Graham Holdings Co - Annual Report: 2007 (Form 10-K)
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED
DECEMBER 30, 2007
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 St., N.W., Washington, D.C.
|
20071 | |
(Address of principal executive offices) | (Zip Code) |
Registrants
Telephone Number, Including Area
Code: (202) 334-6000
Securities
Registered Pursuant to Section 12(b) of the Act:
Title of each class Class B
Common Stock, par value
$1.00 per share |
Name of each exchange on which registered New York Stock Exchange |
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the Act).
Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Act 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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer, or a smaller reporting company. See the definition of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Act).
Yes o No þ
Aggregate market value of the registrants common equity
held by non-affiliates on July 1, 2007, based on the
closing price for the Companys Class B Common Stock
on the New York Stock Exchange on such date: approximately
$4,500,000,000.
Shares of common stock outstanding | at February 22, 2008: |
Class A Common
Stock 1,291,693 shares
Class B Common
Stock 8,224,848 shares
Documents
partially incorporated by reference:
Definitive Proxy
Statement for the registrants 2008 Annual Meeting of
Stockholders
(incorporated in
Part III to the extent provided in Items 10, 11,
12, 13 and 14 hereof).
THE WASHINGTON
POST COMPANY 2007
FORM 10-K
Table of Contents
PART I
Item 1.
Business.
The Washington Post Company (the Company) is a
diversified education and media company. The Companys
Kaplan subsidiary provides a wide variety of educational
services, both domestically and outside the United States. The
Companys media operations consist of newspaper publishing
(principally The Washington Post), television
broadcasting (through the ownership and operation of six
television broadcast stations), magazine publishing (principally
Newsweek) and the ownership and operation of cable
television systems.
Information concerning the consolidated operating revenues,
consolidated income from operations and identifiable assets
attributable to the principal segments of the Companys
business for the last three fiscal years is contained in
Note O to the Companys Consolidated Financial
Statements appearing elsewhere in this Annual Report on
Form 10-K.
(Revenues for each segment are shown in such Note O net of
intersegment sales, which did not exceed 0.1% of consolidated
operating revenues.)
The Companys operations in geographic areas outside the
United States consist primarily of Kaplans foreign
operations and the publication of the international editions of
Newsweek. During the fiscal years 2007, 2006 and 2005,
these operations accounted for approximately 12%, 9% and 7%,
respectively, of the Companys consolidated revenues, and
the identifiable assets attributable to foreign operations
represented approximately 11%, 10% and 7% of the Companys
consolidated assets at December 30, 2007, December 31,
2006 and January 1, 2006, respectively.
Education
Kaplan, Inc., a subsidiary of the Company, provides an extensive
range of educational services for children, students and
professionals. Kaplans historical focus on test
preparation has been expanded as new educational and career
services businesses have been acquired or initiated. The Company
divides Kaplans various businesses into three categories:
Test Prep and Admissions; Professional; and Higher Education.
Test Prep and
Admissions
Test Prep and Admissions divides its businesses into six
categories: Test Prep, Professional Licensing Exam Prep,
English-
Language, Kaplan K12 Learning Services; Kaplan Publishing and
Score!
Test Prep prepares students for a broad range of admissions
examinations, including the SAT, ACT, LSAT, GMAT, MCAT and GRE,
that are required for admission to college and graduate schools,
including medical, business and law schools. During 2007, these
courses were offered at 160 permanent centers located throughout
the United States and in Canada, Puerto Rico, Mexico, London,
Paris and Hong Kong. In addition, Kaplan licenses material for
certain of its test preparation courses to third parties and a
Kaplan affiliate, who, during 2007, offered courses at 43
locations in 14 countries outside the U.S. Test Prep also
produces a college newsstand guide in conjunction with Newsweek.
Test Prep includes The Kidum Group, which provides preparation
courses for Israeli high school graduation and university
admissions exams and also provides English-language courses at
52 permanent centers located throughout Israel. The Professional
Licensing Exam Prep business prepares medical, nursing and law
students for licensing examinations, including the U.S. MLE,
NCLEX and, under the Kaplan PMBR name, the multistate portion of
state bar exams. The English-language business, which now
operates under the name Kaplan Aspect, provides English-language
training, academic preparation programs and test preparation for
English proficiency exams, such as the TOEFL, principally for
students wishing to study and travel in English-speaking
countries in North America, Europe or Australia/New Zealand.
Kaplan Aspect operates 21 English-language schools located in
the U.K., Ireland, Australia, New Zealand, Canada and the
U.S. and is co-located in 15 of the U.S. Test Prep
centers. Kaplan K12 Learning Services develops and provides a
range of programs and services to schools and school districts,
including offering reading and math programs to help students
who are performing below grade level improve fundamental skills;
preparing students for state assessment tests and the SAT and
ACT; and providing curriculum consulting, professional
development and assessment services to support teaching and
learning. During 2007, these businesses provided courses to more
than 440,000 students (including over 83,000 enrolled in online
programs).
2007 FORM 10-K 1
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Kaplan Publishing, whose results are now included entirely
within the Test Prep and Admissions Division, publishes a
variety of general trade and educational books in subject areas
such as test preparation, business, real estate, law, medicine
and nursing. At the end of 2007, Kaplan Publishing had more than
470 books in print, including over 180 new titles published in
2007.
Test Prep and Admissions also includes the Score! Educational
Centers. Score! offers computer-based learning and
individualized tutoring for children from pre-K through
10th grade. In 2007, this business provided services
through 155 dedicated Score! centers located throughout the
United States to more than 62,000 students. In the fourth
quarter of 2007, Kaplan restructured the Score! business and
closed 75 Score! locations. As a result of the
restructuring, Kaplan anticipates that the number of students
served by the Score! business in 2008 will be significantly
lower than the number served in 2007.
Professional
In the United States, Kaplan Professional offers continuing
education, certification, licensing, exam preparation and
professional development to corporations and to individuals
seeking to advance their careers in a variety of disciplines.
This division includes Kaplan Financial, a provider of
continuing education and test preparation courses for financial
services and insurance industry professionals; Kaplan Schweser
(formerly known as The Schweser Study Program), a provider of
test preparation courses for the Chartered Financial Analyst and
Financial Risk Manager examinations; Kaplan CPA, which offers
test preparation courses for the Certified Public Accounting
Examination; Kaplan Professional Schools, a provider of courses
for real estate, financial services and home inspection
licensing examinations, as well as continuing education in those
areas; Kaplan Professional Publishing (formerly known as
Dearborn Publishing), which provides printed and online
materials that help individuals satisfy state pre-licensing and
continuing education requirements and prepare for state
licensing examinations in the real estate, architecture, home
inspection, engineering and construction industries; and Kaplan
IT, which offers online test preparation courses for technical
certifications in the information technology industry, as well
as training, software consultancy and related products to a
broad range of industries. The courses offered by these
businesses are provided in various formats (including
classroom-based instruction, online programs, printed study
guides, in-house training and audio CDs) and at a wide range of
per-course prices. During 2007, these businesses sold
approximately 600,000 courses and separately priced course
components to students in the United States (who in some subject
areas typically purchase more than one course component offered
by the Division).
In March 2007, Kaplan acquired EduNeering, which is
headquartered in Princeton N.J. This business, now known as
Kaplan EduNeering, is a provider of online regulatory compliance
training and management systems, principally for businesses in
the life sciences, healthcare, energy and food service
industries. During 2007, this business provided services to
approximately 600,000 users at more than 200 companies.
Internationally, Professionals largest business in terms
of revenue is Kaplan Financial Limited, formerly named FTC
Kaplan Limited (Kaplan Financial), a
U.K.-based provider of training and test preparation services
for accounting and financial services professionals. In 2007,
Kaplan Financial provided courses to approximately 48,000
students. Headquartered in London, Kaplan Financial has 25
training centers around the United Kingdom, as well as
operations in Hong Kong, Shanghai and Singapore.
In Hong Kong, Kaplan Financial also offers
Mandarin-language
training to students (principally Cantonese-speaking Chinese
wishing to learn Mandarin) through Hong Kong Putonghua
Vocational School (HKPVS) and offers test
preparation courses for the Chinese Proficiency Test, which is a
standardized examination that assesses
Mandarin-language
proficiency. HKPVS has five centers in Hong Kong and, at the end
of 2007, was serving more than 9,000 students.
Asia Pacific Management Institute (APMI), which is
headquartered in Singapore and has a satellite location in Hong
Kong, provides students with the opportunity to earn
undergraduate and graduate degrees, principally in
business-related subjects, offered by affiliated educational
institutions in Australia, the United Kingdom and the United
States. APMI also offers pre-university and diploma programs.
APMI had more than 4,250 students enrolled at year-end 2007.
In 2007, Kaplan acquired a minority interest in Shanghai Kai Bo
Education Investment Management Co., Ltd. (ACE
Education), an education company headquartered in
Shanghai, China. In February 2008, Kaplan exercised an
option to increase its investment in ACE Education to a majority
interest. ACE Education provides preparatory programs for entry
to U.K. universities and international-standard degree programs
at campuses in several cities in China. Through a collaboration
with the University of Shanghai for Science and Technology and
the Northern
2 THE WASHINGTON POST
COMPANY
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Consortium (a university
consortium comprising 11 U.K. universities), ACE Education also
offers programs at the Sino-British College in Shanghai. ACE
Education had approximately 1,600 students enrolled at year-end.
In 2007, Professional acquired the education business of the
Financial Services Institute of Australasia
(FINSIA), which is headquartered in Sydney,
Australia. FINSIA is a provider of financial services
post-graduate education in Australia, and its acquisition, along
with Tribeca Learning Limited, which Kaplan acquired in 2006,
allows Kaplan Financial to deliver a broad range of financial
services education and professional development courses in
Australia. In 2007, FINSIA and Tribeca provided courses to over
22,000 students through classroom programs and to over 70,000
students through distance-learning programs.
Higher
Education
Higher Education
U.S.
Kaplans
U.S.-based
Higher Education business currently consists of 70 schools in
22 states that provide classroom-based instruction and two
institutions that specialize in distance education. The schools
providing classroom-based instruction offer a variety of
diploma, associate degree and bachelor degree programs,
primarily in the fields of healthcare, business, paralegal
studies, information technology, criminal justice and fashion
and design. The classroom-based schools were serving more than
33,500 students at year-end 2007 (which includes the
classroom-based programs of Kaplan University), with
approximately 36% of such students enrolled in accredited
bachelor or associate degree programs. Each of these schools has
its own accreditation from one of several regional or national
accrediting agencies recognized by the U.S. Department of
Education.
The institutions of higher education that specialize in distance
education are Kaplan University and Concord Law School. Kaplan
University offers various master degree, bachelor degree,
associate degree and certificate programs, principally in the
fields of management, criminal justice, paralegal studies,
information technology, financial planning, nursing and
education. Kaplan University is accredited by the Higher
Learning Commission of the North Central Association of Colleges
and Schools (HLC). Most of Kaplan Universitys
programs are offered online, while others are offered in a
traditional classroom format at eight campuses in Iowa and
Nebraska. At year-end 2007, Kaplan University had approximately
37,000 students enrolled in online programs. Concord Law School
(Concord), the nations first online law
school, offers Juris Doctor and Executive Juris Doctor degrees
wholly online (the Executive Juris Doctor degree program is
designed for individuals who do not intend to practice law).
Concord is accredited by the Accrediting Commission of the
Distance Education and Training Council and has received
operating approval from the California Bureau of Private
Post-Secondary and Vocational Education. Concord also has
complied with the registration requirements of the California
Committee of Bar Examiners and, therefore, its graduates are
able to apply for admission to the California Bar. In 2008,
California supervision of Concord will shift to the California
Committee of Bar Examiners. In the fourth quarter of 2007,
Concord merged into Kaplan University, and as a result of the
merger, Concord is now part of Kaplan University and, as a
result, Concord is also accredited by HLC. At year-end 2007,
approximately 1,200 students were enrolled at Concord.
Kaplan Virtual
Education
In April 2007, Kaplan acquired Virtual Sage, an online
curriculum publisher, and an online high school doing business
under the name University of Miami Online High School. The
combined businesses became part of what is now known as Kaplan
Virtual Education (KVE), which offers online high
school instruction and online content and curriculum
development. KVEs programs are geared toward adults
wishing to earn a high school diploma, public school students
seeking courses that may not be offered at their school or
credit recovery, and private and home school students who need
an expanded curriculum. At year-end 2007, KVE was providing
courses to approximately 2,200 students.
Dublin Business
School
Dublin Business School (DBS) is an undergraduate and
graduate institution located in Dublin, Ireland. DBS offers
various undergraduate and graduate degree programs in business
and the liberal arts. At year-end 2007, DBS was providing
courses to approximately 5,200 students.
Holborn
College
Holborn College (Holborn) is located in London and
offers various pre-university, undergraduate, post-graduate and
professional programs, primarily in law and business, with its
students receiving degrees from affiliated universities in the
United Kingdom. Holborn offers both full-time and
flexible-learning delivery options to its students. Most of
2007 FORM 10-K 3
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Holborns students come from
outside the United Kingdom and the European Union. At year-end
2007, Holborn was providing courses to approximately 2,100
students.
Kaplan Law
School
In 2007, Kaplan began operating Kaplan Law School in London in
collaboration with Nottingham Trent Universitys Nottingham
Law School. Kaplan Law School provides graduate diploma, legal
practice and bar vocational training for U.K. university
graduates wishing to progress into the U.K. legal profession.
Student Visas for
Study in the U.S.
One of the ways a foreign national wishing to enter the United
States to study may do so is to obtain an F-1 student visa. For
many years, most of Kaplans Test Prep and Admissions
centers in the United States have been authorized by what is now
the U.S. Citizenship and Immigration Services (the
USCIS) to issue certificates of eligibility to
prospective students to assist them in applying for F-1 visas
through a U.S. Embassy or Consulate. Under an
administrative program that became effective early in 2003,
educational institutions are required to report electronically
to the USCIS specified enrollment, departure and other
information about the F-1 students to whom they have issued
certificates of eligibility. Kaplan has certified 138 of its
U.S. Test Prep and Admissions centers to participate in
this program, and Kaplan Aspect has 7 locations certified
to participate in this program. During 2007 students holding F-1
visas accounted for approximately 3.8% of the enrollment at
Kaplans Test Prep and Admissions centers and an
insignificant number of students at Kaplans Higher
Education programs. Kaplan Aspect is also a Designated Sponsor
for the U.S. Department of States Summer
Work & Travel Program. This cultural exchange program
is designed to allow international college or university
students to come to the U.S. on a J-1 visa to fill temporary,
paid positions during their summer break. In 2007, Kaplan Aspect
sponsored approximately 1,700 international students on a J-1
visa to participate in the exchange visitor program.
Title IV
Federal Student Financial Aid Programs
Funds provided under the student financial aid programs that
have been created under Title IV of the Federal Higher
Education Act of 1965, as amended, historically have been
responsible for a majority of the net revenues of Kaplan Higher
Education. During 2007, funds received under the Title IV
programs accounted for approximately $745 million, or
approximately 73%, of total Kaplan Higher Education revenues.
The Company estimates that funds received from students
borrowing under private loan programs comprised approximately an
additional 9% of its higher education revenues. Direct student
payments and funds received under various state and agency grant
programs accounted for most of the remainder of 2007 higher
education revenues. The significant role of Title IV
funding in the operations of Kaplan Higher Education is expected
to continue.
Title IV programs encompass various forms of student loans,
with the funds being provided either by the federal government
itself or by private financial institutions with a federal
guaranty protecting the institutions against the risk of
default. In some cases the federal government pays part of the
interest expense. Other Title IV programs offer
non-repayable grants. Subsidized loans and grants are only
available to students who can demonstrate financial need. During
2007, approximately 73% of the approximately $745 million
of Title IV funds received by Kaplan Higher Education came
from student loans and approximately 27% of such funds came from
grants.
To maintain Title IV eligibility, a school must comply with
extensive statutory and regulatory requirements relating to its
financial aid management, educational programs, financial
strength, recruiting practices and various other matters. Among
other things, the school must be licensed or otherwise
authorized to offer its educational programs by the appropriate
governmental body in the state or states in which it is located,
be accredited by an accrediting agency recognized by the
U.S. Department of Education (the Department of
Education) and enter into a program participation
agreement with the Department of Education.
A school may lose its eligibility to participate in
Title IV programs if student defaults on the repayment of
Title IV loans exceed specified default rates (referred to
as cohort default rates). A school whose cohort
default rate exceeds 40% for any single year may have its
eligibility to participate in Title IV programs limited,
suspended or terminated at the discretion of the Department of
Education. A school whose cohort default rate equals or exceeds
25% for three consecutive years will automatically lose its
Title IV eligibility for at least two years unless the
school can demonstrate exceptional circumstances justifying its
continued eligibility. Pursuant to another program requirement,
any for-profit post-secondary institution (a category that
includes all of the schools in Kaplans Higher Education
Division) will lose its Title IV eligibility for at least
one year if more than 90% of that institutions receipts
for any fiscal year are derived from Title IV programs.
4 THE WASHINGTON POST
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As a general matter, schools participating in Title IV
programs are not financially responsible for the failure of
their students to repay Title IV loans. However, the
Department of Education may fine a school for a failure to
comply with Title IV requirements and may require a school
to repay Title IV program funds if it finds that such funds
have been improperly disbursed. In addition, there may be other
legal theories under which a school could be subject to suit as
a result of alleged irregularities in the administration of
student financial aid.
Pursuant to Title IV program regulations, a school that
undergoes a change in control must be reviewed and recertified
by the Department of Education. Certifications obtained
following a change in control are granted on a provisional basis
that permits the school to continue participating in
Title IV programs, but provides fewer procedural
protections if the Department of Education asserts a material
violation of Title IV requirements. In accordance with
Department of Education regulations, a number of the schools in
Kaplans Higher Education Division are combined into groups
of two or more schools for the purpose of determining compliance
with Title IV requirements. Including schools that are not
combined with other schools for that purpose, the Higher
Education Division has 36 Title IV reporting units; of
these, 5 reporting units have been provisionally certified,
while the remaining 31 are fully certified.
If the Department of Education were to find that one reporting
unit in Kaplans Higher Education Division had failed to
comply with any applicable Title IV requirement and as a
result limited, suspended or terminated the Title IV
eligibility of the school or schools in that reporting unit,
that action normally would not affect the Title IV
eligibility of the schools in other reporting units that had
continued to comply with Title IV requirements. The largest
Title IV reporting unit in the Higher Education Division in
terms of revenue is Kaplan University, which accounted for
approximately 48% of the Title IV funds received by the
Division in 2007. For the most recent year for which final data
are available from the Department of Education, the cohort
default rate for Kaplan University was 5.95%, and the cohort
default rates for the other Title IV reporting units in
Kaplans Higher Education Division averaged 9.33%; no
reporting unit had a cohort default rate of 25% or more. In
2007, Kaplan University derived less than 85% of its receipts
from the Title IV programs, and other reporting units
derived an average of less than 81% of their receipts from
Title IV programs, with no unit deriving more than 88% of
its receipts from such programs.
No proceeding by the Department of Education is currently
pending to fine any Kaplan school for a failure to comply with
any Title IV requirement, or to limit, suspend or terminate
the Title IV eligibility of any Kaplan school. As noted
previously, to remain eligible to participate in Title IV
programs, a school must maintain its accreditation by an
accrediting agency recognized by the Department of Education. As
previously reported, in December 2006 four schools in one
Title IV reporting unit received notice that their
accreditor did not intend to renew the schools
accreditation due to the failure to meet certain completion and
placement requirements. Kaplan closed three of the four schools
and sought and received new accreditation from a different
accrediting body for the fourth school. In 2007, no Kaplan
school received notice from its accreditors indicating that the
schools accreditation was being withdrawn or that the
school was being issued a show cause order.
No assurance can be given that the Kaplan schools currently
participating in Title IV programs will maintain their
Title IV eligibility in the future or that the Department
of Education might not successfully assert that one or more of
such schools have previously failed to comply with Title IV
requirements.
All of the Title IV financial aid programs are subject to
periodic legislative review and reauthorization. In addition,
while Congress historically has not limited the amount of
funding available for the various Title IV student loan
programs, the availability of funding for the Title IV
programs that provide for the payment of grants is wholly
contingent upon the outcome of the annual federal appropriations
process.
Whether as a result of changes in the laws and regulations
governing Title IV programs, a reduction in Title IV
program funding levels or a failure of schools included in
Kaplan Higher Education to maintain eligibility to participate
in Title IV programs, a material reduction in the amount of
Title IV financial assistance available to the students of
those schools would have a significant negative impact on
Kaplans operating results. In addition, any development
that has the effect of making the terms on which Title IV
financial assistance is made available materially less
attractive could also adversely affect Kaplans operating
results.
Newspaper
Publishing
The Washington
Post
WP Company LLC (WP Company), a subsidiary of the
Company, publishes The Washington Post, which is a
morning daily and Sunday newspaper primarily distributed by home
delivery in the Washington, D.C., metropolitan area,
including large portions of Maryland and northern Virginia.
2007 FORM 10-K 5
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The following table shows the average paid daily (including
Saturday) and Sunday circulation of The Post for the
12-month
periods ended September 30 in each of the last five years
(October 1 in 2006), as reported by the Audit Bureau of
Circulations (ABC) for the years 2003 through 2006
and as estimated by The Post for the
12-month
period ended September 30, 2007 (for which period ABC had
not completed its audit as of the date of this report) from the
semiannual publishers statements submitted to ABC for the
six-month periods ended April 1, 2007 and
September 30, 2007:
Average Paid Circulation | ||||||||
Daily | Sunday | |||||||
2003
|
749,323 | 1,035,204 | ||||||
2004
|
729,068 | 1,016,163 | ||||||
2005
|
706,015 | 983,243 | ||||||
2006
|
681,510 | 945,343 | ||||||
2007
|
658,059 | 912,709 |
In The Posts primary circulation territory, which
accounts for more than 90% of its daily and Sunday circulation
and consists of Washington, D.C. and communities generally
within a
50-mile
radius from the city (but excluding Baltimore City and its
northern and eastern suburbs), the newsstand price for the daily
newspaper was increased from $0.35, which had been the price
since 2002, to $0.50 effective December 31, 2007. All other
rates are unchanged. The newsstand price for the Sunday
newspaper has been $1.50 since 1992, while the rate charged for
each four-week period for home-delivered copies of the daily and
Sunday newspaper has been $14.40 since 2004, and the
corresponding rate charged for Sunday-only home delivery has
been $6.00 since 1991. The same rates prevailed outside The
Posts primary circulation territory until the third
quarter of 2006, when The Post raised its newsstand
prices and home-delivery rates for such sales. Newsstand prices
for sales outside the primary circulation territory were
increased to $0.50 for the daily newspaper and $2.00 for the
Sunday newspaper, while home-delivery rates for each four-week
period increased to $20.00 for the daily and Sunday newspaper
and $8.00 for the Sunday newspaper only.
General advertising rates were increased by an average of
approximately 4.0% on January 1, 2007 and by additional
amounts on January 1, 2008 that WP Company estimates will
average approximately 3.5%. Rates for most categories of
classified and retail advertising were increased by an average
of approximately 3.2% on February 1, 2007 and by additional
amounts on February 1, 2008 that WP Company estimates will
average approximately 2.9%.*
The following table sets forth The Posts
advertising inches (excluding preprints) and number of preprints
for the past five years:
2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||
Total Inches (in thousands)
|
2,675 | 2,726 | 2,661 | 2,613 | 2,301 | |||||||||||||||
Full-Run Inches
|
2,121 | 2,120 | 1,943 | 1,839 | 1,592 | |||||||||||||||
Part-Run Inches
|
554 | 606 | 718 | 774 | 709 | |||||||||||||||
Preprints (in millions)
|
1,835 | 1,887 | 1,833 | 1,828 | 1,700 |
WP Company also publishes The Washington Post National Weekly
Edition, a tabloid that contains selected articles and
features from The Washington Post edited for a national
audience. The National Weekly Edition has a basic
subscription price of $78 per year and is delivered by
second-class mail to approximately 26,400 subscribers.
The Post has about 596 full-time editors, reporters
and photographers on its staff; draws upon the news reporting
facilities of the major wire services; and maintains
correspondents in 17 news centers abroad and in New York City,
Los Angeles, Chicago and Miami. The Post also maintains
reporters in nine local news bureaus.
In 2007, The Post launched a new reader rewards program
called PostPoints to strengthen subscriber loyalty. The program
allows readers to earn points that can be exchanged for rewards
by subscribing to The Washington Post, shopping at
participating major retailers, interacting on
washingtonpost.com, and other similar activities.
* The percentages set forth in
this paragraph were calculated from The Posts
published non-discounted advertising rates. However, most
advertisers qualify for multiple-insertion and other discounts,
and the demand for advertising varies over time, so those
percentages may not accurately reflect the actual revenue impact
of
year-over-year
rate changes.
6 THE WASHINGTON POST
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In late August 2007, WP Company and Bonneville International
Corporation agreed to terminate an arrangement whereby WP
Company provided weekday programming content, including
interviews and news coverage featuring writers, editors and
columnists from The Post, for distribution on two of
Bonnevilles radio stations in the D.C. market (WTWP on
1500 AM and 107.7 FM). The date of the last broadcast
under that arrangement was September 19, 2007.
The Post has announced plans to close its printing plant
located in College Park, MD, in 2010 after moving two printing
presses to its Springfield, VA, plant.
Express
Publications
Express Publications Company, LLC (Express
Publications), another subsidiary of the Company,
publishes a weekday tabloid newspaper named Express,
which is distributed free of charge using hawkers and news
boxes near Metro stations and in other locations in
Washington, D.C. and nearby suburbs with heavy daytime
sidewalk traffic. A typical edition of Express is 45 to
60 pages long and contains short news, entertainment and sports
stories, as well as both classified and display advertising.
Current daily circulation is approximately 184,000 copies.
Express relies primarily on wire service and syndicated
content and is edited by a full-time newsroom staff of 23.
Advertising sales, production and certain other services for
Express are provided by WP Company. The Express
newsroom also produces a website, www.readexpress.com,
which features entertainment and lifestyle coverage of local
interest.
Washingtonpost.Newsweek
Interactive
Washingtonpost.Newsweek Interactive Company, LLC
(WPNI) develops news and information products for
electronic distribution. Since 1996, this subsidiary of the
Company has produced washingtonpost.com, an Internet site that
currently features the full editorial text of The Washington
Post and most of The Posts classified
advertising, as well as original content created by WPNIs
staff, blogs written by Post reporters and others,
interactive discussions hosted by Post reporters and
outside subject experts, user-posted comments and content
obtained from other sources. As measured by WPNI, this site
averaged more than 232 million page views per month during
2007. The washingtonpost.com site also features extensive
information about activities, groups and businesses in the
Washington, D.C., area, including an arts and entertainment
section and news sections focusing on politics and on technology
businesses and related policy issues. This site has developed a
substantial audience of users who are outside the
Washington, D.C., area, and WPNI believes that
approximately 85% of the unique users who access the site each
month are in that category. WPNI requires most users accessing
the washingtonpost.com site to register and provide their year
of birth, gender, ZIP code, job title and the type of industry
in which they work. The resulting information helps WPNI provide
online advertisers with opportunities to target specific
geographic areas and demographic groups. WPNI also offers
registered users the option of receiving various
e-mail
newsletters that cover specific topics, including political news
and analysis, personal technology and entertainment.
WPNI also produces the Newsweek website, which was
launched in 1998 and contains editorial content from the print
edition of Newsweek, as well as daily news updates and
analysis, photo galleries, Web guides and other features. In
2005, WPNI assumed responsibility for the production of the
Budget Travel magazine website and relaunched it as
BudgetTravel.com. This site contains editorial content from
Arthur Frommers Budget Travel magazine and other
sources.
In 2005, WPNI purchased Slate, an online magazine that
was founded by Microsoft Corporation in 1996. Slate
features articles analyzing news, politics and contemporary
culture and adds new material on a daily basis. Content is
supplied by the magazines own editorial staff, as well as
by independent contributors.
Since September 2006, WPNI has provided content from
washingtonpost.com and the Slate and Newsweek
websites specially formatted to be downloaded and displayed on
Web-enabled cell phones and other personal digital devices.
In 2007, WPNI launched Sprig, an online shopping and
information resource. Sprig offers smart solutions and
stylish products to help consumers more easily integrate green
(eco-friendly) choices and action into their lives.
In January of 2008, WPNI launched The Root, an online
magazine focused on issues of importance to African Americans
and others interested in black culture. The Root offers
daily news and provocative commentary on politics and culture.
Additionally, it offers a geneology tool designed to help users
trace their family history.
WPNI holds a 16.5% equity interest in Classified Ventures LLC
(Classified Ventures), a company formed in
1997 to compete in the business of providing online classified
advertising databases for cars, apartment rentals and
residential
2007 FORM 10-K 7
Table of Contents
real estate. The other owners are
Tribune Company, The McClatchy Company, Gannett Co., Inc. and
Belo Corp. Listings for these databases come from print and
online-only sales of classified ads by the newspaper and online
sales staffs of the various owners, as well as from sales made
by Classified Ventures own sales staff. The
washingtonpost.com site provides links to the Classified
Ventures national car and apartment rental websites
(www.cars.com and www.apartments.com). WPNI uses
software from Classified Ventures to host
washingtonpost.coms online listing of residential real
estate for sale in the greater Washington, D.C., area, and
Classified Ventures consolidates the local listings of its
various owners into a national residential real estate website
(www.homescape.com).
Under an agreement signed in 2000 and amended in 2003, WPNI and
several other business units of the Company have been sharing
certain news material and promotional resources with NBC News
and MSNBC. Among other things, under this agreement the
Newsweek website is a feature on MSNBC.com, and
MSNBC.com is being provided access to certain content
from The Washington Post. Similarly, washingtonpost.com
is being provided with access to certain MSNBC.com multimedia
content. On July 1, 2007, the parties entered into a new
relationship for cross-promotional marketing opportunities
between the companies. The new agreement will extend through
June of 2009. In addition, effective July 2007, MSNBC no longer
hosts Newsweek.com, which now exists as a
stand-alone
site produced by WPNI.
PostNewsweek
Media
The Companys PostNewsweek Media, Inc. subsidiary
publishes 2 weekly paid-circulation, 3 twice-weekly
paid-circulation and 34 controlled-circulation weekly community
newspapers. This subsidiarys newspapers are divided into
two groups: The Gazette Newspapers, which circulate in
Montgomery, Prince Georges and Frederick Counties and in
parts of Carroll County, MD; and Southern Maryland
Newspapers, which circulate in southern Prince Georges
County and in Charles, St. Marys and Calvert
Counties, MD. During 2007, these newspapers had a combined
average circulation of approximately 660,000 copies. This
division also produces military newspapers (most of which are
weekly) under agreements where editorial material is supplied by
local military bases, with the exception of one independent
newspaper. In 2007, the 12 military newspapers produced by this
division had a combined average circulation of more than 125,000
copies.
The Gazette Newspapers have a companion website
(www.gazette.net) that includes editorial material and
classified advertising from the print newspapers. The military
newspapers produced by this division are supported by a website
(www.dcmilitary.com) that includes base guides and other
features, as well as articles from the print newspapers. The
Southern Maryland Newspapers website
(www.SoMdNews.com) also includes editorial and classified
advertising from the print newspapers. Each website also
contains display advertising that is sold specifically for the
site.
The Gazette Newspapers and Southern Maryland
Newspapers together employ approximately 168 editors,
reporters and photographers.
This division also operates a commercial printing business in
suburban Maryland.
The
Herald
The Company owns The Daily Herald Company, publisher of The
Herald in Everett, WA, about 30 miles north of Seattle.
The Herald is published mornings seven days a week and is
primarily distributed by home delivery in Snohomish County and
online at www.heraldnet.com. The Daily Herald Company
also provides commercial printing services and publishes four
controlled-circulation weekly community newspapers (collectively
known as The Enterprise Newspapers) that are distributed
by home delivery in south Snohomish and north King Counties. The
Daily Herald Company also publishes La Raza del
Noroeste, a weekly
Spanish-language
newspaper that is distributed free of charge in more than 700
retail locations in Snohomish, King, Skagit and northern Pierce
Counties, as well as the Snohomish County Business
Journal, a monthly publication focused on business news in
Snohomish County. In April of 2007, The Daily Herald Company
acquired the assets of Seattles Child, a monthly
parenting magazine and pioneer among parenting publications in
America.
The Heralds average paid circulation as reported to
ABC for the 12 months ended September 30, 2007 was
48,808 daily (Monday through Friday); 48,854 (Monday through
Saturday) and 54,667 Sunday. The aggregate average weekly
circulation of The Enterprise Newspapers during the
12-month period ended March 31, 2007 was approximately
74,000 copies as reported by Verified Audit Circulation. The
current weekly circulation of La Raza del Noroeste
is approximately 25,000 copies. The monthly circulation of
the Snohomish County Business Journal is 16,000 copies,
including 400 sold through retail single-copy outlets.
8 THE WASHINGTON POST
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Table of Contents
The Herald, The Enterprise Newspapers, the Snohomish
County Business Journal, La Raza and Seattles Child
together employ approximately 85 editors, reporters and
photographers.
Greater
Washington Publishing
The Companys Greater Washington Publishing, Inc.
subsidiary publishes several free-circulation advertising
periodicals that have little or no editorial content and are
distributed in the greater Washington, D.C., metropolitan
area using sidewalk distribution boxes. Greater Washington
Publishings periodicals of that kind are The Washington
Post Apartment Showcase, which is published monthly and has
an average circulation of about 52,000 copies; New Homes
Guide, which is published six times a year and has an
average circulation of about 84,000 copies; and Guide to
Retirement Living Sourcebook, which is published nine times
a year and has an average circulation of about
55,000 copies. Greater Washington Publishing also produces
Washington Spaces, a luxury home and design magazine
featuring photographic layouts of visually appealing homes in
the greater Washington, D.C., area, resource information
and editorial content. Washington Spaces, which is
distributed by mail (principally on a controlled-circulation
basis) and through newsstand sales, is published six times a
year and has an average circulation of approximately 75,000
copies.
El Tiempo
Latino
El Tiempo Latino LLC, another subsidiary of the Company,
publishes El Tiempo Latino, a weekly
Spanish-language
newspaper that is distributed free of charge in northern
Virginia, suburban Maryland and Washington, D.C., using
sidewalk news boxes and retail locations that provide space for
distribution. El Tiempo Latino provides a mix of local,
national and international news together with sports and
community-events coverage and has a current circulation of
approximately 55,000 copies. Employees of the newspaper handle
advertising sales as well as pre-press production, and content
is provided by a combination of wire service copy, contributions
from freelance writers and photographers and stories produced by
the newspapers own editorial staff.
Television
Broadcasting
Through subsidiaries, the Company owns six VHF television
stations located in Houston, TX; Detroit, MI; Miami, FL;
Orlando, FL; San Antonio, TX; and Jacksonville, FL; which
are, respectively, the 10th, 11th, 16th, 19th, 37th and
49th largest broadcasting markets in the United States.
Five of the Companys television stations are affiliated
with one or another of the major national networks. The
Companys Jacksonville station, WJXT, has operated as an
independent station since 2002.
The Companys 2007 net operating revenues from
national and local television advertising and network
compensation were as follows:
National
|
$ | 102,574,000 | ||
Local
|
210,410,000 | |||
Network
|
13,026,000 | |||
Total
|
$ | 326,010,000 | ||
2007 FORM 10-K 9
Table of Contents
The following table sets forth certain information with respect
to each of the Companys television stations:
Station Location and |
Expiration |
|||||||||||
Year Commercial |
National |
Expiration |
Date of |
Total Commercial Stations in |
||||||||
Operation |
Market |
Network |
Date of FCC |
Network |
DMA (b) | |||||||
Commenced | Ranking (a) | Affiliation | License | Agreement | Allocated | Operating | ||||||
KPRC Houston, TX 1949 |
10th | NBC |
Aug. 1, 2006 (c) |
Dec. 31, 2011 |
VHF-3 UHF-11 |
VHF-3 UHF-11 |
||||||
WDIV Detroit, MI 1947 |
11th | NBC |
Oct. 1, 2013 |
Dec. 31, 2011 |
VHF-4 UHF-6 |
VHF-4 UHF-5 |
||||||
WPLG Miami, FL 1961 |
16th | ABC |
Feb. 1, 2013 |
Dec. 31, 2009 |
VHF-5 UHF-8 |
VHF-5 UHF-8 |
||||||
WKMG Orlando, FL 1954 |
19th | CBS |
Feb. 1, 2013 |
Apr. 6, 2015 |
VHF-3 UHF-10 |
VHF-3 UHF-9 |
||||||
KSAT San Antonio, TX 1957 |
37th | ABC |
Aug. 1, 2006 (c) |
Dec. 31, 2009 |
VHF-4 UHF-6 |
VHF-4 UHF-6 |
||||||
WJXT Jacksonville, FL 1947 |
49th | None |
Feb. 1, 2013 |
|
VHF-2 UHF-6 |
VHF-2 UHF-5 |
(a) | Source: 2007/2008 DMA Market Rankings, Nielsen Media Research, Fall 2007, based on television homes in DMA (see note (b) below). | |
(b) | Designated Market Area (DMA) is a market designation of A.C. Nielsen that defines each television market exclusive of another, based on measured viewing patterns. References to stations that are operating in each market are to stations that are broadcasting analog signals. However, most of the stations in these markets are also engaged in digital broadcasting using the FCC-assigned channels for DTV operations. | |
(c) | The Company has filed timely applications to renew the FCC licenses of KPRC and KSAT. For each of these renewal applications, an objection was filed, and the FCC will resolve these objections when it acts on the applications. The Companys timely filing of the applications extended the effectiveness of each stations existing license until the renewal application is acted upon. The Company does not believe, based on its assessment of the objections filed, that either license renewal application will be denied. |
The Companys Detroit, Houston and Miami stations each
began digital television (DTV) broadcast operations
in 1999, while the Companys Orlando station began such
operations in 2001. The Companys two other stations
(San Antonio and Jacksonville) began DTV broadcast
operations in 2002.
All of the Companys television stations either are or in
2008 will be engaged in some form of DTV multicasting. In 2006,
the Companys two NBC affiliates (KPRC and WDIV) began
multicasting the NBC Weather Plus Network, which is a
24-hour
channel jointly owned by NBC and participating NBC affiliates
that provides both national and local weather information using
a combination of text and graphics with periodic forecasts
provided by an on-air reporter. In 2007 KPRC, WPLG, WKMG and
KSAT began multicasting LATV, a
24-hour
entertainment and lifestyle network targeting bilingual Latino
youth. The Company expects WJXT to begin multicasting LATV in
early 2008.
