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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Registrant's telephone number, including area code: (212) 416-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ---------------------------- -----------------------------------------
Common Stock $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock $1.00 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
---- ----
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
Aggregate market value of common stock held by non-affiliates of the
registrant
at January 31, 2003 was approximately $1,892,000,000.
The number of shares outstanding of each of the registrant's classes of common
stock on January 31, 2003: 61,142,074 shares of Common Stock and 20,774,839
shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information from certain portions of the registrant's
definitive Proxy Statement for the 2003 annual meeting of stockholders to be
filed with the Securities and Exchange Commission within 120 days after the
close of the fiscal year.
DOW JONES & COMPANY, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
INDEX
PAGE
PART I
ITEM 1. Business 1
ITEM 2. Properties 7
ITEM 3. Legal Proceedings 8
ITEM 4. Submission of Matters to a Vote
of Security Holders 9
Executive Officers of the Registrant 10
PART II
ITEM 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 11
ITEM 6. Selected Financial Data 11
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
ITEM 8. Financial Statements and Supplementary Data 34
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 69
PART III
ITEM 10. Directors and Executive Officers of
the Registrant 69
ITEM 11. Executive Compensation 69
ITEM 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters 69
ITEM 13. Certain Relationships and Related Transactions 70
PART IV
ITEM 14. Controls and Procedures 70
ITEM 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 71
Signatures 74
Certifications 76
PART I.
ITEM 1. BUSINESS.
Dow Jones & Company, Inc. (the company) is a global provider of business and
financial news and information through newspapers, newswires, magazines, the
Internet, television and radio stations. In addition, the company owns
certain general-interest community newspapers throughout the U.S.
The company has determined the following three reportable segments based on
the manner in which it manages its business: print publishing, electronic
publishing and general-interest community newspapers. In addition, the
company reports certain administrative activities under the corporate
segment. Financial information about operating segments and geographic areas
is incorporated by reference to Note 13 to the Financial Statements of this
report.
The company's principal executive offices are located at 200 Liberty Street,
New York, New York, 10281.
The company makes available all of its annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to such
reports free of charge through its Internet website at www.dowjones.com.
These reports are also available on the Securities and Exchange Commission's
Internet website at www.sec.gov.
EMPLOYEES
At December 31, 2002, the company employed 6,816 full-time employees,
compared with 8,077 at December 31, 2001 and 8,574 at December 31, 2000. The
reduction in full-time employees was largely the result of workforce
reductions in 2002 and 2001.
PRINT PUBLISHING
The print publishing segment includes 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
operations are included in equity in earnings (losses) of associated
companies. The print publishing segment represented about 60% of 2002
revenues.
U.S. Publications
The Wall Street Journal, the company's flagship publication, is one of the
country's largest daily newspapers with average circulation for 2002 of
1,817,000. The Journal's three major national editions are printed at 17
printing plants located throughout the U.S. The Journal also sells regional
advertising in 18 regional editions.
In April 2002, the company debuted the enhanced Wall Street Journal (Today's
Journal) which completed the final phase of its four year, $226 million
project which tripled color print capacity, from 8 to 24 pages and expanded
overall print capacity at The Wall Street Journal by 20%, from 80 to 96
pages. Today's Journal is the cornerstone of Business Now, the company's
long range strategic plan. Its improved navigation and readability along
with richer content and the new Personal Journal ("business of life") section
(running every Tuesday, Wednesday and Thursday) are aimed at reinforcing the
Journal as a must-read for every serious business person as well as opening
its pages to new readers.
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Today's Journal provides advertisers with more color advertising pages and
increased flexibility to use these pages (for example partial pages, multi-
page spreads and back-to-back color pages to name a few). Together with the
highly-acclaimed "Weekend Journal" section, which runs each Friday and
includes pages devoted to personal-finance, travel, wine, sports, shopping,
residential real estate and the arts, this package of changes is helping new
advertisers (both color and black & white) to both increase ad revenue as
well as reduce the company's reliance on its dominant technology and
financial advertising categories. Today's Journal is also helping to improve
circulation economics by helping attract new customers and retain existing
ones. The Journal also publishes at various times of the year special
reports on topics such as technology, personal finance and executive
compensation, e-commerce, health and medicine as well as demographically
targeted editions devoted to subjects of retirement and small business.
The Journal also reaches local readers through Wall Street Journal Sunday,
which focuses on personal finance and careers and is published once a week in
the business sections of local newspapers with combined circulation of about
10.3 million. These branded pages now appear in the Sunday business section
of 72 local newspapers.
The Journal production process employs electronic pagination and satellite
transmission of page images to outlying plants as well as other technologies
designed to speed transmission of news and editorial material to printing
plants which enables earlier delivery of fresher content to our readers.
The Wall Street Journal is delivered principally in three ways. Each
business day, approximately 140,000 copies of the Journal are sold at
newsstands. Most home and office deliveries are handled through the
company's National Delivery Service, Inc. subsidiary. In 2002, the National
Delivery Service, which provides earlier and more reliable delivery, on
average delivered about 1.3 million, or 82%, of the Journal's subscription
copies each publishing day. The balance of the Journal's home and office
deliveries is made by second class postal service.
Barron's, the Dow Jones Business and Financial Weekly, is a weekly magazine
with average circulation in 2002 of 295,000 that caters to financial
professionals, individual investors and others interested in financial
markets. In 2002, Barron's tripled its color page capacity and also launched
a new "Technology Week" section, which has added value to readers and brought
in new advertisers.
Barron's is printed in twelve of The Wall Street Journal's seventeen printing
plants. It is delivered by second-class postal service and through National
Delivery Service. About 79,000 newsstand copies are sold each week.
The Wall Street Journal Classroom Edition is published nine times during the
school year and is read by an estimated 745,000 students every month during
the academic year in more than 4,600 middle-school and high-school classrooms
throughout the U.S. Individuals, organizations and corporations sponsor
nearly one-half of all subscriptions and schools sponsor the remainder. The
Wall Street Journal Campus Edition is included in 19 college newspapers and
includes the week's top business news and feature stories.
The company has a global business television alliance with NBC. U.S
television operations, where the company provides business news content,
programming and on-air commentary to CNBC as part of an exclusive multiyear
license agreement, are included in the print publishing segment. As part of
this global business television alliance with CNBC, the company also owns 50%
of television ventures in Europe and Asia Pacific, reported as equity
investments.
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International Publications
The Wall Street Journal Europe, which had an average circulation in 2002 of
97,000, is headquartered in Brussels, Belgium and printed in Belgium,
Germany, Switzerland, Italy, Spain, the United Kingdom and Israel. It is
available on the day of publication in continental Europe, the United
Kingdom, the Middle East and North Africa. The Wall Street Journal Europe
was ranked as the fastest growing international title in the 2002 European
Business Readership Survey. In April 2002, the newspaper received the
prestigious Harold Wincott Press Award for 2001 as "Business Journal of the
Year" in the U.K., the first time that a non-U.K. based publication has won
the award.
The Asian Wall Street Journal, which had an average circulation of 82,000 in
2002, is headquartered in Hong Kong and printed in Hong Kong, Singapore,
Japan, Thailand, Malaysia, Taiwan, Philippines, Korea and Indonesia. The
Asian Journal has been ranked as Asia's "most important business reading" for
the last 14 years. In June 2002, the newspaper was twice cited for
excellence by the Society of Publishers in Asia.
The company also publishes The Wall Street Journal Special Editions, which
are a collection of Journal pages in local languages distributed as part of
36 newspapers in 33 countries. The Wall Street Journal Americas, serving
Central and South America, is the centerpiece of the Special Editions
published in Spanish and Portuguese in 19 leading Latin America newspapers.
The Far Eastern Economic Review is published weekly in Hong Kong and is
Asia's leading English-language business magazine, providing authoritative
news and analysis on Asian business, economics and politics. Its circulation
in 2002 was about 95,000 which was concentrated in Hong Kong, Malaysia,
Singapore and other parts of Southeast Asia, with roughly 15,000 copies sold
in North America and Europe. In 2002, the Review was twice cited for
excellence by the Society of Publishers in Asia.
ELECTRONIC PUBLISHING
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 consumer focused electronic publishing licensing
businesses. Revenues in the electronic publishing segment are mainly
subscription based and comprised about 20% of 2002 revenues.
Dow Jones Newswires
Dow Jones Newswires is the premier provider of real-time business and
financial news offering real-time, comprehensive news and information for
financial professionals around the world. Its news is displayed on
approximately 308,000 English-language terminals worldwide, in addition to
some foreign language terminals, providing users with real-time information
on equities, fixed income, foreign exchange, commodities and energy. Dow
Jones Newswires has a dedicated staff of close to 700 journalists in addition
to drawing on the global resources of The Wall Street Journal and the
Associated Press. Since 1999, Newswires also distributes selected content on
a real-time basis to retail customers of on-line brokers.
3
Dow Jones News Service is North America's leading source of business and
financial news on U.S. and Canadian companies and markets for brokerage
firms, banks, investment companies and other businesses. Capital Markets
Report is the company's newswire covering the global debt and money markets.
Corporate Filings Alert provides real-time news covering Securities and
Exchange Commission filings, bankruptcy courts and government agencies.
The Dow Jones Economic Report and the Dow Jones Financial Wire, which are
produced outside the United States with contribution from the Associated
Press (AP) since 1967, provide international economic, business and financial
news to subscribers in 62 countries. In addition to these two broad
internationalnewswires, the company and the AP offer specialized wires
dedicated to the coverage of European and Asian equities, banking and foreign
exchange markets. Other newswires provided in alliance with the AP include
the World Equities Report, which serves U.S. institutions investing in
international markets.
Newswires also publishes in Chinese, Japanese, Spanish, French, Korean,
Portugese, Dutch, Italian and German.
During 2002, the company entered into a wholesale agreement to deliver a
selection of Dow Jones news bundled into all Moneyline Telerate terminals
worldwide. The company is also working on a new Newswire of the Future, a
web-style product that will improve the presentation of the newswires, adding
clarity, links, stock quotes and convenience to news feeds. The first phase
of this project, DJ News Plus, debuted in February 2003. The company also
produces newsletters that cover targeted industries and trading arenas. The
largest newsletter, Daily Bankruptcy Review, provides readers with a
compendium of large bankruptcy filings throughout the U.S. Other newsletters
target niche-investing communities. The company launched 7 such newsletters
successfully in 2002.
