline in circulation footprint and lower volume of printed pages, and a reduction in newsprint prices. During 2009, the Company’s publishing operations used approximately 74,800 metric tons of newsprint at an average cost price per metric ton of $624 compared to 112,000 metric tons at an average cost per metric ton of $653 in 2008. During 2009 and 2008, the average purchase price per metric ton of newsprint was $575 and $702, respectively. During 2009, the Company recorded a goodwill impairment charge at The Providence Journal of $80,940, an asset impairment charge at The Dallas Morning News of $20,000 related to impairment of the South Plant and additional impairments of $5,449 related to software and computer hardware no longer being used. Impairment charges of $14,145 were recorded in 2008 to write off goodwill attributable to The Press-Enterprise (See the Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies and Note 3 — Goodwill and Intangible Assets, for additional information related to the goodwill impairments and additional information related to the impairment of the South Plant). Depreciation expense decreased $7,919, or 16.9 percent, in 2009 compared to the same period in 2008. This decrease is primarily due to lower depreciable assets in service due to disposals and impairments.

 

Interest expense decreased $574, or 41.5 percent, for 2010 compared to 2009 and decreased $2,646, or 65.7 percent, from 2009 compared to 2008. The decrease in 2010 is a result of no borrowings being outstanding under the Company’s Credit Agreement during 2010, and the decrease in 2009 is related to reduced borrowings outstanding under the Company’s Credit Agreement. As of February 8, 2008, in connection with the Distribution, Belo Corp. contributed to the capital of A. H. Belo and its subsidiaries the net intercompany indebtedness owed to Belo by A. H. Belo and its subsidiaries or assigned indebtedness to the Company. This effectively settled A. H. Belo’s notes payable balances owed to Belo. As a result, no interest expense for these notes was accrued after February 8, 2008.

 

Other income (expense), net, increased $7,744 in 2010 when compared to 2009. This increase reflects an increase in non-operating gain on the sale of fixed assets of $6,402, including a gain recorded in June 2010 of approximately $5,373 related to the sale of a parking garage in Providence, Rhode Island. This increase also reflects income of $514 from investments accounted for using the equity method of accounting and dividend income of $486. This increase is partially offset by the effect of The Dallas Morning News’ receipt of a sales tax refund during 2009 of $956, and amounts payable to Belo Corp. of $1,183 associated with Belo’s share of the refund agreement under the Tax Matters Agreement, which allows the Company to carry back 2009 tax losses against Belo’s taxable income from prior years.

 

Other income (expense), net, increased $1,285, or 211.7 percent, in 2009 when compared to 2008. This is primarily due to the decision made by the Company to write off investments and/or loans previously made in startup companies. The Company had invested or loaned approximately $2,334 for non-controlling ownership interests in these startup companies. As part of the Company’s periodic review of its investments, the Company made the decision that these previously invested amounts were permanently impaired and no longer had value. This decision that the investments or loans were impaired was made due to the ongoing lack of success of the companies. These write-offs were partially offset by a sales tax refund and the gain on the sale of a subsidiary.

 

Income tax benefit decreased $4,900 in 2010 when compared to 2009 and decreased $3,382 in 2009 when compared to 2008. This decrease in tax benefit was primarily attributable to lower taxable loss and adjustments made for the valuation allowance. The effective tax rates for 2010, 2009 and 2008 were 5.7 percent, 10.4 percent and 24.3 percent, respectively.

 

As of December 31, 2010, the Company has federal and state taxable net operating losses of $1,234. These net operating losses can be carried forward to offset future taxable income. These losses will begin to expire in the years 2029 if not utilized.

