G R A H A M H OLDIN GS

2014 ANNUAL REPORT REVENUE BY PRINCIPAL OPERATIONS

! EDUCATION 61% !" CABLE 23% !" TELEVISION BROADCASTING 10% !" OTHER BUSINESSES 6% FINANCIAL HIGH LIGH TS

(in thousands, except per share amounts) 2014 2013 Change

Operating revenues $ 3,535,166 $ 3,407,911 4% Income from operations $ 407,932 $ 319,169 28% Net income attributable to common shares $ 1,292,996 $ 236,010 — Diluted earnings per common share from continuing operations $ 138.88 $ 23.36 — Diluted earnings per common share $ 195.03 $ 32.05 — Dividends per common share $ 10.20 $ — — Common stockholders’ equity per share $ 541.54 $ 446.73 21% Diluted average number of common shares outstanding 6,559 7,333 –11%

INCOME FROM NET INCOME ATTRIBUTABLE OPERATING REVENUES OPERATIONS TO COMMON SHARES ($ in millions) ($ in millions) ($ in millions) 3,861 582 1,293

3,453 3,535 3,373 3,408

408

314 319

149 277 236 116 131

201120102012 2013 2014 201120102012 2013 2014 201120102012 2013 2014

RETURN ON DILUTED EARNINGS PER AVERAGE COMMON COMMON SHARE FROM DILUTED EARNINGS STOCKHOLDERS’ EQUITY* CONTINUING OPERATIONS PER COMMON SHARE ($) ($) 46.6% 138.88 195.03

38.16 9.8% 9.0% 23.36 31.04 32.05 5.2% 17.32 4.4% 14.70 17.39 6.40

201120102012 2013 2014 201120102012 2013 2014 201120102012 2013 2014

* Computed on a comparable basis, excluding the impact of the adjustment for pensions and other postretirement plans on average common stockholders’ equity.

2014 ANNUAL REPORT 1 TO OUR SHA REHOLDERS

Quite a lot happened in 2014. around it. The sale requires regulatory approvals and won’t be closed for months. / We wrapped up selling the remaining assets of The Washington Post newspaper. As a result of all these transactions (plus the sale of The Washington Post and Newsweek in previous / We completed a transaction with Berkshire years), we have changed quite a bit as a company. Hathaway, trading our television station in Miami, WPLG, to Berkshire along with cash and some / We’re smaller. In revenues, 2014 ended up at BRK stock in exchange for most of BRK’s stake $3.5 billion. In 2010, revenues were $4.7 billion, in our Company. reflecting our ownership of The Washington Post and higher revenues at Kaplan Higher Education. / We announced that in 2015 we will spin-o! Cable In 2015, with Cable ONE spun-off, we’ll be ONE, making the cable company we’ve owned smaller still. for almost 30 years an independent company. / We have many fewer shares outstanding. At / Toward the end of the year, Tim O’Shaughnessy, the beginning of 2010, the number was about the 33-year-old founder of LivingSocial, started 9.3 million. At the end of 2014, it was around work as our president. 5.8 million — 38% fewer shares outstanding in five years. / Just as this report was going to press, Kaplan announced an agreement to sell its 38 U.S. col- / We’re quite strong financially. On our balance lege campuses (those are the vocational educa- sheet we have almost $800 million in cash and tion campuses) to ECA. We aren’t selling Kaplan $194 million in stocks. The balance sheet will be University and the campuses a"liated with it, and strengthened at the time of the Cable ONE we certainly aren’t selling Kaplan. We’ll be building spin-o!, when we receive a $400 million to $500 million dividend from Cable ONE, roughly equal to our tax basis in that company. Outstand- We have a world of opportunity in front ing debt is about $450 million, as it has been for of us. Our television business is one of years. And this means: the most profitable (as well as highest / We have a world of opportunity in front of us. quality) in its industry. Education has a Our television business is one of the most prof- lot of growth opportunity in front of it, itable (as well as highest quality) in its industry. now and over the years. Education has a lot of growth opportunity in front

