SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act ofACT OF 1934
For the Quarterly Period Ended September 30, 200129, 2002
Commission File Number 1-6714
THE WASHINGTON POST COMPANY
| Delaware | 53-0182885 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| ||
1150 15th Street, N.W. Washington, D.C. 20071
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(202) 334-6000
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.
Shares outstanding at November 6, 2002:
| Class A Common Stock | 1,722,250 | Shares | ||||||
| Class B Common Stock | 7,786,603 | Shares | ||||||
2.
THE WASHINGTON POST COMPANY
Index to Form 10-Q
| PART I. | FINANCIAL INFORMATION | |||||||
| Financial Statements | ||||||||
| a. Condensed Consolidated Statements of Income (Unaudited) for the Thirteen and Thirty-nine Weeks Ended September 29, 2002 and September 30, 2001 | 3 | |||||||
| b. Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen and Thirty-nine Weeks Ended September 29, 2002 and September 30, 2001 | 4 | |||||||
THE WASHINGTON POST COMPANYForm 10-Q
INDEX
| c. Condensed Consolidated Balance Sheets at September 29, 2002 (Unaudited) and December 30, 2001 | ||||||||
| 5 | ||||||||
| d. Condensed Consolidated Statements of Cash Flows (Unaudited) for the Thirty-nine Weeks Ended September 29, 2002 and September 30, 2001 | 6 | |||||||
| e. Notes to Condensed Consolidated Financial Statements (Unaudited) | 7 | |||||||
| Item 2. | Management's Discussion and Analysis of Results of Operations and Financial Condition | 14 | ||||||
| Item 4. | Controls and Procedures | 21 | ||||||
| PART II. | OTHER INFORMATION | |||||||
| Item | ||||||||
| 6. | ||||||||
| 22 | ||||||||
| Signatures | 23 | |||||||
| Certifications | ||||||||
| 24 | ||||||||
3.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Washington Post Company
Condensed Consolidated Statements of Income (Unaudited)
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||
| September 29, | September 30, | September 29, | September 30, | ||||||||||||||
| (In thousands, except per share amounts) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
| Operating revenues | |||||||||||||||||
| Advertising | $ | 292,523 | $ | 277,425 | $ | 882,183 | $ | 888,281 | |||||||||
| Circulation and subscriber | 171,535 | 174,716 | 501,382 | 483,469 | |||||||||||||
| Education | 160,454 | 127,159 | 457,148 | 367,680 | |||||||||||||
| Other | 15,781 | 13,007 | 47,605 | 43,185 | |||||||||||||
| 640,293 | 592,307 | 1,888,318 | 1,782,615 | ||||||||||||||
| Operating costs and expenses | |||||||||||||||||
| Operating | 342,411 | 345,567 | 1,011,093 | 1,029,097 | |||||||||||||
| Selling, general and administrative | 162,642 | 144,954 | 499,895 | 444,278 | |||||||||||||
| Depreciation of property, plant and equipment | 45,808 | 34,765 | 128,267 | 105,264 | |||||||||||||
| Amortization of goodwill and other intangibles | 172 | 20,068 | 483 | 57,185 | |||||||||||||
| 551,033 | 545,354 | 1,639,738 | 1,635,824 | ||||||||||||||
| Income from operations | 89,260 | 46,953 | 248,580 | 146,791 | |||||||||||||
| Other income (expense) | |||||||||||||||||
| Equity in losses of affiliates | (1,254 | ) | (26,535 | ) | (16,943 | ) | (45,636 | ) | |||||||||
| Interest income | 69 | 226 | 261 | 1,597 | |||||||||||||
| Interest expense | (8,717 | ) | (11,861 | ) | (26,381 | ) | (39,726 | ) | |||||||||
| Other, net | 1,115 | (4,365 | ) | 1,606 | 293,688 | ||||||||||||
| Income before income taxes and cumulative effect of change in accounting principle | 80,473 | 4,418 | 207,123 | 356,714 | |||||||||||||
| Provision for income taxes | 32,700 | 2,850 | 84,500 | 141,600 | |||||||||||||
| Income before cumulative effect of change in accounting principle | 47,773 | 1,568 | 122,623 | 215,114 | |||||||||||||
| Cumulative effect in method of accounting for goodwill and other intangible assets, net of taxes | — | — | (12,100 | ) | — | ||||||||||||
| Net income | 47,773 | 1,568 | 110,523 | 215,114 | |||||||||||||
| Redeemable preferred stock dividends | (249 | ) | (263 | ) | (1,033 | ) | (1,052 | ) | |||||||||
| Net income available for common shares | $ | 47,524 | $ | 1,305 | $ | 109,490 | $ | 214,062 | |||||||||
| Basic earnings per common share: | |||||||||||||||||
| Before cumulative effect of change in accounting principle | $ | 5.03 | $ | 0.17 | $ | 12.90 | $ | 22.68 | |||||||||
| Cumulative effect of change in accounting principle | — | — | (1.27 | ) | — | ||||||||||||
| Redeemable preferred stock dividends | (0.03 | ) | (0.03 | ) | (0.11 | ) | (0.11 | ) | |||||||||
| Net income available for common stock | $ | 5.00 | $ | 0.14 | $ | 11.52 | $ | 22.57 | |||||||||
| Diluted earnings per share: | |||||||||||||||||
| Before cumulative effect of change in accounting principle | $ | 5.02 | $ | 0.17 | $ | 12.88 | $ | 22.64 | |||||||||
| Cumulative effect of change in accounting principle | — | — | (1.27 | ) | — | ||||||||||||
| Redeemable preferred stock dividends | (0.03 | ) | (0.03 | ) | (0.11 | ) | (0.11 | ) | |||||||||
| Net income available for common stock | $ | 4.99 | $ | 0.14 | $ | 11.50 | $ | 22.53 | |||||||||
| Dividends declared per common share | $ | 1.40 | $ | 1.40 | $ | 5.60 | $ | 5.60 | |||||||||
| Basic average number of common shares outstanding | 9,506 | 9,489 | 9,502 | 9,484 | |||||||||||||
| Diluted average number of common shares outstanding | 9,523 | 9,502 | 9,518 | 9,500 | |||||||||||||
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||
| September 30, | October 1, | September 30, | October 1, | ||||||
| (In thousands, except per share amounts) | 2001 | 2000 | 2001 | 2000 | |||||
Operating revenues | |||||||||
Advertising | $277,425 | $338,428 | $ 888,281 | $1,010,807 | |||||
Circulation and subscriber | 177,925 | 151,144 | 482,609 | 447,639 | |||||
Education | 127,159 | 99,428 | 368,103 | 240,261 | |||||
Other | 13,007 | 13,452 | 48,034 | 42,057 | |||||
595,516 | 602,452 | 1,787,027 | 1,740,764 | ||||||
Operating costs and expenses | |||||||||
Operating | 348,776 | 340,733 | 1,033,509 | 953,031 | |||||
Selling, general and administrative | 144,954 | 131,206 | 444,278 | 405,332 | |||||
Depreciation of property, plant | |||||||||
and equipment | 34,765 | 30,019 | 105,264 | 87,043 | |||||
Amortization of goodwill and | |||||||||
other Intangibles | 20,068 | 15,937 | 57,185 | 45,430 | |||||
548,563 | 517,895 | 1,640,236 | 1,490,836 | ||||||
Income from operations | 46,953 | 84,557 | 146,791 | 249,928 | |||||
Other income (expense) | |||||||||
Equity in losses of affiliates, net | (5,535 | ) | (8,890 | ) | (24,636 | ) | (29,666 | ) | |
Interest income | 226 | 228 | 1,597 | 726 | |||||
Interest expense | (11,861 | ) | (14,617 | ) | (39,726 | ) | (39,757 | ) | |
Other, net | (25,365 | ) | 238 | 272,688 | (5,169 | ) | |||
Income before income taxes | 4,418 | 61,516 | 356,714 | 176,062 | |||||
Provision for income taxes | 2,850 | 28,000 | 141,600 | 77,300 | |||||
Net income | 1,568 | 33,516 | 215,114 | 98,762 | |||||
Redeemable preferred stock dividends | (263 | ) | (263 | ) | (1,052 | ) | (1,026 | ) | |
Net income available for common shares | $1,305 | $ 33,253 | $ 214,062 | $ 97,736 | |||||
Basic earnings per common share | $ 0.14 | $ 3.52 | $22.57 | $ 10.35 | |||||
Diluted earnings per common share | $ 0.14 | $ 3.51 | $ 22.53 | $ 10.33 | |||||
Dividends declared per common share | $ 1.40 | $ 1.35 | $ 5.60 | $ 5.40 | |||||
Basic average number of common shares outstanding | 9,489 | 9,448 | 9,484 | 9,443 | |||||
Diluted average number of common shares outstanding | 9,502 | 9,463 | 9,500 | 9,459 | |||||
4.
The Washington Post Company
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||
| September 29, | September 30, | September 29, | September 30, | ||||||||||||||
| (In thousands) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
| Net income | $ | 47,773 | $ | 1,568 | $ | 110,523 | $ | 215,114 | |||||||||
| Other comprehensive income (loss) | |||||||||||||||||
| Foreign currency translation adjustment | (1,906 | ) | (423 | ) | 2,511 | (3,799 | ) | ||||||||||
| Change in unrealized gain on available-for-sale securities | 20,427 | (3,439 | ) | 4,997 | (2,067 | ) | |||||||||||
| Less: reclassification adjustment for realized (gains) losses included in net income | — | 24 | (11,209 | ) | 3,238 | ||||||||||||
| 18,521 | (3,838 | ) | (3,701 | ) | (2,628 | ) | |||||||||||
| Income tax (expense) benefit related to other comprehensive income | (7,961 | ) | 1,333 | 2,383 | (513 | ) | |||||||||||
| 10,560 | (2,505 | ) | (1,318 | ) | (3,141 | ) | |||||||||||
| Comprehensive income (loss) | $ | 58,333 | $ | (937 | ) | $ | 109,205 | $ | 211,973 | ||||||||
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||
| September 30, | October 1, | September 30, | October 1, | ||||||
| (In thousands) | 2001 | 2000 | 2001 | 2000 | |||||
Net income | $ 1,568 | $ 33,516 | $215,114 | $ 98,762 | ||||||
| ||||||||||
Other comprehensive income (loss) | ||||||||||
Foreign currency translation adjustment | (423 | ) | (2,266 | ) | (3,799 | ) | (3,445 | ) | ||
Change in unrealized gain on | ||||||||||
available-for-sale securities | (3,439 | ) | 30,296 | (2,067 | ) | 1,876 | ||||
Less: reclassification adjustment | ||||||||||
for realized gains included in | ||||||||||
net income | 24 | - | 3,238 | (197 | ) | |||||
(3,838 | ) | 28,030 | (2,628 | ) | (1,766 | ) | ||||
Income tax benefit (expense) related | ||||||||||
to other comprehensive loss | 1,333 | (11,757 | ) | (513 | ) | (564 | ) | |||
(2,505 | ) | 16,273 | (3,141 | ) | (2,330 | ) | ||||
Comprehensive income | $ (937 | ) | $ 49,789 | $211,973 | $ 96,432 | |||||
5.
5.