Consumer Electronic Publishing
The Wall Street Journal Online (WSJ.com), introduced in 1996, is a paid
subscription site on the Internet that offers continuously updated coverage
of business news both in the U.S. and abroad. WSJ.com content is created by
its own dedicated journalists as well as drawing on the global resources of
The Wall Street Journal and Dow Jones Newswires. The Wall Street Journal
Online has undergone a significant redesign which was launched in January
2002, featuring easier to navigate pages, state-of-the-art personalization
and a more reliable and flexible technology platform. This redesign is
contributing to increased usage and advertising as well as the roll-out of
new online products. In addition to continuously updated news, subscribers
have access to more than 10,000 in-depth company background reports, an
archive of news articles, and personalized news and stock portfolios. At
December 31, 2002, WSJ.com had 679,000 subscribers and was the largest paid
subscription news site on the Internet. Barron's Online is offered in
conjunction with The Wall Street Journal Online. Dow Jones also offers
electronic rights to use Dow Jones' content through its consumer electronic
licensing/business development division.
Other consumer sites in the Journal Network include OpinionJournal.com, which
provides commentary on global issues from The Wall Street Journal editorial
page; CareerJournal.com, which gives career guidance and job-search services
for executives; StartupJournal.com, the premier Web site for entrepreneurs
seeking guidance on starting or buying a business or franchise;
CollegeJournal.com, which provides guidance and job-search services for
future business leaders; and RealEstateJournal.com, a comprehensive guide to
commercial and residential property.
4
Dow Jones Indexes/Ventures
In 1997, the company began licensing the Dow Jones Industrial Averages as
well as other indexes as the basis for trading options, futures, unit trusts,
annuities, exchange traded funds, mutual funds, derivatives and specialized
structured products. Dow Jones Indexes now offers more than 10,000 indexes.
Dow Jones Ventures include the company's reprints/permissions and radio
businesses. The reprints/permissions business sells print or electronic
reprints of The Wall Street Journal and Barron's stories. The Wall Street
Journal Radio Network produces and distributes late-breaking business reports
during the week to about 200 radio stations in the U.S. and Canada. In 2002,
the Radio group launched a one-hour morning show, which is now carried on 23
radio stations.
COMMUNITY NEWSPAPERS
Community newspapers consists of the company's wholly-owned Ottaway
Newspapers, Inc. Revenues in this segment are largely dependent on local
consumer-based advertising revenue and comprised about 20% of 2002 revenues.
In the first quarter of 2002, Ottaway sold four of its newspaper properties
in Ashland, KY, Sharon, PA, Joplin, MO, and Mankato, MN to Community
Newspaper Holdings, Inc. and in the second quarter of 2002 sold its Essex
County Newspapers to Eagle-Tribune Publishing Company. These sales completed
the divestiture phase of the company's Business Now priority to enhance the
Ottaway newspaper portfolio by divesting non-strategic properties and and re-
investing in more strategic properties. In the fourth quarter of 2002, the
company continued its strategy with the purchase of two small papers in
southern Oregon, The Ashland Daily Tidings and the Medford Nickel.
Ottaway publications now include 14 general-interest dailies, published in 9
states: California, Connecticut, Maine, Massachusetts, Michigan, New
Hampshire, New York, Oregon and Pennsylvania. Average circulation of the
dailies during 2002 excluding properties sold and acquired, was approximately
384,000; Sunday circulation for 11 newspapers was 428,000. Ottaway also
publishes more than 30 weekly newspapers and "shoppers." The principal
administrative office of Ottaway Newspapers is in Campbell Hall, New York.
The primary delivery method for the newspapers is by carrier delivery.
STRATEGIC ALLIANCES (Included in Equity in Losses of Associated Companies)
Dow Jones Reuters Business Interactive LLC (Factiva) is a 50/50 joint venture
launched in mid-1999 with Reuters Group Plc. Factiva is the number one
provider of global news and business information to corporate end users and
holds the number two position, based on revenue, in the archival business
news and information marketplace. Factiva's business information sources
include Dow Jones and Reuters Newswires and The Wall Street Journal, plus
nearly 8,000 other sources and 10,000 business-oriented Web sites from around
the world. These sources provide current news, historical articles, local-
language articles, market research and investment analyst reports, and stock
quotes.
CNBC Europe and CNBC Asia Pacific are 50/50 joint ventures between Dow Jones
and NBC. In early 1998, NBC and Dow Jones re-launched their business
information channels in Europe and Asia Pacific as CNBC, a service of NBC and
Dow Jones. The overseas services reach over 73 million households on a full-
time basis and nearly 30 million households on a part-time basis.
5
SmartMoney is a 50/50 joint venture with Hearst Corp. SmartMoney magazine,
The Wall Street Journal Magazine of Personal Business, featuring personal
investing, spending and saving money, has circulation of about 1 million
copies. SmartMoney also includes SmartMoney.com and SmartMoney Custom
Solutions, a custom publishing business.
Vedomosti, or The Record, a joint venture held equally by Dow Jones, Pearson
and Independent Media, was introduced in 1999. Vedomosti, considered the
only independent business newspaper in Russia, is published Monday through
Friday. Circulation reached 33,000 in 2002, with original content created by
67 local reporters and editors and content from The Wall Street Journal and
The Financial Times translated into Russian.
STOXX, Ltd was formed in 1998 by Dow Jones Indexes and the leading exchanges
of France (SBF-Bourse de Paris), Germany (Deutsche Borse) and Switzerland
(Swiss Exchange). The Dow Jones STOXX family of indices accounted for $262
billion of assets at year-end 2002. In 2002, the 25% share owned by the
French exchange was purchased pro-rata by the three remaining partners, which
now own 33.33% each of Stoxx.
Effective January 1, 2000, the company and von Holtzbrinck Group, a leading
German media company (publisher of Handelsblatt, a German daily business
newspaper, and with interests in book publishing, newspapers, and TV
production) exchanged equity-shareholdings in their respective subsidiaries
so as to give the von Holtzbrinck Group 49% ownership of The Wall Street
Journal Europe and the company 22% ownership of Handelsblatt. In November
2002, the company and the von Holtzbrinck Group entered into a memorandum of
understanding pursuant to which they agreed to exchange equity shareholdings
so as to reduce the von Holtzbrinck Group's ownership of The Wall Street
Journal Europe to 10% from 49% and the company's ownership of Handelsblatt to
10% from 22%, with news and advertising relationships continuing. The
agreement also provides each party the unilateral option to unwind the
strategic alliance entirely.
Other equity investments include OsterDowJones Commodity News, a commodity
newswire in partnership with Oster Communications, Inc.; VWD-Vereinigte
Wirtschaftsdienste GmbH, a German news agency specializing in business and
economic news and information; HB-Dow Jones S.A., a part-owner of Economia, a
publishing company in the Czech Republic; CareerCast, Inc., a leading
supplier of data services to employers and online career sites; and F.F.
Soucy Inc. & Partners, L.P., a newsprint mill in Canada.
RAW MATERIALS
The primary raw material used by the company is newsprint. In 2002,
approximately 231,000 metric tons were consumed. Newsprint was purchased
principally from 11 suppliers. The company is a limited partner in F.F.
Soucy, Inc. & Partners, L.P., Riviere du Loup, Quebec, Canada. F.F. Soucy
furnished 8% of total newsprint requirements in 2002. The company has signed
long-term contracts with certain newsprint suppliers, including F.F. Soucy,
for a substantial portion of its annual newsprint requirements. For many
years the available sources of newsprint have been adequate to supply the
company's needs.
RESEARCH AND DEVELOPMENT
Research and development expenses, which primarily relate to software
development for various operations of the company, were $24.3 million in
2002, $27 million in 2001 and $30.6 million in 2000.
6
COMPETITION
Dow Jones print publishing businesses compete with a wide range of
information providers in many different channels of distribution. All
metropolitan general interest newspapers and many small city or suburban
papers carry business and financial content as do many Internet-based
services as well as television and radio. In addition, specialized magazines
in the business and financial field, as well as general news magazines
publish substantial amounts of business-related material. The Journal also
competes for advertising with non-business publications offering audiences of
similar demographic quality, such as technology and lifestyle magazines.
Nearly all these services seek audiences and to sell advertising making them
competitive with Dow Jones' publications and services.
The company's newswires compete with other global financial newswires
including Reuters Group Plc, Bloomberg L.P., as well as McGraw-Hill, Inc.
The company's newswires maintain a stronger market position in North America
than internationally.
Consumer Electronic Publishing competes with other websites that offer
continuously updated coverage of business news as well as licensing of
electronic content. Competitors have for the most part, not migrated to a
full online paid subscription model and mostly remain free sites.
Competitors include FT.com, New York Times Digital, TheStreet.com, Bloomberg,
Forbes.com, Yahoo!Finance, CNET, MarketWatch, AOL/CNNfn and MSNMoney/CNBC.
Dow Jones' index-licensing business competes with various organizations that
develop and license indexes, including Standard & Poors, The Financial Times,
and Morgan Stanley/Capital International.
Ottaway Newspapers competes with the metropolitan general-interest
newspapers, and other community newspapers as well as radio and television
stations in their respective local markets.
Factiva competes with various business information service providers,
including Dialog Corp., a division of The Thomson Corporation; and Lexis-
Nexis, a division of Reed Elsevier Plc. Factiva also competes with various
online, Web-based information services.
The company's international television ventures compete with various
international satellite networks that specialize in general news but also
provide business programming. Also, individual television stations, networks
and cable channels in each country broadcast programming that competes for
advertising and the attention of viewers in their respective markets.
ITEM 2. PROPERTIES.
Dow Jones operates 17 plants with an aggregate of approximately one million
square feet for the printing of its domestic publications. Printing plants
are located in Palo Alto and Riverside, California; Denver, Colorado;
Orlando, Florida; LaGrange, Georgia; Naperville and Highland, Illinois; Des
Moines, Iowa; White Oak, Maryland; Chicopee, Massachusetts; South Brunswick,
New Jersey; Charlotte, North Carolina; Bowling Green, Ohio; Sharon,
Pennsylvania; Dallas and Beaumont, Texas; and Federal Way, Washington. All
plants include office space. All are owned in fee except the Palo Alto,
California, plant, which is located on 8.5 acres under a lease to Dow Jones
for 50 years, expiring in 2015.