2 2014 ANNUAL REPORT of it, now and over the years. Our small acquisi- we did not include our headquarters building at 1150 tions, made over the past few years, look good. 15th Street, NW; our stake in Classified Ventures; and We can invest in our familiar, traditional busi- some land in Alexandria, VA, that includes warehouses nesses; we can invest in new businesses; once in formerly used by Robinson Terminal. a great while, we can invest in starting a business (we promise not to get too carried away with our- All of these were sold in late 2013 and 2014, except selves for the amazing success of SocialCode); the Alexandria land. (We hope to complete this sale and, we can invest in stocks if, from time to time, in 2015, but the sale must be approved by local they seem to us undervalued. And, of course, authorities.) The o"ce building brought us almost we can continue to buy in our own stock when it $160 million, and, to our utter astonishment, our looks attractive. 16.5% stake in Classified Ventures brought us more than $500 million (both sums are pre-tax). Tim and I are di!erent in many ways. (Irritatingly, he’s a lot younger than I.) But the Graham and O’Shaughnessy families are alike in one way: we’re We want to make the stock more heavily concentrated in GHC stock—in my case, valuable for us and for you, our it’s well over 90% of my family’s assets. We want shareholders/partners. Our outlook to make the stock more valuable for us and for will be long term. you, our shareholders/partners. Our outlook will be long term; as always, the focus on quarterly results around here will be zero. (If you are a shareholder The CV sale deserves some retrospective atten- and YOU care about our quarterly results, perhaps tion. It was the third of three newspaper-industry you should think about selling the stock.) The focus joint ventures we invested in in the 1990s. The first on long-term increase in value will be total. two, New Century Network and CareerPath, were expensive failures. One reason was the consortium / / / form of management: each of our partners was a decent company, represented by excellent execu- When we sold The Washington Post to Je! Bezos in tives. But disagreements among us all led to slow 2013, we included, along with the newspaper, several decision making. other assets: a printing plant in Springfield, VA, and the land around it; Robinson Terminal Warehouse That CV survived and thrived in the face of the Corp.; the weekly and semi-weekly newspapers same problem was due to the talent and persis- originally called The Gazette Newspapers; Express tence of its CEO Dan Jauernig and an able team, and El Tiempo Latino; and Greater Washington among whom Dick Burke and Mitch Golub were Publishing. After asking Je! if he was interested, long enduring. I would also like to thank Alan Spoon,

2014 ANNUAL REPORT 3 Early in 2014, Warren Buffett suggested The transaction represents a big change: WPLG had we consider a transaction in which been part of our Company since the early 1970s, and we are proud of the station. Graham Holdings would exchange our Miami television station and cash for Warren had bought shares of The Washington Post most of Berkshire Hathaway’s shares in Company in 1973, quickly joined our board and, Graham Holdings. in e!ect, become our lead director. (My mother, Katharine Graham, then our CEO, had to overcome some negative advice from people she normally Steve Hills and, particularly, the infinitely patient trusted. But, after one meeting with Warren and Gerry Rosberg—all board members—on behalf of Charlie Munger, she reached the conclusion that our Company. these were the smartest businesspeople she had ever met. The conclusion held up well over time.) The total amount generated by the sale of the Post and a"liated properties was a bit over $900 million, There was a period after 1986 when Warren left our plus whatever the Alexandria land ultimately brings. board. (He had bought 20% of the stock of Capital (It will not be a large sum in this context.) Cities Communications, which had bought ABC; both companies owned TV stations in Detroit.) / / / But he remained such a respected adviser to our Company that when people were discussing the Early in 2014, Warren Bu!ett suggested we con- then-new concept of lead directors at a confer- sider a transaction in which Graham Holdings would ence she attended, Mrs. Graham said, “I have a lead exchange our Miami television station and cash for director who’s not a director.” most of Berkshire Hathaway’s shares in Graham Holdings. Here’s what was finally exchanged: I’ve recounted in past reports how much Warren’s advice has been worth to The Washington Post / We gave Berkshire WPLG, which had 2013 net Company/Graham Holdings. Kay took his advice revenues of $66 million and operating income of and switched pension advisers in the late 1970s. $26 million (it was valued at $438 million); $328 Result: perhaps the most overfunded pension plan million in cash; and shares of Berkshire Hathaway, in the Fortune 1000. He also recommended that then worth $400 million. she consider repurchasing our stock, a most unusual thing for public companies at the time. Over the / In exchange, we received approximately 1.6 mil- years, our share count decreased from 20 million at lion shares, about 22%, of our outstanding stock. the time of our public o!ering to the much smaller After the repurchase, we have about 5.8 million number today. shares outstanding.

