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Graham Holdings Co - Quarter Report: 2003 June (Form 10-Q)

Form 10Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended June 29, 2003

 

Commission File Number 1-6714

 


 

THE WASHINGTON POST COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware   53-0182885

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1150 15th Street, N.W.

Washington, D.C.

  20071
(Address of principal executive offices)   (Zip Code)

 

(202) 334-6000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x.  No  ¨.

 

Shares outstanding at July 28, 2003:

 

Class A Common Stock

  1,722,250 Shares

Class B Common Stock

  7,809,440 Shares

 



THE WASHINGTON POST COMPANY

 

Index to Form 10-Q

 

PART I.

   FINANCIAL INFORMATION     

Item 1.

  

Financial Statements

    
    

a.      Condensed Consolidated Statements of Income (Unaudited) for the Thirteen and Twenty-six Weeks Ended June 29, 2003 and June 30, 2002

   3
    

b.      Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Thirteen and Twenty-six Weeks Ended June 29, 2003 and June 30, 2002

   5
    

c.      Condensed Consolidated Balance Sheets at June 29, 2003 (Unaudited) and December 29, 2002

   6
    

d.      Condensed Consolidated Statements of Cash Flows (Unaudited) for the Twenty-six Weeks Ended June 29, 2003 and June 30, 2002

   7
    

e.      Notes to Condensed Consolidated Financial Statements (Unaudited)

   8

Item 2.

  

Management’s Discussion and Analysis of Results of Operations and Financial Condition

   15

Item 4.

  

Controls and Procedures

   23

PART II.

  

OTHER INFORMATION

    

Item 4.

  

Submission of Matters to a Vote of Security Holders

   24

Item 6.

  

Exhibits and Reports on Form 8-K

   25

Signatures

   26

 

2


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The Washington Post Company

Condensed Consolidated Statements of Income (Unaudited)

 

     Thirteen Weeks Ended

    Twenty-six Weeks Ended

 

(In thousands, except per share amounts)


   June 29,
2003


    June 30,
2002


    June 29,
2003


    June 30,
2002


 

Operating revenues

                                

Advertising

   $ 318,927     $ 316,102     $ 598,724     $ 589,671  

Circulation and subscriber

     176,348       168,614       348,534       329,755  

Education

     195,560       149,695       373,338       296,776  

Other

     16,105       13,292       26,784       31,823  
    


 


 


 


       706,940       647,703       1,347,380       1,248,025  
    


 


 


 


Operating costs and expenses

                                

Operating

     368,974       335,443       717,608       668,683  

Selling, general and administrative

     187,493       160,387       356,663       337,252  

Depreciation of property, plant and equipment

     43,212       41,286       86,607       82,459  

Amortization of intangible assets

     363       159       512       311  
    


 


 


 


       600,042       537,275       1,161,390       1,088,705  
    


 


 


 


Income from operations

     106,898       110,428       185,990       159,320  

Other income (expense)

                                

Equity in losses of affiliates

     (5,524 )     (9,183 )     (8,166 )     (15,689 )

Interest income

     458       59       573       192  

Interest expense

     (6,658 )     (8,797 )     (13,896 )     (17,664 )

Other, net

     2,274       (5,963 )     50,409       491  
    


 


 


 


Income before income taxes and cumulative effect of change in accounting principle

     97,448       86,544       214,910       126,650  

Provision for income taxes

     36,800       35,400       81,200       51,800  
    


 


 


 


Income before cumulative effect of change in accounting principle

     60,648       51,144       133,710       74,850  

Cumulative effect of change in method of accounting for goodwill and other intangible assets, net of taxes

     —         —         —         (12,100 )
    


 


 


 


Net income

     60,648       51,144       133,710       62,750  

Redeemable preferred stock dividends

     (258 )     (259 )     (775 )     (784 )
    


 


 


 


Net income available for common shares

   $ 60,390     $ 50,885     $ 132,935     $ 61,966  
    


 


 


 


Basic earnings per share:

                                

Before cumulative effect of change in accounting principle

   $ 6.34     $ 5.35     $ 13.95     $ 7.79  

Cumulative effect of change in accounting principle

     —         —         —         (1.27 )
    


 


 


 


Net income available for common stock

   $ 6.34     $ 5.35     $ 13.95     $ 6.52  
    


 


 


 


 

3


Diluted earnings per share:

                             

Before cumulative effect of change in accounting principle

   $ 6.32    $ 5.34    $ 13.91    $ 7.78  

Cumulative effect of change in accounting principle

     —        —        —        (1.27 )
    

  

  

  


Net income available for common stock

   $ 6.32    $ 5.34    $ 13.91    $ 6.51  
    

  

  

  


Dividends declared per common share

   $ 1.45    $ 1.40    $ 4.35    $ 4.20  
    

  

  

  


Basic average number of common shares outstanding

     9,527      9,503      9,527      9,501  

Diluted average number of common shares outstanding

     9,555      9,521      9,554      9,516  

 

4


The Washington Post Company

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

 

     Thirteen Weeks Ended

    Twenty-six Weeks Ended

 

(In thousands)


   June 29,
2003


    June 30,
2002


    June 29,
2003


    June 30,
2002


 

Net income

   $ 60,648     $ 51,144     $ 133,710     $ 62,750  
    


 


 


 


Other comprehensive income (loss)

                                

Foreign currency translation adjustment

     5,088       4,318       8,193       4,417  

Reclassification adjustment on sale of affiliate investment

     —         —         (1,633 )     —    

Change in unrealized gain on available-for-sale securities

     23,370       (13,049 )     1,652       (15,430 )

Less: reclassification adjustment for realized (gains) losses included in net income

     —         —         214       (11,209 )
    


 


 


 


       28,458       (8,731 )     8,426       (22,222 )

Income tax (expense) benefit related to other comprehensive income

     (9,114 )     5,080       (728 )     10,345  
    


 


 


 


       19,344       (3,651 )     7,698       (11,877 )
    


 


 


 


Comprehensive income

   $ 79,992     $ 47,493     $ 141,408     $ 50,873  
    


 


 


 


 

5


The Washington Post Company

Condensed Consolidated Balance Sheets

 

(In thousands)


   June 29, 2003
(unaudited)


    December 29,
2002


 

Assets

                

Current assets

                

Cash and cash equivalents

   $ 30,796     $ 28,771  

Investments in marketable equity securities

     1,920       1,753  

Accounts receivable, net

     300,982       285,374  

Inventories

     31,476       27,629  

Income taxes receivable

     1,004       —    

Other current assets

     35,695       39,428  
    


 


       401,873       382,955  

Property, plant and equipment

                

Buildings

     284,252       283,233  

Machinery, equipment and fixtures

     1,612,931       1,551,931  

Leasehold improvements

     94,671       85,720  
    


 


       1,991,854       1,920,884  

Less accumulated depreciation

     (1,018,458 )     (926,385 )
    


 


       973,396       994,499  

Land

     34,550       34,530  

Construction in progress

     61,033       65,371  
    


 