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Other facilities owned in fee with a total of approximately 1 million square
feet house news, sales, administrative, technology and operational staff.
These facilities are located in South Brunswick, New Jersey, and Chicopee
Falls, Massachusetts. The company has leased 224,000 square feet of its
office space in South Brunswick to other companies.
Dow Jones occupies two major leased facilities in New York City, including
leasing over 300,000 square feet downtown at the World Financial Center,
which primarily houses editorial and executive staff, and 98,000 square feet
at a separate midtown location for advertising sales staff. See a further
discussion of the company's activities at the World Financial Center on page
22 of Management's Discussion and Analysis.
The company also leases other business and editorial offices in numerous
locations around the world, including 92,000 square feet in Jersey City,
N.J., 75,000 square feet in four locations in London and 72,000 square feet
in three locations in Hong Kong.
Ottaway Newspapers operates in 21 locations, including a 24,000 square foot
administrative headquarters in Campbell Hall, New York. These facilities are
located in Santa Cruz, California; Danbury, Connecticut; Kennebunk and York,
Maine; Beverly, Hyannis, New Bedford and Nantucket, Massachusetts; Traverse
City, Michigan; Exeter and Portsmouth, New Hampshire; Middletown, Oneonta,
and Plattsburgh, New York; Medford and Ashland, Oregon; and Grove City,
Stroudsburg, Danville and Sunbury, Pennsylvania. Local printing facilities,
which include office space, total approximately 800,000 square feet. All of
these facilities are owned in fee.
The company believes that its current facilities are suitable and adequate,
well maintained and in good condition. Older facilities have been modernized
and expanded to meet present and anticipated needs.
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 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 Information System'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.
8
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.
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 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 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 (since consolidated with the company's case) 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 guarantee for the distribution of certain
other data, attorneys' fees, interest, and other relief.
Arguments were heard in August 2002 on the parties' respective motions to
grant their own claims and to dismiss the competing claims. The Court
rendered a decision in January 2003 denying these motions in all material
respects. Thus, the case is expected to enter the discovery phase shortly.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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Executive Officers of the Registrant
Each executive officer is elected annually to serve at the pleasure of the Board of
Directors.
Mr. Zannino and Mr. Vieth have been employed by the company for fewer than five years.
Peter R. Kann, age 60, Chairman of the Board since July 1991, Chief Executive Officer
since January 1991, served as Publisher of The Wall Street Journal from January 1989
to July 2002, President from July 1989 to July 1991 and Chief Operating Officer from
July 1989 to December 1990, Executive Vice President from 1985 to 1989 and Associate
Publisher of The Wall Street Journal from 1979 to 1988. Mr. Kann is the spouse of Ms.
House.
Richard F. Zannino, age 44, Chief Operating Officer since July 2002, Executive Vice
President since joining the company in February 2001 and served as Chief Financial
Officer from February 2001 until July 2002. Before joining Dow Jones, Mr. Zannino was
Executive Vice President of Liz Claiborne, Inc., having joined in 1998 as Senior Vice
President, Finance & Administration and Chief Financial Officer. Previously, Mr.
Zannino had worked briefly as Chief Financial Officer of General Signal Corporation,
prior to that company's sale and before that for five years at Saks Fifth Avenue,
ultimately as Executive Vice President and Chief Financial Officer.
Peter G. Skinner, age 58, Executive Vice President since October 1998 and General
Counsel and Secretary since 1985, Senior Vice President from November 1989 to October
1998, President, Television from January 1995 to December 1997, served as Vice
President from 1985 to November 1989.
James H. Ottaway Jr., age 65, Director of Dow Jones since 1987, Senior Vice President
since 1986 and Chairman of Ottaway Newspapers, Inc. since 1979, was President of
Magazines from February 1988 to January 1998, served as President of the International
Group from February 1988 to January 1995, as Vice President/Community Newspapers from
1980 to 1985 and as President of Ottaway Newspapers, Inc. from 1970 to 1985 and its
Chief Executive from 1976 to January 1989, resuming that position in June 1998. Mr.
Ottaway will relinquish his positions as Chairman of Ottaway Newspapers and Senior
Vice President of Dow Jones by the end of 2003 and will remain a director of Ottaway
Newspapers. In addition, Mr. Ottaway has been nominated for another term as a
Director of Dow Jones, and will continue as Director for another term, presuming he is
reelected in 2003.
L. Gordon Crovitz, age 44, Senior Vice President and President, Electronic Publishing
and Senior Vice President/Electronic Publishing since October 1998, Vice
President/Planning and Development from November 1997 to October 1998. Managing
Director for Telerate's Asia/Pacific operation from September 1996 to November 1997.
Editor and Publisher of Review Publishing Company from July 1993 to September 1996.
Christopher W. Vieth, age 38, Vice President and Chief Financial Officer since July
2002 and Vice President, Finance from March 2001 to July 2002 and Corporate Controller
after joining the company in July 2000 up until July 2002. Prior to joining Dow
Jones, Mr. Vieth had been Vice President and Corporate Controller of Barnes and Noble,
Inc. since May 1999. He joined Barnes and Noble in December 1995 as Director of
Finance. From 1987 through 1995, Mr. Vieth worked at Amerada Hess Corporation.
Karen House, age 54, Senior Vice President and Publisher of all print editions of The
Wall Street Journal since July 2002 and President of Dow Jones' International Group
from January 1995 to July 2002, Vice President of the International Group from March
1989 to January 1995. Ms. House is the spouse of Mr. Kann.
Paul Steiger, age 59, Managing Editor of The Wall Street Journal since June 1991 and
Vice President of The Wall Street Journal since May 1992, Deputy Managing Editor from
April 1985 to June 1991 and Assistant Managing Editor from 1983 to April 1985.
10
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The company's common stock is listed on the New York Stock Exchange. The
class B common stock is not traded. The approximate number of stockholders
of record as of January 31, 2003 was 10,765 for common stock and 3,806 for
class B common stock. The company paid $1.00 per share in dividends in 2002
and in 2001.
Market Price 2002 Dividends Market Price 2001 Dividends
Quarters High Low Paid 2002 High Low Paid 2001
- -------- ------ ------ --------- -------- ------ ---------
First $58.42 $49.95 $.25 $64.30 $48.09 $.25
Second 60.20 46.50 .25 59.75 49.81 .25
Third 48.80 35.35 .25 61.59 43.19 .25
Fourth 44.37 29.50 .25 55.25 43.05 .25
ITEM 6. SELECTED FINANCIAL DATA.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations for a discussion of factors that affect the comparability of
the information reflected in this table. The following table shows selected
financial data for the most recent five years:
(in thousands, except
per share amounts) 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Revenues $1,559,173 $1,773,083 $2,202,618 $2,001,835 $2,158,106
Operating income 75,083 110,199 498,226 389,541 218,573
Net income (loss) 201,506 98,220 (118,962) 272,429 8,362
Earnings (loss) per share:
Basic $2.41 $1.15 $(1.35) $3.01 $.09
Diluted 2.40 1.14 (1.35) 2.99 .09
Dividends per share 1.00 1.00 1.00 .96 .96
Total assets $1,207,659 $1,298,340 $1,362,056 $1,512,713 $1,484,022
Long-term debt 92,937 173,958 150,865 149,945 149,889
Net income (loss) included certain items affecting comparisons as follows
(presented net of taxes):
(in thousands) 2002 2001 2000 1999 1998
-------- -------- --------- ------- --------
Restructuring and Sept. 11
related items, net $(13,922) $(43,926) $(1,643) $(45,484)
Gain (loss) on
disposition of
businesses and
investments 164,128 $ 18,161 51,660 (103,621)
Contract
guarantee, net (11,878) 17,136 (255,308)
Write-down of
investments (8,827) (178,499)
Certain items within
equity in losses 1,311 (3,009) 2,052 (4,225)
Income tax
valuation allowance
for capital loss
carryforward 30,000
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overall operating results for 2002 were sharply reduced by the depressed
business-to-business (B2B) advertising environment which led to a decline in
advertising linage at The Wall Street Journal of 17.6% in 2002. The
Journal's consumer-based advertising, representing one quarter of total
Journal advertising volume, began to recover with a 2.6% increase for the
year. In addition, color advertising increased sequentially each quarter of
2002 yielding an annual gain of 34%, driven by the company's enhanced color
capacity and the April 2002 launch of Today's Journal. However, these
increases were more than offset by declines in B2B advertising, most notably
at the company's core financial and technology advertising segments, which
were down 28.2% and 30.4%, respectively, from 2001 levels.
To preserve profitability in this harsh B2B advertising environment, the
company took further steps to reduce spending, tightly manage cash flows,
improve performance at its non-national advertising dependent businesses and
execute its Business Now long-range plan initiatives. The company
aggressively trimmed its cost base through workforce and other reductions.
In 2002, the company reduced costs by approximately $80 million, back below
1999 expense levels. Since the workforce and expense reductions began in
March 2001, the company has reduced headcount by roughly 16% and expenses by
approximately $160 million.
Throughout 2002, the company continued to execute Business Now, its long-
range strategic plan. The cornerstone of the plan is the $226 million, four-
year project to increase page capacity at the Journal by 20%, from 80 to 96
pages and triple color capacity from 8 to 24 pages. In April 2002, the
company successfully completed the final phase of this project with the debut
of Today's Journal, a package of content, organization and design changes to
the paper that also included a new Personal Journal section. In addition to
increases in color advertising, these changes have met with very positive
response from readers, and are driving improved circulation economics at the
Journal. Circulation revenue at the Journal began to rebound in the latter
half of 2002, reversing 4 years of declines. This gave the company added
confidence, on October 1, 2002, to implement a $14 price increase for an
annual subscription to The Wall Street Journal to $189.
