Washington Post 2006 Annual Report Download - page 62

sales returns. The Company bases its estimates for sales returns on ($410 million in additional prepaid pension cost, net of deferred
historical experience and has not experienced significant fluctua- taxes of $164 million). Note H to the Consolidated Financial
tions between estimated and actual return activity. Statements provides additional details surrounding pension costs
and related assumptions.
Accounts receivable have been reduced by an allowance for
amounts that may be uncollectible in the future. This estimated Kaplan Stock Compensation. The Kaplan stock option plan
allowance is based primarily on the aging category, historical was adopted in 1997 and initially reserved 15%, or
trends and management's evaluation of the financial condition of the 150,000 shares of Kaplan's common stock, for awards to be
customer. Accounts receivable also have been reduced by an granted under the plan to certain members of Kaplan management.
estimate of advertising rate adjustments and discounts, based on Under the provisions of this plan, options are issued with an exercise
estimates of advertising volumes for contract customers who are price equal to the estimated fair value of Kaplan's common stock,
eligible for advertising rate adjustments and discounts. and options vest ratably over the number of years specified (gen-
erally 4 to 5 years) at the time of the grant. Upon exercise, an
Pension Costs. Excluding special termination benefits related to option holder receives cash equal to the difference between the
early retirement programs, the Company's net pension credit was exercise price and the then fair value.
$21.8 million, $37.9 million and $42.0 million for 2006, 2005
and 2004, respectively. The Company's pension benefit costs are In the first quarter of 2006, the Company adopted Statement of
actuarially determined and are impacted significantly by the Com- Financial Accounting Standards No. 123R (SFAS 123R), ""Share-
pany's assumptions related to future events, including the discount Based Payment.'' SFAS 123R requires companies to record the cost
rate, expected return on plan assets and rate of compensation of employee services in exchange for stock options based on the
increases. At December 28, 2003, the Company reduced its grant-date fair value of the awards. The adoption of SFAS 123R
discount rate assumption from 6.75% to 6.25%. Due to the required the Company to change its accounting for Kaplan equity
reduction in the discount rate, a plan amendment from June 2003, awards from the intrinsic value method to the fair-value-based
and a reduction in the actuarial gain amortization, offset by higher method of accounting. This change in accounting resulted in the
than expected investment returns in 2003, the pension credit for acceleration of expense recognition for Kaplan equity awards;
2004 declined by $13.2 million compared to 2003. At January 2, however, it will not impact the overall Kaplan stock compensation
2005, the Company reduced its discount rate assumption from expense that will ultimately be recorded over the life of the award.
6.25% to 5.75%, and during the first quarter of 2005, the As a result, for the year ended December 31, 2006, the Company
Company changed to a more current Mortality Table. As a result, reported a $5.1 million after-tax charge for the cumulative effect of
the pension credit in 2005 declined by $4.0 million compared to change in accounting for Kaplan equity awards ($8.2 million in
2004. At January 1, 2006, the Company reduced its expected pre-tax Kaplan stock compensation expense).
return on plan assets from 7.5% to 6.5%; the pension credit for The amount of compensation expense varies directly with the
2006 declined by $16.1 million compared to 2005, largely due to estimated fair value of Kaplan's common stock, the number of
this change. At December 31, 2006, the Company raised its options outstanding and the key assumptions used to determine the
assumption on discount rate from 5.75% to 6.0%; the pension fair value of Kaplan stock options under the Black-Scholes method
credit for 2007 is expected to be approximately the same as in (these key assumptions include expected life, interest rate, volatility
2006. For each one-half percent increase or decrease to the and dividend yield). The estimated fair value of Kaplan's common
Company's assumed expected return on plan assets, the pension stock is based upon a comparison of operating results and public
credit increases or decreases by approximately $7 million. For each market values of other education companies and is determined by
one-half percent increase or decrease to the Company's assumed the Company's compensation committee of the Board of Directors
discount rate, the pension credit increases or decreases by approx- (the committee), with input from management and an independent
imately $5 million. The Company's actual rate of return on plan outside valuation firm. Over the past several years, the value of
assets was 9.0% in 2006, 7.6% in 2005 and 4.3% in 2004, education companies has fluctuated significantly, and consequently,
based on plan assets at the beginning of each year. there has been significant volatility in the amounts recorded as
The Company adopted Statement of Financial Accounting Standards expense each year as well as on a quarterly basis.
No. 158 (SFAS 158), ""Employers' Accounting for Defined Benefit A small number of key Kaplan executives continue to hold the
Pension and Other Postretirement Plans,'' on December 31, 2006. remaining 73,352 outstanding Kaplan stock options (representing
SFAS 158 has no impact on pension or other postretirement plan about 5.2% of Kaplan's common stock), with approximately 2% of
expense or credit recognized in the Company's results of opera- these options expiring in 2007 and 98% expiring in 2011. In
tions, but the new standard requires the Company to recognize the January 2007, the committee set the fair value price at $2,115 per
funded status of pension and other postretirement benefit plans on share. Option holders have a 30-day window in which to exercise
its balance sheet at December 31, 2006. The overall impact of the at this price, after which time the committee has the right to
adoption of SFAS 158, taking into account the Company's pension determine a new price in the event of an exercise. Also in the first
and other postretirement plans, was a $270 million increase in the two months of 2007, 5,202 Kaplan stock options were exercised,
Company's Common Shareholders' Equity (accumulated other and 3,262 Kaplan stock options were awarded at an option price
comprehensive income). Of this increase, $246 million relates to of $2,115 per share.
the Company's recognizing the funded status of its pension plans
46 THE WASHINGTON POST COMPANY