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04
The Washington Post Company 2004 Annual Report
NEWSPAPER/ONLINE PUBLISHING
TELEVISION BROADCASTING
MAGAZINE PUBLISHING
CABLE TELEVISION
EDUCATION

Table of contents

  • Page 1
    04 NEWSPAPER/ONLINE PUBLISHING TELEVISION BROADCASTING MAGAZINE PUBLISHING CABLE TELEVISION EDUCATION The Washington Post Company 2004 Annual Report

  • Page 2
    Contents Financial Highlights, 1 Letter to Shareholders, 2 Corporate Directory, 12 Form 10-K

  • Page 3
    ... (in thousands, except per share amounts) 2004 2003 % Change Operating revenue Income from operations Net income Diluted earnings per common share Dividends per common share Common shareholders' equity per share Diluted average number of common shares outstanding $ 3,300,104 $ $ $ $ $ 563,006...

  • Page 4
    ... in 1999. (Goodwill amortization was deducted from operating income then, so, if that is added back, 1999 operating income was $447 million.) It is especially pleasing to report that every division of the company participated, growing operating income over 2003. THE WASHINGTON POST COMPANY 2

  • Page 5
    ...of our media businesses. Newspapers are losing circulation, they would say; television viewers have more choices, so local stations are less important; news magazines no longer have a clear place in the media landscape; cable faces overwhelming competition from satellite and telephone companies, and...

  • Page 6
    ... the editorial page, won another for her magnificent book, Gulag, a history of the Soviet-era prison system. Phil Bennett, who led The Post's foreign staff through the past five years, became managing editor, succeeding Steve Coll. All these achievements were shaded by one problem: Daily circulation...

  • Page 7
    The Post started a free-distribution paper, Express, in 2003; its advertising results increased impressively. How's this for a statistic: In the course of a week, 82% of Washington-area adults look into The Post, washingtonpost.com or Express. At midyear, we bought El Tiempo Latino, a fine local ...

  • Page 8
    ...share credit for Newsweek's best year since 2000. Shareholders might want to say thank you to Alan Frank, president of Post - Newsweek Stations. Each of our six television stations had a strong year, three of them as a direct result of moves Alan made. The continuing strength of WDIV (NBC - Detroit...

  • Page 9
    ... The Washington Post Company with those of ten years ago, there are two large differences. The biggest is Kaplan (on which more later); the other is Cable One, where operating income has almost doubled under chief executive officer Tom Might. Cable One serves 709,000 customers in smaller communities...

  • Page 10
    ... and telephone companies have formed effective partnerships to sell dishes and high-speed data service. But RBOC announcements of planned video service have turned the partners into future competitors. And then there's Kaplan. Ten years ago, Kaplan's revenues were 3% of The Washington Post Company...

  • Page 11
    ... train exam-takers in several fields, including real estate (booming), insurance (steady) and securities (slumping). Investment in a new software platform for Kaplan Professional's businesses kept results flat for the year, but this business is well positioned for the future. Eric also runs Score...

  • Page 12
    ... not interested in short-term results or in the price of the stock in the near future. All our interest focuses on making the company as valuable as possible many years from now. (If the long-term value of the company increases, the stock price will do so as well.) THE WASHINGTON POST COMPANY 10

  • Page 13
    ... cofounder of the Bill and Melinda Gates Foundation, the world's largest non-profit, joined our board. Donald E. Graham Chairman of the Board Chief Executive Officer February 25, 2005 ALL OUR INTEREST FOCUSES ON MAKING THE COMPANY AS VALUABLE AS POSSIBLE MANY YEARS FROM NOW. 11 2004 ANNUAL REPORT

  • Page 14
    ... Warren E. Buffett (3, 4) Chairman of the Board, Berkshire Hathaway Inc. Barry Diller (2, 3) Chairman and Chief Executive Officer, IAC/InterActiveCorp John L. Dotson Jr. (2) Former President and Publisher, Akron Beacon-Journal Melinda French Gates Co-Founder, Bill & Melinda Gates Foundation George...