       1,068,979       1,094,400  

Investments in marketable equity securities

     216,265       214,780  

Investments in affiliates

     61,295       70,703  

Goodwill, net

     874,948       770,861  

Indefinite-lived intangible assets, net

     483,919       482,419  

Amortized intangible assets, net

     6,032       2,153  

Prepaid pension cost

     518,313       493,786  

Deferred charges and other assets

     83,442       71,837  
    


 


     $ 3,715,066     $ 3,583,894  
    


 


Liabilities and Shareholders’ Equity

                

Current liabilities

                

Accounts payable and accrued liabilities

   $ 351,674     $ 336,582  

Deferred revenue

     160,372       135,419  

Dividends declared

     14,000       —    

Federal and state income taxes payable

     —         4,853  

Short-term borrowings

     195,141       259,258  
    


 


       721,187       736,112  

Postretirement benefits other than pensions

     138,730       136,393  

Other liabilities

     198,538       194,480  

Deferred income taxes

     267,420       261,153  

Long-term debt

     427,793       405,547  
    


 


       1,753,668       1,733,685  

Redeemable preferred stock

     12,622       12,916  
    


 


Preferred stock

     —         —    
    


 


Common shareholders’ equity

                

Common stock

     20,000       20,000  

Capital in excess of par value

     158,754       149,090  

Retained earnings

     3,271,174       3,179,607  

Accumulated other comprehensive income (loss)

                

Cumulative foreign currency translation adjustment

     (951 )     (7,511 )

Unrealized gain on available-for-sale securities

     19,051       17,913  

Cost of Class B common stock held in treasury

     (1,519,252 )     (1,521,806 )
    


 


       1,948,776       1,837,293  
    


 


     $ 3,715,066     $ 3,583,894  
    


 


 

6


The Washington Post Company

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     Twenty-six Weeks Ended

 

(In thousands)


   June 29,
2003


    June 30,
2002


 

Cash flows from operating activities:

                

Net income

   $ 133,710     $ 62,750  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Cumulative effect of change in accounting principle

     —         12,100  

Depreciation of property, plant and equipment

     86,607       82,459  

Amortization of goodwill and other intangibles

     512       311  

Net pension benefit

     (26,850 )     (32,164 )

Early retirement program expense

     2,165       12,986  

Gain from sale of affiliate

     (49,762 )     —    

Gain on sale of marketable securities

     —         (13,209 )

Cost method and other investment write-downs

     1,112       16,694  

Equity in losses of affiliates, net of distributions

     8,166       15,689  

Provision for deferred income taxes

     5,667       6,755  

Change in assets and liabilities:

                

(Increase) decrease in accounts receivable, net

     (2,957 )     10,011  

Increase in inventories

     (3,847 )     (10,246 )

Increase in accounts payable and accrued liabilities

     7,263       42,668  

(Increase) decrease in income taxes receivable

     (1,004 )     10,253  

(Decrease) increase in income taxes payable

     (4,853 )     3,267  

Decrease in other assets and other liabilities, net

     24,139       23,164  

Other

     (1,637 )     (404 )
    


 


Net cash provided by operating activities

     178,431       243,084  
    


 


Cash flows from investing activities:

                

Purchases of property, plant and equipment

     (58,772 )     (79,559 )

Investments in certain businesses

     (77,692 )     (26,673 )

Proceeds from the sale of business

     65,000       —    

Proceeds from sale of marketable securities

     —         19,701  

Other investments

     (5,977 )     (7,610 )

Other

     575       (189 )
    


 


Net cash used in investing activities

     (76,866 )     (94,330 )
    


 


Cash flows from financing activities:

                

Net repayment of commercial paper

     (70,742 )     (133,192 )

Dividends paid

     (28,143 )     (27,123 )

Common shares repurchased

     —         (334 )

Proceeds from exercise of stock options

     1,252       3,132  

Other

     (1,672 )     —    
    


 


Net cash used in financing activities

     (99,305 )     (157,517 )
    


 


Effect of currency exchange rate change

     (235 )     —    
    


 


Net increase (decrease) in cash and cash equivalents

     2,025       (8,763 )

Beginning cash and cash equivalents

     28,771       31,480  
    


 


Ending cash and cash equivalents

   $ 30,796     $ 22,717  
    


 


 

7


The Washington Post Company

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Results of operations, when examined on a quarterly basis, reflect the seasonality of advertising that affects the newspaper, magazine and broadcasting operations. Advertising revenues in the second and fourth quarters are typically higher than first and third quarter revenues. All adjustments reflected in the interim financial statements are of a normal recurring nature.

 

The Company generally reports on a 13 week fiscal quarter ending on the Sunday nearest the calendar quarter-end. With the exception of the newspaper publishing operations, subsidiaries of the Company report on a calendar-quarter basis.

 

Note 1: Acquisitions, Exchanges and Dispositions.

 

In the second quarter of 2003, Kaplan acquired two additional businesses in its higher education and professional divisions for a total of $17.5 million, financed through cash and debt, with $3 million remaining to be paid. In addition, the cable division acquired a system in North Dakota for $1.5 million. Most of the purchase price for these acquisitions has been preliminarily allocated to goodwill and intangible assets.

 

In March 2003, Kaplan completed its acquisition of the stock of Financial Training Corporation (FTC), for £55.3 million ($87.4 million). Headquartered in London, FTC provides test preparation services for accountants and financial services professionals, with 18 training centers in the United Kingdom and Asia. The acquisition was financed through cash and debt with $26.5 million remaining to be paid, primarily to employees of the business. Most of the purchase price has been allocated to goodwill, on a preliminary basis.

 

On January 1, 2003, the Company sold its 50 percent interest in the International Herald Tribune for $65 million and the Company recorded an after-tax non-operating gain of $32.3 million in the first quarter of 2003.

 

In the first six months of 2002, Kaplan acquired several businesses in their higher education and test preparation divisions, totaling $37.9 million, with most of the aggregate purchase price allocated to goodwill.

 

Note 2: Investments.

 

Investments in marketable equity securities at June 29, 2003 and December 29, 2002 consist of the following (in thousands):

 

    

June 29,

2003


  

December 29,

2002


Total cost

   $ 186,955    $ 187,169

Gross unrealized gains

     31,230      29,364
    

  

Total fair value

   $ 218,185    $ 216,533
    

  

 

There were no sales of marketable securities in the first six months of 2003. During the first quarter of 2002, the Company sold its shares of Ticketmaster, resulting in a pre-tax gain of $13.2 million. There were no sales of marketable equity securities in the second quarter of 2002.

 

At June 29, 2003 and December 29, 2002, the carrying value of the Company’s cost method investments was $9.0 million and $9.5 million, respectively. There were no

 

8


investments in companies constituting cost method investments during the first six months of 2003 or 2002.

 

The Company recorded charges of $0 million and $1.1 million during the second quarter and first six months of 2003, respectively, to write-down certain of its investments to estimated fair value; for the same periods of 2002, the Company recorded charges of $6.6 million and $16.7 million, respectively. The Company’s 2002 write-downs relate to several investments. Three of the investments were written down by an aggregate $11.1 million, primarily as a result of significant recurring losses in each of the underlying businesses, with the write-downs recorded based on the Company’s best estimate of the fair value of each of these investments. Another of the Company’s investments was written down by $2.8 million, due to the investee’s announced merger and the Company’s best estimate of anticipated proceeds.