 

Pursuant to the Tax Matters Agreement between Belo and the Company, Belo agreed to carry back certain taxable net operating losses of the Company against previous years’ taxable income, resulting in net refunds to the Company. In 2010, the carry back resulted in a $4,732 refund to the Company, of which $1,183 was retained by Belo and recorded as Other expense. In 2009, the taxable net operating loss carry back resulted in an $11,978 tax refund. As discussed in Note 6 — Pension and Other Retirement Plans to the Consolidated Financial Statements, this refund was held by Belo on the Company’s behalf and applied towards the Company’s obligations to reimburse Belo for a portion of its contributions to the GBD Pension Plan. The realization of the net operating loss carry backs resulted in reductions to the respective year’s valuation allowance.

 

Applicable accounting guidance related to income taxes places a threshold for recognition of deferred tax assets based on whether it is more likely than not that these assets will be realized. In making this determination, the Company considers all positive and negative evidence, including future reversals of existing taxable temporary differences, tax planning strategies,

 

 

PAGE 22  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

future taxable income and taxable income in prior carry back years. Based on the criteria established in the accounting guidance, the Company established a valuation allowance in 2009 as it is more likely than not that a portion of the benefits derived from certain deferred tax assets may not be realized.

 

At December 31, 2010 and 2009, the Company recorded deferred tax assets of $66,333 and $18,451, respectively. These deferred tax assets were partially offset by deferred tax liabilities of $19,793 and $15,269, respectively, and were further reduced by valuation allowances of $43,019 and $3,405, respectively. The establishment of the valuation allowance is primarily due to the Company’s determination that some of the deferred tax assets may not be realized. The Company will continue to evaluate its ability to realize its deferred tax assets in accordance with applicable accounting guidance and will adjust the amount of such allowance if necessary.

 

Critical Accounting Policies and Estimates

 

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

 

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

 

The Company estimates and records a reserve for uncollectible accounts receivable based upon recent collection experience and management’s knowledge of customers’ ability to pay amounts due. Expense for such uncollectible amounts is included in other production, distribution and operating costs.

 

Goodwill.     The Company tests for impairment of goodwill by estimating the fair value of each reporting unit compared to its carrying value. Reporting units of the Company are based on its internal reporting structure and represent a reporting level below an operating segment. The Company uses a discounted cash flow model to calculate the fair value of its reporting units. The model includes a number of significant assumptions and estimates regarding future cash flows including discount rates, volumes, prices, capital expenditures and the impact of current market conditions. These estimates could be materially impacted by adverse changes in market conditions. The Company performs the goodwill impairment test as of December 31 each fiscal year or when changes in circumstances indicate an impairment event may have occurred. There is no tax effect related to impairment charges, and these non-cash charges do not affect the Company’s liquidity, cash flows from operating activities, debt covenants, or have any effect on future operations. As of December 31, 2010, the Company has recorded goodwill at The Dallas Morning News reporting unit, for which the fair value substantially exceeds its carrying value. See Consolidated Financial Statements, Note 3 — Goodwill and Intangible Assets, for a discussion of the impairment charges recorded.

 

Long-lived Assets.     The Company evaluates the carrying value of property, plant and equipment and finite-lived intangible assets whenever a change in circumstances indicates that the carrying value may not be recoverable from the undiscounted future cash flows from operations and anticipated future capital spending requirements over the remaining life of the primary asset. If an impairment condition exists, the carrying values are reduced to fair values, as warranted. See Consolidated Financial Statements Note 1 — Summary of Significant Accounting Policies for impairment charges recorded on long-lived assets.

 

Equity Investments.     The Company owns certain equity securities in other companies and accounts for these investments under the equity method or cost method of accounting, as applicable. Each reporting period, the Company evaluates its ability to recover the carrying value of these investments based upon the estimated fair value of the net assets of the investee and its anticipated future operating results. See Consolidated Financial Statements Note 4 — Investments, regarding the Company’s equity investments.

 

Self-Insured Risks.     The Company self-insures certain risks such as employee medical costs, workers’ compensation, general liability and commercial automotive claims, and purchases stop-loss insurance coverage to limit these risks. Each period, the

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 23 

 

Company estimates its liability based on historical claim patterns, employee demographic data, assets insured, and insurance policy terms.

