2004 Annual Report Contents

NEWSPAPER/ONLINE PUBLISHING TELEVISION BROADCASTING MAGAZINE PUBLISHING CABLE TELEVISION 04EDUCATION The Washington Post Company 2004 Annual Report Contents Financial Highlights, 1 Letter to Shareholders, 2 Corporate Directory, 12 Form 10-K Financial Highlights (in thousands, except per share amounts) 2004 2003 % Change Operating revenue $ 3,300,104 $ 2,838,911 + 16% Income from operations $ 563,006 $ 363,820 + 55% Net income $ 332,732 $ 241,088 + 38% Diluted earnings per common share $ 34.59 $ 25.12 + 38% Dividends per common share $ 7.00 $ 5.80 + 21% Common shareholders’ equity per share $ 251.93 $ 217.46 + 16% Diluted average number of common shares outstanding 9,592 9,555 – Operating Revenue Income from Operations Net Income ($ in millions) ($ in millions) ($ in millions) 04 3,300 04 563 04 333 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 Diluted Earnings Return on Average Common per Common Share Shareholders’ Equity ($) 04 34.59 04 14.8% 03 25.12 03 12.3% 02 21.34 02 11.5% 01 24.06 01 14.4% 00 14.32 00 9.5% 1 2004 ANNUAL REPORT A LETTER FROM DONALD E. GRAHAM To Our Shareholders For Red Sox fans and The Washington Post Company, 2004 was annus mirabilis, an amazing year. Many, many things went well for our company. Some were long planned and the result of careful work; others were strokes of luck. One statistic sums it up. Operating income of $563 million was $175 million higher than the best year we ever had, $388 million 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 The biggest contributor (in terms of increase over last year) was the education division, where we began to harvest some of the many seeds planted over the past ten years. Because of investments and charges in earlier years, this was the first year Kaplan contributed significantly to operating income; it won’t be the last. Kaplan recorded $121 million of operating income, more than Cable One, less than the newspaper and broadcast divisions. In a few years, perhaps as soon as this year, Kaplan should be our largest division in terms of operating income (it is already the largest in revenue). But the media divisions did well, too. These four businesses alone produced revenue gains of 8% and increased operating income by 17% — helped, of course, by Post– Newsweek Stations’ performance in an election/Olympics year. Despite this good news, there is plenty of reason for concern as we look to the future. There are intelligent people who would minimize the future of each 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 others. None of these doubts is groundless. Nevertheless, we like each of our businesses, and prospects for growing combined results in the long term are good. (In 2005, however, everyone should remember that Post–Newsweek Stations’ income will be meaningfully down because of the absence of $42 million in election/Olympics advertising. In addition, Cable One will forego a basic rate increase, and announced newsprint increases could hurt Post results.) To start our review of 2004 with the business we are named for, The Washington Post had a very strong year, journalistically and financially. Publisher Bo Jones and president Steve Hills turned in best-of-industry results: Print advertising revenue was up 5.4%, and operating income was up sharply, excluding both the cost of early retirement programs and the gain on the sale of a parking lot in 2003. 3 2004 ANNUAL REPORT We owed some of the good results to the economic health of the Washington area. Fueled by government contractor hiring, print employment advertising took off in January and rose 20% for the year, after three straight down years. National advertising, under Post veteran Rick Tippett, continued its amazing 20-year climb, in part because advertisers realize The Post is the most effective way to reach the most influential people in Washington. National grew 4.0%. Expense performance was something: up modestly despite an 11.8% climb in the newsprint bill. The Post continued to distinguish itself for brave, thoughtful coverage of the war in Iraq. Anthony Shadid won the Pulitzer Prize for international reporting for his Baghdad coverage. Anne Applebaum, of 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 fell by 2.6% and Sunday by 2.3%. That newspapers all over the country also lost circulation does not help. With (still) the highest market penetration of any major metropolitan newspaper in the country to start with, and with outstanding circulation management, our goal is to be a top performer among metropolitan papers. THE POST CONTINUED TO DISTINGUISH ITSELF FOR BRAVE, THOUGHTFUL COVERAGE OF THE WAR IN IRAQ. THE WASHINGTON POST COMPANY 4 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 Spanish-language weekly, from its founder. Washingtonpost.Newsweek Interactive and washingtonpost.com had an excellent year in several respects. The company made money for the first time, as we measure it internally. Revenue grew 32%; traffic, after a slow six months when we first required registration, started growing again during the fall. Most important, Caroline Little, the company’s new chief executive officer/publisher, is just the right person for an absolutely key job. In March, longtime editor Doug Feaver, a giant at the newspaper and WPNI, will retire. Caroline has picked Jim Brady, already a web veteran, to succeed him. We were fortunate enough to acquire Slate from Microsoft in January. Founded in 1996 by Michael Kinsley and Microsoft’s Bill Gates, Slate has grown to be (we think) the best purely online publication. Since the internet appears to be such a large part of our media future, our company cannot help but learn from Slate’s excellent editor, Jacob Weisberg, and the rest of the staff. Slate is a small business, likely to be important for its quality and for what it teaches us about internet publishing. 5 2004 ANNUAL REPORT Newsweek’s year was outstanding and gratifying. For the second year in the past three, Newsweek won the National Magazine Award for general excellence. Under editor Mark Whitaker, the sustained high quality of Newsweek has won us a uniquely strong audience. Business results improved significantly. Chief executive officer Rick Smith, president Harold Shain and publisher Greg Osberg 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), KPRC (NBC–Houston) and KSAT (ABC–San Antonio) has driven our broadcasting results for eight years. These are three of the strongest local stations in the country, with extraordinary news results and high margins — suddenly joined by a fourth in WKMG (CBS–Orlando). Henry Maldonado, longtime promotion/marketing director of WDIV, was put in charge of WKMG two years ago, and the results have been dramatic. We had traded our Hartford station for the Orlando station in 1997 and thrown in $60 million; until Henry took over, the results hadn’t justified the swap. The station is now the market leader in late news (though the competition is excellent); its margins for the year almost equaled our station average, for the first time ever. In Miami, improvement wasn’t as dramatic, but new station manager Dave Boylan made important changes at WPLG and positioned the station to take advantage of ABC’s recent comeback. Finally, at our independent station in Jacksonville, Larry Blackerby looks like the right man for the job of station manager; profits climbed back to half the level we achieved as a CBS affiliate (minus network comp), after a very poor 2003. We think we are on course for a good result in Jacksonville. THE WASHINGTON POST COMPANY 6 Shareholders have every reason to be proud of WJXT’s staff: The news department led the early and 10 p.m. news time periods; during big local news stories (like the hurricanes), WJXT dominated local ratings. A rebuilt sales department showed better results as the year went on. Until 2003, PNS had consistently led independent broadcasters in profit margins. Gannett took the lead in 2003; we narrowed the gap in 2004. We renewed affiliation agreements with CBS in Orlando (for ten years) and with ABC in San Antonio and Miami (for five years). If you compare the profits at 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.

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