Regulation of
Broadcasting and Related Matters
The Companys television broadcasting operations are
subject to the jurisdiction of the Federal Communications
Commission (FCC) under the Communications Act of
1934, as amended. The FCC, among other things, assigns frequency
bands for broadcast and other uses; issues, revokes, modifies
and renews broadcasting licenses for particular frequencies;
determines the location and power of stations and establishes
areas to be served; regulates equipment used by stations; and
adopts and implements various regulations and policies that
directly or indirectly affect the ownership, operations and
profitability of broadcasting stations.
Each of the Companys television stations holds an FCC
license that is renewable upon application for an eight-year
period.
Digital Television. The FCC formally
approved DTV technical standards in 1996. DTV is a flexible
system that permits broadcasters to utilize a single digital
signal in various ways, including providing at least one channel
of high-definition television (HDTV) programming
with greatly enhanced image and sound quality and one or more
channels
10 THE WASHINGTON POST
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of lower-definition television
programming (multicasting), and that also is capable
of accommodating subscription video and data services known as
ancillary and supplementary services. Broadcasters
may offer a combination of services as long as they transmit at
least one stream of free video programming on the DTV channel.
Broadcasters that offer ancillary and supplementary services
must pay a fee to the FCC of 5% of the gross revenues generated
from such services. No Company station currently offers
ancillary and supplementary services.
While most full-power television stations (including each
station owned by the Company) are currently using two broadcast
channels to operate both analog and DTV services, Congress has
required broadcasters to terminate analog service by
February 17, 2009. After that date, stations will operate
on only one channel in a digital-only format. To determine the
channel on which their stations will operate after the
transition to digital television is complete, broadcasters were
generally permitted to choose between each stations
current analog channel and current DTV channel, provided that
those channels are between channels 2 and 51.
All of the Companys TV stations except WKMG have two
channels that are within this range, and they have accordingly
elected to operate on either their existing analog or digital
channel. Two of the Companys stations WPLG and
KSAT are returning to their current analog channels
for their final digital operations. These stations must request
construction permits from the FCC in order to build their final,
post-transition facilities. WPLGs plan to construct a new
broadcast tower for post-transition use has been delayed due to
local regulatory issues, and it is unclear whether this delay
will affect the stations ability to timely complete
construction of its final DTV facilities. Three stations (KPRC,
WDIV and WJXT) are already operating on their post-transition
DTV channels and have completed construction of what the FCC
considers to be their final DTV facilities. Finally, because
WKMGs current DTV channel is not within the permitted
range for post-transition channels and technical issues prevent
post-transition use of the stations analog channel, in
August 2007 the FCC approved WKMGs request to use another
channel allotment between channels 2 and 51 as its DTV channel
when all-digital operations commence. WKMG has requested that
the FCC modify the final DTV facilities the FCC originally
specified for the station because the specified facilities
cannot be exactly constructed. This request for modification was
unopposed, and it remains pending.
The FCC has a policy of reviewing its DTV rules periodically to
determine whether those rules need to be adjusted in light of
new developments. In December 2007, the FCC issued an order in
its third periodic review of the DTV transition. Among other
changes, the order established deadlines for the construction of
final digital facilities and provided flexibility for stations
in certain circumstances to transition to their final facilities
before or after February 17, 2009. The order also
established other rules that will apply to the Companys
stations, including technical rules such as those governing the
DTV transmission standards.
Full-power digital television stations, including the
Companys stations, may experience interference from a
variety of sources, such as other full-power stations and
low-power television stations that have been authorized to
provide digital service on either the low-power stations
existing analog channel or a different channel. In addition, in
the future, broadcast stations may experience interference from
electronic devices that the FCC may allow to be operated on an
unlicensed basis. In connection with its third periodic review,
the FCC adopted rules to limit the amount of interference that
full-power digital television stations may cause to other
stations. Low-power stations are required to accept interference
from and avoid interference to full-power broadcasters. Certain
low-power stations, known as Class A LPTV
stations, have greater interference protection rights, and
protecting such stations may limit the Companys ability to
expand its television service in the future. Notwithstanding the
FCCs interference protection rules, full-power broadcast
stations may experience interference from other television
stations.
Public Interest Obligations. In
November 2007, the FCC imposed new public interest obligations
for broadcasters. Among other changes, the FCC announced that it
will require broadcasters to report on the amount and type of
public interest programming they offer and to make their public
inspection files available over the Internet. The FCC has also
requested comment on additional proposals, including its
tentative conclusions to adopt processing guidelines
that establish minimum amounts of locally-oriented programming
broadcasters should provide and to require broadcasters to
establish permanent community advisory boards.
Childrens Programming
Obligations. New childrens programming
obligations for digital television took effect in January 2007.
Under the new rules, stations must air three hours of
core childrens programming on their primary
digital video stream and additional core childrens
programming if they also broadcast free multicast video streams.
Core programming includes programming that serves
the educational needs of children, is at least 30 minutes long
and airs between 7 a.m. and 10 p.m. In addition,
stations must limit the type of advertising that may be
broadcast during programming intended for young children.
2007 FORM 10-K 11
Table of Contents
Closed Captioning. Effective
January 1, 2008, the FCC increased the amount of
programming aired on broadcast stations that must contain closed
captioning. The FCC maintained its existing requirement that all
programming first published or exhibited after January 1,
1998 or first prepared for digital television after July 1,
2002 and aired between 6 a.m. and 2 a.m. must be
captioned unless the programming or programming provider falls
within one of several exemptions. The January 1, 2008
change expands the percentage of programming prepared before
those dates that must contain closed captioning unless it is
otherwise exempt. Network programming is closed captioned when
delivered to network affiliates for broadcast, but the cost of
captioning locally originated and certain syndicated programming
must be borne by the broadcast stations themselves.
Carriage of Local Broadcast
Signals. Pursuant to the
must-carry requirements of the Cable Television
Consumer Protection and Competition Act of 1992 (the 1992
Cable Act), a commercial television broadcast station may,
under certain circumstances, insist on carriage of its analog
signal on cable systems serving the stations market area.
Alternatively, such stations may elect, at three-year intervals
that began in October 1993, to forego must-carry rights and
insist instead that their signals not be carried without their
prior consent pursuant to a retransmission consent agreement.
Stations that elect retransmission consent may negotiate for
compensation from cable systems in the form of such things as
mandatory advertising purchases by the system operator, station
promotional announcements on the system and cash payments to the
station. The analog signal of each of the Companys
television stations is being carried on all of the major cable
systems in the stations respective local markets pursuant
to retransmission consent agreements.
Under the FCCs rules, only stations that broadcast in a
DTV-only mode and elect must-carry are entitled to mandatory
carriage of their DTV signals. For stations that are entitled to
such mandatory carriage, only a single stream of video (that is,
a single channel of programming), rather than a television
broadcast stations entire DTV signal, is eligible for
mandatory carriage by a cable television operator. Thus, a
television station can presently obtain carriage of both its
analog and digital signals or of a multicast stream only through
retransmission consent agreements
The FCCs rules require cable operators to carry the
portion of the DTV signal of any DTV station eligible for
mandatory carriage in the same format in which the signal was
originally broadcast. Thus, an HDTV video stream eligible for
mandatory carriage must be carried in HDTV format by cable
operators. In addition, to ensure that all cable subscribers
have the ability to view the digital signals of local broadcast
stations, cable operators must either down-convert the signals
of must-carry stations to analog format for analog cable
subscribers, or, if the cable system is all-digital, carry the
must-carry signals only in digital format, provided that all
subscribers with analog television sets have the necessary
equipment to view the broadcast content. Although a cable system
that is not all-digital will be required to carry
analog versions of all must-carry signals to ensure that analog
subscribers can view the signals, the digital signals of
stations carried pursuant to retransmission consent may be
carried in any manner that comports with the private agreements
of the parties. As noted previously, all of the Companys
television stations are transmitting both analog and digital
broadcasting signals; with the exception of WJXT, each of those
stations digital signals are being carried on all of the
major cable systems in their respective markets pursuant to
retransmission consent agreements.
The Satellite Home Viewer Improvement Act of 1999 gave
commercial television stations the right to elect either
must-carry or retransmission consent with respect to the
carriage of their analog signals on direct broadcast satellite
(DBS) systems that choose to provide
local-into-local service (i.e., to distribute the
signals of local television stations to viewers in the local
market area). In addition, the Satellite Home Viewer Extension
and Reauthorization Act of 2004 gave DBS operators the option to
offer FCC-determined significantly viewed signals of
out-of-market
(or distant) broadcast stations to subscribers in
local markets. Stations made their first DBS carriage election
in July 2001, with subsequent elections occurring at three-year
intervals beginning in October 2005. The analog signal of each
of the Companys television stations (and the digital
signal of most of the Companys television stations) is
being carried by DBS providers EchoStar and DirecTV on a
local-into-local basis pursuant to retransmission consent
agreements. In a pending proceeding, the FCC has sought comment
on how it should apply digital signal carriage rules to DBS
providers.
Ownership Limits. The FCC maintains
rules to limit the number of broadcast licenses a single entity
may control. The Communications Act requires the FCC to review
these broadcast ownership rules periodically and to repeal or
modify any rule it determines is no longer in the public
interest. In June 2003, the FCC conducted such a review, and it
issued an order that relaxed several of its local broadcast
ownership rules. The FCCs decision to modify its ownership
rules, however, was appealed to the U.S. Court of Appeals
for the Third Circuit, and that court stayed the effectiveness
of the new rules pending the outcome of the appeal.
Subsequently, in June 2004 the Third Circuit held that the FCC
did not adequately justify its revised rules and remanded the
case to the FCC for further proceedings.
12 THE WASHINGTON POST
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In July 2006 the FCC initiated a broad remand proceeding to
reconsider the revised rules and asked for public comment on
whether to revise, among other things, the numerical limits
governing local television and cross-ownership. As a result of
that proceeding, in December 2007 the FCC announced a
liberalization of its newspaper/broadcast cross-ownership rule.
Under the new rule, the Commission will assess proposed
newspaper/broadcast combinations on a
case-by-case
basis, but will presumptively consent to a newspapers
ownership of one television station or one radio station in the
20 largest markets, under limited circumstances, and will
presumptively not consent to such ownership outside the 20
largest markets. Despite these presumptions, the FCC stated that
it would consider permitting newspaper/broadcast cross-ownership
in smaller markets if the newspaper can show either that the
broadcast property is failed or failing
or that the transaction will result in a new source of news in
the market, that is, at least seven new hours of local news per
week on an acquired broadcast station that previously has not
aired local news. Because the U.S. Court of Appeals for the
Third Circuit stayed the effectiveness of any modifications to
the ownership rules until it reviews the FCCs compliance
with its order, the new newspaper/broadcast cross-ownership rule
will not go into effect until after it survives judicial review.
In its 2006 order, the FCC declined to modify other ownership
rules, including the local television station ownership rule,
which permits one company to own two television stations in the
same market only if there are at least eight independently owned
full-power television stations in that market (including
non-commercial stations and counting the co-owned stations as
one), and if at least one of the co-owned stations is not among
the top four ranked television stations in that market. This
rule includes an exception allowing common ownership of stations
in a single market where one of the stations is failing or
unbuilt.
By legislation, Congress removed the national limit on broadcast
ownership from the FCCs consideration in its ongoing
ownership proceeding and instead permitted a broadcast company
to own an unlimited number of television stations, as long as
the combined service areas of such stations do not include more
than 39% of nationwide television households, and as long as the
holdings comply with the FCCs other ownership restrictions.
Political Advertising. The Bipartisan
Campaign Reform Act of 2002 imposed various restrictions on both
contributions to political parties during federal elections and
certain broadcast, cable television and DBS advertisements that
refer to a candidate for federal office. Those restrictions may
have the effect of reducing the advertising revenues of the
Companys television stations during campaigns for federal
office below the levels that otherwise would be realized in the
absence of such restrictions. However, the U.S. Supreme
Courts June 2007 decision in Federal Election
Commission v. Wisconsin Right to Life, Inc.
limited the acts restrictions by allowing corporations
and labor unions to finance more advocacy communications than
were previously permitted. Although the full effect of this
decision is not yet clear, it may provide the Company with
limited relief from any adverse effects of the act.
Commercial broadcast stations sell advertising time through a
number of methods, and some stations use third-party brokers to
sell otherwise unused inventory at below-market prices. The FCC
is currently considering a request that it declare that such
sales, when made through Internet brokers, do not affect a
broadcast stations lowest unit charge for advertising,
which such stations must offer to candidates for public office
during pre-election periods. It is unclear what effect this
matter will have on the Companys operations because it is
still pending at the FCC, but an adverse result could limit the
Companys ability to obtain revenue from certain types of
broadcast advertising.
Broadcast Indecency. During 2007, the
FCC amended its rules, in response to the enactment of the
Broadcast Decency Enforcement Act of 2005, to increase the
maximum monetary forfeiture for the broadcast of indecent
programming from $32,500 per occurrence to $325,000 per
occurrence. In June 2007, the U.S. Court of Appeals for the
Second Circuit issued a decision vacating certain of the
FCCs proposed forfeitures for the broadcast of so-called
fleeting expletives, which the FCC found were
indecent. The court concluded that the FCC had failed to
articulate a reasoned basis for its decisions and remanded the
relevant cases to the FCC for further consideration. The FCC
responded by requesting that the U.S. Supreme Court review
the matter, and that request remains pending. In addition, the
U.S. Court of Appeals for the Third Circuit is considering
a challenge to the FCCs proposal to impose monetary
forfeitures in connection with CBSs 2004 broadcast of a
musical performance during the Super Bowl halftime show, which
the FCC also found to be indecent. Particularly in light of the
increase in maximum forfeitures, the resolution of this
litigation could affect the risks associated with operation of
the Companys broadcast television stations.
It is not generally the FCCs policy to notify licensees
when it receives indecency complaints regarding their broadcasts
before it issues a formal Letter of Inquiry or takes other
enforcement action. As a result, the FCC may have received
complaints of which the Company is not aware alleging that one
or more of the Companys stations broadcast indecent
material. The Company was, however, notified by Letters of
Inquiry during 2007 that the FCC had received complaints from
viewers alleging that a program broadcast by Company station
WPLG and a program broadcast by Company
2007 FORM 10-K 13
Table of Contents
station WDIV included indecent
material. The Company responded to each of the notices by letter
to the FCC denying that the programs identified in the
complaints were indecent, and these matters remain pending. In
addition, the Company was notified on January 25, 2008 that
the FCC had proposed a monetary forfeiture against station KSAT,
along with 51 other television stations, in connection with the
stations broadcast of an allegedly indecent scene in an
episode of the drama NYPD Blue.
Sponsorship Identification
Issues. During 2006 and 2007, a media
watchdog group filed a series of complaints at the FCC alleging
that various broadcast stations and cable channels violated the
FCCs sponsorship identification rules by broadcasting
material provided to them by a third party without disclosing
the source of the material. The FCC issued Letters of Inquiry to
three Company-owned stations that had been named in the
complaints. Specifically, Company-owned station WJXT was named
in the first complaint, along with 76 other broadcast
stations, and Company-owned stations WKMG and WPLG were
named in the second complaint, along with 44 other stations.
During September 2007, the FCC released two decisions proposing
monetary forfeitures against a cable operator in connection with
a series of news broadcasts identified in the complaints. These
decisions do not directly impact the Company, but they are
relevant because the FCC typically uses similar standards to
evaluate alleged sponsorship identification violations by
broadcast stations and cable operators. Nonetheless, no
forfeitures have been proposed against broadcast stations in
connection with this matter, and because the Company-owned
stations identified in these complaints did not receive any
consideration in exchange for the material that they broadcast,
the Company does not believe that the actions of those stations
violated FCC rules or federal law. However, while the FCCs
investigations concerning the three Company stations remain
pending, it is not possible to predict what further actions (if
any) the FCC may take in response to the complaints.
The FCC is conducting proceedings dealing with various issues in
addition to those described elsewhere in this section, including
proposals to modify its regulations relating to the ownership
and operation of cable television systems (which regulations are
discussed in the section titled Cable Television
Operations).
Depending on the respective outcomes, the various rule changes,
FCC proceedings and other matters described in this section
could adversely affect the profitability of the Companys
television broadcasting operations.
Magazine
Publishing
Newsweek
Newsweek is a weekly news magazine published both
domestically and internationally by Newsweek, Inc., another
subsidiary of the Company. In gathering, reporting and writing
news and other material for publication, Newsweek
maintains news bureaus in 8 U.S. and 11 foreign cities.
The domestic edition of Newsweek includes more than 100
different geographic or demographic editions that carry
substantially identical news and feature material, but enable
advertisers to direct messages to specific market areas or
demographic groups. Domestically, Newsweek ranks second
in circulation among the three leading weekly news magazines
(Newsweek, Time and U.S. News & World
Report). For each of the past five years,
Newsweeks average weekly domestic circulation rate
base has been 3,100,000 copies, and its percentage of the total
weekly domestic circulation rate base of the three leading
weekly news magazines, which had been 34.0%, increased in 2007
to 37.1% because Time Magazine had implemented a rate base
reduction earlier in 2007. Effective with the January 14,
2008 issue, Newsweek, Inc. lowered the magazines average
weekly domestic rate base to 2,600,000 copies. As a result,
Newsweeks percentage of the total weekly domestic
circulation rate base of the three leading weekly news magazines
will be 33.1%.
Newsweek is sold on newsstands and through subscription
mail order sales derived from a number of sources, principally
direct mail promotion. The basic one-year subscription price is
$41.08. Most subscriptions are sold at a discount from the basic
price. Newsweeks newsstand cover price was
increased to $4.50 from $3.95 effective with the May 8,
2006 issue and then was increased to $4.95 effective with the
December 18, 2006 issue; $4.95 remains the current cover
price.
Newsweeks published advertising rates are based on
its average weekly circulation rate base and are competitive
with those of the other weekly news magazines. As is common in
the magazine industry, advertising typically is sold at varying
discounts from Newsweeks published rates. Effective
with the January 8, 2007 issue, Newsweeks
published national advertising rates for all categories of such
advertising were increased by an average of approximately 5.0%.
Beginning with the issue dated January 14, 2008,
Newsweeks published national advertising rates were
lowered
14 THE WASHINGTON POST
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commensurate with the percentage
decline in the average weekly domestic rate base; such rates
were increased again, also by an average of approximately 5.0%.
Internationally, Newsweek is published in a Europe,
Middle East and Africa edition; an Asia edition covering Japan,
Korea and south Asia; and a Latin America edition, all of which
are in the English language. As of April 1, 2007, Castelo
de Pedra Editoria, LTDA, took over responsibility for the
advertising, distribution and production of the Latin America
edition. Editorial copy solely of domestic interest is
eliminated in the international editions and is replaced by
other international, business or national coverage primarily of
interest abroad. Newsweek estimates that the combined average
weekly paid circulation for these
English-language
international editions of Newsweek in 2007 was
approximately 450,000 copies.
Since 1984, a section of Newsweek articles has been
included in The Bulletin, an Australian weekly news
magazine that also circulates in New Zealand. Effective
January 24, 2008, The Bulletin with Newsweek ceased
publication; the last issue of the magazine went on sale
January 23, 2008. A
Japanese-language
edition of Newsweek, Newsweek Nihon Ban, has been
published in Tokyo since 1986 pursuant to an arrangement with a
Japanese publishing company that translates editorial copy,
sells advertising in Japan and prints and distributes the
edition. Newsweek Hankuk Pan, a
Korean-language
edition of Newsweek, began publication in 1991 pursuant
to a similar arrangement with a Korean publishing company.
Newsweek en Español, a
Spanish-language
edition of Newsweek that has been distributed in Latin
America since 1996, is currently being published under an
agreement with a Mexico-based company that translates editorial
copy, prints and distributes the edition and jointly sells
advertising with Newsweek. Newsweek Bil Logha Al-Arabia,
an
Arabic-language
edition of Newsweek, began publication in 2000 under a
similar arrangement with a Kuwaiti publishing company. Pursuant
to agreements with local subsidiaries of a German publishing
company, Newsweek Polska, a
Polish-language
newsweekly, began publication in 2001, and Russky Newsweek,
a
Russian-language
newsweekly, began publication in 2004. In addition to containing
selected stories translated from Newsweeks various
U.S. and foreign editions, each of these magazines includes
editorial content created by a staff of local reporters and
editors. Under an agreement with a Hong Kong-based publisher,
Newsweek Select, a
Chinese-language
magazine based primarily on selected content translated from
Newsweeks U.S. and international editions, has
been distributed in Hong Kong since 2003 and in mainland China
since 2004. Newsweek estimates that the combined average weekly
paid circulation of The Bulletin insertions and the
various
foreign-language
international editions of Newsweek was approximately
653,500 copies in 2007.
The online version of Newsweek, which includes stories
from Newsweeks print edition as well as other
material, had been a co-branded feature on the MSNBC.com website
since 2000. This feature is being produced by
Washingtonpost.Newsweek Interactive, another subsidiary of the
Company. Since October of 2007, Newsweek.com has been hosted
independent of MSNBC.com through WPNI, although a co-branding
and traffic relationship with MSNBC.com has continued.
Arthur Frommers Budget Travel magazine, another
Newsweek publication, was published 10 times during 2007 and had
an average paid circulation of more than 600,000 copies.
Budget Travel is headquartered in New York City and has
its own editorial staff. This magazines website is also
produced by Washingtonpost.Newsweek Interactive.
Cable Television
Operations
At the end of 2007, the Company (through its Cable ONE
subsidiary) provided cable service to approximately 702,700
basic video subscribers (representing about 51% of the 1,371,000
homes passed by the systems) and had in force approximately
223,900 subscriptions to digital video service and 341,000
subscriptions to cable modem service. Digital video and cable
modem services are each available in markets serving virtually
all of Cable ONEs subscriber base. Among the digital video
services offered by Cable ONE is the delivery of certain
premium, cable network and local
over-the-air
channels in HDTV.
In January 2007, Cable ONE purchased some cable systems in Idaho
(near our West Valley system) which passed 11,000 homes and
served 4,557 basic customers.
In December 2007, Cable ONE completed a trade of a Cable ONE
Texas system (which was managed by a third party) for cable
systems in Arkansas, Texas and Missouri. The basic subscriber
counts were about equal, but Cable ONE picked up an additional
2,600 homes passed in the transaction.
The Companys cable systems are located in 19 midwestern,
southern and western states and typically serve smaller
communities. Thus, 6 of the Companys current systems pass
fewer than 10,000 dwelling units, 34 pass 10,00050,000
dwelling units and 5 pass more than 50,000 dwelling units. The
two largest clusters of systems
2007 FORM 10-K 15
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(which each currently serve more
than 80,000 basic video subscribers) are located on the Gulf
Coast of Mississippi and in the Boise, ID, area.
Cable ONE continued its introduction of its voice over Internet
protocol (VoIP), or digital telephone, service in
2007. At year-end, Cable ONE provided VoIP service to 58,640
customers, and the service is currently available to 90% of the
homes passed.
In December 2006, Cable ONE purchased in the FCCs Advanced
Wireless Service auction approximately 20 MHz of spectrum
in the 1.7 GHz and 2.1 GHz frequency bands in areas
that cover more than 85% of the homes passed by Cable ONEs
systems. This spectrum can be used to provide a variety of
advanced wireless services, including fixed and mobile
high-speed Internet access using WiMAX and other digital
transmission systems. Licenses for this spectrum have an initial
15-year term
and 10-year
renewal terms. Licensees will be required to show that they have
provided substantial service by the end of the initial license
term, but there are no interim construction or service
requirements. Cable ONE is evaluating how best to utilize its
spectrum, but has no plans to offer any wireless services in the
immediate future.
Regulation of
Cable Television and Related Matters
The Companys cable, Internet, and voice operations are
subject to various requirements imposed by local, state and
federal governmental authorities. The regulation of certain
cable television rates pursuant to procedures established by
Congress has negatively impacted the revenues of the
Companys cable systems. Many of the other legislative and
regulatory matters discussed in this section also have the
potential to adversely affect the Companys cable
television, Internet, and voice businesses.
Cable
Television
The Cable Television Consumer Protection and Competition Act of
1992 (the 1992 Cable Act) requires or authorizes the
imposition of a wide range of regulations on cable television
operations. Three major areas of regulation are: (i) the
rates charged for certain cable television services;
(ii) required carriage (must-carry) of some
local broadcast stations; and (iii) retransmission consent
rights for commercial broadcast stations.
Franchising. As a condition to their
ability to operate, the Companys cable systems have been
required to obtain franchises granted by state or local
governmental authorities. Those franchises typically are
nonexclusive and limited in time, contain various conditions and
limitations and provide for the payment of fees to the local
authority, determined generally as a percentage of revenues.
Additionally, those franchises often regulate the conditions of
service and technical performance and contain various types of
restrictions on transferability. Failure to comply with all of
the terms and conditions of a franchise may give rise to rights
of termination by the franchising authority.
Rate Regulation. In 1993, the FCC
adopted regulations that permitted local franchising authorities
or the FCC to regulate rates charged for certain levels of cable
service, equipment and service calls. Among other things, the
Telecommunications Act of 1996 expanded the definition of
effective competition (a condition that precludes
any regulation of the rates charged by a cable system), and
sunsetted the FCCs authority to regulate the rates charged
for optional tiers of service. The FCC has confirmed that some
of the cable systems owned by the Company fall within the
effective-competition exemption, and the Company believes, based
on an analysis of competitive conditions within its systems,
that other of its systems may also qualify for that exemption.
Monthly subscription rates charged for the basic tier of cable
service, as well as rates charged for equipment rentals and
service calls, for many of our cable systems remain subject to
regulation by local franchise authorities in accordance with FCC
rules. However, rates charged by cable television systems for
tiers of service other than the basic tier for
pay-per-view
and per-channel premium program services, for digital video,
cable modem services and digital telephone and for
advertising are all currently exempt from regulation.
Must-Carry and Retransmission
Consent. As previously discussed in the
section titled Television Broadcasting, under the
must-carry requirements of the 1992 Cable Act, a
commercial television broadcast station may, subject to certain
limitations, insist on carriage of its signal on cable systems
located within the stations market area. Similarly, a
non-commercial public station may insist on carriage of its
signal on cable systems located either within the stations
predicted Grade B signal contour or within 50 miles of a
reference point in a stations community designated by the
FCC. As a result of these obligations, certain of the
Companys cable systems have had to carry broadcast
stations that they might not otherwise have elected to carry,
and the freedom the Companys systems would otherwise have
to drop signals previously carried has been reduced.
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Also as explained in that section, at three-year intervals
beginning in October 1993, commercial broadcasters have had the
right to forego must-carry rights and insist instead that their
signals not be carried by cable systems without their prior
consent. The next-three year election cycle begins
October 1, 2008, with the elections effective
January 1, 2009 through December 31, 2011. Congress
has barred broadcasters from entering into exclusive
retransmission consent agreements through the end of 2010. The
Companys cable systems are currently carrying all of the
stations that insisted on retransmission consent. However, in
some cases the Company has been required to provide
consideration to broadcasters to obtain retransmission consent,
such as commitments to carry other program services offered by a
station or an affiliated company, to purchase advertising on a
station, or to provide advertising availabilities on cable to a
station. Moreover, the FCC has issued a Notice of Proposed
Rulemaking to, among other things, review the ability of a
broadcast programmer to require carriage of affiliated
programming as a condition of obtaining retransmission consent.
Digital Television. As previously
noted, the FCC has determined that currently only television
stations broadcasting in a DTV-only mode can require local cable
systems to carry their DTV signals and that if a DTV signal
contains multiple video streams only the primary
stream of video, as designated by the station, is required to be
carried. In December 2007, the FCC issued an order requiring
cable operators to ensure that following the February 17,
2009 digital transition deadline, all local must-carry broadcast
stations are viewable by all subscribers, either by
providing customers with both a digital and down-converted
analog version of such stations (and in some instances also
providing a standard definition digital signal) or by deploying
an all-digital system platform prior to the
February 17, 2009 deadline. Moreover, where a must-carry
broadcast stations signal is transmitted in HDTV format,
cable operators will be required to carry the signal in HDTV
format and cannot downconvert that signal to standard
definition. Satisfaction of these requirements by carrying the
analog and the standard definition
and/or the
HDTV format signal of local broadcast signals could result in
the Companys cable systems being required to delete some
existing programming to make room for all of the video streams
included in broadcasters DTV signals. Satisfaction of
these requirements by converting to all-digital platforms in our
systems would require substantial capital expenditures,
including provisioning households with analog television
receivers with set-top boxes capable of down-converting the
digital broadcast signals. In addition, the FCC is considering
expanded must-carry requirements for Class A low-power
television stations after the digital transition deadline that
could have similar adverse effects on Cable Ones
operations.
Pole Attachments. Pursuant to the Pole
Attachment Act, the FCC exercises authority to disapprove
unreasonable rates charged to cable operators by most telephone
and power utilities for utilizing space on utility poles or in
underground conduits. The FCC has adopted two separate formulas
under the Pole Attachment Act: one for attachments by cable
operators generally and a higher rate for attachments used to
provide telecommunications services. However the
Pole Attachment Act does not apply to poles and conduits owned
by municipalities or cooperatives. Also, states can reclaim
exclusive jurisdiction over the rates, terms and conditions of
pole attachments by certifying to the FCC that they regulate
such matters, and several states in which the Company has cable
operations have so certified. A number of cable operators
(including the Companys Cable ONE subsidiary) are using
their cable systems to provide not only television programming,
but also Internet access and digital telephony. In 2002, the
U.S. Supreme Court held, based on a prior FCC ruling that
Internet access service provided by cable operators is not a
telecommunications service, that the lower pole
attachment rates apply not only to attachments used to provide
traditional cable services, but also to attachments used to
provide Internet access. The FCC has not yet finally determined
whether digital telephony provided by cable operators is a
telecommunications service that would trigger the
higher pole attachment rates. In November 2007, the FCC issued a
Notice of Proposed Rulemaking exploring whether to effectively
eliminate cables lower pole attachment fees by imposing a
higher unified rate for entities providing broadband Internet
service, which could moot the foregoing precedent. While the
outcome of this proceeding can not be predicted, changes to
Cable ONEs pole attachment rate structure could
significantly increase its annual pole attachment costs.
Federal Copyright Issues. The Copyright
Act of 1976 gives cable television systems the ability, under
certain terms and conditions and assuming that any applicable
retransmission consents have been obtained, to retransmit the
signals of television stations pursuant to a compulsory
copyright license. Those terms and conditions permit cable
systems to retransmit the signals of local television stations
on a royalty-free basis; however, in most cases, cable systems
retransmitting the signals of distant stations are required to
pay certain license fees set forth in the statute or established
by subsequent administrative regulations. The compulsory license
fees have been increased on several occasions since this act
went into effect. The 1999 Satellite Home Viewer Improvement Act
provides direct broadcast satellite (DBS) with a
royalty-free compulsory copyright license for distribution of
the signals of local television stations to satellite
subscribers in the markets served by such stations. This act
continued the limitation on importing the signals of distant
2007 FORM 10-K 17
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network-affiliated stations
contained in the original compulsory license for DBS operators.
In September 2006, the U.S. Copyright Office requested
comments concerning the appropriate treatment of imported
digital television broadcast signals, including comments
addressing the question of whether the same compulsory license
fees that apply to imported analog signals should apply to
imported digital signals that incorporate multiple program
streams.
During 2006, the U.S. Copyright Office commenced inquiries
regarding clarification and revisions of certain cable
compulsory copyright license reporting requirements and
clarification of certain issues relating to the application of
the compulsory license to the carriage of digital broadcast
stations. In December 2007, the Copyright Office issued a Notice
of Inquiry to review whether cable operators must include in
their compulsory license royalty calculation a distant signal
carried anywhere in the cable system as if it were carried
everywhere in the system, thus resulting in payments on
phantom signals. Furthermore, the Copyright Office
is reviewing an approach by which all copyright payments would
be computed electronically by a system administered by the
Copyright Office that may not reflect the unique circumstances
of each of our systems
and/or
groupings of systems. We cannot predict the outcome of any such
inquiries, rulemakings or proceedings; however, it is possible
that certain changes in the rules or copyright compulsory
license fee computations or compliance procedures could have an
adverse effect on our business by increasing our copyright
compulsory license fee costs or by causing us to reduce or
discontinue carriage of certain broadcast signals that we
currently carry on a discretionary basis.
Telephone Company Competition. The
Telecommunications Act of 1996 permits telephone companies to
offer video programming services in areas where they provide
local telephone service. Over the past decade, telephone
companies have pursued multiple strategies to enter the
multichannel video programming delivery market. Initially, some
telephone companies partnered with DBS operators to resell a DBS
service to their telephone customers. Other telephone companies
have obtained traditional cable franchise agreements and built
their own cable systems. Still other telephone companies have
developed other methods to deliver video programming that,
depending on the technology employed, may be regulated in a
manner similar to the Companys cable systems. The FCC
rejected the argument that IPTV is not cable
service, though the matter is still under consideration.
Some telephone company providers have taken the position that
the specific technology employed in delivering video programming
dictates whether a local franchise is required. The theory is
that because it is not providing a cable service, as
that term is defined in federal law, but rather is delivering an
information service, which by law is not subject to
regulation by state and local governments, no local franchise is
required. The FCC initially rejected this argument, but the
matter is still under consideration. In the meantime, telephone
companies have urged the adoption of state-wide or national
franchise rules in order to circumvent the need for local
franchise approvals before they can offer video service.
Beginning in 2005, a number of states (including Arizona,
Kansas, Missouri and Texas, which are states where the Company
has cable systems) have enacted legislation that permits
telephone companies and others to offer cable service within the
state without obtaining local government approvals. A number of
other states are considering similar legislation. State-issued
franchises typically have fewer requirements than franchises
granted by local governmental authorities, and in some cases the
Companys cable systems may obtain their own state-issued
franchises. Telephone companies have also asked Congress to pass
legislation establishing a national franchise for certain types
of video delivery systems, although the prospects for such
legislation are uncertain. In addition, in December 2006, the
FCC adopted rules intended to speed up the local franchising
process by requiring local franchising authorities to act on
franchise proposals within 90 days and prohibiting those
authorities from imposing various requirements (such as special
fees and payments) viewed by the FCC as unreasonable. All of
these legislative and regulatory actions will likely have the
effect of accelerating the development of competitive providers.
Wireless Services. At various times
over the past decade, the FCC has taken steps to facilitate the
use of certain frequencies, notably the 2.5 GHz and
31 GHz bands, to deliver
over-the-air
multichannel video programming services to subscribers in
competition with cable television systems. However those
services generally were not deployed in any commercially
significant way. Beginning in 2004, the FCC adopted rule changes
that allowed the 2.5 GHz band to be used for non-video
services and permitted transmitters to be deployed in cellular
patterns. With the assistance of these rule changes, the
2.5 GHz and other frequency bands (including the
1.7 GHz and 2.1 GHz bands in which the FCC auctioned
spectrum in 2006) are now being adopted for the delivery of
two-way broadband digital data and high-speed Internet access
services capable of covering large areas. These services were
initially being provided on a fixed basis, delivering access to
houses and businesses, but are expected shortly to accommodate
mobile devices, such as laptop computers with a wireless adapter
card. These wireless networks may use a variety of advanced
transmission standards, including an increasingly popular
standard known as WiMAX. Also in 2006, a number of cellular
telephone providers introduced or expanded subscription services
that deliver full-length television programs or video clips
directly to cellular telephones, although at present, these
services are capable of supporting only a limited number of
available video streams. During 2008, the FCC will auction off
the 700 MHz
18 THE WASHINGTON POST
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spectrum currently used for analog
television broadcasting. The precise use of that spectrum has
not yet been determined; however, it could be used to deliver
content and services that could compete with Cable ONEs
content and services.
Ownership Limits. In December 2007, the
FCC reinstated its horizontal cable ownership rule, which
governs the number of subscribers an owner of cable systems may
reach on a national basis, providing that a single company could
not serve more than 30% of potential cable subscribers (or
homes passed by cable) nationwide. The revised rule
is virtually identical to the prior restriction that was
invalidated on constitutional and procedural grounds by the
U.S. Court of Appeals for the District of Columbia Circuit
in 2001.
In 1996, Congress repealed the statutory provision that
generally prohibited a party from owning an interest in both a
television broadcast station and a cable television system
within that stations Grade B contour. However, Congress
left the FCCs parallel rule in place, subject to a
congressionally mandated periodic review by the agency. The FCC,
in its subsequent review, decided to retain the prohibition for
various competitive and diversity reasons. However, in 2002, the
U.S. Court of Appeals for the District of Columbia Circuit
struck down the rule, holding that the FCCs decision to
retain the rule was arbitrary and capricious. Thus, there
currently is no restriction on the ownership of both a
television broadcast station and a cable television system in
the same market.
Set-Top Boxes. In the interests of
trying to promote competition in the market for set-top
converter boxes, effective July 1, 2007, FCC rules require
cable operators to support converter boxes and digital
television tuners designed to accept plug-in cards (known as
CableCARDs) that provide the descrambling and other
security features that traditionally have been included in the
integrated set-top converter boxes leased by cable operators to
their customers. During 2007, the FCC denied a waiver request by
the National Cable & Telecommunications Association asking
the FCC to delay the rules effectiveness until after the
transition to digital broadcasting in 2009. This rule has the
potential to increase the capital costs of cable operators
(because of the need to provide CableCARDs to customers and
because the new type of converter box is typically more
expensive than the traditional integrated box) and, to the
extent subscribers decide to buy their own boxes, to reduce the
revenues cable operators receive from leasing converter boxes
(although in the case of the Companys Cable ONE
subsidiary, that revenue is not material).
Other Requirements. Various other
provisions in current federal law may significantly affect the
costs or profits of cable television systems. These matters
include a prohibition on exclusive franchises, restrictions on
the ownership of competing video delivery services, a variety of
consumer protection measures and various regulations intended to
facilitate the development of competing video delivery services.
For example, the FCCs program carriage rules govern
disputes between cable operators and programming services over
the terms of carriage. Cable operators may not require a
programming service to grant it a financial interest or
exclusive carriage rights as a condition of its carriage on a
cable system, and a cable system may not discriminate against a
programming service in the terms and conditions of carriage on
the basis of its affiliation or nonaffiliation with such cable
system. Moreover, in November 2007, the FCC issued rules voiding
existing and prohibiting future exclusive service contracts for
services to multiple dwelling unit or other residential
developments. Other provisions benefit the owners of cable
systems by restricting regulation of cable television in many
significant respects, requiring that franchises be granted for
reasonable periods of time, providing various remedies and
safeguards to protect cable operators against arbitrary refusals
to renew franchises and limiting franchise fees to 5% of a cable
systems gross revenues from the provision of cable service
(which, for this purpose, includes digital video service, but
does not include cable modem service or digital telephony
service).