 

Note 3: Borrowings.

 

Long-term debt consists of the following (in millions):

 

    

June 29,

        2003        


    December 30,
2002


 

Commercial paper borrowings

   $ 188.5     $ 259.3  

5.5 percent unsecured notes due February 15, 2009

     398.5       398.4  

4.0 percent notes due 2004-2006 (£16.7 million)

     26.5       —    

Other indebtedness

     9.4       7.1  
    


 


Total

     622.9       664.8  

Less current portion

     (195.1 )     (259.3 )
    


 


Total long-term debt

   $ 427.8     $ 405.5  
    


 


 

The Company’s commercial paper borrowings at June 29, 2003 were at an average interest rate of 1.2 percent and mature through August 2003; the Company’s commercial paper borrowings at December 30, 2002 were at an average interest rate of 1.6 percent and matured through April 2003. The notes of £16.7 million were issued to current FTC employees who were former FTC shareholders in connection with the acquisition. The noteholders, at their discretion, may elect to receive 25 percent of their outstanding balance in January 2004. In August 2004, 50 percent of the original outstanding balance (less any amounts paid in January 2004) is due for payment. The remaining balance outstanding is due for repayment in August 2006. The Company’s other indebtedness at June 29, 2003 and December 30, 2002 is at interest rates of 6 percent to 7 percent and matures from 2004 to 2007.

 

During the second quarter of 2003 and 2002, the Company had average borrowings outstanding of approximately $633.2 million and $830.6 million, respectively, at average annual interest rates of approximately 4.1 percent and 3.7 percent, respectively. During the second quarter of 2003 and 2002, the Company incurred net interest expense on borrowings of $6.2 million and $8.7 million, respectively.

 

During the first six months of 2003 and 2002, the Company had average borrowings outstanding of approximately $617.4 million and $859.5 million, respectively, at average annual interest rates of approximately 4.1 percent and 3.6 percent, respectively. During the first six months of 2003 and 2002, the Company incurred net interest expense on borrowings of $13.3 million and $17.5 million, respectively.

 

Note 4: Business Segments.

 

The following table summarizes financial information related to each of the Company’s business segments. The 2003 and 2002 asset information is as of June 29, 2003 and December 29, 2002, respectively.

 

9


Second Quarter Period

(in thousands)

 

     Newspaper
Publishing


   Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Corporate
Office


    Consolidated

 

2003

                                                     

Operating revenues

   $ 223,142    $ 81,825    $ 91,861    $ 114,552     $ 195,560     $ —       $ 706,940  

Income (loss) from operations

   $ 37,030    $ 38,986    $ 12,404    $ 21,248     $ 3,527     $ (6,297 )   $ 106,898  

Equity in losses of affiliates

                                                  (5,524 )

Interest expense, net

                                                  (6,200 )

Other, net

                                                  2,274  
                                                 


Income before income taxes

                                                $ 97,448  
                                                 


Depreciation expense

   $ 10,451    $ 2,774    $ 929    $ 22,964     $ 6,094     $ —       $ 43,212  

Amortization expense

   $ 4    $ —      $ —      $ 37     $ 322     $ —       $ 363  

Net pension credit (expense)

   $ 1,792    $ 1,065    $ 8,998    $ (243 )   $ (352 )   $ —       $ 11,260  

Identifiable assets

   $ 701,725    $ 410,696    $ 497,092    $ 1,134,182     $ 675,640     $ 16,251     $ 3,435,586  

Investments in marketable equity securities

                                                  218,185  

Investments in affiliates

                                                  61,295  
                                                 


Total assets

                                                $ 3,715,066  
                                                 


 

     Newspaper
Publishing


   Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Corporate
Office


    Consolidated

 

2002

                                                     

Operating revenues

   $ 215,067    $ 86,092    $ 88,886    $ 107,963     $ 149,695     $ —       $ 647,703  

Income (loss) from operations

   $ 37,811    $ 43,459    $ 13,272    $ 21,766     $ 624     $ (6,504 )   $ 110,428  

Equity in losses of affiliates

                                                  (9,183 )

Interest expense, net

                                                  (8,738 )

Other, net

                                                  (5,963 )
                                                 


Income before income taxes

                                                $ 86,544  
                                                 


Depreciation expense

   $ 10,744    $ 2,784    $ 1,022    $ 20,738     $ 5,998     $ —       $ 41,286  

Amortization expense

   $ 4    $ —      $ —      $ 39     $ 116     $ —       $ 159  

Net pension credit (expense)

   $ 5,492    $ 1,220    $ 7,221    $ (226 )   $ (298 )   $ —       $ 13,409  

Identifiable assets

   $ 690,197    $ 413,663    $ 488,562    $ 1,142,995     $ 542,251     $ 18,990     $ 3,296,658  

Investments in marketable equity securities

                                                  216,533  

Investments in affiliates

                                                  70,703  
                                                 


Total assets

                                                $ 3,583,894  
                                                 


 

 

10


Six Month Period

(in thousands)

 

     Newspaper
Publishing


   Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Corporate
Office


    Consolidated

 

2003

                                                     

Operating revenues

   $ 427,182    $ 152,577    $ 169,363    $ 224,920     $ 373,338     $ —       $ 1,347,380  

Income (loss) from operations

   $ 58,388    $ 65,333    $ 13,241    $ 42,010     $ 19,454     $ (12,436 )   $ 185,990  

Equity in losses of affiliates

                                                  (8,166 )

Interest expense, net

                                                  (13,323 )

Other, net

                                                  50,409  
                                                 


Income before income taxes

                                                $ 214,910  
                                                 


Depreciation expense

   $ 21,748    $ 5,520    $ 1,881    $ 45,677     $ 11,781     $ —       $ 86,607  

Amortization expense

   $ 8    $ —      $ —      $ 75     $ 429     $ —       $ 512  

Net pension credit (expense)

   $ 5,749    $ 2,130    $ 17,995    $ (485 )   $ (704 )   $ —       $ 24,685  

 

     Newspaper
Publishing


   Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Corporate
Office


    Consolidated

 

2002

                                                     

Operating revenues

   $ 415,839    $ 161,510    $ 163,904    $ 209,996     $ 296,776     $ —       $ 1,248,025  

Income (loss) from operations

   $ 55,354    $ 77,010    $ 1,694    $ 37,808     $ 74     $ (12,620 )   $ 159,320  

Equity in losses of affiliates

                                                  (15,689 )

Interest expense, net

                                                  (17,472 )

Other, net

                                                  491  
                                                 


Income before income taxes

                                                $ 126,650  
                                                 


Depreciation expense

   $ 21,623    $ 5,549    $ 2,072    $ 41,217     $ 11,998     $ —       $ 82,459  

Amortization expense

   $ 8    $ —      $ —      $ 78     $ 225     $ —       $ 311  

Net pension credit (expense)

   $ 10,983    $ 2,440    $ 6,803    $ (451 )   $ (597 )   $ —       $ 19,178  

 

 

11


Newspaper publishing includes the publication of newspapers in the Washington, D.C. area (The Washington Post, the Gazette community newspapers, and Southern Maryland newspapers) and Everett, Washington (The Everett Herald). This business division also includes newsprint warehousing, recycling operations and the Company’s electronic media publishing business (primarily washingtonpost.com).

