Washington Post 2007 Annual Report Download - page 68

compensation increases. At January 2, 2005, the Company
reduced its discount rate assumption from 6.25% to 5.75%,
and during the first quarter of 2005, the Company changed to
a more current Mortality Table. As a result, the pension credit in
2005 declined by $4.0 million compared to 2004. At January 1,
2006, the Company reduced its expected return on plan assets
from 7.5% to 6.5%; the pension credit for 2006 declined by
$16.1 million compared to 2005, largely due to this change. At
December 31, 2006, the Company raised its discount rate
assumption from 5.75% to 6.0%; the pension credit for 2007
increased slightly compared to 2006. At December 30, 2007,
the discount rate and expected rate of return assumptions will
remain at 6.0% and 6.5%, respectively. The pension credit for
2008 is expected to increase by approximately $4.0 million
compared to 2007, as a result of higher than expected
investment returns on plan assets in 2007. For each one-half
percent increase or decrease to the Company’s assumed
expected return on plan assets, the pension credit increases or
decreases by approximately $8 million. For each one-half
percent increase or decrease to the Company’s assumed
discount rate, the pension credit increases or decreases by
approximately $2 million. The Company’s actual rate of return
on plan assets was 7.7% in 2007, 9.0% in 2006 and 7.6% in
2005, based on plan assets at the beginning of each year.
The Company adopted Statement of Financial Accounting
Standards No. 158 (SFAS 158), “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans,” on
December 31, 2006. SFAS 158 has no impact on pension or
other postretirement plan expense or credit recognized in the
Company’s results of operations, but the new standard required
the Company to recognize the funded status of pension and other
postretirement benefit plans on its balance sheet at December 31,
2006. The overall impact of the adoption of SFAS 158, taking
into account the Company’s pension and other postretirement
plans, was a $270 million increase in the Company’s Common
Shareholders’ Equity (accumulated other comprehensive income).
Of this increase, $246 million related to the Company’s
recognizing the funded status of the Company’s pension plans.
At December 30, 2007, the overall impact of SFAS 158
increased by about $28 million to $298 million. Of this
amount, $268 million relates to the funded status of the
Company’s pension plans. Note J to the Consolidated
Financial Statements provides additional details surrounding
pension costs and related assumptions.
Kaplan Stock Compensation. The Kaplan stock option plan was
adopted in 1997 and initially reserved 15%, or 150,000 shares
of Kaplan’s common stock, for awards to be granted under the
plan to certain members of Kaplan management. 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 four to five years) at the time of the grant.
Upon exercise, an option holder may receive Kaplan shares or
cash equal to the difference between the exercise price and the
then fair value.
In the first quarter of 2006, the Company adopted Statement of
Financial Accounting Standards No. 123R (SFAS 123R), “Share-
Based Payment.” SFAS 123R requires companies to record the
cost of employee services in exchange for stock options based on
thegrant-datefairvalueoftheawards.Theadoptionof
SFAS 123R required the Company to change its accounting for
Kaplan equity awards from the intrinsic value method to the fair-
value-based method of accounting. This change in accounting
resulted in the acceleration of expense recognition for Kaplan
equity awards; however, it will not impact the overall Kaplan
stock compensation expense that will ultimately be recorded over
the life of the award. As a result, for the year ended December 31,
2006, the Company reported a $5.1 million after-tax charge for
the cumulative effect of change in accounting for Kaplan equity
awards ($8.2 million in pre-tax Kaplan stock compensation
expense).
The amount of compensation expense varies directly with the
estimated fair value of Kaplan’s common stock, the number of
options outstanding and the key assumptions used to determine
the fair value of Kaplan stock options under the Black-Scholes
method (these key assumptions include expected life, interest rate,
volatility and dividend yield). The estimated fair value of Kaplan’s
common stock is based upon a comparison of operating results
and public market values of other education companies and is
determined by the Company’s compensation committee of the
Board of Directors (the committee), with input from management
and an independent outside valuation firm. Over the past several
years, the value of education companies has fluctuated
significantly, and consequently, there has been significant
volatility in the amounts recorded as expense each year, as
well as on a quarterly basis.
A small number of key Kaplan executives continue to hold the
remaining 69,662 outstanding Kaplan stock options
(representing about 4.9% of Kaplan’s common stock), which
expire in 2011. In January 2008, the committee set the fair
value price at $2,700 per share. Option holders have a
30-day window in which to exercise at this price, after which
time the committee has the right to determine a new price in the
event of an exercise. Also in the first two months of 2008,
26,656 Kaplan stock options were exercised, and 21,325
Kaplan stock options were awarded at an option price of
$2,700 per share.
The compensation committee awarded to a senior manager of
Kaplan shares equal in value to $4.8 million, $4.6 million and
$4.8 million for the 2007, 2006 and 2005 fiscal year,
respectively, and the expense of these awards was recorded in
the Company’s results of operations for each relevant fiscal year.
As a result, in the first quarter of 2008, 1,778 Kaplan shares will
be issued related to the 2007 share awards, based on the
January 2008 valuation of $2,700 per share value. In the first
quarter of 2007 and second quarter of 2006, 2,175 and
2,619 shares were issued related to the 2006 and 2005
Kaplan share awards. In the fourth quarter of 2007, a senior
manager exercised Kaplan stock options and received 1,750
Kaplan shares.
52 THE WASHINGTON POST COMPANY