In February of 2008, the FCC issued revised leased access rules
that could substantially reduce the rates for parties desiring
to lease from 10% to 15% of the capacity on cable systems. The
regulations also impose a variety of leased access customer
service, information and reporting standards. These changes will
likely increase Cable ONEs costs and could cause
additional leased access activity on Cable ONEs cable
systems. As a result, Cable ONE may find it necessary to either
discontinue other channels of programming or opt not to carry
new channels of programming or other services that may be more
desirable to its customers.
In November 2007, the FCC Chairman announced an intent to
collect information from cable operators to determine whether
cable systems with 36 or more activated channels are available
to 70% of households in the United States and whether 70% of
those households subscribe to cable. Upon such a finding, the
Cable Communications Policy Act of 1984 (1984 Cable
Act) authorizes the FCC to promulgate any additional
rules necessary to promote diversity of information
sources. It is unclear whether this provision applies
solely to the FCCs leased access rules or more broadly.
Although Cable ONE does not believe that this measure has been
satisfied, it cannot predict whether the FCC will reach the same
conclusion. Any additional regulations on Cable ONEs
business could have a negative impact.
2007 FORM 10-K 19
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Apart from its authority under the 1992 Cable Act and the
Telecommunications Act of 1996, the FCC regulates various other
aspects of cable television operations.
Long-standing
FCC rules require cable systems to black out from certain
distant broadcast stations they carry syndicated programs for
which local stations have purchased exclusive rights and
requested exclusivity, and to delete under certain circumstances
duplicative network programs broadcast by distant stations. The
FCC also imposes certain technical standards on cable television
operators, exercises the power to license various microwave and
other radio facilities frequently used in cable television
operations and regulates the assignment and transfer of control
of such licenses.
Internet Access
Services
In 2005, the U.S. Supreme Court upheld the FCCs 2002
classification of cable modem service as an information
service. As a result, cable modem service is not subject
to the full panoply of regulations applied to
telecommunications services or to cable
services under the Communications Act, nor is it subject
to state or local government regulation. In the wake of the
Supreme Courts decision, the FCC ruled in August 2005 that
a telephone companys offering of digital subscriber line
(DSL) Internet access service is also an
information service. At that time, the FCC adopted a
general policy statement that the providers of cable modem and
DSL services should not interfere with the use of the Internet
by their customers, but it declined to adopt any specific rules
in that regard. However, the FCC also initiated a rulemaking on
what consumer protection requirements should apply in the
context of cable modem and DSL services. That rulemaking is
currently pending, and its outcome is uncertain.
The Companys Cable ONE subsidiary currently offers
Internet access on virtually all of its cable systems and is the
sole Internet service provider on those systems. However, it
does not restrict the sites that a subscriber may view. The 2005
Supreme Court decision described above removes some uncertainty
surrounding the Companys ability to deliver Internet
access without facing substantially increased regulatory
burdens, although legislation or regulations could still be
enacted or adopted that might restrict the Companys future
ability to modify the way it provides cable modem service. In
particular, Congress has been considering whether to impose
various net neutrality requirements that would limit
the ability of Internet access providers to prioritize the
delivery of particular types of content, applications or
services over their networks. As a result of recent allegations
that cable operators may be interfering with transmission and
receipt of data on so-called
peer-to-peer
networks, several entities have asked the FCC to ban such
practices and to rule that reasonable network management
practices do not include conduct that would block, degrade or
unreasonably discriminate against lawful Internet applications,
content or technologies. The FCC is currently reviewing a
complaint against another cable operator for, among other
things, allegedly managing user bandwidth consumption by
identifying and restricting the applications being run, not the
actual bandwidth consumed. We cannot predict the outcome of this
proceeding or any impact it may have on the FCCs net
neutrality requirements as they apply to Internet access
providers.
Broadband Internet access services, like the Companys
cable and VoIP services, are subject to other federal and state
privacy laws applicable to electronic communications. Providers
of broadband Internet access services must comply with the
FCCs regulations implementing the Communications
Assistance for Law Enforcement Act (CALEA), which
requires providers to make their services and facilities
accessible for law enforcement intercept requests. Various other
federal and state laws apply to providers of services that are
accessible through the Companys Internet access service,
including copyright laws, prohibitions on obscenity and a ban on
unsolicited commercial
e-mail.
Online content provided by the Company is also subject to these
laws.
Voice
Services
Voice Over Internet Protocol. Cable
companies (including the Companys Cable ONE subsidiary)
and others offer telephone service using a technology known as
voice over Internet protocol (VoIP), which permits
users to make telephone calls over broadband communications
networks, including the Internet. Depending on their equipment
and service provider, VoIP subscribers can use a regular
telephone (connected to an adaptor) to make and receive calls to
or from anyone on the public network. The Telecommunications Act
of 1996 preempts state and local regulatory barriers to the
offering of telephone service by cable companies and others, and
the FCC has used that federal provision to preempt specific
state laws that seek to regulate VoIP. Other provisions of the
1996 Act enable a competitor such as a cable company to exchange
voice and data traffic with the incumbent telephone company and
to purchase certain features at reduced costs, and these
provisions have enabled some cable companies to offer a
competing telephone service.
During 2004, some states sought to regulate VoIP service
pursuant to their public utility jurisdiction, but VoIP
providers challenged these actions before the FCC and in federal
courts. Later in 2004, the FCC ruled that VoIP services are
20 THE WASHINGTON POST
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interstate services subject
exclusively to the FCCs federal jurisdiction. This
decision was upheld on appeal, although the court held that the
FCCs order did not squarely address the classification of
cable-provided VoIP services. The FCC has an ongoing proceeding
to consider whether VoIP services provided by cable companies
are properly classified as an information service,
telecommunications service or some new category.
This determination could have numerous regulatory implications
for cable companies that provide VoIP services, including, as
discussed above, whether they have to pay higher pole attachment
rates because of their provision of VoIP services. Legislation
also has been introduced in Congress to address the
classification and regulatory obligations of VoIP providers,
though the prospect for passage of such legislation is uncertain.
Emergency 911 Services. In 2005, the
FCC ruled that an interconnected VoIP provider that enables its
customers to make calls to and from persons who use the public
switched telephone network must provide its customers with the
same enhanced 911 or E911 features that
traditional telephone and wireless companies are obligated to
provide, and that rule was upheld by the U.S. Court of
Appeals for the District of Columbia Circuit in December 2006.
CALEA. Beginning in 2007, new FCC
regulations required VoIP providers to comply with the
requirements of the Communications Assistance for Law
Enforcement Act, which requires covered carriers and their
equipment suppliers to deploy equipment that law enforcement can
readily access for lawful wiretap purposes.
Universal Service. The FCC decided in
June 2006 that interconnected VoIP services, such as those
provided by the Companys Cable ONE subsidiary, should be
required to contribute to the universal service fund on an
interim basis. The amount of universal service contribution is
based on a percentage of revenues earned from end-user
interstate services. The FCC developed three alternatives under
which an interconnected VoIP service provider may elect to
calculate its universal service contribution: (i) an
interim safe harbor that assumes 64.9% of the providers
end-user revenues are interstate; (ii) a traffic study to
determine an allocation for interstate end user revenues or
(iii) actual interstate and international end user
revenues. If an interconnected VoIP service provider calculates
its universal service contributions based on its actual
percentage of interstate calls, the interstate classification of
the service might no longer apply, in which case the VoIP
service provider could be subject to regulation by each state in
which it operates, as well as federal regulation. The FCCs
decision to apply universal service obligations to VoIP
providers was upheld by a federal court.
CPNI. In April 2007, the FCC adopted
rules expanding protection of customer proprietary network
information (CPNI) and extending CPNI protection
requirements to interconnected VoIP service providers effective
December 8, 2007. Interconnected VoIP providers were
required to institute measures to protect customers CPNI
from unauthorized disclosure to third parties, including use of
passwords to protect online access to CPNI and
customer-initiated telephone access to call detail information.
Access for Persons with
Disabilities. In June 2007, the FCC adopted
rules requiring interconnected VoIP providers to comply with all
disability access requirements that apply to telecommunications
carriers, including provision of telecommunications relay
services for persons with speech or hearing impairments,
effective October 5, 2007.
Regulatory Fees. An August 2007 FCC
order established that interconnected VoIP service providers
must begin contributing to shared costs of FCC regulation
through an annual regulatory fee assessment. The orders
effective date has not yet been established.
Local Number Portability. In a November
2007 order, the FCC required interconnected VoIP service
providers and their numbering partners to ensure
that their customers have the ability to port their telephone
numbers when changing providers to or from the interconnected
VoIP service. The order also clarifies that local exchange
carriers and commercial mobile radio service providers have an
obligation to port numbers to an interconnected VoIP service
provider upon a valid port request. Interconnected VoIP service
providers are also required under the order to begin to
contribute to federal funds to meet the shared costs of local
number portability and the costs of North American Numbering
Plan Administration. The orders effective date has not yet
been established.
Other
Activities
CourseAdvisor,
Inc.
In October 2007, the Company acquired the outstanding stock of
CourseAdvisor, Inc., an online lead generation provider,
headquartered in Wakefield, MA. In 2006, the Company made a
small investment in CourseAdvisor. Through its search engine
marketing expertise and proprietary technology platform,
CourseAdvisor generates student
2007 FORM 10-K 21
Table of Contents
leads for the post-secondary
education market. CourseAdvisor operates as an independent
subsidiary of the Company.
Bowater Mersey
Paper Company
The Company owns 49% of the common stock of Bowater Mersey Paper
Company Limited, the majority interest in which is held by a
subsidiary of AbitibiBowater, Inc. Bowater Mersey owns and
operates a newsprint mill near Halifax, Nova Scotia, and also
owns extensive woodlands that provide part of the mills
wood requirements. In 2007, Bowater Mersey produced about
266,000 tons* of newsprint.
Production and
Raw Materials
The Washington Post, Express and El Tiempo Latino
are all produced at the printing plants of WP Company in
Fairfax County, VA, and Prince Georges County, MD. The
Herald, The Enterprise Newspapers, the SCBJ and
La Raza del Noroeste are produced at The Daily
Herald Companys plant in Everett, WA, while The Gazette
Newspapers and Southern Maryland Newspapers are
printed at the commercial printing facilities owned by
PostNewsweek Media, Inc. (which facilities also produce
the divisions military newspapers). Greater Washington
Publishings periodicals are produced by independent
contract printers. The Post has announced plans to close
its printing plant located in College Park, MD, in 2010 after
moving two printing presses to its Springfield, VA, plant.
In 2007, The Washington Post, Express and El Tiempo
Latino collectively consumed about 152,258 tons* of
newsprint. Such newsprint was purchased from a number of
suppliers, including AbitibiBowater, Inc., which supplied
approximately 28% of the 2007 newsprint requirements for these
newspapers. Although for many years some of the newsprint
purchased by WP Company from Bowater Incorporated typically was
provided by Bowater Mersey Paper Company Limited (in which, as
noted previously, the Company owns an interest), since 1999 none
of the newsprint delivered to WP Company has come from that
source. In November 2007, Bowater Incorporated merged with
Abitibi-Consolidated, Inc., which supplied approximately 20% of
the 2007 newsprint requirements for The Post newspapers.
The price of newsprint has historically been volatile. During
2007, the RISI East Coast Newsprint Price Index, which provides
monthly single-price estimates based on marketplace surveys of
both buyers and sellers, for 30-lb. newsprint (the kind of
newsprint used by The Washington Post and most of the
newspapers published by PostNewsweek Media, Inc.), ranged
(on a short-ton basis) from a high of $565 per ton in January to
a low of $506 per ton in October. (Because of quantity discounts
and other factors, the RISI index prices do not necessarily
correspond with the prices actually paid by the Companys
subsidiaries for newsprint.) The Company believes that adequate
supplies of newsprint are available to The Washington Post
and the other newspapers published by the Companys
subsidiaries through contracts with various suppliers. More than
90% of the newsprint consumed by WP Companys printing
plants includes recycled content. The Company owns 80% of the
stock of Capitol Fiber Inc., which handles and sells to
recycling industries old newspapers, paper and other recyclable
materials collected in Washington, D.C., Maryland and
northern Virginia.
Newsweeks domestic edition is produced by two
independent contract printers at four separate plants in the
United States; advertising inserts and photo-offset films for
the domestic edition are also produced by independent
contractors. The international editions of Newsweek are
printed in England, Singapore, the Netherlands, South Africa and
Hong Kong; insertions for The Bulletin were printed in
Australia. Since 1997, Newsweek and a subsidiary of Time Warner
have used a jointly owned company based in England to provide
and procure production and distribution services for the Europe,
Middle East and Africa edition of Newsweek and the Europe
edition of Time. In 2002, this jointly owned company
began providing certain production and distribution services for
the Asian editions of these magazines. Budget Travel is
produced by an independent contract printer.
The domestic edition of Newsweek consumed about 26,000 tons of
paper in 2007, the bulk of which was purchased from six major
suppliers. The current cost of body paper (the principal paper
component of the magazine) is approximately $1,070 per ton.
In 2007, the operations of The Daily Herald Company and
PostNewsweek Media, Inc. consumed approximately 6,400 and
22,000
tons*
of newsprint, respectively, which were obtained in each case
from various suppliers. Approximately 66% of the newsprint used
by The Daily Herald Company and 56% of the newsprint used by
* All references in this
report to newsprint tonnage and prices refer to short tons
(2,000 pounds) and not to metric tons (2,204.6 pounds), which
are often used in newsprint quotations.
22 THE WASHINGTON POST
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PostNewsweek Media, Inc.
includes recycled content. The domestic edition of Newsweek
consumed about 26,000 tons of paper in 2007, the bulk of
which was purchased from six major suppliers. The current cost
of body paper (the principal paper component of the magazine) is
approximately $1,035 per ton.
More than 90% of the aggregate domestic circulation of both
Newsweek and Budget Travel is delivered by
periodical (formerly second-class) mail, and most subscriptions
for such publications are solicited by either first-class or
standard (formerly third-class) mail. Thus, substantial
increases in postal rates for these classes of mail could have a
significant negative impact on the operating income of these
business units. On February 26, 2007, the Postal Service
Board of Governors approved a rate increase of 5.1% for
first-class letters and 9.3% for route-sorted standard mail
effective May 14, 2007 and 11.7% for periodicals effective
July 15, 2007. Those increases had the effect of increasing
Newsweeks 2007 postage costs (May through December) by
approximately $1.8 million and Newsweeks 2008 postage
costs (January through June) are expected to increase by about
$2.1 million. On December 20, 2006, the Postal
Accountability and Enhancement Act was signed into law. Among
other things, it will abolish the current method of ratemaking
and generally limit future increases to increases in the
Consumer Price Index. It is anticipated that, effective May
2008, for all classes of mail the rate increase would be 2.9%,
which would increase Newsweeks 2008 postal costs (May
through December) by approximately an additional
$1.1 million.
Competition
Kaplan competes in each of its test preparation product lines
with a variety of regional and national test preparation
businesses, as well as with individual tutors and in-school
preparation for standardized tests. Kaplans Score!
Education subsidiary competes with other regional and national
learning centers, individual tutors and other educational
businesses that target parents and students. Kaplan PMBR
competes with an online provider of Multistate Bar Exam
preparation services, as well as with various bar review
providers (the largest of which is BAR/BRI, a unit of The
Thomson Corporation) that prepare students for the multistate
portion of the bar exam in addition to the state-specific
portion of the exam. Kaplans Professional Division
competes with other companies that provide alternative or
similar professional training, test preparation and consulting
services. Kaplans Higher Education Division competes with
both facilities-based and other distance-learning providers of
similar educational services, including
not-for-profit
colleges and universities and for-profit businesses. Overseas,
each of Kaplans businesses competes with other for-profit
companies and, in certain instances, with governmentally
supported schools and institutions that provide similar training
and educational programs.
The Washington Post competes in the
Washington, D.C., metropolitan area with The Washington
Times, a newspaper that has published weekday editions since
1982 and Saturday and Sunday editions since 1991. The Post
also encounters competition in varying degrees from other
newspapers and specialized publications distributed in The
Posts circulation area (including newspapers published
in suburban and outlying areas and nationally circulated
newspapers), and from websites, television, radio, magazines and
other advertising media, including direct mail advertising.
Express similarly competes with various other advertising
media in its service area, including both daily and weekly
free-distribution newspapers.
The websites produced by Washingtonpost.Newsweek Interactive
face competition from many other Internet services (particularly
in the case of washingtonpost.com from services that feature
national and international news), as well as from alternative
methods of delivering news and information. In addition, other
Internet-based services, including search engines, are carrying
significant amounts of advertising, and the Company believes
that such services have adversely affected the Companys
print publications and, to a lesser extent, its television
broadcasting operations, all of which rely on advertising for
the majority of their revenues. National online classified
advertising has become a particularly crowded field, with
competitors such as Yahoo! and eBay aggregating large volumes of
content into national classified or direct-shopping databases
covering a broad range of product lines. Some nationally managed
sites, such as Fandango and Weather.com, also offer local
information and services (in the case of those sites, movie
information and tickets and local weather). In addition, major
national search engines have entered local markets. For example,
Google and Yahoo! have launched local services that offer
directory information for local markets with enhanced
functionality, such as mapping and links to reviews and other
information. At the same time, other competitors are focusing on
vertical niches in specific content areas. For example,
AutoTrader.com and Autobytel.com aggregate national car
listings; Realtor.com and move.com aggregate national real
estate listings; Monster.com, Yahoo! Hotjobs (which is owned by
Yahoo!) and CareerBuilder.com (which is jointly owned by
Gannett, McClatchy, Tribune Co. and Microsoft) aggregate
employment listings. All of these vertical-niche sites can be
searched for local listings, typically by using ZIP codes.
Finally, several new services have been launched in the past
several years that have challenged established business models.
Many of these are free classified sites, one of which is
craigslist.com. In
2007 FORM 10-K 23
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addition, the role of the free
classified board as a center for community information has been
expanded by hyper local neighborhood sites, such as
dcurbanmom.com (which provides community information to mothers
in the Washington, D.C., metro area). Some free classified
sites, such as Oodle and Indeed, feature databases populated
with listings indexed from other publishers classified
sites. Google Base is taking a somewhat different approach and
is accepting free uploads of any type of structured data, from
classified listings to an individuals favorite recipes.
For its part, Slate competes for readers with many other
political and lifestyle publications, both online and in print,
and competes for advertising revenue with those publications, as
well as with a wide variety of other print publications and
online services, plus other forms of advertising.
The Herald circulates principally in Snohomish County,
WA; its chief competitors are the Seattle Times and the
Seattle Post-Intelligencer, which are daily and Sunday
newspapers published in Seattle and whose Snohomish County
circulation is principally in the southwest portion of the
county. Since 1983 the two Seattle newspapers have consolidated
their business and production operations and combined their
Sunday editions pursuant to a joint operating agreement,
although they continue to publish separate daily newspapers.
The Enterprise Newspapers are distributed in south
Snohomish and north King Counties, where their principal
competitors are the Seattle Times and The Journal
Newspapers, a group of monthly controlled-circulation
newspapers. Numerous other newspapers and shoppers are
distributed in The Heralds and The Enterprise
Newspapers principal circulation areas.
La Raza del Noroestes principal competitors in
its circulation territory are the weekly
Spanish-language
newspapers El Mundo and Seattle Latino, although
it also competes with various other
Spanish-language
media. The chief competitor for the Snohomish County Business
Journal is the Puget Sound Business Journal, with
parenting publication Parent Map serving as the principal
competitor for Seattles Child.
The circulation of The Gazette Newspapers is limited to
Montgomery, Prince Georges and Frederick Counties and
parts of Carroll County, MD. The Gazette Newspapers
compete with many other advertising vehicles available in
their service areas, including The Potomac and
Bethesda/Chevy Chase Almanacs, The Western Montgomery
Bulletin, The Bowie Blade-News, The West County News and
The Laurel Leader, weekly controlled-circulation
community newspapers; The Montgomery Sentinel, a weekly
paid-circulation community newspaper; The Prince
Georges Sentinel, a weekly controlled-circulation
community newspaper (which also has a weekly paid-circulation
edition); and The Frederick News-Post and Carroll
County Times, daily paid-circulation community newspapers.
The Southern Maryland Newspapers circulate in southern
Prince Georges County and in Charles, Calvert and
St. Marys Counties, MD, where they also compete with
many other advertising vehicles available in their service
areas, including the Calvert County Independent and
St. Marys Today, weekly paid-circulation
community newspapers.
In 2004, Clarity Media Group, a company associated with Denver
businessman and billionaire Philip Anschutz, bought The
Montgomery, Prince Georges and Northern Virginia
Journals, three community newspapers with a combination of
paid and free circulation that had been published in suburban
Washington, D.C., for many years by a local company. In
February 2005 Clarity Media Group relaunched The Journal
newspapers as The Washington Examiner, a free
newspaper which is being published six days a week in northern
Virginia, suburban Maryland and Washington, D.C., zoned
editions, each of which contains national and international as
well as local news. The Company believes that the three editions
of The Washington Examiner are currently being
distributed primarily by ZIP-code targeted home delivery in
their respective service areas. The Washington Examiner
competes in varying degrees with The Gazette Newspapers,
Express and The Washington Post. In March 2006
Clarity Media Group began publishing The Baltimore Examiner,
a similar type of free-distribution newspaper for the
greater Baltimore, MD, metropolitan area.
The advertising periodicals published by Greater Washington
Publishing compete with many other forms of advertising
available in their distribution area, as well as with various
other free-circulation advertising periodicals.
El Tiempo Latino competes with other
Spanish-language
advertising media available in the Washington, D.C., area,
including several other
Spanish-language
newspapers.
The Companys television stations compete for audiences and
advertising revenues with television and radio stations, cable
television systems and video services offered by telephone
companies serving the same or nearby areas, with direct
broadcast satellite services, and to a lesser degree, with other
media such as newspapers and magazines. Cable television systems
operate in substantially all of the areas served by the
Companys television stations where they compete for
television viewers by importing
out-of-market
television signals; by distributing pay-cable,
advertiser-supported and other programming that is originated
for cable systems; and by offering movies and other programming
on a
pay-per-view
basis. In addition, DBS services provide nationwide distribution
of television programming (including in some cases
pay-per-view
programming and programming packages unique to DBS) using
digital transmission technologies. In 1999, Congress passed the
Satellite Home Viewer Improvement Act, which gives
24 THE WASHINGTON POST
COMPANY
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DBS operators the ability to
distribute the signals of local television stations to
subscribers in the stations local market area
(local-into-local service), subject to obtaining the
consent of each local television station included in such a
service. Under an FCC rule implementing provisions of this act,
DBS operators are required to carry the analog signals of all
full-power television stations that request such carriage in the
markets in which the DBS operators have chosen to offer
local-into-local service. The FCC has also adopted rules that
require certain program-blackout rules applicable to cable
television to be applied to DBS operators. In addition, the
Satellite Home Viewer Improvement Act and subsequent legislation
continued restrictions on the transmission of distant network
stations by DBS operators. Thus, DBS operators generally are
prohibited from delivering the signals of distant network
stations to subscribers who can receive the analog signal of the
networks local affiliate. Several lawsuits were filed
beginning in 1996 in which plaintiffs (including all four major
broadcast networks and network-affiliated stations, including
one of the Companys Florida stations) alleged that certain
DBS operators had not been complying with the prohibition on
delivering network signals to households that can receive the
analog signal of the local network affiliate over the air. The
plaintiffs entered into a settlement with DBS operator DirecTV,
under which it agreed to discontinue distant network service to
certain subscribers and alter the method by which it determines
eligibility for this service. In 2003, the plaintiffs obtained a
favorable verdict and an injunction against DBS operator
EchoStar, and those actions were upheld by the U.S. Court
of Appeals for the Eleventh Circuit in May 2006. In October
2006, the lower court issued an order enjoining EchoStar from
providing the signals of
out-of-market
affiliates of the major broadcast networks to its subscribers
(including, as permitted by the relevant statute, subscribers
who EchoStar could have provided signals to had it not violated
the importation restrictions) after December 1, 2006.
EchoStar did stop providing those signals, but leased satellite
capacity to a third party who announced that it would provide
distant network signals to those EchoStar customers who would
have been entitled to receive them from EchoStar absent the
court order. That arrangement is currently being challenged in
court by the networks. In addition to the matters discussed
above, the Companys television stations may also become
subject to increased competition from low-power television
stations, wireless cable services and satellite master antenna
systems (which can carry pay-cable and similar program
material). Beginning in late 2005, the ABC and NBC television
networks and the MTV cable network began to make certain of
their television programming available on a
fee-per-episode
basis for downloading over the Internet to video-enabled iPod
players. In 2006, Google launched a service that distributes
certain programming from the CBS television network, the
National Basketball Association and other sources for viewing on
personal computers, as well as on portable video players. Google
charges a fee for some of the programming available on its
service while other programming is provided free. Major TV
networks have started to offer some of their programming on
their Internet sites, in some cases free of charge. In September
2006, Apple Computer, Inc. announced a new device (initially
referred to as iTV) that will display programming
downloaded over the Internet on television sets, and other
vendors have begun to offer similar devices. If these
video-download services become popular, they could become a
competitive factor for both the Companys television
stations and, with respect to the conventional delivery of
television programming, the Companys cable television
systems. Such services might also present additional revenue
opportunities for the Companys television stations from
the possible distribution on such services of the stations
news and other local programming.
Cable television systems operate in a highly and increasingly
competitive environment. In addition to competing with the
direct reception of television broadcast signals by the
viewers own antenna, such systems (like existing
television stations) are subject to competition from various
other forms of video program delivery. In particular, DBS
services (which are discussed in more detail in the preceding
paragraph) have been growing rapidly and are now a significant
competitive factor. The ability of DBS operators to provide
local-into-local service (as described above) has increased
competition between cable and DBS operators in markets where
local-into-local service is provided. Although DBS operators are
not required by law to provide local-into-local service, in
connection with the 2003 acquisition by News Corporation
(News Corp.) of a controlling interest in DirecTV,
DirecTV agreed with the FCC to provide that service in all
U.S. markets by the end of 2008. EchoStar has announced
that it also intends eventually to provide local-into-local
service in all U.S. markets. While some smaller markets may
not receive this service for another year or so,
local-into-local service is currently being offered by both
DirecTV and EchoStar in most markets in which the Company
provides cable television service. News Corp. is a global media
company that in the United States owns the Fox Television
Network, 35 broadcast television stations, a group of regional
sports networks and a number of nationally distributed cable
networks (including the Fox News Channel, FX, the Fox Movie
Channel, the Speed Channel and Fox Sports Net). Its acquisition
of a controlling interest in DirecTV was approved by the FCC in
an order that, among other things, requires News Corp. to offer
carriage of its broadcast television stations and access to its
cable programming services to cable television systems and other
multichannel video programming distributors on nonexclusive and
nondiscriminatory terms and conditions. Notwithstanding the
requirements imposed by the FCC, this acquisition has the
potential not only to enhance DirecTVs effectiveness as a
competitor, but also to limit the access of cable television
systems to desirable programming and to increase the costs of
such programming. Certain of the Companys cable television
2007 FORM 10-K 25
Table of Contents
systems have also been partially
or substantially overbuilt using conventional cable system
technology by various small to mid-sized independent telephone
companies, which typically offer cable modem and telephone
service, as well as basic cable service. The Company anticipates
that some overbuilding of its cable systems will continue,
although it cannot predict the rate at which overbuilding will
occur. Even without constructing their own cable plant, local
telephone companies can also compete with cable television
systems in the delivery of high-speed Internet access by
providing DSL service. In addition, some telephone companies
have entered into strategic partnerships with DBS operators that
permit the telephone company to package the video programming
services of the DBS operator with the telephone companys
own DSL service, thereby competing with the video programming
and cable modem services being offered by existing cable
television systems. Finally, it now seems clear that telephone
companies and others will be able to compete with cable
television systems in providing high-speed Internet access over
large areas by constructing wireless networks based on WiMAX and
other advanced transmission standards. Cable ONE
distinguishes itself from its competition by attaining very high
levels of customer satisfaction.
According to figures compiled by Publishers Information
Bureau, Inc., of the 248 magazines reported on by the Bureau,
Newsweek ranked sixth in total advertising revenues in
2007, when it received approximately 2.0% of all advertising
revenues of the magazines included in the report. As a result of
the 2008 rate base reduction, there is no assurance that the
ranking for Newsweek will remain consistent in 2008. The
magazine industry is highly competitive, both within itself and
with other advertising media (including Internet-based media)
that compete for audience and advertising revenue.
The Companys publications and television broadcasting and
cable operations also compete for readers and
viewers time with various other leisure-time activities.
Executive
Officers
The executive officers of the Company, each of whom is elected
for a one-year term at the meeting of the Board of Directors
immediately following the Annual Meeting of Stockholders held in
May of each year, are as follows:
Donald E. Graham, age 62, has been Chairman of the Board of
the Company since September 1993 and Chief Executive Officer of
the Company since May 1991. Mr. Graham served as President
of the Company from May 1991 until September 1993 and prior to
that had been a Vice President of the Company for more than five
years. Mr. Graham also served as Publisher of The
Washington Post from 1979 until September 2000.
Veronica Dillon, age 58, became the Vice President, General
Counsel and Secretary of the Company in January 2007.
Ms. Dillon began her career with the Company in February
1991 as corporate counsel at Kaplan, Inc. She was subsequently
named General Counsel at Kaplan in June 1995 and then served as
Kaplans Chief Administrative Officer beginning in December
2003.
Boisfeuillet Jones, Jr., age 61, became Vice Chairman
of the Company and Chairman of The Washington Post in
February 2008. Mr. Jones joined The Washington Post
in 1980 as Vice President and counsel. In 1995, he became
President and General Manager and was named Associate Publisher
in January 2000. In September 2000, he succeeded Donald Graham
as Publisher and Chief Executive Officer of The Washington
Post.
Ann L. McDaniel, age 52, has been the Vice
PresidentHuman Resources of the Company since September
2001. She also serves as Managing Director of Newsweek, a
position she assumed in January 2008. Ms. McDaniel had
previously served as Senior Director of Human Resources of the
Company since January 2001 and before that held various
editorial positions at Newsweek.
John B. Morse, Jr., age 61, has been Vice
PresidentFinance of the Company since November 1989. He
joined the Company as Vice President and Controller in July 1989
and prior to that had been a partner of Price Waterhouse.
Gerald M. Rosberg, age 61, became Vice
PresidentPlanning and Development of the Company in
February 1999. He had previously served as Vice
PresidentAffiliates at The Washington Post, a
position he assumed in November 1997. Mr. Rosberg joined
the Company in January 1996 as The Posts Director
of Affiliate Relations.
Employees
The Company and its subsidiaries employ approximately
19,000 persons on a full-time basis.
Worldwide, Kaplan employs approximately 11,800 persons on a
full-time basis. Kaplan also employs substantial numbers of
part-time employees who serve in instructional and
administrative capacities. During peak seasonal
26 THE WASHINGTON POST
COMPANY
Table of Contents
periods, Kaplans part-time
workforce exceeds 16,000 employees. About 15 of
Kaplans employees in New Zealand are subject to a
collective employment agreement that expired on
December 31, 2007. No other Kaplan employees are
represented by unions.
WP Company has approximately 2,393 full-time employees.
About 1,344 of that units full-time employees and about
424 part-time employees are represented by one or another
of five unions. Collective bargaining agreements are currently
in effect with locals of the following unions covering the
full-time and part-time employees and expiring on the dates
indicated: 1,140 editorial, newsroom and commercial department
employees represented by the Communications Workers of America
(November 7, 2008); 39 machinists represented by the
International Association of Machinists (January 10, 2011);
22 photoengravers-platemakers represented by the Graphic
Communications Conference of the International Brotherhood of
Teamsters (February 7, 2010); 31 engineers, carpenters and
painters represented by the International Union of Operating
Engineers (April 12, 2008); and 60 paper handlers and
general workers represented by the Graphic Communications
Conference of the International Brotherhood of Teamsters
(November 17, 2008). The agreement covering 450 mailroom
workers represented by the Communications Workers of America
expired on May 18, 2003; efforts to negotiate a new
agreement were unsuccessful, and in early 2006, WP Company
declared an impasse and implemented parts of its last contract
offer for employees in a particular job category. No
negotiations with this bargaining unit are ongoing at the
present time. Also, the agreement covering 26 electricians
represented by the International Brotherhood of Electrical
Workers expired on December 13, 2007; negotiations have yet
to produce a successor agreement. On February 7, 2008, WP
Company announced that a Voluntary Retirement Incentive Program
will be offered in March to some employees of The Washington
Post newspaper. It is uncertain at this time how many
employees will be eligible or will make the election to retire
early.
Washingtonpost.Newsweek Interactive has approximately
329 full-time and 14 part-time employees, none of whom
is represented by a union.
Of the approximately 280 full-time and 80 part-time
employees at The Daily Herald Company, about 50 full-time
and 15 part-time employees are represented by one or
another of three unions. The newspapers collective
bargaining agreement with the Graphic Communications Conference
of the International Brotherhood of Teamsters, which represents
press operators, expires on March 15, 2008; its agreement
with the Communications Workers of America, which represents
printers and mailers, expires on October 31, 2009; and its
agreement with the International Brotherhood of Teamsters, which
represents bundle haulers, expires on September 22, 2010.
The Companys broadcasting operations have approximately
960 full-time employees, of whom about 200 are
union-represented. Of the eight collective bargaining agreements
covering union-represented employees, one has expired and is
being renegotiated. Three collective bargaining agreements will
expire in 2008.
The Companys Cable Television Division has approximately
1,910 full-time employees, none of whom is represented by a
union.
Newsweek has approximately 575 full-time employees
(including about 125 editorial employees represented by the
Communications Workers of America under a collective bargaining
agreement that expires on January 1, 2009). On
February 6, 2008, Newsweek offered a Voluntary Retirement
Incentive Program that will be funded primarily through the
Companys pension plans. Approximately 150 employees
are eligible to take early retirement under the program. While
the actual acceptance rate is not reliably predictable, a
somewhat reduced workforce is likely as a result of the program.
PostNewsweek Media, Inc. has approximately
492 full-time and 190 part-time employees. Robinson
Terminal Warehouse Corporation (the Companys newsprint
warehousing and distribution subsidiary), Greater Washington
Publishing, Inc., Express Publications Company, LLC and El
Tiempo Latino LLC each employs fewer than 100 persons. None
of these units employees is represented by a union.
Forward-Looking
Statements
All public statements made by the Company and its
representatives that are not statements of historical fact,
including certain statements in this Annual Report on
Form 10-K
and elsewhere in the Companys 2007 Annual Report to
Stockholders, are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include comments about the
Companys business strategies and objectives, the prospects
for growth in the Companys various business operations,
and the Companys future financial performance. As with any
projection or forecast, forward-looking statements are subject
to various risks and uncertainties, including the risks and
uncertainties described in Item 1A of this Annual Report on
Form 10-K,
that could cause actual results or
2007 FORM 10-K 27
Table of Contents
events to differ materially from
those anticipated in such statements. Accordingly, undue
reliance should not be placed on any forward-looking statement
made by or on behalf of the Company. The Company assumes no
obligation to update any forward-looking statement after the
date on which such statement is made, even if new information
subsequently becomes available.
Available
Information
The Companys Internet address is www.washpostco.com.
The Company makes available free of charge through its
website its annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after such documents are electronically
filed with the Securities and Exchange Commission. In addition,
the Companys Certificate of Incorporation, its Corporate
Governance Guidelines, the Charters of the Audit and
Compensation Committees of the Companys Board of
Directors, and the codes of conduct adopted by the Company and
referred to in Item 10 of this Annual Report on
Form 10-K
are each available on the Companys website; printed copies
of such documents may be obtained by any stockholder upon
written request to the Secretary of the Company at 1150
15th Street, N.W., Washington, D.C. 20071.
Item 1A.
Risk Factors.
The Company faces a number of significant risks and
uncertainties in connection with its operations. The most
significant of these are described below. These risks and
uncertainties may not be the only ones facing the Company.
Additional risks and uncertainties not presently known, or
currently deemed immaterial, may adversely affect the Company in
the future. If any of the events or developments described below
occurs, it could have a material adverse effect on the
Companys business, financial condition or results of
operations.
| Reductions in the Amount of Funds Available to Students, including under the Federal Title IV Programs, in Kaplans Higher Education Schools Or Changes in the Terms on Which Such Funds Are Made Available |
During the Companys 2007 fiscal year, funds provided under
the student financial aid programs created under Title IV
of the Federal Higher Education Act accounted for approximately
$745 million of the net revenues of the schools in
Kaplans Higher Education Schools. Any legislative,
regulatory or other development that has the effect of
materially reducing the amount of Title IV financial
assistance or other funds available to the students of those
schools would have a significant adverse effect on Kaplans
operating results. In addition, any development that has the
effect of making the terms on which Title IV financial
assistance or other funds are available to students of those
schools materially less attractive could have an adverse effect
on Kaplans operating results.
| Tighter Lending Standards Imposed by Private Lenders |
Students obtain financing from a number of sources. In addition
to funds available under the Federal Title IV programs in
the form of federal loans and grants, students often obtain
loans from private lenders. In response to a general tightening
in the credit markets, lenders have announced that they will
apply more stringent lending standards for loans to students. A
significant reduction in the ability of students to obtain loans
from private lenders could lead to reduced enrollment in Kaplan
schools. Kaplan Higher Education estimates that approximately 9%
of its revenue comes from students who obtain loans from private
lenders.
| Failure to Maintain Institutional Accreditation Could Lead to Loss of Ability to Participate in Title IV Programs |
Each of Kaplan Higher Educations ground campuses and
online university are institutionally accredited by one or
another of a number of national and regional accreditors
recognized by the U.S. Department of Education.
