The Washington Post Company 2003 Annual Report Contents Financial Highlights 01 To Our Shareholders 02 Corporate Directory 16 Form 10-K FINANCIAL HIGHLIGHTS (in thousands, except per share amounts) 2003 2002 % Change Operating revenue $ 2,838,911 $ 2,584,203 + 10% Income from operations $ 363,820 $ 377,590 – 4% Net income Before cumulative effect of change in accounting principle in 2002 $ 241,088 $ 216,368 + 11% After cumulative effect of change in accounting principle in 2002 $ 241,088 $ 204,268 + 18% Diluted earnings per common share Before cumulative effect of change in accounting principle in 2002 $ 25.12 $ 22.61 + 11% After cumulative effect of change in accounting principle in 2002 $ 25.12 $ 21.34 + 18% Dividends per common share $ 5.80 $ 5.60 + 4% Common shareholders’ equity per share $ 217.46 $ 193.18 + 13% Diluted average number of common shares outstanding 9,555 9,523 – Operating Revenue Income from Operations Net Income ($ in millions) ($ in millions) ($ in millions) 03 2,839 03 364 03 241 02 2,584 02 378 02 204 01 2,411 01 220 01 230 00 2,410 00 340 00 136 99 2,212 99 388 99 226 Diluted Earnings Return on Average Common per Common Share Shareholders’ Equity ($) 03 25.12 03 12.3% 02 21.34 02 11.5% 01 24.06 01 14.4% 00 14.32 00 9.5% 99 22.30 99 15.2% 01 The Washington Post Company The undramatic financial results of 2003—earnings per share a bit higher than last year’s—mask a year in which some important things happened at The Washington Post Company. The report will start with things shareholders should keep in mind as they view our 2003 operating results; then we’ll walk through the division-by-divi- sion outlook. A separate essay on page 8 covers To Our SHAREHOLDERS some of the purely journalistic highlights 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 plenty of problems in every division, and the most important will be addressed. So will some good news. ✧ In viewing our 2003 results, shareholders will want to To summarize a year’s worth of developments: With our keep in mind four one-time events that took place dur- advertising-based businesses still doing poorly, we ing the year: made $135 million of acquisitions, mostly at Kaplan; spent most of the $138 million to reduce the Kaplan • We received $65 million from The New York Times stock compensation plan; and still reduced debt by Company for our share of the International Herald about $34 million and increased cash by about $59 Tribune (I wrote about this transaction in last year’s million. Now we start a year in which advertising is turn- annual report). The gain is recorded in “Other income.” ing up at least a bit, and Kaplan has a wind at its back. • We repurchased options covering 6 percent of the ✧ stock of Kaplan, which had been given to Kaplan management, for $138 million (more about this later). The shape of The Washington Post Company changed dramatically during 2003; where we had three large • We sold the parking lot next to our headquarters at businesses (Post–Newsweek Stations, The Post and year-end for $45 million, the result of some patient Cable One) earning most of our profits for years, we negotiating by Post publisher Bo Jones. For some rea- will now have four. son, accounting rules require that the gain be record- ed in newspaper division operating income. In 2004, Kaplan will almost certainly be one of our most profitable businesses (after a still unpredictable • We provided enhanced retirement payments worth charge for our reduced stock compensation plan). In a $34.1 million to 153 Post employees in 2003. These few years we expect Kaplan to be our most profitable payments came from our amply funded pension plan, business, even if we make no more acquisitions. and this should result in savings in payroll. 03 The Washington Post Company Kaplan’s professional training and higher education In education, however, transactions were more common businesses (including online) have plenty of room to and prices more typical of most American businesses. grow through new programs and improved opera- Our largest purchase for the year, Financial Training tions. Score and Test Prep will grow some, too. Company, moved us into the professional training business in the U.K. FTC is a provider of training for But we will, of course, continue to look for acquisitions. accounting and financial services professionals, Jonathan Grayer, Andy Rosen and the Kaplan team including preparation for the E.U. and U.K. equiva- have consistently shown the ability to identify good lents of the CPA exam. As the year went on, FTC acquisition prospects at fair