The Washington Post Company
Condensed Consolidated Balance Sheets
| September 29, | December 30, | |||||||||
| 2002 | 2001 | |||||||||
| (In thousands) | ||||||||||
| (unaudited) | ||||||||||
| Assets | ||||||||||
| Current assets | ||||||||||
| Cash and cash equivalents | $ | 35,280 | $ | 31,480 | ||||||
| Investments in marketable equity securities | 4,597 | 16,366 | ||||||||
| Accounts receivable, net | 291,098 | 279,328 | ||||||||
| Federal and state income taxes receivable | — | 10,253 | ||||||||
| Inventories | 36,208 | 19,042 | ||||||||
| Other current assets | 39,744 | 40,388 | ||||||||
| 406,927 | 396,857 | |||||||||
| Property, plant and equipment | ||||||||||
| Buildings | 270,511 | 267,658 | ||||||||
| Machinery, equipment and fixtures | 1,539,683 | 1,422,228 | ||||||||
| Leasehold improvements | 82,214 | 79,108 | ||||||||
| 1,892,408 | 1,768,994 | |||||||||
| Less accumulated depreciation | (915,389 | ) | (794,596 | ) | ||||||
| 977,019 | 974,398 | |||||||||
| Land | 34,733 | 34,733 | ||||||||
| Construction in progress | 85,413 | 89,080 | ||||||||
| 1,097,165 | 1,098,211 | |||||||||
| Investments in marketable equity securities | 218,921 | 219,039 | ||||||||
| Investments in affiliates | 74,124 | 80,936 | ||||||||
| Goodwill, net | 771,053 | 754,554 | ||||||||
| Indefinite lived intangible assets, net | 453,306 | 450,759 | ||||||||
| Other intangible assets, net | 2,095 | 1,448 | ||||||||
| Prepaid pension cost | 476,679 | 447,688 | ||||||||
| Deferred charges and other assets | 76,504 | 109,606 | ||||||||
| $ | 3,576,774 | $ | 3,559,098 | |||||||
| Liabilities and Shareholders’ Equity | ||||||||||
| Current liabilities | ||||||||||
| Accounts payable and accrued liabilities | $ | 330,840 | $ | 253,346 | ||||||
| Deferred revenue | 138,827 | 130,744 | ||||||||
| Dividends declared | 13,550 | — | ||||||||
| Federal and state income taxes payable | 5,126 | — | ||||||||
| Short-term borrowings | 362,714 | 50,000 | ||||||||
| 851,057 | 434,090 | |||||||||
| Postretirement benefits other than pensions | 134,867 | 130,824 | ||||||||
| Other liabilities | 198,536 | 192,540 | ||||||||
| Deferred income taxes | 231,179 | 221,949 | ||||||||
| Long-term debt | 405,267 | 883,078 | ||||||||
| 1,820,906 | 1,862,481 | |||||||||
| Redeemable preferred stock | 12,916 | 13,132 | ||||||||
| Preferred stock | — | — | ||||||||
| Common shareholders’ equity | ||||||||||
| Common stock | 20,000 | 20,000 | ||||||||
| Capital in excess of par value | 146,080 | 142,814 | ||||||||
| Retained earnings | 3,085,882 | 3,029,595 | ||||||||
| Accumulated other comprehensive income(loss) | ||||||||||
| Cumulative foreign currency translation adjustment | (7,167 | ) | (9,678 | ) | ||||||
| Unrealized gain on available-for-sale securities | 20,452 | 24,281 | ||||||||
| Cost of Class B common stock held in treasury | (1,522,295 | ) | (1,523,527 | ) | ||||||
| 1,742,952 | 1,683,485 | |||||||||
| $ | 3,576,774 | $ | 3,559,098 | |||||||
Assets | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 23,848 | $ | 20,345 | ||
Investments in marketable equity securities | 11,491 | 10,948 | ||||
Accounts receivable, net | 306,923 | 306,016 | ||||
Federal and state income taxes receivable | - | 12,370 | ||||
Inventories | 24,259 | 15,178 | ||||
Other current assets | 41,376 | 40,210 | ||||
| 407,897 | 405,067 | ||||
Property, plant and equipment | ||||||
Buildings | 264,642 | 263,311 | ||||
Machinery, equipment and fixtures | 1,391,652 | 1,217,282 | ||||
Leasehold improvements | 77,856 | 70,706 | ||||
| 1,734,150 | 1,551,299 | ||||
Less accumulated depreciation | (769,273 | ) | (736,781 | ) | ||
| 964,877 | 814,518 | ||||
Land | 38,301 | 38,000 | ||||
Construction in progress | 77,472 | 74,543 | ||||
| 1,080,650 | 927,061 | ||||
Investments in marketable equity securities | 207,319 | 210,189 | ||||
Investments in affiliates | 103,305 | 131,629 | ||||
Goodwill and other intangibles, | ||||||
less accumulated amortization | 1,227,085 | 1,007,720 | ||||
Prepaid pension cost | 439,570 | 374,084 | ||||
Deferred charges and other assets | 126,207 | 144,993 | ||||
| $3,592,033 | $3,200,743 | ||||
Liabilities and Shareholders' Equity | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | $ 304,116 | $ 273,076 | ||||
Income taxes payable | 3,003 | — | ||||
Deferred subscription revenue | 81,552 | 85,721 | ||||
Dividends declared | 13,540 | — | ||||
Short-term borrowings | 50,000 | 50,000 | ||||
| 452,211 | 408,797 | ||||
Post retirement benefits other than pensions | 128,706 | 128,764 | ||||
Other liabilities | 221,907 | 178,029 | ||||
Deferred income taxes | 202,381 | 117,731 | ||||
Long-term debt | 921,108 | 873,267 | ||||
| 1,926,313 | 1,706,588 | ||||
Redeemable preferred stock | 13,132 | 13,148 | ||||
Common shareholders' equity | ||||||
Common stock | 20,000 | 20,000 | ||||
Capital in excess of par value | 137,755 | 128,159 | ||||
Retained earnings | 3,015,079 | 2,854,122 | ||||
Accumulated other comprehensive income (losses) | ||||||
Cumulative foreign currency translation | ||||||
adjustment | (10,373 | ) | (6,574 | ) | ||
Unrealized gain on available-for-sale | ||||||
securities | 14,160 | 13,502 | ||||
Cost of Class B common stock held in treasury | (1,524,033 | ) | (1,528,202 | ) | ||
| 1,652,588 | 1,481,007 | ||||
| $3,592,033 | $3,200,743 | |||||
6.
6.
The Washington Post Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Thirty-nine Weeks Ended | |||||||||||
| September 29, | September 30, | ||||||||||
| 2002 | 2001 | ||||||||||
| (In thousands) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 110,523 | $ | 215,114 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Cumulative effect of change in method of accounting for goodwill and other intangibles | 12,100 | — | |||||||||
| Depreciation of property, plant and equipment | 128,267 | 105,264 | |||||||||
| Amortization of goodwill and other intangibles | 483 | 57,185 | |||||||||
| Net pension benefit | (48,280 | ) | (59,053 | ) | |||||||
| Early retirement program expense | 19,001 | — | |||||||||
| Gain from disposition of businesses | — | (321,091 | ) | ||||||||
| Gain on sale of marketable securities | (13,209 | ) | 354 | ||||||||
| Cost method and other investment write-downs | 18,194 | 22,850 | |||||||||
| Equity in losses of affiliates, net of distributions | 16,943 | 45,636 | |||||||||
| Provision for deferred income taxes | 18,514 | 84,207 | |||||||||
| Change in assets and liabilities: | |||||||||||
| (Increase) decrease in accounts receivable, net | (8,242 | ) | 1,208 | ||||||||
| Increase in inventories | (17,166 | ) | (8,607 | ) | |||||||
| Increase in accounts payable and accrued liabilities | 68,508 | 30,307 | |||||||||
| Decrease in income taxes receivable | 10,253 | 12,370 | |||||||||
| Increase in income taxes payable | 5,126 | 2,477 | |||||||||
| Decrease in other assets and other liabilities, net | 24,642 | 50,972 | |||||||||
| Other | (1,931 | ) | (5,100 | ) | |||||||
| Net cash provided by operating activities | 343,726 | 234,093 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property, plant and equipment | (116,882 | ) | (167,500 | ) | |||||||
| Investments in certain businesses | (26,673 | ) | (104,356 | ) | |||||||
| Proceeds from the sale of business | — | 61,921 | |||||||||
| Proceeds from sale of marketable securities | 19,701 | 145 | |||||||||
| Investment in affiliates | (7,610 | ) | (32,787 | ) | |||||||
| Other | 706 | 770 | |||||||||
| Net cash used in investing activities | (130,758 | ) | (241,807 | ) | |||||||
| Cash flows from financing activities: | |||||||||||
| Net (repayment) issuance of commercial paper | (172,693 | ) | 48,037 | ||||||||
| Dividends paid | (40,686 | ) | (40,616 | ) | |||||||
| Common shares repurchased | (786 | ) | (445 | ) | |||||||
| Proceeds from exercise of stock options | 4,997 | 4,241 | |||||||||
| Net cash (used in) provided by financing activities | (209,168 | ) | 11,217 | ||||||||
| Net increase in cash and cash equivalents | 3,800 | 3,503 | |||||||||
| Beginning cash and cash equivalents | 31,480 | 20,345 | |||||||||
| Ending cash and cash equivalents | $ | 35,280 | $ | 23,848 | |||||||
Thirty-nine Weeks Ended | ||||
| September 30, 2001 | October 1, 2000 | |||
Cash flows from operating activities: | ||||
Net income | $215,114 | $98,762 | ||
Adjustments to reconcile net income to net cash | ||||
provided by operating activities: | ||||
Depreciation of property, plant and equipment | 105,264 | 87,043 | ||
Amortization of goodwill and other intangibles | 57,185 | 45,430 | ||
Net pension benefit | (60,269 | ) | (45,000 | ) |
Gain from sale or exchange of certain businesses | (321,091 | ) | — | |
Loss/(gain) on disposition of marketable | ||||
equity securities | 354 | (4,900 | ) | |
Investment write-downs | 43,850 | 14,601 | ||
Provision for deferred income taxes | 84,207 | 26,222 | ||
Equity in losses of affiliates, net of | ||||
distributions | 24,636 | 29,666 | ||
Change in assets and liabilities: | ||||
Decrease (increase) in accounts receivable, net | 1,208 | (31,263 | ) | |
Increase in inventories | (8,607 | ) | (19,184 | ) |
Increase in accounts payable and | ||||
accrued liabilities | 30,307 | 27,174 | ||
Decrease in income taxes receivable | 12,370 | 20,037 | ||
Increase in income taxes payable | 2,477 | — | ||
Decrease in other assets and other | ||||
liabilities, net | 52,188 | 25,939 | ||
Other | (5,100 | ) | (19,070 | ) |
Net cash provided by operating activities | 234,093 | 255,457 | ||
Cash flows from investing activities: | ||||
Purchases of property, plant and equipment | (167,500 | ) | (108,585 | ) |
Investments in certain businesses | (104,356 | ) | (197,061 | ) |
Net proceeds from sale of business | 61,921 | 1,000 | ||
Proceeds from sale of marketable securities | 145 | 6,287 | ||
Other investments | (32,787 | ) | — | |
Other | 770 | (14,879 | ) | |
Net cash used in investing activities | (241,807 | ) | (313,238 | ) |
Cash flows from financing activities: | ||||
Net issuance of commercial paper | 48,037 | 47,306 | ||
Dividends paid | (40,616 | ) | (39,006 | ) |
Common shares repurchased | (445 | ) | (253 | ) |
Proceeds from exercise of stock options | 4,241 | 4,014 | ||
Net cash provided by financing activities | 11,217 | 12,061 | ||
Net increase (decrease) in cash and cash equivalents | 3,503 | (45,720 | ) | |
Beginning cash and cash equivalents | 20,345 | 75,479 | ||
Ending cash and cash equivalents | $ 23,848 | $ 29,759 | ||
7.
7.