Also in 2002, the company successfully launched its newly redesigned Online
Journal at WSJ.com. This roughly $30 million investment includes
improvements in systems infrastructure, a new content management system and a
simpler, more modern architecture to accommodate long-term growth in scale
and new product initiatives. Launched in January, the redesigned site
included a new look and feel with easier user access to information and
state-of-the-art personalization features aimed at increasing site usage.
Evidence of the success of this project includes an 8% increase in paid
subscribers despite a 33% subscription price increase in July, and an
increase in both subscription and advertising revenues.
During 2002, the company also executed its strategy to enhance the long-term
growth and profitability of the Ottaway community newspaper portfolio. Phase
one of that strategy was completed in the first half of 2002 by divesting
five community newspaper properties in non-strategic areas, which generated
after tax cash proceeds of approximately $235 million. Phase two of the plan
is to acquire more strategic papers. In October, the company purchased two
small publications in Ashland, Oregon and continues to explore potential
acquisitions.
2002 COMPARED TO 2001
In 2002, the company reported net income of $201.5 million, or $2.40 per
diluted share, compared with earnings of $98.2 million, or $1.14 per diluted
share, in 2001 (all "per share" amounts included herein are based on reported
net income or loss and use diluted shares). Earnings per share included
certain items affecting comparisons, which netted to a gain of $1.66 per
share in 2002 and a net charge of $.10 per share in 2001. These items are
detailed beginning on page 21.
12
Revenues in 2002 declined $213.9 million, or 12%, to $1.6 billion, driven
largely by a $174.6 million, or 17%, decline in company-wide advertising
revenue. Excluding Ottaway divested and newly-acquired properties, total
revenue was down 10% and advertising revenue decreased 14%. Information
services revenue declined $8.1 million, or 2.8%, primarily due to lower
domestic Newswires revenue, as a result of contraction in the securities
industry; and circulation and other revenues decreased $31.2 million, or
7.2%. Excluding Ottaway divested and newly-acquired properties, circulation
and other revenue was down 3.9%, on lower overall circulation revenue and
declines in list rental revenue, commercial printing and reprint revenues.
Operating expenses in 2002 declined $178.8 million, or 11%, to $1.5 billion,
primarily reflecting cost saving initiatives ($80 million), a reduction in
restructuring charges and September 11 related items ($49.4 million), lower
newsprint costs ($42 million), reduced costs as a result of Ottaway
divestitures, net of newly-acquired properties ($37.8 million) offset by
launch and ongoing costs of Today's Journal ($32 million). Newsprint
expense, excluding Ottaway divested/newly-acquired operations, was down 29.2%
as a result of a 22.2% drop in prices and a 9% decline in newsprint
consumption. Employee compensation expense for 2002, excluding restructuring
charges and Ottaway divested and newly-acquired newspapers, was down
approximately 5% and the number of full-time employees was down 10%. The
number of full-time employees at December 31, 2002 was 6,816.
Operating income in 2002 was $75.1 million (4.8% of revenues), down $35.1
million, or 32%, from $110.2 million (6.2% of revenues) last year as a drop-
off in print publishing 2002 operating results was partially offset by
increases at electronic publishing and continuing community newspapers
segments and a reduction in restructuring charges.
2001 COMPARED TO 2000
Net income in 2001 was $98.2 million, or $1.14 per share compared with a net
loss of $119 million, or $1.35 per share, in 2000. Included in earnings
(loss) per share were certain items affecting comparisons, which netted to a
loss of $.10 per share in 2001 and a loss of $4.67 per share in 2000. These
items are detailed beginning on page 21.
Revenues in 2001 decreased $429.5 million, or 20%, to $1.8 billion.
Advertising revenue decreased $414.9 million, or 28%, reflecting a
comparative collapse in the global advertising environment, further
exacerbated by the impacts of September 11. Information services revenue
increased $8 million, or 2.8%, primarily due to modest growth in overseas
Newswires revenue and an increase in paid subscriptions at the Online Journal
at WSJ.com. Circulation and other revenue declined $22.6 million, or 5%,
reflecting an increase in circulation units that was more than offset by an
increase in lower revenue-producing copies.
Operating expenses in 2001 declined $41.5 million, or 2.4%, to $1.7 billion,
mainly the result of cost saving initiatives totaling about $80 million and
lower newsprint costs of $32 million offset by higher restructuring and
September 11 related charges of $73 million. Newsprint expense was down 17%,
reflecting a 21% reduction in consumption slightly offset by a 4.5% increase
in average price per ton.
Operating income in 2001 totaled $110.2 million (6.2% of revenues) down $388
million, or 78%, from $498.2 million (22.6% of revenues) in 2000.
13
SEGMENT DATA
A summary of results of operations for each of the company's principal
business segments as well as additional financial data is displayed in Note
13 to the financial statements. Segment data excludes restructuring charges
and certain September 11 related items as management evaluates segment
results exclusive of these items. Please refer to page 21 for further
explanation of these items.
The company's business and financial news and information operations are
reported in two segments: print publishing and electronic publishing. The
results of the company's Ottaway Newspapers subsidiary, which publishes 14
daily newspapers, 11 Sunday papers and more than 30 weeklies and shoppers in
9 states in the U.S., are reported in the community newspaper segment. In
addition, the company reports certain administrative activities under the
corporate segment. Print publishing accounted for approximately 60% of 2002
and 2001 revenues, with electronic publishing and community newspapers each
accounting for roughly 20% of revenues. In 2000, when business-to-business
advertising was cyclically strong, print publishing accounted for 70% of
company revenues, with electronic publishing and community newspapers each
contributing roughly 15% of company revenues.
PRINT PUBLISHING
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 revenues and profits are largely dependent on business-to-
business advertising revenue. Advertising volume declined sharply in 2002
and 2001 from cyclically strong 2000 levels, driven by overall weakness in
the global advertising environment, particularly in the company's core
financial and technology segments. Financial and technology advertising,
comprised about 40% of the U.S. Journal's total linage in 2002, 46% in 2001,
and 56% in 2000.
(in thousands) 2002 2001 2000
---------- ---------- ----------
Revenues
U.S. Publications:
Advertising $ 585,851 $ 705,961 $1,071,731
Circulation and other 272,100 279,959 299,000
International Publications:
Advertising 54,832 79,080 102,686
Circulation and other 36,087 41,934 45,529
---------- ---------- ----------
Total revenues 948,870 1,106,934 1,518,946
Expenses* 956,928 1,015,466 1,118,789
---------- ---------- ----------
Operating (loss) income* $ (8,058) $ 91,468 $ 400,157
========== ========== ==========
Operating margin (.8)% 8.3% 26.3%
Included in expenses:
Depreciation and amortization $ 71,568 $ 65,668 $ 64,965
* Restructuring charges and September 11 related items are not included in
segment expenses as management evaluates segment results exclusive of these
items. For information purposes, restructuring and September 11 related
items allocable to the print publishing segment were $16,794 and $49,447 in
2002 and 2001, respectively.
14
Advertising Volume
Year-Over-Year Percentage Change:
(Decreases)/Increases 2002 2001 2000
---- ---- ----
The Wall Street Journal
General (7.9)% (27.0)% 1.4%
Technology (30.4) (52.6) 44.7
Financial (28.2) (42.3) 4.2
Classified (6.8) (17.8) 12.3
Total (17.6) (37.6) 14.1
The Asian Wall Street Journal (19.2) (28.2) 25.2
The Wall Street Journal Europe (18.7) (28.0) 14.9
Barron's (10.4) (33.4) 12.9
2002 COMPARED TO 2001
2002 was the second year of heavily depressed business-to-business
advertising at the company's advertising dependent print publishing
businesses, which led to an operating loss for the segment in 2002.
In 2002, print publishing revenues declined $158.1 million, or 14%, from
2001. U.S. print publication advertising revenue fell $120.1 million, or
17%, as a result of a 17.6% decline in advertising volume at The Wall Street
Journal and a 10.4% decline at Barron's. While it was not enough to offset
declines in other business-to-business advertising, color advertising, which
is billed at a premium, increased 34% in 2002, driven by the company's color
print expansion and Today's Journal launch. International print revenues
declined $30.1 million, or 25%, reflecting lower advertising volume and the
divestiture earlier this year of a small near break-even publication in South
America. Advertising linage at the The Asian Wall Street Journal, The Wall
Street Journal Europe and the Far Eastern Economic Review decreased 19.2%,
18.7% and 30.9%, respectively. Excluding the loss of revenue from the South
American publication, international revenues were down 18%. U.S. television
advertising license revenue from CNBC decreased 55%.
Wall Street Journal general advertising, which represented 42% of total 2002
Journal linage, fell 7.9% in 2002. Within the general category, consumer
advertising (which represented one quarter of total linage) increased 2.6% in
2002 on increases in auto, travel and other consumer advertising. The
increase in consumer advertising was more than offset, however, by a 20.5%
decline in general business-to-business advertising, including declines in
professional services, public utilities and other corporate advertising.
Technology advertising, which represented about 20% of total 2002 Journal
linage, fell 30.4% in 2002 on further declines in business-to-business e-
commerce, software, hardware, personal computer and telecommunications
advertising. Financial advertising comprised 20% of total Journal
advertising in 2002 and declined 28.2% in 2002 reflecting ongoing cyclical
weakness in the financial markets. Classified advertising linage,
representing 18% of total Journal linage, declined 6.8% in 2002, primarily
due to declines in help-wanted advertising.
Circulation and other revenue for U.S. publications decreased $7.9 million,
or 2.8%, in 2002. Average circulation for The Wall Street Journal was
1,817,000 in 2002, up modestly from 1,798,000 in 2001 and 1,789,000 in 2000.
Barron's average annual circulation was 295,000 in 2002 compared with 291,000
in 2001 and 305,000 in 2000. Despite an increase in average circulation,
circulation revenue decreased during the year on an increase in lower
revenue-producing copies. During the fourth quarter of 2002, the company
increased the subscription price of The Wall Street Journal by $14, or 8%.
15
Circulation and other revenue for international publications declined $5.8
million, or 14%, in 2002 resulting from an increase in lower revenue-
producing copies and a decline in international conference revenues. Average
combined circulation for the international editions of The Wall Street
Journal was 179,000 in 2002 compared with 185,000 in 2001 and 170,000 in
2000. Print publishing 2002 expenses declined $58.5 million, or 5.8%, from
2001, reflecting lower newsprint costs, cost savings initiatives and the
divestiture of the South American publication, offset somewhat by costs
related to the launch of Today's Journal. Newsprint expense decreased 30% as
a result of a 9.7% decrease in consumption coupled with a 22.5% decrease in
average newsprint prices.
