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The Washington Post Company 2003Annual Report

Table of contents

  • Page 1
    The Washington Post Company 20 03 Annual Report

  • Page 2
    Contents Financial Highlights To Our Shareholders Corporate Directory Form 10-K 01 02 16

  • Page 3
    ... earnings per common share Before cumulative effect of change in accounting principle in 2002 After cumulative effect of change in accounting principle in 2002 Dividends per common share Common shareholders' equity per share Diluted average number of common shares outstanding $ 2,838,911 $ 363...

  • Page 4
    ... of the year; I won't do this every year, but Post and Newsweek coverage of the Iraq war was remarkable enough that shareholders may want to know more about it. We in Washington Post Company management view this report as a chance to tell you both the good and bad news about the company. There are...

  • Page 5
    ... received $65 million from The New York Times Company for our share of the International Herald Tribune (I wrote about this transaction in last year's annual report). The gain is recorded in "Other income." • We repurchased options covering 6 percent of the stock of Kaplan, which had been given to...

  • Page 6
    ... training business in the U.K. but the prices of most such deals remain in the stratosphere (a pretty typical newspaper sold last year for 13 times the following year's projected EBITDA). We are interested in buying media companies from sellers who care about the way their newspaper, magazine, TV...

  • Page 7
    ... four-year schools. • Capital requirements: None of our company's businesses (except cable) is very capital-intensive. Kaplan will consume more capital than the TV stations or Newsweek (which consume very little) and a bit more than the newspaper (but once a generation, new press purchases will...

  • Page 8
    ... future - and this is the last place I'd make an exception - but in general, Kaplan's prospects are quite good. As I wrote you in September, we announced a $138 million offer to buy back options covering 6 percent of the stock of Kaplan. This diminishes the long-term 06 The Washington Post Company

  • Page 9
    ...same peak; competition from Internet job sites will take a share, and the job market in 2000 was a highly unusual one. The best Internet job site for Washington-area job seekers is washingtonpost.com/jobs. And newspaper help-wanted ads still work extremely well. ✧ 07 The Washington Post Company

  • Page 10
    ... troops. Barton Gellman, Walter Pincus and Dana Priest did invaluable reporting on Iraq's unconventional weapons program. Reporting on this story was hard and complex, as well as dangerous, and reporters at The Post and Newsweek excelled all year long. Rarely have two reporters dominated our front...

  • Page 11
    ...part of the company. While paid newspaper circulation is down over the past ten years everywhere, readership of newspapers has never been higher if Internet "editions" are included (though washingtonpost.com is far more than a web edition of the paper). ers in the press corps, he reported and wrote...

  • Page 12
    ... - Olympics and election years are much better than odd-numbered years for became vice president - strategy of The Washington C able modem sales rocketed, reaching more than 15 percent of subscribers by year-end. Post Company, advising me on corporate direction, after three years in which he set...

  • Page 13
    ... counts came with a year-long freeze on basic rates. Programmers' prices are increasing; we won't hold rates forever (neither will our DBS competitors). Cable modem sales rocketed, reaching more than 15 percent of subscribers by the end of 2003. Paying digital video subscribers, which we thought had...

  • Page 14
    ...'s sales staff, under publisher Greg Osberg, had its second straight year of expanding market share; CEO Rick Smith and president Harold Shain kept costs low. Newsweek's international editions had an even more difficult year than usual; early in the year, SARS virtually eliminated advertising in...

  • Page 15
    ... at the TV stations and circulation at The Post will be tough; the cable business will fight to hold its own. Still - thanks to the almost impossibly strong team of people running our company's major businesses, and to the many thousands of our colleagues throughout The Washington Post Company - as...

  • Page 16
    ... the stock of Kaplan was optioned (subsequent equity purchases by The Washington Post Company to finance growth reduced this to 10.6 percent). If our offer is successful, the company will spend approximately $138 million to buy out these options, including a 10 percent premium over the share price...

  • Page 17
    ... 2000 2001 2002 2003 (6 months) Post Company earnings will still be affected by the annual valuation, and charges for the cost of the plan (albeit 55 percent smaller than they would have been) will still be recorded. As usual, what motivates us is not the effect on Kaplan's reported numbers. (These...

  • Page 18
    CORPORATE DIRECTORY Board of Directors Donald E. Graham (3, 4) Chairman of the Board and Chief Executive Officer Chairman, The Washington Post Warren E. Buffett (3, 4) Chairman of the Board, Berkshire Hathaway Inc. Daniel B. Burke (1, 2) Former President and Chief Executive Officer, Capital Cities/...