4 2014 ANNUAL REPORT Kay’s memoir, Personal History, also recounts a num- advertising, and, when the chance came to go to ber of acquisitions Warren slowed down—mostly of Cable ONE 15 years later, he was ready. newspapers. Thank goodness. Kay Graham and Dick Simmons had bought Cable And, thank goodness, again; Warren is still a phone ONE from Capital Cities in 1986—“our most spec- call away. tacular success and the best acquisition Dick and I made together,” she wrote in Personal History. / / /

Later in the year, Tom Might, the CEO of Cable Spinning Cable ONE into a separate ONE since 1993, came to me and described a num- public company made the best sense ber of strategic challenges he thought Cable ONE for our shareholders and for the future could face in the future. We went through several of the cable company. alternative approaches and concluded that spinning Cable ONE into a separate public company made the best sense for our shareholders and for the For its first seven years, as Post–Newsweek Cable, future of the cable company. Our board approved the company performed as it had under Capital the spin-o! in November. Cities. Tom took over in 1993, reshaped it (out of metropolitan areas and into small cities and towns, The stories of both Cable ONE and Tom Might go where he thought competition, acquisition costs back to long-ago days. I was a young general manager and operating economics o!ered a more attractive of the Post in 1977, consumed with the challenges of ROI), renamed it, resta!ed it and changed its strat- getting the daily newspaper out on time. Looking for egy. His team—veterans like Julie Laulis, Steve Fox, help, I found a young graduate of Harvard Business Alan Silverman, Mike Bowker, Aldo Casartelli and School who was a Georgia Tech engineer and a for- a host of others—saw trends in the industry before mer captain in the U.S. Army, willing to plunge into others did and stayed away from huge investments the pressroom to investigate subjects like newsprint others made that turned out to be unattractive. We waste. Luckily for us, Tom preferred our o!er to have traditionally been a leader in cable industry more glamorous ones; within two months of arriv- customer satisfaction; had lower long-term oper- ing, he was the project manager in charge of build- ating and capital expense per subscriber than any ing the Springfield plant, ever since the principal larger cable company; and consistently made lots of home of printing The Washington Post. Tom moved money for shareholders long after every other mid- through assignments in production, marketing and sized operator sold out.

2014 ANNUAL REPORT 5 Some years ago, networks (first ESPN, then all the Tim’s investment focuses will be different rest) began ramping up their demands for compen- from mine. What Warren Bu!ett refers to sation from cable companies (which really means from cable customers). Every time you read a news as a “circle of competence” is quite dif- story about record-high payments from networks ferent for me and for Tim. But one thing to sports teams or a record-high contract with an we share is a long-term orientation. athlete, the plan is that almost all of those dollars will come from your pocket. This is true whether you ever watch sports on TV or not. All networks try to Tom and I believe an independent Cable ONE will negotiate with cable companies, mandating that all be better able to address these and many other their networks—the ones you watch and the ones challenges and opportunities facing cable today. you don’t—are included on the “expanded basic” The new company can use its own significant cash tier so all customers must pay for them. If the cable flow, its own stock and its own debt to be more company won’t agree to those terms, the company aligned with typical cable capitalization. I will be a can’t have the programs on any terms. major shareholder in Cable ONE personally, and I won’t be selling a share of that company (or of In April last year, with my enthusiastic approval, Graham Holdings). Cable ONE dropped all 15 networks o!ered by a huge programming company. Most of the 15 had / / / declining audiences. But the company demanded more than a 100% rate increase. This has become The end of this long list of transactions may be typical. Networks know it’s hard for cable companies a good place to thank Hal Jones and his team. to drop them, and in the confusing controversies Through years of deals, Hal has provided a stream that follow, it’s always clear that the cable company of good advice to me and the board. He has also is dropping the network, and it isn’t always clear that worked impossibly hard. He and Wally Cooney have the network is trying to gouge the consumer. put together a terrific team, and their work has ben- efited shareholders a lot. Thanks to this unfortunate programmer behavior and a growing consumer appetite for video over / / / the Internet, Tom does not believe video o!ers a meaningful source of free cash-flow growth going This may also be a good place to address a long-term forward. But residential Internet sales and business frustration. I own a good deal of GHC stock in my sales definitely do for many years to come. Tom is own name, and I am a beneficiary of some trusts set smartly and carefully focusing a soon-to-be inde- up by my parents. So are my siblings; I am a trustee pendent Cable ONE on the future, not the past. of some trusts for them.