Accreditation by an accrediting agency recognized by the
U.S. Department of Education is required for an institution
to become and remain eligible to participate in Title IV
programs. The loss of accreditation would, among other things,
render Kaplan schools and programs ineligible to participate in
Title IV programs and would have a material adverse effect
on its business.
| Failure to Maintain State Authorizations Could Cause Loss of Ability to Operate and to Participate in Title IV Programs in Some States |
Kaplan Higher Education ground campuses and online university are authorized to operate and to grant degrees, certificates or diplomas by the applicable state agency of each state where such authorization is required. Such state authorization is required for each campus located in the state or, in the case of states that require it, for Kaplan University online to offer post-secondary education. In either case, state authorization is required for students at |
28 THE WASHINGTON POST
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Higher Education campuses or enrolled in online programs to be eligible to participate in Title IV programs. The loss of such authorization would preclude the campuses or online university from offering post-secondary education and render students ineligible to participate in Title IV programs. Loss of authorization at those state campus locations or, in states that require it for Kaplan University online, could have a material adverse effect on Kaplan Higher Educations business. |
| Changes in the Extent to Which Standardized Tests Are Used in the Admissions Process by Colleges or Graduate Schools |
A substantial portion of Kaplans operating income is
generated by its Test Prep and Admissions operations. The source
of this income is fees charged for courses that prepare students
for a broad range of admissions examinations that are required
for admission to colleges and graduate schools. Historically,
colleges and graduate schools have required standardized tests
as part of the admissions process. There has been some movement
away from this historical reliance on standardized admissions
tests among a small number of colleges that have adopted
test-optional admissions policies. Any significant
reduction in the use of standardized tests in the college or
graduate school admissions process could have an adverse effect
on Kaplans operating results.
| Changes in the Extent to Which Licensing and Proficiency Examinations Are Used to Qualify Individuals to Pursue Certain Careers |
A substantial portion of Kaplan Professionals revenue
comes from preparing individuals for licensing or technical
proficiency examinations in various fields. Any significant
relaxation or elimination of licensing or technical proficiency
requirements in those fields served by Kaplans
Professional Division could negatively impact Kaplans
operating results.
| Failure to Successfully Assimilate Acquired Businesses |
The Companys Kaplan subsidiary has historically been an
active acquirer of businesses that provide educational services.
Consistent with this historical trend, during 2007 Kaplan
completed a total of nine acquisitions. Acquisitions involve
various inherent risks and uncertainties, including difficulties
in efficiently integrating the service offerings, accounting and
other administrative systems of an acquired business; the
challenges of assimilating and retaining key personnel; the
consequences of diverting the attention of senior management
from existing operations; the possibility that an acquired
business does not meet or exceed the financial projections that
supported the purchase price; and the possible failure of the
due diligence process to identify significant business risks or
undisclosed liabilities associated with the acquired business. A
failure to effectively manage growth and integrate acquired
businesses could have a material adverse effect on Kaplans
operating results.
| Difficulties of Managing Foreign Operations |
Kaplan has operations and investments in a growing number of
foreign countries, including Canada, Mexico, the United Kingdom,
Ireland, France, Israel, Australia, New Zealand, Singapore and
China. Operating in foreign countries presents a number of
inherent risks, including the difficulties of complying with
unfamiliar laws and regulations, effectively managing and
staffing foreign operations, successfully navigating local
customs and practices, preparing for potential political and
economic instability and adapting to currency exchange rate
fluctuations. The failure to manage these risks could have a
material adverse effect on Kaplans operating results.
| Changes in Prevailing Economic Conditions, Particularly in the Specific Geographic Markets Served by the Companys Newspaper Publishing and Television Broadcasting Businesses |
A significant portion of the Companys revenues in its
publishing and broadcasting businesses comes from advertising.
The demand for advertising is sensitive to the overall level of
economic activity, both nationally and locally. A general
decline in economic activity could adversely affect the
operating results of the Companys newspaper and magazine
publishing and television broadcasting businesses.
| Changing Preferences of Readers Or Viewers Away From Traditional Media Outlets |
The rates the Companys publishing and television
broadcasting businesses can charge for advertising are directly
related to the number of readers and viewers of its publications
and broadcasts. There is tremendous competition for readers and
viewers from other media. The Companys publishing and
television broadcasting businesses will be adversely affected to
the extent individuals decide to obtain news, entertainment,
classified listings and local shopping information from
Internet-based or other media to the exclusion of the
Companys publications and broadcasts.
2007 FORM 10-K 29
Table of Contents
| Changing Perceptions About the Effectiveness of Publishing and Television Broadcasting in Delivering Advertising |
Historically, newspaper and magazine publishing and television
broadcasting have been viewed as cost-effective methods of
delivering various forms of advertising. There can be no
guarantee that this historical perception will guide future
decisions on the part of advertisers. To the extent that
advertisers shift advertising expenditures to other media
outlets, the profitability of the Companys publishing and
television broadcasting businesses will suffer.
| Increased Competition Resulting From Technological Innovations in News, Information and Video Programming Distribution Systems |
The development of direct broadcast satellite systems has
significantly increased the competition faced by the
Companys cable television systems. In addition, the
continuing growth and technological expansion of Internet-based
services has increased competitive pressure on the
Companys media businesses. The development and deployment
of new technologies has the potential to negatively and
dramatically affect the Companys businesses in ways that
cannot now be reliably predicted.
| Changes in the Nature and Extent of Government Regulations, Particularly in the Case of Television Broadcasting and Cable Television |
The Companys television broadcasting and cable television
businesses operate in highly regulated environments. Complying
with applicable regulations has significantly increased the
costs and reduced the revenues of both businesses. Changes in
regulations have the potential to further negatively impact
those businesses, not only by increasing compliance costs and
(through restrictions on certain types of advertising,
limitations on pricing flexibility or other means) reducing
revenues, but also by possibly creating more favorable
regulatory environments for the providers of competing services.
More generally, all of the Companys businesses could have
their profitability or their competitive positions adversely
affected by significant changes in applicable regulations.
| Potential Liability for Patent Infringement in Cable Industry |
Providers of services similar to those offered by the
Companys Cable ONE subsidiary have been the target of
patent infringement claims from time to time relating to such
matters as cable system architecture, electronic program guides,
cable modem technology and VoIP voice services. Although we
cannot predict the impact at this juncture, if any such claims
are successful, the outcome would likely affect Cable ONE as
well as all other cable operators in the U.S.
| Changes in the Cost Or Availability of Raw Materials, Particularly Newsprint |
The Companys newspaper publishing businesses collectively
spend significant amounts each year on newsprint. Material
increases in the cost of newsprint or significant disruptions in
the supply of newsprint could have a material adverse effect on
the operating results of the Companys newspaper publishing
businesses.
Item 1B.
Unresolved Staff Comments.
Not applicable.
Item 2.
Properties.
Directly or through subsidiaries, Kaplan owns a total of 11
properties: a 30,000-square-foot six-story building located at
131 West 56th Street in New York City, which serves as
an educational center primarily for international students; a
4,000-square-foot office condominium in Chapel Hill, NC, which
it utilizes for its Test Prep business; a 15,000-square-foot
three-story building in Berkeley, CA, used for its Test Prep and
English-Language training businesses; a 39,000-square-foot
four-story brick building and a 19,000-square-foot two-story
brick building in Lincoln, NE, each of which is used by Kaplan
University; a 25,000-square-foot one-story building in Omaha,
NE, also used by Kaplan University; a 131,000-square-foot
five-story brick building in Manchester, NH, used by Hesser
College; a 25,000-square-foot building in Hammond, IN, used by
Sawyer College; a 45,000-square-foot three-story brick building
in Houston, TX, used by the Texas School of Business; and a
35,000-square-foot building in London, U.K. and a
2,200-square-foot building in Oxfordshire, U.K., each of which
is used by Holborn College. Kaplan Universitys corporate
offices together with a data center, call center and
employee-training facilities are located in two
97,000-square-foot leased buildings located on adjacent lots in
Ft. Lauderdale, FL. Both of those leases will expire in
2017. Kaplans distribution facilities for most of its
domestic publications are located in a 291,000-square-foot
warehouse in Aurora, IL, under a lease expiring in 2017.
Kaplans headquarters offices are located at 888
7th Avenue in New York City, where Kaplan rents space on
three floors under a lease that will expires in 2017. Overseas,
Dublin Business Schools facilities in Dublin, Ireland, are
located in nine buildings aggregating approximately
79,000 square feet of space that have been rented under
leases expiring between 2008 and 2029. Kaplan Financials
three largest leaseholds are office and
30 THE WASHINGTON POST
COMPANY
Table of Contents
instructional space in London of
33,000 square feet (which lease will expire in 2033),
21,000 square feet (which lease will expire in
2015) and office and instructional space in Birmingham of
23,000 square feet (which lease will expire in 2017). Kidum
has 52 locations throughout Israel, all of which are occupied
under leases that will expire between 2008 and 2012. All other
Kaplan facilities in the United States and overseas (including
administrative offices and instructional locations) also occupy
leased premises.
WP Company owns the principal offices of The Washington Post
in downtown Washington, D.C., including both a
seven-story building in use since 1950 and a connected
nine-story office building on contiguous property completed in
1972 in which the Companys principal executive offices are
located. WP Company also owns and occupies a small office
building on L Street which is connected to The
Posts office building. Additionally, WP Company owns
land on the corner of 15th and L Streets, N.W., in
Washington, D.C., adjacent to The Posts office
building. This land is leased on a long-term basis to the owner
of a multi-story office building that was constructed on the
site in 1982. WP Company rents one floor in this building, which
it has subleased to a third party.
WP Company owns a printing plant in Fairfax County, VA, which
was built in 1980 and expanded in 1998. That facility is located
on 19 acres of land owned by WP Company. WP Company also
owns a printing plant and distribution facility in College Park,
MD, which was built in 1998 on a
17-acre
tract of land owned by WP Company. As noted previously, WP
Company has announced plans to close this facility in 2010.
The Daily Herald Company owns its plant and office building in
Everett, WA; it also owns two warehouses adjacent to its plant
and a small office building in Lynnwood, WA.
Early in 2007, PostNewsweek Media, Inc. completed the
construction of a two-story combination office building and
printing plant on a
seven-acre
plot in Laurel, MD. In July 2006, The Gazette sold the
two-story brick building in Gaithersburg, MD, that served as its
headquarters, although certain editorial and administrative
personnel occupied the building until early 2008. At this time,
the staff moved into the renovated two-story brick building,
also in Gaithersburg, that had formerly held the Montgomery
County printing operations for PostNewsweek Media. The
Company also owns a printing facility in Waldorf, MD, which
serves as the headquarters for the Southern Maryland Newspapers.
In May 2007, the Company finished renovations to a one-story
brick building in St. Marys County and moved that
countys editorial and sales staff to this property. In
addition to this owned property, PostNewsweek Media leases
editorial and sales office space in Alexandria, VA, and in
Frederick, Carroll, Calvert and Prince Georges Counties,
MD.
The headquarters offices of the Companys broadcasting
operations are located in Detroit, MI, in the same facilities
that house the offices and studios of WDIV. That facility and
those that house the operations of each of the Companys
other television stations are all owned by subsidiaries of the
Company, as are the related tower sites (except in Houston,
Orlando and Jacksonville, where the tower sites are 50% owned).
In January 2007, the Companys PostNewsweek Stations
subsidiary purchased a 5.8-acre site north of Miami on which it
intends to construct a new building to house the operations of
WPLG and sold WPLGs existing facility in Miami. WPLG will
continue to occupy this facility pursuant to a lease with the
new owner until the new building in completed.
The principal offices of Newsweek are located at 251 West
57th Street in New York City, where Newsweek rents space on
nine floors. The lease on this space will expire in 2009, but is
renewable for a
15-year
period at Newsweeks option at rentals to be negotiated or
arbitrated. Newsweek did not exercise its renewal option and is
presently negotiating for a new
long-term
lease for less space elsewhere in New York City, for occupancy
prior to the expiration of the current lease. Budget
Travels offices are also located in New York City,
where they occupy premises under a lease that was renewed
through 2015. Newsweek also leases a portion of a building in
Mountain Lakes, NJ, to house its accounting, production and
distribution departments. The lease on this space will expire on
July 31, 2012, but is renewable for two 5-year periods at
Newsweeks option.
The headquarters offices of the Cable Television Division are
located in a three-story office building in Phoenix, AZ that was
purchased by Cable ONE in 1998. Cable ONE purchased an adjoining
two-story office building in 2005; that building is currently
leased to third-party tenants. The majority of the offices and
head-end facilities of the Divisions individual cable
systems are located in buildings owned by Cable ONE. Most of the
tower sites used by the Division are leased. In addition, the
Division houses call-center operations in 60,000 square
feet of rented space in Phoenix under a lease that will expire
in 2013.
2007 FORM 10-K 31
Table of Contents
Robinson Terminal Warehouse Corporation owns two wharves and
several warehouses in Alexandria, VA. These facilities are
adjacent to the business district and occupy approximately 7
acres of land. Robinson also owns two partially developed tracts
of land in Fairfax County, VA, aggregating about 20 acres.
These tracts are near The Washington Posts Virginia
printing plant and include several warehouses. In 1992, Robinson
purchased approximately 23 acres of undeveloped land on the
Potomac River in Charles County, MD, for the possible
construction of additional warehouse capacity.
The offices of Washingtonpost.Newsweek Interactive occupy
85,000 square feet of office space in Arlington, VA, under
a lease that will expire in 2015. Express Publications Company
subleases part of this space. In addition, WPNI leases space in
Washington, D.C., and Los Angeles and subleases space from
Newsweek in New York City for Slates offices in
those cities. Furthermore, WPNI also leases office space for
WPNI sales representatives in New York City, Chicago,
San Francisco and Los Angeles.
Greater Washington Publishings offices are located in
leased space in Vienna, VA, while El Tiempo Latinos
offices are located in leased space in Arlington, VA.
Item 3.
Legal Proceedings.
Kaplan, Inc., a subsidiary of the Company, is a party to a
previously disclosed class action antitrust lawsuit filed on
April 29, 2005, by purchasers of BAR/BRI bar review courses
in the U.S. District Court for the Central District of
California. On February 2, 2007, the parties filed a
settlement agreement with the court together with documents
setting forth a procedure for class notice. The court approved
the terms of the settlement on July 9, 2007. However,
certain class members filed an appeal to the case to the
U.S. Court of Appeals for the Ninth Circuit, and that
appeal remains pending. Effectiveness of the settlement is
subject to court approval. On February 6, 2008, Kaplan was
served with a purported class action lawsuit alleging
substantially similar claims as the previously settled lawsuit.
The putative class is said to include all persons who purchased
a bar review course from BAR/BRI in the United States since 2006
and all potential future purchasers of bar review courses. The
case is pending in the U.S. District Court for the Central
District of California. Kaplan intends to vigorously defend this
lawsuit. The Company and its subsidiaries are also defendants in
various other civil lawsuits that have arisen in the ordinary
course of their businesses, including actions alleging libel,
invasion of privacy, violations of applicable wage and hour laws
and claims involving current and former students at the
Companys schools. While it is not possible to predict the
outcome of these lawsuits, in the opinion of management their
ultimate dispositions should not have a material adverse effect
on the Companys business or financial position.
The Company is aware of several state attorneys general who have
opened inquiries or investigations into arrangements between
lenders and institutions of higher education. In this regard,
subsidiaries of the Company have received requests for
information from the Attorneys General of the states of Arizona,
Iowa and Maryland regarding relationships with student loan
providers. The Company is also aware of similar requests from
members of the U.S. Congress to at least one lender with
regard to its relationship with the Company and its
subsidiaries, as well as other institutions of higher education.
The Company believes that these governmental authorities are
conducting wide-ranging inquiries of student lending practices
generally and that the Company is not the sole recipient of this
type of information request. The Companys subsidiaries
have responded to these information requests and intend to
cooperate fully with these inquiries.
On or about January 17, 2008, an Assistant
U.S. Attorney in the Civil Division of the
U.S. Attorneys Office for the Eastern District of
Pennsylvania contacted Kaplan Higher Education Divisions
CHI-Broomall campus and made inquiries about the Surgical
Technology program, including the programs eligibility for
Title IV federal financial aid, the programs student
loan defaults, licensing and accreditation. The inquiry is
presently proceeding on an informal, voluntary
basis. Kaplan is responding to the information requests
made and intends to cooperate fully with the inquiry.
Item 4.
Submission of Matters to a Vote of Security Holders.
Not applicable.
32 THE WASHINGTON POST
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Table of Contents
PART II
Item 5.
Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.
Market
Information and Holders
The Companys Class B Common Stock is traded on the
New York Stock Exchange under the symbol WPO. The
Companys Class A Common Stock is not publicly traded.
The high and low sales prices of the Companys Class B
Common Stock during the last two years were:
2007 | 2006 | |||||||||||||||
Quarter
|
High | Low | High | Low | ||||||||||||
January March
|
$ | 796 | $ | 727 | $ | 805 | $ | 717 | ||||||||
April June
|
779 | 731 | 815 | 737 | ||||||||||||
July September
|
885 | 753 | 780 | 690 | ||||||||||||
October December
|
880 | 727 | 766 | 713 |
At January 31, 2008, there were 29 holders of record of the
Companys Class A Common Stock and 848 holders of
record of the Companys Class B Common Stock.
Dividend
Information
Both classes of the Companys Common Stock participate
equally as to dividends. Quarterly dividends were paid at the
rate of $2.05 per share during 2007 and $1.95 per share during
2006.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table and the footnote thereto set forth certain
information as of December 30, 2007, concerning
compensation plans of the Company under which equity securities
of the Company are authorized to be issued.
Number of Securities |
||||||||||||
Remaining Available for |
||||||||||||
Number of Securities to |
Future Issuance Under |
|||||||||||
Be Issued Upon |
Equity Compensation |
|||||||||||
Exercise of Outstanding |
Weighted-Average Exercise |
Plans (Excluding |
||||||||||
Options, Warrants and |
Price of Outstanding Options |
Securities Reflected in |
||||||||||
Rights | Warrants and Rights | Column (a)) | ||||||||||
Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by security holders
|
92,275 | $ | 606.89 | 287,500 | ||||||||
Equity compensation plans not approved by security holders
|
| | | |||||||||
Total
|
92,275 | $ | 606.89 | 287,500 |
This table does not include information relating to restricted
stock grants awarded under The Washington Post Company Incentive
Compensation Plan, which plan has been approved by the
stockholders of the Company. At December 30, 2007, there
were 11,315 shares of restricted stock outstanding under
the 2005 2008 Award Cycle and 12,610 shares of
restricted stock outstanding under the 2007 2010
Award Cycle that had been awarded to employees of the Company
and its subsidiaries under that Plan, and 137,365 shares of
restricted stock were available for future awards. In addition,
the Company has from time to time awarded special discretionary
grants of restricted stock to employees of the Company and its
subsidiaries. At December 30, 2007, there were a total of
10,555 shares of restricted stock outstanding under special
discretionary grants approved by the Compensation Committee of
the Board of Directors.
2007 FORM 10-K 33
Table of Contents
Performance
Graph
The following graph is a comparison of the yearly percentage
change in the Companys cumulative total shareholder return
with the cumulative total return of the Standard &
Poors 500 Stock Index, the Standard &
Poors Publishing Index, and a custom peer group index
comprised of education companies. The Standard &
Poors 500 Stock Index is comprised of 500
U.S. companies in the industrial, transportation, utilities
and financial industries, and is weighted by market
capitalization. The Standard & Poors Publishing
Index is comprised of Gannett Co., Inc., The McGraw-Hill
Companies, The Meredith Corporation, The New York Times Company
and The Washington Post Company, and also is weighted by market
capitalization. The custom peer group of education companies
includes Apollo Group Inc., Capella Education Co., Career
Education Corp., Corinthian Colleges, Inc., DeVry Inc., ITT
Educational Services Inc. and Strayer Education Inc. The Company
is using a custom peer index of education companies this year
because the Company is a diversified education and media
company. Its largest and fastest growing business is Kaplan
Inc., a leading global provider of educational services to
individuals, schools and businesses. The graph reflects the
investment of $100 on December 31, 2002, in the
Companys Class B Common Stock, the
Standard & Poors 500 Stock Index, the
Standard & Poors Publishing Index and the custom
peer group index of education companies. For purposes of this
graph, it has been assumed that dividends were reinvested on the
date paid in the case of the Company and on a quarterly basis in
the case of the Standard & Poors 500 Index, the
Standard & Poors Publishing Index and the custom
peer group index of education companies.
![(PERFORMANCE GRAPH)](https://www.sec.gov/Archives/edgar/data/0000104889/000095013308000866/w48813w4881301.gif)
December 31 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||||
The Washington Post Company
|
100 | 108.10 | 135.34 | 106.25 | 104.62 | 112.21 | ||||||||||||||||||
S&P 500 Index
|
100 | 128.68 | 142.69 | 149.70 | 173.34 | 182.86 | ||||||||||||||||||
S&P Publishing Index
|
100 | 118.80 | 115.38 | 100.68 | 116.10 | 87.18 | ||||||||||||||||||
Education Peer Group
|
100 | 164.21 | 170.90 | 140.81 | 117.59 | 185.89 |
Item 6.
Selected Financial Data.
See the information for the years 2003 through 2007 contained in
the table titled Ten-Year Summary of Selected Historical
Financial Data which is included in this Annual Report on
Form 10-K
and listed in the index to financial information on page 39
hereof (with only the information for such years to be deemed
filed as part of this Annual Report on
Form 10-K).
Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
See the information contained under the heading
Managements Discussion and Analysis of Results of
Operations and Financial Condition which is included in
this Annual Report on
Form 10-K
and listed in the index to financial information on page 39
hereof.
34 THE WASHINGTON POST
COMPANY
Table of Contents
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk.
The Company is exposed to market risk in the normal course of
its business due primarily to its ownership of marketable equity
securities, which are subject to equity price risk; to its
borrowing and cash-management activities, which are subject to
interest rate risk; and to its foreign business operations,
which are subject to foreign exchange rate risk. Neither the
Company nor any of its subsidiaries is a party to any derivative
financial instruments.
Equity Price
Risk
The Company has common stock investments in several publicly
traded companies (as discussed in Note C to the
Companys Consolidated Financial Statements) that are
subject to market price volatility. The fair value of these
common stock investments totaled $469,459,000 at
December 30, 2007.
The following table presents the hypothetical change in the
aggregate fair value of the Companys common stock
investments in publicly traded companies assuming hypothetical
stock price fluctuations of plus or minus 10%, 20% and 30% in
the market price of each stock included therein:
Value of Common Stock Investments |
Value of Common Stock Investments |
|||||||||||||||||||||
Assuming Indicated Decrease in |
Assuming Indicated Increase in |
|||||||||||||||||||||
Each Stocks Price | Each Stocks Price | |||||||||||||||||||||
−30% | −20% | −10% | +10% | +20% | +30% | |||||||||||||||||
$ | 328,621,000 | $ | 375,567,000 | $ | 422,513,000 | $ | 516,405,000 | $ | 563,351,000 | $ | 610,297,000 |
Interest Rate
Risk
The Company has historically satisfied some of its financing
requirements through the issuance of short-term commercial
paper. Conversely, when cash generation exceeds its current need
for cash the Company may pay down its commercial paper
borrowings and invest some or all of the surplus in commercial
paper issued by third parties and money market funds. Although
the Company invested excess cash for most of 2007, as of
December 30, 2007 the Company had $84.8 million of
commercial paper borrowings outstanding at an average interest
rate of 4.5%. The Company is exposed to interest rate risk with
respect to such investments and borrowings since an increase in
short-term interest rates would increase the Companys
interest income on any commercial paper or money market
investments it held at the time and would increase the
Companys interest expense on any commercial paper it had
outstanding at the time. Assuming a hypothetical 100 basis
point increase in the average interest rate on the
Companys commercial paper borrowings during 2007, the
Companys interest expense would have been greater by less
than $0.1 million in 2007.
The Companys long-term debt consists of $400,000,000
principal amount of 5.5% unsecured notes due February 15,
2009 (the Notes). At December 30, 2007, the
aggregate fair value of the Notes, based upon quoted market
prices, was $400,800,000. An increase in the market rate of
interest applicable to the Notes would not increase the
Companys interest expense with respect to the Notes since
the rate of interest the Company is required to pay on the Notes
is fixed, but such an increase in rates would affect the fair
value of the Notes. Assuming, hypothetically, that the market
interest rate applicable to the Notes was 100 basis points
higher than the Notes stated interest rate of 5.5%, the
fair value of the Notes at December 30, 2007, would have
been approximately $395,715,000. Conversely, if the market
interest rate applicable to the Notes was 100 basis points
lower than the Notes stated interest rate, the fair value
of the Notes at such date would then have been approximately
$404,300,000.
Foreign Exchange
Rate Risk
The Company is exposed to foreign exchange rate risk due to its
Newsweek and Kaplan international operations, and the primary
exposure relates to the exchange rate between the British pound
and U.S. dollar. Translation gains and losses affecting the
Consolidated Statements of Income have historically not been
significant and represented less than 2.5% of net income during
each of the Companys last three fiscal years. If the value
of the British pound relative to the U.S. dollar had been
10% lower than the values that prevailed during 2007, the
Companys reported net income for fiscal 2007 would have
been decreased by approximately 2.5%. Conversely, if such value
had been 10% greater, the Companys reported net income for
fiscal 2007 would have been increased by approximately 2.5%.
Item 8.
Financial Statements and Supplementary Data.
See the Companys Consolidated Financial Statements at
December 30, 2007, and for the periods then ended, together
with the report of PricewaterhouseCoopers LLP thereon and the
information contained in Note P to said
2007 FORM 10-K 35
Table of Contents
Consolidated Financial Statements
titled Summary of Quarterly Operating Results and
Comprehensive Income (Unaudited), which are included in
this Annual Report on
Form 10-K
and listed in the index to financial information on page 39
hereof.
Item 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 9A.
Controls and Procedures.
Disclosure
Controls and Procedures
An evaluation was performed by the Companys management,
with the participation of the Companys Chief Executive
Officer (the Companys principal executive officer) and the
Companys Vice President Finance (the
Companys principal financial officer), of the
effectiveness of the Companys disclosure controls and
procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e)),
as of December 30, 2007. Based on that evaluation, the
Companys Chief Executive Officer and Vice
President Finance have concluded that the
Companys disclosure controls and procedures, as designed
and implemented, are effective in ensuring that information
required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and is
accumulated and communicated to management, including the Chief
Executive Officer and Vice President Finance, in a
manner that allows timely decisions regarding required
disclosure.
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting (as defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f)).
The Companys internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 30, 2007.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control Integrated Framework. Our management has
concluded that, as of December 30, 2007, our internal
control over financial reporting is effective based on these
criteria. The effectiveness of our internal control over
financial reporting as of December 30, 2007 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report included
herein.
Changes in
Internal Control Over Financial Reporting
Effective October 1, 2007, the Company implemented a new
system for advertising and billing for the majority of the
newspaper publishing segment that has materially affected the
segments internal control over financial reporting. This
system has upgraded information system capabilities, improved
business processes and expanded customer service opportunities.
The Company has taken the appropriate steps to ensure the
internal controls around advertising and billing for the
newspaper publishing segment are designed and operating
effectively in all material respects at the reporting date.
No other changes in the Companys internal control over
financial reporting during the quarter ended December 30,
2007 have materially affected, or are reasonably likely to
materially affect, the Companys internal control over
financial reporting.
Item 9B.
Other Information.
Not applicable.
36 THE WASHINGTON POST
COMPANY
Table of Contents
PART III
Item 10.
Directors, Executive Officers and Corporate
Governance.
The information contained under the heading Executive
Officers in Item 1 hereof and the information
contained under the headings Nominees for Election by
Class A Stockholders, Nominees for Election by
Class B Stockholders, Audit Committee and
Section 16(a) Beneficial Ownership Reporting
Compliance in the definitive Proxy Statement for the
Companys 2008 Annual Meeting of Stockholders is
incorporated herein by reference thereto.
The Company has adopted codes of conduct that constitute
codes of ethics as that term is defined in paragraph
(b) of Item 406 of
Regulation S-K
and that apply to the Companys principal executive
officer, principal financial officer, principal accounting
officer or controller and to any persons performing similar
functions. Such codes of conduct are posted on the
Companys Internet website, the address of which is
www.washpostco.com, and the Company intends to satisfy
the disclosure requirements under Item 5.05 of
Form 8-K
with respect to certain amendments to, and waivers of the
requirements of, the provisions of such codes of conduct
applicable to the officers and persons referred to above by
posting the required information on its Internet website.
In addition to the certifications of the Companys Chief
Executive Officer and Chief Financial Officer filed as exhibits
to this Annual Report on
Form 10-K,
on June 6, 2007, the Companys Chief Executive Officer
submitted to the New York Stock Exchange the annual
certification regarding compliance with the NYSEs
corporate governance listing standards required by
Section 303A.12(a) of the NYSE Listed Company Manual.
Item 11.
Executive Compensation.
The information contained under the headings Director
Compensation, Compensation Committee Interlocks and
Insider Participation,
Executive Compensation and Compensation
Committee Report in the definitive Proxy Statement for the
Companys 2008 Annual Meeting of Stockholders is
incorporated herein by reference thereto.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The information contained under the heading Stock Holdings
of Certain Beneficial Owners and Management in the
definitive Proxy Statement for the Companys 2008 Annual
Meeting of Stockholders is incorporated herein by reference
thereto.
Item 13.
Certain Relationships and Related Transactions, and Director
Independence.
The information contained under the headings Transactions
with Related Persons, Promoters and Certain Control
Persons and Controlled Company in the
definitive Proxy Statement for the Companys 2008 Annual
Meeting of Stockholders is incorporated herein by reference
thereto.
Item 14.
Principal Accounting Fees and Services.
The information contained under the heading Audit
Committee Report in the definitive Proxy Statement for the
Companys 2008 Annual Meeting of Stockholders is
incorporated herein by reference thereto.
PART IV
Item 15.
Exhibits, Financial Statement Schedules.
The following documents are filed as part of this report:
1. Financial Statements
As listed in the index to financial information on page 39
hereof.
2. Financial Statement Schedules
As listed in the index to financial information on page 39
hereof.
3. Exhibits
As listed in the index to exhibits on page 87 hereof.
2007 FORM 10-K 37
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on February 27,
2008.
THE WASHINGTON POST COMPANY
(Registrant)
By |
/s/ John
B. Morse, Jr.
|
John B. Morse, Jr.
Vice PresidentFinance
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities
indicated on February 27, 2008:
Donald
E. Graham
|
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) and Director |
|||
John
B. Morse, Jr.
|
Vice President--Finance (Principal Financial and Accounting Officer) |
|||
Lee C.
Bollinger
|
Director | |||
Warren
E. Buffett
|
Director | |||
Christopher
C. Davis
|
Director | |||
Barry
Diller
|
Director | |||
John
L. Dotson Jr.
|
Director | |||
Melinda
French Gates
|
Director | |||
Thomas
S. Gayner
|
Director | |||
Anne
M. Mulcahy
|
Director | |||
Ronald
L. Olson
|
Director | |||
Richard
D. Simmons
|
Director |
By |
/s/ John
B. Morse, Jr.
|
John B. Morse, Jr.
Attorney-in-Fact
An original power of attorney authorizing Donald E. Graham, John
B. Morse, Jr. and Veronica Dillon, and each of them, to
sign all reports required to be filed by the Registrant pursuant
to the Securities Exchange Act of 1934 on behalf of the
above-named directors and officers has been filed with the
Securities and Exchange Commission.
38 THE WASHINGTON POST
COMPANY
Table of Contents
INDEX TO
FINANCIAL INFORMATION
THE WASHINGTON
POST COMPANY
Managements Discussion and Analysis of Results of
Operations and Financial Condition (Unaudited)
|
40 | |||
Financial Statements and Schedules:
|
||||
Report of Independent Registered Public Accounting Firm
|
54 | |||
Consolidated Statements of Income and Consolidated Statements of
Comprehensive Income for the Three Fiscal Years Ended
December 30, 2007
|
55 | |||
Consolidated Balance Sheets at December 30, 2007 and
December 31, 2006
|
56 | |||
Consolidated Statements of Cash Flows for the Three Fiscal Years
Ended December 30, 2007
|
58 | |||
Consolidated Statements of Changes in Common Shareholders
Equity for the Three Fiscal Years Ended December 30, 2007
|
59 | |||
Notes to Consolidated Financial Statements
|
60 | |||
Financial Statement Schedule for the Three Fiscal Years Ended
December 30, 2007:
|
||||
II Valuation and Qualifying Accounts
|
83 | |||
Ten-Year Summary of Selected Historical Financial Data
(Unaudited)
|
84 |
All other schedules have been omitted either because they are
not applicable or because the required information is included
in the Consolidated Financial Statements or the Notes thereto
referred to above.
2007 FORM 10-K 39
Table of Contents
MANAGEMENTS
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.
OVERVIEW
The Washington Post Company is a diversified education and media
company, with education as the largest and fastest growing
business. The Company operates principally in four areas of the
media business: newspaper publishing, television broadcasting,
magazine publishing and cable television. Through its subsidiary
Kaplan, Inc., the Company provides educational services for
individuals, schools and businesses. The Companys business
units are diverse and subject to different trends and risks.
The Companys education division is the largest operating
division of the Company, accounting for 49% of the
Companys consolidated revenues in 2007. The Company has
devoted significant resources and attention to this division,
given the attractiveness of investment opportunities and growth
prospects. The growth of Kaplan in recent years has come from
both rapid internal growth and acquisitions. Each of
Kaplans segments showed revenue growth in 2007.
Kaplans higher education division showed strong operating
income growth, for both its online and fixed-facility
operations, due to increased enrollment in the online programs,
course fee increases and demand for higher priced programs.
Operating results for Kaplans test prep division were
adversely impacted by weakness in the Score! and K12 businesses;
however, the traditional test preparation programs, as well as
the Aspect and PMBR businesses (acquired in 2006), reported
strong results for 2007. Kaplan professional results improved in
2007 due to growth at Kaplan Professional (U.K.) and
Kaplans Schweser CFA programs. Overall operating income
was down at Kaplan Professional (U.S.), due to continued
weakness in the real estate, insurance and securities
businesses. As a result of the continued weakness at Score! and
Kaplan Professional (U.S.), Kaplan announced plans to
restructure these businesses in the fourth quarter of 2007 to
better position these businesses for improved operating results
in the future.
Kaplan made several acquisitions in its professional division in
2007, including the March 2007 acquisition of EduNeering
Holdings, Inc., a Princeton, NJ-based provider of knowledge
management solutions for organizations in the pharmaceutical,
medical device, healthcare, energy and manufacturing sectors;
and the August 2007 acquisition of the education division of
Financial Services Institute of Australasia. In 2006, Kaplan
acquired Tribeca Learning Limited, a leading provider of
education to the Australian financial services sector, also
included in Kaplans professional division. Other
significant 2006 acquisitions were in Kaplans test prep
business, including PMBR, a nationwide provider of test
preparation for the Multistate Bar Exam, and Aspect Education
Limited, a major provider of
English-language
instruction in the U.K., Ireland, Australia, New Zealand, Canada
and the U.S. Kaplan made 9 acquisitions in 2007 and 11
acquisitions in 2006; the largest of these are mentioned above.
Over the past several years, Kaplans revenues have grown
rapidly, while operating income has fluctuated due largely to
various business investments and stock compensation charges.
The cable division has also been a source of recent growth and
capital investment. Cable ONEs industry has experienced
significant technological changes that have created new revenue
opportunities, such as digital television, broadband and, more
recently, telephony. Cable ONE has also experienced increased
competition, particularly from satellite television service
providers and, to a smaller extent, other telephony providers.
The cable division began offering telephone service on a limited
basis using voice over Internet protocol (VoIP) in the second
quarter of 2006; by the end of 2007, cable telephone services
were being offered in all or part of systems representing 90% of
homes passed, with approximately 58,600 subscribers at the end
of 2007. The continued launch and selling of telephony will be a
major emphasis for the division in 2008. The cable
divisions subscriber base improved overall in 2007
(increase of 9,100 subscribers to approximately 702,700 at the
end of 2007). There was no monthly rate increase for basic cable
service in 2007, but effective January 1, 2008, a
$3.50 monthly basic cable service increase was implemented.
High-speed data subscribers grew 18% to approximately 341,000 at
the end of 2007, and a $3.05 monthly rate increase was
implemented for most high-speed data subscribers in September
2007. The cable division continues to provide monthly discounts
for subscribers who take at least three offered services (basic
service, digital service, high-speed data service and/or
telephony service). Promotional discounts are offered for new
subscribers or existing subscribers adding new services.
The Companys newspaper publishing, broadcast television
and magazine publishing divisions derive revenue from
advertising and, to a lesser extent, circulation and
subscriptions. The results of these divisions tend to fluctuate
with the overall advertising cycle, among other business
factors. Like many other large newspapers, however, The
Washington Post has experienced a continued downward trend in
print advertising revenue, which was down 13% in 2007, with
declines in real estate, classified, national and retail. This
follows a 4% print advertising revenue decline at The Washington
Post in 2006. Circulation volume also continued a downward
trend. The Companys online publishing businesses,
Washingtonpost.Newsweek Interactive and Slate, reported an 11%
revenue increase in 2007; however, online revenue growth has
slowed down, from 28% growth in 2006. Given the continued
downward trend in print advertising and circulation, in February
2008, The Washington Post announced that a Voluntary Retirement
Incentive Program will be offered to some of its employees in
2008, and that its College Park, MD, printing plant will
close in early 2010.
The Companys television broadcasting division reported a
large decrease in operating income due primarily to significant
political and Olympics-related advertising in 2006. Newsweek
40 THE WASHINGTON POST
COMPANY
Table of Contents
magazine advertising revenue was down 9% in 2007 due to lower ad
pages at both domestic and international editions. In January
2008, Newsweek announced a Voluntary Retirement Incentive
Program being offered to certain Newsweek employees.
The Company generates a significant amount of cash from its
businesses that is used to support its operations, to pay down
debt, and to fund capital expenditures, share repurchases,
dividends, acquisitions and other investments.
RESULTS OF
OPERATIONS 2007 COMPARED TO 2006
Net income was $288.6 million ($30.19 per share) for the
fiscal year 2007 ended December 30, 2007, down from
$324.5 million ($33.68 per share) for the fiscal year 2006
ended December 31, 2006. The Companys results for
2007 and 2006 include several unusual or one-time items, as
described below.