Print publishing's 2002 segment loss was $8.1 million, which was down almost
$100 million from 2001's segment profit of $91.5 million (8.3% of revenues).
2001 COMPARED TO 2000
As discussed above, 2001 marked the beginning of a very severe, cyclical
downturn in the global advertising environment, which was particularly acute
at the company's advertising dependent print publishing businesses. In 2001,
revenues fell $412 million, or 27%, from 2000. Advertising revenue for U.S.
publications fell $365.8 million, reflecting a 37.6% decline in advertising
linage at The Wall Street Journal as well as a 33.4% drop in Barron's
national ad pages. International print revenues fell 18% as advertising
linage at The Wall Street Journal Europe decreased 28%, linage at The Asian
Wall Street Journal fell 28.2%, and at the Far Eastern Economic Review
advertising pages declined 32.2%. U.S. television advertising license
revenue decreased 41%.
The Journal's general advertising fell 27% in 2001 due to lower professional
service, travel and business-to-consumer advertising. Technology advertising
fell 52.6% in 2001 due to a falloff in business-to-business e-commerce, which
thrived during the first half of 2000 and much of 1999, as did advertising
for computer hardware and software. Financial advertising was down 42.3% in
2001, reflecting the cyclical downturn in the financial markets. Classified
and other linage decreased 17.8%, reflecting softness in help-wanted and real
estate advertising.
Circulation and other revenues for U.S. print publications declined $19
million, or 6.4%, in 2001. Average circulation for The Wall Street Journal
was 1,798,000 in 2001, up from 1,789,000 in 2000 and 1,772,000 in 1999.
Barron's average annual circulation was 291,000 compared with 305,000 in 2000
and 300,000 in 1999. Circulation revenues were down primarily due to a drop
in paid orders, partially offset by a 2001 price increase in Journal single
copy units.
Circulation and other revenue for international print publications in 2001
was down 7.9% from 2000 on increases in lower rate copies, a decline in The
Wall Street Journal Europe newsstand revenue and volume declines at the Far
Eastern Economic Review. Average combined circulation in 2001 for the
international editions of The Wall Street Journal grew to 185,000, up 8.8%
from 170,000 in 2000 and compared with 147,000 in 1999 as a result of an
increase in lower rate copies.
Print publishing expenses in 2001 declined $103.3 million, or 9.2%, compared
to 2000 levels, largely reflecting the company's cost reduction initiatives
and lower newsprint costs. Newsprint expense decreased 21%, as a result of a
24% decrease in consumption slightly offset by a 4.5% increase in average
newsprint prices.
Print publishing 2001 segment profit was $91.5 million (8.3% of revenues), a
decline of $308.7 million, or 77%, from profits of $400.2 million (26.3% of
revenues) in 2000.
16
ELECTRONIC PUBLISHING
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 the electronic publishing segment are mainly
subscription-based. Electronic publishing represented about 20% of total
2002 revenues.
(in thousands) 2002 2001 2000
-------- -------- --------
Revenues
Dow Jones Newswires:
North America $177,706 $193,134 $192,019
International 44,519 41,864 39,894
-------- -------- --------
Total Newswires 222,225 234,998 231,913
Consumer Electronic Publishing 50,230 48,683 60,471
Dow Jones Indexes/Ventures 37,036 34,305 35,185
-------- -------- --------
Total revenues 309,491 317,986 327,569
Expenses* 248,628 272,269 287,272
-------- -------- --------
Operating income* $ 60,863 $ 45,717 $ 40,297
======== ======== ========
Operating margin 19.7% 14.4% 12.3%
Included in expenses:
Depreciation and amortization $ 25,374 $ 22,421 $ 25,261
Statistical:
Dow Jones Newswires terminals 308,000 330,000 346,000
WSJ.com subscribers 679,000 626,000 535,000
* Restructuring charges and September 11 related items are not included in
segment expenses as management evaluates segment results exclusive of these
items. For information purposes, restructuring and September 11 related
items allocable to the electronic publishing segment were $6,521 and $18,796
in 2002 and 2001, respectively.
2002 COMPARED TO 2001
Electronic publishing significantly improved profitability in 2002 as
modestly lower segment revenues were more than offset with cost controls,
which led to increased profitability and margins for the segment.
Electronic publishing 2002 revenue decreased $8.5 million, or 2.7%, from
2001, as a decline in Newswires revenue was somewhat offset by increased
revenue at Dow Jones Indexes/Ventures and at Consumer Electronic Publishing.
Dow Jones Newswires revenue decreased $12.8 million, or 5.4%, from 2001.
North American revenue declined $15.4 million, or 8%, primarily the result of
a decline in retail revenue caused by further retrenchment in the securities
industry. The decline in domestic revenue was partially offset by a 6.3%
increase in international newswire revenue as a result of a wholesale
agreement to deliver a selection of Dow Jones news on all Moneyline Telerate
terminals worldwide. English-language terminals carrying Dow Jones Newswires
at the end of 2002 were 308,000 compared with 330,000 at the end of 2001,
with North American terminals declining 45,000 and international terminals
increasing 23,000 year over year. International and North American terminal
counts and revenues benefited from the Moneyline Telerate bundling agreement.
17
Driven largely by the launch of the redesigned Online Journal at WSJ.com in
January 2002, Consumer Electronic Publishing revenues increased $1.5 million,
or 3.2%, from 2001. Increases in subscriber (13%) and advertising revenue
(6%) were partially offset by declines in licensing revenue (18%). Total
WSJ.com subscribers at the end of 2002 reached 679,000, up 8.5% over year-end
2001 and the number of different users who accessed at least one page of
WSJ.com subscriber-only content over the course of a 24-hour day was 121,000,
up 13% compared with 107,000 in 2001.
Dow Jones Indexes/Ventures revenues, which include Dow Jones Indexes,
reprints/permissions and radio businesses increased $2.7 million, or 8%, as a
result of higher revenues at Dow Jones Indexes and radio, somewhat offset by
a decline in reprints revenue.
Electronic publishing 2002 expenses declined $23.6 million, or 8.7%, from
2001, as a result of lower employee costs, decreased royalty expense and cost
controls offset by an increase in depreciation expense related to the
investment in the company's redesigned WSJ.com website.
Electronic publishing profits in 2002 of $60.9 million (19.7% of revenues)
was $15.1 million, or 33%, better than 2001 operating income of $45.7 million
(14.4% of revenues). The improvement in margins and profits was primarily
driven by cost control and reduced losses at Consumer Electronic Publishing
and increased profits at Dow Jones Indexes/Ventures.
2001 COMPARED TO 2000
In 2001, electronic publishing revenue fell $9.6 million, or 2.9%, from 2000,
largely reflecting a drop in advertising revenue at The Online Journal. Dow
Jones Newswires revenue in 2001 increased $3.1 million, or 1.3%, from 2000.
International newswire revenue posted a gain of 4.9%, while North American
revenue grew 0.6%. At the end of 2001, there were 330,000 terminals carrying
Dow Jones Newswires compared with 346,000 in 2000. North American terminals
decreased 23,000, offset by an increase of 7,000 terminals throughout the
rest of the world.
Consumer Electronic Publishing 2001 revenue fell $11.8 million, or 19%, from
2000, reflecting a 50% decline in advertising revenue partially offset by an
8.7% rise in subscription revenue and increased licensing revenue. The
number of Online Journal subscribers at the end of 2001 reached 626,000, up
from 535,000 in 2000 and 375,000 in 1999. At year-end 2001, the average
number of different individuals who accessed at least one page of The Online
Journal subscriber-only content over the course of a 24-hour day was 107,000
compared with 100,000 in 2000. Dow Jones Indexes/Ventures revenue in 2001
decreased $.9 million, or 2.5%, reflecting a decline in radio and reprint
revenue partially offset by an increase in Dow Jones Indexes revenue.
Electronic publishing 2001 expenses decreased $15 million, or 5.2%, largely
due to cost reduction efforts at The Online Journal and other electronic
publishing businesses. Electronic publishing profits of $45.7 million (14.4%
of revenues) increased $5.4 million, or 13%, from $40.3 million (12.3% of
revenues) in 2000.
COMMUNITY NEWSPAPERS
Community newspapers includes the operations of Ottaway Newspapers, which
publishes 14 daily newspapers and over 30 weekly newspapers and "shoppers" in
9 states in the U.S. Community newspapers comprised about 20% of total
company 2002 revenues.
18
During 2002, the company sold five community newspaper properties, completing
the divestiture phase of its strategy to enhance the Ottaway Newspaper
portfolio. In October 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. Excluding divested and newly-acquired
properties, Ottaway "same store" sales, margins and profitability increased
in 2002.
(in thousands) 2002 2001 2000
-------- -------- --------
Revenues
Advertising
Comparable operations $198,894 $194,222 $199,760
Divested/newly-acquired operations 16,732 53,145 56,255
-------- -------- --------
Total advertising 215,626 247,367 256,015
Circulation and other
Comparable operations 78,516 79,109 79,712
Divested/newly-acquired operations 6,670 21,687 20,376
-------- -------- --------
Total circulation and other 85,186 100,796 100,088
-------- -------- --------
Total revenues 300,812 348,163 356,103
Expenses
Comparable operations 203,647 207,294 205,737
Divested/newly-acquired operations 17,910 55,722 55,884
-------- -------- --------
Total segment expenses* 221,557 263,016 261,621
Operating income
Comparable operations 73,763 66,037 73,735
Divested/newly-acquired operations 5,492 19,110 20,747
-------- -------- --------
Total operating income* $ 79,255 $ 85,147 $ 94,482
======== ======== ========
Operating margin
Comparable operations 26.6% 24.2% 26.4%
Divested/newly-acquired operations 23.5% 25.5% 27.1%
Included in expenses:
Depreciation and amortization
Comparable operations $11,034 $ 12,699 $13,284
Divested/newly-acquired operations 716 3,751 3,950
Advertising volume increase/(decrease)**
Dailies (1.7)% (4.0)% 3.9%
Non-Dailies (2.5) 6.6 1.9
Overall (1.8) (2.5) 3.6
* Restructuring charges and September 11 related items are not included in
segment expenses as management evaluates segment results exclusive of these
items. For information purposes, restructuring and September 11 related
items allocable to the community newspaper segment were $321 in 2001.