The Washington Post Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
Results of operations, when examined on a quarterly basis, reflect the seasonality of advertising that affects the newspaper, magazine and broadcasting operations. Advertising revenues in the second and fourth quarters are typically higher than first and third quarter revenues. All adjustments reflected in the interim financial statements are of a normal recurring nature. Certain 2001 amounts have been reclassified to conform with current year presentation.
Note 1: Acquisitions, Exchanges and DispositionsDispositions.
In the first nine months of 2002, Kaplan acquired several businesses in their higher education and test preparation divisions, totaling $37.9 million, with most of the aggregate purchase price allocated to goodwill. Approximately $9.1 million remains to be paid on these acquisitions, of which $2.1 million has been classified in current liabilities and $7.0 million as long-term debt at September 29, 2002.
During the first nine months of 2001, the companyCompany spent approximately $104.4 million on business acquisitions and exchanges, which principally included the purchase of Southern Maryland Newspapers, a division of Chesapeake Publishing Corporation, and amounts paid as part of a cable system exchange with AT&T Broadband.
Southern Maryland Newspapers publishes the Maryland Independent in Charles County, Maryland; the Lexington Park Enterprise in St. Mary's County, Maryland; and the Recorder in Calvert County, Maryland. The acquired newspapers have a combined total paid circulation of approximately 50,000.
The cable system exchange with AT&T Broadband was completed on March 1, 2001 and consisted of the exchange by the company of its cable systems in Modesto and Santa Rosa, California, and approximately $42.0 million to AT&T Broadband for cable systems serving approximately 155,000 subscribers principally located in Idaho. In a related transaction on January 12, 2001, the Company completed the sale of a cable system serving about 15,000 subscribers in Greenwood, Indiana for $61.9 million.
The company Kaplan also acquired a providertwo businesses that are part of CFA exam preparation services and a company which provides pre-certification training for real estate, insurance and securities professionals during the first nine months of 2001.their professional division.
The gain resulting from the cable system sale and exchange transactions, which is included in "Other, net"“Other income, net” in the Condensed Consolidated Statements of Income, increased net income for the first nine months of 2001 by $196.5 million, or $20.70$20.69 per share. For income tax purposes, a substantial component of the cable system sale and exchange transactions qualifyqualified as like-kind exchanges, and therefore, a large portion of these transactions dodid not result in a current tax liability.
During the first nine months of 2000, the company acquired Quest Education Corporation (on August 2, 2000) for approximately $177.7 million, including assumed debt and related acquisition expenses, and two cable systems serving approximately 8,500 subscribers in South Sioux City, NE (in June 2000) and Diamondhead, MS (in August 2000) for approximately $16.2 million.
The acquisition of Quest Education Corporation (Quest) was completed through an all cash tender offer in which the company purchased substantially all the outstanding stock of Quest for $18.35 per share. The acquisition was financed through the issuance of additional short-term borrowings. The operating results of Quest from the date of acquisition have been included in the Education segment.
Quest, headquartered in Atlanta, Ga., is a leading provider of post-secondary education, currently serving more than 13,400 students in 30 schools located in 11 states. Quest's schools offer bachelor degrees, associate degrees, and diploma programs designed to provide students with the knowledge and skills necessary to qualify them for entry-level employment, primarily in the fields of health care, business and information technology.
There were no business dispositions during the first nine months of 2000.
Note 2: Investments in Marketable Securities.Investments.
8.
Investments in marketable equity securities at September 30, 200129, 2002 and December 31, 200030, 2001 consist of the following (in thousands):
| September 29, | December 30, | |||||||
| 2002 | 2001 | |||||||
| Total cost | $ | 189,986 | $ | 195,661 | ||||
| Gross unrealized gains | 33,532 | 39,744 | ||||||
| Total fair value | $ | 223,518 | $ | 235,405 | ||||
September 30, | December 31, | |||
| 2001 | 2000 | |||
Total cost | $195,661 | $199,159 | ||
Gross unrealized gains | 23,149 | 21,978 | ||
Total fair value | $218,810 | $221,137 | ||
During the first quarter of 2002, the Company sold its shares of Ticketmaster, resulting in a pre-tax gain of $13.2 million. There were no sales of marketable equity securities in the second or third quarters of 2002. During the first nine months of 2001, proceeds from sales of marketable equity securities were $0.1 million. Gross realized losses on such sales were $0.4 million. During
At September 29, 2002 and December 30, 2001, the carrying value of the Company’s cost method investments was $12.2 million and $29.6 million, respectively. There were no investments in companies constituting cost method investments during the first nine months of 2000, proceeds from sales of marketable equity securities were $6.3 million. Gross realized gains on such sales were $4.9 million. Gross realized gains upon the sale of marketable equity securities are included in "Other, net" in the Condensed Consolidated Statements of Income.
At September 30, 2001 and December 31, 2000, the carrying value of the Company's cost method investments was $40.9 million and $48.6 million, respectively.2002. During the third quarter and the first nine months of 2001, the Company invested $4.04.0 million and $11.7 million, respectively, in companies constituting cost method investments; during the third quarter and first nine months of 2000, the Company invested $6.0 million and $32.4 million in such companies. investments.
The Company recorded charges of $8.6$1.5 million and $22.8$18.2 million during the third quarter and first nine months of 2001,2002, respectively, to write-down certain of its cost method investments to estimated fair value; for the same periods of 2000,2001, the Company recorded charges of $2.0$8.6 million and $10.1$25.9 million, respectively.
8.
Note 3: BorrowingsBorrowings.
At September 30, 2001,29, 2002, the Company had $971.1$768.0 million in total debt outstanding, which was comprised of $573.0$362.7 million of commercial paper borrowings, and $398.1$398.3 million of 5.5 percent unsecured notes due February 15, 2009. At September 30, 2001,2009, and $7.0 million in other debt. During the third quarter, the Company has classified $523.0replaced its revolving credit facility agreements with a five year $350 million of its commercial paper borrowings as long-term debtrevolving credit facility, which expires in August 2007 and 364 day $350 million revolving credity facility, which expires in August 2003. Refer to Exhibits 4.6 and 4.7 for the Condensed Consolidated Balance Sheet as the Company has the ability and intent to finance such borrowings on a long-term basis.Company’s new revolving credit facilities.
During the third quarter of 2002 and first nine months of 2001 the Company had average borrowings outstanding of approximately $773.4 million and $995.9 million, respectively, at average annual interest rates of approximately 3.8 percent and 4.5 percent, respectively. During the third quarter of 2002 and 2001, the Company incurred net interest expense on borrowings of $8.6 million and $11.6 million, respectively.
During the first nine months of 2002 and 2001 the Company had average borrowings outstanding of approximately $830.8 million and $973.4 million, respectively, at average annual interest rates of approximately 4.53.6 percent and 5.1 percent, respectively. During the third quarter and first nine months of 2000, the Company had average borrowings outstanding of approximately $883.2 million2002 and $845.3 million, respectively, at average annual interest rates of approximately 6.4 percent and 6.0 percent, respectively.
During the third quarter and first nine months of 2001, the Company incurred net interest expense on borrowings of $11.6$26.1 million and $38.1 million, respectively; for the same periods of 2000, the Company incurred interest expense on borrowings of $14.4 million and $39.0 million, respectively.
Note 4: Business Segments.
The following table summarizes financial information related to each of the company'sCompany’s business segments. The 20012002 and 20002001 asset information is as of September 29, 2002 and December 30, 2001, and December 31, 2000.
respectively.
9.
Third Quarter Period 2001 Newspaper Publishing Television Broadcasting Magazine Publishing Cable Corporate Operating revenues $199,946 $ 68,191 $101,546 $ 98,674 $127,159 $ - $ 595,516 Income (loss) from operations $ 11,574 $ 22,329 $ 9,430 $ 8,037 $ 760 $ (5,177 ) $ 46,953 Equity in losses of affiliates (5,535 ) Interest expense, net (11,635 ) Other expense, net (25,365 ) Income before income taxes Depreciation expense $ 8,911 $ 2,933 $ 1,160 $ 16,886 $ 4,875 $ - $ 34,765 Amortization expense $ 691 $ 3,534 $ 1,667 $ 10,229 $ 3,947 $ - $ 20,068 Pension credit (expense) $ 6,808 $ 1,565 $ 11,246 $ (152 ) $ (170 ) $ - $ 19,297 Identifiable assets $712,783 $410,205 $483,138 $1,109,470 $487,435 $ 66,887 $3,269,918 Investments in securities 218,810 Investments in affiliates 103,305 Total assets
(in thousands)
Television
Education
Office
Consolidated $ 4,418
marketable equity $3,592,033
| Newspaper | Television | Magazine | Cable | Corporate | ||||||||||||||||||||||||
| Publishing | Broadcasting | Publishing | Television | Education | Office | Consolidated | ||||||||||||||||||||||
2002 | ||||||||||||||||||||||||||||
| Operating revenues | $ | 202,445 | $ | 82,074 | $ | 87,487 | $ | 107,647 | $ | 160,640 | $ | — | $ | 640,293 | ||||||||||||||
| Income (loss) from operations | $ | 18,197 | $ | 38,464 | $ | 12,450 | $ | 16,597 | $ | 11,500 | $ | (7,948 | ) | $ | 89,260 | |||||||||||||
| Equity in losses of affiliates | (1,254 | ) | ||||||||||||||||||||||||||
| Interest expense, net | (8,648 | ) | ||||||||||||||||||||||||||
| Other expense, net | 1,115 | |||||||||||||||||||||||||||
| Income before income taxes | $ | 80,473 | ||||||||||||||||||||||||||
| Depreciation expense | $ | 10,672 | $ | 2,873 | $ | 1,010 | $ | 24,866 | $ | 6,387 | $ | — | $ | 45,808 | ||||||||||||||
| Amortization expense | $ | 3 | $ | — | $ | — | $ | 39 | $ | 130 | $ | — | $ | 172 | ||||||||||||||
| Net pension credit (expense) | $ | 5,454 | $ | 1,182 | $ | 9,979 | $ | (203 | ) | $ | (296 | ) | $ | — | $ | 16,116 | ||||||||||||
| Identifiable assets | $ | 699,681 | $ | 410,801 | $ | 474,312 | $ | 1,122,103 | $ | 550,442 | $ | 21,793 | $ | 3,279,132 | ||||||||||||||
| Investments in marketable equity securities | 223,518 | |||||||||||||||||||||||||||
| Investments in affiliates | 74,124 | |||||||||||||||||||||||||||
| Total assets | $ | 3,576,774 | ||||||||||||||||||||||||||
| Newspaper | Television | Magazine | Cable | Corporate | ||||||||||||||||||||||||
| Publishing | Broadcasting | Publishing | Television | Education | Office | Consolidated | ||||||||||||||||||||||
2001 | ||||||||||||||||||||||||||||
| Operating revenues | $ | 199,946 | $ | 68,191 | $ | 98,337 | $ | 98,674 | $ | 127,159 | $ | — | $ | 592,307 | ||||||||||||||
| Income (loss) from operations | $ | 11,574 | $ | 22,329 | $ | 9,430 | $ | 8,037 | $ | 760 | $ | (5,177 | ) | $ | 46,953 | |||||||||||||
Pro forma income (loss) from operations (1) | $ | 12,261 | $ | 25,863 | $ | 11,097 | $ | 18,227 | $ | 4,598 | $ | (5,177 | ) | $ | 66,869 | |||||||||||||
| Equity in losses of affiliates | (26,535 | ) | ||||||||||||||||||||||||||
| Interest expense, net | (11,635 | ) | ||||||||||||||||||||||||||
| Other expense, net | (4,365 | ) | ||||||||||||||||||||||||||
| Income before income taxes | $ | 4,418 | ||||||||||||||||||||||||||
| Depreciation expense | $ | 8,911 | $ | 2,933 | $ | 1,160 | $ | 16,886 | $ | 4,875 | $ | — | $ | 34,765 | ||||||||||||||
| Amortization expense | $ | 691 | $ | 3,534 | $ | 1,667 | $ | 10,229 | $ | 3,947 | $ | — | $ | 20,068 | ||||||||||||||
| Net pension credit (expense) | $ | 6,808 | $ | 1,565 | $ | 11,246 | $ | (152 | ) | $ | (170 | ) | $ | — | $ | 19,297 | ||||||||||||
| Identifiable assets | $ | 703,947 | $ | 419,246 | $ | 486,804 | $ | 1,117,426 | $ | 472,988 | $ | 42,346 | $ | 3,242,757 | ||||||||||||||
| Investments in marketable equity securities | 235,405 | |||||||||||||||||||||||||||
| Investments in affiliates | 80,936 | |||||||||||||||||||||||||||
| Total assets | $ | 3,559,098 | ||||||||||||||||||||||||||
| (1) | Third quarter 2001 results, adjusted as if SFAS 142 had been adopted at the beginning of 2001 — refer to Note 5 for additional information |
2000 | Newspaper | Television | Magazine Publishing | Cable |
| Corporate |
| ||||||
Operating revenues | $227,634 | $ 88,857 | $95,911 | $ 90,622 | $ 99,428 | $ - | $ 602,452 | ||||||
Income (loss) from | |||||||||||||
operations | $ 34,994 | $ 41,906 | $ 4,577 | $ 15,923 | $ (6,668 | ) | $ (6,175 | ) | $ 84,557 | ||||
Equity in losses of | |||||||||||||
affiliates | (8,890 | ) | |||||||||||
Interest expense, net | (14,389 | ) | |||||||||||
Other income, net |
| ||||||||||||
Income before income | |||||||||||||
taxes | $ 61,516 | ||||||||||||
Depreciation expense | $ 9,683 | $ 3,335 | $ 1,270 | $ 11,945 | $ 3,786 | $ - | $ 30,019 | ||||||
Amortization expense | $ 389 | $ 3,534 | $ 1,697 | $ 7,401 | $ 2,916 | $ - | $ 15,937 | ||||||
Pension credit (expense) | $ 4,572 | $ 1,346 | $ 9,001 | $ (170 | ) | $ (172 | ) | $ - | $ 14,577 | ||||
Identifiable assets | $684,908 | $430,444 | $452,453 | $ 757,083 | $482,014 | $ 41,075 | $2,847,977 | ||||||
Investments in marketable equity | |||||||||||||
securities | 221,137 | ||||||||||||
Investments in | |||||||||||||
affiliates | 131,629 | ||||||||||||
Total assets | $3,200,743 |
10.