 

Pension and Other Retirement Obligations.     Through December 31, 2010, the Company provided retirement benefits for certain current and former employees through the GBD Pension Plan, which is sponsored by Belo. By prior agreement, the Company was required to reimburse Belo for 60.0 percent of contributions assessed by the GBD Pension Plan, through December 31, 2010.

 

Through December 31, 2010, the Company accounted for its pension obligations under accounting guidance for multiemployer pension plans under which it recognized as net pension cost the required contribution for each period and recognizes as a liability any reimbursement obligation due and unpaid. On October 6, 2010, the Company and Belo entered into a Pension Plan Transfer Agreement (the “Transfer Agreement”), agreeing to split the GBD Pension Plan. Under the Transfer Agreement, the GBD Pension Plan assets and liabilities related to Company employees were transferred into two newly established pension plans, sponsored solely by the Company, effective January 1, 2011 having similar terms. Accordingly, the Company recognized a loss for the unfunded projected benefit obligation related to the current and former employees to be transferred to the New Pension Plans, as the liability was probable and could be estimated. In 2011, the Company will follow accounting guidance for single employer defined benefit plans, which requires companies to record the funded position of the plans. Certain changes in actuarial valuations are required to be recorded to other comprehensive income and recognized to earnings over future periods. Assumptions used in determining the unfunded position, future funding requirements and future pension expense are discussed in the Consolidated Financial Statements, Note 6 — Pension and Other Retirement Plans.

 

The Company estimated the projected benefit obligations of the New Pension Plans using the Citigroup Pension Yield Curve, which is based upon a portfolio of high quality corporate debt securities with cash flows similar to the cash flows that match the benefit payments to plan participants. Each year’s future benefit payments were discounted to their present value at the appropriate yield curve rate to determine the pension obligations. The resulting pension obligation yielded a composite weighted average discount rate of 5.3 percent for the New Pension Plans.

 

The Company will assume a 6.5 percent long-term return on assets transferred to the New Pension Plans in determining its net periodic pension expense for 2011. This return is based upon historical returns of similar investment pools having asset allocations consistent with the expected allocations of the New Pension Plans, as well as management’s expectation of future investment performance over the remaining expected term of the plans. In 2011, the Company expects the plans’ assets invested in equity securities to be between 60 to 70 percent and amounts invested in fixed-income securities to be between 30 to 40 percent. See Note 6 — Pension and Other Retirement Plans to the Consolidated Financial Statements.

 

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

 

Share-Based Compensation.     The Company records the compensation expense related to its stock options using the fair value as of the date of grant using the Black-Scholes-Merton method. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of the Company’s stock, and expected dividends. In addition, judgment is required in estimating the amount of share-based awards that are expected to be forfeited. The Company records the compensation expense related to its restricted stock units using the fair value as of the date of grant.

 

Income Taxes.     In accordance with the applicable accounting guidance relating to income taxes, the Company recognizes deferred tax assets and liabilities based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect. The Company also assesses the realizability of these deferred tax assets, and establishes a valuation allowance in accordance with the applicable accounting guidance if the realizability threshold of more likely than not is not met. The factors used to assess the likelihood of realization of the deferred tax assets include reversal of future deferred tax liabilities, available tax planning strategies, and future taxable income and taxable income in prior carry back years.

 

The Company also evaluates any uncertain tax positions and only recognizes the tax benefit from an uncertain position if it is more likely than not that the position will be sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. In accordance with the accounting guidance,

 

 

PAGE 24  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

the Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Any change in judgment related to the expected ultimate resolution of uncertain tax positions is recognized in earnings in the period in which such change occurs. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.

 

Recent Accounting Standards

 

See Note 2 — Recently Issued Accounting Standards to the Consolidated Financial Statements included in this report, regarding the impact of certain recent accounting pronouncements.