** Percentage excludes divested/newly-acquired operations.
19
2002 COMPARED TO 2001
Community newspapers revenue for 2002 declined $47.4 million, or 13.6%, from
2001. Excluding divested and newly-acquired operations, revenue increased
$4.1 million, or 1.5%. Advertising revenue, excluding divested and newly-
acquired operations, increased $4.7 million, as higher preprint revenue and
rate increases more than offset a modest 1.8% decline in advertising linage.
Circulation and other revenues for 2002 declined $15.6 million, or 15.5%.
Excluding divested and newly-acquired operations, circulation and other
revenue declined slightly as an increase in circulation revenue was more than
offset by a decrease in other revenue, primarily from a decline in commercial
printing revenue. Average daily circulation excluding divested and newly-
acquired papers was 384,000 in 2002 and 2001.
Community newspapers expenses in 2002 declined $41.5 million, or 15.8%, from
2001. Excluding divested and newly-acquired operations, operating expenses
decreased $3.6 million, or 1.8%, due to lower newsprint expense partially
offset by increased employee benefit-related expenses. Newsprint expense
fell 25.3%, on a 5.8% decline in consumption and 20.8% lower prices.
Operating income in 2002 of $79.3 million (26.3% of revenues) declined $5.9
million, or 6.9%, from operating income of $85.1 million (24.5% of revenues).
Excluding divested and newly-acquired operations, operating income of $73.8
million (26.6% of revenues) increased $7.7 million, or 12%, from operating
income of $66 million (24.2% of revenues).
2001 COMPARED TO 2000
In 2001, community newspaper revenues declined 2.2% from 2000. This
relatively modest decrease in revenue largely resulted from an $8.6 million,
or 3.4%, decline in advertising revenue. Overall advertising linage fell
3.1% in 2001, with linage at the daily papers down 4.2%, and non-daily linage
up 3.3%. Circulation and other revenues showed a slight improvement of 0.7%.
Average circulation for the dailies was 540,000 in 2001 versus 546,000 in
2000. Segment expenses rose 0.5% resulting from higher administration costs,
which were nearly offset by savings in newsprint consumption and other cost
containment efforts. Newsprint costs declined 1.2% on a 5.1% reduction in
consumption and a 4% increase in average newsprint prices. Community
newspapers 2001 profit of $85.1 million (24.5% of revenues) decreased $9.3
million, or 9.9%, from $94.5 million (26.5% of revenues) in 2000.
20
CERTAIN ITEMS AFFECTING COMPARISONS
The following table summarizes certain items affecting comparisons by year.
(in millions, except
per share amounts) 2002 2001 2000
---------------------- ---------------------- ---------------------
Pretax Net EPS Pretax Net EPS Pretax Net EPS
------- --- --- ------- --- --- ------- --- ---
Included in
operating income: (a)
Restructuring
charges ($ 26.9)($ 15.8)($ .18) ($39.3) ($23.5) ($.27)
Insurance gain 3.1 1.8 .02
WFC operating
lease (32.2) (19.3) (.23)
Sept 11
disaster-related (1.7) (1.0) (.01)
Included in non-
operating income:
Equity method
investments: (b)
CNBC International
gains 3.9 3.9 .05 1.2 .7 .01 $ 3.2 $ 2.1 $ .02
Restructuring/workforce
reductions at Factiva
and CNBC International (2.7) (1.6) (.03)
Lease termination charge
at SmartMoney (1.5) (.9) (.01) (3.6) (2.2) (.02)
Shut-down of Work.com (2.4) (1.6) (.02)
Gains on sale of
businesses & investments: (c)
Five Ottaway properties 197.9 164.1 1.94
DJ Financial
Publishing 13.8 9.5 .10
SportsTicker
Enterprises 6.4 4.8 .05
Swap of NextVenue
shares for iBEAM
shares 3.8 3.8 .04
Contract
guarantee, net (d) (11.9) (11.9) (.14) 17.1 17.1 .20 (255.3) (255.3) (2.93)
Write-downs of
investments: (e)
Nation Multimedia (4.8) (4.8) (.06)
iBEAM (4.0) (4.0) (.05)
Bridge Information
Systems (166.4) (166.4) (1.90)
OptiMark Technologies (12.1) (12.1) (.14)
Income tax valuation
allowance for capital
loss carryforward (f) 30.0 .35
------ ------ ----- ----- ----- ---- ------ ------ -----
TOTAL $161.9 $139.6 $1.66* ($69.7) ($ 8.6) ($.10) ($406.6)($413.6)($4.67)*
* Per share amounts for each item were calculated using the average shares
outstanding during the quarter that the transaction occurred. Therefore, the total
of the individual items does not add to the full-year earnings per share.
21
(a) Restructuring Charges and September 11 related items, net:
Restructuring
In 2002, the company initiated two workforce reductions resulting in total
restructuring charges of $26.9 million largely reflecting employee severance
related to workforce reductions of about 445 full-time employees, or roughly
6%, of the company's full-time workforce. These workforce reductions
occurred in all business segments with the exception of community newspapers.
Annualized cost savings associated with the workforce reduction are expected
to be about $39 million. As of December 31, 2002, about 87% of the employees
that were part of the workforce reductions were terminated and the remaining
separations are expected to be completed by mid-year 2003.
In 2001, the company initiated three separate workforce reductions totaling
roughly 550, or 6%, of its full-time employees. Severance and other exit
costs related to these workforce reductions, which occurred in every business
segment, amounted to $34.9 million. The company also wrote down assets that
were made obsolete or redundant, and were abandoned totaling $4.4 million.
Annualized cost savings associated with the workforce reduction are expected
to be about $47 million. As of December 31, 2002, all of the employees that
were part of the 2001 workforce reduction were terminated.
World Financial Center/September 11 related
The fourth quarter of 2002 included a gain of $3.1 million ($1.8 million
after taxes, or $.02 per diluted share), reflecting the recovery of insurance
proceeds in excess of the carrying value of World Financial Center assets
that were destroyed as a result of the September 11 terrorist attacks. On
September 11, 2001, the company's headquarters at the World Financial Center
sustained damage from debris and dust as a result of the terrorist attacks on
the World Trade Center. Approximately 60% of the floor space, including
furniture and related equipment, was determined a total loss. In 2001, the
company had written off the $15 million carrying value in assets that were
destroyed and recorded as a receivable from insurance, which was included in
other noncurrent assets on the balance sheet.
The third quarter of 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 terrorist attacks. 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 company announced in October 2001 that it intended to permanently
relocate various personnel housed at the World Financial Center to other
available office space in the surrounding area, including company-owned
facilities in South Brunswick, New Jersey. Dow Jones permanently vacated
four of its existing seven floors (165,000 sq ft of its over 300,000 sq ft)
of leased office space at World Financial Center. The lease is due to expire
in 2005.
In the fourth quarter of 2001, as a result of its decision to permanently re-
deploy its personnel from the World Financial Center, Dow Jones recorded a
charge of $32.2 million, primarily reflecting its obligation to the landlord
on the vacated space. This amount was undiscounted and included a $3.7
million write-down of undamaged leasehold improvements on the floors the
company was vacating.
(b) Gains/Charges in Equity in Losses of Associated Companies
In 2002, equity in losses of associated companies included a net charge of
$0.3 million consisting of charges in the fourth quarter totaling $4.2
million, offset by second quarter 2002 gains at CNBC Asia of $3.9 million.
The fourth quarter of 2002 included restructuring/workforce reduction charges
of $2.7 million ($1.6 million after taxes) at Factiva and CNBC International,
combined, and an office lease termination charge of $1.5 million ($.9 million
after taxes) at SmartMoney. The second quarter 2002 gains at CNBC Asia
included 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.
22
In 2001, equity in losses of associated companies included a net charge of
$4.8 million ($3.1 million after taxes). The fourth quarter of 2001 included
a charge of $3.6 million ($2.2 million after taxes) related to a loss on an
office lease that was abandoned by SmartMoney. The third quarter of 2001
included a $1.2 million ($.7 million after taxes) gain relating to the early
extinguishment of debt for CNBC Europe. In the first quarter of 2001, the
company recorded a charge of $2.4 million ($1.6 million after taxes) for
costs related to the shut-down of Work.com, a joint venture with Excite@Home.
Equity losses in associated companies for 2000 included a reversal of a 1998
restructuring charge of $3.2 million ($2.1 million after taxes) relating to
CNBC Europe, resulting from the favorable disposition of a satellite lease in
Europe.
(c) Gains on Sale of Businesses and Investments
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.
In 2000, the company recorded after-tax gains on the sale of businesses and
investments of $18.1 million, as follows: a gain of $9.5 million from the
sale of Dow Jones Financial Publishing Corp.; a gain of $4.8 million on the
sale of the company's minority interest in SportsTicker Enterprises L.P.; and
a net gain of $3.8 million resulting from the exchange of the company's
holdings in NextVenue Inc. for shares issued through a merger of iBEAM
Broadcasting Corp.
The company utilized a portion of its capital loss carryforward on these
sales.
(d) Contract Guarantee, net
In 1998, the company completed the sale of its former subsidiary, Telerate,
to Bridge Information Systems, Inc. (Bridge). The purchase price consisted
of $150 million aggregate par value of 5 year, redeemable, convertible, 4%
preferred stock of Bridge, which was included in other investments, and cash
of $360 million. Under the terms of the sale, Dow Jones retained its
guarantee of payments under certain circumstances of certain annual minimum
payments for data acquired by Telerate from Cantor Fitzgerald Securities and
Market Data Corporation (MDC) under contracts entered into during the period
when Telerate was a subsidiary of Dow Jones (contract guarantee). 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. However, Bridge filed
for bankruptcy protection on February 15, 2001 after unsuccessful attempts to
reorganize its operations and arrange for additional financing.
Dow Jones believes that Cantor Fitzgerald and MDC have the obligation to
cover, mitigate or otherwise reduce and/or avoid any losses or damages under
these circumstances, including by securing the best possible commercial terms
for the supply of the subject data to a third party or parties. Cantor and
MDC deny that they have this obligation. Dow Jones believes that any and all
amounts which are received by Cantor Fitzgerald and/or MDC in respect of such
data would reduce any liability that Dow Jones might have under the contract
guarantee. As of December 31, 2000, however, there was a high degree of
uncertainty as to what value the data might have in the marketplace; whether
an agreement will be reached by Cantor Fitzgerald and/or MDC to supply the
data to a third party or parties; the financial position of such party or
parties; the timing of any such agreement, and various related factors.
Therefore, it was not possible for Dow Jones to determine with any certainty
that any such offsets would in fact be realized, or at what time or in what
amounts. Consequently, in December 2000, the company established a reserve
in the amount of $255 million representing the present value of the total
estimated annual minimum payments of about $300 million over the remainder of
the contract (through October 2006 and using a discount rate of approximately
6%).
23
At December 31, 2001, the company's reserve for the contract guarantee was
$232.4 million. Earnings in 2001 included income of $31.1 million resulting
from Bridge fulfilling its payment obligation to Cantor during its post-
petition bankruptcy phase, which was partially offset by the accretion of
discount on the reserve balance of $14 million. Dow Jones made one payment
of $5.8 million for amounts not paid by Bridge prior to its bankruptcy.
Earnings in 2002 included accretion charges of $11.9 million, which increased
the reserve balance as of December 31, 2002 to $244.3 million. The company
has classified $111.6 million of this reserve as current based on the
original due dates of the contract.
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 and is no longer receiving the government securities data
from Cantor and MDC and will not be making payments to Cantor and MDC.
Cantor and MDC advised the company that they would be seeking payment from
Dow Jones of an amount they allege was due on November 15, 2001 under the
contract guarantee and future payments due through 2006. The company has
various substantial defenses to these claims.
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. Cantor Fitzgerald and MDC
have filed counterclaims, and an additional lawsuit against the company
disagreeing with the company's position and asserting damages of
approximately $250 million.
Arguments were heard in August 2002 on the parties' respective motions to
grant their own claims and to dismiss the competing claims. The Court
rendered a decision in January 2003 denying these motions in all material
respects. Thus, the case is expected to enter the discovery phase shortly.
(e) Write-down of Investments
In 2001, the company realized a loss of $8.8 million from impairment in the
value of its investments in Nation Multimedia Group Public Co.($4.8 million),
and iBEAM Broadcasting Corp.($4 million).
In 2000, the company wrote down the carrying value of its investments in
Bridge and SAVVIS Communications Corp. (in aggregate, $166.4 million) and
OptiMark Technologies, Inc. ($12.1 million).
See Note 5 to the financial statements for additional information on the 2001
and 2000 write-downs of investments.
(f) Income Tax Valuation Allowance for Capital Loss Carryforward
A tax benefit of $30 million was recorded in the fourth quarter of 2001 as
the company believed that it was more likely than not that it would use a
portion of its capital loss carryforward to offset capital gains on the sales
of the five Ottaway properties. The valuation allowance against the
carryforward was reduced in an amount equal to the anticipated net tax
benefit.
24
OTHER INCOME/DEDUCTIONS
Interest expense, net of investment income, in 2002 was $2.7 million compared
with net investment income of $.9 million in 2001. The negative swing
largely reflected reduced capitalized interest as a result of the completion
of the Journal color expansion and the WSJ.com redesign projects.
Equity in Losses of Associated Companies
The company's share of losses from equity investments was $.5 million in
2002, which was an improvement of $16.7 million compared with a loss of $17.2
million in 2001. The reduced losses were the result of improved results at
SmartMoney, Factiva and CNBC International as well as a favorable comparison
as the first quarter of 2001 included $2.7 million of losses from Work.com
operations and shut-down costs of $2.4 million. Partly offsetting these
gains were reduced earnings at F.F. Soucy, the company's newsprint affiliate,
driven by lower newsprint prices.
Equity in losses in 2001 relative to 2000 was flat at a loss of $17.2 million
largely reflecting improved results at Factiva and a favorable comparison
relating to the first quarter 2001 shut-down of Work.com, offset by a decline
in earnings from the Handelsblatt and VWD investments.
INCOME TAXES
The effective income tax rate in 2000 through 2002 was affected by capital
loss/gain transactions including the utilization of its capital loss
carryforward on the Ottaway property sales, a reduction in the tax valuation
allowance in 2001 (related to the expectation of utilizing a portion of the
company's capital loss carryforward), the non-deductibility of the reserve
for the contract guarantee and the investment write-downs in 2001 and 2000.
The following table shows the impact of these items.
2002 2001 2000
---- ---- ----
Effective income tax rate (net
of minority interests) 24.0% 9.9% 252.5%
Effective income tax rate (net of minority
interests) excluding items identified
in the table on page 21 40.0% 40.0% 39.2%
At December 31, 2002, the company had available approximately $715 million of
capital loss carryforward (a deferred tax asset of $276 million which is
fully reserved). About $451 million of this loss carryforward is recognized
for tax purposes, with $294 million expiring at the end of 2003 and $157
million expiring in 2006. The remaining $264 million of capital loss
carryfoward, which primarily relates to the Cantor contract guarantee
obligation, will be recognized for tax purposes only to the extent, if any,
that the company is required to make payment. If the company is required to
make any such payment, the resulting loss carryforward will be available for
use five years from the year it is recognized.
25
As a result of changes to Internal Revenue Service (IRS) guidelines in 2002,
the company will amend its 1998 U.S. Corporate income tax return in 2003 and
recalculate its capital loss on its sale of Telerate. If approved by the
IRS, this will increase the allowable tax loss on the sale of Telerate by
approximately $575 million. Factoring in the additional capital loss, the
company would have a total capital loss carryforward of approximately $1.3
billion, of which $1.03 billion is recognized for tax purposes, with $870
million expiring on December 31, 2003.
During 2002, the company utilized about $190 million of capital loss
carryforward on its sales of its Ottaway properties. In 2001, based on the
expected utilization of capital loss carryforward through sales of the
Ottaway properties, the company reduced its tax valuation allowance and
recorded a tax benefit of $30 million ($.35 per diluted share).
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.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires at the time
a company issues a guarantee, the company must recognize an initial liability
for the fair market value of the obligations it assumes under that guarantee
and must disclose that information in its interim and annual financial
statements. The initial recognition and measurement provisions are effective
on a prospective basis to guarantees issued or modified after December 31,
2002.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" (FIN 46). Variable Interest Entities ("VIEs")
are entities where control is achieved through means other than voting
rights. FIN 46 provides guidance on the identification of and financial
reporting for VIEs. A VIE is required to be consolidated if the company is
subject to the majority of the risk of loss from the VIE's activities or is
entitled to receive a majority of the entity's residual returns, or both.
The consolidation requirements for VIEs created after January 31, 2003 are
effective immediately and consolidation requirements apply to existing
entities in the first fiscal year or interim period beginning after June 15,
2003. While the company continues to evaluate the impact, the adoption of
this Interpretation is not expected to have a material effect on the
company's consolidated financial statements.
26
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations in 2002 was $145.6 million, down $196.1 million,
or 57%, from 2001's $341.7 million. The decline was due to a drop in
operating income adjusted for restructuring charges and September 11 related
items not paid in each year, the timing of collections of accounts receivable
and higher income tax payments in 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.
Net cash provided by investing activities was $158.5 million in 2002 compared
with net cash used in investing activities of $172.2 million in 2001 and
$202.8 million in 2000. Cash provided by investing activities in 2002,
included pretax proceeds from the sales of the five Ottaway properties of
$244 million. The company used these proceeds to repurchase shares and
reduce its debt. Cash provided by investing activities also included
proceeds from a property damage insurance claim of $16.9 million, net of
clean-up costs. The insurance reimbursement stemmed from the company's
property damage claim at its World Financial Center (WFC) offices as a result
of the September 11 terrorist attacks. These insurance proceeds, along with
an additional $1.3 million due in 2003, reflect a final settlement of the
company's property damage claim. The company has not set up a claim
receivable for its business interruption related losses as it continues to
assess the amount of its recovery with its insurance providers. Capital
expenditures totaled $77.7 million in 2002, including $12 million for
replacement of assets damaged as a result of the World Trade Center attacks,
which was fully recovered from insurers. Capital expenditures were $128.8
million in 2001 and $187 million in 2000, which included capital expenditures
for The Wall Street Journal color expansion project ($41 million in 2001 and
$71 million in 2000) and the WSJ.com redesign ($19 million in 2001).
Net cash used in financing activities was $285.7 million in 2002 compared to
$197.9 million in 2001 and $280.7 million in 2000. Cash outlays in 2002
included $143.5 million to repurchase 3.2 million of the company's shares,
the payment of $83.6 million in dividends to shareholders and the reduction
in debt of $81 million. In 2001, the company paid $154.3 million to
repurchase 2.6 million shares and paid $85.8 million in dividends while
increasing its debt balance only slightly. During 2000, the company
purchased 3.7 million shares for $221.2 million and paid dividends of $88.1
million.
In 2003, the company expects its beginning cash balance and cash provided by
operations to be sufficient to meet its normal recurring operating
commitments, fund capital expenditures of about $65 million and pay
dividends. The company expects to repurchase fewer shares than it has over
the last few years as the repurchase of shares will be calibrated to free
cash flow.
As previously disclosed 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
allegedly due under the contract guarantee. The company has various
substantial defenses to these claims and the litigation is proceeding.
27
As of December 31, 2002, the balance of the reserve for the contract
guarantee was $244.3 million. Due to the stage of the lawsuit at December
31, 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 other payables 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.
If necessary, the company's liquidity requirements may be funded through the
issuance of commercial paper, which is supported by a $400 million revolving
credit agreement with several banks, $130 million through June 23, 2003, and
$270 million through June 24, 2006. The company plans to extend the credit
agreement prior to its expiration. Borrowings may be in the form of
commercial paper, bank loans or long-term notes under a $300 million shelf
registration statement filed with the Securities and Exchange Commission.