Nine Month Period 2001 Newspaper Publishing Television Broadcasting Magazine Publishing Cable Corporate Operating revenues $630,965 $ 226,046 $227,610 $ 284,303 $ 368,103 $ - $ 1,787,027 Income (loss) from operations $ 60,981 $ 88,688 $ 15,450 $ 21,118 $ (20,994 ) $ (18,452 ) $ 146,791 Equity in losses of affiliates (24,636 ) Interest expense, net (38,129 ) Other income, net Income before income taxes $ 356,714 Depreciation expense $ 28,438 $ 8,791 $ 3,597 $ 50,031 $ 14,407 $ - $ 105,264 Amortization expense $ 1,885 $ 10,601 $ 5,002 $ 28,167 $ 11,530 $ - $ 57,185 Pension credit (expense) $ 21,054 $ 4,891 $ 34,078 $ (458 ) $ (512 ) $ - $ 59,053
(in thousands)
Television
Education
Office
Consolidated
272,688
| Newspaper | Television | Magazine | Cable | Corporate | ||||||||||||||||||||||||
| Publishing | Broadcasting | Publishing | Television | Education | Office | Consolidated | ||||||||||||||||||||||
2002 | ||||||||||||||||||||||||||||
| Operating revenues | $ | 618,284 | $ | 243,584 | $ | 251,391 | $ | 317,643 | $ | 457,416 | — | $ | 1,888,318 | |||||||||||||||
| Income (loss) from operations | $ | 73,551 | $ | 115,474 | $ | 14,144 | $ | 54,405 | $ | 11,574 | $ | (20,568 | ) | $ | 248,580 | |||||||||||||
| Equity in losses of affiliates | (16,943 | ) | ||||||||||||||||||||||||||
| Interest expense, net | (26,120 | ) | ||||||||||||||||||||||||||
| Other expense, net | 1,606 | |||||||||||||||||||||||||||
| Income before income taxes | $ | 207,123 | ||||||||||||||||||||||||||
| Depreciation expense | $ | 32,295 | $ | 8,422 | $ | 3,082 | $ | 66,083 | $ | 18,385 | $ | — | $ | 128,267 | ||||||||||||||
| Amortization expense | $ | 11 | $ | — | $ | — | $ | 117 | $ | 355 | $ | — | $ | 483 | ||||||||||||||
| Net pension credit (expense) | $ | 16,437 | $ | 3,622 | $ | 29,768 | $ | (654 | ) | $ | (893 | ) | $ | — | $ | 48,280 | ||||||||||||
| Newspaper | Television | Magazine | Cable | Corporate | ||||||||||||||||||||||||
| Publishing | Broadcasting | Publishing | Television | Education | Office | Consolidated | ||||||||||||||||||||||
2001 | ||||||||||||||||||||||||||||
| Operating revenues | $ | 630,965 | $ | 226,046 | $ | 273,198 | $ | 284,303 | $ | 368,103 | $ | — | $ | 1,782,615 | ||||||||||||||
| Income (loss) from operations | $ | 60,981 | $ | 88,688 | $ | 15,450 | $ | 21,118 | $ | (20,994 | ) | $ | (18,452 | ) | $ | 146,791 | ||||||||||||
Pro forma income (loss) from operations(1) | $ | 62,854 | $ | 99,289 | $ | 20,452 | $ | 49,168 | $ | (9,791 | ) | $ | (18,452 | ) | $ | 203,520 | ||||||||||||
| Equity in losses of affiliates | (45,636 | ) | ||||||||||||||||||||||||||
| Interest expense, net | (38,129 | ) | ||||||||||||||||||||||||||
| Other expense, net | 293,688 | |||||||||||||||||||||||||||
| Income before income taxes | $ | 356,714 | ||||||||||||||||||||||||||
| Depreciation expense | $ | 28,438 | $ | 8,791 | $ | 3,597 | $ | 50,031 | $ | 14,407 | $ | — | $ | 105,264 | ||||||||||||||
| Amortization expense | $ | 1,885 | $ | 10,601 | $ | 5,002 | $ | 28,167 | $ | 11,530 | $ | — | $ | 57,185 | ||||||||||||||
| Net pension credit (expense) | $ | 21,054 | $ | 4,891 | $ | 34,078 | $ | (458 | ) | $ | (512 | ) | $ | — | $ | 59,053 | ||||||||||||
| (1) | Fiscal year 2001 results, adjusted as if SFAS 142 had been adopted at the beginning of 2001 — refer to Note 5 for additional information |
2000 | Newspaper Publishing | Television | Magazine Publishing | Cable |
| Corporate |
| ||||||
Operating revenues | $680,448 | $ 257,017 | $296,225 | $266,813 | $ 240,261 | $ - | $ 1,740,764 | ||||||
Income (loss) from | |||||||||||||
operations | $108,456 | $ 117,050 | $ 28,012 | $ 46,652 | $ (32,650 | ) | $(17,592 | ) | $ 249,928 | ||||
Equity in losses of | |||||||||||||
affiliates | (29,666 | ) | |||||||||||
Interest expense, net | (39,031 | ) | |||||||||||
Other income, net |
|
| |||||||||||
Income before | |||||||||||||
income taxes | $ 176,062 | ||||||||||||
Depreciation expense | $ 28,739 | $ 9,676 | $ 3,847 | $ 35,525 | $ 9,256 | $ - | $ 87,043 | ||||||
Amortization expense | $ 1,170 | $ 10,601 | $ 5,091 | $ 22,204 | $ 6,364 | $ - | $ 45,430 | ||||||
Pension credit (expense) | $ 13,715 | $ 4,037 | $ 27,004 | $ (510 | ) | $ (516 | ) | $ - | $ 43,730 |
11.
Newspaper publishing includes the publication of newspapers in the Washington, D.C. area (The Washington Post and, theGazettecommunity newspapers, and effective March 1, 2001 Southern Maryland newspapers) and Everett, Washington (The Everett HeraldHerald)). This business division also includes newsprint warehousing, recycling operations and the company'sCompany’s electronic media publishing business (primarily washingtonpost.com).
Television broadcasting operations are conducted through six VHF, network-affiliated television stations serving the Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville television markets. Each of the stations is network-affiliated except for Jacksonville, which became an independent station on July 15, 2002, when its network affiliation agreement with CBS expired.
The magazine publishing division consists of the publication of a weekly news magazine, Newsweek, which has one domestic and three international editions, the publication of Arthur Frommer'sFrommer’s Budget Travel, and the publication of business periodicals for the computer services industry and the Washington-area technology community.
Cable television operations consist of cable systems offering basic cable, and pay television and other services to approximately 753,000721,000 subscribers in midwestern, western, and southern states.
Educational productsEducation and career services are provided through the company'sCompany’s wholly-owned subsidiary Kaplan, Inc. Kaplan's five major lines ofKaplan’s businesses include Test Preparationsupplemental education services, which is made up of test preparation and Admissions,admissions, providing test preparation services for college and graduate school entrance exams; Kaplan Professional, providing education and career services to business people and other professionals; and Score!, offering multi-media learning and private tutoring to children and educational resources to parents. Kaplan’s businesses also include higher education services, which includes all of Kaplan’s post-secondary education businesses, including the fixed facility colleges that were formerly part of Quest Education, Corporation, a provider of post-secondary education offering Bachelor'swhich offers bachelor’s degrees, Associate'sassociate’s degrees and diploma programs primarily in the fields of healthcare, business and information technology; Kaplan Professional, providing educationand online post-secondary and career services to business people and other professionals; SCORE!, offering multi-media learning and private tutoring to children and educational resources to parents; and The Kaplan Colleges, Kaplan's distance learning business,programs (various distance-learning businesses, including kaplancollege.com.kaplancollege.com).
Corporate office includes the expenses of the company'sCompany’s corporate office.
Note 5: New Accounting PronouncementsPronouncement.
In July 2001, the Financial Accounting Standards Board issued StatementsThe Company adopted Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142 "Goodwill(SFAS 142), “Goodwill and Other Intangible Assets." The significant provisions of these statements and implications toAssets” effective on the company are as follows:
SFAS No. 141- "Business Combinations" supersedes Accounting Principles Board Opinion (APB) No. 16 and provides, among other provisions, that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of intangible assets separately from goodwill. The company adopted SFAS No. 141 effective June 30, 2001 and does not believe applicationfirst day of itsrequirements to
prospective acquisitions will2002 fiscal year. As a resultin a significant change to howof thecompany has historically accounted for its acquisitions.adoption of SFAS
No.142,- "Goodwill and Other Intangible Assets" supersedes APB 17 and provides, among other provisions, that (1) goodwill and indefinite lived intangible assets will no longer be amortized, (2) goodwill will be tested for impairment at least annually atthereporting unit level, (3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually, and (4) the amortization period of intangible assets with finite lives will no longer be limited to forty years. The company will adopt SFAS No. 142 effective in fiscal 2002 and presently estimates the application of its requirements will result in the cessation ofCompany ceased most of the periodic chargespresently beingpreviously recorded from the amortization of goodwill and other intangibles.As required under SFAS 142, earlier this year, the Company completed its transitional impairment review of indefinite-lived intangible
assets.assets and goodwill. The expected future cash flows for one of the business units in the Company’s magazine segment, on a discounted basis, did not support the net carrying value of the related goodwill. Accordingly, an after-tax goodwill impairment loss of $12.1 million, or $1.27 per share was recorded. The loss is included in the Company’s year-to-date results for the nine months ended September 29, 2002 as a cumulative effect of change in accounting principle.