Items included in the Companys results in 2007:
| A charge of $6.6 million ($0.70 per share) in additional income tax expense, net, as the result of a $12.9 million increase in taxes associated with Bowater Mersey, offset by a tax benefit of $6.3 million associated with recent changes in certain state income tax laws. Both of these are non-cash items in 2007, impacting the Companys long-term net deferred income tax liabilities; |
| Expenses of $11.2 million (after-tax impact of $6.7 million, or $0.70 per share) related to lease obligations, severance and accelerated depreciation of fixed assets in connection with Kaplans restructuring of the Score! business; |
| A charge of $6.0 million (after-tax impact of $3.6 million, or $0.38 per share) related to the write-off of an integrated software product under development, and severance costs in connection with Kaplans restructuring of the Kaplan Professional (U.S.) businesses; and |
| A gain of $9.5 million from the sale of property at the Companys television station in Miami (after-tax impact of $5.9 million, or $0.62 per share); |
Items included in the Companys results in 2006:
| Charges of $50.9 million related to early retirement plan buyouts (after-tax impact of $31.7 million, or $3.30 per share); |
| A non-operating write-down of $14.2 million of a marketable equity security (after-tax impact of $9.0 million, or $0.94 per share); |
| A charge of $13.0 million related to an agreement to settle a lawsuit at Kaplan (after-tax impact of $8.3 million, or $0.86 per share); |
| A goodwill impairment charge of $9.9 million at PostNewsweek Tech Media and a $1.5 million loss on the sale of PostNewsweek Tech Media, which was part of the magazine publishing segment (after-tax impact of $7.3 million, or $0.75 per share); |
| Transition costs and operating losses at Kaplan related to acquisitions and start-ups for 2006 of $11.9 million (after-tax impact of $8.0 million, or $0.83 per share); |
| A charge for the cumulative effect of a change in accounting for Kaplan equity awards (after-tax impact of $5.1 million, or $0.53 per share) in connection with the Companys adoption of Statement of Financial Accounting Standards No. 123R (SFAS 123R), Share-Based Payment |
| A non-operating gain of $43.2 million on the sale of BrassRing, in which the Company held a 49% interest (after-tax impact of $27.4 million, or $2.86 per share); |
| Insurance recoveries of $10.4 million from cable division losses related to Hurricane Katrina (after-tax impact of $6.4 million, or $0.67 per share); and |
| Non-operating gains of $33.8 million from sales of marketable equity securities for the year (after-tax impact of $21.1 million, or $2.19 per share). |
Revenue for 2007 was $4,180.4 million, up 7% compared to
revenue of $3,904.9 million in 2006. The increase is due to
significant revenue growth at the education division, along with
strong revenue growth at the cable division. Revenues were down
at the Companys newspaper publishing, magazine publishing
and television broadcasting divisions. Advertising revenue
decreased 9% in 2007, and circulation and subscriber revenue
increased 6%. Education revenue increased 21% in 2007, and other
revenue was up 8%. The decline in advertising revenue is due to
declines in print advertising at The Washington Post, the
absence of significant political and Olympics-related television
advertising in 2007 and declines in the magazine publishing
division. The increase in circulation and subscriber revenue is
due to a 12% increase in subscriber revenue at the cable
division from continued growth in all major product offerings.
This increase was offset by a 5% decrease in circulation revenue
at The Post, and a 6% decline in Newsweek circulation revenue
due to subscription rate declines at the domestic and
international editions of Newsweek. Revenue growth at Kaplan
(about 38% of which was from acquisitions) accounted for the
increase in education revenue.
Operating costs and expense for the year increased 7% to
$3,703.4 million, from $3,445.1 million in 2006. The
increase is primarily due to higher expenses from operating
growth at Kaplan and Cable ONE, and increased stock compensation
expense, offset by charges of $50.9 million in early
retirement plan buyouts at The Washington Post and the
Companys corporate office in 2006.
Operating income for 2007 increased by 4% to
$477.0 million, from $459.8 million in 2006. Operating
results were significantly impacted by unusual or one-time
operating items described above. Excluding these one-time or
unusual items, results at the newspaper publishing, magazine
publishing and television broadcasting divisions were down,
generally due to
2007 FORM 10-K 41
Table of Contents
weakness in advertising demand, offset by improved results at
the Companys education and cable television divisions.
The Companys 2007 operating income includes
$22.3 million of net pension credits, compared to
$21.8 million in 2006. These amounts exclude
$50.9 million in charges related to early retirement
programs in 2006.
DIVISION RESULTS
Education Division. Education division revenue in
2007 increased 21% to $2,030.9 million, from
$1,684.1 million in 2006. Excluding revenue from acquired
businesses, education division revenue increased 13% in 2007.
Kaplan reported operating income of $149.0 million for the
year, compared to $130.2 million in 2006. Kaplans
results for 2007 and 2006 were impacted by several unusual or
one-time items (discussed below). The improvement in 2007
operating income was offset by a $13.6 million increase in
stock compensation expense.
A summary of Kaplans operating results for 2007 compared
to 2006 is as follows:
(in thousands) | 2007 | 2006 | % Change | |||||||||
Revenue
|
||||||||||||
Higher education
|
$ | 1,021,595 | $ | 855,757 | 19 | |||||||
Test prep
|
569,316 | 457,293 | 24 | |||||||||
Professional
|
439,720 | 371,091 | 18 | |||||||||
Kaplan corporate
|
1,261 | | | |||||||||
Intersegment elimination
|
(1,003 | ) | | | ||||||||
$ | 2,030,889 | $ | 1,684,141 | 21 | ||||||||
Operating income (loss)
|
||||||||||||
Higher education
|
$ | 125,629 | $ | 100,690 | 25 | |||||||
Test prep
|
71,316 | 77,632 | (8 | ) | ||||||||
Professional
|
41,073 | 35,503 | 16 | |||||||||
Kaplan corporate
|
(32,773 | ) | (50,726 | ) | 35 | |||||||
Other
|
(55,964 | ) | (32,910 | ) | (70 | ) | ||||||
Intersegment elimination
|
(244 | ) | | | ||||||||
$ | 149,037 | $ | 130,189 | 14 | ||||||||
Higher education includes Kaplans domestic and
international post-secondary education businesses, including
fixed-facility colleges, as well as online post-secondary and
career programs. Higher education revenue grew by 19% for 2007.
Enrollments increased 11% to 80,000 at December 31, 2007,
compared to 72,000 at December 31, 2006, due to enrollment
growth in the online programs. Higher education results for the
online programs in 2007 benefited from increases in both price
and demand for higher priced advanced programs. Results at the
fixed-facility colleges also benefited from course fee
increases. Higher education results in 2007 were adversely
affected by $2.7 million in lease termination charges;
results in 2006 were adversely affected by $3.0 million in
asset write-downs.
Test prep includes Kaplans standardized test preparation
and
English-language
course offerings, as well as the K12 and Score! businesses. Test
prep revenue grew 24% in 2007, largely due to the Aspect and
PMBR acquisitions made in October 2006. Excluding revenue from
acquired businesses, revenue grew 6% in 2007 due to overall
strength in the traditional test preparation courses, offset by
declines in revenue from the Score! business. Operating income
for test prep declined in 2007 due to an $11.2 million
Score! restructuring charge and weakness from the Score! and K12
businesses, offset by strong results from the Aspect and PMBR
acquisitions and a $6.1 million revenue decrease in 2006 related to
timing of courses and estimates of average course length. In the
fourth quarter of 2007, Kaplan management announced plans to
restructure the Score! business. In order to implement a revised
business model, 75 Score! centers have been closed. After
closings and consolidations, Score! has 80 centers that focus on
providing computer-assisted instruction and small-group
tutoring. The restructuring plan includes relocating certain
management and terminating certain employees from closed
centers. The Company incurred approximately $11.2 million
in expenses in 2007 related to lease obligations, severance and
accelerated depreciation of fixed assets. The Company completed
an impairment review of Score! long-lived assets and intangibles
in 2007 and determined that no impairment charge was necessary.
Professional includes Kaplans domestic and overseas
professional businesses. Professional revenue grew 18% in 2007,
largely due to the May 2006 acquisition of Tribeca; the March
2007 acquisition of EduNeering Holdings, Inc., a Princeton,
NJ-based provider of knowledge management solutions for
organizations in the pharmaceutical, medical device, healthcare,
energy and manufacturing sectors; and the August 2007
acquisition of the education division of Financial Services
Institute of Australasia. Excluding revenue from acquired
businesses, professional revenue grew 8% in 2007. The revenue
increase is a result of higher revenues at Kaplan Professional
(U.K.) due primarily to favorable exchange rates, and from
growth in the Schweser CFA exam course offerings, offset by
continued soft market demand for professionals insurance,
securities, real estate book publishing and real estate course
offerings. Operating income increased in 2007 due to strong
results at Kaplan Professional (U.K.) and $6.9 million in
transition costs at Tribeca in 2006, offset by weakness in
professionals insurance, securities and real estate
businesses. Also, Kaplan Professional (U.S.) recorded a
$6.0 million charge in the fourth quarter of 2007,
comprised of a write-off of an integrated software product under
development and severance costs in connection with the
restructuring of Kaplan Professional (U.S.). As part of the
restructuring, product changes are being implemented and certain
operations are in the process of being decentralized, in
addition to employee terminations. Additional severance and
other restructuring related expenses of an estimated
$3.0 million are expected to be incurred in 2008.
Corporate represents unallocated expenses of Kaplan, Inc.s
corporate office and other minor activities. Corporate expenses
declined in 2007 primarily due to the fourth quarter 2006 charge
of $13.0 million related to an agreement to settle a
42 THE WASHINGTON POST
COMPANY
Table of Contents
lawsuit, along with a reduction in technology and other general
expenses in the fourth quarter of 2007.
Other includes charges for incentive compensation arising from
equity awards under the Kaplan stock option plan, which was
established for certain members of Kaplans management.
Kaplan recorded stock compensation expense of $41.3 million
in 2007, compared to $27.7 million in 2006 (excluding stock
compensation recorded in the first quarter of 2006 related to a
change in accounting discussed below). The increase in the
charge for 2007 reflects growth and improved prospects for
several Kaplan businesses, as well as an increase in public
market values of other education companies. In addition, Other
includes amortization of certain intangibles, which increased by
$9.5 million in 2007, due to recent Kaplan acquisitions.
Newspaper Publishing Division. Newspaper publishing
division revenue in 2007 decreased 7% to $889.8 million,
from $961.9 million in 2006. Division operating income for
2007 totaled $66.4 million, compared to $63.4 million
in 2006. The increase in operating income for 2007 is due
primarily to $47.1 million in pre-tax charges associated
with early retirement plan buyouts at The Washington Post during
2006. Excluding this charge, operating income was down sharply
for 2007 due to a decline in division revenues and a
$2.3 million pre-tax gain on the sale of property in 2006,
partially offset by a reduction in newspaper division operating
expenses, including a 19% reduction in newsprint expense.
Operating margin at the newspaper publishing division was 7% for
2007 and 2006; however, the 2007 operating margin declined
significantly, excluding the $47.1 million in early
retirement plan buyouts in 2006.
Print advertising revenue at The Post in 2007 declined 13% to
$496.2 million, from $573.2 million in 2006. The
decline in 2007 is due to reductions in real estate,
classified, general and retail. Daily circulation at The Post
declined 3.6%, and Sunday circulation declined 3.7% in 2007;
average daily circulation totaled 649,700 (unaudited), and
average Sunday circulation totaled 902,500 (unaudited).
During 2007, revenue generated by the Companys online
publishing activities, primarily washingtonpost.com, increased
11% to $114.2 million, from $102.7 million in 2006.
Display online advertising revenue grew 16% and online
classified advertising revenue on washingtonpost.com increased
10%. A small portion of the Companys online publishing
revenue is included in the magazine publishing division.
In February 2008, the Company announced that a Voluntary
Retirement Incentive Program will be offered in 2008 to some
employees of The Washington Post newspaper and the
Companys corporate office in light of the current economic
environment and to assure the future strength of the business.
The cost of the program will be funded primarily from the assets
of the Companys pension plans. The Company also announced
that The Post will close its College Park, MD, printing plant in
early 2010, after two presses are moved to The Posts
Springfield, VA, plant.
Television Broadcasting Division. Revenue for the
television broadcasting division decreased 6% to
$340.0 million in 2007, from $361.9 million in 2006.
The revenue decline is due to a $28.6 million decrease in
political advertising and $6.3 million in incremental
winter Olympics-related advertising at the Companys NBC
affiliates in the first quarter of 2006.
In July 2007, the Company entered into a transaction to sell and
lease back its current Miami television station facility; a
$9.5 million gain was recorded as a reduction to expense in
2007. The Company has purchased land and is building a new Miami
television station facility, which is expected to be completed
in 2009.
Operating income for 2007 declined 12% to $142.1 million,
from $160.8 million in 2006. The decline in operating
income is primarily related to the absence of significant
political and Olympics revenue in 2007, as well as increased
programming expenses, offset by the $9.5 million gain on
the sale of property at the Miami television station. Operating
margin at the broadcast division was 42% for 2007 and 44% for
2006; however, the operating margin in 2007 would have been
lower without the $9.5 million gain from the sale of
property at the Miami television station.
Competitive market position remained strong for the
Companys television stations. KSAT in San Antonio and
WPLG in Miami ranked number one in the November 2007 ratings
period, Monday through Friday, sign-on to sign-off; WDIV in
Detroit, WKMG in Orlando and WJXT in Jacksonville ranked second;
and KPRC in Houston ranked third.
Magazine Publishing Division. Revenue for the
magazine publishing division totaled $288.4 million in
2007, a 13% decline from $331.0 million for 2006. Magazine
publishing division results in 2006 included revenue of
$23.4 million from PostNewsweek Tech Media, which was sold
in December 2006. The remainder of the revenue decline is due
primarily to a 9% reduction in Newsweek advertising revenue for
2007, due to fewer ad pages at both the Newsweek domestic and
international editions, despite one additional domestic and
international issue in 2007. The revenue decline was offset by
increased revenue at Arthur Frommers Budget Travel.
Operating income totaled $31.4 million in 2007, compared to
$27.9 million for 2006. Magazine publishing division
results in 2006 included an operating loss of $8.8 million
from PostNewsweek Tech Media, largely the result of a goodwill
impairment charge of $9.9 million in the third quarter of
2006. Excluding PostNewsweek Tech Media, operating income at the
magazine publishing division was down due primarily to
advertising revenue reductions, offset by lower overall
operating expenses. Operating margin at the magazine publishing
division was 11% in 2007 and 8% for 2006, including the pension
credit, with the increase primarily due to losses at
PostNewsweek Tech Media in 2006. If the pension credit is
excluded, the division would have had operating losses in 2007
and 2006.
2007 FORM 10-K 43
Table of Contents
In January 2008, the Company announced a Voluntary Retirement
Incentive Program, which is being offered to certain Newsweek
employees. The program includes enhanced retirement benefits and
should be completed by the end of the first quarter of 2008; it
will be funded primarily from the assets of the Companys
pension plans.
Cable Television Division. Cable television division
revenue of $626.4 million for 2007 represents an 11%
increase from $565.9 million in 2006. The 2007 revenue
increase is due to continued growth in the divisions cable
modem and digital revenues, along with revenues from telephony
services. The cable division did not raise basic video cable
service rates in 2007, having last implemented a basic video
cable service rate increase of $3 per month at most of its
systems effective February 1, 2006. In September 2007, a
$3.05 monthly rate increase was implemented for a majority
of high-speed data subscribers. Effective January 1, 2008,
the cable division implemented a basic video cable service rate
increase of $3.50 per month at nearly all of its systems.
Cable division operating income increased in 2007 to
$123.7 million, from $120.0 million in 2006. This
increase is due to the divisions revenue growth, offset by
increases in programming, telephony and technical costs. The
annual trends are also impacted by certain activity in the prior
year. In 2006, the cable division incurred an estimated
$5.4 million in incremental cleanup and repair expense from
Hurricane Katrina, offset by $10.4 million in 2006
insurance recoveries. Operating margin at the cable television
division was 20% in 2007, compared to 21% in 2006.
At December 31, 2007, Revenue Generating Units (RGUs) grew
11% due to continued growth in high-speed data and telephony
subscribers and increases in the basic video and digital video
subscriber categories. The cable division began offering
telephone service on a very limited basis in the second quarter
of 2006; as of December 31, 2007, telephone service is
being offered in all or part of systems representing 90% of
homes passed. A summary of RGUs is as follows:
Cable Television Division |
December 31, |
December 31, |
||||||
Subscribers | 2007 | 2006 | ||||||
Basic
|
702,669 | 693,550 | ||||||
Digital
|
223,931 | 213,873 | ||||||
High-speed data
|
341,034 | 289,010 | ||||||
Telephony
|
58,640 | 2,925 | ||||||
Total
|
1,326,274 | 1,199,358 | ||||||
RGUs include about 6,700 subscribers who receive free basic
video service, primarily local governments, schools and other
organizations as required by various franchise agreements.
Below are details of cable division capital expenditures for
2007 and 2006 in the NCTA Standard Reporting Categories (in
millions):
2007 | 2006 | |||||||
Customer premise equipment
|
$ | 52.5 | $ | 49.7 | ||||
Commercial
|
| 0.1 | ||||||
Scalable infrastructure
|
20.6 | 24.4 | ||||||
Line extensions
|
21.1 | 19.4 | ||||||
Upgrade/rebuild
|
12.8 | 9.5 | ||||||
Support capital
|
31.3 | 39.4 | ||||||
Total
|
$ | 138.3 | $ | 142.5 | ||||
Other Businesses and Corporate Office. In October
2007, the Company acquired the outstanding stock of
CourseAdvisor, Inc., a premier online lead generation provider,
headquartered in Wakefield, MA. In 2006, the Company made a
small investment in CourseAdvisor. Through its search engine
marketing expertise and proprietary technology platform,
CourseAdvisor generates student leads for the post-secondary
education market. CourseAdvisor operates as an independent
subsidiary of the Company.
In 2007, other businesses and corporate office included the
expenses associated with the Companys corporate office and
the operating results of CourseAdvisor since its October 2007
acquisition. In 2006, other businesses and corporate office
included the expenses of the Companys corporate office.
Revenue for other businesses (CourseAdvisor) totaled
$6.6 million in 2007. Operating expenses were
$42.2 million in 2007 and $42.5 million in 2006. The
decline in expenses for 2007 is due to $3.8 million in
pre-tax charges recorded in 2006 related to early retirement
plan buyouts at the corporate office and other expense
reductions at the corporate office, offset by expenses from
CourseAdvisor.
Equity in Earnings (Losses) of Affiliates. The
Companys equity in earnings of affiliates for 2007 was
$6.0 million, compared to $0.8 million in 2006. In the
first quarter of 2007, the Companys equity in earnings of
affiliates included a gain of $8.9 million on the sale of
land at the Companys Bowater Mersey affiliate; however,
operating losses at Bowater Mersey in 2007 largely offset the
gain. The Companys affiliate investments at the end of
2007 consisted primarily of a 49% interest in Bowater Mersey
Paper Company Limited. In November 2006, the Company sold its
49% interest in BrassRing and recorded a pre-tax non-operating
gain of $43.2 million in 2006.
Non-Operating Items. The Company recorded other
non-operating income, net, of $10.8 million in 2007,
compared to $73.4 million in 2006. The 2007 non-operating
income, net, included $8.8 million in foreign currency
gains and other non-operating items. The 2006 non-operating
income, net, comprised a $43.2 million gain from the sale
of the Companys interest in BrassRing, $33.8 million
in gains related to sales of marketable equity securities and
$11.9 million in foreign currency gains, offset by a
$14.2 million write-down of a marketable equity security
and other non-operating items.
44 THE WASHINGTON POST
COMPANY
Table of Contents
A summary of non-operating income (expense) for the years ended
December 30, 2007 and December 31, 2006 follows (in
millions):
2007 | 2006 | |||||||
Foreign currency gains
|
$ | 8.8 | $ | 11.9 | ||||
Gain on sales of marketable equity securities
|
0.4 | 33.8 | ||||||
Gain on sale of affiliate
|
| 43.2 | ||||||
Impairment write-downs on investments
|
| (15.1 | ) | |||||
Other gains (losses)
|
1.6 | (0.3 | ) | |||||
Total
|
$ | 10.8 | $ | 73.5 | ||||
The Company incurred net interest expense of $12.7 million
in 2007, compared to $14.9 million in 2006. At
December 30, 2007, the Company had $490.1 million in
borrowings outstanding at an average interest rate of 5.3%; at
December 31, 2006, the Company had $407.2 million in
borrowings outstanding at an average interest rate of 5.5%.
Income Taxes. The effective tax rate was 40.0% for
2007 and 36.5% for 2006. As previously discussed, results for
2007 included an additional $12.9 million in income tax
expense related to the Companys Bowater Mersey affiliate
and a $6.3 million income tax benefit related to a change
in certain state income tax laws enacted in the second quarter
of 2007. Both of these are non-cash items in 2007, impacting the
Companys long-term net deferred income tax liabilities.
Excluding the impact of these items, the effective tax rate for
2007 was 38.6%. The higher effective tax rate in 2007 compared
to 2006 was primarily due to higher state taxes and an increase
in nondeductible compensation expenses. The Company expects an
effective tax rate in 2008 of approximately 38.5% to 39.0%.
Cumulative Effect of Change in Accounting
Principle. In the first quarter of 2006, the
Company adopted SFAS 123R, which requires companies to
record the cost of employee services in exchange for stock
options based on the grant-date fair value of the awards.
SFAS 123R did not have any impact on the Companys
results of operations for Company stock options as the Company
had adopted the fair-value-based method of accounting for
Company stock options in 2002. However, the adoption of
SFAS 123R required the Company to change its accounting for
Kaplan equity awards from the intrinsic value method to the
fair-value-based method of accounting. As a result, in the first
quarter of 2006, the Company reported a $5.1 million
after-tax charge for the cumulative effect of change in
accounting for Kaplan equity awards ($8.2 million in
pre-tax Kaplan stock compensation expense).
RESULTS OF
OPERATIONS 2006 COMPARED TO 2005
Net income was $324.5 million ($33.68 per share) for the
fiscal year 2006 ended December 31, 2006, up from
$314.3 million ($32.59 per share) for the fiscal year 2005
ended January 1, 2006. The Companys results for 2006
and 2005 include several unusual or one-time items, as described
below.
Items included in the Companys results in 2006:
| Charges of $50.9 million related to early retirement plan buyouts (after-tax impact of $31.7 million, or $3.30 per share); |
| A non-operating write-down of $14.2 million of a marketable equity security (after-tax impact of $9.0 million, or $0.94 per share); |
| A charge of $13.0 million related to an agreement to settle a lawsuit at Kaplan (after-tax impact of $8.3 million, or $0.86 per share); |
| A goodwill impairment charge of $9.9 million at PostNewsweek Tech Media and a $1.5 million loss on the sale of PostNewsweek Tech Media, which was part of the magazine publishing segment (after-tax impact of $7.3 million, or $0.75 per share); |
| Transition costs and operating losses at Kaplan related to acquisitions and start-ups for 2006 of $11.9 million (after-tax impact of $8.0 million, or $0.83 per share); |
| A charge for the cumulative effect of a change in accounting for Kaplan equity awards (after-tax impact of $5.1 million, or $0.53 per share) in connection with the Companys adoption of Statement of Financial Accounting Standards No. 123R (SFAS 123R), Share-Based Payment |
| A non-operating gain of $43.2 million on the sale of BrassRing, in which the Company held a 49% interest (after-tax impact of $27.4 million, or $2.86 per share); |
| Insurance recoveries of $10.4 million from cable division losses related to Hurricane Katrina (after-tax impact of $6.4 million, or $0.67 per share); and |
| Non-operating gains of $33.8 million from sales of marketable equity securities for the year (after-tax impact of $21.1 million, or $2.19 per share). |
Items included in the Companys results in 2005:
| Charges and lost revenue associated with Hurricane Katrina and other hurricanes; estimated adverse impact on operating income of $27.5 million (after-tax impact of $17.3 million, or $1.80 per share) primarily at the cable division, but also at the television broadcasting and education divisions; and |
| Non-operating gains of $17.8 million from the sales of non-operating land and marketable securities (after-tax impact of $11.2 million, or $1.16 per share). |
Revenue for 2006 was $3,904.9 million, up 10% compared to
revenue of $3,553.9 million in 2005. The increase is due
mostly to significant revenue growth at the education division,
increases at the cable and television broadcasting divisions,
and a small increase at the newspaper publishing division,
offset by a decline at the magazine publishing division.
Advertising revenue increased 3% in 2006, and circulation and
subscriber revenue increased 4%. Education revenue increased 19%
in 2006, and other revenue was up 7%. The increase in
advertising revenue is due primarily to increased revenue at the
television broadcasting
2007 FORM 10-K 45
Table of Contents
and magazine publishing divisions, offset by declines in print
advertising at The Washington Post. The increase in circulation
and subscriber revenue is due to an 11% increase in subscriber
revenue at the cable division from continued growth in cable
modem, basic and digital service revenue. This increase was
offset by a 4% decrease in circulation revenue at The Post, and
an 11% decline in Newsweek circulation revenue due to
subscription rate declines at the domestic edition and
international editions of Newsweek and subscription rate base
declines at certain of the international editions. Revenue
growth at Kaplan, Inc. (about 31% of which was from
acquisitions) accounted for the increase in education revenue.
Operating costs and expenses for the year increased 13% to
$3,445.1 million, from $3,039.0 million in 2005. The
increase is primarily due to higher expenses from operating
growth, increased stock compensation expense at the education
division, charges of $50.9 million in early retirement plan
buyouts at The Washington Post and the Companys corporate
office, and a reduced pension credit.
Operating income for 2006 declined by 11% to
$459.8 million, from $514.9 million in 2005. Much of
the decline is due to the unusual or one-time operating items
described above, as well as a $24.7 million increase in
Kaplan stock compensation expense, offset by strong results at
the Companys cable television and television broadcasting
divisions.
The Companys 2006 operating income includes
$21.8 million of net pension credits, compared to
$37.9 million in 2005. These amounts exclude
$50.9 million and $1.2 million in charges related to
early retirement programs in 2006 and 2005, respectively.
DIVISION
RESULTS
Education Division. Education division revenue in
2006 increased 19% to $1,684.1 million, from
$1,412.4 million in 2005. Excluding revenue from acquired
businesses, education division revenue increased 13% in 2006.
Kaplan reported operating income of $130.2 million for the
year, compared to $157.8 million in 2005. The decline is
due to a $24.7 million increase in stock compensation
expense; a $13.0 million charge related to an agreement to
settle a lawsuit; a $13.3 million operating income decline
at Kaplan Professionals real estate businesses;
$11.9 million in transition costs and operating losses from
acquisitions and
start-ups; a
reduction in revenue growth at Kaplans test prep division
due to a fourth quarter $6.1 million revenue decrease
related to timing of courses and estimates of average course
length; and $3.0 million in asset write-downs at the higher
education division. These declines were offset by operating
income growth at Kaplans higher education businesses.
In the second quarter of 2006, Kaplan completed the acquisitions
of two businesses: Tribeca Learning Limited, a leading provider
of education to the Australian financial services sector, and
SpellRead, originator of SpellRead Phonological Auditory
Training, a reading intervention program for struggling
students. In October 2006, Kaplan completed the acquisitions of
two additional businesses: Aspect Education Limited, a major
provider of
English-language
instruction in the U.K., Ireland, Australia, New Zealand, Canada
and the U.S.; and PMBR, a nationwide provider of test
preparation for the Multistate Bar Exam. Tribeca is included in
Kaplan professional, and the other acquisitions are included in
Kaplan test prep. As noted above, Kaplan incurred
$11.9 million in transition costs and operating losses from
these acquired businesses and
start-ups.
A summary of operating results for 2006 compared to 2005 is as
follows (in thousands):
(In thousands) | 2006 | 2005 | % Change | |||||||||
Revenue
|
||||||||||||
Higher education
|
$ | 855,757 | $ | 707,966 | 21 | |||||||
Test prep
|
457,293 | 391,456 | 17 | |||||||||
Professional
|
371,091 | 312,972 | 19 | |||||||||
$ | 1,684,141 | $ | 1,412,394 | 19 | ||||||||
Operating income (loss)
|
||||||||||||
Higher education
|
$ | 100,690 | $ | 77,728 | 30 | |||||||
Test prep
|
77,632 | 75,940 | 2 | |||||||||
Professional
|
35,503 | 46,067 | (23 | ) | ||||||||
Kaplan corporate
|
(50,726 | ) | (33,305 | ) | (52 | ) | ||||||
Other
|
(32,910 | ) | (8,595 | ) | | |||||||
$ | 130,189 | $ | 157,835 | (18 | ) | |||||||
Higher education includes Kaplans domestic and
international post-secondary education businesses, including
fixed-facility colleges, as well as online post-secondary and
career programs. Higher education revenue grew by 21% for 2006.
Excluding revenue from acquired businesses, higher education
revenue grew 19% for 2006. Higher education enrollments
increased 8% to 72,000 at December 31, 2006, compared to
66,500 at December 31, 2005, with most of the enrollment
growth occurring in the online programs. Higher education
results for the online programs in 2006 benefited from increases
in both price and demand, as well as an increase in the number
of course offerings. Higher education results were adversely
affected by $3.0 million in asset write-downs related to
three campuses in the fourth quarter of 2006.
Test prep includes Kaplans standardized test preparation
and
English-language
course offerings, as well as the K12 and Score! businesses. Test
prep revenue grew 17% in 2006, due to strong enrollment in the
GMAT, MCAT, nursing and
English-language
course offerings, as well as from acquisitions (the October 2006
Aspect and PMBR acquisitions and the August 2005 acquisition of
The Kidum Group, the leading provider of test preparation
services in Israel), offset by declines at Score! Excluding
revenue from acquired businesses, revenue grew 9% in 2006.
Operating income was up slightly due to overall revenue growth,
offset by the reduction in revenue growth at Kaplans test
prep division due to a fourth quarter revenue decrease related
to timing of courses and estimates of average course length
(discussed above), as well as a decline in operating income at
Score!
46 THE WASHINGTON POST
COMPANY
Table of Contents
Professional includes Kaplans domestic and overseas
professional businesses. Professional revenue grew 19% in 2006,
largely due to the May 2006 acquisition of Tribeca, the May 2005
acquisition of Singapore-based Asia Pacific Management
Institute, a private education provider for students in Asia,
and the April 2005 acquisition of BISYS Education Services, a
provider of licensing education and compliance solutions for
financial services institutions and professionals. Excluding
revenue from acquired businesses, professional revenue grew 5%
in 2006. The revenue increase is a result of higher revenues at
Kaplan Professional (U.K.) due to favorable exchange rates,
higher enrollments, price increases and an acquisition, offset
by soft market demand for Kaplan professionals real estate
book publishing and real estate course offerings. Operating
income declined in 2006 due to $6.9 million in transition
costs at Tribeca in 2006, as well as a $13.3 million
decline in operating income for the real estate businesses of
Kaplan professional, offset by strong results at Kaplan
Professional (U.K.).
Corporate overhead represents unallocated expenses of Kaplan,
Inc.s corporate office and other minor activities.
Corporate expenses increased in 2006 primarily due to a fourth
quarter 2006 charge of $13.0 million related to an
agreement to settle a lawsuit.
Other includes charges for incentive compensation arising from
equity awards under the Kaplan stock option plan, which was
established for certain members of Kaplans management. In
addition, Other includes amortization of certain intangibles. In
the first quarter of 2006, the Company adopted SFAS 123R,
which required the Company to change its accounting for Kaplan
equity awards from the intrinsic value method to the
fair-value-based method of accounting (see additional discussion
below regarding the cumulative effect of change in accounting
principle). Excluding Kaplan stock compensation expense recorded
as a result of this change in accounting, Kaplan recorded stock
compensation expense of $27.7 million in 2006, compared to
$3.0 million in 2005. The increase in the charge for 2006
reflects growth and improved prospects for several Kaplan
businesses.
Newspaper Publishing Division. Newspaper publishing
division revenue in 2006 increased 1% to $961.9 million,
from $957.1 million in 2005. Division operating income for
2006 totaled $63.4 million, compared to $125.4 million
in 2005. The decline in operating results for 2006 is due
primarily to $47.1 million in pre-tax charges associated
with early retirement plan buyouts at The Washington Post and a
decrease in print advertising at The Post, offset by improved
results at the divisions online publishing activities,
both washingtonpost.com and Slate, and a $2.3 million
pre-tax gain on the sale of property. Operating income at the
newspaper division was also adversely impacted in 2006 by a 4%
increase in newsprint expense for the entire newspaper division.
Operating margin at the newspaper publishing division was 7% for
2006 and 13% for 2005, with the decline primarily due to the
$47.1 million in early retirement plan buyouts.
Print advertising revenue at The Post in 2006 declined 4% to
$573.2 million, from $595.8 million in 2005. The Post
reported declines in classified, national and retail advertising
in 2006, offset by increases in zoned advertising. Classified
recruitment advertising revenue was down 14% to
$68.1 million in 2006, from $79.3 million in 2005.
Daily circulation at The Post declined 2.9%, and Sunday
circulation declined 3.2% in 2006; average daily circulation
totaled 673,900 (unaudited), and average Sunday circulation
totaled 937,700 (unaudited).
During 2006, revenue generated by the Companys online
publishing activities, primarily washingtonpost.com, increased
28% to $102.7 million, from $80.2 million in 2005.
Display online advertising revenue grew 46%, and online
classified advertising revenue on washingtonpost.com increased
18%. A small portion of the Companys online publishing
revenue is included in the magazine publishing division.
Television Broadcasting Division. Revenue for the
television broadcasting division increased 9% to
$361.9 million in 2006, from $331.8 million in
2005, due to an increase of $27.9 million in political
advertising and $6.3 million in incremental winter
Olympics-related advertising at the Companys NBC
affiliates.
Operating income for 2006 increased 13% to $160.8 million,
from $142.5 million in 2005. The increase in operating
income is primarily related to the significant political and
Olympics revenue in 2006 discussed above, as well as the adverse
impact of 2005 hurricanes in Florida and Texas. Operating margin
at the broadcast division was 44% for 2006 and 43% for 2005.
Competitive market position remained strong for the
Companys television stations. KSAT in San Antonio,
WPLG in Miami and WJXT in Jacksonville ranked number one in the
November 2006 ratings period, Monday through Friday, sign-on to
sign-off; WDIV in Detroit and WKMG in Orlando ranked second; and
KPRC in Houston ranked third.
Magazine Publishing Division. Revenue for the
magazine publishing division totaled $331.0 million for
2006, a 4% decline from $344.9 million for 2005. The
decrease in revenue for 2006 reflects declines in both Newsweek
circulation revenue and revenue at PostNewsweek Tech Media,
offset by a 1% increase in Newsweek advertising revenue related
to increased ad pages at the international editions of Newsweek.
Operating income totaled $27.9 million for 2006, compared
to $45.1 million for 2005. The decline in 2006 operating
income is due primarily to a $9.9 million goodwill
impairment charge at PostNewsweek Tech Media in the third
quarter of 2006 and a $1.5 million loss on the sale of
PostNewsweek Tech Media recorded in the fourth quarter of 2006.
Also adversely impacting results were lower Newsweek circulation
revenue and a reduced pension credit, offset by lower operating
expenses at Newsweek and a $1.5 million early retirement
charge at Newsweek International in the third quarter of
2007 FORM 10-K 47
Table of Contents
2005. Operating margin at the magazine publishing division was
8% for 2006 and 13% for 2005, including the pension credit, with
the decline primarily due to losses at PostNewsweek Tech Media.
All revenue and operating results of the magazine publishing
division for 2006 and 2005 include PostNewsweek Tech Media up to
the sale date of December 22, 2006.
Cable Television Division. Cable television division
revenue of $565.9 million for 2006 represents an 11%
increase from $507.7 million in 2005. The 2006 revenue
increase is due primarily to continued growth in the
divisions cable modem revenue and a $3 monthly rate
increase for basic cable service at most of its systems,
effective February 1, 2006. Hurricane Katrina had an
adverse impact on 2005 revenue of approximately
$12.5 million, from subscriber losses and the granting of a
30-day
service credit to the divisions 94,000 pre-hurricane Gulf
Coast subscribers. In 2006, subscriber losses from the hurricane
resulted in lost revenue of approximately $12.4 million.
Cable television division operating income increased in 2006 to
$120.0 million, from $76.7 million in 2005. The
increase in operating income for 2006 is due to several factors,
including the divisions revenue growth and an additional
$10.4 million in hurricane-related insurance recoveries
recorded during the second quarter of 2006 as a reduction of
expense in connection with a final settlement on cable
division Hurricane Katrina insurance claims. Also,
Hurricane Katrina had an estimated adverse impact of
$23.7 million on the cable divisions results in 2005,
when the Company recorded $9.6 million in property, plant
and equipment losses; incurred an estimated $9.4 million in
incremental cleanup, repair and other expenses associated with
the hurricane; and experienced an estimated $9.7 million
reduction in operating income from subscriber losses and the
granting of a
30-day
service credit to all of its 94,000 pre-hurricane Gulf Coast
subscribers. Offsetting these items, a $5.0 million
insurance recovery was recorded for part of the hurricane losses
through December 31, 2005 under the Companys property
and business interruption insurance program (this was recorded
as a reduction of cable division expense in the fourth quarter
of 2005). Cable division results in 2006 continue to include the
impact of subscriber losses and expenses as a result of
Hurricane Katrina. As noted above, the Company estimates that
lost revenue for 2006 was approximately $12.4 million;
variable cost savings offset a portion of the lost revenue
impact on the cable divisions operating income. The
Company also incurred an estimated $5.4 million in
incremental cleanup and repair expense in 2006. Operating margin
at the cable television division increased to 21% in 2006, from
15% in 2005, due to a strong year in 2006 and to the adverse
impact of the hurricane on 2005 results.
At December 31, 2006, the Gulf Coast region showed
increases in all Revenue Generating Unit (RGU) categories
compared to estimated subscriber counts as of December 31,
2005. For all other regions, there was an increase in RGUs due
to continued growth in high-speed data subscribers, offset by a
decline in basic video and digital video subscriber categories
primarily as a result of the $3 monthly basic rate increase
implemented in February 2006. The cable division began offering
telephone services on a very limited basis in the second quarter
of 2006; as of December 31, 2006, telephone services were
being offered to about half of homes passed.