Commercial paper, amounting to $92.9 million at December 31, 2002, is
classified as long-term, as it is the company's intent to refinance such
obligations on a long-term basis. The company's borrowing capacity is
limited by certain debt covenants, based on cash flow measures. As of year-
end 2002, the company's indebtedness was approximately $640 million less than
the maximum borrowing allowed under the debt covenants.
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+. Moody's
Investor Service left the company's ratings unchanged in 2002 at AA- for the
senior unsecured debt and P-1 for short-term corporate credit and commercial
paper.
Contractual cash obligations as of December 31, 2002, excluding the contract
guarantee to Cantor/MDC discussed above, were as follows:
Due in
(in millions) 2003 2004-2005 2006-2007 After 2007
-----------------------------------------
Long-term debt $92.9
Lease commitments 55.5 $68.3 $34.0 $45.2
Other commitments:
Lease guarantees of investees .9 1.9 2.4 2.9
MARKET RISK
In December 2002, the company entered into forward foreign currency exchange
contracts to exchange $24.5 million for 15.8 million British pounds and to
exchange $25.3 million for 25.2 million euro. These contracts, which expire
ratably over 2003, 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.
28
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.
The company's commercial paper outstanding of $93 million at December 31,
2002, is also subject to market risk as the debt reaches maturity and is
reissued at prevailing interest rates. At December 31, 2002, interest rates
outstanding ranged from 1.28% to 1.31%, with a weighted-average of 1.3%. The
bulk of this debt matures in the first quarter of 2003.
OUTLOOK
Operating results in 2003 will primarily hinge on advertising volume at the
print publishing segment, or more specifically on business-to-business (B2B)
advertising at The Wall Street Journal. B2B advertising is largely dependent
on business, investor and public confidence, which is at a low ebb, and there
remains a prevailing uncertainty of when a recovery in B2B advertising might
take hold. Operating expenses for 2003 are planned to decline nearly 4%, as
expected increases in newsprint prices and employee benefit costs will be
more than offset by lower costs as a result of 2002 workforce reductions, and
favorable comparisons to the 2002 restructuring charges, launch costs of
Today's Journal and expenses from divested Ottaway properties.
PENDING TRANSACTION
In November 2002, the company and the von Holtzbrinck Group entered into a
memorandum of understanding pursuant to which they agreed to exchange equity
shareholdings so as to reduce the von Holtzbrinck Group's ownership of The
Wall Street Journal Europe to 10% from 49% and the company's ownership of the
von Holtzbrinck Group's business daily, Handelsblatt to 10% from 22%, with
news and advertising relationships continuing. The agreement also provides
each party the unilateral option to unwind the strategic alliance entirely.
Assuming the transaction is consummated, the company expects to record an
after-tax gain of $11 million, or $.14 per share, on the exchange of its 12%
interest in Handelsblatt for 39% of The Wall Street Journal Europe.
CRITICAL ACCOUNTING POLICIES
The company's discussion and analysis of its financial condition and results
of operations are based upon the company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires the company's management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities.
The company's accounting policies affect its more significant judgments and
estimates used in the preparation of its financial statements. Actual
results could differ from these estimates.
29
The following are significant accounting policies of the company:
Advertising revenue, net of commissions, is recognized in the period in which
the advertisement is displayed. The company's advertising rate card reflects
certain volume-based discounts, which require management to make certain
estimates regarding future advertising volume. These estimated rebates are
recorded as a reduction of revenue in the period the advertisement is
displayed and are revised as necessary based on actual volume realized.
Online-related advertising revenue based on a minimum number of "impressions"
is recognized as impressions occur.
Revenue recognition from subscriptions to the company's print publications
and information services is recognized in income as earned, pro rata on a
per-issue basis, over the subscription period. Circulation revenue includes
sales to retail outlets/newsstands, which are subject to returns. The
company records these retail sales upon delivery, net of estimated returns.
These estimated returns are based on historical return rates and are revised
as necessary based on actual returns realized. Costs in connection with the
procurement of subscriptions are charged to expense as incurred. Revenue
from licensing the Dow Jones Averages includes both upfront one-time fees and
ongoing revenue. Both upfront fees and ongoing licensing revenue are
recognized in income as earned over the license period.
Accounts receivable includes an allowance for doubtful accounts, which is an
estimate of amounts that may not be collectible. This estimated allowance is
based on historical trends, review of aging categories and the specific
identification of certain customers that are at risk of not paying. Actual
write-offs of bad debt have historically been insignificant, less than 0.5%
of revenues.
Certain costs and related obligations of the company are based on actuarial
assumptions, including some of its pension plans and the cost of the
company's postretirement medical plan, which provides lifetime healthcare
benefits to retirees who meet specified length of service and age
requirements. These benefit costs are expensed over the employee's expected
employment period. At December 31, 2002, the company's postretirement
retiree medical benefit obligation was $190 million, which is not funded as
it is the company's policy to fund postretirement medical costs as claims are
incurred. In determining the cost of retiree medical costs, some factors
that management must consider include the expected increase in health care
costs, discount rates and turnover and mortality rates. The discount rate is
based on the yield of high-quality, 15-year, corporate bonds at December 31,
while other assumptions are updated periodically based on recent actual
trends. Increasing the assumed healthcare cost trend rates by one percentage
point in each year would have increased the accumulated postretirement
benefit obligation by $30.6 million and increased the cost for 2002 by $3.7
million. Conversely, a one percentage point decline in assumed health care
cost trend rates would have lowered the benefit obligation at the end of 2002
by $25.6 million and the cost for 2002 by $2.9 million.
The majority of the company's employees who meet specific length of service
requirements are covered by defined contribution retirement plans.
Substantially all employees who are not covered by these plans are covered by
defined benefit pension plans based on length of service and age
requirements. At December 31, 2002, the company's projected pension benefit
obligation was $148 million, of which $117 million was funded. In
determining the cost and obligation of the defined pension benefit plans,
management must consider such factors as the expected return on plan assets,
discount rates and expected employee salary increases. While the company
believes its assumptions are appropriate, significant differences in actual
experience or changes in these assumptions would affect the calculation of
its projected obligation and cost under the defined benefit pension and
postretirement medical plans.
30
Management must use its judgment in assessing whether the carrying value of
certain long-lived assets, cost-method investments, identifiable intangibles
and goodwill is impaired and if any asset is impaired, the extent of any such
loss. Certain events or changes in circumstances may indicate that the
carrying value may not be recoverable and require an impairment review.
Based on that review, if the carrying value of these assets exceeds fair
value and is determined to not be recoverable, an impairment loss
representing the amount of excess over its fair value would be recognized in
income. Fair value estimates are based on quoted market values in active
markets, if available. If quoted market prices are not available, the
estimate of fair value is based on various valuation techniques, including
discounted value of estimated future cash flows.
Management also exercises judgment in determining the estimated useful life
of long-lived assets, specifically plant and property and certain intangible
assets with a finite life. The company depreciates the cost of buildings
over 40 years; improvements to the buildings over 10 years; software over 3
to 5 years and machinery and equipment over 3 to 25 years. The 25-year life
is applicable to the company's press equipment. The cost of leasehold
improvements is depreciated over the lesser of the useful lives or the terms
of the respective leases. Management bases its judgment on estimated lives
of these assets based on actual experienced length of service of similar
assets and expert opinions.
The company maintains a stock incentive plan under the Dow Jones 2001 Long-
Term Incentive Plan. This plan provides for the grant of contingent stock
rights, stock options, restricted stock, restricted stock units and other
stock-based awards. The company accounts for its stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25 (APB 25) and its
related interpretations. Under APB 25, pretax stock-based compensation
charged to income principally in relation to the company's contingent stock
rights and restricted stock awards was $2.7 million in 2002, $5.6 million in
2001 and $3.4 million in 2000. Had the company's stock-based compensation
been determined by the fair-value based method of SFAS 123, "Accounting for
Stock-Based Compensation," the company's earnings per share for 2002, 2001
and 2000 would have been reduced by roughly $.20 per share, $.16 per share
and $.11 per share, respectively.
Management must exercise judgment in assessing the likely outcome of
contingencies and legal proceedings that have arisen in the ordinary course
of business and those described in Note 4 to the financial statements. Both
the timing and amount of the provisions made in the financial statements and
related disclosures represent management's judgment of likelihood, based on
information available at the time and on the advice of legal counsel.
Judicial or governmental bodies largely determine the outcome of these
matters. The ultimate resolution of these matters, either by determinations
by these bodies or other means, could be materially different from that
assumed by the company in makings its provisions and related disclosures.
The company records a tax valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. Currently,
the company maintains a valuation allowance on deferred tax assets related to
its capital loss carryforward. The company has considered ongoing prudent
and feasible tax planning strategies in assessing the need for a valuation
allowance. In the event the company were to determine that it would be able
to realize all or a portion of its net deferred tax assets, an adjustment to
the deferred tax asset would increase income in the period such determination
was made. Likewise, should the company determine that it would not be able
to realize all or a portion of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
31
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 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, particularly in the financial and technology segments,
will not improve or will very slowly or only to a limited extent; the risk
that the company will not benefit from or will only benefit to a limited
extent from any improvement in the advertising market in the face of
competition from other national business magazines, television, trade
publications and other publications and services; the company's ability 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,
specialized magazines, free and paid Internet publications and services,
financial television programming and other new media, and the impact this
will have on the company's initiatives to expand its existing market presence
as well as to extend its consumer reach; the company's ability to expand and
diversify its market segment focus beyond financial and technology and the
challenge it will face in attempting to become a leading presence in new
market segments, such as health care, automotive, telecom, and high-end
consumer goods, where competing publications and services, such as specialty
and trade magazines, have already established themselves; the competition the
company will face in introducing new products and services in the business-
to-business market from already existing newsletters, trade publications,
research reports and services; with respect to Newswires, the challenges the
company will face in launching its "Newswire of the Future" initiative, in
the face of competing resources for in-depth news analysis; with respect to
Newswires and other subscription-based products and services, the negative
impact of business consolidations and layoffs in the financial services
industry on sales of the company's products and services; with respect to
Newswires, the challenges the company faces in striving to increase its
international revenues given the competition from and