  • Page 15
    ...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 of...

  • Page 16
    THE WASHINGTON POST COMPANY 2004 FORM 10-K PART I Item 1. Business Newspaper Publishing Television Broadcasting Cable Television Operations Education Magazine Publishing Other Activities Production and Raw Materials Competition Executive OÇcers Employees Forward-Looking Statements ...

  • Page 17
    ...of newspaper publishing (principally The Washington Post ), television broadcasting (through the ownership and operation of six television broadcast stations), the ownership and operation of cable television systems, the provision of educational services (through its Kaplan subsidiary), and magazine...

  • Page 18
    ... 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 42,000 subscribers. The Post has about 645 full-time editors, reporters and photographers on its staff; draws...

  • Page 19
    ...Washington, about 30 miles north of Seattle. The Herald is published mornings seven days a week and is primarily distributed by home delivery in Snohomish County. The Daily Herald Company also provides commercial printing services and publishes four controlled-circulation weekly community newspapers...

  • Page 20
    ... table sets forth certain information with respect to each of the Company's television stations: Station Location and Year Commercial Operation Commenced National Market Ranking(a) Expiration Date of FCC License Expiration Date of Network Agreement Total Commercial Stations in DMA(b) Allocated...

  • Page 21
    ... such things as mandatory advertising purchases by 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...

  • Page 22
    ... video delivery systems that would compete in varying degrees with both cable television and television broadcasting operations. Also, in July 2004 the FCC instituted an inquiry into its rules and policies concerning broadcasters' service to their local communities. 6 THE WASHINGTON POST COMPANY

  • Page 23
    ... cable systems owned by the Company fall within the effective-competition or small-system exemptions, monthly subscription rates charged by most of the Company's cable systems for the basic tier of cable service, as well as rates charged for equipment rentals and service calls, may be regulated by...

  • Page 24
    ...-affiliated stations to subscribers who could not receive an over-the-air signal of a station affiliated with the same network. However, in 1999 Congress enacted the Satellite Home Viewer Improvement Act, which created a royalty-free compulsory copyright license 8 THE WASHINGTON POST COMPANY

  • Page 25
    ... the 31 gigahertz band for use by a new wireless service, which is referred to as the Local Multipoint Distribution Service or ""LMDS,'' that has the potential to deliver television programming directly to subscribers' homes as well as provide Internet access and telephony services. To date, however...

  • Page 26
    ... to predict what effect the other matters discussed in this section may ultimately have on its cable television business. Education Kaplan, Inc., a subsidiary of the Company, provides an extensive range of educational services for children, students and professionals. Kaplan's historical focus on...

  • Page 27
    ... print- and computer-based supplemental programs, preparing students for state assessment tests and for the SATs and ACTs, providing curriculum consulting services and providing professional training for teachers); Graduate and Pre-College (serving high school and college students and professionals...

  • Page 28
    ... of Private Post-Secondary and Vocational Education. Concord also has complied with the registration requirements of the State Bar of California; graduates are, therefore, able to apply for admission to the California Bar. The College for Professional Studies, which had approximately 1,000 students...

  • Page 29
    ... is a weekly news magazine published both domestically and internationally by Newsweek, Inc., a subsidiary of the Company. In gathering, reporting and writing news and other material for publication, Newsweek maintains news bureaus in 8 U.S. and 11 foreign cities. The domestic edition of Newsweek...

  • Page 30
    ... of the total weekly domestic circulation rate base of the three leading weekly news magazines 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 is $41...

  • Page 31
    ...The Washington Post and Express are produced at the printing plants of 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, Southern...

  • Page 32
    ... areas, other nationally circulated newspapers, and from television, radio, magazines and other advertising media, including direct mail advertising. Express similarly competes with various other advertising media in its service area, including both daily and weekly free-distribution newspapers...