 

Liquidity and Capital Resources

 

The Company operates with a credit agreement, which serves as a working capital facility subject to a borrowing base and other covenants and restrictions, including maintenance of defined financial ratios, restrictions on capital expenditures and dividends, and limitations on indebtedness, liens, and asset sales. On December 3, 2009, at the recommendation of management, the original commitments under the credit facility were reduced from $50,000 to $25,000. Management concluded that, based on estimated future borrowing needs, the cost of the revolving credit facility, and borrowing base availability, $25,000 is sufficient to meet the Company’s borrowing needs. The borrowing base is calculated using eligible accounts receivable and inventory, as defined in the Credit Agreement. A decrease in the borrowing base could limit the Company’s borrowing capacity. At December 31, 2010 and 2009, the Company had eligible collateral to secure the Credit Agreement of $40,471 and $44,202, respectively, resulting in a borrowing base of $25,000 for both periods. When letters of credit and other required reserves are deducted from the borrowing base, the Company had $19,976 and $18,871 of borrowing capacity available under the Credit Agreement as of December 31, 2010 and December 31, 2009, respectively. There were no borrowings outstanding under the Credit Agreement at any time during 2010 or at December 31, 2009. See the Consolidated Financial Statements Note 7 — Long-term Debt.

 

The Company believes it has sufficient access to liquidity from several sources, such as operations, existing liquid assets and from unused borrowing capacity under its Credit Agreement, to meet its foreseeable liquidity needs.

 

The table below reflects the Company’s sources of liquidity as of December 31, 2010:

 

 

Operating Cash Flows and Liquidity

 

Net cash provided by operations was $61,222, $30,297 and $28,928 in 2010, 2009 and 2008, respectively. The increase in cash flows from operations in 2010 was a result of cost reduction efforts and the receipt of dividend proceeds of $3,116 from an investment in a joint venture, partially offset by declines in revenues. Cost reductions were primarily realized in salaries and wages, newsprint, technology and bad debt expense. Earnings before pension and asset impairment charges, interest, depreciation, and taxes were $56,527 in 2010 as compared to $32,764 in 2009. The Tax Matters Agreement between Belo and the Company provides for the carry back of the net operating losses, the sharing of refunds and other related post distribution tax matters. Pursuant to this agreement, Belo carried back the Company’s 2008 and 2009 net operating losses to previous tax years. The carry back of the 2009 net operating loss will result in a refund of $4,732, to be received in 2011, of which $1,183 will be retained by Belo. The 2008 net operating loss carry back claim resulted in an $11,978 tax refund. As discussed in Note 6 — Pension and Other Retirement Plans to the Consolidated Financial Statements, this refund was held by Belo on the Company’s behalf and applied towards the Company’s obligations to reimburse Belo for a portion of its contributions to the GBD Pension Plan. The realization of the net operating loss carry backs resulted in reductions to deferred tax assets and correspondingly, the respective years’ valuation allowance.

 

The Company uses net cash provided by operations to fund capital expenditures, make additional contributions to its pension plans and invest in strategic opportunities. During 2011, the first quarter cash pension contribution will be approximately $8,700, and $3,410 of this amount will come from A. H. Belo funds held on deposit by Belo Corp. for pension contributions. In the second, third and fourth quarters, the Company anticipates required cash contributions of approximately $5,400 each quarter. With these required payments and an additional $30,000 contribution to be made in the first quarter, the Company’s

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 25 

 

cash pension contributions will total approximately $55,000 in 2011. The $30,000 contribution is incremental to funding as required by the Pension Protection Act and is based on expectations of receiving more advantageous returns in the New Pension Plans, as opposed to short-term investment from these liquid assets.

 

Investing Cash Flows

 

Net cash flows used for investing activities were ($800), ($5,731) and ($23,068) in 2010, 2009 and 2008, respectively. Cash flows provided by investing activities in 2010 reflect $9,765 of proceeds from the sale of property, plant and equipment. Cash flows used in investing activities are primarily attributable to capital expenditures and investments in joint ventures. The investments are long-term in nature and are not readily convertible into cash.