On a pro forma basis, the Company’s operating income would have been $66.9 million in the third quarter of 2001, if SFAS 142 had been adopted at the beginning of fiscal 2001, compared to $89.3 for the third quarter of 2002. On a pro forma basis, the Company’s operating income would have been $203.5 million in the first nine months of 2001, if SFAS 142 had been adopted at the beginning of fiscal 2001, compared to $248.6 million for the first nine months of 2002.
12.
Other pro forma results for the third quarter of 2002, compared to 2001, adjusted as if SFAS 142 had been adopted at the beginning of 2001, are as follows:
| Third Quarter | |||||||||
| 2002 | 2001 | ||||||||
| Net income available for common stock as reported | $ | 47,524 | $ | 1,305 | |||||
| Amortization of goodwill and other intangibles, net of tax | — | 13,948 | |||||||
| Pro forma net income available for common stock | $ | 47,524 | $ | 15,253 | |||||
| Basic earnings per share | $ | 5.00 | $ | 1.61 | |||||
| Diluted earnings per share | $ | 4.99 | $ | 1.61 | |||||
Other pro forma results for the first nine months of 2002, compared to 2001, adjusted as if SFAS 142 had been adopted at the beginning of 2001, are as follows:
| Year-to-Date | ||||||||||
| 2002 | 2001 | |||||||||
| Income before cumulative effect of change in accounting principle, as reported | $ | 122,623 | $ | 215,114 | ||||||
| Amortization of goodwill and other intangibles, net of tax | — | 40,035 | ||||||||
| Pro forma income before cumulative effect of change in accounting principle | 122,623 | 255,149 | ||||||||
| Cumulative effect of change in method of accounting for goodwill and other intangible assets, net of tax | (12,100 | ) | — | |||||||
| Redeemable preferred stock dividends | (1,033 | ) | (1,052 | ) | ||||||
| Pro forma net income available for common stock | $ | 109,490 | $ | 254,097 | ||||||
| Basic earnings per share: | ||||||||||
| Before cumulative effect of change in accounting principle | $ | 12.90 | $ | 26.90 | ||||||
| Cumulative effect of change in accounting principle | (1.27 | ) | — | |||||||
| Redeemable preferred stock dividends | (0.11 | ) | (0.11 | ) | ||||||
| Net income available for common stock | $ | 11.52 | $ | 26.79 | ||||||
| Diluted earnings per share: | ||||||||||
| Before cumulative effect of change in accounting principle | $ | 12.88 | $ | 26.86 | ||||||
| Cumulative effect of change in accounting principle | (1.27 | ) | — | |||||||
| Redeemable preferred stock dividends | (0.11 | ) | (0.11 | ) | ||||||
| Net income available for common stock | $ | 11.50 | $ | 26.75 | ||||||
13.
In accordance with SFAS 142, the Company has reviewed its goodwill and other intangible assets and reported them on the consolidated balance sheet in three categories (goodwill, indefinite-lived intangible assets, and other intangible assets). The Company’s intangible assets with an indefinite life are from franchise agreements at its cable division. Other intangible assets are primarily non-compete agreements, with amortization periods up to five years. At September 29, 2002, goodwill, indefinite lived intangible assets and other intangible assets were net of accumulated amortization of $298.4 million, $163.8 million and $1.2 million, respectively. At December 30, 2001, goodwill, indefinite lived intangible assets and other intangible assets were net of accumulated amortization of $279.4 million, $163.8 million and $0.7 million, respectively.
Note 6: Change in Accounting Method — Stock Options
Effective the first day of the Company’s 2002 fiscal year, the Company has adopted the fair-value-based method of accounting for company stock options as outlined in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This change in accounting method will be applied prospectively to all awards granted from the beginning of the Company’s fiscal year 2002 and thereafter. Stock options awarded prior to fiscal 2002 will continue to be accounted for under the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”
No stock options have been awarded in fiscal year 2002 through the end of the third quarter; therefore, this change in accounting method has had no impact on the Company’s reported results of operations in 2002. The impact on the Company’s overall 2002 operating results is not expected to be material.
14.
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
This analysis should be read in conjunction with the consolidated financial statements and the notes thereto.
Revenues and expenses in the first and third quarters are customarily lower than those in the second and fourth quarters because of significant seasonal fluctuations in advertising volume. For
As discussed above, the Company adopted SFAS 142 effective on the first day of its 2002 fiscal year. All operating income comparisons presented below are on a pro forma basis as if SFAS 142 had been adopted at the beginning of 2001. Therefore, 2001 pro forma operating results exclude amortization charges of goodwill and certain other intangible assets that reason, the resultsare no longer amortized under SFAS 142.
Results of operations for each quarter are compared with those of the corresponding quarter in the preceding year.
Third Quarter ComparisonsOperations
Net income for the third quarter of 20012002 was $1.6$47.8 million ($0.144.99 per share), downup from net income of $33.5$1.6 million ($3.510.14 per share) in the third quarter of last year. The company's pre-tax incomeResults for the third quarter of 2002 include early retirement program charges ($3.6 million, or $0.38 per share) and losses on the write-down of certain investments $0.8 million, or $0.09 per share). Results for the third quarter of 2001 includes write-downsinclude losses on the write-down of approximately $26 million to adjust several of the company'scertain investments to their estimated fair values. Excluding these non-operating investment write-downs, net income for the third quarter of 2001 totaled $15.1($13.4 million, or $1.56$1.41 per share.share) and a charge of $13.9 million, or $1.47 per share, for amortization of goodwill and certain other intangible assets that are no longer amortized under SFAS 142.
Revenue for the third quarter of 20012002 was $595.5$640.3 million, down 1up 8 percent from $602.5$592.3 million in 2000. Advertising2001. The increase in revenue declined 18 percentis due mostly to significant revenue growth at the education, broadcast and cable divisions. Revenues at the company’s newspaper publishing division were up slightly for the third quarter of 2002, while revenues were down at the magazine publishing division compared to last year. Circulation and subscriber revenue and education revenue increased 18 percent and 28 percent, respectively.
The decline inthe prior year; the advertising revenue is the result of continued softnessclimate at both divisions continues to be soft. In addition, Newsweek newsstand sales were significantly higher in the advertising marketsthird quarter of the Company's largest advertising-based businesses. This already-soft advertising environment worsened for several weeks2001, following the events of September 11. Approximately 30
Operating income for the quarter increased 33 percent to $89.3 million, from $66.9 million in 2001, adjusted as if SFAS 142 had been adopted at the beginning of 2001. Excluding the decline$6.0 million in total advertising revenue is attributable to the decline in classified recruitment advertising at The Washington Post newspaper.
The 18 percent improvement in circulation and subscriber revenue is mostly attributable to a significant spike in Newsweek's newsstand sales in September on regular and special editions related to the September 11 terrorist attacks. Growth in subscriber revenue at Cable One, due to rate increases established to offset the rising cost of programming, as well as growth in basic subscribers as a result of acquisitions and cable system exchanges completed in the first quarter of 2001 also contributed to the increase.
Over half of the increase in education revenue is attributable to the acquisition of Quest Educational Corporation (Quest) in August 2000. The remaining improvement in education revenue is due mostly to revenue growth at Kaplan's traditional test preparation and Score! businesses.
Costs and expensespre-tax charges from early retirement programs, operating income for the third quarter of 20012002 was $95.3 million, an increase of 42 percent. Third quarter 2002 operating results benefited from significant increases at the company’s broadcast, education and newspaper publishing divisions. These factors were offset in part by increased 6 percent to $548.6 million from $517.9 million in 2000. A substantial portion of the increase in costs and expenses is attributable to operating expenses of Quest (acquired in August 2000), with the remaining increase due to higher depreciation and amortization expense, a reduced net pension credit, early retirement program charges and higher stock-based compensation expense accruals at the education division.
The company's expenses forFor the third quarter were reduced by $19.7first nine months of 2002, net income totaled $110.5 million ($11.50 per share), compared with net income of pension credits, compared to $15.0$215.1 million ($22.53 per share) for the same period of 2000.2001. Results for the first nine months of 2002 include a transitional goodwill impairment loss ($12.1 million, or $1.27 per share), charges from early retirement programs ($11.3 million, or $1.18 per share), and a net non-operating loss from the write-down of certain of the company’s investments ($0.3 million, or $0.04 per share). Results for the first nine months of 2001 include net non-operating gains, principally from the sale and exchange of certain cable systems ($171.3 million, or $18.03 per share), and a charge of $40.0 million, or $4.21 per share, for amortization of goodwill and other intangible assets that are no longer amortized under SFAS 142.
15.
Revenue for the first nine months of 2002 was $1,888.3 million, up 6 percent over revenue of $1,782.6 million for the first nine months of 2001. Operating income increased 22 percent to $248.6 million, from $203.5 million in 2001, adjusted as if SFAS 142 had been adopted at the beginning of 2001. Excluding the $19.0 million in pre-tax charges from early retirement programs, operating income for the first nine months of 2002 was $267.6 million, an increase of 31 percent. The company’s year-to-date results benefited from improved operating results at the education and broadcast divisions, along with improved earnings at The Washington Post newspaper and the cable division. These factors were offset in part by increased depreciation expense, a reduced net pension credit, early retirement program charges and higher stock-based compensation expense accruals at the education division.
Excluding charges related to early retirement programs, the company’s operating income for the third quarter decreased 44and first nine months of 2002 includes $16.1 million and $48.3 million of net pension credits, respectively, compared to $19.3 million and $59.1 million for the same periods of 2001. At December 30, 2001, the company modified certain assumptions surrounding the company’s pension plans. Specifically, the company reduced its assumptions on discount rate from 7.5 percent to $47.0 million,7.0 percent and expected return on plan assets from $84.69.0 percent to 7.5 percent. These assumption changes result in a reduction of approximately $5.5 million in 2000.the company’s net pension credit each quarter. Management expects the 2002 annual net pension credit to approximate $64 million, compared to $76.9 million in 2001, excluding charges related to early retirement programs.
Newspaper Publishing Division.. Newspaper publishing division revenue totaled $199.9$202.4 million for the third quarter of 2001,2002, a decrease of 121 percent increase from revenue of $227.6$199.9 million in the third quarter of 2000.2001; division revenue decreased 2 percent to $618.3 million for the first nine months of 2002, from $631.0 million for the first nine months of 2001. Division operating income for the third quarter declined 67increased 48 percent to $11.6$18.2 million, from $35.0pro forma operating income of $12.3 million in the third quarter of 2000. The decrease in2001; operating income is dueincreased 17 percent to a decline in print advertising, offset in part by higher online advertising revenues and$73.6 million for the first nine months of 2002, compared to pro forma operating income of $62.9 million for the first nine months of 2001. Improved operating results for the third quarter of 2002 reflect the benefits of cost control initiatives employed throughout the division.division and a 26 percent decrease in newsprint expense; these savings were partially offset by a pre-tax early retirement program charge of $2.9 million and a reduced pension credit. Operating results for the first nine months of 2002 also benefited from cost control initiatives employed throughout the division, and a 25 percent decrease in newsprint expense; these savings were partially offset by a decrease in print advertising revenues, the early retirement charge discussed above and a reduced pension credit.