  • Page 19
    ... 1150 15th St., N.W., Washington, D.C. (Address of principal executive offices) 20071 (Zip Code) Registrant's Telephone Number, Including Area Code: (202) 334-6000 Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange on which registered New York Stock Exchange Title...

  • Page 20
    THE WASHINGTON POST COMPANY 2003 FORM 10-K PART I Item 1. Business Newspaper Publishing Television Broadcasting Cable Television Operations Magazine Publishing Education Other Activities Production and Raw Materials Competition Executive OÇcers Employees Forward-Looking Statements ...

  • Page 21
    ... Post National Weekly Edition, a tabloid that contains selected articles and features from The Washington Post edited for a national audience. The National Weekly Edition has a basic subscription price of $78 per year and is delivered by second class mail to approximately 46,000 subscribers. 2003...

  • Page 22
    ... is edited by a newsroom staff of 13. Advertising sales, production, and certain other services for Express are provided by WP Company. Washingtonpost.Newsweek Interactive Washingtonpost.Newsweek Interactive Company, LLC (""WPNI'') develops news and information products for electronic distribution...

  • Page 23
    ... home delivery in Snohomish County. The Daily Herald Company also provides commercial printing services and publishes six controlled-circulation weekly community newspapers (collectively known as The Enterprise Newspapers ) that are distributed in south Snohomish and north King Counties. The Herald...

  • Page 24
    The Company's 2003 net operating revenues from national and local television advertising and network compensation were as follows: National Local Network Total Regulation of Broadcasting and Related Matters The Company's television broadcasting operations are subject to the jurisdiction of the ...

  • Page 25
    ...the system operator, station promotional announcements on the system, and cash payments to the station. The analog signal of each of the Company's television stations, with the exception of WJXT, is being carried on all of the major cable systems in the stations' respective local markets pursuant to...

  • Page 26
    ... Cable One) and 134,000 subscriptions to cable modem service. Digital video and cable modem services are each currently available in markets serving virtually all of Cable One's subscriber base. The Company's cable systems are located in 19 Midwestern, Southern and Western states and typically serve...

  • Page 27
    ... program services offered by a station or an affiliated company, to provide advertising availabilities on cable for sale by a station and to distribute promotional announcements with respect to a station. As has already been noted, in January 2001 the FCC determined that, pending further inquiry...

  • Page 28
    ...the switching center, and directory assistance) on an unbundled basis. As an alternative method of providing local telephone service, the Act permits cable companies and others to purchase telephone service on a wholesale basis and then resell it to their subscribers. 8 THE WASHINGTON POST COMPANY

  • Page 29
    ... struck down the rule, holding that the FCC's decision to retain the rule was arbitrary and capricious. In March 2002 the FCC issued a declaratory ruling classifying cable modem service as an ""interstate information service.'' Concurrently, the FCC issued a notice of proposed rulemaking to consider...

  • Page 30
    ... circulation rate base of the three leading weekly news magazines was 33.5%. Since 2000 that percentage has been 34.0%. Newsweek is sold on newsstands and through subscription mail order sales derived from a number of sources, principally direct mail promotion. The basic one-year subscription price...

  • Page 31
    ... and services; and GCN Technology, a news magazine published four times per year providing information technology product reviews and other buying information for government information technology managers. Washington Technology, Government Computer News, and GCN Technology have circulations of...

  • Page 32
    ... test preparation courses for financial services and insurance industry professionals; Dearborn Publishing, publisher of a variety of business and real estate books as well as printed and online materials for licensing, test preparation and continuing education in the real estate, architecture, home...

  • Page 33
    ... of the net revenues of the schools in Kaplan's Higher Education Division, accounting, for example, for approximately $250 million of the revenues of such schools for the Company's 2003 fiscal year. The significant role of Title IV funding in the operations of these schools is expected to continue...

  • Page 34
    ... WP Company in Fairfax County, Virginia and Prince George's County, Maryland. The Herald and The Enterprise Newspapers are produced at The Daily Herald Company's plant in Everett, Washington, while The Gazette Newspapers and the Southern Maryland Newspapers are all printed at the commercial printing...

  • Page 35
    ... some recycled content. The Company owns 80% of the stock of Capitol Fiber Inc., which handles and sells to recycling industries old newspapers and other paper collected in Washington, D.C., Maryland and northern Virginia. In 2003 the operations of The Daily Herald Company and Post-Newsweek Media...

  • Page 36
    ...Post and Carroll County Times, daily paid-circulation community newspapers. The Southern Maryland Newspapers circulate in southern Prince George's County and in Charles, Calvert and St. Mary's Counties, Maryland, where they also compete with many other advertising vehicles available in their service...