  • Page 33
    ... currently being distributed primarily by zip-code targeted home delivery in their respective service areas. The Examiner will compete in varying degrees with The Gazette Newspapers, Express and The Washington Post, although the Company is unable to predict how significant a competitive factor The...

  • Page 34
    ... provides cable television service. In December 2003 News Corporation Limited (""News Corp''), a global media company that in the United States owns the Fox Television Network, 35 broadcast television stations, a group of regional sports networks and a number of nationally distributed cable networks...

  • Page 35
    ... approximately 250 full-time and 100 part-time employees at The Daily Herald Company, about 70 full-time and 20 part-time employees are represented by one or another of three unions. The newspaper's collective bargaining agreement with the Graphic Communications International Union, which represents...

  • Page 36
    ... on 15th Street next to the lot containing The Post 's office building. WP Company owns a printing plant in Fairfax County, Virginia which was built in 1980 and expanded in 1998. That facility is located on 19 acres of land owned by WP Company. WP Company also owns a printing plant and distribution...

  • Page 37
    ...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 The Gazette Newspapers and the Southern Maryland Newspapers are located in...

  • Page 38
    ... sales representatives in New York City, Chicago, San Francisco and Los Angeles. Greater Washington Publishing's offices are located in leased space in Fairfax, Virginia, while El Tiempo Latino LLC's offices are located in leased space in Arlington, Virginia. Item 3. Legal Proceedings. The Company...

  • Page 39
    ...of the Company's common stock investments in publicly traded companies to change by approximately 20% in one quarter, 15% in five quarters and by 10% or less in each of the other 18 quarters. Interest Rate Risk At January 2, 2005, the Company had short-term commercial paper borrowings outstanding of...

  • Page 40
    ...exhibits to this Annual Report on Form 10-K, in May 2004 the Company's Chief Executive Officer submitted to the New York Stock Exchange the certification regarding compliance with the NYSE's corporate governance listing standards required by Section 303A.12 of the NYSE Listed Company Manual. Item 11...

  • Page 41
    ... is incorporated herein by reference thereto. Item 14. Principal Accountant Fees and Services. The information contained under the heading ""Audit Committee Report'' in the definitive Proxy Statement for the Company's 2005 Annual Meeting of Stockholders is incorporated herein by reference...

  • Page 42
    ..., Jr. and Diana M. Daniels, and each of them, to sign all reports required to be filed by the Registrant pursuant to the Securities Exchange Act of 1934 on behalf of the above-named directors and officers has been filed with the Securities and Exchange Commission. 26 THE WASHINGTON POST COMPANY

  • Page 43
    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 Registered Public Accounting Firm Consolidated Statements of Income and ...

  • Page 44
    ..., circulation and subscriptions. The results of these divisions tend to fluctuate with the overall advertising cycle (amongst other business factors). In 2004, advertising showed continued improvement. The Washington Post newspaper reported continued strong increases in print classified recruitment...

  • Page 45
    ... in circulation revenue at The Post, and a 4% decline in Newsweek circulation revenues due to subscription rate declines at the domestic edition of Newsweek. Revenue growth at Kaplan, Inc. (about 33% of which was from acquisitions) accounted for the increase in education revenue. Operating costs and...

  • Page 46
    ... services for accountants and financial services professionals, with training centers in the United Kingdom and Asia. FTC revenues grew by 44% in 2004 over the same time period the business was owned by Kaplan in 2003. Supplemental education results also include professional real estate, insurance...

  • Page 47
    ...25.5 million, 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% premium associated with the purchase of certain outstanding stock options announced in the third...

  • Page 48
    ...national online advertising revenues grew 59% and revenues at the Jobs section of washingtonpost.com increased 29%. As previously discussed, the Post launched a new newspaper, Express, in August 2003. The new publication appears each morning, Monday through Friday, in tabloid form and is distributed...

  • Page 49
    ... Educational Foundation in the fourth quarter of 2003, offset by significant revenue growth during the year. Approximately 43% of the increase in Kaplan revenue is from acquired businesses, primarily in the higher education division and the professional training schools that are part of supplemental...