Print advertising revenue at The Washington Post newspaper in the third quarter decreased 202 percent to $130.4 million, from $132.9 million in 2001, and decreased 5 percent to $405.7 million for the first nine months of 2002, from $427.6 million for the first nine months of 2001. The decrease in print advertising revenues for the third quarter of 2002 is due to a continued decline in recruitment advertising revenue, with volume decreases of 22 percent in the third quarter, offset by higher revenue from several advertising categories, including preprints and other classified advertising. The decrease in print advertising revenues for the first nine months of 2002 is primarily due to a $26.1 million decline in recruitment advertising revenue, resulting from a 35 percent volume decline, and a decline in retail advertising sales and volume. These declines are partially offset by higher revenues from several advertising categories, including preprints and other classified advertising.
For the first nine months of 2002, Post daily and Sunday circulation each declined about 1 percent compared to the same period of the prior year. For the nine months ended September 29, 2002, average daily circulation at The Post totaled 749,000 and average Sunday circulation totaled 1,054,000.
16.
Revenue generated by the company’s online publishing activities, primarily washingtonpost.com, totaled $9.1 million for the third quarter of 2001, from $165.12002, versus $7.7 million in 2000. A volume declinefor 2001; online revenue totaled $25.3 million for the first nine months of 482002, versus $23.1 million for 2001. Local and national online advertising revenues grew 51 percent in classified recruitment advertising caused a classified recruitment advertising revenue declineand 50 percent for the third quarter and first nine months of 45 percent, due to the cyclical economic downturn. The economic environment surrounding most of the other advertising categories2002, respectively. Revenue at the Post (i.e., retail, general, preprints) was also sluggish compared to the prior year. In these categories, rate increases only partially offset volume declines ranging from 7 to 33 percent. The soft advertising climate worsened for several weeks lateJobs section of washingtonpost.com increased 11 percent in the third quarter of 2001 as the company experienced further reductions in advertising revenue and volumes following the events of September 11.
Revenue generated by the company's online publishing activities, primarily washingtonpost.com, totaled $7.7 million2002 but was down 6 percent for the third quarterfirst nine months of 2001, an increase of 7 percent compared to the third quarter of 2000.2002.
Television Broadcasting Division.. Revenue for the television broadcasting division declined 23increased 20 percent in the third quarter of 20012002 to $82.1 million, from $68.2 million from $88.9in 2001, primarily due to approximately $9.0 million in 2000. Excluding approximately $16 million inof political and Olympics advertising in 2000, the decline inadvertising. Additionally, third quarter revenues in 2001 revenues was 6 percent,were lower due largely to several days of commercial-freecommercial free coverage following the events of September 11. A general softness in advertising (particularly national advertising) also adversely impacted comparisonsRevenues for the third quarter were higher at all of 2001.the company’s stations, including WJXT in Jacksonville, Florida, which began operations as an independent station in July 2002 when its network affiliation with CBS ended. For the first nine months of 2002, revenue increased 8 percent to $243.6 million, from $226.0 million in 2001, due to an increase in national advertising, including political, and Olympics-related advertising at the company’s NBC affiliates in the first quarter of 2002. These increases were partially offset by reduced network compensation revenues in both the third quarter and first nine months of 2002.
Operating income for the third quarter and first nine months of 2002 increased 49 percent and 16 percent to $38.5 million and $115.5 million, respectively, from pro forma operating income of $25.9 million and $99.3 million for the third quarter and first nine months of 2001, decreased 47 percentrespectively. Operating income growth for the third quarter and first nine months of 2002 is due to $22.3 million, from $41.9 million in 2000.revenue growth and tight cost controls, partially offset by a reduced pension credit.
Magazine Publishing Division.. RevenuesRevenue for the magazine publishing division totaled $101.5$87.5 million for the third quarter of 2001, a 62002, an 11 percent increasedecrease from $95.9$98.3 million for the third quarter of 2000. Operating income2001; division revenue totaled $9.4$251.4 million for the first nine months of 2002, an 8 percent decline from $273.2 million for the first nine months of 2001. The revenue declines for the third quarter and first nine months of 2002 are primarily due to a significant spike in newsstand circulation revenue at Newsweek in the third quarter of 2001 a 106 percent from the same period of the prior year. The increase in operating income is primarily attributabledue to a significant increase in newsstand circulation revenues on regular and special editions related to the events of September 11 terrorist attacks, offset by a 21 percent decrease in advertising revenue11. Advertising revenues at Newsweek were up slightly in the third quarter of 2002, but were down for the first nine months of 2002, primarily due to fewer advertising pagesdeclines in the international division. Operating income totaled $12.5 million for the third quarter of 2002, a 12 percent increase from pro forma operating income of $11.1 million in the third quarter of 2001. Excluding the $3.1 million pre-tax charge in connection with an early retirement program at bothNewsweek, operating income increased 40 percent to $15.6 million. Third quarter 2001 operating results included approximately $5.0 million in nonrecurring costs associated with regular and special editions related to September 11; 2002 costs have also declined due to payroll and other related cost savings from employees accepting early retirement programs offered by Newsweek, and from significant cost savings programs put into place at Newsweek’s international operations.
Operating income totaled $14.1 million for the domestic and international editions.
first nine months of 2002, down from pro forma operating income of $20.5 million for the first nine months of 2001. Excluding the $16.1 million in pre-tax charges in connection with early retirement programs at Newsweek, operating income increased 48 percent to $30.2 million, primarily as a result of the decline in operating expenses noted above.
17.
Cable Television Division.. AtCable division revenue of $107.6 million for the cable division, third quarter of 2002 represents a 9 percent increase over 2001 revenuesthird quarter revenue of $98.7 million; for the first nine months of 2002, revenue increased 12 percent to $317.6 million, were 9 percent higher than 2000;from $284.3 million in 2001. The 2002 revenue increase is principally due to rapid growth in the division’s cable modem and digital service revenues.
Cable division cash flow (operating income excluding depreciation and amortization expense) totaled $41.5 million for the third quarter of 2002, an increase of 18 percent from $35.2 million for the third quarter of 2001 compared with $35.32001; for the first nine months of 2002, cash flow increased 21 percent to $120.6 million, from $99.3 million in 2001. Cable division operating income for the third quarter of 2000.
Cable division2002 decreased 9 percent to $16.6 million, from pro forma operating income decreased 50of $18.2 million in 2001. Although revenues increased for the quarter, depreciation expense was up 47 percent, including a $3.5 million charge for obsolete assets. Operating income increased 11 percent for the third quarterfirst nine months of 2002 to $54.4 million from pro forma operating income of $49.2 million for the first nine months of 2001. The declineincrease in operating income inis due mostly to increasedthe division’s revenue growth, offset by higher depreciation and amortization expense (which increased by $7.8 million over the third quarter of 2000), higher programming expense and costs associated with the launch of digital cable services.increased programming expense.
The increase in depreciation expense is due to the charge discussed above, as well as significant capital spending, primarily in 2001 and 2000, which is enablinghas enabled the cable division to offer digital and broadband cable services to its subscribers. The cable division began its rollout plan for these services in the third quarter of 2000. At September 30, 2001,29, 2002, the cable division had approximately 172,000218,600 digital cable subscribers, representing a 2331 percent penetration of the subscriber base in the markets where digital services are offered. Digital services are currently offered in markets serving 9097 percent of the cable division'sdivision’s subscriber base. The initial rollout plan for the new digital cable services includesincluded an offer for the cable division'sdivision’s customers to obtain these services free for one year. Accordingly, management expects the benefits from these new services to show beginning in 2002 and thereafter.
At September 30, 2001,29, 2002, the cable division had 753,000142,900 paying digital subscribers. The benefits from these services began to show in the first quarter of 2002 and are expected to continue throughout the year, with the remaining portion of free one-year periods generally ending later in 2002.
At September 29, 2002, the cable division had 721,000 basic subscribers, compared to 735,700753,000 at the end of September 2000. The2001, with the decrease due primarily to the difficult economic environment over the past year; basic customer disconnects for non-payment of bills have increased significantly. At September 29, 2002, the cable division had 69,300 CableONE.net service subscribers, compared to 35,800 at the end of September 2001, due to a large increase in basicthe company’s cable modem deployment (offered to 95 percent of homes passed at the end of September 2002) and subscriber penetration rates. Of these subscribers, is largely attributable to a net gain in65,900 and 22,600 were cable modem subscribers arising fromat the cable system exchange and sale transactions completed in the first quarterend of 2001.Education and Career Services. Excluding Quest Education(acquired in August 2000), education division revenue increased 16 percent to $90.3 million in the third quarter of 2001;2002 and 2001, respectively, with the remainder being dial-up subscribers.
On November 1, 2002, the Company completed a cable system exchange transaction with Time Warner Cable which consisted of the exchange by the Company of its cable system in Akron, Ohio serving about 15,500 subscribers, and approximately $5 million to Time Warner Cable, for cable systems serving about 20,300 subscribers in Kansas. The company will report a non-cash, non-operating gain on this transaction in the fourth quarter, which will reflect the step-up of assets exchanged to their fair market value, in accordance with generally accepted accounting principles.
18.
Education Division.Education division revenue totaled $160.6 million for the third quarter of 2002, a 26 percent increase over revenue of $127.2 million for the same period of 2001. Kaplan reported operating income for the third quarter of $11.5 million, compared to a pro forma operating income of $4.6 million for the third quarter of 2001. Excluding charges for stock options held by Kaplan management, Kaplan operating earnings were $18.2 million for the third quarter of 2002, compared to $8.1 million for the third quarter of 2001. For the first nine months of 2002, education division revenue totaled $457.4 million, a 24 percent increase over revenue of $368.1 million for the same period of 2001. Kaplan reported operating income of $11.6 million for the first nine months of 2002, compared to a pro forma operating loss of $9.8 million for the quarter
improved from $7.7first nine months of 2001. Excluding charges for stock options held by Kaplan management, Kaplan operating earnings were $44.9 million for the first nine months of 2002, compared to $1.1 million. Aoperating earnings of $9.0 million for the first nine months of 2001. Excluding goodwill amortization in 2001, a summary of operating results for the third quarter and first nine months of 20012002 compared to 20002001 is as follows (in thousands):follows:
Third Quarter | ||||||
% Better | ||||||
2001 | 2000 | (worse) | ||||
Revenue | ||||||
Test prep and professional training | $ 71,489 | $63,879 | +12 | |||
Quest post-secondary education* | 36,894 | 21,634 | +71 | |||
New business development activities | 18,776 | 13,915 | +35 | |||
| $127,159 | $99,428 | +28 | ||||
Operating income (loss) | ||||||
Test prep and professional training | $ 12,523 | $ 10,778 | +16 | |||
Quest post-secondary education* | 3,669 | 2,216 | +66 | |||
New business development activities | (2,752 | ) | (12,826 | ) | +79 | |
Kaplan corporate overhead | (5,897 | ) | (2,421 | ) | (144 | ) |
Other** | (6,783 | ) | (4,415 | ) | (54 | ) |
| $ 760 | $ (6,668 | ) | +111 | |||
_________________________
| Third Quarter | Year-to-date | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||
| 2002 | 2001 | % Change | 2002 | 2001 | % Change | ||||||||||||||||||||
Revenue | |||||||||||||||||||||||||
| Supplemental education | $ | 97,414 | $ | 86,533 | +13 | $ | 280,787 | $ | 249,232 | +13 | |||||||||||||||
| Higher education | 63,226 | 40,626 | +56 | 176,629 | 118,871 | +49 | |||||||||||||||||||
| $ | 160,640 | $ | 127,159 | +26 | $ | 457,416 | $ | 368,103 | +24 | ||||||||||||||||
Operating income (loss) | |||||||||||||||||||||||||
| Supplemental education | $ | 19,505 | $ | 11,755 | +66 | $ | 43,696 | $ | 23,708 | +84 | |||||||||||||||
| Higher education | 4,150 | 1,695 | +145 | 18,101 | 3,114 | +481 | |||||||||||||||||||
| Kaplan corporate overhead | (5,356 | ) | (5,214 | ) | (3 | ) | (16,574 | ) | (17,494 | ) | +5 | ||||||||||||||
| Other* | (6,799 | ) | (3,638 | ) | (87 | ) | (33,649 | ) | (19,119 | ) | (76 | ) | |||||||||||||
| $ | 11,500 | $ | 4,598 | 150 | $ | 11,574 | $ | (9,791 | ) | — | |||||||||||||||
*Quest was acquired in August 2000, therefore, 2000 results only include 2 months of activity for the third quarter.
| * | Other includes charges accrued for stock-based incentive compensation and amortization of certain intangibles. |
**OtherSupplemental education includes charges accrued for stock-based incentive compensationKaplan’s test preparation, professional training, and amortization of goodwill and other intangibles.