A summary of RGUs broken down by Gulf Coast and all other
regions is as follows:
Cable Television Division |
December 31, |
December 31, |
||||||
Subscribers | 2006 | 2005* | ||||||
Gulf Coast Region
|
||||||||
Basic
|
84,531 | 72,770 | ||||||
Digital
|
31,686 | 27,501 | ||||||
High-speed data
|
36,335 | 24,049 | ||||||
Telephony
|
| | ||||||
Total
|
152,552 | 124,320 | ||||||
All Other Regions
|
||||||||
Basic
|
609,019 | 616,408 | ||||||
Digital
|
182,187 | 186,900 | ||||||
High-speed data
|
252,675 | 210,012 | ||||||
Telephony
|
2,925 | | ||||||
Total
|
1,046,806 | 1,013,320 | ||||||
Total
|
||||||||
Basic
|
693,550 | 689,178 | ||||||
Digital
|
213,873 | 214,401 | ||||||
High-speed data
|
289,010 | 234,061 | ||||||
Telephony
|
2,925 | | ||||||
Total
|
1,199,358 | 1,137,640 | ||||||
* | Gulf Coast region subscriber figures as of December 31, 2005 are estimated and reflect a 21,400, 7,700 and 3,100 decline, respectively, in estimated basic, digital and high-speed data subscribers due to Hurricane Katrina. |
RGUs include about 6,500 subscribers who receive free basic
video service, primarily local governments, schools and other
organizations as required by various franchise agreements.
Below are details of cable division capital expenditures for
2006 and 2005 in the NCTA Standard Reporting Categories (in
millions):
2006 | 2005 | |||||||
Customer premise equipment
|
$ | 49.7 | $ | 30.0 | ||||
Commercial
|
0.1 | 0.2 | ||||||
Scalable infrastructure
|
24.4 | 8.1 | ||||||
Line extensions
|
19.4 | 14.6 | ||||||
Upgrade/rebuild
|
9.5 | 13.1 | ||||||
Support capital
|
39.4 | 45.3 | ||||||
Total
|
$ | 142.5 | $ | 111.3 | ||||
Corporate Office. Operating expenses for the
Companys corporate office increased to $42.5 million
in 2006, from $32.6 million in 2005. The increase is due to
$3.8 million in pre-tax charges recorded in the second
quarter of 2006 associated with early retirement plan buyouts at
the corporate
48 THE WASHINGTON POST
COMPANY
Table of Contents
office, increased technology costs and other compensation
related expenses.
Equity in Earnings (Losses) of Affiliates. The
Companys equity in earnings of affiliates for 2006 was
$0.8 million, compared to losses of $0.9 million in
2005. The Companys affiliate investments at the end of
2006 consisted primarily of a 49% interest in Bowater Mersey
Paper Company Limited. In November 2006, the Company sold its
49% interest in BrassRing and recorded a pre-tax non-operating
gain of $43.2 million in the fourth quarter of 2006.
Non-Operating Items. The Company recorded other
non-operating income, net, of $73.5 million in 2006,
compared to $9.0 million in 2005. The 2006 non-operating
income, net, comprised a $43.2 million gain from the sale
of the Companys interest in BrassRing, $33.8 million
in gains related to the sales of marketable equity securities
and $11.9 million in foreign currency gains, offset by a
$14.2 million write-down of a marketable equity security
and other non-operating items. The 2005 non-operating income
comprised $17.8 million in gains related to the sales of
non-operating land and marketable equity securities, offset by
$8.1 million in foreign currency losses and other
non-operating items.
A summary of non-operating income (expense) for the years ended
December 31, 2006 and January 1, 2006 follows (in
millions):
2006 | 2005 | |||||||
Gain on sale of affiliate
|
$ | 43.2 | $ | | ||||
Gain on sales of marketable equity securities
|
33.8 | 12.7 | ||||||
Foreign currency gains (losses), net
|
11.9 | (8.1 | ) | |||||
Impairment write-downs on investments
|
(15.1 | ) | (1.5 | ) | ||||
Gain on sales of non-operating land
|
| 5.1 | ||||||
Other (losses) gains
|
(0.3 | ) | 0.8 | |||||
Total
|
$ | 73.5 | $ | 9.0 | ||||
The Company incurred net interest expense of $14.9 million
in 2006, compared to $23.4 million in 2005. The decline in
net interest expense is primarily due to increases in interest
income in 2006. At December 31, 2006, the Company had
$407.2 million in borrowings outstanding at an average
interest rate of 5.5%; at January 1, 2006, the Company had
$428.4 million in borrowings outstanding at an average
interest rate of 5.4%.
Income Taxes. The effective tax rate was 36.5% for
2006 and 37.1% for 2005. The decline in the 2006 effective tax
rate is primarily due to lower state taxes.
Cumulative Effect of Change in Accounting
Principle. In the first quarter of 2006, the Company
adopted SFAS 123R, which requires companies to record the
cost of employee services in exchange for stock options based on
the grant-date fair value of the awards. SFAS 123R did not
have any impact on the Companys results of operations for
Company stock options as the Company had adopted the
fair-value-based method of accounting for Company stock options
in 2002. However, the adoption of SFAS 123R required the
Company to change its accounting for Kaplan equity awards from
the intrinsic value method to the fair-value-based method of
accounting. As a result, in the first quarter of 2006, the
Company reported a $5.1 million after-tax charge for the
cumulative effect of change in accounting for Kaplan equity
awards ($8.2 million in pre-tax Kaplan stock compensation
expense).
FINANCIAL
CONDITION: CAPITAL RESOURCES AND LIQUIDITY
Acquisitions and Dispositions. During 2007, the
Company acquired businesses for a total cost of
$296.3 million, financed with cash and $2.0 million in
debt. Kaplan acquired nine businesses in its higher education,
test prep and professional divisions, of which the largest two
were the Kaplan professional acquisition of EduNeering Holdings,
Inc., a Princeton, NJ-based provider of knowledge management
solutions for organizations in the pharmaceutical, medical
device, healthcare, energy and manufacturing sectors; and the
education division of Financial Services Institute of
Australasia. In October 2007, the Company acquired the
outstanding stock of CourseAdvisor Inc., a premier online lead
generation provider, headquartered in Wakefield, MA. Through its
search engine marketing expertise and proprietary technology
platform, CourseAdvisor generates student leads for the
post-secondary education market. CourseAdvisor operates as an
independent subsidiary of the Company. Most of the purchase
price for the 2007 acquisitions has been allocated on a
preliminary basis to goodwill and other intangibles.
Also in 2007, the cable division acquired subscribers in the
Boise, ID area for $4.3 million. Most of the purchase price
for this transaction has been allocated to indefinite-lived
intangibles and property, plant and equipment.
In connection with the 2007 acquisitions, additional purchase
consideration of approximately $22 million is contingent on
the achievement of certain future operating results; such
amounts have largely been funded in escrow and are not included
in the Companys purchase accounting as of
December 30, 2007. Any additional purchase consideration
related to these contingencies is expected to be recorded as goodwill.
In July 2007, the television broadcasting division entered into
a transaction to sell and lease back its current Miami
television station facility; a $9.5 million gain was
recorded as reduction to expense in the third quarter of 2007.
An additional $1.9 million deferred gain is being amortized
over the leaseback period. The television broadcasting
division has purchased land and is building a new Miami
television station facility that is expected to be completed in
2009.
During the second quarter of 2007, Kaplan purchased a 40%
interest in ACE Education, a provider of education in China that
provides preparation courses for entry to U.K. universities,
along with degree and professional training programs at campuses
throughout China. In February 2008, Kaplan exercised an option
to increase its investment in ACE Education to a majority
interest.
2007 FORM 10-K 49
Table of Contents
During 2006, Kaplan acquired 11 businesses in its test prep,
professional and higher education divisions for a total of
$143.4 million, financed with cash. The largest of these
included Tribeca Learning Limited, a leading provider of
education to the Australian financial services sector;
SpellRead, originator of SpellRead Phonological Auditory
Training, a reading intervention program for struggling
students; Aspect Education Limited, a major provider of
English-language
instruction with schools located in the U.K., Ireland,
Australia, New Zealand, Canada and the U.S.; and PMBR, a
nationwide provider of test preparation for the Multistate Bar
Exam. Most of the purchase price for the 2006 acquisitions was
allocated to goodwill and other intangibles.
In the fourth quarter of 2006, the Company recorded a
$43.2 million pre-tax gain on the sale of BrassRing, in
which the Company held a 49% interest. Also in the fourth
quarter of 2006, the Company recorded a $1.5 million loss
on the sale of PostNewsweek Tech Media, which was part of the
Companys magazine publishing segment.
During 2005, Kaplan acquired 10 businesses in its higher
education, professional and test prep divisions for a total of
$140.1 million, financed with cash and $3.0 million in
debt. The largest of these included BISYS Education Services, a
provider of licensing education and compliance solutions for
financial service institutions and professionals; The Kidum
Group, the leading provider of test preparation services in
Israel; and Asia Pacific Management Institute, a private
education provider for undergraduate and postgraduate students
in Asia. In January 2005, the Company completed the acquisition
of Slate, the online magazine, which is included as part of the
Companys newspaper publishing division. Most of the
purchase price for the 2005 acquisitions was allocated to
goodwill and other intangibles, and property, plant and
equipment.
Capital Expenditures. During 2007, the
Companys capital expenditures totaled $290.0 million.
The Companys capital expenditures for 2007, 2006 and 2005
are disclosed in Note O to the Consolidated Financial
Statements. The Company estimates that its capital expenditures
will be in the range of $350 million to $375 million
in 2008, with the increases due primarily to a new television
station facility under construction in Miami and a headquarters
office relocation at Newsweek.
Investments in Marketable Equity Securities. At
December 30, 2007, the fair value of the Companys
investments in marketable equity securities was
$469.5 million, which includes $417.8 million in
Berkshire Hathaway Inc. Class A and B common stock and
$51.7 million in the common stock of a publicly traded
education company.
At December 30, 2007 and December 31, 2006, the gross
unrealized gain related to the Companys Berkshire stock
investment totaled $232.9 million and $140.9 million,
respectively. The Company presently intends to hold the
Berkshire common stock investment long term, thus the investment
has been classified as a non-current asset in the Consolidated
Balance Sheets. The gross unrealized gain related to the
Companys other marketable equity security investments
totaled $23.0 million and $0.1 million at
December 30, 2007 and December 31, 2006, respectively.
In January and February 2008, the Company purchased
approximately $60 million in the common stock of Corinthian
Colleges, Inc., a publicly traded education company.
Common Stock Repurchases and Dividend Rate. During
2007 and 2006, the Company repurchased 54,506 shares and
77,300 shares, respectively, of its Class B common
stock at a cost of $42.0 million and $56.6 million,
respectively. In 2005, there were no share repurchases. At
December 30, 2007, the Company had authorization from the
Board of Directors to purchase up to 410,994 shares of
Class B common stock. The annual dividend rate for 2008 was
increased to $8.60 per share, from $8.20 per share in 2007 and
from $7.80 per share in 2006.
Liquidity. At December 30, 2007, the Company
had $321.5 million in cash and cash equivalents, compared
to $348.1 million at December 31, 2006. As of
December 30, 2007 and December 31, 2006, the Company
had commercial paper and money market investments of
$5.1 million and $142.9 million, respectively, that
are classified as Cash and cash equivalents in the
Companys Consolidated Balance Sheets.
At December 30, 2007, the Company had $84.8 million in
commercial paper borrowing outstanding at an average interest
rate of 4.5% with various maturities through the first quarter
of 2008. In addition, the Company had outstanding
$399.7 million of 5.5% unsecured notes due
February 15, 2009 and $5.6 million in other debt. The
unsecured notes require semi-annual interest payments of
$11.0 million, payable on February 15 and August 15.
During 2007, the Companys borrowings, net of repayments,
increased by $82.9 million, and the Companys
commercial paper and money market investments decreased by
$137.8 million.
During 2006, the Company replaced its expiring $250 million
364-day
revolving credit facility and its
5-year
$350 million revolving credit facility with a new
$500 million
5-year
revolving credit facility on essentially the same terms. The new
facility expires in August 2011. This revolving credit facility
agreement supports the issuance of the Companys short-term
commercial paper and provides for general corporate purposes.
As previously noted, the Company has $399.7 million in
unsecured notes that mature on February 15, 2009. As of
December 30, 2007, the Company had sufficient cash and
marketable equity securities that could be used to pay off this
debt at maturity. In addition, the Company could refinance some
or all of this debt by issuing commercial paper under its
$500 million commercial paper program or by borrowing money
in the capital markets.
During 2007 and 2006, the Company had average borrowings
outstanding of approximately $412.1 million and
$418.7 million, respectively, at average annual interest
rates of approximately 5.5%.
50 THE WASHINGTON POST
COMPANY
Table of Contents
The Company incurred net interest costs on its borrowings of
$12.7 million and $14.9 million, respectively, during
2007 and 2006.
At December 30, 2007 and December 31, 2006, the
Company had a working capital deficit of $18.5 million and
working capital of $123.2 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 Companys net cash provided by operating activities, as
reported in the Companys Consolidated Statements of Cash
Flows, was $581.2 million in 2007, compared to
$594.8 million in 2006.
The Company expects to fund its estimated capital needs
primarily through existing cash balances and internally
generated funds and, to a lesser extent, through commercial
paper borrowings. In managements opinion, the Company will
have ample liquidity to meet its various cash needs in 2008.
The following reflects a summary of the Companys
contractual obligations and commercial commitments as of
December 30, 2007:
Contractual Obligations |
||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | Total | ||||||||||||||||||||||
Debt and interest
|
$ | 111,585 | $ | 411,700 | $ | 75 | $ | | $ | | $ | | $ | 523,360 | ||||||||||||||
Programming purchase commitments(1)
|
159,455 | 135,685 | 113,309 | 103,640 | 68,906 | 107,252 | 688,247 | |||||||||||||||||||||
Operating leases
|
125,526 | 111,568 | 98,143 | 81,400 | 69,358 | 214,206 | 700,201 | |||||||||||||||||||||
Other purchase obligations(2)
|
247,070 | 66,614 | 45,500 | 29,079 | 16,107 | 25,500 | 429,870 | |||||||||||||||||||||
Long-term liabilities(3)
|
5,513 | 5,253 | 6,208 | 7,163 | 8,118 | 63,248 | 95,503 | |||||||||||||||||||||
Total
|
$ | 649,149 | $ | 730,820 | $ | 263,235 | $ | 221,282 | $ | 162,489 | $ | 410,206 | $ | 2,437,181 | ||||||||||||||
(1) | Includes commitments for the Companys television broadcasting and cable television businesses that are reflected in the Companys Consolidated Balance Sheets and commitments to purchase programming to be produced in future years. | |
(2) | Includes purchase obligations related to newsprint contracts, printing contracts, employment agreements, circulation distribution agreements, capital projects and other legally binding commitments. Other purchase orders made in the ordinary course of business are excluded from the table above. Any amounts for which the Company is liable under purchase orders are reflected in the Companys Consolidated Balance Sheets as Accounts payable and accrued liabilities. | |
(3) | Primarily made up of postretirement benefit obligations other than pensions. The Company has other long-term liabilities excluded from the table above, including obligations for deferred compensation, long-term incentive plans and long-term deferred revenue. |
Other Commercial Commitments |
|||||
(in thousands)
|
|||||
Fiscal Year | Line of Credit | ||||
2008
|
$ | | |||
2009
|
| ||||
2010
|
| ||||
2011
|
500,000 | ||||
2012
|
| ||||
Thereafter
|
| ||||
Total
|
$ | 500,000 | |||
Other. The Company does not have any
off-balance-sheet arrangements or financing activities with
special-purpose entities (SPEs). Transactions with related
parties, as discussed in Note C to the Consolidated
Financial Statements, are in the ordinary course of business and
are conducted on an arms-length basis.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements. In preparing these financial
statements, management has made its best estimates and judgments
of certain amounts included in the financial statements. Actual
results will inevitably differ to some extent from these
estimates.
The following are accounting policies that management believes
are the most important to the Companys portrayal of the
Companys financial condition and results and require
managements most difficult, subjective or complex
judgments.
Revenue Recognition and Trade Accounts Receivable,
Less Estimated Returns, Doubtful Accounts and
Allowances. The Companys revenue recognition
policies are described in Note A to the Consolidated
Financial Statements. Education revenue is recognized ratably
over the period during which educational services are delivered.
At Kaplans test prep division, estimates of average
student course length are developed for each course, along with
estimates for the anticipated level of student drops and refunds
from test performance guarantees, and these estimates are
evaluated on an ongoing basis and adjusted as necessary. As
Kaplans businesses and related course offerings have
expanded, including distance-learning businesses and contracts
with school districts as part of its K12 business, the
complexity and significance of management estimates have
increased. Revenues from magazine retail sales are recognized on
the later of delivery or the cover date, with adequate provision
made for anticipated sales returns. The Company bases its
estimates for sales returns on historical experience and has not
experienced significant fluctuations between estimated and
actual return activity.
Accounts receivable have been reduced by an allowance for
amounts that may be uncollectible in the future. This estimated
allowance is based primarily on the aging category, historical
trends and managements evaluation of the financial
condition of the customer. Accounts receivable also have been
reduced by an estimate of advertising rate adjustments and
discounts, based on estimates of advertising volumes for
contract customers who are eligible for advertising rate
adjustments and discounts.
Pension Costs. Excluding special termination
benefits related to early retirement programs, the
Companys net pension credit was $22.3 million,
$21.8 million and $37.9 million for 2007, 2006 and
2005, respectively. The Companys pension benefit costs are
actuarially determined and are impacted significantly by the
Companys assumptions related to future events, including
the discount rate, expected return on plan assets and rate of
compensation increases. At January 2, 2005, the Company
reduced its discount rate assumption from 6.25% to 5.75%, and
during the first quarter of 2005, the Company changed to a more
current Mortality Table. As a result, the pension credit in 2005
declined by $4.0 million compared to 2004. At
January 1, 2006, the Company reduced its expected return on
plan assets from 7.5% to 6.5%; the pension credit for 2006
declined by
2007 FORM 10-K 51
Table of Contents
$16.1 million compared to
2005, largely due to this change. At December 31, 2006, the
Company raised its discount rate assumption from 5.75% to 6.0%;
the pension credit for 2007 increased slightly compared to 2006.
At December 30, 2007, the discount rate and expected rate
of return assumptions will remain at 6.0% and 6.5%,
respectively. The pension credit for 2008 is expected to
increase by approximately $4.0 million compared to 2007, as
a result of higher than expected investment returns on plan
assets in 2007. For each one-half percent increase or decrease
to the Companys assumed expected return on plan assets,
the pension credit increases or decreases by approximately
$8 million. For each one-half percent increase or decrease
to the Companys assumed discount rate, the pension credit
increases or decreases by approximately $2 million. The
Companys actual rate of return on plan assets was 7.7% in
2007, 9.0% in 2006 and 7.6% in 2005, based on plan assets at the
beginning of each year.
The Company adopted Statement of Financial Accounting Standards
No. 158 (SFAS 158), Employers Accounting
for Defined Benefit Pension and Other Postretirement
Plans, on December 31, 2006. SFAS 158 has no
impact on pension or other postretirement plan expense or credit
recognized in the Companys results of operations, but the
new standard required the Company to recognize the funded status
of pension and other postretirement benefit plans on its balance
sheet at December 31, 2006. The overall impact of the
adoption of SFAS 158, taking into account the
Companys pension and other postretirement plans, was a
$270 million increase in the Companys Common
Shareholders Equity (accumulated other comprehensive
income). Of this increase, $246 million related to the
Companys recognizing the funded status of the
Companys pension
plans. At December 30, 2007, the overall impact of
SFAS 158 increased by about $28 million to
$298 million. Of this amount, $268 million relates to
the funded status of the Companys pension plans. Note J to the
Consolidated Financial Statements provides additional details
surrounding pension costs and related assumptions.
Kaplan Stock Compensation. The Kaplan stock option
plan was adopted in 1997 and initially reserved 15%, or
150,000 shares of Kaplans common stock, for awards to
be granted under the plan to certain members of Kaplan
management. Under the provisions of this plan, options are
issued with an exercise price equal to the estimated fair value
of Kaplans common stock, and options vest ratably over the
number of years specified (generally four to five years) at
the time of the grant. Upon exercise, an option holder may
receive Kaplan shares or cash equal to the difference between
the exercise price and the then fair value.
In the first quarter of 2006, the Company adopted Statement of
Financial Accounting Standards No. 123R (SFAS 123R),
Share-Based Payment. SFAS 123R requires
companies to record the cost of employee services in exchange
for stock options based on the grant-date fair value of the
awards. The adoption of SFAS 123R required the Company to
change its accounting for Kaplan equity awards from the
intrinsic value method to the fair-value-based method of
accounting. This change in accounting resulted in the
acceleration of expense recognition for Kaplan equity awards;
however, it will not impact the overall Kaplan stock
compensation expense that will ultimately be recorded over the
life of the award. As a result, for the year ended
December 31, 2006, the Company reported a $5.1 million
after-tax charge for the cumulative effect of change in
accounting for Kaplan equity awards ($8.2 million in
pre-tax Kaplan stock compensation expense).
The amount of compensation expense varies directly with the
estimated fair value of Kaplans common stock, the number
of options outstanding and the key assumptions used to determine
the fair value of Kaplan stock options under the Black-Scholes
method (these key assumptions include expected life, interest
rate, volatility and dividend yield). The estimated fair value
of Kaplans common stock is based upon a comparison of
operating results and public market values of other education
companies and is determined by the Companys compensation
committee of the Board of Directors (the committee), with input
from management and an independent outside valuation firm. Over
the past several years, the value of education companies has
fluctuated significantly, and consequently, there has been
significant volatility in the amounts recorded as expense each
year, as well as on a quarterly basis.
A small number of key Kaplan executives continue to hold the
remaining 69,662 outstanding Kaplan stock options (representing
about 4.9% of Kaplans common stock), which expire in 2011.
In January 2008, the committee set the fair value price at
$2,700 per share. Option holders have a
30-day
window in which to exercise at this price, after which time the
committee has the right to determine a new price in the event of
an exercise. Also in the first two months of 2008, 26,656 Kaplan
stock options were exercised, and 21,325 Kaplan stock options
were awarded at an option price of $2,700 per share.
The compensation committee awarded to a senior manager of Kaplan
shares equal in value to $4.8 million, $4.6 million
and $4.8 million for the 2007, 2006 and 2005 fiscal year,
respectively, and the expense of these awards was recorded in
the Companys results of operations for each relevant
fiscal year. As a result, in the first quarter of 2008, 1,778
Kaplan shares will be issued related to the 2007 share
awards, based on the January 2008 valuation of $2,700 per share
value. In the first quarter of 2007 and second quarter of 2006,
2,175 and 2,619 shares were issued related to the 2006 and
2005 Kaplan share awards. In the fourth quarter of 2007, a
senior manager exercised Kaplan stock options and received 1,750
Kaplan shares.
Kaplan recorded stock compensation expense of $41.3 million
for 2007, compared to $27.7 million for 2006 and
$3.0 million for 2005, excluding Kaplan stock compensation
expense in 2006 of $8.2 million as a result of the change
in accounting under SFAS 123R. In 2007, 2006 and 2005,
total net payouts were $8.1 million, $31.1 million and
$35.2 million, respectively. At December 30, 2007, the
Companys accrual balance related to Kaplan stock-based
compensation totaled
52 THE WASHINGTON POST
COMPANY
Table of Contents
$101.2 million. If Kaplans profits increase and the
value of education companies increases in 2008, there will
be significant Kaplan stock-based compensation in 2008.
Note I to the Consolidated Financial Statements provides
additional details surrounding Kaplan stock compensation.
Goodwill and Other Intangibles. The Company reviews
goodwill and indefinite-lived intangibles at least annually for
impairment, generally utilizing a discounted cash flow model. In
the case of the Companys cable systems, both a discounted
cash flow model and a market approach employing comparable sales
analysis are considered. In reviewing the carrying value of
goodwill and indefinite-lived intangible assets at the cable
division, the Company aggregates its cable systems on a regional
basis. The Company must make assumptions regarding estimated
future cash flows and market values to determine a reporting
units estimated fair value. If these estimates or related
assumptions change in the future, the Company may be required to
record an impairment charge. At December 30, 2007, the
Company has $2,089.6 million in goodwill and other
intangibles, net.
OTHER
New Accounting Pronouncements. In June 2006, The
Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes an Interpretation of
FASB Statement No. 109. FIN 48 prescribes a
comprehensive model of how a company should recognize, measure,
present and disclose in its financial statements uncertain tax
positions that a company has taken or expects to take on a tax
return. The Company implemented FIN 48 in the first quarter
of 2007, and there was no impact on the Companys financial
position or results of operations as a result of the
implementation. The Company has determined that there are no
material transactions or material tax positions taken by the
Company that would fail to meet the more likely than not
threshold established by FIN 48 for recognizing
transactions or tax positions in the financial statements. In
making this determination, the Company presumes that all matters
will be examined with full knowledge of all relevant information by
appropriate taxing authorities and that the Company will pursue,
if necessary, resolution by related appeals or litigation. The
Company has accrued a tax liability for certain tax positions
reflected in the financial statements where it is uncertain
whether the tax benefit associated with the tax positions will
ultimately be recognized in full. The amount of, and changes to,
this accrued tax liability are not material to the
Companys financial position or results of operations, and
the Company does not expect the total amount of this accrued tax
liability or the gross unrecognized tax benefits to
significantly increase or decrease within the next
12 months.
In September 2006, the FASB issued SFAS 157, Fair
Value Measurements, which defines fair value, establishes
a framework for measuring fair value and expands disclosures
about fair value measurements. The provisions of SFAS 157
are effective as of the beginning of the Companys 2008 fiscal year.
However, the FASB deferred the effective date of SFAS 157
for nonfinancial assets and liabilities that are not remeasured
at fair value on a recurring basis, until the beginning of the
Companys
2009 fiscal year. We are currently evaluating the impact of
adopting SFAS 157 on the Companys financial statements, but do not
expect the adoption to have a material impact.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115.
SFAS 159 permits entities to choose to measure eligible
items at fair value at specified election dates and report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at such subsequent reporting
dates. The provisions of SFAS 159 are effective as of the
beginning of the Companys 2008 fiscal year. The adoption of SFAS 159
is not expected to impact the Companys financial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007),
Business Combinations (SFAS 141R), and
SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements, to improve, simplify and converge
internationally the accounting for business combinations and the
reporting of noncontrolling interests in consolidated financial
statements. The provisions of SFAS 141R and SFAS 160
are effective as of the beginning of the Companys 2009 fiscal year. We
are currently evaluating the impact of adopting SFAS 141R
and SFAS 160 on the Companys financial statements.
2007 FORM 10-K 53
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of The Washington Post Company:
In our opinion, the consolidated financial statements referred
to under Item 15 (1) on page 37 and listed in the
index on page 39 present fairly, in all material respects,
the financial position of The Washington Post Company and its
subsidiaries at December 30, 2007 and December 31,
2006, and the results of their operations and their cash flows
for each of the three years in the period ended
December 30, 2007 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 30, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial
statement schedule, and on the Companys internal control
over financial reporting based on our integrated audits. We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Notes I and J to the financial statements,
The Washington Post Company changed the manner in which it
accounts for share-based compensation and the manner in which it
accounts for defined benefit pensions and postretirement plans,
both in fiscal 2006.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
McLean, Virginia
February 26, 2008
54 THE WASHINGTON POST
COMPANY
Table of Contents
CONSOLIDATED
STATEMENTS OF INCOME
Fiscal Year Ended | ||||||||||||
December 30, |
December 31, |
January 1, |
||||||||||
(in thousands, except per share amounts) | 2007 | 2006 | 2006 | |||||||||
Operating Revenues
|
||||||||||||
Education
|
$ | 2,030,889 | $ | 1,684,141 | $ | 1,412,394 | ||||||
Advertising
|
1,234,643 | 1,358,739 | 1,317,484 | |||||||||
Circulation and subscriber
|
817,807 | 772,250 | 740,004 | |||||||||
Other
|
97,067 | 89,797 | 84,005 | |||||||||
4,180,406 | 3,904,927 | 3,553,887 | ||||||||||
Operating Costs and Expenses
|
||||||||||||
Operating
|
1,882,984 | 1,738,918 | 1,618,231 | |||||||||
Selling, general and administrative
|
1,581,596 | 1,484,003 | 1,222,721 | |||||||||
Depreciation of property, plant and equipment
|
221,239 | 205,295 | 190,543 | |||||||||
Amortization of intangibles and goodwill impairment charge
|
17,571 | 16,907 | 7,478 | |||||||||
3,703,390 | 3,445,123 | 3,038,973 | ||||||||||
Income from Operations
|
477,016 | 459,804 | 514,914 | |||||||||
Equity in earnings (losses) of affiliates
|
5,975 | 790 | (881 | ) | ||||||||
Interest income
|
11,338 | 10,431 | 3,385 | |||||||||
Interest expense
|
(24,046 | ) | (25,343 | ) | (26,754 | ) | ||||||
Other income (expense), net
|
10,824 | 73,452 | 8,980 | |||||||||
Income Before Income Taxes and Cumulative Effect of Change in
Accounting Principle
|
481,107 | 519,134 | 499,644 | |||||||||
Provision for Income Taxes
|
192,500 | 189,600 | 185,300 | |||||||||
Income Before Cumulative Effect of Change in Accounting
Principle
|
288,607 | 329,534 | 314,344 | |||||||||
Cumulative Effect of Change in Method of Accounting for
Share-based Payments, Net of Taxes
|
| (5,075 | ) | | ||||||||
Net Income
|
288,607 | 324,459 | 314,344 | |||||||||
Redeemable Preferred Stock Dividends
|
(952 | ) | (981 | ) | (981 | ) | ||||||
Net Income Available for Common Shares
|
$ | 287,655 | $ | 323,478 | $ | 313,363 | ||||||
Basic Earnings per Common Share:
|
||||||||||||
Before Cumulative Effect of Change in Accounting Principle
|
$ | 30.31 | $ | 34.34 | $ | 32.66 | ||||||
Cumulative Effect of Change in Accounting Principle
|
| (0.53 | ) | | ||||||||
Net Income Available for Common Shares
|
$ | 30.31 | $ | 33.81 | $ | 32.66 | ||||||
Diluted Earnings per Common Share:
|
||||||||||||
Before Cumulative Effect of Change in Accounting Principle
|
$ | 30.19 | $ | 34.21 | $ | 32.59 | ||||||
Cumulative Effect of Change in Accounting Principle
|
| (0.53 | ) | | ||||||||
Net Income Available for Common Shares
|
$ | 30.19 | $ | 33.68 | $ | 32.59 | ||||||
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
Fiscal Year Ended | ||||||||||||
December 30, |
December 31, |
January 1, |
||||||||||
(in thousands) | 2007 | 2006 | 2006 | |||||||||
Net Income
|
$ | 288,607 | $ | 324,459 | $ | 314,344 | ||||||
Other Comprehensive Income (Loss)
|
||||||||||||
Foreign currency translation adjustments
|
26,653 | 17,650 | (8,834 | ) | ||||||||
Change in net unrealized gain on available-for-sale securities
|
115,269 | 64,858 | (15,014 | ) | ||||||||
Pension and other postretirement plan adjustments
|
42,777 | | | |||||||||
Less reclassification adjustment for realized gains included in
net income
|
(394 | ) | (19,560 | ) | (13,085 | ) | ||||||
184,305 | 62,948 | (36,933 | ) | |||||||||
Income tax (expense) benefit related to other comprehensive
income (loss)
|
(67,330 | ) | (18,997 | ) | 10,964 | |||||||
116,975 | 43,951 | (25,969 | ) | |||||||||
Comprehensive Income
|
$ | 405,582 | $ | 368,410 | $ | 288,375 | ||||||
The information on pages 60 through 82 is an integral part
of the financial statements.
2007 FORM 10-K 55
Table of Contents
CONSOLIDATED
BALANCE SHEETS
December 30, |
December 31, |
|||||||
(in thousands) | 2007 | 2006 | ||||||
Assets
|
||||||||
Current Assets
|
||||||||
Cash and cash equivalents
|
$ | 321,466 | $ | 348,148 | ||||
Investments in marketable equity securities
|
51,678 | 28,923 | ||||||
Accounts receivable, net
|
480,743 | 423,403 | ||||||
Deferred income taxes
|
46,399 | 48,936 | ||||||
Inventories
|
23,194 | 19,973 | ||||||
Other current assets
|
71,490 | 65,442 | ||||||
994,970 | 934,825 | |||||||
Property, Plant and Equipment
|
||||||||
Buildings
|
346,116 | 331,682 | ||||||
Machinery, equipment and fixtures
|
2,185,920 | 1,939,110 | ||||||
Leasehold improvements
|
239,641 | 204,797 | ||||||
2,771,677 | 2,475,589 | |||||||
Less accumulated depreciation
|
(1,596,698 | ) | (1,433,060 | ) | ||||
1,174,979 | 1,042,529 | |||||||
Land
|
49,187 | 42,030 | ||||||
Construction in progress
|
56,571 | 133,750 | ||||||
1,280,737 | 1,218,309 | |||||||
Investments in Marketable Equity Securities
|
417,781 | 325,805 | ||||||
Investments in Affiliates
|
102,399 | 64,691 | ||||||
Goodwill, Net
|
1,498,237 | 1,240,251 | ||||||
Indefinite-Lived Intangible Assets, Net
|
520,905 | 517,742 | ||||||
Amortized Intangible Assets, Net
|
70,437 | 31,799 | ||||||
Prepaid Pension Cost
|
1,034,789 | 975,292 | ||||||
Deferred Charges and Other Assets
|
84,254 | 72,658 | ||||||
$ | 6,004,509 | $ | 5,381,372 | |||||
The information on pages 60 through 82 is an integral part of
the financial statements.
56 THE WASHINGTON POST
COMPANY
Table of Contents
December 30, |
December 31, |
|||||||
(In thousands, except share amounts) | 2007 | 2006 | ||||||
Liabilities and Shareholders Equity
|
||||||||
Current Liabilities
|
||||||||
Accounts payable and accrued liabilities
|
$ | 564,744 | $ | 517,816 | ||||
Income taxes
|
4,580 | 4,728 | ||||||
Deferred revenue
|
354,564 | 283,475 | ||||||
Short-term borrowings
|
89,585 | 5,622 | ||||||
1,013,473 | 811,641 | |||||||
Postretirement Benefits Other Than Pensions
|
81,041 | 81,337 | ||||||
Accrued Compensation and Related Benefits
|
242,583 | 234,216 | ||||||
Other Liabilities
|
84,214 | 81,486 | ||||||
Deferred Income Taxes
|
709,694 | 599,487 | ||||||
Long-Term Debt
|
400,519 | 401,571 | ||||||
2,531,524 | 2,209,738 | |||||||
Commitments and Contingencies
|
||||||||
Redeemable Preferred Stock, Series A, $1 par
value, with a redemption and liquidation value of $1,000 per
share; 23,000 shares authorized; 11,826 and
12,120 shares issued and outstanding
|
11,826 | 12,120 | ||||||
Preferred Stock, $1 par value; 977,000 shares
authorized, none issued
|
| | ||||||
Common Shareholders Equity
|
||||||||
Common stock
|
||||||||
Class A common stock, $1 par value;
7,000,000 shares authorized; 1,291,693 and
1,722,250 shares issued and outstanding
|
1,292 | 1,722 | ||||||
Class B common stock, $1 par value;
40,000,000 shares authorized; 18,708,307 and
18,277,750 shares issued; 8,224,354 and
7,813,940 shares outstanding
|
18,708 | 18,278 | ||||||
Capital in excess of par value
|
217,780 | 205,820 | ||||||
Retained earnings
|
4,329,726 | 4,120,143 | ||||||
Accumulated other comprehensive income, net of taxes
|
||||||||
Cumulative foreign currency translation adjustment
|
42,845 | 22,689 | ||||||
Unrealized gain on available-for-sale securities
|
153,539 | 84,614 | ||||||
Unrealized gain on pensions and other postretirement plans
|
298,152 | 270,258 | ||||||
Cost of 10,483,953 and 10,463,810 shares of Class B
common stock held in treasury
|
(1,600,883 | ) | (1,564,010 | ) | ||||
3,461,159 | 3,159,514 | |||||||
$ | 6,004,509 | $ | 5,381,372 | |||||
The information on pages 60 through 82 is an integral part of
the financial statements.
2007 FORM 10-K 57
Table of Contents
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Fiscal Year Ended | ||||||||||||
December 30, |
December 31, |
January 1, |
||||||||||
(In thousands) | 2007 | 2006 | 2006 | |||||||||
Cash Flows from Operating Activities:
|
||||||||||||
Net income
|
$ | 288,607 | $ | 324,459 | $ | 314,344 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
Cumulative effect of change in accounting principle
|
| 5,075 | | |||||||||
Depreciation of property, plant and equipment
|
221,239 | 205,295 | 190,543 | |||||||||
Amortization of intangible assets
|
17,571 | 7,043 | 7,478 | |||||||||
Goodwill impairment charge
|
| 9,864 | | |||||||||
Net pension benefit
|
(22,280 | ) | (21,833 | ) | (37,914 | ) | ||||||
Early retirement program expense
|
| 50,942 | 1,192 | |||||||||
Net loss on sale or write-down of property, plant and equipment
and non-operating land
|
3,136 | 3,433 | 4,517 | |||||||||
Gain on sale of marketable equity securities
|
(394 | ) | (33,805 | ) | (12,661 | ) | ||||||
Foreign exchange (gain) loss
|
(8,790 | ) | (11,920 | ) | 8,099 | |||||||
Write-downs of marketable equity securities and other investments
|
| 15,051 | 1,465 | |||||||||
Gain from sale or exchange of businesses
|
(214 | ) | (41,742 | ) | | |||||||
Equity in (earnings) losses of affiliates, net of distributions
|
(3,820 | ) | 110 | 1,731 | ||||||||
Provision for deferred income taxes
|
33,041 | (38,234 | ) | 29,297 | ||||||||
Change in assets and liabilities:
|
||||||||||||
Increase in accounts receivable, net
|
(42,246 | ) | (10,494 | ) | (19,416 | ) | ||||||
(Increase) decrease in inventories
|
(3,356 | ) | (4,222 | ) | 11,483 | |||||||
Increase (decrease) in accounts payable and accrued liabilities
|
97,240 | 51,357 | (27,033 | ) | ||||||||
(Decrease) increase in income taxes payable
|
(1,247 | ) | 31,343 | (8,139 | ) | |||||||
Decrease in other assets and other liabilities, net
|
3,028 | 55,130 | 53,618 | |||||||||
Other
|
(328 | ) | (2,102 | ) | 4,168 | |||||||
Net cash provided by operating activities
|
581,187 | 594,750 | 522,772 | |||||||||
Cash Flows from Investing Activities:
|
||||||||||||
Purchases of property, plant and equipment
|
(290,007 | ) | (284,022 | ) | (238,349 | ) | ||||||
Investments in certain businesses, net of cash acquired
|
(273,929 | ) | (153,696 | ) | (143,478 | ) | ||||||
Escrow funding for acquisition
|
(18,914 | ) | | | ||||||||
Proceeds from sale of property, plant and equipment
|
16,676 | 6,794 | 24,077 | |||||||||
Investments in affiliates
|
(15,309 | ) | (3,349 | ) | (4,981 | ) | ||||||
Purchases of cost method investments
|
(694 | ) | (8,422 | ) | (8,709 | ) | ||||||
Proceeds from sale of marketable equity securities
|
538 | 82,910 | 64,801 | |||||||||
Net proceeds from sale of businesses
|
| 76,389 | | |||||||||
Purchases of marketable equity securities
|
| (42,888 | ) | | ||||||||
Insurance proceeds from property, plant and equipment losses
|
| 9,281 | | |||||||||
Other
|
528 | (4,267 | ) | | ||||||||
Net cash used in investing activities
|
(581,111 | ) | (321,270 | ) | (306,639 | ) | ||||||
Cash Flows from Financing Activities:
|
||||||||||||
Issuance (repayment) of commercial paper, net
|
84,800 | | (50,201 | ) | ||||||||
Dividends paid
|
(79,024 | ) | (75,903 | ) | (71,979 | ) | ||||||
Common shares repurchased
|
(42,031 | ) | (56,559 | ) | | |||||||
Proceeds from exercise of stock options
|
8,449 | 5,905 | 6,832 | |||||||||
Principal payments on debt
|
(3,578 | ) | (27,846 | ) | (6,964 | ) | ||||||
Cash overdraft
|
(3,070 | ) | 4,375 | 6,534 | ||||||||
Other
|
2,697 | 1,285 | | |||||||||
Net cash used in financing activities
|
(31,757 | ) | (148,743 | ) | (115,778 | ) | ||||||
Effect of Currency Exchange Rate Change
|
4,999 | 7,550 | (3,894 | ) | ||||||||
Net (Decrease) Increase in Cash and Cash Equivalents
|
(26,682 | ) | 132,287 | 96,461 | ||||||||
Cash and Cash Equivalents at Beginning of Year
|
348,148 | 215,861 | 119,400 | |||||||||
Cash and Cash Equivalents at End of Year
|
$ | 321,466 | $ | 348,148 | $ | 215,861 | ||||||
Supplemental Cash Flow Information:
|
||||||||||||
Cash paid during the year for:
|
||||||||||||
Income taxes
|
$ | 158,100 | $ | 194,900 | $ | 161,600 | ||||||
Interest
|
$ | 23,800 | $ | 24,600 | $ | 27,300 |
The information on pages 60 through 82 is an integral part
of the financial statements.