  • Page 50
    ... leading Spanish-language weekly newspaper in the greater Washington area. Most of the purchase price for the 2004 acquisitions was allocated to goodwill and other intangibles. During 2003, Kaplan acquired 13 businesses in its higher education and professional divisions for a total of $166.8 million...

  • Page 51
    ...2004 and significant payments for Kaplan stock options in 2003, offset by an increase in the company's income tax payments in 2004. The Company expects to fund its estimated capital needs primarily through internally generated funds and, to a lesser extent, commercial paper borrowings. In management...

  • Page 52
    ... customer. Accounts receivable also have been reduced by an estimate of advertising rate adjustments and discounts, based on estimates of advertising volumes for contract customers who are eligible for advertising rate adjustments and discounts. Pension Costs. Excluding special termination benefits...

  • Page 53
    ...5 years) at the time of the grant. Upon exercise, an option holder receives cash equal to the difference between the exercise price and the then fair value. The amount of compensation expense varies directly with the estimated fair value of Kaplan's common stock and the number of options outstanding...

  • Page 54
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of The Washington Post Company We have completed an integrated audit of The Washington Post Company's 2004 consolidated financial statements referred to under Item 15(1) on page 25 and listed on the ...

  • Page 55
    ...year ended December 28, 2003 (in thousands, except per share amounts) January 2, 2005 December 29, 2002 Operating Revenues Advertising Circulation and subscriber Education...) 21.34 Operating Costs and Expenses Operating Selling, general and administrative Gain on sale of land Depreciation of...

  • Page 56
    ... 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 57 is an integral part of the financial statements. 40 THE WASHINGTON POST COMPANY

  • Page 57
    (in thousands, except share amounts) January 2, 2005 December 28, 2003 Liabilities and Shareholders' Equity Current Liabilities Accounts payable and accrued liabilities Deferred revenue Short-term borrowings 443,332 186,593 58,236 688,161 145,490 228,654 403,698 425,889 1,891,892 $ 368,363 164...

  • Page 58
    ... Ì 19,701 (175,683) Cash Flows from Financing Activities: Repayment of commercial paper, net 138,116) Principal payments on debt 19,253) Dividends paid 67,917) Common shares repurchased Proceeds from exercise of stock options 15,616 Other 1,953) Net cash used in financing activities 211,623...

  • Page 59
    ...Unrealized Gain on Availablefor-Sale Securities Treasury Stock Balance, December 30, 2001 1,722 $18,278 $142,814 $3,029,595 Net income for the year Dividends paid on common stock Ì $5.60 per share ÏÏÏ Dividends paid on redeemable preferred stock Repurchase of 1,229 shares of Class B common...

  • Page 60
    ... of cable transmission and distribution facilities and new cable service installations. Costs include all direct labor and materials, as well as certain indirect costs. Also at the cable division, the carrying value applicable to assets sold or retired is removed from the accounts, with the gain or...

  • Page 61
    ...broadcast. Revenues from newspaper and magazine subscriptions and retail sales are recognized upon the later of delivery or cover date, with adequate provision made for anticipated sales returns. Cable subscriber revenue is recognized monthly as services are delivered. Education revenue is generally...

  • Page 62
    ...): 2004 2003 Book overdrafts of $27.2 million and $29.1 million are included in accounts payable and accrued expenses at January 2, 2005 and December 29, 2003, respectively. C. INVESTMENTS BrassRing Bowater Mersey Paper Company Los Angeles TimesÃ"Washington Post News Service $ 8,755 52...

  • Page 63
    ... the Company sold its 50% interest in The International Herald Tribune newspaper for $65 million; the Company reported a $49.8 million pre-tax gain that is included in ""Other income (expense), net'' in the Consolidated Statements of Income. Cost Method Investments. Most of the companies represented...