 

Television broadcasting operations are conducted through six VHF, television stations serving the Detroit, Houston, Miami, San Antonio, Orlando and Jacksonville television markets. All stations are network-affiliated (except for WJXT in Jacksonville).

 

The magazine publishing division consists of the publication of a weekly news magazine, Newsweek, which has one domestic and three international editions, the publication of Arthur Frommer’s Budget Travel, and the publication of business periodicals for the computer services industry and the Washington-area technology community.

 

Cable television operations consist of cable systems offering basic cable, digital cable, pay television, cable modem and other services to approximately 715,000 subscribers in midwestern, western, and southern states.

 

Education products and services are provided through the Company’s wholly-owned subsidiary Kaplan, Inc. Kaplan’s businesses include supplemental education services, which is made up of test preparation and admissions, providing test preparation services for college and graduate school entrance exams; Kaplan Professional, providing education and career services to business people and other professionals; and Score!, offering multi-media learning and private tutoring to children and educational resources to parents. Kaplan’s businesses also include higher education services, which includes all of Kaplan’s post-secondary education businesses, including the fixed facility colleges that were formerly part of Quest Education, which offers bachelor’s degrees, associate’s degrees and diploma programs primarily in the fields of healthcare, business and information technology; and online post-secondary and career programs (various distance-learning businesses, including kaplancollege.com).

 

Corporate office includes the expenses of the Company’s corporate office.

 

Note 5: Goodwill and Other Intangible Assets.

 

In accordance with Statement of Financial Accounting Standards No. 142(SFAS 142), “Goodwill and Other Intangible Assets,” the Company has reviewed its goodwill and other intangible assets and classified them in three categories (goodwill, indefinite-lived intangible assets, and amortized intangible assets). The Company’s intangible assets with an indefinite life are from franchise agreements at its cable division. Amortized intangible assets are primarily non-compete agreements, with amortization periods up to five years.

 

The Company’s goodwill and other intangible assets as of June 29, 2003 and December 29, 2002 were as follows (in thousands):

 

12


     Gross

  

Accumulated

Amortization


   Net

2003

                    

Goodwill

   $ 1,173,350    $ 298,402    $ 874,948

Indefinite-lived intangible assets

     647,725      163,806      483,919

Amortized intangible assets

     7,916      1,884      6,032
    

  

  

     $ 1,828,991    $ 464,092    $ 1,364,899
    

  

  

2002

                    

Goodwill

   $ 1,069,263    $ 298,402    $ 770,861

Indefinite-lived intangible assets

     646,225      163,806      482,419

Amortized intangible assets

     3,525      1,372      2,153
    

  

  

     $ 1,719,013    $ 463,580    $ 1,255,433
    

  

  

 

Activity related to the Company’s goodwill and amortized intangible assets during the six months ended June 29, 2003 was as follows (in thousands):

 

     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Total

 

Goodwill, net

                                              

Beginning of year

   $ 72,738     $ 203,165    $ 69,556    $ 85,666     $ 339,736     $ 770,861  

Acquisitions

                                   101,719       101,719  

Disposition

     (1,461 )     —        —        —         —         (1,461 )

Foreign currency exchange rate changes

     —         —        —        —         3,829       3,829  
    


 

  

  


 


 


Balance at June 29, 2003

   $ 71,277     $ 203,165    $ 69,556    $ 85,666     $ 445,284     $ 874,948  
    


 

  

  


 


 


     Newspaper
Publishing


    Television
Broadcasting


   Magazine
Publishing


   Cable
Television


    Education

    Total

 

Amortized intangible assets, net

                                              

Beginning of year

   $ 45       —        —      $ 1,232     $ 876     $ 2,153  

Acquisitions

                                   4,391       4,391  

Amortization

     (8 )                   (75 )     (429 )     (512 )
    


 

  

  


 


 


Balance at June 29, 2003

   $ 37       —        —      $ 1,157     $ 4,838     $ 6,032  
    


 

  

  


 


 


 

The Company’s indefinite-lived intangible assets increased $1.5 million during the first six months of 2003 due to an acquisition by the cable division.

 

As required under SFAS 142, the Company completed its transitional impairment review of indefinite-lived intangible assets and goodwill in 2002. The expected future cash flows for PostNewsweek Tech Media (part of the magazine publishing segment), on a discounted basis, did not support the net carrying value of the related goodwill. Accordingly, an after-tax goodwill impairment loss of $12.1 million, or $1.27 per share was recorded. The loss is included in the Company’s 2002 year-to-date results as a cumulative effect of change in accounting principle

 

Note 6: Change in Accounting Method—Stock Options

 

Effective the first day of the Company’s 2002 fiscal year, the Company adopted the fair-value-based method of accounting for Company stock options as outlined in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This change in accounting method was applied prospectively to all awards granted from the beginning of the Company’s fiscal year 2002 and thereafter. Stock options awarded prior to fiscal 2002 are accounted for under the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The following table presents what the Company’s results would have been had the fair values of options granted after 1995, but prior to 2002, been recognized as compensation expense in the second quarter and first six-months of 2003 and 2002 (in thousands, except per share amounts).

 

13


     Quarter ended

   Six-months ended

    

June 29,

2003


  

June 30,

2002


  

June 29,

2003


  

June 30,

2002


Company stock-based compensation expense included in net income (pre-tax)

   $ 142    $ —      $ 284    $ —  
    

  

  

  

Net income available for common shares, as reported

   $ 60,390    $ 50,885    $ 132,935    $ 61,966

Stock-based compensation expense not included in net income (after-tax)

     790      904      1,580      1,809
    

  

  

  

Pro forma net income available for common shares

   $ 59,600    $ 49,981    $ 131,355    $ 60,157
    

  

  

  

Basic earnings per share, as reported

   $ 6.34    $ 5.35    $ 13.95    $ 6.52

Pro forma basic earnings per share

   $ 6.26    $ 5.26    $ 13.79    $ 6.33

Diluted earnings per share, as reported

   $ 6.32    $ 5.34    $ 13.91    $ 6.51

Pro forma diluted earnings per share

   $ 6.24    $ 5.25    $ 13.75    $ 6.32

 

Note 7: Antidilutive Securities

 

The second quarter 2003 diluted earnings per share amount excludes the effects of 11,500 stock options outstanding as their inclusion would be antidilutive (there were no antidilutive stock options outstanding during the second quarter of 2002).

 

The year-to-date 2003 and 2002 diluted earnings per share amounts exclude the effects of 11,500 and 1,000 stock options outstanding, respectively, as their inclusion would be antidilutive.

 

Note 8: Pension Plan Amendment

 

Effective June 1, 2003, the retirement pension program for certain employees at the Post was amended and provides for increased annuity payments for vested employees retiring after this date. This plan amendment was not significant to the newspaper division results for the second quarter of 2003.