prices and to integrate them into Kaplan’s ongoing business. ur largest purchase for the year, Financial Training Company, moved us into the professional training Our acquisitions have focused on business in the U.K. Kaplan for several years. We would love to buy more media companies, O but the prices of most such deals remain in the strato- acquired a few other U.K. businesses, and at year-end sphere (a pretty typical newspaper sold last year for 13 Kaplan acquired the Dublin Business School. Dublin is times the following year’s projected EBITDA). We are a well-run college offering undergraduate and gradu- interested in buying media companies from sellers who ate degrees in business. Another meaningful acquisi- care about the way their newspaper, magazine, TV sta- tion, Transcender LLC, expands Kaplan Professional’s tion or cable system is managed in the future. (If you offerings in online computer training, a field that is down want to sell such a company and have a price in mind, in the dumps now, but won’t be forever. call me.) We almost never win media auctions. 04 The Washington Post Company In addition to growing operating income (before stock hand, students in our courses typically have a lot at compensation charges) dramatically in 2003, Kaplan stake in the quality of the course they take and are will- planted a lot of seeds for future growth. Throughout ing to pay for good instruction. Since almost all stu- the year and in early 2004, Gary Kerber’s Kaplan dents know previous course-takers, consistent quality Higher Education team added campuses in several experience can be a differentiator. Word-of-mouth is a new places, greatly expanding our presence in the dominant marketing medium in education; this California and Texas markets. rewards quality, but keeps us on our toes. State licen- sure and regional accreditation requirements serve as Since Kaplan is becoming a much larger component barriers to entry in higher education. Still, there are of our company, and since most shareholders are far thousands of for-profit colleges—plus traditional two- more familiar with our traditional media businesses, and four-year schools. here are a few thoughts on the characteristics of the education business: • Capital requirements: None of our company’s busi- nesses (except cable) is very capital-intensive. Kaplan • Market size: Demand for test prep and highly practi- will consume more capital than the TV stations or cal, job-related education is booming. Demographics Newsweek (which consume very little) and a bit more should see to it that this is so for many years. than the newspaper (but once a generation, new press • Competition: Every aspect of Kaplan’s business is purchases will dwarf anything Kaplan spends). The competitive. Most famous is our decades-long test increase in Kaplan’s capital expenditures last year, prep battle with The Princeton Review. On the other from $23 million to $35 million, reflected money spent 05 The Washington Post Company on opening two new campuses in Texas and expand- can be severely punished. Campuses or entire compa- ing existing campuses. This year—a year of abnor- nies can be denied eligibility for federal student aid for mally high capital expenditures—we will spend at severe violations of several different types of regulations. least $25 million more. We will open a number of new Kaplan steers well to the good side of federal guidelines, campuses (these contribute to profits in a short time if but it’s a regulated business. well managed), and as several leases at colleges To summarize: Education is a booming market, but the expire, we will take the opportunity to rent and equip business is heavily regulated, competitive, moderately better space. Good real estate management is an capital-intensive and cyclical. This sounds like a important contributor to profits at our colleges. description of a good business, but not a great one. • Cyclicality: In general, Kaplan has benefited from What makes Kaplan a very good business is the the down economy of the past three years. Test Prep Kaplan team. Jonathan Grayer has instilled in Kaplan (more students applying to grad school) and higher ed a unique style of operating. At its best, Kaplan analyzes (more students looking for job-centered courses) are problems in the business, focuses on the key issues the beneficiaries. Don’t forget, though, that Kaplan quickly and is decisive in attacking them. As Jonathan Professional’s securities and IT offerings have been likes to say, Kaplan knows where it’s going, takes risks badly hurt by the poor economy.