 

Total capital expenditures were $10,597, $11,431 and $18,089 in 2010, 2009 and 2008, respectively. These were primarily for the Company’s facilities and equipment and corporate-driven technology initiatives. The Company expects to finance future capital expenditures, which include approximately $13,000 to $15,000 in 2011, using cash generated from operations.

 

Financing Cash Flows

 

Net cash flows provided by financing activities in 2010 of $1,366 are related to proceeds received from the exercise of stock options. Net cash flows used in financing activities were $9,997 and $2,800 in 2009 and 2008, respectively. The cash used in 2009 reduced the amount outstanding under the Company’s Credit Agreement. The cash flows in 2008 are primarily attributable to dividends and distributions paid to Belo Corp., offset by borrowings from Belo Corp. pursuant to notes payable. In conjunction with the Distribution, Belo Corp. contributed to the capital of A. H. Belo and its subsidiaries the net inter-company indebtedness owed by A. H. Belo and its subsidiaries to Belo Corp., or assigned the indebtedness to A. H. Belo.

 

Contractual Obligations

 

The table below summarizes the following commitments of the Company as of December 31, 2010. See also Consolidated Financial Statements, Note 9 — Commitments.

 

 

The Company anticipates required cash pension contributions of approximately $25,000 in 2011, of which $3,410 will come from A. H. Belo funds held on deposit by Belo Corp. for pension contributions. With these required payments and the additional $30,000 contribution, the Company’s cash pension contributions will total approximately $55,000 in 2011.

 

 

A. H. Belo has exposure to changes in the price of newsprint. The Company does not engage in the purchase of derivative contracts to hedge against price fluctuations that may occur. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion of this risk.

 

The Credit Agreement entered into by A. H. Belo bears interest at a floating market rate plus a premium specific to the Company’s credit risk. As of December 31, 2010, the Company does not have any borrowings outstanding against the Credit Agreement. See the Consolidated Financial Statements Note 7 — Long-term Debt, for information regarding A. H. Belo’s debt.

 

The Company will be exposed to market risk associated with the performance of the assets contributed to the New Pension Plans. These assets will be invested in equity and debt securities and volatility in the market value of these investments can have a direct and material impact to the level of funding the Company is required to meet.

 

 

PAGE 26  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

 

The Consolidated Financial Statements, together with the Reports of Independent Registered Public Accounting Firms, are included elsewhere in this Annual Report on Form 10-K.

 

 

In March 2009, the Audit Committee of the Board of Directors of the Company approved the engagement of KPMG LLP as the Company’s independent registered public accounting firm. In connection with the selection of KPMG, the Audit Committee released Ernst & Young LLP as the Company’s independent registered public accounting firm effective as of March 31, 2009. The report of Ernst & Young LLP on the Company’s consolidated financial statements as of and for the year ended December 31, 2008 did not contain an adverse opinion or a disclaimer of an opinion, and was not qualified or modified as to uncertainty, audit scope or accounting principles.

 

 

 

A. H. Belo carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chairman of the Board, President and Chief Executive Officer and the Senior Vice President/Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this Annual Report on Form 10-K. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.

 

The material weakness that was previously disclosed as of December 31, 2009 was remediated as of December 31, 2010. See “Item 9A (T). Controls and Procedures” and “Item 9A (T). Controls and Procedures — Management’s Report on Internal Control over Financial Reporting” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and “Item 4 T. Controls and Procedures” contained in the Company’s quarterly reports on Form 10-Q during 2010, for disclosure of information about the material weakness that was reported as a result of the Company’s annual assessment as of December 31, 2009 and remediation of that material weakness. As disclosed in the quarterly reports on Form 10-Q for the first three quarters of 2010, in response to the identified material weakness, management has identified several enhancements to the Company’s internal control over financial reporting to remediate the material weakness described above. These ongoing efforts include the following:

 

 

Implementation of the actions described above and resulting improvements in controls have strengthened internal control over financial reporting and have, in particular, addressed the related material weakness that was identified as of December 31, 2009. As part of the 2010 assessment of internal control over financial reporting, management tested and evaluated these additional controls to assess whether they are operating effectively and as of December 31, 2010, such controls were successfully tested and the material weakness was deemed remediated.