 

14


Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

 

This analysis should be read in conjunction with the consolidated financial statements and the notes thereto.

 

Revenues and expenses in the first and third quarters are customarily lower than those in the second and fourth quarters because of significant seasonal fluctuations in advertising volume.

 

Results of Operations

 

Net income for the second quarter of 2003 was $60.6 million ($6.32 per share), up from net income of $51.1 million ($5.34 per share) for the second quarter of last year.

 

Results for the second quarter of 2003 include an early retirement program charge at The Washington Post newspaper (after-tax impact of $1.3 million, or $0.14 per share). Results for the second quarter of 2002 included net losses on the write-down of certain investments (after-tax impact of $3.3 million, or $0.34 per share) and an early retirement program charge at Newsweek (after-tax impact of $1.6 million, or $0.17 per share).

 

Revenue for the second quarter of 2003 was $706.9 million, up 9 percent from $647.7 million in 2002. The increase in revenue is due mostly to significant revenue growth at the education division. Revenues at the Company’s cable, newspaper publishing, and magazine publishing divisions also increased for the second quarter of 2003, while revenues were down at the broadcast division.

 

Operating income for the quarter was down 3 percent for the second quarter of 2003 to $106.9 million, from $110.4 million in 2002. The Company’s results were adversely impacted by the sluggish economy, certain incremental costs due to the war in Iraq, increased depreciation expense, higher stock-based compensation expense accruals at the education division, and a reduced net pension credit, partially offset by improved operating results at the education division.

 

For the first six months of 2003, net income totaled $133.7 million ($13.91 per share), compared with net income of $62.8 million ($6.51 per share) for the same period of 2002. Results for the first six months of 2003 include an after-tax non-operating gain from the sale of the Company’s 50 percent interest in the International Herald Tribune (after-tax impact of $32.3 million, or $3.38 per share) and an early retirement program charge at The Washington Post newspaper (after-tax impact of $1.3 million, or $0.14 per share). Results for the first six months of 2002 included a transitional goodwill impairment loss (after-tax impact of $12.1 million, or $1.27 per share), charges from early retirement programs at Newsweek (after-tax impact of $7.7 million, or $0.81 per share), and a net non-operating gain from the sale of marketable securities (after-tax impact of $0.6 million, or $0.06 per share).

 

Revenue for the first half of 2003 was $1,347.4 million, up 8 percent over revenue of $1,248.0 million for the first six months of 2002. Operating income increased 17 percent to $186.0 million, from $159.3 million in 2002. Consistent with the Company’s results for the second quarter of 2003, the Company’s year-to-date results benefited from improved operating results at the education division. Year-to-date results also benefited from improved operating results at the cable, newspaper publishing, and magazine publishing divisions. These factors were offset in part by certain incremental costs due to the war in Iraq, a reduction in operating income at the broadcast division, increased depreciation expense, higher stock-based compensation expense accruals at the education division and a reduced net pension credit.

 

15


The Company’s operating income for the second quarter and first six months of 2003 includes $13.4 million and $26.9 million of net pension credits, respectively, compared to $16.1 million and $32.2 million for the same periods of 2002. At December 29, 2002, the Company reduced its assumption on discount rate from 7.0 percent to 6.75 percent. Due to the reduction in the discount rate and lower than expected investment returns in 2002, the net pension credit for 2003 is expected to be down by about $10 million compared to 2002, excluding charges related to early retirement programs.

 

Newspaper Publishing Division. Newspaper publishing division revenue totaled $223.1 million for the second quarter of 2003, an increase of 4 percent from revenue of $215.1 million in the second quarter of 2002; division revenue increased 3 percent to $427.2 million for the first six months of 2003, from $415.8 million for the first six months of 2002. Division operating income for the second quarter declined 2 percent to $37.0 million, from operating income of $37.8 million in the second quarter of 2002; operating income increased 5 percent to $58.4 million for the first six months of 2003, compared to operating income of $55.4 million for the first six months of 2002. The decrease in division operating income for the second quarter is due to a $2.2 million pre-tax early retirement charge at The Washington Post newspaper, a 10 percent increase in newsprint expense, incremental costs associated with the war in Iraq, and a reduced net pension credit, offset by increases in print and online advertising revenue. The increase in operating income for the first six months of 2003 is due to increased advertising revenue and cost control initiatives employed throughout the division, offset by the early retirement charge noted above and a reduced net pension credit.

 

Print advertising revenue at The Washington Post newspaper in the second quarter increased 3 percent to $148.1 million, from $143.7 million in 2002, and increased 2 percent to $280.6 million for the first six months of 2003, from $275.3 million for the first six months of 2002. The increase in print advertising revenues for the second quarter of 2003 was due to increases in general and preprint advertising revenues, which more than offset a decline in classified advertising revenue from volume declines. Classified recruitment advertising revenue decreased $2.8 million during the second quarter, due to a 20 percent volume decline. The increase in print advertising revenues for the first six months of 2003 is primarily due to increases in general and preprint advertising categories, offset by a $5.1 million decrease in classified recruitment advertising revenue resulting from a 19 percent volume decline.

 

For the first six months of 2003, Post daily and Sunday circulation declined 1.9 percent and 1.1 percent, respectively, compared to the same period of the prior year. For the six months ended June 29, 2003, average daily circulation at The Post totaled 745,000 and average Sunday circulation totaled 1,048,000.

 

Revenue generated by the Company’s online publishing activities, primarily washingtonpost.com, increased 27 percent to $11.1 million for the second quarter of 2003, versus $8.7 million for the second quarter of 2002; online revenues increased 27 percent to $20.6 million for the first six months of 2003, versus $16.2 million for 2002. Local and national online advertising revenues grew 47 percent and 59 percent for the second quarter and first six months of 2003, respectively. Revenues at the Jobs section of washingtonpost.com increased 24 percent in the second quarter of 2003 and increased 21 percent for the first six months of 2003.

 

In July, the Company announced that it will launch a new commuter newspaper, EXPRESS, in August. The new publication will appear each weekday morning, Monday through Friday, in tabloid form and will be distributed free-of-charge in the Washington area.

 

16


Television Broadcasting Division. Revenue for the television broadcasting division decreased 5 percent in the second quarter of 2003 to $81.8 million, from $86.1 million in 2002, due to declines in both local and national advertising, and higher political advertising in 2002. For the first six months of 2003, revenue decreased 6 percent to $152.6 million, from $161.5 million in 2002, due to heavy Olympics-related advertising at the Company’s NBC affiliates in the first quarter of 2002, declines in both local and national advertising, higher political advertising in 2002, and several days of commercial-free coverage in connection with the Iraq war in March 2003.

 

Operating income for the second quarter and first six months of 2003 decreased 10 percent and 15 percent, respectively, to $39.0 million and $65.3 million, respectively, from operating income of $43.5 million and $77.0 million for the second quarter and first six months of 2002, respectively. The operating income declines are primarily related to the revenue reductions discussed above.

 

In July 2002, WJXT in Jacksonville, Florida began operations as an independent station when its network affiliation with CBS ended.