58 THE WASHINGTON POST
COMPANY
Table of Contents
CONSOLIDATED
STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS
EQUITY
Unrealized |
||||||||||||||||||||||||||||||||
Cumulative |
Unrealized |
Gain on |
||||||||||||||||||||||||||||||
Foreign |
Gain on |
Pensions and |
||||||||||||||||||||||||||||||
Class A |
Class B |
Capital in |
Currency |
Available- |
Other |
|||||||||||||||||||||||||||
Common |
Common |
Excess of |
Retained |
Translation |
for-Sale |
Postretirement |
||||||||||||||||||||||||||
(in thousands) | Stock | Stock | Par Value | Earnings | Adjustment | Securities | Plans | Treasury Stock | ||||||||||||||||||||||||
Balance, January 2,
2005
|
$ | 1,722 | $ | 18,278 | $ | 178,951 | $ | 3,629,222 | $ | 13,873 | $ | 75,448 | $ | | $ | (1,512,888 | ) | |||||||||||||||
Net income for the year
|
314,344 | |||||||||||||||||||||||||||||||
Dividends paid on common stock $7.40 per share
|
(70,998 | ) | ||||||||||||||||||||||||||||||
Dividends paid on redeemable preferred stock
|
(981 | ) | ||||||||||||||||||||||||||||||
Issuance of 25,459 shares of Class B common stock, net
of restricted stock award forfeitures
|
3,138 | 3,700 | ||||||||||||||||||||||||||||||
Amortization of unearned stock compensation
|
5,578 | |||||||||||||||||||||||||||||||
Change in foreign currency translation adjustment (net of taxes)
|
(8,834 | ) | ||||||||||||||||||||||||||||||
Change in unrealized gain on available-for-sale securities (net
of taxes)
|
(17,135 | ) | ||||||||||||||||||||||||||||||
Stock option expense
|
1,101 | |||||||||||||||||||||||||||||||
Tax benefits arising from employee stock plans
|
3,904 | |||||||||||||||||||||||||||||||
Balance, January 1,
2006
|
1,722 | 18,278 | 192,672 | 3,871,587 | 5,039 | 58,313 | | (1,509,188 | ) | |||||||||||||||||||||||
Net income for the year
|
324,459 | |||||||||||||||||||||||||||||||
Dividends paid on common stock $7.80 per share
|
(74,922 | ) | ||||||||||||||||||||||||||||||
Dividends paid on redeemable preferred stock
|
(981 | ) | ||||||||||||||||||||||||||||||
Repurchase of 77,300 shares of Class B common stock
|
(56,559 | ) | ||||||||||||||||||||||||||||||
Issuance of 11,959 shares of Class B common stock, net
of restricted stock award forfeitures
|
3,589 | 1,737 | ||||||||||||||||||||||||||||||
Amortization of unearned stock compensation
|
6,315 | |||||||||||||||||||||||||||||||
Change in foreign currency translation adjustment (net of taxes)
|
17,650 | |||||||||||||||||||||||||||||||
Change in unrealized gain on available-for-sale securities (net
of taxes)
|
26,301 | |||||||||||||||||||||||||||||||
Adjustment to initially apply SFAS 158 for pensions and
other postretirement plans (net of taxes)
|
270,258 | |||||||||||||||||||||||||||||||
Stock option expense
|
1,291 | |||||||||||||||||||||||||||||||
Tax benefits arising from employee stock plans
|
1,953 | |||||||||||||||||||||||||||||||
Balance, December 31,
2006
|
1,722 | 18,278 | 205,820 | 4,120,143 | 22,689 | 84,614 | 270,258 | (1,564,010 | ) | |||||||||||||||||||||||
Net income for the year
|
288,607 | |||||||||||||||||||||||||||||||
Dividends paid on common stock $8.20 per share
|
(78,072 | ) | ||||||||||||||||||||||||||||||
Dividends paid on redeemable preferred stock
|
(952 | ) | ||||||||||||||||||||||||||||||
Repurchase of 54,506 shares of Class B common stock
|
(42,031 | ) | ||||||||||||||||||||||||||||||
Issuance of 34,363 shares of Class B common stock, net
of restricted stock award forfeitures
|
2,699 | 5,158 | ||||||||||||||||||||||||||||||
Amortization of unearned stock compensation
|
6,563 | |||||||||||||||||||||||||||||||
Change in foreign currency translation adjustment (net of taxes)
|
20,156 | |||||||||||||||||||||||||||||||
Change in unrealized gain on available-for-sale securities (net
of taxes)
|
68,925 | |||||||||||||||||||||||||||||||
Adjustment for pensions and other postretirement plans (net of
taxes)
|
27,894 | |||||||||||||||||||||||||||||||
Stock option expense
|
1,225 | |||||||||||||||||||||||||||||||
Conversion of Class A common stock to Class B common
stock
|
(430 | ) | 430 | |||||||||||||||||||||||||||||
Tax benefits arising from employee stock plans
|
1,473 | |||||||||||||||||||||||||||||||
Balance, December 30,
2007
|
$ | 1,292 | $ | 18,708 | $ | 217,780 | $ | 4,329,726 | $ | 42,845 | $ | 153,539 | $ | 298,152 | $ | (1,600,883 | ) | |||||||||||||||
The information on pages 60 through 82 is an integral part
of the financial statements.
2007 FORM 10-K 59
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
A. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Fiscal Year. The Company reports on a 52- to 53-week
fiscal year ending on the Sunday nearest December 31. The
fiscal years 2007, 2006 and 2005, which ended on
December 30, 2007, December 31, 2006 and
January 1, 2006, respectively, included 52 weeks. With
the exception of most of the newspaper publishing operations,
subsidiaries of the Company report on a calendar-year basis.
Principles of Consolidation. The accompanying
financial statements include the accounts of the Company and its
subsidiaries; significant intercompany transactions have been
eliminated.
Presentation. In 2007, the Company made changes to
certain departments and cost centers at several of its
divisions. Prior year amounts were reclassified to conform with
the current year presentation, resulting in a net increase to
selling, general and administrative expenses and a net decrease
to operating expenses. Certain other amounts in previously
issued financial statements have also been reclassified to
conform with the current year presentation.
Use of Estimates. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.
Cash Equivalents. Short-term investments with
original maturities of 90 days or less are considered cash
equivalents.
Investments in Marketable Equity Securities. The
Companys investments in marketable equity securities are
classified as available-for-sale and therefore are recorded at
fair value in the Consolidated Balance Sheets, with the change
in fair value during the period excluded from earnings and
recorded net of tax as a separate component of comprehensive
income. Marketable equity securities the Company expects to hold
long term are classified as non-current assets. If the fair
value of a marketable equity security declines below its cost
basis and the decline is considered other than temporary, the
Company will record a write-down, which is included in earnings.
Inventories. Inventories are valued at the lower of
cost or market. Cost of newsprint is determined by the
first-in,
first-out method, and cost of magazine paper is determined by
the specific-cost method.
Property, Plant and Equipment. Property, plant and
equipment is recorded at cost and includes interest capitalized
in connection with major long-term construction projects.
Replacements and major improvements are capitalized; maintenance
and repairs are charged to operations as incurred.
Depreciation is calculated using the straight-line method over
the estimated useful lives of the property, plant and equipment:
3 to 20 years for machinery and equipment, and 20 to
50 years for buildings. The costs of leasehold improvements
are amortized over the lesser of the useful lives or the terms
of the respective leases.
The cable division capitalizes costs associated with the
construction of cable transmission and distribution facilities
and new cable service installations. Costs include all direct
labor and materials, as well as certain indirect costs.
Investments in Affiliates. The Company uses the
equity method of accounting for its investments in and earnings
or losses of affiliates that it does not control, but over which
it does exert significant influence. The Company considers
whether the fair values of any of its equity method investments
have declined below their carrying value whenever adverse events
or changes in circumstances indicate that recorded values may
not be recoverable. If the Company considered any such decline
to be other than temporary (based on various factors, including
historical financial results, product development activities and
the overall health of the affiliates industry), then a
write-down would be recorded to estimated fair value.
Cost Method Investments. The Company uses the cost
method of accounting for its minority investments in non-public
companies where it does not have significant influence over the
operations and management of the investee. Investments are
recorded at the lower of cost or fair value as estimated by
management. Charges recorded to write down cost method
investments to their estimated fair value and gross realized
gains or losses upon the sale of cost method investments are
included in Other income (expense), net in the
Consolidated Statements of Income. Fair value estimates are
based on a review of the investees product development
activities, historical financial results and projected
discounted cash flows.
Goodwill and Other Intangibles. The Company reviews
goodwill and indefinite-lived intangibles at least annually for
impairment. All other intangible assets are amortized over their
useful lives. The Company reviews the carrying value of goodwill
and indefinite-lived intangible assets generally utilizing a
discounted cash flow model. In the case of the Companys
cable systems, both a discounted cash flow model and a market
approach employing comparable sales analysis are considered. In
reviewing the carrying value of goodwill and indefinite-lived
intangible assets at the cable division, the Company aggregates
its cable systems on a regional basis. The Company must make
assumptions regarding estimated future cash flows and market
values to determine a reporting units estimated fair
value. If these estimates or related assumptions change in the
future, the Company may be required to record an impairment
charge.
Long-Lived Assets. The recoverability of long-lived
assets other than goodwill and other intangibles is assessed
whenever adverse events or changes in circumstances indicate
that recorded values may not be recoverable. A long-lived asset
is considered to be not recoverable when the undiscounted
estimated future cash flows are less than its recorded value. An
impairment charge is measured based on estimated fair market
60 THE WASHINGTON POST
COMPANY
Table of Contents
value, determined primarily using estimated future cash flows on
a discounted basis. Losses on long-lived assets to be disposed
are determined in a similar manner, but the fair market value
would be reduced for estimated costs to dispose.
Program Rights. The broadcast subsidiaries are
parties to agreements that entitle them to show syndicated and
other programs on television. The costs of such program rights
are recorded when the programs are available for broadcasting,
and such costs are charged to operations as the programming is
aired.
Revenue Recognition. Education revenue is recognized
ratably over the period during which educational services are
delivered. At Kaplans test prep division, estimates of
average student course length are developed for each course, and
these estimates are evaluated on an ongoing basis and adjusted
as necessary. Revenue from media advertising is recognized, net
of agency commissions, when the underlying advertisement is
published or broadcast. Revenues from newspaper and magazine
subscriptions and retail sales are recognized upon the later of
delivery or cover date, with adequate provision made for
anticipated sales returns. Cable subscriber revenue is
recognized monthly as services are delivered.
The Company bases its estimates for sales returns on historical
experience and has not experienced significant fluctuations
between estimated and actual return activity. Amounts received
from customers in advance of revenue recognition are deferred as
liabilities. Deferred revenue to be earned after one year is
included in Other Liabilities in the Consolidated
Balance Sheets.
Pensions and Other Postretirement
Benefits. Note J provides detailed information on
the Companys pension and other postretirement plans,
including the adoption of SFAS 158.
Income Taxes. The provision for income taxes is
determined using the asset and liability approach. Under this
approach, deferred income taxes represent the expected future
tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities. The Company
adopted FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109, in the
first quarter of 2007. FIN 48 prescribes a comprehensive
model of how a company should recognize, measure, present and
disclose in its financial statements uncertain tax positions
that a company has taken or expects to take on a tax return. See
Note F for additional details surrounding FIN 48.
Foreign Currency Translation. Gains and losses on
foreign currency transactions and the translation of the
accounts of the Companys foreign operations where the
U.S. dollar is the functional currency are recognized
currently in the Consolidated Statements of Income. Gains and
losses on translation of the accounts of the Companys
foreign operations where the local currency is the functional
currency, and the Companys equity investment in its
foreign affiliates, are accumulated and reported as a separate
component of equity and comprehensive income.
Stock Options. Effective the first day of the
Companys 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 (SFAS 123), Accounting for Stock-Based
Compensation. This change in accounting method was applied
prospectively to all awards granted from the beginning of the
Companys fiscal year 2002 and thereafter. Stock options
awarded prior to fiscal year 2002, which were 100% vested by the
end of 2005, were 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 Companys results would
have been had the fair values of options granted prior to 2002
been recognized as compensation expense in 2005 (in thousands,
except per share amounts).
2005 | ||||
Net income available for common shares, as reported
|
$ | 313,363 | ||
Add: Company stock option compensation expense included in net
income, net of related tax effects
|
694 | |||
Deduct: Total Company stock option compensation expense
determined under the fair-value-based method for all awards, net
of related tax effects
|
(1,071 | ) | ||
Pro forma net income available for common shares
|
$ | 312,986 | ||
Basic earnings per share, as reported
|
$ | 32.66 | ||
Pro forma basic earnings per share
|
$ | 32.62 | ||
Diluted earnings per share, as reported
|
$ | 32.59 | ||
Pro forma diluted earnings per share
|
$ | 32.55 |
In the first quarter of 2006, the Company adopted Statement of
Financial Accounting Standards No. 123R (SFAS 123R),
Share-Based Payment. SFAS 123R requires
companies to record the cost of employee services in exchange
for stock options based on the grant-date fair value of the
awards. SFAS 123R did not have any impact on the
Companys results of operations for Company stock options
as the Company had adopted the fair-value-based method of
accounting for Company stock options in 2002. However, the
adoption of SFAS 123R required the Company to change its
accounting for Kaplan equity awards from the intrinsic value
method to the fair-value-based method of accounting. This change
in accounting results in the acceleration of expense recognition
for Kaplan equity awards. As a result, for the year ended
December 31, 2006, the Company reported a $5.1 million
after-tax charge for the cumulative effect of change in
accounting for Kaplan equity awards ($8.2 million in
pre-tax Kaplan stock compensation expense).
2007 FORM 10-K 61
Table of Contents
B. | ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
Accounts receivable at December 30, 2007 and
December 31, 2006 consist of the following (in thousands):
2007 | 2006 | |||||||
Trade accounts receivable, less estimated returns, doubtful
accounts and allowances of $81,903 and $86,227
|
$ | 458,594 | $ | 400,380 | ||||
Other accounts receivable
|
22,149 | 23,023 | ||||||
$ | 480,743 | $ | 423,403 | |||||
Accounts payable and accrued liabilities at December 30,
2007 and December 31, 2006 consist of the following (in
thousands):
2007 | 2006 | |||||||
Accounts payable and accrued expenses
|
$ | 339,443 | $ | 331,783 | ||||
Accrued compensation and related benefits
|
219,332 | 179,991 | ||||||
Due to affiliates (newsprint)
|
5,969 | 6,042 | ||||||
$ | 564,744 | $ | 517,816 | |||||
Cash overdrafts of $35.0 million and $38.1 million are
included in accounts payable and accrued expenses at
December 30, 2007 and December 31, 2006, respectively.
C. | INVESTMENTS |
Investments in Marketable Equity
Securities. Investments in marketable equity securities
at December 30, 2007 and December 31, 2006 consist of
the following (in thousands):
2007 | 2006 | |||||||
Total cost
|
$ | 213,561 | $ | 213,705 | ||||
Net unrealized gains
|
255,898 | 141,023 | ||||||
Total fair value
|
$ | 469,459 | $ | 354,728 | ||||
At December 30, 2007 and December 31, 2006, the
Companys ownership of 2,634 shares of Berkshire
Hathaway Inc. (Berkshire) Class A common stock
and 9,845 shares of Berkshire Class B common stock
accounted for $417.8 million or 89% and $325.8 million
or 92%, respectively, of the total fair value of the
Companys investments in marketable equity securities.
Berkshire is a holding company owning subsidiaries engaged in a
number of diverse business activities, the most significant of
which consists of property and casualty insurance businesses
conducted on both a direct and reinsurance basis. Berkshire also
owns approximately 18% of the common stock of the Company. The
chairman, chief executive officer and largest shareholder of
Berkshire, Mr. Warren Buffett, is a member of the
Companys Board of Directors. Neither Berkshire nor
Mr. Buffett participated in the Companys evaluation,
approval or execution of its decision to invest in Berkshire
common stock. The Companys investment in Berkshire common
stock is less than 1% of the consolidated equity of Berkshire.
At December 30, 2007 and December 31, 2006, the gross
unrealized gain related to the Companys Berkshire stock
investment totaled $232.9 million and $140.9 million,
respectively. The Company presently intends to hold the
Berkshire common stock investment long term, thus the investment
has been classified as a non-current asset in the Consolidated
Balance Sheets.
During 2006, the Company made $42.9 million in investments
in marketable equity securities. There were no investments in
marketable equity securities in 2007 and 2005. During 2007, 2006
and 2005, proceeds from the sales of marketable equity
securities were $0.5 million, $82.9 million and
$64.8 million, respectively, and net realized gains on such
sales were $0.4 million, $33.8 million and
$12.7 million, respectively. During 2006, the Company
recorded a write-down on a marketable equity security of
$14.2 million.
Investments in Affiliates. At the end of 2007, the
Companys investments in affiliates consisted of a 49%
interest in the common stock of Bowater Mersey Paper Company
Limited, which owns and operates a newsprint mill in Nova
Scotia, and other investments.
On November 13, 2006, the Company sold its 49% interest in
BrassRing and recorded a $43.2 million pre-tax gain that is
included in Other income (expense), net in the
Consolidated Statements of Income.
Cash and Cash Equivalents. As of December 30,
2007 and December 31, 2006, the Company had
$5.1 million and $142.9 million in commercial paper
and money market investments that were classified as Cash
and cash equivalents in the Companys Consolidated
Balance Sheets.
D. | ACQUISITIONS AND DISPOSITIONS |
The Company completed business acquisitions totaling
approximately $296.3 million in 2007, $143.4 million
in 2006 and $156.1 million in 2005. The assets and
liabilities of the companies acquired have been recorded at
their estimated fair values at the date of acquisition; the
purchase price allocations mostly comprised goodwill and other
intangibles, and property, plant and equipment.
During 2007, the Company acquired 11 businesses within its
Kaplan, Newspaper, and Other Businesses and Corporate Office
segments for a total cost of $292.0 million, financed with
cash and $2.0 million in debt. Kaplan acquired 9 businesses
in its higher education, test prep and professional divisions,
of which the largest two were Kaplan professionals
acquisitions of EduNeering Holdings, Inc., a Princeton,
NJ-based
provider of knowledge management solutions for organizations in
the pharmaceutical, medical device, healthcare, energy and
manufacturing sectors; and the education division of Financial
Services Institute of Australasia. In October 2007, the Company
acquired the outstanding stock of CourseAdvisor, Inc., a
premier online lead generation provider, headquartered in
Wakefield, MA. Through its search engine marketing expertise and
proprietary technology platform, Course Advisor generates
student leads for the post-secondary education market.
CourseAdvisor operates as an independent subsidiary of the
Company. Most of the purchase price for the 2007 acquisitions
62 THE WASHINGTON POST
COMPANY
Table of Contents
has been allocated on a preliminary basis to goodwill and other
intangibles.
Also in 2007, the cable division acquired subscribers in the
Boise, ID area for $4.3 million. Most of the purchase price
for this transaction has been allocated to indefinite-lived
intangibles and property, plant and equipment.
In connection with the 2007 acquisitions, additional purchase
consideration of approximately $22 million is contingent on
the achievement of certain future operating results; such
amounts have largely been funded in escrow and are not included
in the Companys purchase accounting as of
December 30, 2007. Any additional purchase consideration
related to these contingencies is expected to be recorded as
goodwill.
In July 2007, the television broadcasting division entered into
a transaction to sell and lease back its current Miami
television station facility; a $9.5 million gain was
recorded as a reduction to expense in the third quarter. An
additional $1.9 million deferred gain is being amortized
over the leaseback period. The television broadcasting division
has purchased land and is building a new Miami television
station facility that is expected to be completed in 2009.
During the second quarter of 2007, Kaplan purchased a 40%
interest in ACE Education, a provider of education in China that
provides preparation courses for entry to U.K. universities,
along with degree and professional training programs at campuses
throughout China. In February 2008, Kaplan exercised an option
to increase its investment in ACE Education to a majority
interest.
During 2006, Kaplan acquired 11 businesses in its higher
education, professional and test prep divisions for a total of
$143.4 million, financed with cash. The largest of these
included Tribeca, a leading provider to the Australian financial
services sector; SpellRead, the originator of SpellRead
Phonological Auditory Training, a reading intervention program
for struggling students; Aspect Education Limited, a major
provider of
English-language
instruction in the U.K., Ireland, Australia, New Zealand, Canada
and the U.S.; and PMBR, a nationwide provider of test
preparation for the Multistate Bar Exam. Most of the purchase
price for the 2006 acquisitions was allocated to goodwill and
other intangibles.
In December 2006, Cable ONE participated in the FCCs
Advanced Wireless Service auction and purchased approximately
20 MHz of spectrum, which can be used to provide a variety
of advanced wireless services, in areas that cover more than 85%
of the homes passed by the cable divisions systems.
Licenses for this spectrum have an initial
15-year term
and 10-year
renewal term and require proof that they have provided
substantial service by the end of the initial license term.
In November 2006, the Company completed the sale of the
Companys 49% interest in BrassRing. The pre-tax gain of
$43.2 million resulting from this transaction, which is
included in Other income, net in the Consolidated
Statements of Income, increased net income by approximately
$27.4 million and diluted earnings per share by $2.86.
In December 2006, the Company completed the sale of the
PostNewsweek Tech Media division, which was part of the
Companys magazine publishing segment, and recorded a
$1.5 million loss.
During 2005, Kaplan acquired 10 businesses in its higher
education, professional and test prep divisions for a total of
$140.1 million, financed with cash and $3.0 million in
debt. The largest of these included BISYS Education Services, a
provider of licensing education and compliance solutions for
financial service institutions and professionals; The Kidum
Group, the leading provider of test preparation services in
Israel; and Asia Pacific Management Institute, a private
education provider for undergraduate and postgraduate students
in Asia. In addition, on January 14, 2005, the Company
completed the acquisition of Slate, the online magazine, which
is included as part of the Companys newspaper publishing
division. Most of the purchase price for the 2005 acquisitions
was allocated to goodwill and other intangibles, and property,
plant and equipment.
The results of operations for each of the businesses acquired
are included in the Consolidated Statements of Income from their
respective dates of acquisition. Pro forma results of operations
for 2007, 2006 and 2005, assuming the acquisitions occurred at
the beginning of 2006 or 2005, are not materially different from
reported results of operations.
E. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The Company accounts for goodwill and other intangible assets in
accordance with Statement of Financial Accounting Standards
No. 142 (SFAS 142), Goodwill and Other
Intangible Assets.
The Companys intangible assets with an indefinite life are
principally from franchise agreements at its cable division, as
the Company expects its cable franchise agreements to provide
the Company with substantial benefit for a period that extends
beyond the foreseeable horizon, and the Companys cable
division historically has obtained renewals and extensions of
such agreements for nominal costs and without any material
modifications to the agreements. Amortized intangible assets are
primarily mastheads, customer relationship intangibles,
non-compete agreements, trademarks and databases, with
amortization periods up to 10 years. Amortization expense
was $17.6 million in 2007 and is estimated to be
approximately $20.0 million in each of the next five years.
In the third quarter of 2006, as a result of a challenging
advertising environment, the Company completed a review of the
carrying value of goodwill at PostNewsweek Tech Media, which was
part of the magazine publishing division. As a result of this
review, the Company recorded an impairment charge of
$9.9 million to write down PostNewsweek Tech Medias
goodwill to its estimated fair value utilizing a discounted cash
flow model. The Company subsequently sold PostNewsweek Tech
Media in December 2006.
2007 FORM 10-K 63
Table of Contents
The Companys goodwill and other intangible assets as of
December 30, 2007 and December 31, 2006 were as
follows (in thousands):
Accumulated |
||||||||||||
Gross | Amortization | Net | ||||||||||
2007:
|
||||||||||||
Goodwill
|
$ | 1,796,639 | $ | 298,402 | $ | 1,498,237 | ||||||
Indefinite-lived intangible assets
|
684,711 | 163,806 | 520,905 | |||||||||
Amortized intangible assets
|
114,663 | 44,226 | 70,437 | |||||||||
$ | 2,596,013 | $ | 506,434 | $ | 2,089,579 | |||||||
2006:
|
||||||||||||
Goodwill
|
$ | 1,538,653 | $ | 298,402 | $ | 1,240,251 | ||||||
Indefinite-lived intangible assets
|
681,548 | 163,806 | 517,742 | |||||||||
Amortized intangible assets
|
58,454 | 26,655 | 31,799 | |||||||||
$ | 2,278,655 | $ | 488,863 | $ | 1,789,792 | |||||||
Activity related to the Companys goodwill and intangible
assets during 2007 was as follows (in thousands):
Goodwill, Net | ||||||||||||||||
Foreign Currency |
||||||||||||||||
Beginning of |
Exchange Rate |
End of |
||||||||||||||
Year | Acquisitions | and Other | Year | |||||||||||||
Education
|
$ | 845,754 | $ | 155,299 | $ | 19,124 | $ | 1,020,177 | ||||||||
Newspaper Publishing
|
79,739 | 472 | 958 | 81,169 | ||||||||||||
Television Broadcasting
|
203,165 | 203,165 | ||||||||||||||
Magazine Publishing
|
25,015 | 25,015 | ||||||||||||||
Cable Television
|
85,666 | 85,666 | ||||||||||||||
Other Businesses and
Corporate Office |
912 | 82,133 | 83,045 | |||||||||||||
$ | 1,240,251 | $ | 237,904 | $ | 20,082 | $ | 1,498,237 | |||||||||
Indefinite-Lived Intangible Assets, Net | ||||||||||||||||
Beginning of |
End of |
|||||||||||||||
Year | Acquisitions | Other | Year | |||||||||||||
Education
|
$ | 9,262 | $ | 9,262 | ||||||||||||
Newspaper Publishing
|
||||||||||||||||
Television Broadcasting
|
||||||||||||||||
Magazine Publishing
|
||||||||||||||||
Cable Television
|
508,480 | $ | 3,804 | $ | (641 | ) | 511,643 | |||||||||
Other Businesses and Corporate Office
|
||||||||||||||||
$ | 517,742 | $ | 3,804 | $ | (641 | ) | $ | 520,905 | ||||||||
Amortized Intangible Assets, Net | ||||||||||||||||||||
Foreign Currency |
||||||||||||||||||||
Beginning of |
Acquisitions |
Exchange Rate |
End of |
|||||||||||||||||
Year | and Additions | and Other | Amortization | Year | ||||||||||||||||
Education
|
$ | 25,270 | $ | 25,691 | $ | 530 | $ | (14,669 | ) | $ | 36,822 | |||||||||
Newspaper Publishing
|
5,508 | (106 | ) | (1,162 | ) | 4,240 | ||||||||||||||
Television Broadcasting
|
||||||||||||||||||||
Magazine Publishing
|
||||||||||||||||||||
Cable Television
|
1,021 | 123 | 379 | (442 | ) | 1,081 | ||||||||||||||
Other Businesses and
Corporate Office |
29,592 | (1,298 | ) | 28,294 | ||||||||||||||||
$ | 31,799 | $ | 55,406 | $ | 803 | $ | (17,571 | ) | $ | 70,437 | ||||||||||
Activity related to the Companys goodwill and intangible
assets during 2006 was as follows (in thousands):
Goodwill, Net | ||||||||||||||||||||||||
Foreign |
||||||||||||||||||||||||
Beginning |
Currency |
|||||||||||||||||||||||
of |
Exchange |
Impairment |
End of |
|||||||||||||||||||||
Year | Acquisitions | Rate | Charge | Disposition | Year | |||||||||||||||||||
Education
|
$ | 686,532 | $ | 133,340 | $ | 25,882 | $ | 845,754 | ||||||||||||||||
Newspaper Publishing
|
79,739 | 79,739 | ||||||||||||||||||||||
Television Broadcasting
|
203,165 | 203,165 | ||||||||||||||||||||||
Magazine Publishing
|
69,556 | $ | (9,864 | ) | $ | (34,677 | ) | 25,015 | ||||||||||||||||
Cable Television
|
85,666 | 85,666 | ||||||||||||||||||||||
Other Businesses and
Corporate Office |
912 | 912 | ||||||||||||||||||||||
$ | 1,125,570 | $ | 133,340 | $ | 25,882 | $ | (9,864 | ) | $ | (34,677 | ) | $ | 1,240,251 | |||||||||||
Indefinite-Lived Intangible |
||||||||||||
Assets, Net | ||||||||||||
Beginning of |
End of |
|||||||||||
Year | Acquisitions | Year | ||||||||||
Education
|
$ | 8,362 | $ | 900 | $ | 9,262 | ||||||
Newspaper Publishing
|
||||||||||||
Television Broadcasting
|
||||||||||||
Magazine Publishing
|
||||||||||||
Cable Television
|
486,330 | 22,150 | 508,480 | |||||||||
Other Businesses and Corporate Office
|
||||||||||||
$ | 494,692 | $ | 23,050 | $ | 517,742 | |||||||
Amortized Intangible Assets, Net | ||||||||||||||||||||
Foreign |
||||||||||||||||||||
Currency |
||||||||||||||||||||
Beginning of |
Acquisitions |
Exchange |
End of |
|||||||||||||||||
Year | and Additions | Rate | Amortization | Year | ||||||||||||||||
Education
|
$ | 14,428 | $ | 15,545 | $ | 483 | $ | (5,186 | ) | $ | 25,270 | |||||||||
Newspaper Publishing
|
6,676 | (1,168 | ) | 5,508 | ||||||||||||||||
Television Broadcasting
|
||||||||||||||||||||
Magazine Publishing
|
||||||||||||||||||||
Cable Television
|
1,710 | (689 | ) | 1,021 | ||||||||||||||||
Other Businesses and
Corporate Office |
||||||||||||||||||||
$ | 22,814 | $ | 15,545 | $ | 483 | $ | (7,043 | ) | $ | 31,799 | ||||||||||
64 THE WASHINGTON POST
COMPANY
Table of Contents
F. | INCOME TAXES |
The provision for income taxes consists of the following (in
thousands):
Current | Deferred | Total | ||||||||||
2007
|
||||||||||||
U.S. Federal
|
$ | 132,235 | $ | 32,673 | $ | 164,908 | ||||||
Foreign
|
10,261 | 1,010 | 11,271 | |||||||||
State and local
|
16,963 | (642 | ) | 16,321 | ||||||||
$ | 159,459 | $ | 33,041 | $ | 192,500 | |||||||
2006
|
||||||||||||
U.S. Federal
|
$ | 193,261 | $ | (19,681 | ) | $ | 173,580 | |||||
Foreign
|
6,949 | (1,088 | ) | 5,861 | ||||||||
State and local
|
27,624 | (17,465 | ) | 10,159 | ||||||||
$ | 227,834 | $ | (38,234 | ) | $ | 189,600 | ||||||
2005
|
||||||||||||
U.S. Federal
|
$ | 132,650 | $ | 22,591 | $ | 155,241 | ||||||
Foreign
|
4,849 | 29 | 4,878 | |||||||||
State and local
|
18,504 | 6,677 | 25,181 | |||||||||
$ | 156,003 | $ | 29,297 | $ | 185,300 | |||||||
In addition to the income tax provision presented above, in
2006, the Company recorded a federal and state income tax
benefit of $3.1 million on the charge recorded as a
cumulative effect of a change in accounting principle for Kaplan
equity awards in connection with the adoption of SFAS 123R.
The provision for income taxes exceeds the amount of income tax
determined by applying the U.S. Federal statutory rate of
35% to income before taxes as a result of the following (in
thousands):
2007 | 2006 | 2005 | ||||||||||
U.S. Federal statutory taxes
|
$ | 168,387 | $ | 181,697 | $ | 174,875 | ||||||
State and local taxes, net of U.S. Federal income tax benefit
|
10,609 | 6,603 | 16,368 | |||||||||
Tax provided on foreign affiliate earnings at more (less) than
the expected U.S. Federal statutory tax rate
|
13,254 | (755 | ) | 175 | ||||||||
Tax provided on foreign subsidiary earnings and distributions at
more (less) than the expected U.S. Federal statutory tax rate
|
(1,777 | ) | 190 | (6,704 | ) | |||||||
Other, net
|
2,027 | 1,865 | 586 | |||||||||
Provision for income taxes
|
$ | 192,500 | $ | 189,600 | $ | 185,300 | ||||||
Results for 2007 include an additional $12.9 million in
income tax expense related to Bowater Mersey Paper Company
Limited, the Companys 49% owned affiliate based in Canada.
The Company previously recorded deferred income taxes on the
equity in earnings (losses) of Bowater Mersey based on the 5%
dividend withholding rate provided in the tax treaty between the
U.S. and Canada. In the second quarter of 2007, the Company
obtained additional information related to Bowater Merseys
Canadian tax position and determined that deferred income taxes
on the equity in earnings (losses) of this affiliate investment
should be recorded at a 35% tax rate. The Company concluded that
this charge is not material to the Companys financial
positions or results of operations for 2007 and prior years,
based on its consideration of quantitative and qualitative
factors. Results for 2007 also include a $6.3 million
income tax benefit related to changes in certain state income
tax laws enacted during the second quarter of 2007. Both of
these are non-cash items in 2007, impacting the Companys
long-term net deferred income tax liabilities.
Deferred income taxes at December 30, 2007 and
December 31 2006, consist of the following (in thousands):
2007 | 2006 | |||||||
Accrued postretirement benefits
|
$ | 33,551 | $ | 33,640 | ||||
Other benefit obligations
|
137,626 | 129,909 | ||||||
Accounts receivable
|
20,479 | 24,839 | ||||||
State income tax loss carryforwards
|
10,198 | 12,002 | ||||||
U.S. Federal income tax loss carryforwards
|
12,301 | | ||||||
Other
|
27,035 | 27,140 | ||||||
Deferred tax asset
|
$ | 241,190 | $ | 227,530 | ||||
Property, plant and equipment
|
119,002 | 132,095 | ||||||
Prepaid pension cost
|
410,590 | 392,253 | ||||||
Unrealized gain on available-for-sale securities
|
102,369 | 56,419 | ||||||
Affiliate operations
|
22,973 | 2,188 | ||||||
Goodwill and other intangibles
|
249,551 | 195,126 | ||||||
Deferred tax liability
|
$ | 904,485 | $ | 778,081 | ||||
Deferred income taxes
|
$ | 663,295 | $ | 550,551 | ||||
Deferred U.S. and state income taxes have been recorded for
undistributed earnings of investments in foreign subsidiaries to
the extent taxable dividend income would be recognized if such
earnings were distributed. Deferred income taxes recorded for
undistributed earnings of investments in foreign subsidiaries
are net of foreign tax credits estimated to be available.
Deferred U.S. and state income taxes have not been recorded
for the full book value and tax basis differences related to
investments in foreign subsidiaries because such investments are
expected to be indefinitely held. The book value exceeded the
tax basis of investments in foreign subsidiaries by
approximately $45.5 million and $30.3 million at
December 30, 2007 and December 31, 2006, respectively.
If the investments in foreign subsidiaries were held for sale,
instead of expected to be held indefinitely, then additional
U.S. and state deferred income tax liabilities, net of
foreign tax credits estimated to be available on undistributed
earnings, of approximately
2007 FORM 10-K 65
Table of Contents
$10.9 million and $8.0 million would have been
recorded at December 30, 2007 and December 31, 2006,
respectively.
The Company has approximately $35 million of
U.S. Federal income tax loss carryforwards obtained as a
result of recent stock acquisitions. These U.S. Federal
income tax loss carryfowards are expected to be fully utilized;
during 2008 through 2013, approximately $5 million a year
will be utilized, and during 2014 through 2025, the balance will
be utilized.
The Company has approximately $217 million of state income
tax loss carryforwards that are expected to be fully utilized.
However, if unutilized, state income tax loss carryforwards will
start to expire approximately as follows (in millions):
2008
|
$ | 2.1 | ||
2009
|
10.3 | |||
2010
|
2.3 | |||
2011
|
11.7 | |||
2012
|
6.5 | |||
2013 to 2025
|
184.1 | |||
Total
|
$ | 217.0 | ||
The Company has approximately $6 million of foreign income
tax loss carryforwards as a result of recent stock acquisitions.