 

Based on that evaluation, the Chairman, President and Chief Executive Officer and the Senior Vice President/Chief Financial Officer concluded that as of December 31, 2010, the Company’s disclosure controls and procedures were effective.

 

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 27 

 

process to provide reasonable assurance regarding the reliability of the Company’s financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect the Company’s transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the Company’s financial statements; providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on the Company’s financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.

 

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010. The related Report of Our Independent Registered Public Accounting Firm, KPMG LLP, on Internal Control Over Financial Reporting can be found on page 35 of this Form 10-K, each of which is incorporated by reference herein.

 

 

As reported in the Company’s Annual Report on Form 10-K for December 31, 2009, the Company determined there were control deficiencies that constituted a material weakness related to the accounting for the Company’s participation in the GBD Pension Plan. As discussed previously, to remediate the identified material weakness, several enhancements to the Company’s internal control over financial reporting have been implemented, as follows:

 

 

As part of the Company’s 2010 assessment of internal control over financial reporting, management has tested and concluded that these additional controls are operating effectively and the material weakness is remediated as of December 31, 2010.

 

 

On March 3, 2011, the Company completed the purchase of Mr. John C. McKeon’s personal residence in California pursuant to retention and relocation arrangements with Mr. McKeon. The purchase price was $3,096. Mr. McKeon is President and General Manager of The Dallas Morning News, Inc., a subsidiary of the Company, and a member of the Company’s Management Committee.

 

On March 9, 2011, the Board of Directors of the Company approved an agreement with Belo and the Pension Benefit Guaranty Corporation (the “PBGC”). Under the agreement, which was executed and delivered on March 10, 2011, the Company agreed to make additional contributions to the New Pension Plans and the PBGC agreed to forbear from initiating certain proceedings relating to the February 2008 spin-off of the Company from Belo and the pension plan split that was effective January 1, 2011. The agreed-upon additional contributions are $20,000 on or before March 31, 2011, $5,000 on or before December 31, 2012, and $5,000 on or before December 31, 2013. The Company intends to contribute $30,000 to the New Pension Plans on or before March 31, 2011, which contribution will satisfy in full the Company’s agreed-upon contributions under the agreement with the PBGC.

 

On March 10, 2011, the Company amended its Credit Agreement, excluding certain pension plan contributions from the calculation of the fixed charge coverage ratio.

 

 

PAGE 28  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

 

 

The information set forth under the headings “A. H. Belo Corporation Stock Ownership — Section 16(a) Beneficial Ownership Reporting Compliance,” “Proposal One: Election of Directors,” “Corporate Governance — Audit Committee,” “Corporate Governance — Nominating and Corporate Governance Committee,” and “Executive Officers” contained in the definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 18, 2011 is incorporated herein by reference.

 

A. H. Belo has a Code of Business Conduct and Ethics that applies to all directors, officers and employees, which can be found at the Company’s Web site, www.ahbelo.com. The Company will post any amendments to the Code of Business Conduct and Ethics, as well as any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on the Company’s Web site. Information on A. H. Belo’s Web site is not incorporated by reference into this Annual Report on Form 10-K.

 

The Company’s Board of Directors has adopted Corporate Governance Guidelines and charters for the Audit, Compensation, and Nominating and Governance Committees of the Board of Directors. These documents can be found at the Company’s Web site, www.ahbelo.com.