6 2014 ANNUAL REPORT I haven’t sold a share of GHC or its predecessor A key part of Tim’s compensation is a unique stock since 1979. (On very rare occasions I have made option. He joined the Company on November 3, charitable gifts of the stock.) Neither has any trust 2014. The stock closed at $787. Tim’s option is at for my benefit. Trusts for my siblings have sold stock $1,111—the closing price the day he joined plus 3.5% from time to time, and even sophisticated publica- a year for ten years. tions sometimes report these sales as if I were the seller. If you read that Don Graham is selling stock Adding our dividend (then roughly 1.3%), Tim won’t in GHC, you can assume it is my siblings’ trusts that get any reward unless shareholders first gain about are selling, not me. 5% per year over the life of his option.

/ / / This is quite di!erent from more common stock options, typically granted at the market price of the Adding Tim O’Shaughnessy as president is a big step company on the day of the grant. As Warren has for us. pointed out for years: companies retain some of their earnings, and by earning a normal—or even a Tim is my son-in-law; a few years after graduating slightly subnormal—amount on their capital employed from Georgetown, he and three friends started a (including retained earnings), executives can earn company called The Hungry Machine. A few busi- quite a bit over ten years even if shareholders get no ness models later (at one time, they had built the reward at all. Tim will have an option on nearly 1% of largest-audience Facebook app), the company piv- our stock, but won’t begin getting rewarded for it oted and became LivingSocial. That company took until shareholders do. You and I should hope he o! like a rocket, changed business models rapidly makes a fortune. and repeatedly and built a business with an impres- sive value. / / /

Tim saw some innovations work out and some fail; How might Graham Holdings grow in the future? he became a smart investor, both in start-ups and in traditional companies. He’ll be focusing at first on First, we can acquire within our existing businesses. how Graham Holdings invests its money. In 2014, Kaplan added a tiny business called Dev Bootcamp. It’s one of many businesses aiming to Tim’s investment focuses will be di!erent from mine. train young people to become successful computer What Warren Bu!ett refers to as a “circle of com- programmers/software developers. (In this case, the petence” is quite di!erent for me and for Tim. But typical student is a college graduate who didn’t major one thing we share is a long-term orientation. in computer science, but now wishes to change

2014 ANNUAL REPORT 7 careers.) The business, the management team, the of our international businesses grew to almost quality of the education provided and the placement $70 million in 2014. Our pathways and university rates of our graduates into careers have been as hosting units partner with leading international col- good as we hoped. This is a business that can grow. leges and universities to prepare students for higher learning. Along with our English-language training, The same is true of our wonderful TV station these recruit students from all over the world. Local group, now known as Graham Media Group changes in the economy and student visa policies and headed by Emily Barr. In 2014, we added will see to it that those businesses fluctuate with SocialNewsDesk, a start-up founded in Jacksonville time. But, over the years, our international busi- by some entrepreneurs who used to work at WJXT. nesses will grow. 1,200 newsrooms—radio, TV and newspaper—use SocialNewsDesk’s products. Emily and GMG have Third, we can acquire companies in businesses we been experimenting in local programming designed like, with management teams we admire, in new to further connect communities by providing adver- fields. In the past three years, we’ve added four busi- tisers something fresh. In addition, GMG’s web and nesses that have been successful so far and will be mobile sites grew in usage and advertising support; part of our Company for a long time. In 2014, we they’re attracting a new generation of users. (2014 bought Residential Healthcare Group in Troy, MI, a was an amazing year for our stations, especially for leader in home health care in the Michigan market. KPRC in Houston, our largest. Under Jerry Martin’s Mike Lewis, David Curtis and Justin DeWitte make leadership, the station had strong momentum at up an excellent management team. Results were year-end and bids to join our Detroit, San Antonio equal to what we expected, and there are opportu- and Jacksonville stations as market news leaders.) nities for growth.

Second, and even more important, we can grow Residential is our second company in the home health the earnings of companies we already own. Kaplan’s care business. If you think this means we are happy international businesses (there are dozens) have with the first one, you’re right. Celtic Healthcare, run steadily grown. From providing about $20 million by Arnie Burchianti and Kurt Baumgartel, grew nicely in earnings ten years ago, the collective earnings and set the table for considerable future growth. At the end of 2014, Celtic signed a joint venture with Allegheny Health Network, the second-largest We can grow the earnings of companies hospital system in Pittsburgh. The joint venture will we already own. Kaplan’s international o!er home health care services throughout western businesses (there are dozens) have Pennsylvania under the AHN brand; we couldn’t be more delighted. steadily grown.

8 2014 ANNUAL REPORT Further afield, we bought Joyce/Dayton Corp., the We can acquire companies in businesses leading manufacturer of jacks, actuators and lift- we like, with management teams we ing systems in North America. (Don’t think about the jack that lifts your car. Think about jacks that lift admire, in new fields. In the past three and stabilize heavy objects in industries like energy, years, we’ve added four businesses that communications and many more.) When CEO Mike have been successful so far and will be Harris called to tell me about it, he brought a copy of part of our Company for a long time. their impressive 1917 catalogue. This record of long- term (really long-term) profitability is an important part of why we wanted Joyce/Dayton to be part of home since 1950. This meant moving. With a pro- Graham Holdings. longed gulp, knowing that two of our businesses (education and health care) are federally regulated, Joyce/Dayton, along with Forney Corporation, which we decided to move our Company’s headquarters to we acquired last year, gives us two small specialty- Northern Virginia, where we might see what it’s like manufacturing businesses. We like both a lot. to have two home-state senators. We’ve learned (to our sorrow—more later) the importance of educat- What kinds of businesses do we want to buy? ing members of Congress on issues that are impor- Businesses we can understand. Businesses with a tant to us. Our new headquarters is located at proven record of profitability and a management 1300 North 17th Street in Arlington, a couple of team that wants to continue to run the company blocks from the Rosslyn Metro stop. after selling it to us. And, businesses that aren’t too capital intensive. / / /

I’d like to thank Gerry Rosberg, our longtime senior Since I have written about it in the past, I must vice president in charge of planning and acquisitions, record the outcome of the Obama administration’s for helping us buy these companies. And, Gerry and “gainful employment” regulation. I would both like to tell you that Stuart Farrell, the youngest member of the Graham Holdings senior The regulations, published last fall, are dreadful. They corporate team, has been a star at identifying com- will make success less likely on many goals that are panies that are sensible acquisition prospects for us. important to the administration and the country. A smart regulation would throw out bad programs, but / / / see to it that the number of seats in good programs expanded and that good institutions were encour- I mentioned earlier that we sold The Washington Post aged to serve low-income students. A good regula- building at 15th and L Streets, NW, our Company’s tion would also encourage innovation.

2014 ANNUAL REPORT 9 The debate on economic inequality children and are seeking an education to climb the has highlighted the importance of a economic ladder. Kaplan does a good job under- standing and meeting the needs of these students; college education. American adults our students attain a higher graduation rate than with college degrees consistently similar students do, on average. show higher incomes and a greater likelihood of employment. Our sector has its critics and some (not all) of the criticism is deserved. Some of the criticism is silly. Do students at for-profit colleges include a higher The gainful employment regulations will mean fewer percentage of those who default? Yes, but so do all students, fewer degrees, much less attention to low- low-income college students, regardless of what income students and much less innovation. kind of college they attend. (They default more because their families have no money so they carry The debate on economic inequality has highlighted more debt.) the importance of a college education. American adults with college degrees consistently show higher When our students graduate, they have a low incomes and a greater likelihood of employment. No likelihood of default. (The default rate of Kaplan one has said so more eloquently than the President University graduates is 4%.) They typically already and the First Lady, who continue to highlight the have jobs when they enroll (the average age of particular importance of college degrees to students KU students is 34), and they enroll in the hope of from the lowest income families. The President improving their advancement prospects. has introduced programs to try to improve college attendance and college graduation. The regulation does not address how well our pro- grams work or how much our students learn. Instead, All this good work will be undone by the administra- in hundreds of pages added to thousands of pages tion’s approach to for-profit education. Those who of already-existing regulations, it tries to establish wrote the regulations aimed at punishing the sector ratios showing how much of a student’s income will end up punishing the country and, in particular, should go to paying o! student loans (no more than its low-income students. 8% of a student’s income or 20% of discretionary income). You get a college education to prepare Kaplan University has historically focused on non- for a career that may last a lifetime. The regulations traditional students who are older, have been out of focus on earnings in the first few years after gradu- school for a period and need flexibility in their pro- ation. Our students’ average incomes, obviously, will grams. Typically, these are working adults who have go down when there’s a major national recession. In

10 2014 ANNUAL REPORT a recession, many programs will close just when stu- daily newspaper in Washington State, weeklies near dents need them most. Washington, DC, Slate and The Root. Ann’s been a uniquely helpful adviser to me during every high- One of the worst e!ects of the regulation may be pressure situation the Company has faced. Her a benefit for Kaplan. It’s hard to imagine there will duties will be assumed by the team she has led, be many new entrants into the for-profit education headed by Denise Demeter, who takes over as our business. (The uncertainty associated with all the top human resources executive. regulations and the high compliance costs will see to that.) We have a profitable business and will cau- Ronnie came to Kaplan in 1991—she says she was tiously see what we can make of it. The regulations looking for a lower pressure job after working in a will make Kaplan’s U.S. higher education business law firm. worse for now. Big mistake. / / / But what great luck for our Company. We lean on Two of our top executives, Ann McDaniel and our lawyers, and in Ronnie, we found someone whose Ronnie Dillon, announced that they will be retiring advice was always excellent. She was Kaplan’s law- in March. Our shareholders owe them both a lot. yer during countless deals; she became an operating executive for a while. She came to corporate in 2007 I first met Ann when she was a young Newsweek at my request. Here, she was invaluable during the reporter covering the George H. W. Bush White times of turmoil in for-profit education and worked to House. She moved up slowly within Newsweek: she ensure that Kaplan’s compliance process was strong. became Washington bureau chief, then managing Ronnie worked ceaselessly and well through the bliz- editor. Since personal reasons kept Ann from mov- zard of activity at WPO/GHC the past few years. ing to New York, the magazine’s home, she had gone as far as she could go there, and she listened to my Ronnie will be succeeded by someone she hired— o!er to become our senior vice president in charge Nicole Maddrey, her longtime deputy. We, and of human resources for the Company. She turned you, have been lucky indeed to have all these folks out to be great at it. work here.

Once she settled in, Ann added an unusual array Donald E. Graham of additional duties. She supervised our public and Chairman of the Board and press communications, was involved in all our senior Chief Executive O!cer hiring and had Newsweek and every smaller edito- rial business reporting to her from time to time—a February 20, 2015

2014 ANNUAL REPORT 11

GRAHAM HOLDINGS 1300 NORTH 17TH STREET SUITE 1700 ARLINGTON, VA 22209

703 345 6300 GHCO.COM