  • Page 37
    ... to the provision of competing program delivery services by local telephone companies. According to figures compiled by Publishers' Information Bureau, Inc., of the 228 magazines reported on by the Bureau, Newsweek ranked fifth in total advertising revenues in 2003, when it received approximately...

  • Page 38
    ... by a union. Post-Newsweek Media, Inc. has approximately 650 full-time and 105 part-time employees. Robinson Terminal Warehouse Corporation (the Company's newsprint warehousing and distribution subsidiary), Greater Washington Publishing and Express Publications Company each employ fewer than...

  • Page 39
    ... Gaithersburg, Maryland. In addition, Post-Newsweek Media, Inc. owns a one-story brick building in Waldorf, Maryland that houses its Charles County commercial printing business and also serves as the headquarters for two of the Southern Maryland Newspapers . The other editorial and sales offices for...

  • Page 40
    ..., including a six-story building located at 131 West 56th Street in New York City, which serves as an educational center primarily for international students, and a 2,300 square foot office condominium in Chapel Hill, North Carolina which it utilizes for its Test Prep business. Kaplan also owns a 15...

  • Page 41
    ...Statements) that are subject to market price volatility. The fair value of these common stock investments totaled $247,958,000 at December 28, 2003. The following table presents the hypothetical change in the aggregate fair value of the Company's common stock investments in publicly traded companies...

  • Page 42
    ... Financial Statements titled ""Summary of Quarterly Operating Results and Comprehensive Income (Unaudited),'' which are included in this Annual Report on Form 10-K and listed in the index to financial information on page 25 hereof. Item 9. Changes in and Disagreements with Accountants on Accounting...

  • Page 43
    ... period covered by this report: (i) Current Report on Form 8-K dated September 29, 2003, reporting under Item 5 the Company's oÃ...er to purchase certain options outstanding under the Kaplan, Inc. stock option plan. (ii) Current Report on Form 8-K dated October 31, 2003, reporting under Items 7 and 12...

  • Page 44
    ... Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 9, 2004. THE WASHINGTON POST COMPANY (Registrant) By /s/ JOHN B. MORSE, JR...

  • Page 45
    INDEX TO FINANCIAL INFORMATION THE WASHINGTON POST COMPANY Page Management's Discussion and Analysis of Results of Operations and Financial Condition (Unaudited Financial Statements and Schedules: Report of Independent Auditors Consolidated Statements of Income and Consolidated Statements of ...

  • Page 46
    (This page intentionally left blank) 26 THE WASHINGTON POST COMPANY

  • Page 47
    ..., or $2.66 per share), early retirement program charges at The Washington Post newspaper (after-tax impact of $20.8 million, or $2.18 per share), Kaplan stock compensation expense for the 10 percent premium associated with the purchase of certain outstanding stock options announced in the third...

  • Page 48
    ... in Newsweek circulation revenues due to increased newsstand sales for both the domestic and international editions of Newsweek. Revenue growth at Kaplan, Inc. (about 43 percent of which was from acquisitions) accounted for the increase in education revenue. Operating costs and expenses for the year...

  • Page 49
    ... for 2003, a 1 percent increase from $349.1 million in 2002. The revenue increase in 2003 is due to increases in ad pages at Newsweek's domestic edition, Arthur Frommer's Budget Travel magazine, and the Company's trade magazines, offset by lower advertising revenue at the international editions of...

  • Page 50
    ... education companies. See additional discussion above regarding the Company's announcement in September 2003 of its offer to purchase 55 percent of the outstanding Kaplan stock options. In February 2004, Kaplan announced that its higher education division acquired Texas School of Business, a career...

  • Page 51
    ...and digital service revenues, and a 4 percent increase in circulation revenue at The Post due to circulation price increases. This increase was offset by a 14 percent decrease in Newsweek domestic circulation revenue due to difficult comparisons with 2001, when Newsweek saw spikes in newsstand sales...

  • Page 52
    ...2002 due to increases in single copy newsstand and home delivery prices in 2002. Daily circulation at The Post declined 1.7 percent and Sunday circulation declined 1.2 percent in 2002. For the year ended December 29, 2002, average daily circulation at The Post totaled 760,000 (unaudited) and average...

  • Page 53
    ...operating income from Kaplan's CFA » and real estate licensure preparation services. Score! also contributed to the improved results, with increased enrollment, higher prices and strong cost controls. Higher education includes all of Kaplan's post-secondary education businesses, including the fixed...

  • Page 54
    ...also acquired a provider of CFA » exam preparation services and a company that provides precertification training for real estate, insurance and securities professionals. Southern Maryland Newspapers publishes the Maryland Independent in Charles County, Maryland; The Enterprise in St. Mary's County...

  • Page 55
    ... in future years. (2) Includes purchase obligations related to newsprint contracts, printing contracts, employment agreements, circulation distribution agreements, capital projects and other legally binding commitments. Other purchase orders made in the ordinary course of business are excluded...

  • Page 56
    ... the fair value price of Kaplan common stock at $1,625 per share, which is determined after deducting intercompany debt from Kaplan's enterprise value. Also in September 2003, the Company announced an offer totaling $138 million for approximately 55 percent of the stock options outstanding at Kaplan...

  • Page 57
    ... to hold the remaining 68,000 outstanding Kaplan stock options (representing about 4.8 percent of Kaplan's common stock), with roughly half of these options expiring in 2007 and half expiring in 2011. The Company does not expect to issue additional Kaplan stock options in the future. For 2003, 2002...

  • Page 58
    REPORT OF INDEPENDENT AUDITORS To The Board of Directors and Shareholders of The Washington Post Company: In our opinion, the consolidated financial statements referred to under Item 15(a)(i) on page 23 and listed in the index on page 25 present fairly, in all material respects, the financial ...

  • Page 59
    CONSOLIDATED STATEMENTS OF INCOME Fiscal year ended December 29, 2002 (in thousands, except per share amounts) December 28, 2003 December 30, 2001 Operating Revenues Advertising Circulation and subscriber Education Other 1,233,358 706,248 838,077 61,228 2,838,911 1,549,262 792,292 (41,747) ...

  • Page 60
    ... Investments in Affiliates Goodwill, Net Indefinite-Lived Intangible Assets, Net Amortized Intangible Assets, Net Prepaid Pension Cost Deferred Charges and Other Assets The information on pages 44 through 58 is an integral part of the financial statements. 40 THE WASHINGTON POST COMPANY

  • Page 61
    ...,540 and 12,916 shares issued and outstanding Preferred Stock, $1 par value; 977,000 shares authorized, none issued 12,540 Ì 12,916 Ì Common Shareholders' Equity Common stock Class A common stock, $1 par value; 7,000,000 shares authorized; 1,722,250 shares issued and outstanding Class B common...

  • Page 62
    ...Net pension benefit 55,137) Early retirement program expense 34,135 Gain from sale or exchange of businesses 49,762) Gain on sale of property, plant and equipment 41,734) (Gain) loss on disposition of marketable equity securities and cost method investments, net Cost method investment and other...

  • Page 63
    ...of 17,156 shares of Class B common stock, net of restricted stock award forfeitures Change in foreign currency translation adjustment (net of taxes Change in unrealized gain on available-for-sale securities (net of taxes Stock option expense Tax benefits arising from employee stock plans (786...

  • Page 64
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year. The Company reports on a 52- to 53-week fiscal year ending on the Sunday nearest December 31. The fiscal years 2003, 2002 and 2001, which ended on December 28, 2003, December 29, 2002, and December...

  • Page 65
    ..., ""Accounting for Stock Issued to Employees.'' The following table presents what the Company's results would have been had the fair values of options granted after 1995, but prior to 2002, been recognized as compensation expense in 2003, 2002 and 2001 (in thousands, except per share amounts). 2003...

  • Page 66
    ... 2003, the Company sold its 50 percent interest in The International Herald Tribune newspaper for $65 million; the Company reported a $49.8 million pre-tax gain that is included in BrassRing Bowater Mersey Paper Company International Herald Tribune Los Angeles TimesÃ"Washington Post News Service...

  • Page 67
    ""Other income (expense), net'' in the Consolidated Statements of Income. Cost Method Investments. Most of the companies represented by the Company's cost method investments have concentrations in Internet-related business activities. At December 28, 2003 and December 29, 2002, the carrying value of...

  • Page 68
    ...right to require the Company to purchase their shares at the redemption price during an annual 60-day election period; the first such period began on February 23, 2001. Dividends on the Series A Preferred Stock are payable four times a year at the annual rate of $80.00 per share and in preference to...

  • Page 69
    ... the fair value price of Kaplan common stock at $1,625 per share, which is determined after deducting intercompany debt from Kaplan's enterprise value. Also in September 2003, the Company announced an offer totaling $138 million for approximately 55 percent of the stock options outstanding at Kaplan...

  • Page 70
    ... age and service requirements. The Company uses a measurement date of December 31 for its pension and other postretirement benefit plans. In 2001, 2002 and 2003, the Company offered several early retirement programs to certain groups of employees at The Washington Post newspaper, Newsweek and the...

  • Page 71
    ... held shares of Berkshire Class A and Class B common stock with a total market value of $398.2 million and $343.8 million at December 28, 2003 and December 29, 2002, respectively. The total (income) cost arising from the Company's defined benefit pension and postretirement plans for the years ended...

  • Page 72
    ... 2001 principally included the purchase of Southern Maryland Newspapers, a division of Chesapeake Publishing Corporation, and a cable system exchange with AT&T Broadband. During 2001, the Company also acquired a provider of CFA » exam preparation services and a company that The Company leases real...

  • Page 73
    ... for real estate, insurance and securities professionals. Southern Maryland Newspapers publishes the Maryland Independent in Charles County, Maryland; The Enterprise in St. Mary's County, Maryland; and The Calvert Recorder in Calvert County, Maryland, with a combined total paid circulation of...

  • Page 74
    ... the Company's goodwill and intangible assets during 2003 was as follows (in thousands): Newspaper Publishing Television Broadcasting Magazine Publishing Cable Television Education Total Goodwill, Net Beginning of year ÏÏÏ $ 72,738 Acquisitions Disposition 1,461) Foreign currency exchange rate...

  • Page 75
    ... of newspapers in the Washington, D.C. area and Everett, Washington; newsprint warehousing and recycling facilities; and the Company's electronic media publishing business (primarily washingtonpost.com). The magazine publishing division consists of the publication of a weekly news magazine, Newsweek...

  • Page 76
    ... Newspaper publishing operating income in 2003 includes gain on sale of land at The Washington Post newspaper of $41.7 million. (2) 2001 results, adjusted to exclude amortization of goodwill and indefinite-lived intangible assets no longer amortized under SFAS 142. 56 THE WASHINGTON POST COMPANY

  • Page 77
    ... except per share amounts): First Quarter Second Quarter Third Quarter(1) Fourth Quarter 2003 Quarterly Operating Results Operating revenues Advertising Circulation and subscriber Education Other 279,796 172,036 177,778 10,830 640,440 Operating costs and expenses Operating Selling, general and...

  • Page 78
    ... except per share amounts) First Quarter Second Quarter Third Quarter Fourth Quarter 2002 Quarterly Operating Results Operating revenues Advertising Circulation and subscriber Education Other 273,564 161,298 146,929 18,531 600,322 Operating costs and expenses Operating Selling, general and...

  • Page 79
    SCHEDULE II THE WASHINGTON POST COMPANY SCHEDULE II Ì VALUATION AND QUALIFYING ACCOUNTS Column A Column B Column C Column D Column E Description Year Ended December 30, 2001 Allowance for doubtful accounts and returns Allowance for advertising rate adjustments and discounts Year Ended December ...

  • Page 80
    ...the sale of the Company's 50 percent interest in the International Herald Tribune ‚ gain of $25.5 million ($2.66 per share) on sale of land at The Washington Post newspaper ‚ charge of $20.8 million ($2.18 per share) for early retirement programs at The Washington Post newspaper ‚ Kaplan stock...

  • Page 81
    ... share) for an early retirement program at The Washington Post newspaper 1999 ‚ gains of $18.6 million ($1.81 per share) on the sales of marketable equity securities 1998 ‚ gain of $168.0 million ($16.59 per share) on the disposition of the Company's 28 percent interest in Cowles Media Company...

  • Page 82
    (This page intentionally left blank) 62 THE WASHINGTON POST COMPANY

  • Page 83
    ..., 2001).* The Washington Post Company Deferred Compensation Plan as amended and restated eÃ...ective March 9, 2000 (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the Ã'scal year ended January 2, 2000).* Calculation of earnings per share of common stock. List...

  • Page 84
    ... Washingtonpost.Newsweek Interactive Express The Washington Post National Weekly Edition The Washington Post Writers Group The Herald Community Newspaper Group The Gazette Southern Maryland Newspapers Comprint Military Publications Commercial Printing Greater Washington Publishing Robinson Terminal...

  • Page 85
    ... the company's web site, washpostco.com. Annual Meeting The annual meeting of stockholders will be held on May 13, 2004, at 8 a.m., at The Washington Post Company, 1150 15th Street, NW, Washington, DC. Common Stock Prices and Dividends High and low sales prices during the past two years were: 2003...

  • Page 86
    The Washington Post Company ✧ 1150 15th Street, NW Washington, DC 20071 ✧ 202.334.6000 ✧ washpostco.com