Score! businesses. The improvement in test preparation and professional trainingsupplemental education results for the third quarter and first nine months of 2002 is due mostly to higher enrollments and to a lesser extent higher rates,prices at Kaplan'sKaplan’s traditional test preparation business (particularly the GMATLSAT, MCAT and the LSATGRE prep course)courses), andas well as higher revenues and profits from Kaplan'sKaplan’s CFA and real estate exam preparation courses.services. Score! also contributed to the improved results, with increased enrollment, higher prices and strong cost controls.
New business development activities representHigher education includes all of Kaplan’s post-secondary education businesses, including the resultsfixed-facility colleges that were formerly part of Score!Quest Education, as well as online post-secondary and Kaplan Collegecareer programs (various distance learning businesses). The improvement in new development revenue is primarily attributableHigher education results are showing significant growth due to Score!, with both increasedstudent enrollment from new learning centers opened (operated 147 centers at the endincreases, high student retention rates, and as a result of the third quarter of 2001 versus 115 centers at the end of the same period in the prior year) and rate increases implemented early in 2001.several acquisitions.
Corporate overhead represents unallocated expenses of Kaplan, Inc.'s’s corporate office, including expenses associated with the design and development of educational software that, if successfully completed, will benefit all of Kaplan'sKaplan’s business units. The increasedecrease in this expense category in 20012002 is principally due to increaseddecreased spending for these internal software development initiatives.
Other expense is comprised primarily of accrued charges for stock-based incentive compensation arising from a stock option plan established for certain members of Kaplan'sKaplan’s management and amortization of goodwill and othercertain intangibles. Under the stock-based incentive plan, the amount of
compensation expense varies directly with the estimated fair value of Kaplan'sKaplan’s common stock and the number of options outstanding. The increase in other expense for the third quarter of 20012002 is mostly attributable to an increase in stock-based incentive compensation, which was primarilyis due to an increase in Kaplan'sKaplan’s estimated value.
19.
Equity in Earnings and Losses of AffiliatesAffiliates.. The company'scompany’s equity in losses of affiliates for the third quarter of 20012002 was $5.5$1.3 million, compared to losses of $8.9$26.5 million for the third quarter of 2000.2001. For the first nine months of 2002, the company’s equity in losses of affiliates totaled $16.9 million, compared to losses of $45.6 million for the same period of 2001. The company's affiliate investments consistimprovements were primarily due to better operating results at BrassRing LLC, which accounted for approximately $2.0 million and $12.7 million of a 42the 2002 third quarter and first nine month equity in losses of affiliates, respectively, compared to $29.1 million and $51.6 million in equity losses for the same periods of 2001. In addition to its 49 percent interest in BrassRing Inc.,LLC, the company’s affiliate investments include a 50 percent interest in the International Herald Tribune, and a 49 percent interest in Bowater Mersey Paper Company Limited.
BrassRing accounted for approximately $8.1 millionIn October 2002, the Company signed a letter of intent to sell its fifty percent share in the 2001 third quarter equity losses, comparedInternational Herald Tribune to $9.8 millionThe New York Times Company. The closing is expected to occur after a definitive agreement is reached and all regulatory approvals have been obtained, which will likely be in equity losses forlate 2002 or early 2003. The Company expects to report a gain on the same period of 2000.transaction upon closing.
Non-Operating ItemsItems.. The company recorded other non-operating expense, net, of $25.4 million for the third quarter of 2001, compared to non-operating income, net, of $0.2 million for the third quarter of 2000. The 2001 non-operating expense includes investment write-downs of approximately $26 million to adjust several of the company's investments to their estimated fair values.
Net Interest Expense. The Company incurred net interest expense of $11.6 million for the third quarter of 2001, compared to $14.4 million for the same period of 2000. At September 30, 2001, the Company had $971.1 million in borrowings outstanding at an average interest rate of 4.2 percent.
Income taxes. The effective tax rate during the third quarter of 2001 was 64.5 percent, compared to 45.5 percent in 2000. The increase in the effective tax rate is principally due to the decline in pretax income.
Earnings Per Share. The calculation of diluted earnings per share for the third quarter of 2001 was based on 9,502,000 weighted average shares outstanding, compared to 9,463,000 for the third quarter of 2000. The company made no significant repurchases of its stock during the third quarter of 2001.
Nine Month Comparisons
For the first nine months of 2001, net income totaled $215.1 million ($22.53 per share), compared with net income of $98.8 million ($10.33 per share) for the same period of 2000. Excluding certain one-time non-operating transactions from the first nine months of 2001, principally net gains from the sale and exchange of certain cable systems and write-downs of investments, net income for the first nine
months totaled $43.9 million, or $4.51 per share. Consistent with the company's results for the third quarter of 2001, the decrease in the company's nine-month earnings is primarily attributable to the decline in advertising revenue, increased depreciation and amortization expense, and higher stock-based compensation expense accruals at the education division. These factors were offset in part by increased operating income contributed from Quest Education, higher profits from Kaplan's test preparation and professional training businesses, reduced operating losses at Kaplan's new business development activities, and an increased pension credit.
Revenue for the first nine months of 2001 was $1,787.0 million, up 3 percent over revenue of $1,740.8 million for the first nine months of 2000. Advertising revenues declined 12 percent from the prior year and circulation and subscriber revenue increased 8 percent. Education revenues increased 53 percent and other operating revenues increased 14 percent, as compared to the first nine months of 2000. The decrease in advertising revenue is mostly attributable to a soft advertising environment at most of the company's advertising-based businesses. The improvement in circulation and subscriber revenues is attributable to an improvement in Cable One subscriber revenues, mainly due to rate increases and subscribers acquired in system exchange transactions completed in the first quarter of 2001 and increased Newsweek newsstand sales from regular and special editions related to the September 11 terrorist attacks. The increase in education revenues aros e from acquisitions (principally Quest, acquired in August 2000), and to a lesser extent, growth in the test preparation and Score! businesses.
Costs and expenses for the first nine months of 2001 increased 10 percent to $1,640.2 million from $1,490.8 million in 2000. The increase in costs and expenses is the result of higher depreciation and amortization expense, and an increase in stock-based compensation at the education division, offset in part by increased pension credits and cost control initiatives employed throughout the company.
The company's expenses for the first nine months of 2001 were reduced by $60.3 million of pension credits, compared to $45.0 million during the first nine months of 2000.
Operating income declined 41 percent to $146.8 million, from $249.9 million in 2000.
Newspaper Publishing. Newspaper publishing division revenues of $631.0 million in the first nine months of 2001 were down 7 percent from the comparable period of 2000; division operating income for the first nine months of 2001 totaled $61.0 million, a 44 percent decrease from the prior year. The decrease in operating income for the first nine months is due to a decline in print advertising, offset in part by higher on-line advertising revenues and cost control initiatives employed throughout the division.
Print advertising revenue at The Washington Post newspaper decreased 13 percent for the first nine months of 2001, with much of this decline due to a 40 percent volume decline in classified recruitment advertising which caused a classified recruitment advertising revenue decline of 36 percent due to the cyclical economic downturn.
For the first nine months of 2001, Post daily and Sunday circulation both declined 1 percent compared to the same period of the prior year. For the nine months ended September 30, 2001, average daily circulation at the Post totaled 758,000 and average Sunday circulation totaled 1,066,000.
Compared to the same period in the prior year, online advertising revenues for the first nine months of 2001 increased approximately 19 percent to $23.1 million.
Television Broadcasting. Revenue for the broadcast division totaled $226.0 million, 12 percent less than revenues for the first nine months of 2000; division operating income through the first nine months of 2001 totaled $88.7 million, a decline of 24 percent compared to the same period in 2000. The overall decrease in broadcast division operating results is due to a general softness in advertising, difficult comparisons from 2000 related to significant political and Olympics advertising and several days of commercial-free coverage following the events of September 11.
Magazine Publishing. Magazine division revenue totaled $277.6 million for the first nine months of 2001, a decrease of 6 percent from 2000. Magazine division operating income for the first nine months of 2001 totaled $15.5 million, a 45 percent decrease from 2000.
Softness in domestic and international advertising pages at Newsweek, offset in part by increased newsstand sales, a higher pension credit and reduced operating expenses, accounted for most of the 45 percent decline in the operating results for the first nine months of 2001.
Cable Television. Cable division revenue of $284.3 million increased 7 percent in the first nine months of 2001. Division cash flow (operating income excluding depreciation and amortization expense) of $99.3 million represents a 5 percent decline from 2000. The decline in cable division cash flow is mostly due to higher programming expense, costs associated with the launch of digital cable services, and comparatively lower cash flow margin subscribers acquired in the cable system exchanges completed in the first quarter of 2001.
Cable division operating income decreased 55 percent for the first nine months of 2001 compared to the same period of 2000. The decrease in operating income is mostly due to higher depreciation and
amortization expense, which increased by $20.5 million for the first nine months of 2001. Higher programming expense and costs associated with the launch of digital services also contributed to the decline in operating income.
Education and Career Services. Excluding Quest Education (acquired in August 2000), the education division's nine-month revenue for 2001 grew 18 percent to $258.9 million and operating losses were reduced from $33.6 million to $26.6 million. A summary of operating results for the first nine months of 2001 compared to 2000 is as follows (in thousands):
YTD | ||||||
% Better | ||||||
2001 | 2000 | (worse) | ||||
Revenue | ||||||
Test prep and professional training | $207,462 | $181,122 | +15 | |||
Quest post-secondary education* | 109,197 | 21,634 | +405 | |||
New business development activities | 51,444 | 37,505 | +37 | |||
| $368,103 | $240,261 | +53 | ||||
Operating income (loss) | ||||||
Test prep and professional training | $ 31,104 | $ 20,191 | +54 | |||
Quest post-secondary education* | 11,241 | 2,216 | +407 | |||
New business development activities | (18,202 | ) | (37,273 | ) | +51 | |
Kaplan corporate overhead | (14,807 | ) | (6,920 | ) | (114 | ) |
Other** | (30,330 | ) | (10,864 | ) | (179 | ) |
| $ (20,994 | ) | $ (32,650 | ) | +36 | ||
_________________________
*Quest was acquired in August 2000, therefore, 2000 results only include 2 months of activity for the year-to-date.
**Other includes charges accrued for stock-based incentive compensation and amortization of goodwill and other intangibles.