 

Magazine Publishing Division. Revenue for the magazine publishing division totaled $91.9 million for the second quarter of 2003, a 3 percent increase from $88.9 million for the second quarter of 2002; division revenue totaled $169.4 million for the first six months of 2003, a 3 percent increase from $163.9 million for the first six months of 2002. The revenue increase for the second quarter was primarily due to the timing of the primary trade show of PostNewsweek Tech Media, which was in the second quarter of 2003 versus the first quarter of 2002. This increase more than offset a second quarter drop of 6 percent in advertising revenues at Newsweek due to declines in ad pages at both the domestic and international editions. Travel-related advertising revenues at the Pacific edition of Newsweek were down sharply in the second quarter of 2003 due to the SARS outbreak. The increase in revenues for the first six months of 2003 is primarily due to increased advertising revenue at Newsweek, as a result of increased ad pages at the domestic edition, as well as one additional issue of both the domestic and international editions.

 

Operating income totaled $12.4 million for the second quarter of 2003, a 7 percent decline from operating income of $13.3 million in the second quarter of 2002. In the second quarter of 2002, Newsweek had a $2.7 million charge in connection with an early retirement program. The decline in operating income is primarily due to the reduction in advertising revenue, increased manufacturing and distribution expenses at the international editions of Newsweek, and a reduced net pension credit. Operating income totaled $13.2 million for the first six months of 2003, up from operating income of $1.7 million for the first six months of 2002. The year-to-date improvement in operating results is primarily attributable to $13.0 million in charges in connection with early retirement programs at Newsweek in 2002.

 

Cable Television Division. Cable division revenue of $114.6 million for the second quarter of 2003 represents a 6 percent increase over 2002 second quarter revenue of $108.0 million; for the first six months of 2003, revenue increased 7 percent to $224.9 million, from $210.0 million in 2002. The 2003 revenue increase is principally due to rapid growth in the division’s cable modem and digital service revenues, offset by lower pay and basic revenues due to fewer basic and pay subscribers and the lack of rate increases due to a decision to freeze most rates for Cable One subscribers in 2003 (the Company’s price increases normally take effect in the second quarter each year).

 

Cable division operating income for the second quarter of 2003 decreased 2 percent to $21.2 million, from operating income of $21.8 million for the second quarter of 2002. The decrease in operating income is due mostly to the division’s higher depreciation and programming expenses, along with an increase in technical, internet, marketing and employee benefits costs; part of the decrease is also

 

17


attributable to the rate freeze on subscribers noted above. Cable division operating income for the first six months of 2003 increased 11 percent to $42.0 million, from operating income of $37.8 million for the first six months of 2002. The increase is due mostly to the division’s significant revenue growth, offset by higher depreciation and programming expenses, along with an increase in technical, internet, marketing, and employee benefits costs.

 

The increase in depreciation expense is due to significant capital spending in recent years that has enabled the cable division to offer digital and broadband cable services to its subscribers. The cable division began its rollout plan for these services in the third quarter of 2000. At June 30, 2003, the cable division had approximately 210,000 digital cable subscribers, representing a 30 percent penetration of the subscriber base in the markets where digital services are offered. Digital services are offered in markets serving 99 percent of the cable division’s subscriber base. The initial rollout plan for the new digital cable services included an offer for the cable division’s customers to obtain these services free for one year. At the end of June 2003, the cable division had about 203,900 paying digital subscribers.

 

At June 30, 2003, the cable division had 714,500 basic subscribers, lower than 736,100 basic subscribers at the end of June 2002 and 718,000 basic subscribers at the end of December 2002. At June 30, 2003, the cable division had 106,600 CableONE.net service subscribers, compared to 60,600 at the end of June 2002, due to a large increase in the Company’s cable modem deployment (offered to 99 percent of homes passed at the end of June 2003) and take-up rates.

 

At June 30, 2003, Revenue Generating Units (RGUs), representing the sum of basic, digital, and high-speed data customers, as defined by the NCTA Standard Reporting Categories, totaled 1,025,400, compared to 886,300 as of June 30, 2002. The increase is due to increased paying digital cable and high-speed data customers.

 

Below are details of Cable division capital expenditures for the first six months of 2003 and 2002, as defined by the NCTA Standard Reporting Categories (in millions):

 

     2003

   2002

Customer Premise Equipment

   $ 7.4    $ 15.1

Commercial

     0.1      0.1

Scaleable Infrastructure

     2.4      6.5

Line Extensions

     4.4      6.1

Upgrade/Rebuild

     14.5      23.4

Support Capital

     6.0      4.4
    

  

Total

   $ 34.8    $ 55.6
    

  

 

Education Division. Education division revenue totaled $195.6 million for the second quarter of 2003, a 31 percent increase over revenue of $149.7 million for the same period of 2002. Kaplan reported operating income for the second quarter of 2003 of $3.5 million, compared to operating income of $0.6 million in the second quarter of 2002. Approximately 41 percent of the increase in Kaplan revenue is from acquired businesses, primarily in the higher education division and the professional training schools that are part of supplemental education. For the first six months of 2003, education division revenue totaled $373.3 million, a 26 percent increase over revenue of $296.8 million for the same period of 2002. Kaplan reported operating income of $19.5 million for the first six months of 2003, compared to operating income of $0.1 million for the first six months of 2002. Approximately 33 percent of the increase in Kaplan revenue is from acquired businesses, primarily in the higher education division and the professional training schools that are part of supplemental education. A summary of operating results for the second quarter and the first six months of 2003 compared to 2002 is as follows:

 

18


(In thousands)

 

     Second Quarter

    Year-to-Date

 
     2003

    2002

    % Change

    2003

    2002

    % Change

 

Revenue

                                            

Supplemental education

   $ 115,708     $ 92,623     25     $ 213,890     $ 183,373     17  

Higher education

     79,852       57,072     40       159,448       113,403     41  
    


 


 

 


 


 

     $ 195,560     $ 149,695     31     $ 373,338     $ 296,776     26  
    


 


 

 


 


 

Operating income (loss)

                                            

Supplemental education

   $ 21,643     $ 10,989     97     $ 40,195     $ 24,191     66  

Higher education

     9,099       5,065     80       24,021       13,951     72  

Kaplan corporate overhead

     (6,893 )     (5,314 )   (30 )     (14,333 )     (11,216 )   (28 )

Other*

     (20,322 )     (10,116 )   (101 )     (30,429 )     (26,852 )   (13 )
    


 


 

 


 


 

     $ 3,527     $ 624     465     $ 19,454     $ 74     —    
    


 


 

 


 


 


*   Other includes charges accrued for stock-based incentive compensation and amortization of certain intangibles.

 

Supplemental education includes Kaplan’s test preparation, professional training, and Score! businesses. On March 31, 2003, Kaplan completed its acquisition of Financial Training Corporation (FTC) for £55.3 million ($87.4 million), financed through cash and debt. Headquartered in London, FTC provides test preparation services for accountants and financial services professionals, with training centers in the United Kingdom and Asia. The improvement in supplemental education results for the second quarter and the first six months of 2003 is due to increased enrollment at Kaplan’s traditional test preparation business, significant increases in the professional real estate courses, and the FTC acquisition. Score! also contributed to the improved results, with increased enrollments at existing centers, and five new centers compared to last year.