  • Page 64
    ... a total of 910 shares and 1,229 shares, respectively, of its Class B common stock at a cost of approximately $0.7 million and $0.8 million. At January 2, 2005, the Company has authorization from the Board of Directors to purchase up to 542,800 shares of Class B common stock. 48 THE WASHINGTON POST...

  • Page 65
    ..., or 150,000 shares, of Kaplan's common stock for options to be granted under the plan. Under the provisions of this plan, options are issued with an exercise price equal to the estimated fair value of Kaplan's common stock and options vest ratably over the number of years specified (generally 4 to...

  • Page 66
    ...Company offered several early retirement programs to certain groups of employees at The Washington Post newspaper, Newsweek and the corporate office, the effects of which are included below. Effective June 1, 2003, the retirement pension program for certain employees at The Washington Post newspaper...

  • Page 67
    ...'s defined benefit pension obligations are funded by a relatively small but diversified mix of stocks and high-quality fixedincome securities that are held in trust. Essentially all of the assets are managed by two investment companies. None of the assets are managed internally by the Company or are...

  • Page 68
    ... leading Spanish-language weekly newspaper in the greater Washington area. Most of the purchase price for the 2004 acquisitions was allocated to goodwill and other intangibles. During 2003, Kaplan acquired 13 businesses in its higher education and professional divisions for a total of $166.8 million...

  • Page 69
    ..., the Company sold its 50 percent interest in the International Herald Tribune for $65 million and the Company recorded an after-tax non-operating gain of $32.3 million ($3.38 per share) in the first quarter of 2003. During 2002, Kaplan acquired several businesses in its higher education and test...

  • Page 70
    ... a weekly news magazine, Newsweek, which has one domestic and three international editions, the publication of Arthur Frommer's Budget Travel, and the publication of business periodicals for the computer services industry and the Washington-area technology community. Revenues from both newspaper and...

  • Page 71
    (in thousands) Newspaper Publishing Television Broadcasting Magazine Publishing Cable Television Education Corporate OÇce Consolidated 2004 Operating revenues Income (loss) from operations Equity in losses of affiliates Interest expense, net Other income, net Income before income taxes...

  • Page 72
    ..., except per share amounts): First Quarter Second Quarter Third Quarter Fourth Quarter 2004 Quarterly Operating Results Operating revenues Advertising Circulation and subscriber Education Other 299,127 180,259 258,271 21,312 758,969 Operating costs and expenses Operating Selling, general and...

  • Page 73
    ..., 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 277,121 172,036 177,778 13,505 640,440 Operating costs and expenses Operating Selling, general...

  • Page 74
    (This page intentionally left blank) 58 THE WASHINGTON POST COMPANY

  • Page 75
    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 29, 2002 Allowance for doubtful accounts and returns Allowance for advertising rate adjustments and discounts Year Ended December ...

  • Page 76
    ...) on the sale of the Company's 50% 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 77
    ...16.5 million ($1.74 per 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% interest in Cowles...

  • Page 78
    (This page intentionally left blank) 62 THE WASHINGTON POST COMPANY

  • Page 79
    ...20, 2005).* The Washington Post Company Stock Option Plan as amended and restated eÃ...ective May 31, 2003 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 2003).* The Washington Post Company Supplemental Executive Retirement...

  • Page 80
    ... The Washington Post The Washington Post National Weekly Edition The Washington Post Writers Group Washingtonpost.Newsweek Interactive washingtonpost.com Newsweek.com Slate.com EXPRESS El Tiempo Latino Slate The Herald The Enterprise Community Newspaper Group The Gazette Southern Maryland Newspapers...

  • Page 81
    ...Washington Post Company washpostco.com The Washington Post washingtonpost.com washpost.com Washingtonpost.Newsweek Interactive washingtonpost.com newsweek.msnbc.com slate.com The Washington Post National Weekly Edition nationalweekly.com The Washington Post Writers Group postwritersgroup.com EXPRESS...

  • Page 82
    The Washington Post Company 1150 15th Street, NW, Washington, DC 20071 • (202) 334-6000 • washpostco.com