 

Shareholders can also obtain, without charge, printed copies of any of the materials referred to above by contacting the Company at the following address:

 

A. H. Belo Corporation

P. O. Box 224866

Dallas, Texas 75222-4866

Attn: Corporate Secretary

Telephone: (214) 977-8200

 

 

The information set forth under the headings “Executive Compensation–Compensation Discussion and Analysis,–Compensation Committee Interlocks and Insider Participation,–Compensation Committee Report,–Summary Compensation Table,–Grants of Plan-Based Awards in 2010,–Outstanding A. H. Belo Equity Awards at Fiscal Year-End 2010,–Option Exercises and Stock Vested in 2010,–Post-Employment Benefits,–Pension Benefits at December 31, 2010,–Non-Qualified Deferred Compensation for 2010,–Termination of Employment and Change in Control Arrangements,–Potential Payments on Termination of Employment or Change in Control at December 31, 2010”, “Director Compensation” and “Corporate Governance–Compensation Committee” contained in the definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 18, 2011 is incorporated herein by reference.

 

 

The information set forth under the headings “A. H. Belo Corporation Stock Ownership” contained in the definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 18, 2011 is incorporated herein by reference.

 

Information regarding the number of shares of common stock available under the Company’s equity compensation plans is included in the Consolidated Financial Statements Note 5–Long-Term Incentive Plan.

 

 

The information set forth under the heading “Director Compensation–Certain Relationships” and “Corporate Governance–Director Independence” contained in the definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 18, 2011 is incorporated herein by reference.

 

In connection with the Distribution, A. H. Belo entered into various agreements with Belo Corp. These agreements provide that A. H. Belo and Belo will furnish certain specified services to each other. Several of the services are no longer being provided. If the agreement is terminated for any reason, A. H. Belo would need to obtain the continuing services from

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 29 

 

another provider or decide to perform these services itself. Payments made or other consideration provided in connection with all continuing transactions between the Company and Belo are conducted on an arm’s-length basis.

 

In connection with the Distribution and an assessment of their respective downtown Dallas real estate needs, A. H. Belo and Belo Corp. agreed to co-own, through the creation of Belo Investment LLC, The Belo Building, related parking sites, and specified other downtown Dallas real estate. A. H. Belo and Belo each own 50 percent of Belo Investment and lease 50 percent of the available rental space in The Belo Building and related parking sites under long-term leases that are terminable under various conditions. A third party real estate services firm, engaged by Belo Investment, manages The Belo Building and other real estate owned.

 

On October 6, 2010, the Company and Belo executed the Pension Plan Transfer Agreement under which Belo and the Company agreed to split the assets and obligations of the GBD Pension Plan. Under this agreement, projected benefit obligations and assets allocable to the approximately 5,100 current and former employees of the Company and its newspaper businesses were transferred to two newly established A. H. Belo pension plans effective January 1, 2011, based on preliminary estimates. The Company and Belo expect to complete a final reconciliation of assets and liabilities transferred in the second quarter of 2011 (See Consolidated Financial Statements, Note 6–Pension and Other Retirement Plans).

 

 

The information set forth under the heading “Proposal Two: Ratification of the Appointment of Independent Registered Public Accounting Firm” contained in the definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 18, 2011, is incorporated herein by reference.

 

 

PAGE 30  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

 

 

 

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 31 

 

 

 

PAGE 32  A. H. Belo Corporation 2010 Annual Report on Form 10-K

 

 

 

A. H. Belo Corporation 2010 Annual Report on Form 10-K PAGE 33 

 

 

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

 

Robert W. Decherd

Chairman of the Board, President and Chief

Executive Officer

 

Dated: March 11, 2011

 

POWER OF ATTORNEY

 

The undersigned hereby constitute and appoint Robert W. Decherd, Alison K. Engel, and Daniel J. Blizzard, and each of them and their substitutes, our true and lawful attorneys-in-fact with full power to execute in our name and behalf in the capacities indicated below any and all amendments to this report and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby ratify and confirm all that such attorneys-in-fact, or any of them, or their substitutes shall lawfully do or cause to be done by virtue thereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated: