UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 1-7564
DOW JONES & COMPANY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-5034940
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 LIBERTY STREET, NEW YORK, NEW YORK 10281
(Address of principal executive offices) (Zip Code)
(212) 416-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of
common stock on September 30, 2002: 61,605,230 shares of Common Stock and
20,849,586 shares of Class B Common Stock.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Dow Jones & Company, Inc.
=========================================================================================
Quarters Ended Nine Months Ended
(in thousands, except September 30 September 30
per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------
Revenues:
Advertising $185,308 $220,450 $ 650,177 $ 797,542
Information services 69,132 72,270 211,488 218,048
Circulation and other 97,969 104,840 300,659 325,964
- -----------------------------------------------------------------------------------------
Total revenues 352,409 397,560 1,162,324 1,341,554
- -----------------------------------------------------------------------------------------
Expenses:
News, operations and development 121,695 127,337 373,385 399,085
Selling, administrative and general 122,752 136,020 428,630 463,035
Newsprint 24,283 32,234 77,699 119,442
Print delivery costs 47,572 45,600 142,715 144,942
Depreciation and amortization 28,143 25,982 84,570 81,196
Restructuring and other special charges 1,720 11,098 33,772
- -----------------------------------------------------------------------------------------
Operating expenses 344,445 368,893 1,118,097 1,241,472
- -----------------------------------------------------------------------------------------
Operating income 7,964 28,667 44,227 100,082
Other income (deductions):
Investment income 106 233 302 1,286
Interest expense (493) (60) (2,574) (199)
Equity in losses of
associated companies (674) (1,983) (17) (12,040)
Gain on sale of businesses 197,925
Write-down of investments (8,827) (8,827)
Contract guarantee, net (2,901) 8,435 (9,120) 18,720
Other, net (303) (1,088) 147 (255)
- -----------------------------------------------------------------------------------------
Income before income taxes and
minority interests 3,699 25,377 230,890 98,767
Income taxes 3,565 11,376 51,758 38,091
- -----------------------------------------------------------------------------------------
Income before minority interests 134 14,001 179,132 60,676
Minority interests 2,312 2,667 7,139 5,415
- -----------------------------------------------------------------------------------------
NET INCOME $ 2,446 $ 16,668 $ 186,271 $ 66,091
=========================================================================================
Per share:
Net income per share:
- Basic $.03 $.20 $2.22 $.77
- Diluted .03 .19 2.21 .76
Weighted-average shares outstanding:
- Basic 83,450 85,213 83,933 86,044
- Diluted 83,768 85,777 84,379 86,646
Cash dividends declared $.75 $.75
- -----------------------------------------------------------------------------------------
Comprehensive income $ 1,731 $ 26,662 $ 189,072 $ 68,706
=========================================================================================
<FN>
See notes to condensed consolidated financial statements.
-2-
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
Dow Jones & Company, Inc.
=========================================================================
Nine Months Ended September 30
(in thousands) 2002 2001
- -------------------------------------------------------------------------
Operating Activities:
Net income $186,271 $ 66,091
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 84,570 81,699
Equity in losses of associated companies,
net of distributions 4,067 19,362
Gain on sale of businesses (197,925)
Write-down of assets 12,473
Contract guarantee, net 9,120 (18,720)
Changes in assets and liabilities:
Accounts receivable 16,355 57,106
Other assets 29,184 13,347
Accounts payable and accrued liabilities (43,100) (34,344)
Income taxes (23,521) 26,238
Unearned revenue (12,659) (13,450)
Other liablities 16,965 11,141
Other, net (7,475) (6,888)
- -------------------------------------------------------------------------
Net cash provided by
operating activities 61,852 214,055
- -------------------------------------------------------------------------
Investing Activities:
Additions to plant and property (63,820) (96,441)
Funding of equity-method investments (24,295) (25,690)
Disposition of businesses and investments 247,911 1,176
Other, net 14,665 (10,795)
- -------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 174,461 (131,750)
- -------------------------------------------------------------------------
Financing Activities:
Cash dividends (63,066) (64,641)
Increase in long-term debt 58,036 82,556
Reduction of long-term debt (135,069)
Repurchase of treasury stock (112,345) (134,222)
Proceeds from sales under stock
compensation plans 13,798 13,878
Contribution from minority partner 5,737 3,930
- -------------------------------------------------------------------------
Net cash used in financing activities (232,909) (98,499)
- -------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 3,404 (16,194)
Cash and cash equivalents at beginning of year 21,026 49,347
- -------------------------------------------------------------------------
Cash and cash equivalents at September 30 $ 24,430 $ 33,153
=========================================================================
<FN>
See notes to condensed consolidated financial statements.
-3-
CONDENSED CONSOLIDATED
BALANCE SHEETS (Unaudited)
Dow Jones & Company, Inc.
=========================================================================
September 30 December 31
(in thousands) 2002 2001
- -------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 24,430 $ 21,026
Accounts receivable-trade, net 138,801 162,559
Newsprint inventory 12,991 10,810
Deferred income taxes 10,445 10,648
Other current assets 45,712 40,916
- -------------------------------------------------------------------------
Total current assets 232,379 245,959
- -------------------------------------------------------------------------
Investments in associated companies,
at equity 81,654 78,985
Other investments 7,580 6,700
Plant and property, at cost 1,681,853 1,673,193
Less, accumulated depreciation 953,942 911,844
- -------------------------------------------------------------------------
727,911 761,349
Intangible assets, principally goodwill 57,589 81,583
Deferred income taxes 79,880 99,919
Other assets 7,688 23,845
- -------------------------------------------------------------------------
Total assets $1,194,681 $1,298,340
=========================================================================
Liabilities:
Accounts payable and accrued liabilities $ 253,364 $ 283,494
Contract guarantee obligation 98,560 47,151
Income taxes 40,386 66,260
Unearned revenue 188,109 204,988
- -------------------------------------------------------------------------
Total current liabilities 580,419 601,893
Long-term debt 96,925 173,958
Deferred compensation, principally
postretirement benefit obligation 265,837 247,915
Contract guarantee obligation 142,884 185,173
Other noncurrent liabilities 39,486 43,755
- -------------------------------------------------------------------------
Total liabilities 1,125,551 1,252,694
- -------------------------------------------------------------------------
Minority Interests in Subsidiaries 2,468 3,869
Stockholders' Equity:
Common stock 102,181 102,181
Additional paid-in capital 122,624 127,846
Retained earnings 738,068 614,863
Accumulated other comprehensive income (loss) 1,502 (1,299)
- -------------------------------------------------------------------------
964,375 843,591
Less, treasury stock, at cost 897,713 801,814
- -------------------------------------------------------------------------
Total stockholders' equity 66,662 41,777
- -------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,194,681 $1,298,340
=========================================================================
<FN>
See notes to condensed consolidated financial statements.
-4-
NOTES TO FINANCIAL STATEMENTS
Dow Jones & Company, Inc.
1. The accompanying unaudited condensed consolidated financial statements
reflect all adjustments considered necessary by management to present fairly
the company's consolidated financial position as of September 30, 2002, the
consolidated results of operations for the three and nine-month periods ended
September 30, 2002 and 2001 and consolidated cash flows for the nine-month
periods then ended. In management's opinion, all adjustments necessary for a
fair presentation in accordance with generally accepted accounting principles
are reflected in the financial statements presented.
The condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes included in the
company's annual report on Form 10-K for the year ended December 31, 2001
filed with the Securities and Exchange Commission. The results of operations
for the respective interim period are not necessarily indicative of the
results to be expected for the full year.
2. Effective January 1, 2002, the company adopted the provisions of Statement
of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other
Intangible Assets". SFAS 142 requires that an intangible asset acquired
either individually or with a group of other assets be initially recognized
and measured based on fair value. An intangible with a finite life is
amortized over its useful life, while an intangible asset with an infinite
life, including goodwill, is not amortized. All intangible assets, including
goodwill, are tested at least annually for impairment. As of September 30,
2002, the company had completed its transitional impairment review, which did
not result in an impairment of its intangible assets.
The following table reflects net income and basic and diluted earnings per
share assuming SFAS 142 had been adopted on January 1, 2001:
===================================================================================
Nine months ended
(in thousands, except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------
Net income, as reported $186,271 $66,091
Add back: goodwill amortization expense, net of tax 2,489
-------- -------
Adjusted net income $186,271 $68,580
Basic earnings per share:
As reported $2.22 $.77
Adjusted $2.22 $.80
Diluted earnings per share:
As reported $2.21 $.76
Adjusted $2.21 $.79
===================================================================================
3. Contract Guarantee, net: Under the terms of the company's 1998 sale of
Telerate to Bridge Information Systems (Bridge), Dow Jones retained its
guarantee of payments under certain circumstances of certain minimum payments
for data acquired by Telerate from Cantor Fitzgerald Securities (Cantor) and
Market Data Corporation (MDC). The annual minimum payments average
approximately $50 million per year through October 2006 under certain
conditions. Bridge agreed to indemnify Dow Jones for any liability Dow Jones
incurred under the contract guarantee with respect to periods subsequent to
Bridge's purchase of Telerate. In 2000, based in part on uncertainty with
Bridge's solvency as well as other factors, the company established a reserve
of $255 million representing the net present value of the total estimated
payments from 2001 through October 2006, using a discount rate of 6%. Bridge
filed for bankruptcy in February 2001 but made payments for this data for
-5-
the post-petition periods through October 2001, when Telerate ceased
operations, went out of business, sold certain assets and rejected its
contracts with Cantor and MDC. The company is now in litigation with Cantor
and MDC with respect to their claims for amounts due under the contract
guarantee. The company has various substantial defenses to these claims and
the litigation is proceeding. The third quarter of 2002 included a charge of
$2.9 million, or $.03 per diluted share, reflecting the amortization of the
discount on this guarantee. For the first nine months of 2002, the
amortization of the discount totaled $9.1 million, or $.11 per diluted share.
The third quarter of 2001 included a net gain of $8.4 million, or $.10 per
diluted share, reflecting payments made by Bridge net of amortization of the
discount. For the first nine months of 2001 the company recorded net gains of
$18.7 million, or $.21 per diluted share, relating to this matter.
4. The second quarter of 2002 included a gain of $44.5 million ($38 million
after taxes, or $.45 per diluted share) from the sale of a community newspaper
to Eagle-Tribune Publishing Company. The first quarter of 2002 included a
gain of $153.4 million ($126.1 million after taxes, or $1.49 per diluted
share) resulting from the sale of four of the company's Ottaway newspapers to
Community Newspapers Holdings, Inc. On October 1, 2002, the company purchased
the Ashland Daily Tidings and the Medford Nickel, two small publications in
southern Oregon, for $7.8 million, from Lee Enterprises.
5. The second quarter of 2002 included restructuring charges of $11.1 million
($6.3 million after taxes and minority interests, or $.07 per diluted share)
largely reflecting employee severance related to a workforce reduction across
the print and electronic publishing and corporate segments. The third quarter
2001 included charges to operating income of $1.7 million ($1 million after
taxes, or $.01 per diluted share) related to the September 11 World Trade
Center Disaster. The charge included temporary relocation related costs and a
charitable donation of $1 million to the September 11 Fund, which were partly
offset by savings from World Financial Center rent abatement. The second
quarter of 2001 included restructuring charges of $17.2 million ($10.4 million
after taxes and minority interests, or $.12 per diluted share) for employee
severance and for a technology asset write-down related to WSJ.com. The first
quarter of 2001 included restructuring charges of $14.9 million ($9.1 million
after taxes and minority interests, or $.10 per diluted share) for employee
severance related to a workforce reduction and for asset write-downs
associated with online businesses which were made obsolete or were redundant
and abandoned as a result of the restructuring plan.
The following table displays the activity and balances for the nine months ended
September 30, 2002 of the restructuring reserve account:
===================================================================================
December 31, September 30,
2001 Additional Net Cash 2002
(in thousands) Reserve Reserve Payments Reserve
- -----------------------------------------------------------------------------------
Employee severance $12,541 $10,861 $16,734 $6,668
Other exit costs 336 237 51 522
===================================================================================
As of September 30, 2002, almost all of the roughly 550 full-time employees
that were part of the 2001 workforce reductions have been terminated, and
about 87% of the 165 full-time employees that were part of the second quarter
2002 workforce reduction have been terminated. The majority of the remaining
separations are expected to be completed by the end of the fourth quarter
2002.
6. In the fourth quarter of 2002, the company initiated a workforce reduction
of approximately 230 full-time employees (3.3% of the full time employees at
September 30, 2002). The company expects to record a pretax charge for this
matter of approximately $12 million, or $.09 per share.
7. In the second quarter of 2002, equity in earnings of associated companies
included the company's share of special gains at CNBC Asia of $3.9 million
($.05 per diluted share). These gains consisted of a $2.5 million gain from
the favorable settlement of a contractual obligation and a $1.4 million gain
from the sale of an investment by CNBC Asia. The third quarter 2001 included
-6-
a $1.2 million ($0.7 million after taxes, or $.01 per diluted share) gain relating to
the early extinguishment of debt for CNBC Europe. The first quarter of 2001 included
a $2.4 million ($1.6 million after taxes, or $.02 per diluted share) charge to equity
in losses of associated companies for costs related to the shut-down of Work.com, a
joint venture with Excite@Home.
8. The third quarter 2001 included a write-down of $8.8 million, or $.11 per diluted
share, from the impairment in the value of the company's investments in Nation
Multimedia Group Public Co., a multimedia company in Thailand, and iBEAM Broadcasting
Corp., a provider of streaming video services.
9. Diluted earnings per share have been computed as follows:
=============================================================================
Quarters Ended Nine Months Ended
(in thousands, except September 30 September 30
per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------
Net income $2,446 $16,668 $186,271 $66,091
Weighted-average shares
outstanding - basic 83,450 85,213 83,933 86,044
Stock options 116 367 268 422
Other, principally
contingent stock rights 202 197 178 180
- -----------------------------------------------------------------------------
Weighted-average shares
outstanding - diluted (1) (2) 83,768 85,777 84,379 86,646
Diluted earnings per share $.03 $.19 $2.21 $.76
=============================================================================
(1) The diluted average shares outstanding have been determined using the treasury stock method,
which assumes the proceeds from the exercise of outstanding options are used to acquire treasury
stock at the average market value of the stock during the year.
(2) Options to purchase 7,385,000 shares in the first nine months of 2002 at an average price of
$56.29 were excluded from the diluted earnings per share calculation because the options' exercise
prices were greater than the average market price for 2002 and to include such securities would be
antidilutive, or would, in effect, actually reduce the number of shares outstanding. Options to
purchase 3,311,000 shares in the first nine months of 2001 at an average price of $61.18 were
excluded because to include such securities would be antidilutive.
10. Comprehensive income was computed as follows:
==========================================================================
Quarters Ended Nine Months Ended
September 30 September 30
(in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------
Net income $2,446 $16,668 $186,271 $66,091
Foreign currency
translation adjustments (126) 2,045 1,120 (2,345)
Adjustments for realized loss
included in net income 7,949 6,206
Unrealized (loss) gain on
investments (589) 1,681 (1,246)
- --------------------------------------------------------------------------
Comprehensive income $1,731 $26,662 $189,072 $68,706
==========================================================================
-7-
11. The company's operations by business segment were as follows:
SEGMENT INFORMATION
=============================================================================
Quarters Ended Nine Months Ended
September 30 September 30
(in thousands) 2002 2001 2002 2001
- -----------------------------------------------------------------------------
Revenues:
Print publishing $205,342 $229,280 $ 702,647 $ 840,699
Electronic publishing 75,173 78,235 231,586 239,895
Community newspapers:
Continuing operations 71,894 71,426 205,917 205,000
Divested operations 18,619 22,174 55,960
-------- -------- ---------- ----------
Consolidated revenues $352,409 $397,560 $1,162,324 $1,341,554
- -----------------------------------------------------------------------------
Income before income taxes
and minority interests:
Print publishing $(18,005) $ (981) $ (29,925) $ 45,822
Electronic publishing 13,580 12,978 41,528 22,960
Community newspapers:
Continuing operations 20,554 19,981 54,590 50,337
Divested operations 4,591 5,255 13,772
Corporate (8,165) (7,902) (27,221) (32,809)
-------- -------- ---------- ----------
Consolidated operating income $ 7,964 $ 28,667 $ 44,227 $ 100,082
Equity in losses
of associated companies (674) (1,983) (17) (12,040)
Gain on sale of businesses 197,925
Write-down of investments (8,827) (8,827)
Contract guarantee, net (2,901) 8,435 (9,120) 18,720
Other income, net (690) (915) (2,125) 832
-------- -------- ---------- ----------
Income before income taxes
and minority interests $ 3,699 $ 25,377 $ 230,890 $ 98,767
- -----------------------------------------------------------------------------
Depreciation and amortization (D&A):
Print publishing $ 18,818 $ 16,082 $ 55,058 $ 51,237
Electronic publishing 6,363 5,520 19,794 16,700
Community newspapers:
Continuing operations 2,722 3,168 8,318 9,555
Divested operations 924 681 2,844
Corporate 240 288 719 860
-------- -------- ---------- ----------
Consolidated D&A $ 28,143 $ 25,982 $ 84,570 $ 81,196
=============================================================================
Excluding restructuring charges, segment operating income was as follows:
(in thousands) Quarters Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
Print publishing $(18,005) $ (363) $(21,615) $ 63,319
Electronic publishing 13,580 13,080 43,971 35,146
Community newspapers:
Continuing operations 20,554 19,981 54,590 50,658
Divested operations 4,591 5,255 13,772
Corporate (8,165) (6,902) (26,876) (29,041)
-------- -------- -------- --------
Consolidated operating income $ 7,964 $ 30,387 $ 55,325 $133,854
12. In addition to the litigation that is separately disclosed on page 20 of
this Form 10-Q, there are various libel actions and other legal proceedings
that have arisen in the ordinary course of business that are pending against
the company and its subsidiaries. In the opinion of management, based on
legal counsel, the ultimate outcome to the company and its subsidiaries as a
result of these other legal proceedings will not have a material effect on
the company's financial statements. In addition, the company has insurance
coverage for many of these matters.
-8-
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Third quarter 2002 results reflected the continued difficult global
business-to-business advertising environment. While The Wall Street
Journal's consumer-based advertising, representing 25% of total Journal
advertising volume, rebounded in the quarter with a 10.5% increase, and
color advertising pages increased 35% over last year, these increases were
more than offset by declines in business-to-business advertising at the
Journal, particularly in its core financial and technology segments. This
advertising shortfall was partially mitigated by solid financial performance
at our electronic publishing and community newspapers segments, along with
improved performance at our equity investments and continued cost controls.
During the third quarter, the company continued to execute its long-range
strategic plan. The cornerstone of this plan is our $226 million, four year
color print expansion project. In April 2002, we successfully completed the
final phase of this project with the debut of Today's Journal. The early
successes of this project are evidenced by increases in color advertising,
improving circulation economics and positive reactions from subscribers.
Color advertising pages, which are billed at a premium, were up 35% when
compared to last year's third quarter. Circulation revenue at the Journal
increased modestly in the third quarter of 2002 reflecting in part,
increased subscriber renewal and new order rates as well as an additional
publishing day compared with the third quarter last year. In addition, on
October 1, 2002 the company implemented a $14 price increase for an annual
subscription to The Wall Street Journal to $189. This rate increase, the
first since 1997, is expected to increase circulation revenue by about $10
million next year.
RESULTS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Third Quarter Results
Net income for the third quarter of 2002 was $2.4 million, or $.03 per
diluted share, compared with earnings of $16.7 million, or $.19 per diluted
share, in the third quarter of 2001. Earnings per share included a special
charge of $.03 per share in the third quarter of 2002 and a special net
charge of $.01 per share for the like period last year. These special items
are detailed beginning on page 16.
Third quarter 2002 revenues of $352.4 million were $45.2 million, or 11%,
below the third quarter of 2001. Company-wide advertising revenue fell
$35.1 million, or 16%. Excluding Ottaway divested newspapers, advertising
revenue decreased $22.1 million, or approximately half of the total revenue
decline, due to the continued weakness in the global business-to-business
advertising environment. Information services revenue declined $3.1
million, or 4.3%, primarily due to lower Newswires revenue on continued
contraction in the securities industry. Circulation and other revenues
decreased $6.9 million, or 6.6%. Excluding Ottaway divested newspapers,
circulation and other revenue was down 1.3%, as increased circulation
revenue was more than offset by lower list rental revenue, commercial
printing and reprint revenues.
Operating expenses of $344.4 million for the third quarter of 2002 were
$24.4 million, or 6.6%, below third quarter 2001 levels. Excluding special
charges in 2001 related to the World Trade Center Disaster, divested
-9-
operations and newsprint expenses, operating expenses were down $2.5
million, or 0.8%, due to lower employee-related costs and continued company-
wide efforts to control costs somewhat offset by an increase in depreciation
expense related to Today's Journal. Newsprint expense, excluding divested
operations, was down 20% as a result of a 21% drop in prices slightly offset
by a 1% increase in newsprint consumption. The increase in newsprint
consumption was attributed to an additional publishing day at U.S. print
publications in the third quarter 2002 compared with the third quarter a
year ago as well as an increase in circulation. Employee compensation
expense for the third quarter of 2002, excluding divested Ottaway
newspapers, was down approximately 2.5%. The number of full-time employees
at September 30, 2002 was down 1,090, or 13%, from the comparable period
last year. Excluding the reduction in headcount from the sale of the five
Ottaway properties, the number of full-time employees was down 7%.
Third quarter operating income was $8 million (2.3% of revenues), down $20.7
million, or 72%, from $28.7 million (7.2% of revenues) last year. Excluding
special charges from September 11 and Ottaway divested operations, operating
income decreased $17.8 million, or 69%, from the like period a year ago.
The drop-off in print publishing results was mitigated by increased
profitability and margins at the electronic publishing and continuing
community newspapers segments.
Nine Month Results
Net income for the first nine months of 2002 was $186.3 million, or $2.21
per diluted share, compared to net income of $66.1 million, or $.76 per
diluted share, in the first nine months of 2001. Included in earnings per
share were special items netting to a gain of $1.81 per share in 2002 and a
loss of $.14 per share in 2001. These special items are detailed beginning
on page 16.
Revenues for the first nine months of 2002 of $1.2 billion fell $179.2
million, or 13%, from revenues of $1.3 billion in the like period a year
ago. Excluding Ottaway divested newspapers, revenues were down $145.4
million, or 11%, primarily as a result of the ongoing difficult global
advertising environment and our reliance on the financial and technology
sectors.
For the first nine months of 2002, operating expenses of $1.1 billion
decreased $123.4 million, or 9.9%, from the first nine months of 2001.
Operating expenses, excluding special charges from both periods, divested
operations and newsprint expenses, were down $37.5 million, or 3.6%, from
2001 expense levels as the company's cost reduction measures were partially
offset by $13.9 million in launch costs as well as ongoing costs of Today's
Journal. Newsprint expense, excluding divested operations, was down 33% as
a result of a 25% drop in prices coupled with a 10% reduction in newsprint
consumption.
Operating income for the first nine months of 2002 was $44.2 million (3.8%
of revenues) compared to $100.1 million (7.5% of revenues) in the comparable
period last year. Excluding special charges and Ottaway divested
operations, operating income of $50.1 million (4.4% of revenues) decreased
$70 million, or 58%, from the first nine months of 2001.
SEGMENT DATA
The company reports its operations in three segments: Print Publishing,
Electronic Publishing and Community Newspapers.
-10-
PRINT PUBLISHING
===========================================================================
Quarters Ended Nine Months Ended
September 30 September 30
(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------
U.S. Publications:
Advertising $119,322 $136,604 $435,040 $539,171
Circulation and other 67,505 67,209 203,194 210,966
International Publications:
Advertising 10,020 16,197 37,467 58,814
Circulation and other 8,495 9,270 26,946 31,748
- ---------------------------------------------------------------------------
Total revenue 205,342 229,280 702,647 840,699
Operating expenses 223,347 230,261 732,572 794,877
- ---------------------------------------------------------------------------
Operating (loss) income $(18,005) $ (981) $(29,925) $ 45,822
Operating margin (8.8)% (.4)% (4.3)% 5.5%
- ---------------------------------------------------------------------------
Included in operating expenses:
Special charges $ 618 $ 8,310 $ 17,497
Depreciation and amortization $ 18,818 16,082 55,058 51,237
===========================================================================
Print publishing includes the operations of The Wall Street Journal and its
international editions, Barron's and other periodicals, as well as U.S.
television operations (results of the company's international television
ventures are included in equity in losses of associated companies). Print
publishing accounted for approximately 58% of 2002's third quarter revenues,
of which approximately 9% were earned by international publications. The
third quarter is historically the lightest advertising volume quarter of the
year.
Print publishing's third quarter 2002 revenues decreased $23.9 million, or
10%, from the like period a year ago. Advertising revenue for U.S.
publications decreased $17.3 million, or 13%, reflecting a 12% (13.3% on a
per-issue basis) decline in Wall Street Journal advertising linage offset by
a 3.3% increase in Barron's advertising volume (on a per-issue basis,
Barron's volume was down 4.1%). U.S. television revenue increased 31%.
Advertising volume declines continued to be driven by the recessionary
global business-to-business advertising environment. The difficult
environment has particularly affected the segment's core technology and
financial advertising sectors, which comprised about 39% of total U.S.
Journal advertising linage. Overall Journal advertising linage was down 12%
in the third quarter 2002, compared with a 41.2% decline in last year's
third quarter. Excluding September 11 related advertising cancellations
from 2001, advertising linage would be down about 19% in the third quarter
2002. While this would reflect the lowest quarterly decline since the
fourth quarter of 2000, the company is not yet seeing any meaningful signs
of a recovery in business-to-business advertising.
By category, general linage, which comprised 38.7% of total linage, fell
13.6% in the quarter due to declines in public utilities, professional
service and other business-to-business advertising offset by increases in
hotel and resort advertising. Within the general advertising category,
consumer advertising, which represents 25% of total linage, increased 10.5%.
The increase in general consumer advertising, however, was more than offset
-11-
by a 38.3% decline in general business advertising. Technology linage,
which represented 20.2% of total linage, declined 10.5% primarily due to
decreases in business-to-business e-commerce and software advertising offset
slightly by increases in communications, personal computer and computer
hardware advertising. Financial linage, which comprised 19.3% of total
linage, declined 17.8% in the quarter, primarily due to decreases in
tenders/rebuttals, new issues and investment advisory advertising offset by
improvements in tombstones and savings and loan advertising. Classified and
other linage, which accounted for the remaining 21.8% of total linage,
decreased 4.1% in the quarter due to declines in commercial real estate and
recruitment advertising.
Third quarter 2002 circulation and other revenues for U.S. print
publications increased slightly from the third quarter of 2001 as increases
in circulation for regular and educational subscriptions were offset by
declines in list rental and other revenues. Average circulation for The
Wall Street Journal was 1,792,000 for the third quarter of 2002, up from
1,709,000 in the like period last year. Barron's third quarter average
circulation was 305,000 in 2002, up from 273,000 in the third quarter of
2001.
International print advertising revenues fell $6.2 million, or 38%,
reflecting lower advertising volume and the divestiture earlier this year of
a small near break-even publication in South America. Advertising linage at
The Wall Street Journal Europe and The Asian Wall Street Journal fell 6.3%
(7.7% on a per issue basis) and 20.5% (21.8% on a per-issue basis),
respectively. Advertising pages at The Far Eastern Economic Review declined
38.5%. Excluding the loss of advertising from the divested publication in
South America, international print advertising revenue was down 27%.
International print circulation and other revenues for the third quarter
2002 were down $0.8 million, or 8.4%, from 2001. Average combined
circulation in the third quarter of 2002 for the international editions of
The Wall Street Journal was 158,000, down 11% from 178,000 for the same
period a year ago. The decline in revenue was caused by a decrease in
circulation somewhat offset by a higher rate per copy in the third quarter
of 2002 as a result of the weaker dollar against the euro.
Print publishing third quarter 2002 expenses were $6.9 million, or 3%,
better than third quarter 2001 levels. Excluding special charges in 2001
related to the September 11 World Trade Center Disaster, expenses decreased
$6.3 million, or 2.7%, due to lower newsprint expense, aggressive cost
controls and lower compensation costs, somewhat offset by an increase in
depreciation expense related to Today's Journal. Newsprint expense
decreased 18% as a result of a 21% decline in newsprint prices offset by a
3% increase in consumption. The increase in consumption was a result of an
increase in circulation volume as well as one more publishing day in the
third quarter of 2002 relative to the third quarter of 2001.
Print publishing operating loss for the third quarter of 2002 was $18
million (8.8% of revenues), down $17 million from last year's third quarter
operating loss of $1 million (.4% of revenues). Excluding special charges
in 2001 related to the September 11 World Trade Center Disaster, the
operating loss was $18 million (8.8% of revenues) compared with an operating
loss of $0.4 million (.2% of revenues) in the third quarter of 2001.
Print publishing U.S. revenues for the first nine months of 2002 fell $111.9
million, or 15%, from $750.1 million last year, reflecting a 20.5% linage
decline for The Wall Street Journal and a 13% decline in Barron's
advertising volume. International print revenues were down $26.1 million,
-12-
or 29%, as advertising linage for The Wall Street Journal Europe and The
Asian Wall Street Journal fell 26.6% and 31.4%, respectively. Excluding the
loss of revenue from the divested publication in South America,
international print advertising revenue was down 22%. Print publishing
circulation and other revenues were down $12.6 million, or 5.2%, in the
first nine months of 2002, when compared with last year.
Operating expenses for the first nine months of 2002 were $732.6 million,
down $62.3 million, or 7.8%, from the same period last year. Excluding
restructuring and other special charges in both periods, operating expenses
decreased $53.1 million, or 6.8%, due to lower newsprint expenses, lower
compensation expense and continued cost controls, offset somewhat by costs
related to the launch of Today's Journal.
Print publishing operating loss of $29.9 million (4.3% of revenues) was
$75.7 million worse than last year's operating income of $45.8 million (5.5%
of revenues). Excluding restructuring and other special charges, operating
losses were $21.6 million (3.1% of revenues) compared with operating income
of $63.3 million (7.5% of revenues) for the first nine months of 2001.
ELECTRONIC PUBLISHING
===========================================================================
Quarters Ended Nine Months Ended
September 30 September 30
(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------
Dow Jones Newswires:
North America $43,676 $48,397 $134,323 $146,394
International 10,635 10,379 33,670 31,395
- ---------------------------------------------------------------------------
Total Newswires 54,311 58,776 167,993 177,789
Consumer Electronic Publishing 12,029 11,430 36,340 36,222
Dow Jones Indexes/Ventures 8,833 8,029 27,253 25,884
- ---------------------------------------------------------------------------
Total revenue 75,173 78,235 231,586 239,895
Operating expenses 61,593 65,257 190,058 216,935
- ---------------------------------------------------------------------------
Operating income $13,580 $12,978 $ 41,528 $ 22,960
Operating margin 18.1% 16.6% 17.9% 9.6%
- ---------------------------------------------------------------------------
Included in operating expenses:
Special charges $ 102 $ 2,443 $ 12,186
Depreciation and amortization $ 6,363 5,520 19,794 16,700
===========================================================================
Electronic publishing includes the operations of Dow Jones Newswires,
Consumer Electronic Publishing and Dow Jones Indexes/Ventures. Consumer
Electronic Publishing includes the results of WSJ.com and its related
vertical sites as well as the company's licensing/business development
businesses. Revenues in this segment are mainly subscription based.
Electronic publishing comprised about 21% of 2002's third quarter revenues.
Electronic publishing revenue for the third quarter of 2002 of $75.2 million
fell $3.1 million, or 3.9%, from $78.2 million in the third quarter of last
year. Electronic publishing results reflected increased profitability and
margins despite lower revenues, as costs continued to be closely controlled.
Dow Jones Newswires revenue decreased $4.5 million, or 7.6%, when compared
to the like quarter in 2001, reflecting a decline of 9.8% in North America
-13-
offset slightly by 2.5% growth overseas. Newswires revenue in North America
was down due to a decline in retail revenue caused by ongoing retrenchment
in the U.S. securities industry and a reduction in on-line brokerage
revenue. These declines were partially offset by revenue generated by a
wholesale agreement to deliver a selection of Dow Jones news bundled into
all Moneyline Telerate terminals worldwide. International newswires revenue
increased due to an increase in international terminals as a result of the
Moneyline terminal bundling agreement. At the end of the third quarter of
2002, there were 324,000 terminals carrying Dow Jones Newswires compared
with 326,000 for the like period a year ago. North American terminals
decreased 24,000, which were offset almost entirely by an increase in
international newswire terminals of 22,000. The company is working on its
Newswires of the Future project, a web-style product that will improve the
presentation of the newswires, adding clarity, links, stock quotes and
convenience to news feeds. Phase one of the project is expected to go live
early next year.
Consumer Electronic Publishing revenues increased $0.6 million, or 5.2%,
from the third quarter of last year due to a 24% improvement in
display/banner advertising coupled with increased subscriber revenue, which
was offset by a decrease in licensing and content distribution revenue. The
number of Online Journal subscribers at the end of September 2002 increased
to 664,000, up 9% from 609,000 at the end of September 2001. The redesigned
WSJ.com website, launched earlier this year, has helped drive advertising
revenue and circulation growth and has also met with positive response from
subscribers. In July 2002, the company implemented a 34% subscription
increase for the Online Journal bringing the standard annual subscription
price to $79. This increase is expected to generate $5 million of
additional subscription revenue in 2003.
Dow Jones Indexes/Ventures revenues, which include Dow Jones Indexes,
reprints/permissions and radio businesses, were up $0.8 million, or 10%.
The increase in revenues was attributed to higher revenues at Dow Jones
Indexes and in radio revenue, somewhat offset by a decline in reprints
revenue.
Electronic publishing expenses decreased $3.7 million, or 5.6%, from the
third quarter of 2001. Excluding special charges in 2001, operating
expenses were reduced by $3.6 million, or 5.5%, primarily due to reduced
compensation and royalty expense partially offset by increased depreciation
expense from the relaunch of WSJ.com earlier this year.
Operating income of $13.6 million (18.1% of revenues) for the third quarter
of 2002 was $0.6 million, or 4.6%, higher than 2001 operating income of $13
million (16.6% of revenues), as reduced losses at Consumer Electronic
Publishing and increased profits at Dow Jones Indexes/Ventures were
partially offset by lower earnings at Newswires. Excluding special charges
in 2001, electronic publishing operating income of $13.6 million (18.1% of
revenues) increased $0.5 million, or 3.8%, from profits of $13.1 million
(16.7% of revenues) in the third quarter of 2001.
Electronic publishing revenues for the first nine months of 2002 decreased
$8.3 million, or 3.5%, from the first nine months of 2001, primarily as a
result of a decline in Newswires revenue. Operating expenses for the first
nine months of 2002 of $190.1 million were $26.9 million, or 12%, better
than the first nine months of 2001. Excluding special charges in both
periods, operating expenses decreased $17.1 million, or 8.4%, from 2001
levels. Operating income for the first nine months of 2002 was $41.5
million (17.9% of revenues) compared with $23 million (9.6% of revenues) for
the same period last year. Excluding special charges in both periods,
operating income of $44 million (19.0% of revenues) was 25% better than 2001
operating income of $35.1 million (14.7% of revenues).
-14-
COMMUNITY NEWSPAPERS
===========================================================================
Quarters Ended Nine Months Ended
September 30 September 30
(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------
Advertising
Continuing operations $51,352 $50,379 $146,844 $145,248
Divested operations 13,074 15,707 39,477
------- ------- -------- --------
Total advertising 51,352 63,453 162,551 184,725
Circulation and other
Continuing operations 20,542 21,047 59,073 59,752
Divested operations 5,545 6,467 16,483
------- ------- -------- --------
Total circulation and other 20,542 26,592 65,540 76,235
Total revenue 71,894 90,045 228,091 260,960
- ---------------------------------------------------------------------------
Operating expenses
Continuing operations 51,340 51,445 151,327 154,663
Divested operations 14,028 16,919 42,188
------- ------- -------- --------
Total operating expenses 51,340 65,473 168,246 196,851
- ---------------------------------------------------------------------------
Operating income
Continuing operations 20,554 19,981 54,590 50,337
Divested operations 4,591 5,255 13,772
------- ------- -------- --------
Total operating income $20,554 $24,572 $ 59,845 $ 64,109
Operating margin
Continuing operations 28.6% 28.0% 26.5% 24.6%
Divested operations 24.7 23.7 24.6
- ---------------------------------------------------------------------------
Included in operating expenses:
Special charges $ 321
Depreciation and amortization
Continuing operations $ 2,722 $ 3,168 $ 8,318 9,555
Divested operations 924 681 2,844
===========================================================================
Community newspapers includes the operations of Ottaway Newspapers, which
publishes 14 daily newspapers and 13 weekly newspapers in 9 states in the
U.S. Community newspapers comprised about 21% of 2002's third quarter
revenues.
Community newspapers third quarter 2002 revenues declined $18.2 million, or
20%, from the third quarter of 2001. Excluding divested newspapers,
revenues increased $0.5 million, or 0.7%, from a year ago. Advertising
revenue, excluding divested newspapers, rose $1 million, or 1.9%, as a 1.7%
decline in overall advertising linage was more than offset by rate increases
and higher preprint advertising revenue. Circulation and other revenue,
excluding divested newspapers, was down $0.5 million, or 2.4%, from the
third quarter of 2001, with other revenue down 18% due to a decline in
commercial printing revenue. Average circulation excluding divested
properties for the dailies was 392,000 for the third quarter of 2002 versus
395,000 for the same period last year.
Operating expenses for the third quarter of 2002 declined $14.1 million, or
22%, when compared to last year. Excluding divested newspapers, operating
expenses decreased slightly, 0.2%, as lower newsprint costs were partially
offset by higher employee compensation. Newsprint expenses, excluding
divested operations, were down 28% reflecting a 23% decline in average
newsprint prices coupled with a 7% reduction in consumption.
-15-
Operating income for the third quarter of 2002 of $20.6 million (28.6% of
revenues) decreased $4 million, or 16%, from income of $24.6 million (27.3%
of revenues) for the third quarter of 2001. Excluding divested operations,
operating income was $20.6 million (28.6% of revenues) compared with
operating income of $20 million (28% of revenues) in the third quarter of
2001.
During the first nine months of 2002, the company sold five community
newspaper properties, completing the divestiture phase of our strategy to
enhance the Ottaway newspaper portfolio. On October 1, 2002, the company
purchased the Ashland Daily Tidings and the Medford Nickel, two small
publications in southern Oregon, for $7.8 million, from Lee Enterprises.
Revenues for the first nine months of 2002 of $228.1 million were $32.9
million, or 13%, lower than revenues of $261 million in 2001. Excluding
divested newspapers, revenues of $205.9 million were $0.9 million, or 0.4%,
better than 2001. Operating expenses for the first nine months of 2002 were
$28.6 million, or 15%, lower than last year's levels. Excluding divested
operations, operating expenses were $3.3 million, or 2.2%, better than the
like period a year earlier. Operating income of $59.8 million (26.2% of
revenues) for the first nine months of 2002 was $4.3 million, or 6.7%, worse
than 2001's operating income of $64.1 million (24.6% of revenues).
Excluding divested operations and 2001 restructuring charges of $0.3
million, operating income of $54.6 million (26.5% of revenues) was $3.9
million, or 7.8%, better than income of $50.7 million (24.7% of revenues) in
the first nine months of 2001.
SPECIAL ITEMS
The following table summarizes special items for the third quarter and the
nine months ended September 30, 2002 and 2001. The term "special items," as
used throughout management's discussion and analysis, refers to those items
within the table.
Summary of Special Items
(in millions, except per share amounts)
2002 2001
----------------------- ---------------------
QUARTERS ENDED SEPTEMBER 30 Pre-tax Net EPS Pre-tax Net EPS
- --------------------------- ------- --- --- ------- --- ---
Included in operating income:
WTC disaster-related ($1.7) ($1.0) ($.01)
Included in other income:
Reserve for contract guarantee, net ($2.9) ($2.9) ($.03) 8.4 8.4 .10
CNBC International special gain 1.2 .7 .01
Write-down of investments (8.8) (8.8) (.11)
------ ------ ----- ----- ----- ----
TOTAL ($2.9) ($2.9) ($.03) ($0.9) ($0.7) ($.01)
2002 2001
----------------------- ---------------------
NINE MONTHS ENDED SEPTEMBER 30 Pre-tax Net EPS Pre-tax Net EPS
- ------------------------------ ------- --- --- ------- --- ---
Included in operating income:
Restructuring charges ($ 11.1) ($ 6.3) ($ .07) ($32.1) ($19.5) ($.22)
WTC disaster-related (1.7) (1.0) (.01)
Included in other income:
Reserve for contract guarantee, net (9.1) (9.1) (.11) 18.7 18.7 .21
Shut-down of Work.com (2.4) (1.6) (.02)
CNBC International special gain 3.9 3.9 .05 1.2 .7 .01
Write-down of investments (8.8) (8.8) (.11)
Gains on sale of ONI properties 197.9 164.1 1.94
------ ------ ----- ----- ----- -----
TOTAL $181.6 $152.6 $1.81 ($25.1) ($11.5) ($.14)
-16-
2002 SPECIAL ITEMS
Third quarter 2002 pre-tax income included a charge of $2.9 million, or $.03
per share after taxes. The first nine months of 2002 included a net gain of
$181.6 million ($152.6 million after taxes and minority interests, or $1.81
per diluted share), as follows:
Contract Guarantee
Under the terms of the company's 1998 sale of Telerate to Bridge Information
Systems (Bridge), Dow Jones retained its guarantee of payments under certain
circumstances of certain minimum payments for data acquired by Telerate from
Cantor Fitzgerald Securities (Cantor) and Market Data Corporation (MDC).
The annual minimum payments average approximately $50 million per year
through October 2006 under certain conditions. Bridge agreed to indemnify
Dow Jones for any liability Dow Jones incurred under the contract guarantee
with respect to periods subsequent to Bridge's purchase of Telerate. In
2000, based in part on uncertainty with Bridge's solvency as well as other
factors, the company established a reserve of $255 million representing the
net present value of the total estimated payments from 2001 through October
2006, using a discount rate of 6%. Bridge filed for bankruptcy in February
2001 but made payments for this data for the post-petition periods through
October 2001, when Telerate ceased operations, went out of business, sold
certain assets and rejected its contracts with Cantor and MDC. The company
is now in litigation with Cantor and MDC with respect to their claims for
amounts due under the contract guarantee. The company has various
substantial defenses to these claims and the litigation is proceeding. The
third quarter of 2002 included a charge of $2.9 million, or $.03 per diluted
share, reflecting the amortization of the discount on this guarantee. For
the first nine months of 2002, the amortization of the discount totaled $9.1
million, or $.11 per diluted share.
Sale of Five Ottaway Newspaper Properties
The second quarter of 2002 included a gain of $44.5 million ($38 million
after taxes, or $.45 per diluted share) from the sale of Ottaway's Essex
County newspaper properties to Eagle-Tribune Publishing Company.
During the first quarter of 2002 the company sold four of its Ottaway
newspapers to Community Newspapers Holdings, Inc., resulting in a gain of
$153.4 million ($126.1 million after taxes, or $1.49 per diluted share).
Restructuring and other special charges
The second quarter of 2002 included restructuring charges of $11.1 million
($6.3 million after taxes and minority interests, or $.07 per diluted share)
largely reflecting employee severance related to a workforce reduction
across the print and electronic publishing and corporate segments. The
second quarter restructuring included the termination of 165 full-time
employees, or roughly 2% of the company's workforce. The annualized cost
savings associated with the workforce reduction is expected to be about $15
million.
See Note 5 on page 6 of this Form 10-Q for additional information on 2002
restructuring charges.
Special Items in Equity Investments - CNBC Asia
In the second quarter of 2002, equity in earnings of associated companies
included the company's share of special gains at CNBC Asia of $3.9 million
($.05 per diluted share). These gains consisted of a $2.5 million gain from
the favorable settlement of a contractual obligation and a $1.4 million gain
from the sale of an investment by CNBC Asia.
-17-
2001 SPECIAL ITEMS
The third quarter of 2001 included special items netting to a loss of $0.9
million ($0.7 million after taxes and minority interests, or $.01 per
share), and the first nine months of 2001 included a net loss of $25.1
million ($11.5 million after taxes and minority interests, or $.14 per
share) as follows:
Restructuring and other special charges
The third quarter 2001 included charges to operating income of $1.7 million
($1 million after taxes, or $.01 per diluted share) related to the September
11 World Trade Center Disaster. The charge included temporary relocation
related costs and a charitable donation of $1 million to the September 11
Fund, which were partly offset by savings from World Financial Center rent
abatement. The second quarter of 2001 included restructuring charges of
$17.2 million ($10.4 million after taxes and minority interests, or $.12 per
diluted share) for employee severance and for a technology asset write-down
related to WSJ.com. The first quarter of 2001 included restructuring
charges of $14.9 million ($9.1 million after taxes and minority interests,
or $.10 per diluted share) for employee severance related to a workforce
reduction and for asset write-downs associated with online businesses that
were made obsolete or redundant and were abandoned as a result of the
restructuring plan. See Note 5 on page 6 of this Form 10-Q for additional
information on 2001 restructuring charges.
Contract Guarantee
The third quarter of 2001 included a net gain of $8.4 million, or $.10 per
diluted share, reflecting payments made by Bridge net of amortization of the
discount. For the first nine months of 2001 the company recorded net gains
of $18.7 million, or $.21 per share, relating to this matter (see further
explanation above in 2002 special items).
Special Items in Equity Investments
The third quarter 2001 included a $1.2 million ($.7 million after taxes, or
$.01 per diluted share) gain relating to the early extinguishment of debt
for CNBC Europe. The first quarter of 2001 included a $2.4 million ($1.6
million after taxes, or $.02 per diluted share) charge to equity in losses
of associated companies for costs related to the shut-down of Work.com, a
joint venture with Excite@Home.
Write-down of investments
The third quarter 2001 included a write-down of $8.8 million, or $.11 per
diluted share, from the impairment in the value of the company's investments
in Nation Multimedia Group Public Co., a multimedia company in Thailand, and
iBEAM Broadcasting Corp., a provider of streaming video services.
OTHER INCOME/DEDUCTIONS
Interest expense, net for the third quarter of 2002 was $0.4 million
compared with investment income, net of $0.2 million a year prior. The
negative swing largely reflected a reduction in capitalized interest as a
result of the completion of the Journal color expansion and WSJ.com redesign
projects. Long-term debt outstanding at September 30, 2002 was $96.9
million compared to $233.4 million in the like period a year ago and $174
million at December 31, 2001.
-18-
The company's share of equity in losses of associated companies in the third
quarter of 2002, was $0.7 million, an improvement of $1.3 million from the
$2 million losses in the third quarter of 2001. Excluding the special gains
at CNBC Europe in the third quarter of 2001, equity in losses of associated
companies were $2.5 million better than the third quarter of 2001. Sharply
improved results at Factiva along with lower losses at SmartMoney and CNBC
International were somewhat offset by reduced profits at F.F. Soucy, the
company's newsprint affiliate, driven by lower newsprint prices.
For the first nine months of 2002, equity in losses of associated companies
were close to breakeven compared to equity in losses of associated companies
of $12 million in 2001. Excluding special items, equity in losses were
improved by $6.9 million, reflecting improved results from SmartMoney, CNBC
International, Factiva and a favorable comparison as the first quarter of
2001 included $2.7 million of losses from Work.com operations. These gains
were somewhat offset by lower income at F.F. Soucy.
INCOME TAXES
The following table presents the effective income tax rates:
===========================================================================
Quarters Ended Nine Months ended
September 30 September 30
2002 2001 2002 2001
- ---------------------------------------------------------------------------
Effective income tax rate
(net of minority interests) 59.3% 40.6% 21.7% 36.6%
Effective income tax rate (net of minority
interests), excluding special items 40.0% 40.0% 40.0% 40.0%
===========================================================================
The effective income tax rate inclusive of special items for the nine months
was lower in part by the utilization of capital loss carryforwards on the
Ottaway newspaper sales. For the quarter, the effective income tax rate was
higher in 2002 as a result of the non-deductibility of the reserve for the
contract guarantee. As of September 30, 2002, the company had available
approximately $451 million of capital loss carryforward (a deferred tax
asset of $175 million, which was fully reserved through a valuation
allowance). The company may utilize $294 million of these carryforwards
through 2003 and $157 million through 2006. In addition, the company has
recorded an unrecognized capital loss carryforward of $261 million (a
deferred tax asset of $99 million which is fully reserved) that will be
available for use for five years from the year it is recognized for tax
purposes. The unrecognized capital loss carryforward primarily relates to
the Cantor contract guarantee, which is recognizable for tax purposes only
upon payment.
FINANCIAL POSITION
During the first nine months of 2002, the company repurchased 2,607,600
shares of its common stock for $119.8 million. As of September 30, 2002,
approximately $371 million remained under board authorization for share
repurchases.
As reflected in the condensed consolidated statements of cash flows, net
cash provided by operating activities in the first nine months of 2002 was
$61.9 million compared to $214.1 million from the like period a year
earlier. The decline was due to a drop in operating profits as well as the
timing of collections of accounts receivable and the deferral of federal
-19-
income tax payments into 2002. The company's federal income taxes that were
normally due on September 15, and December 15, 2001 were deferred to January
15, 2002 as the Internal Revenue Service offered relief of these payments
for taxpayers that were affected by the September 11 terrorist attacks on
the World Trade Center. These negative changes in cash from operations were
somewhat offset by the receipt of $16 million in the second quarter 2002,
reflected in other assets, from insurance providers as an advance on the
company's property damage claim at its World Financial Center offices as a
result of the September 11 terrorist attacks.
The first nine months of 2002 included proceeds of about $248 million from
the sale of the five Ottaway properties. In addition to the repurchase of
the company's stock in the first nine months of 2002, the company reduced
debt by $77 million, paid dividends of $63.1 million and made capital
expenditures of $63.8 million.
As of September 30, 2002, the company had borrowings of $96.9 million
through the issuance of commercial paper, which is classified as long-term,
as it is the company's intent to refinance such obligations on a long-term
basis. In June 2002, the company renewed its revolving credit agreements
with a consortium of banks. Under these agreements, the company can borrow
up to $400 million; $130 million through June 23, 2003 and $270 million
through June 24, 2006. The terms are essentially the same as the prior
agreement. In October 2002, citing a lack of short term visibility for a
business-to-business advertising recovery, Fitch Ratings downgraded the
senior unsecured debt rating and the commercial paper rating of the company.
The unsecured debt rating has been downgraded to A+ from AA- and the
commercial paper to F1 from F1+. Also in October 2002, Standard and Poor's
downgraded the company's long-term debt rating from AA- to A+, which is
Standard & Poor's fifth highest rating and still investment grade, and
downgraded its short-term corporate credit and commercial paper ratings to
A-1 from A-1+.
In 2000, the company established a reserve for the present value of the
total estimated payments through October 2006 in connection with Dow Jones'
guarantee of certain minimum payments for data acquired by Dow Jones' former
Telerate subsidiary from Cantor Fitzgerald Securities and Market Data
Corporation (MDC). Bridge Information Systems, Inc., which purchased
Telerate in 1998, is currently in bankruptcy but made payments for this data
for the post-petition periods through October 2001, when Telerate ceased
operations, went out of business, sold certain assets and rejected its
contracts with Cantor and MDC. The company is now in litigation with Cantor
and MDC with respect to their claims for amounts due under the contract
guarantee. The company has various substantial defenses to these claims and
the litigation is proceeding.
As of September 30, 2002, the balance of the reserve for the contract
guarantee was $241 million. Due to the stage of the lawsuit at September
30, 2002, it is not possible to determine whether the court will find that
any obligation under the guarantee may be dismissed or reduced.
Accordingly, the company believes the balance of the reserve continues to be
appropriate. Also included in accounts payable and accrued liabilities are
other reserves related to the sale of Telerate to Bridge in 1998. The
company expects the latter to be resolved in bankruptcy court proceedings.
-20-
MARKET RISK
In January 2002, the company entered into forward foreign currency exchange
contracts to exchange $22.4 million for 15.6 million British pounds and to
exchange $20.7 million for 23.4 million euro. These contracts, which expire
ratably over 2002, are designated as cash flow hedges of anticipated
operating expenses that are denominated in these foreign currencies.
Revenues of the company are largely collected in U.S. dollars. The company
has not entered into any new forward foreign exchange contracts since
January 2002.
These contracts are entered into to protect against the risk that such
expenses will be adversely affected by changes in exchange rates. Such
losses could be significant if a major devaluation were to occur. By using
these derivative instruments the company is exposed to the adverse effect
that a change in currency has on the value of a financial instrument. The
company manages this market risk by establishing and monitoring limits as to
the degree of risk that may be undertaken. The company's derivative
activities are monitored by its treasury and finance functions. Realized
gains or losses on foreign currency forward contracts are recognized
currently through income and generally offset the transaction losses or
gains on the foreign currency cash flows which they are intended to hedge.
FOURTH QUARTER 2002 OUTLOOK
The company expects advertising linage at The Wall Street Journal for the
fourth quarter of 2002 to decline in the mid to high teens percentage range.
Considering this decline and continued softness in advertising at the
international editions of the Journal, combined with relative stability
elsewhere in the company's portfolio, and lost revenue of approximately $19
million as a result of the Ottaway sales, the company expects the revenue
decline in the fourth quarter to be in the low to mid teens percentage
range.
The company expects to continue to aggressively reduce costs to bring them
in line as much as possible with revenue. As a result, total expenses,
prior to any special charges, will be about 7% below year-ago levels for the
quarter. Excluding newsprint costs and about $4 million of fixed costs
related to Today's Journal, and adjusting for the Ottaway divestitures,
comparable expenses in the quarter will be about $13 million, or 4%, below
last year, and 11% below 1999 levels. In the fourth quarter of 2002, the
company initiated a workforce reduction of approximately 230 full-time
employees (3.3% of the full time employees at September 30, 2002). The
company expects to record a pretax special charge for this matter of
approximately $12 million, or $.09 per share. Including this estimated 9
cents per share special charge for workforce reductions as well as the
revenue and expense assumptions above, would result in earnings per share in
the 6 to 11 cents per share range for the fourth quarter, which is
consistent with our guidance given in the company's third quarter earnings
press release on October 10, 2002.
ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (SFAS 146) "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan as was the case in prior
guidance by EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS 146 replaces EITF Issue No. 94-3.
SFAS 146 is effective for exit or disposal activities initiated after
December 31, 2002. The company will adopt the provisions of SFAS 146 as of
January 1, 2003.
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INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from
those anticipated. Such risks and uncertainties include, but are not limited
to: the cyclical nature of the company's business and the strong negative
impact of economic downturns on advertising revenues; the negative impact on
the company's core advertising market---business-to-business advertising---
caused by weak corporate profits, concern over a possible double dip
recession, corporate scandals that result in damage to business, investor
and public confidence and fears over war with Iraq; the risk that the
current weak advertising market in the company's core business-to-business
advertising (especially in the financial and technology segments), will not
improve or will improve slowly, and the risk that the company's advertising
revenues will not benefit from the improvement in the face of competition
from other national business magazines, television, trade publications and
other publications and services; the company's ability to continue to limit
and manage expense growth, especially in light of its prior cost-cutting and
its new planned growth initiatives, without harming its growth prospects;
the extent to which the company is required to perform under the guarantee
to Cantor Fitzgerald Securities and Market Data Corporation, and other
uncertainties relating to liability under this guarantee; the intense
competition the company's existing products and services face in the markets
for financial news and information and advertising revenues from newspapers,
business and other specialized magazines, financial television programming,
free and paid Internet publications and services and other new media, and
the impact this will have on the company's initiatives to expand its
existing market for readers, subscribers and advertisers; the company's
ability to expand and diversify its market segment focus beyond the
business-to-business advertising market, in particular, beyond the financial
and technology segments, and the challenge it will face in attempting to
become a leading presence in new consumer market segments, such as health
care, automotive and high-end consumer goods, where competing publications
and services, have already established themselves; with respect to
Newswires, the challenges the company will face in launching its new
'Newswires of the Future' initiative in the face of competing resources for
in-depth news analysis; with respect to Newswires, the negative impact of
consolidation and layoffs in the financial services industry on sales of the
company's products and services; the company's ability to find strategic and
financially attractive core-business acquisition opportunities; the
company's ability to leverage its brands to develop new business
opportunities and to generate advertising and other revenues from these
products; the company's ability to achieve strategic alliances and to
improve the growth and profitability of existing strategic alliances; with
respect to the company's community newspapers business, its ability to
maintain or grow margins and to strengthen its portfolio of newspaper
properties, particularly given the difficulty of finding quality newspaper
properties to acquire; the degree to which the company's Personal Journal is
able to generate additional advertising revenues from diversified markets,
such as health care, autos, travel, and other consumer goods; the extent to
which Today's Journal will attract a broader base of readers, subscribers,
and advertisers; in light of the weak advertising market and competition,
the company's ability to attract diverse advertisers to place color
advertising; the company's ability to increase its circulation and
advertising revenues from its international print publications and to
further penetrate overseas markets through print and television products,
given the competition from local language publications and television
networks and other international publications and television ventures;
WSJ.com's ability to continue to increase revenues through building
subscriber and advertiser numbers and to limit expenses; the amount of user
traffic on the company's Internet sites and the pricing of advertising on
Internet sites generally; adverse developments relating to the company's
commitments, contingencies and equity investments; cost of newsprint; and
such other risk factors as may have been or may be included from time to
time in the company's reports filed with the Securities and Exchange
Commission.
-22-
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
Within 90 days prior to the filing of this report, under the supervision and
with the participation of the company's management, including the company's
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an
evaluation of the effectiveness of the company's disclosure controls and
procedures was performed. Based on this evaluation, the CEO and CFO have
concluded that the company's disclosure controls and procedures are
effective to ensure that material information is recorded, processed,
summarized and reported by management of the company on a timely basis in
order to comply with the company's disclosure obligations under the
Securities Exchange Act of 1934 and the SEC rules thereunder.
Changes in internal controls
There were no significant changes in the company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of the evaluation.
PART II. OTHER INFORMATION
ITEM 3. Legal Proceedings
On February 20, 2001, Market Data Corp. (MDC) commenced a lawsuit against
Dow Jones in the Supreme Court of the State of New York, seeking to compel
the company to pay $11.7 million, plus interest, attorneys' fees and costs,
that MDC claimed was owed under the guarantee issued to MDC and Cantor
Fitzgerald Securities (together with its affiliates, "Cantor"), together
with unspecified consequential damages that MDC claimed result from Dow
Jones' failure to pay on the guarantee. The guarantee relates to certain
annual "minimum payments" owed by Telerate for data acquired by Telerate
from Cantor Fitzgerald and MDC under contracts entered into when Telerate
was a subsidiary of Dow Jones, and is described above in Management's
Discussion and Analysis.
In April 2001, Dow Jones paid $5.8 million to MDC covering the period
January 1 to February 14, 2001 preceding Bridge's Chapter 11 bankruptcy
filing. Bridge made the payments for the post-petition periods through the
third quarter of 2001. After certain amendments were made to the complaint,
the remaining claims in this lawsuit sought the payment of interest on the
payment made in the first quarter of 2001 and for attorneys' fees and costs
in this litigation. The parties settled these claims and this lawsuit was
then withdrawn.
In October 2001, the bankruptcy court granted Bridge's motion to reject
Telerate's contracts with Cantor and MDC. Telerate has indicated that it
has ceased operations, is no longer receiving government securities data
from Cantor and MDC and will not make further payments to Cantor and MDC.
Cantor and MDC advised the company that they would demand payment from Dow
Jones of an amount they alleged was due on November 15, 2001 under the
contract guarantee as well as future amounts due through October 2006. The
company has various substantial defenses to these claims.
-23-
On November 13, 2001, the company instituted a lawsuit in the Supreme Court
of the State of New York seeking a declaratory judgment with respect to the
contract guarantee and the claims of Cantor and MDC. In this lawsuit the
company has asked the court to find that the company does not and will not
owe any payment under the contract guarantee through October 2006. In the
alternative, the company has asked the court to find that if any amount is
owed, it must be reduced by amounts that Cantor and MDC receive or should
have received from other distribution of the data. MDC and Cantor have
moved to dismiss the company's complaint. MDC has asserted counterclaims
demanding payment of $10,197,416 (allegedly the balance owed by Telerate on
November 15, 2001), interest, attorneys' fees, specific performance of the
contract guarantee, and a declaratory judgment as to the validity and
interpretation of the guarantee through October 2006.
Cantor also commenced a separate lawsuit in the Supreme Court of the State
of New York seeking payment of $10 million (allegedly the balance of the
November 2001 minimum payment), payment of $250 million in breach of
contract damages, specific performance of the guarantee, a declaration that
the guarantee remains in full force and effect, payment of approximately $16
million allegedly owed by Telerate and guaranteed by the company in the
contract guarantee for the distribution of certain other data, attorneys'
fees, interest, and other relief.
The company has moved to oppose MDC's and Cantor's motions, claims, and
counterclaims.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits filed:
Exhibit
Number Document
- ------- --------
10.1 Form of Executive Deferred Compensation Agreement, under which
executive officers are eligible to defer their annual bonuses.
10.2 Forms of Directors' Deferred Compensation Agreements, under which non-
employee directors are eligible to defer their directors' fees.
10.3 Form of Executive Death Benefit Agreement, under which executive
officers are eligible to elect to receive the actuarial value of the
"death benefit" to which their beneficiaries would otherwise be
entitled as deferred compensation payable upon the executive's
retirement.
10.4 Dow Jones & Company, Inc. Supplementary Benefit Plan, as amended and
restated effective January 1, 2000.
10.5 First through Eighth Amendments to, and Letter Agreements relating
to, the Lease Agreement between Dow Jones and WFC Tower A Company
(formerly known as Olympia & York Battery Park Company), relating to
the lease of office space in the World Financial Center.
99 Certification pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code by the Chief Executive Officer and Chief
Financial Officer of the Company.
-24-
(b) Reports on Form 8-K:
Form 8-K, dated August 7, 2002, under Item 9. Regulation FD Disclosure,
Dow Jones filed copies of Statements Under Oath of the Chief Executive
Officer and the Chief Financial Officer of Dow Jones & Company, Inc.
Regarding Facts and Circumstances Relating to Exchange Act Filings and
Statement Pursuant to Section 1350(a) of title 18, United States Code.
SIGNATURE
---------
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.
DOW JONES & COMPANY, INC.
-------------------------
(Registrant)
Dated: November 5, 2002 By:/s/Robert Perrine
-----------------------
Robert Perrine
Chief Accounting Officer
and Controller
CERTIFICATIONS
I, Peter R. Kann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dow Jones &
Company, Inc.;
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 officers 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 officers 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 officers 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.
Date: November 5, 2002
/s/Peter R. Kann
- -----------------
Peter R. Kann
Chief Executive Officer
CERTIFICATIONS
I, Christopher W. Vieth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dow Jones &
Company, Inc.;
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 officers 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 officers 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 officers 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.
Date: November 5, 2002
/s/Christopher W. Vieth
- -----------------------
Christopher W. Vieth
Chief Financial Officer