The improvement in test preparation and professional training results for the first nine months of 2001 is due mostly to higher enrollments, and to a lesser extent higher rates, at Kaplan's traditional test preparation business (particularly the GMAT and the LSAT prep course), and higher revenues and profits from Kaplan's CFA and real estate exam preparation services.
The increase in new business development revenue is due mostly to Score!, with both increased enrollment from new learning centers opened and rate increases implemented in early 2001. The decline in new business development operating losses is due to improved operating performance of Score! and significantly reduced spending for eScore.com.
Growth in Kaplan's corporate overhead is mostly due to increased expenses associated with the design and development of educational software that, if successfully completed, will benefit all of Kaplan's business units. The increase in other expense is due to higher stock-based compensation accruals, with the increase in such accruals largely due to an increase in Kaplan's estimated value.
Equity in Losses of Affiliates. For the first nine months of 2001, the company's equity in losses of affiliates totaled $24.6 million, compared to losses of $29.7 million for the same period in 2000.
BrassRing accounted for approximately $30.6 million of the 2001 equity losses, compared to $28.1 million in equity losses for the same period of 2000.
Non-Operating Items. The company recorded other non-operating income, net, of $272.7$1.1 million for the third quarter of 2002, compared to $4.4 million of non-operating expense, net, in the third quarter of 2001. The 2002 and 2001 non-operating income (expense) includes non-operating gains and charges for the write-down of certain investments to their estimated fair value.
The company recorded non-operating income, net, of $1.6 million for the first nine months of 2001,2002, compared to non-operating expense,income, net, of $5.2$293.7 million for the same period of 2000.the prior year. The 2002 non-operating income, net, includes a gain on the sale of marketable securities, offset by write-downs recorded on certain investments. The 2001 non-operating income is comprised mostly of gains arising from the sale and exchange of certain cable systems completed in Januarythe first quarter of 2001, offset by write-downs recorded on certain investments and March 2001. Offsetting these gains were losses from the write-down of a non-operating parcel of non-operating land and certain investments to their estimated fair value.
Net Interest ExpenseExpense.. Through the first nine months of 2001, the The company incurred net interest expense of $38.1$8.6 million for the third quarter of 2002, compared to $39.0$11.6 million for the same period of 2000.
Income Taxes. The effective tax rate during2001; net interest expense totaled $26.1 million for the first nine months of 20012002, versus $38.1 million in 2001. At September 29, 2002, the company had $768.0 million in borrowings outstanding at an average interest rate of 3.8 percent.
Provision for Income Taxes.The effective tax rate for the third quarter of 2002 was 39.740.6 percent, compared to 43.964.5 percent in 2000.for the same period of 2001, and 40.8 percent versus 39.7 percent for the 2002 and 2001 nine month periods, respectively. Excluding the effect of the cable gain transactions, the Company'scompany’s effective tax rate approximated 47.8 percent for the first nine months of 2001, with2001. The effective tax rate for 2002 has declined because the increasecompany no longer has any permanent difference from goodwill amortization not deductible for tax purposes as a result of the adoption of SFAS 142.
Cumulative Effect of Change in Accounting Principle.Earlier this year, the company completed its SFAS 142 transitional goodwill impairment test, resulting in an impairment loss related to its magazine division of $12.1 million, or $1.27 per share. This loss is included in the rate due mostly tocompany’s year-to-date results for the declinenine months ended September 29, 2002 as a cumulative effect of change in pretax income.accounting principle.
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Earnings Per ShareShare.. The calculation of diluted earnings per share for the third quarter and first nine months of 20012002 was based on 9,500,0009,523,000 and 9,518,000 weighted average shares outstanding, respectively, compared to 9,459,0009,502,000 and 9,500,000, respectively, for the third quarter and first nine months of 2000.2001. The company made no significant repurchases of its stock during the first nine months of 2001.2002.
Financial Condition: Capital Resources and Liquidity
AcquisitionsAcquisitions.. In the first nine months of 2002, Kaplan acquired several businesses in their higher education and test preparation divisions, totaling approximately $37.9 million. About $9.5 million remains to be paid on these acquisitions, of which $2.1 million has been classified in current liabilities and $7.4 million as long-term debt at September 29, 2002.
Capital expenditures.During the first nine months of 2001,2002, the company spent approximately $104.4 million on business acquisitions and exchanges, which principally included the purchase of Southern Maryland Newspapers, a division of Chesapeake Publishing Corporation, and amounts paid as part of a cable system exchange with AT&T Broadband. The Company also acquired a provider of CFA exam preparation services and a company which provides pre-certification training for real estate, insurance and securities professionals.
Southern Maryland Newspapers publishes the Maryland Independent in Charles County, Maryland; the Lexington Park Enterprise in St. Mary's County, Maryland; and the Recorder in Calvert County, Maryland. The
acquired newspapers have a combined total paid circulation of approximately 50,000.
The cable system exchange with AT&T Broadband was completed on March 1, 2001 and consisted of the exchange by the company of its cable systems in Modesto and Santa Rosa, California, and approximately $42.0 million to AT&T Broadband for cable systems serving approximately 155,000 subscribers principally located in Idaho. In a related transaction on January 12, 2001, the Company completed the sale of a cable system serving about 15,000 subscribers in Greenwood, Indiana for $61.9 million.
For income tax purposes, a substantial component of the cable system sale and exchange transactions qualify as like-kind exchanges and therefore, a large portion of these transactions do not result in a current tax liability.
Capital Expenditures. During the first nine months of 2001, the company'sCompany’s capital expenditures totaled approximately $167.5 million, the most significant portion of which related to plant upgrades at the company's cable subsidiary.$116.9 million. The companyCompany anticipates it will spend approximately $233$170.0 million throughout 20012002 for property and equipment. Approximately two-thirds of this spending is earmarked for the cable division in connection with the rollout of new digital and cable modem services. If the rate of customer acceptance for these new services is slower than anticipated, then the Company will consider slowing its capital expenditures in this area to a level consistent with demand.
LiquidityLiquidity.. Throughout the first nine months of 20012002, the Company'sCompany’s borrowings, net of repayments, increaseddecreased by $47.8$165.1 million, with the net increasedecrease primarily due to amounts spent for acquisitions and capital improvements.cash flows from operations.
At September 30, 2001,29, 2002, the Company had $971.1$768.0 million in total debt outstanding, which was comprised of $573.0$362.7 million of commercial paper borrowings, and $398.1$398.3 million of 5.5 percent unsecured notes due February 15, 2009. The2009, and $7.0 million in other debt. During the third quarter, the Company has classified $523.0replaced its revolving credit facility agreements with a five year $350 million of its commercial paper borrowings asrevolving credit facility, which expires in August 2007 and 364 day $350 million revolving credit facility, which expires in August 2003. In May 2002, Moody’s downgraded the Company’s long-term debt in it Condensed Consolidated Balance Sheets asratings to A1 from Aa3 and affirmed the Company has the ability and intent to finance such borrowings on a long-term basis.Company’s short-term debt rating at P-1.
During the first nine months of 2002 and 2001 the companyCompany had average borrowings outstanding of approximately $830.8 million and $973.4 million, respectively, at an average annual interest raterates of approximately 3.6 percent and 5.1 percent.percent, respectively. During the first nine months of 2002 and 2001, the Company incurred net interest expense on borrowings of $26.1 million and $38.1 million, respectively.
The companyCompany expects to fund its estimated capital needs primarily through internally generated funds, and to a lesser extent, commercial paper borrowings. In management'smanagement’s opinion, the companyCompany will have ample liquidity to meet its various cash needs throughout 2001.2002.
Forward-Looking StatementsChange in Accounting Method – Stock Options
All public statements made byEffective the company and its representatives which are not statements of historical fact, including certain statements in this quarterly report, are "forward-looking statements" within the meaningfirst day of the Private Securities Litigation Reform ActCompany’s 2002 fiscal year, the Company has adopted the fair-value-based method of 1995.accounting for company stock options as outlined in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This change in accounting method will be applied prospectively to all awards granted from the beginning of the Company’s fiscal year 2002 and thereafter. Stock options awarded prior to fiscal 2002 will continue to be accounted for under the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”
No stock options have been awarded in fiscal year 2002 through the end of the third quarter; therefore, this change in accounting method has had no impact on the Company’s reported results of operations in 2002. The impact on the Company’s overall 2002 operating results is not expected to be material.
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The accounting treatment for the Company’s Kaplan stock option plan is not impacted by this change in accounting method, as the expense related to the Kaplan stock option plan has been and will continue to be recorded in the Company’s results of operations.
Forward–Looking Statements
This report contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to certainvarious risks and uncertainties that could cause actual results and achievementsor events to differ materially from those expressedanticipated in such statements. For more information about these forward-looking statements and related risks, please refer to the forward-looking statements. These risks and uncertainties include: changessection titled “Forward-Looking Statements” in prevailing economic conditions, particularly inPart I of the specific geographic and other markets served by the company; actions of competitors; changes in customer preferences; changes in communications and broadcast technologies; and the effects of changing cost or availability of raw materials, including changes in the cost or availability of newsprint and magazine body paper. They also include other risks detailed from time to time in the company's publicly-filed documents, including the company'sCompany’s Annual Report on Form 10-K for the periodfiscal year ended December 31, 2000.30, 2001.
Item 4. Controls and Procedures
A review and evaluation was performed by the Company’s management, at the direction of the Company’s Chairman and Chief Executive Officer and Vice President-Finance, Chief Financial Officer (the principal finance and accounting officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as of a date within 90 days prior to the filing of this quarterly report. Based on that review and evaluation, the Company’s Chairman and Chief Executive Officer and Vice President-Finance, Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that all material information required to be included in our periodic SEC reports has been made known to them in a timely fashion. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of their evaluation.
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PART II -– OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.8-K.
(a) The following documents are filed as exhibits to this report:
| (a) | The following documents are filed as exhibits to this report: |
| Exhibit | ||
| Number | Description | |
| 3.1 | Certificate of Incorporation of the Company as amended through May 12, 1998, and the Certificate of Designation for the Company’s Series A Preferred Stock filed January 22, 1996 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995). | |
| 3.2 | By-Laws of the Company as amended through | |
| ||
| 4.1 | ||
Form of the Company’s 5.50% Notes due February 15, 2009, issued under the Indenture dated as of February 17, 1999, between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 1999). | ||
| 4.2 | ||
Indenture dated as of February 17, 1999, between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 1999). | ||
| 4.3 | ||
364-Day Credit Agreement dated as of | ||
| 4.4 | ||
| 11 | Calculation of Earnings per Share of Common Stock. | |
| 99.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 99.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (b) | ||
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23.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |||||
| |||||
THE WASHINGTON POST COMPANY | |||||
| (Registrant) | |||||
| Date: | November | 12, 2002 | /s/ Donald E. Graham | ||
Donald E. Graham, | |||||
| Date: | November | 12, 2002 | /s/ John B. Morse, Jr. | ||
| John B. Morse, Jr., Vice President-Finance (Principal Financial Officer) | |||||
24.
CERTIFICATION PURSUANT TO
RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald E. Graham, Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Washington Post Company (the “registrant”);
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| (a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| (c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
| (a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ Donald E. Graham
Donald E. Graham
Chairman and Chief Executive Officer
November 12, 2002
25.
CERTIFICATION PURSUANT TO
RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John B. Morse, Jr., Vice President-Finance, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Washington Post Company (the “registrant”);
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| (a) | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| (b) | evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| (c) | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
| (a) | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | ||
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/ John B. Morse, Jr.
John B. Morse, Jr.
Vice President-Finance,
Chief Financial Officer
November 12, 2002