 

Higher education includes all of Kaplan’s post-secondary education businesses, including fixed-facility colleges as well as online post-secondary and career programs (various distance-learning businesses). Higher education results are showing significant growth due to student enrollment increases, high student retention rates, and several acquisitions.

 

Corporate overhead represents unallocated expenses of Kaplan, Inc.’s corporate office, including expenses associated with the design and development of educational software that, if successfully completed, will benefit all of Kaplan’s business units.

 

Other expense is comprised of accrued charges for stock-based incentive compensation arising from a stock option plan established for certain members of Kaplan’s management and amortization of certain intangibles. Under the stock-based incentive plan, the amount of compensation expense varies directly with the estimated fair value of Kaplan’s common stock and the number of options outstanding. At the end of each of the first, second and third quarters, the Company estimates the value of Kaplan based upon a comparison of operating results and public market values of other education companies. At the end of each year, a final value is set by the Compensation Committee of the Company’s Board of Directors. Over the past several years, the value of education companies has fluctuated significantly and there could be significant volatility in the amounts recorded as expense each quarter. If Kaplan’s profits continue to grow and values of education companies remain relatively high, this could lead to larger accruals in upcoming quarters. The Company recorded expense of $20.0 million and $10.0 million for the second quarter of 2003 and 2002, respectively, and $30.0 million and $26.6 million for the first six months of 2003 and 2002, respectively, related to this plan. The

 

19


increased stock compensation expense in the second quarter of 2003 reflects the positive earnings growth of Kaplan and the general rise in valuations of education companies over the past three months.

 

Equity in Losses of Affiliates. The Company’s equity in losses of affiliates for the second quarter of 2003 was $5.5 million, compared to losses of $9.2 million for the second quarter of 2002. For the first six months of 2003, the Company’s equity in losses of affiliates totaled $8.2 million, compared to losses of $15.7 million for the same period of 2002. The Company’s affiliate investments consist of a 49 percent interest in BrassRing LLC and a 49 percent interest in Bowater Mersey Paper Company Limited.

 

BrassRing results improved this year, despite a 2003 second quarter charge arising from the shutdown of one of BrassRing businesses, which increased the Company’s equity in losses of BrassRing by $2.2 million. The Company’s equity in losses of BrassRing totaled $4.3 million and $6.3 million for the second quarter and year-to-date of 2003, respectively, compared to $6.5 million and $10.7 million for the same periods of 2002.

 

On January 1, 2003, the Company sold its 50 percent interest in the International Herald Tribune for $65 million and the Company recorded an after-tax non-operating gain of $32.3 million in the first quarter of 2003.

 

Non-Operating Items. The Company recorded other non-operating income, net, of $2.3 million for the second quarter of 2003, compared to $6.0 million of non-operating expense, net, in the second quarter of 2002. The 2003 non-operating income, net is primarily related to foreign currency gains, and the 2002 non-operating expense, net, includes charges for the write-down of certain investments.

 

The Company recorded non-operating income, net, of $50.4 million for the first six months of 2003, compared to non-operating income, net, of $0.5 million for the same period of the prior year. The 2003 non-operating income, net, is comprised mostly of a $49.8 million pre-tax gain from the sale of the Company’s 50 percent interest in the International Herald Tribune. The 2002 non-operating income, net, includes a gain on the sale of marketable securities, offset by write-downs recorded on certain investments.

 

A summary of non-operating income (expense) for the twenty-six weeks ended June 29, 2003, and June 30, 2002, follow (in millions):

 

     2003

    2002

 

Gain on sale of interest in IHT

   $ 49.8     $ —    

Impairment write-downs on cost method and other investments

     (1.1 )     (16.7 )

Gain on sale of marketable securities

     —         13.2  

Foreign currency gains (losses), net

     0.8       —    

Other gains

     0.9       4.0  
    


 


Total

   $ 50.4     $ 0.5  
    


 


 

Net Interest Expense. The Company incurred net interest expense of $6.2 million for the second quarter of 2003, compared to $8.7 million for the second quarter of 2002; net interest expense totaled $13.3 million for the first six months of 2003,

 

20


versus $17.5 million in 2002. The reduction is due to lower average borrowings in the first six months of 2003 versus the same period of the prior year. At June 30, 2003, the Company had $622.9 million in borrowings outstanding at an average interest rate of 4.1 percent.

 

Provision for Income Taxes. The effective tax rate for the second quarter and first six months of 2003 was 37.8 percent, compared to 40.9 percent for the same periods of 2002. The 2003 rate benefited from the 35.1 percent effective tax rate applicable to the one-time gain arising from the sale of the Company’s interest in the International Herald Tribune. The effective tax rate for 2003 has also declined due to an increase in operating earnings and a decrease in the overall state tax rate.

 

Cumulative Effect of Change in Accounting Principle. In 2002, the Company completed its transitional goodwill impairment test required under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), resulting in an after-tax impairment loss of $12.1 million, or $1.27 per share, related to PostNewsweek Tech Media (part of magazine publishing segment). This loss is included in the Company’s 2002 results as a cumulative effect of change in accounting principle.

 

Earnings Per Share. The calculation of diluted earnings per share for the second quarter and first six months of 2003 was based on 9,555,000 and 9,554,000 weighted average shares outstanding, respectively, compared to 9,521,000 and 9,516,000 weighted average shares outstanding, respectively, for the second quarter and first six months of 2002. The Company made no significant repurchases of its stock during the first half of 2003.

 

Stock Options—Change in Accounting Method. Effective the first day of the Company’s 2002 fiscal year, the Company has adopted the fair-value-based method of accounting for company stock options as outlined in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123). This change in accounting method will be applied prospectively to all awards granted from the beginning of the Company’s fiscal year 2002 and thereafter. Stock options awarded prior to fiscal 2002 will continue to be accounted for under the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”

 

The Company recorded $284,000 in stock option expense for the first six-months of 2003; there was no Company stock option expense in the first six-months of 2002.

 

Financial Condition: Capital Resources and Liquidity

 

Acquisitions. In the second quarter of 2003, Kaplan acquired two additional businesses in its higher education and professional divisions for a total of $17.5 million, financed through cash and debt, with $3 million remaining to be paid. In addition, the cable division acquired a system in North Dakota for $1.5 million. Most of the purchase price for these acquisitions has been preliminarily allocated to goodwill.

 

In March 2003, Kaplan completed its acquisition of the stock of Financial Training Corporation (FTC), for £55.3 million ($87.4 million). Headquartered in London, FTC provides test preparation services for accountants and financial services professionals, with 18 training centers in the United Kingdom and Asia. The acquisition was financed through cash and debt with $26.5 million remaining to be

 

21


paid, primarily to employees of the business. Most of the purchase price has been allocated to goodwill, on a preliminary basis.

 

Capital expenditures. During the first six months of 2003, the Company’s capital expenditures totaled $58.8 million. The Company anticipates it will spend approximately $160 to $170 million throughout 2003 for property and equipment.

 

Liquidity. Throughout the first six months of 2003, the Company’s borrowings, net of repayments, decreased by $41.9 million, with the decrease primarily due to cash flows from operations. While the Company paid down $72.4 million in commercial paper borrowings and other long-term debt during the first six months of 2003, the Company also financed part of certain acquisitions during this period, principally $26.5 million in debt from the FTC acquisition.

 

At June 29, 2003, the Company had $622.9 million in total debt outstanding, which comprised $188.5 million of commercial paper borrowings, $398.5 million of 5.5 percent unsecured notes due February 15, 2009, and $35.9 million in other debt.

 

During the second quarter of 2003 and 2002, the Company had average borrowings outstanding of approximately $633.2 million and $830.6 million, respectively, at average annual interest rates of approximately 4.1 percent and 3.7 percent, respectively. During the second quarter of 2003 and 2002, the Company incurred net interest expense on borrowings of $6.2 million and $8.7 million, respectively.

 

During the first six months of 2003 and 2002 the Company had average borrowings outstanding of approximately $617.4 million and $859.5 million, respectively, at average annual interest rates of approximately 4.1 percent and 3.6 percent, respectively. During the first six months of 2003 and 2002, the Company incurred net interest expense on borrowings of $13.3 million and $17.5 million, respectively.

 

At June 29, 2003 and December 29, 2002, the Company has a working capital deficit of $319.3 million and $353.2 million, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments. The Company has classified all of its commercial paper borrowing obligations as a current liability at June 29, 2003 and December 29, 2002 as the Company intends to pay down commercial paper borrowings from operating cash flow. However, the Company continues to maintain the ability to refinance such obligations on a long-term basis through new debt issuance and/or its revolving credit facility agreements.

 

The Company expects to fund its estimated capital needs primarily through internally generated funds, and to a lesser extent, commercial paper borrowings. In management’s opinion, the Company will have ample liquidity to meet its various cash needs throughout 2003.

 

The table below presents long-term debt maturities, required payments under contractual agreements for programming rights (includes commitments that are recorded in the consolidated balance sheet and commitments to purchase programming to be produced in future years) and future minimum lease payments to be made under noncancelable operating leases as of June 29, 2003:

 

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Contractual Obligations

(in thousands)

 

Fiscal

Year


   Commercial
Paper


   Long-term
Debt


   Programming
Purchase
Commitments


   Future
Minimum
Lease
Payments


   Total

Twenty-six weeks ended December 28, 2003

   $ 188,516    $ —      $ 15,761    $ 31,039    $ 235,316

2004

     —        16,440      16,260      57,229      89,929

2005

     —        3,190      12,407      51,120      66,717

2006

     —        15,320      6,196      46,518      68,034

2007

     —        935      851      41,118      42,904

Thereafter

     —        398,533      2,313      100,716      501,562
    

  

  

  

  

Total

   $ 188,516    $ 434,418    $ 53,788    $ 327,740    $ 1,004,462
    

  

  

  

  

 

Other Commercial Commitments

(in thousands)

 

Fiscal Year


   Lines of
Credit


Twenty-six weeks ended December 28, 2003

   $ 350,000

2004

     —  

2005

     —  

2006

     —  

2007

     350,000
    

Total

   $ 700,000
    

 

Forward-Looking Statements

 

This report contains certain forward-looking statements that are based largely on the Company’s current expectations. Forward-looking statements are subject to various risks and uncertainties that could cause actual results or events to differ materially from those anticipated in such statements. For more information about these forward-looking statements and related risks, please refer to the section titled “Forward-Looking Statements” in Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002.

 

Item 4. Controls and Procedures

 

An evaluation was performed by the Company’s management, at the direction of the Company’s Chief Executive Officer (the Company’s principal executive officer) and Vice President-Finance (the Company’s principal financial officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter. Based on that evaluation, the Company’s Chief Executive Officer and Vice President-Finance have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that all material information required to be disclosed in the reports that the Company files or submits under the Exchange Act have been made known to them in a timely fashion.

 

 

23


PART II—OTHER INFORMATION

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

At the Company’s May 8, 2003 Annual Meeting of Stockholders, the stockholders elected each of the nominees named in the Company’s proxy statement dated March 28, 2003 to its Board of Directors. The voting results are set forth below:

 

Class A Directors

              

Nominee


   Votes For

   Votes
Withheld


   Broker
Non-Votes


Warren E. Buffett

   1,722,250    -0-    -0-

Barry Diller

   1,722,250    -0-    -0-

George J. Gillespie, III

   1,722,250    -0-    -0-

Ralph E. Gomory

   1,722,250    -0-    -0-

Donald E. Graham

   1,722,250    -0-    -0-

Richard D. Simmons

   1,722,250    -0-    -0-

George W. Wilson

   1,722,250    -0-    -0-

Class B Directors

              

Nominee


   Votes For

   Votes
Withheld


   Broker
Non-Votes


Daniel B. Burke

   6,800,004    74,100    -0-

John L. Dotson Jr.

   6,852,176    21,928    -0-

Alice M. Rivlin

   6,814,797    59,307    -0-

 

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Item 6. Exhibits and Reports on Form 8-K.

 

  (a)   The following documents are filed as exhibits to this report:

 

Exhibit
Number


  

Description


3.1    Certificate of Incorporation of the Company as amended through May 12, 1988, and the Certificate of Designation for the Company’s Series A Preferred Stock filed January 22, 1996 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
3.2    By-Laws of the Company as amended through May 8, 2003 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Reported on Form 10-Q for the quarter ended March 30, 2003).
4.1    Form of the Company’s 5.50% Notes due February 15, 2009, issued under the Indenture dated as of February 17, 1999, between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 1999).
4.2    Indenture dated as of February 17, 1999, between the Company and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 1999).
4.3    364-Day Credit Agreement dated as of August 14, 2002, among the Company, Citibank, N.A., Wachovia Bank, National Association, SunTrust Bank, JPMorgan Chase Bank, Bank One, N.A., The Bank of New York and Riggs Bank (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2002).
4.4    5-Year Credit Agreement dated as of August 14, 2002, among the Company, Citibank, N.A., Wachovia Bank, National Association, SunTrust Bank, JPMorgan Chase Bank, Bank One, N.A., The Bank of New York and Riggs Bank (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2002).
4.5    The Washington Post Company Stock Option Plan as amended and restated effective May 31, 2003.
11       Calculation of Earnings per Share of Common Stock.
31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

  (b)   Form 8-K

 

Current report on Form 8-K filed April 22, 2003—The Washington Post Company Earnings Press Release.

 

25


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     THE WASHINGTON POST COMPANY
     (Registrant)

Date:    July 31, 2003

  

/s/ Donald E. Graham


    

Donald E. Graham,

Chairman & Chief Executive Officer

(Principal Executive Officer)

Date:    July 31, 2003

  

/s/ John B. Morse, Jr.


    

John B. Morse, Jr.,

Vice President-Finance

(Principal Financial Officer)

 

26