These foreign income tax loss carryforwards are expected to be
fully utilized within the next five years.
The Company files income tax returns in the U.S. and various
state and foreign jurisdictions, with the U.S. Federal
considered the only major tax jurisdiction. In January 2007, the
Internal Revenue Service (IRS) completed their examinations of
the Companys consolidated federal corporate income tax
returns through 2004.
In June 2006, The Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109. FIN 48 prescribes a comprehensive model
of how a company should recognize, measure, present and disclose
in its financial statements uncertain tax positions that a
company has taken or expects to take on a tax return. The
Company implemented FIN 48 in the first quarter of 2007,
and there was no impact on the Companys financial position
or results of operations as a result of the implementation.
The Company has determined that there are no material
transactions or material tax positions taken by the Company that
would fail to meet the more likely than not threshold
established by FIN 48 for recognizing transactions or tax
positions in the financial statements. In making this
determination, the Company presumes that all matters will be
examined with full knowledge of all relevant information by
appropriate taxing authorities and that the Company will pursue,
if necessary, resolution by related appeals or litigation. The
Company has accrued a tax liability for various tax positions
reflected in the financial statements where it is uncertain
whether the tax benefit associated with the tax positions will
ultimately be recognized in full. The amount of, and changes to,
this accrued tax liability are not material to the
Companys financial position or results of operations, and
the Company does not expect the total amount of this accrued tax
liability or the gross amount of any unrecognized tax benefits
to significantly increase or decrease within the next
12 months.
G. | DEBT |
Long-term debt consists of the following (in millions):
December 30, |
December 31, |
|||||||
2007 | 2006 | |||||||
Commercial paper borrowings
|
$ | 84.8 | $ | | ||||
5.5% unsecured notes due February 15, 2009
|
399.7 | 399.4 | ||||||
Other indebtedness
|
5.6 | 7.8 | ||||||
Total
|
490.1 | 407.2 | ||||||
Less current portion
|
(89.6 | ) | (5.6 | ) | ||||
Total long-term debt
|
$ | 400.5 | $ | 401.6 | ||||
At December 30, 2007, the average interest rate on the
Companys outstanding commercial paper borrowings was 4.5%.
The Companys other indebtedness at December 30, 2007
and December 31, 2006 is at interest rates of 5% to 8% and
matures from 2008 to 2010. Interest on the 5.5% unsecured notes
is payable semi-annually on February 15 and August 15.
The Company entered a $500 million
5-year
revolving credit agreement with a group of banks on
August 8, 2006 (the 2006 Credit Agreement).
This agreement supports the issuance of the Companys
commercial paper, but the Company may also draw on the facility
for general corporate purposes. The 2006 Credit Agreement will
expire on August 8, 2011, unless the Company and the banks
agree prior to the second anniversary date to extend the term
(which extensions cannot exceed an aggregate of two years). The
Company has not borrowed any money under this agreement. Any
borrowings that are outstanding under the 2006 Credit Agreement
would have to be repaid on or prior to the final termination
date.
Under the terms of the 2006 Credit Agreement, the Company is
required to pay a facility fee at an annual rate of between
0.04% and 0.10% of the amount of the facility, depending on the
Companys long-term debt ratings. Any borrowings are made
on an unsecured basis and bear interest, at the Companys
option, at Citibanks base rate or at a rate based on LIBOR
plus an applicable margin that also depends on the
Companys long-term debt ratings. The 2006 Credit Agreement
contains terms and conditions, including remedies in the event
of a default by the Company, typical of facilities of this type
and, among other things, requires the Company to maintain at
least $1 billion of consolidated shareholders equity.
During 2007 and 2006, the Company had average borrowings
outstanding of approximately $412.1 million and
$418.7 million, respectively, at average annual interest
rates of approximately 5.5%. The Company incurred net interest
costs
66 THE WASHINGTON POST
COMPANY
Table of Contents
on its borrowings of $12.7 million and $14.9 million
during 2007 and 2006, respectively. No interest expense was
capitalized in 2007 or 2006.
At December 30, 2007 and December 31, 2006, the fair
value of the Companys 5.5% unsecured notes, based on
quoted market prices, totaled $400.8 million and
$398.4 million, respectively, compared with the carrying
amount of $399.7 million and $399.4 million,
respectively.
The carrying value of the Companys other unsecured debt at
December 30, 2007 approximates fair value.
H. | REDEEMABLE PREFERRED STOCK |
In connection with the acquisition of a cable television system
in 1996, the Company issued 11,947 shares of its
Series A Preferred Stock. On February 23, 2000, the
Company issued an additional 1,275 shares related to this
transaction. From 1998 to 2007, 1,396 shares of
Series A Preferred Stock were redeemed at the request of
Series A Preferred Stockholders.
The Series A Preferred Stock has a par value of $1.00 per
share and a liquidation preference of $1,000 per share; it is
redeemable by the Company at any time on or after
October 1, 2015 at a redemption price of $1,000 per share.
In addition, the holders of such stock have a right to require
the Company to purchase their shares at the redemption price
during an annual
60-day
election period; the first such period began on
February 23, 2001. Dividends on the Series A Preferred
Stock are payable four times a year at the annual rate of $80.00
per share and in preference to any dividends on the
Companys common stock. The Series A Preferred Stock
is not convertible into any other security of the Company, and
the holders thereof have no voting rights except with respect to
any proposed changes in the preferences and special rights of
such stock.
I. | CAPITAL STOCK, STOCK AWARDS AND STOCK OPTIONS |
Adoption of SFAS 123R. In the first quarter of
2006, the Company adopted Statement of Financial Accounting
Standards No. 123R (SFAS 123R), Share-Based
Payment. SFAS 123R requires companies to record the
cost of employee services in exchange for stock options based on
the grant-date fair value of the awards. SFAS 123R did not
have any impact on the Companys results of operations for
Company stock options as the Company had adopted the
fair-value-based method of accounting for Company stock options
in 2002. However, the adoption of SFAS 123R required the
Company to change its accounting for Kaplan equity awards from
the intrinsic value method to the fair-value-based method of
accounting. This change in accounting resulted in the
acceleration of expense recognition for Kaplan equity awards. As
a result, for the year ended December 31, 2006, the Company
reported a $5.1 million after-tax charge for the cumulative
effect of change in accounting for Kaplan equity awards
($8.2 million in pre-tax Kaplan stock compensation expense).
Capital Stock. Each share of Class A common
stock and Class B common stock participates equally in
dividends. The Class B stock has limited voting rights and
as a class has the right to elect 30% of the Board of Directors;
the Class A stock has unlimited voting rights, including
the right to elect a majority of the Board of Directors. In the
third quarter of 2007, a majority of the Companys
Class A shareholders voted to convert 430,557, or 25%, of
the Class A shares of the Company to an equal number of
Class B shares. The conversion had no impact on the voting
rights of the Class A and Class B common stock.
During 2007 and 2006, the Company purchased a total of 54,506
and 77,300 shares, respectively, of its Class B common
stock at a cost of approximately $42.0 million and
$56.6 million, respectively. During 2005, the Company did
not purchase any shares of its Class B common stock. At
December 30, 2007, the Company had authorization from the
Board of Directors to purchase up to 410,994 shares of
Class B common stock.
Stock Awards. In 1982, the Company adopted a
long-term incentive compensation plan, which, among other
provisions, authorizes the awarding of Class B common stock
to key employees. Stock awards made under this incentive
compensation plan are subject to the general restriction that
stock awarded to a participant will be forfeited and revert to
Company ownership if the participants employment
terminates before the end of a specified period of service to
the Company. At December 30, 2007, there were
171,720 shares reserved for issuance under the incentive
compensation plan. Of this number, 34,355 shares were
subject to awards outstanding and 137,365 shares were
available for future awards. Activity related to stock awards
under the long-term incentive compensation plan for the years
ended December 30, 2007, December 31, 2006 and
January 1, 2006, was as follows:
2007 | 2006 | 2005 | ||||||||||||||||||||||
Number |
Average |
Number |
Average |
Number |
Average |
|||||||||||||||||||
of |
Award |
of |
Award |
of |
Award |
|||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Beginning of year (nonvested)
|
29,105 | $ | 815.55 | 29,580 | $ | 819.83 | 28,001 | $ | 644.51 | |||||||||||||||
Awarded
|
19,260 | 759.66 | 1,300 | 769.43 | 16,550 | 940.96 | ||||||||||||||||||
Vested
|
(12,838 | ) | 726.94 | (159 | ) | 721.32 | (13,830 | ) | 609.87 | |||||||||||||||
Forfeited
|
(1,172 | ) | 913.33 | (1,616 | ) | 866.07 | (1,141 | ) | 819.22 | |||||||||||||||
End of year (nonvested)
|
34,355 | $ | 813.99 | 29,105 | $ | 815.55 | 29,580 | $ | 819.83 | |||||||||||||||
In addition to stock awards granted under the long-term
incentive compensation plan, the Company also has
125 shares of nonvested stock awards at December 30,
2007.
For the share awards outstanding at December 30, 2007, the
aforementioned restriction will lapse in 2008 for
325 shares, in 2009 for 14,190 shares, in 2010 for
1,225 shares, in 2011 for 17,990 shares and in 2012
for 750 shares. Stock-based compensation costs resulting
from Company stock awards reduced net income by
$3.7 million, $3.3 million and $3.5 million, in
2007, 2006 and 2005, respectively.
2007 FORM 10-K 67
Table of Contents
As of December 30, 2007, there was $15.9 million of
total unrecognized compensation cost related to this plan. That
cost is expected to be recognized on a straight-line basis over
a weighted average period of 1.9 years.
Stock Options. The Companys employee stock
option plan reserves 1,900,000 shares of the Companys
Class B common stock for options to be granted under the
plan. The purchase price of the shares covered by an option
cannot be less than the fair value on the granting date. Options
generally vest over 4 years and have a maximum term of
10 years. At December 30, 2007, there were
379,775 shares reserved for issuance under the stock option
plan, of which 92,275 shares were subject to options
outstanding and 287,500 shares were available for future
grants.
Changes in options outstanding for the years ended
December 30, 2007, December 31, 2006 and
January 1, 2006, were as follows:
2007 | 2006 | 2005 | ||||||||||||||||||||||
Number |
Average |
Number |
Average |
Number |
Average |
|||||||||||||||||||
of |
Option |
of |
Option |
of |
Option |
|||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Beginning of year
|
109,175 | $ | 593.82 | 113,325 | $ | 572.36 | 122,250 | $ | 561.05 | |||||||||||||||
Granted
|
| | 9,000 | 729.67 | 4,500 | 762.50 | ||||||||||||||||||
Exercised
|
(16,275 | ) | 519.12 | (12,275 | ) | 481.05 | (12,800 | ) | 533.24 | |||||||||||||||
Forfeited
|
(625 | ) | 609.62 | (875 | ) | 803.61 | (625 | ) | 530.87 | |||||||||||||||
End of year
|
92,275 | $ | 606.89 | 109,175 | $ | 593.82 | 113,325 | $ | 572.36 | |||||||||||||||
Of the shares covered by options outstanding at the end of 2007,
82,337 are now exercisable, 4,344 will become exercisable in
2008, 3,344 will become exercisable in 2009 and 2,250 will
become exercisable in 2010. For 2007, 2006 and 2005, the Company
recorded expense of $1.2 million, $1.3 million and
$1.1 million, respectively, related to this plan.
Information related to stock options outstanding and exercisable
at December 30, 2007 is as follows:
Options Outstanding | Options Exercisable | ||||||||||||||||||||||||
Weighted |
Weighted |
||||||||||||||||||||||||
Shares |
Average |
Weighted |
Shares |
Average |
Weighted |
||||||||||||||||||||
Outstanding |
Remaining |
Average |
Exercisable |
Remaining |
Average |
||||||||||||||||||||
Range of |
at |
Contractual |
Exercise |
at |
Contractual |
Exercise |
|||||||||||||||||||
Exercise Prices | 12/30/2007 | Life (yrs.) | Price | 12/30/2007 | Life (yrs.) | Price | |||||||||||||||||||
$ | 480 | 750 | 3.0 | $ | 480.00 | 750 | 3.0 | $ | 480.00 | ||||||||||||||||
503586 | 61,650 | 2.8 | 527.57 | 61,650 | 2.8 | 527.57 | |||||||||||||||||||
693 | 500 | 6.0 | 692.51 | 500 | 6.0 | 692.51 | |||||||||||||||||||
729763 | 21,875 | 7.2 | 735.98 | 12,937 | 6.2 | 734.78 | |||||||||||||||||||
816 | 3,500 | 6.0 | 816.05 | 3,500 | 6.0 | 816.05 | |||||||||||||||||||
954 | 4,000 | 7.0 | 953.50 | 3,000 | 7.0 | 953.50 | |||||||||||||||||||
92,275 | 4.3 | $ | 606.89 | 82,337 | 3.7 | $ | 588.48 | ||||||||||||||||||
At December 30, 2007, the intrinsic value for all options
outstanding, exercisable, and nonvested was $18.6 million,
$18.0 million and $0.6 million, respectively. The
intrinsic value of a stock option is the amount by which the
market value of the underlying stock exceeds the exercise price
of the option. The market value of the Companys stock was
$801.50 at December 30, 2007. At December 30, 2007,
there were 9,938 nonvested options related to this plan with an
average exercise price of $759.42 and a weighted average
remaining contractual term of 8.6 years. At
December 31, 2006, there were 15,437 nonvested options with
an average exercise price of $770.79.
As of December 30, 2007, total unrecognized stock-based
compensation expense related to this plan was $2.1 million,
which is expected to be recognized on a straight-line basis over
a weighted average period of approximately 1.75 years. The
total intrinsic value of options exercised during 2007, 2006 and
2005 was $4.7 million, $3.7 million and
$3.8 million, respectively.
There were no options granted during 2007. During 2006 and 2005,
all options were granted at an exercise price equal to or
greater than the fair market value of the Companys common
stock at the date of grant. The weighted average fair value for
options granted during 2006 and 2005 was $211.76 and $218.62,
respectively. The fair value of options at date of grant was
estimated using the Black-Scholes method utilizing the following
assumptions:
2006 | 2005 | |||||||
Expected life (years)
|
7 | 7 | ||||||
Interest rate
|
4.45 | % | 4.49 | % | ||||
Volatility
|
20.35 | % | 19.08 | % | ||||
Dividend yield
|
1.07 | % | 0.97 | % |
The Company also maintains a stock option plan at its Kaplan
subsidiary that provides for the issuance of Kaplan stock
options to certain members of Kaplans management. The
Kaplan stock option plan was adopted in 1997 and initially
reserved 15%, or 150,000 shares, of Kaplans common
stock for awards to be granted under the plan. Under the
provisions of this plan, options are issued with an exercise
price equal to the estimated fair value of Kaplans common
stock, and options vest ratably over the number of years
specified (generally four to five years) at the time of the
grant. Upon exercise, an option holder may receive Kaplan shares
or cash equal to the difference between the exercise price and
the then fair value. The fair value of Kaplans common
stock is determined by the Companys compensation committee
of the Board of Directors. In January 2008, the committee set
the fair value price at $2,700 per share. Option holders have a
30-day
window in which they may exercise at this price, after which
time the compensation committee has the right to determine a new
price in the event of an exercise. Also in the first two months
of 2008, 26,656 Kaplan stock options were exercised, and 21,325
Kaplan stock options were awarded at an option price of $2,700
per share.
68 THE WASHINGTON POST
COMPANY
Table of Contents
Changes in Kaplan stock options outstanding for the years ended
December 30, 2007, December 31, 2006 and
January 1, 2006, were as follows:
2007 | 2006 | 2005 | ||||||||||||||||||||||
Number |
Average |
Number |
Average |
Number |
Average |
|||||||||||||||||||
of |
Option |
of |
Option |
of |
Option |
|||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Beginning of year
|
73,352 | $ | 1,480.11 | 62,229 | $ | 944.63 | 68,000 | $ | 596.17 | |||||||||||||||
Granted
|
3,262 | 2,115.00 | 29,785 | 1,833.00 | 10,582 | 2,080.00 | ||||||||||||||||||
Exercised
|
(6,952 | ) | 457.55 | (18,662 | ) | 257.73 | (16,153 | ) | 225.14 | |||||||||||||||
Forfeited
|
| | | | (200 | ) | 652.00 | |||||||||||||||||
End of year
|
69,662 | $ | 1,611.89 | 73,352 | $ | 1,480.11 | 62,229 | $ | 944.63 | |||||||||||||||
The compensation committee awarded to a senior manager of Kaplan
shares equal in value to $4.8 million, $4.6 million
and $4.8 million for the 2007, 2006 and 2005 fiscal year,
respectively, and the expense of these awards was recorded in
the Companys results of operations for each relevant
fiscal year. As a result, in the first quarter of 2008, 1,778
Kaplan shares will be issued related to the 2007 share
awards, based on the January 2008 valuation of $2,700 per share
value. In the first quarter of 2007 and second quarter of 2006,
2,175 and 2,619 shares were issued related to the 2006 and
2005 Kaplan share awards. In the fourth quarter of 2007, a
senior manager exercised Kaplan stock options and received 1,750
Kaplan shares.
Kaplan recorded stock compensation expense of $41.3 million
for 2007, compared to $27.7 million for 2006 and
$3.0 million for 2005, excluding Kaplan stock compensation
expense in 2006 of $8.2 million as a result of the change
in accounting under SFAS 123R. In 2007, 2006 and 2005,
total net payouts were $8.1 million, $31.1 million and
$35.2 million, respectively. At December 31, 2007, the
Companys accrual balance related to Kaplan stock-based
compensation totaled $101.2 million.
As of December 30, 2007, total unrecognized stock-based
compensation expense related to stock options was
$13.6 million, which is expected to be recognized over a
weighted average period of approximately 2.70 years. The
total intrinsic value of options exercised during 2007 was
$11.5 million; a tax benefit from these stock option
exercises of $4.7 million was realized during 2007.
Information related to stock options outstanding and exercisable
at December 30, 2007 is as follows:
Options Outstanding | Options Exercisable | ||||||||||||||||
Weighted |
Weighted |
||||||||||||||||
Average |
Average |
||||||||||||||||
Shares |
Remaining |
Shares |
Remaining |
||||||||||||||
Outstanding at |
Contractual |
Exercisable at |
Contractual |
||||||||||||||
Exercise Price | 12/30/2007 | Life (yrs.) | 12/30/2007 | Life (yrs.) | |||||||||||||
$ | 526 | 10,533 | 3.8 | 10,533 | 3.8 | ||||||||||||
652 | 2,000 | 4.0 | 2,000 | 4.0 | |||||||||||||
1,625 | 13,500 | 4.0 | 10,800 | 4.0 | |||||||||||||
1,833 | 29,785 | 4.0 | 7,447 | 4.0 | |||||||||||||
2,080 | 10,582 | 4.0 | 5,291 | 4.0 | |||||||||||||
2,115 | 3,262 | 4.0 | | 4.0 | |||||||||||||
69,662 | 4.0 | 36,071 | 3.9 | ||||||||||||||
At December 30, 2007, the intrinsic value for all options
outstanding, exercisable and nonvested was $75.8 million,
$48.3 million and $27.5 million, respectively. The
intrinsic value of a stock option is the amount by which the
estimated fair value of the underlying stock exceeds the
exercise price of the option. The estimated fair value of
Kaplans stock was $2,700 at December 30, 2007. At
December 30, 2007, there were 33,591 nonvested options
related to the plan with an average exercise price of $1,883 and
a weighted average remaining contractual term of 4.0 years.
At December 31, 2006, there were 43,716 nonvested options
with an average exercise price of $1,837.
The fair value of Kaplan stock options at December 30, 2007
and December 31, 2006 was estimated using the Black-Scholes
method utilizing the following assumptions:
December 30, |
December 31, |
|||
2007 | 2006 | |||
Expected life (years)
|
04 | 06 | ||
Interest rate
|
3.05%3.34% | 4.70%5.00% | ||
Volatility
|
34.24%45.39% | 34.78%46.50% | ||
Dividend yield
|
0% | 0% |
Refer to Note A for additional disclosures surrounding
stock option accounting.
Earnings Per Share. Basic earnings per share are
based on the weighted average number of shares of common stock
outstanding during each year. Diluted earnings per common share
are based on the weighted average number of shares of common
stock outstanding each year, adjusted for the dilutive effect of
shares issuable under outstanding stock options and restricted
stock.
2007 FORM 10-K 69
Table of Contents
The Companys earnings per share (basic and diluted) for
2007, 2006 and 2005 are presented below (in thousands, except
per share amounts):
Fiscal Year Ended | ||||||||||||
December 30, |
December 31, |
January 1, |
||||||||||
2007 | 2006 | 2006 | ||||||||||
Income before cumulative effect of change in accounting
principle, after redeemable preferred stock dividends
|
$ | 287,655 | $ | 328,553 | $ | 313,363 | ||||||
Cumulative effect of change in method of accounting for
share-based payments, net of taxes
|
| (5,075 | ) | | ||||||||
Net income available for common shares
|
$ | 287,655 | $ | 323,478 | $ | 313,363 | ||||||
Weighted average shares outstanding basic
|
9,492 | 9,568 | 9,594 | |||||||||
Effect of dilutive shares:
|
||||||||||||
Stock options and restricted stock
|
36 | 38 | 22 | |||||||||
Weighted average shares outstanding diluted
|
9,528 | 9,606 | 9,616 | |||||||||
Basic earnings per common share:
|
||||||||||||
Before cumulative effect of change in accounting principle
|
$ | 30.31 | $ | 34.34 | $ | 32.66 | ||||||
Cumulative effect of change in accounting principle
|
| (0.53 | ) | | ||||||||
Net income available for common shares
|
$ | 30.31 | $ | 33.81 | $ | 32.66 | ||||||
Diluted earnings per common share:
|
||||||||||||
Before cumulative effect of change in accounting principle
|
$ | 30.19 | $ | 34.21 | $ | 32.59 | ||||||
Cumulative effect of change in accounting principle
|
| (0.53 | ) | | ||||||||
Net income available for common shares
|
$ | 30.19 | $ | 33.68 | $ | 32.59 | ||||||
The 2007, 2006 and 2005 diluted earnings per share amounts
exclude the effects of 7,500, 13,000 and 4,000 stock options
outstanding, respectively, as their inclusion would be
antidilutive.
J. | PENSIONS AND OTHER POSTRETIREMENT PLANS |
The Company maintains various pension and incentive savings
plans and contributes to several multi-employer plans on behalf
of certain union-represented employee groups. Substantially all
of the Companys employees are covered by these plans.
The Company also provides healthcare and life insurance benefits
to certain retired employees. These employees become eligible
for benefits after meeting age and service requirements.
The Company uses a measurement date of December 31 for its
pension and other postretirement benefit plans.
Adoption of SFAS 158. On December 31,
2006, the Company adopted Statement of Financial Accounting
Standards No. 158 (SFAS 158), Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans. SFAS 158 required companies to recognize the
funded status of pension and other postretirement benefit plans
on their balance sheets at December 31, 2006. The effects
of adopting the provisions of SFAS 158 on the
Companys Balance Sheet at December 31, 2006, are
presented in the following table (in thousands):
December 31, 2006 | ||||||||||||
Before |
After |
|||||||||||
Adoption | Adjustment | Adoption | ||||||||||
Investment in affiliates
|
$ | 72,333 | $ | (7,642 | ) | $ | 64,691 | |||||
Prepaid pension cost
|
565,262 | 410,030 | 975,292 | |||||||||
Accounts payable and accrued liabilities
|
510,969 | 6,847 | 517,816 | |||||||||
Postretirement benefits other than pensions
|
153,701 | (72,364 | ) | 81,337 | ||||||||
Accrued compensation and related benefits
|
221,199 | 13,017 | 234,216 | |||||||||
Deferred tax liability
|
414,857 | 184,630 | 599,487 | |||||||||
Unrealized gain on pensions and other postretirement benefits
|
| 270,258 | 270,258 |
The Companys investment in affiliates balance declined by
$7.6 million as a result of the adoption of SFAS 158
by Bowater Mersey Paper Company, in which the Company holds a
49% interest. In 2007, the Companys investment in
affiliates balance increased by $5.0 million as a result of
the current year SFAS 158 adjustments.
Defined Benefit Plans. The Companys defined
benefit pension plans consist of various pension plans and a
Supplemental Executive Retirement Plan (SERP) offered to certain
executives of the Company.
The Washington Post implemented a voluntary early retirement
program to the Mailers employees in 2006; pre-tax charges of
$1.1 million were recorded during 2006 in connection with
this program. Additionally in 2006, the Company implemented a
voluntary early retirement program to a large group of exempt
and Guild-covered employees at The Washington Post and the
corporate office; the offer included an incentive payment,
enhanced retirement benefits and other benefits. The Company
recorded pre-tax charges of $49.8 million in connection
with this program. Overall, 198 employees accepted
voluntary early retirement offers under these two programs.
70 THE WASHINGTON POST
COMPANY
Table of Contents
The following table sets forth obligation, asset and funding
information for the Companys defined benefit pension plans
at December 30, 2007 and December 31, 2006 (in
thousands):
Pension Plans | SERP | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Change in Benefit Obligation
|
||||||||||||||||
Benefit obligation at beginning of year
|
$ | 802,791 | $ | 748,873 | $ | 54,382 | $ | 51,625 | ||||||||
Service cost
|
28,115 | 27,298 | 1,542 | 1,728 | ||||||||||||
Interest cost
|
47,201 | 43,707 | 3,213 | 2,936 | ||||||||||||
Amendments
|
(179 | ) | 60,695 | | 1,349 | |||||||||||
Actuarial loss (gain)
|
2,310 | (21,499 | ) | 53 | (2,123 | ) | ||||||||||
Benefits paid
|
(40,068 | ) | (56,283 | ) | (1,728 | ) | (1,133 | ) | ||||||||
Benefit obligation at end of year
|
$ | 840,170 | $ | 802,791 | $ | 57,462 | $ | 54,382 | ||||||||
Change in Plan Assets
|
||||||||||||||||
Fair value of assets at beginning of year
|
$ | 1,778,083 | $ | 1,683,265 | $ | | $ | | ||||||||
Actual return on plan assets
|
136,944 | 151,101 | | | ||||||||||||
Employer contributions
|
| | 1,728 | 1,133 | ||||||||||||
Benefits paid
|
(40,068 | ) | (56,283 | ) | (1,728 | ) | (1,133 | ) | ||||||||
Fair value of assets at end of year
|
$ | 1,874,959 | $ | 1,778,083 | $ | | $ | | ||||||||
Funded status
|
$ | 1,034,789 | $ | 975,292 | $ | (57,462 | ) | $ | (54,382 | ) | ||||||
The accumulated benefit obligation for the Companys
pension plans at December 30, 2007 and December 31,
2006, was $756.7 million and $714.9 million,
respectively. The accumulated benefit obligation for the
Companys SERP at December 30, 2007 and
December 31, 2006 was $44.6 million and
$42.2 million, respectively. The amounts recognized in the
consolidated balance sheets for the Companys defined
benefit pension plans at December 30, 2007 and
December 31, 2006 (in thousands):
Pension Plans | SERP | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Non-current asset
|
$ | 1,034,789 | $ | 975,292 | $ | | $ | | ||||||||
Current liability
|
| | (1,738 | ) | (1,627 | ) | ||||||||||
Non-current liability
|
| | (55,724 | ) | (52,755 | ) | ||||||||||
Recognized asset (liability)
|
$ | 1,034,789 | $ | 975,292 | $ | (57,462 | ) | $ | (54,382 | ) | ||||||
Key assumptions utilized for determining the benefit obligation
at December 30, 2007 and December 31, 2006 are as
follows:
Pension Plans | SERP | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Discount rate
|
6.0 | % | 6.0 | % | 6.0 | % | 6.0 | % | ||||||||
Rate of compensation increase
|
4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % |
The Company made no contributions to its pension plans in 2007,
2006 and 2005, and the Company does not expect to make any
contributions in 2008 or in the foreseeable future. The Company
made contributions to its SERP of $1.7 million and
$1.1 million for the years ended December 30, 2007 and
December 31, 2006, respectively, as the plan is unfunded
and the Company covers benefit payments. The Company makes
contributions to the SERP based on actual benefit payments.
At December 30, 2007, future estimated benefit payments,
excluding charges for early retirement programs, are as follows
(in millions):
Pension Plans | SERP | |||||||
2008
|
$ | 38.5 | $ | 1.8 | ||||
2009
|
$ | 39.2 | $ | 2.3 | ||||
2010
|
$ | 40.4 | $ | 2.6 | ||||
2011
|
$ | 41.9 | $ | 2.9 | ||||
2012
|
$ | 43.8 | $ | 3.2 | ||||
20132017
|
$ | 247.9 | $ | 20.6 |
The Companys defined benefit pension obligations are
funded by a portfolio made up of a relatively small number of
stocks and high-quality fixed-income securities that are held in
trust. As of December 30, 2007 and December 31, 2006,
the assets of the Companys pension plans were allocated as
follows (in percentages):
Pension Plan Asset Allocations | ||||||||
December 30, |
December 31, |
|||||||
2007 | 2006 | |||||||
Equities
|
88 | % | 89 | % | ||||
Fixed income
|
12 | % | 11 | % | ||||
Total
|
100 | % | 100 | % | ||||
Essentially all of the assets are actively managed by two
investment companies. Included in the assets they manage are
$459.1 million and $445.9 million of Berkshire
Hathaway Class A and Class B common stock at
December 30, 2007 and December 31, 2006, respectively.
None of the assets is managed internally by the Company.
The goal of the investment managers is to try to produce
moderate long-term growth in the value of those assets, while
protecting them against large decreases in value. The managers
are not permitted to invest in securities of the Company or in
alternative investments. In addition, they cannot invest more
than 20% of the assets at the time of purchase in the stock of
Berkshire Hathaway or more than 10% of the assets in the
securities of any other single
2007 FORM 10-K 71
Table of Contents
issuer, except for obligations of the U.S. Government,
without receiving prior approval by the Plan administrator. Most
of the investments are in U.S. securities. As of
December 30, 2007, up to 13% of the assets could be
invested in stocks of companies that are domiciled outside the
United States, and no less than 9% of the assets could be
invested in fixed-income securities.
The total (income) cost arising from the Companys defined
benefit pension plans for the years ended December 30,
2007, December 31, 2006 and January 1, 2006 consists
of the following components (in thousands):
Pension Plans | SERP | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
Service cost
|
$ | 28,115 | $ | 27,298 | $ | 27,161 | $ | 1,542 | $ | 1,728 | $ | 1,496 | ||||||||||||
Interest cost
|
47,201 | 43,707 | 39,989 | 3,213 | 2,936 | 2,642 | ||||||||||||||||||
Expected return on assets
|
(98,066 | ) | (93,968 | ) | (104,589 | ) | | | | |||||||||||||||
Amortization of transition asset
|
(53 | ) | (82 | ) | (106 | ) | | | | |||||||||||||||
Amortization of prior service cost
|
5,057 | 4,857 | 4,716 | 446 | 412 | 465 | ||||||||||||||||||
Recognized actuarial (gain) loss
|
(4,534 | ) | (3,645 | ) | (5,085 | ) | 1,565 | 1,589 | 1,215 | |||||||||||||||
Net periodic (benefit) cost for the year
|
(22,280 | ) | (21,833 | ) | (37,914 | ) | 6,766 | 6,665 | 5,818 | |||||||||||||||
Early retirement programs expense
|
| 50,040 | 1,192 | | 902 | | ||||||||||||||||||
Total (benefit) cost for the year
|
$ | (22,280 | ) | $ | 28,207 | $ | (36,722 | ) | $ | 6,766 | $ | 7,567 | $ | 5,818 | ||||||||||
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income:
|
||||||||||||||||||||||||
Current year actuarial (gain) loss
|
$ | (36,568 | ) | $ | 53 | |||||||||||||||||||
Current year prior service credit
|
(179 | ) | | |||||||||||||||||||||
Amortization of transition asset
|
53 | | ||||||||||||||||||||||
Amortization of prior service cost
|
(5,057 | ) | (446 | ) | ||||||||||||||||||||
Recognized actuarial gain (loss)
|
4,534 | (1,565 | ) | |||||||||||||||||||||
Total recognized in other comprehensive income (before tax
effects)
|
$ | (37,217 | ) | $ | (1,958 | ) | ||||||||||||||||||
Total recognized in total (benefit) cost and other
comprehensive income (before tax effects)
|
$ | (59,497 | ) | $ | 28,207 | $ | (36,722 | ) | $ | 4,808 | $ | 7,567 | $ | 5,818 | ||||||||||
The costs for the Companys defined benefit pension plans
are actuarially determined. Below are the key assumptions
utilized to determine periodic cost for the years ended
December 30, 2007, December 31, 2006 and
January 1, 2006:
Pension Plans | SERP | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
Discount rate
|
6.0 | % | 5.75 | % | 5.75 | % | 6.0 | % | 5.75 | % | 5.75 | % | ||||||||||||
Expected return on plan assets
|
6.5 | % | 6.5 | % | 7.5 | % | | | | |||||||||||||||
Rate of compensation increase
|
4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % |
In determining the expected rate of return on plan assets, the
Company considers the relative weighting of plan assets, the
historical performance of total plan assets and individual asset
classes and economic and other indicators of future performance.
In addition, the Company may consult with and consider the input
of financial and other professionals in developing appropriate
return benchmarks.
At December 30, 2007 and December 31, 2006,
accumulated other comprehensive income (AOCI) includes the
following components of unrecognized net periodic (benefit) cost
for the defined benefit plans (in thousands):
Pension Plans | SERP | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Unrecognized actuarial (gain) loss
|
$ | (483,928 | ) | $ | (451,894 | ) | $ | 11,074 | $ | 12,586 | ||||||
Unrecognized prior service cost
|
36,795 | 42,031 | 1,612 | 2,058 | ||||||||||||
Unrecognized transition asset
|
(114 | ) | (167 | ) | | | ||||||||||
Gross amount
|
(447,247 | ) | (410,030 | ) | 12,686 | 14,644 | ||||||||||
Deferred tax liability (benefit)
|
178,899 | 164,012 | (5,074 | ) | (5,858 | ) | ||||||||||
Net amount
|
$ | (268,348 | ) | $ | (246,018 | ) | $ | 7,612 | $ | 8,786 | ||||||
During 2008, the Company expects to recognize the following
amortization components of net periodic cost for the defined
benefit plans (in thousands):
2008 | ||||||||
Pension Plans | SERP | |||||||
Actuarial (gain) loss recognition
|
$ | (6,804 | ) | $ | 686 | |||
Prior service cost recognition
|
5,641 | 446 | ||||||
Transition asset recognition
|
(42 | ) | |
Other Postretirement Plans. The following
table sets forth obligation, asset and funding information for
the Companys other postretirement plans at
December 30, 2007 and December 31, 2006 (in thousands):
Postretirement Plans | ||||||||
2007 | 2006 | |||||||
Change in Benefit Obligation
|
||||||||
Benefit obligation at beginning of year
|
$ | 86,557 | $ | 141,469 | ||||
Service cost
|
3,558 | 5,270 | ||||||
Interest cost
|
4,832 | 6,611 | ||||||
Amendments
|
(4,234 | ) | (45,915 | ) | ||||
Actuarial gain
|
(599 | ) | (15,429 | ) | ||||
Benefits paid, net of Medicare Subsidy
|
(3,982 | ) | (5,449 | ) | ||||
Benefit obligation at end of year
|
$ | 86,132 | $ | 86,557 | ||||
Change in Plan Assets
|
||||||||
Fair value of assets at beginning of year
|
$ | | $ | | ||||
Employer contributions
|
4,252 | 5,674 | ||||||
Benefits paid
|
(4,252 | ) | (5,674 | ) | ||||
Fair value of assets at end of year
|
$ | | $ | | ||||
Funded status
|
$ | (86,132 | ) | $ | (86,557 | ) | ||
72 THE WASHINGTON POST
COMPANY
Table of Contents
The amounts recognized in the consolidated balance sheets for
the Companys other postretirement plans at
December 30, 2007 and December 31, 2006 (in thousands):
Postretirement Plans | ||||||||
2007 | 2006 | |||||||
Current liability
|
$ | (5,091 | ) | $ | (5,220 | ) | ||
Non-current liability
|
(81,041 | ) | (81,337 | ) | ||||
Recognized liability
|
$ | (86,132 | ) | $ | (86,557 | ) | ||
In 2006 and 2007, the Company amended certain of its
postretirement medical plans to modify the cost sharing between
retirees and the Company; these amendments resulted in a greater
portion of the overall cost of postretirement medical plan
expenses to be paid for by retirees in the future. The
amendments resulted in a significant decrease in the
Companys unrecognized prior service cost at
December 31, 2006 and total costs for 2007.
The discount rates utilized for determining the benefit
obligation at December 30, 2007 and December 31, 2006
for the postretirement plans were 5.80% and 5.85%, respectively.
The assumed healthcare cost trend rate used in measuring the
postretirement benefit obligation at December 30, 2007 was
9.5% for both pre-age 65 and post-age 65 benefits,
decreasing to 5.0% in the year 2018 and thereafter.
Assumed healthcare cost trend rates have a significant effect on
the amounts reported for the healthcare plans. A change of
1 percentage point in the assumed healthcare cost trend
rates would have the following effects (in thousands):
1% |
1% |
|||||||
Increase | Decrease | |||||||
Benefit obligation at end of year
|
$ | 11,481 | $ | (10,639 | ) | |||
Service cost plus interest cost
|
$ | 1,207 | $ | (1,167 | ) |
The Company made contributions to its postretirement benefit
plans of $4.3 million and $5.7 million for the years
ended December 30, 2007 and December 31, 2006,
respectively, as the plans are unfunded and the Company covers
benefit payments. The Company makes contributions to its
postretirement plans based on actual benefit payments.
At December 30, 2007, future estimated benefit payments,
net of Medicare Subsidy, are as follows (in millions):
Postretirement |
||||
Plans | ||||
2008
|
$ | 5.2 | ||
2009
|
$ | 5.5 | ||
2010
|
$ | 5.9 | ||
2011
|
$ | 6.1 | ||
2012
|
$ | 6.4 | ||
20132017
|
$ | 34.3 |
The total cost arising from the Companys postretirement
plans for the years ended December 30, 2007,
December 31, 2006 and January 1, 2006, consists of the
following components (in thousands):
Postretirement Plans | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Service cost
|
$ | 3,558 | $ | 5,270 | $ | 6,026 | ||||||
Interest cost
|
4,832 | 6,611 | 7,434 | |||||||||
Amortization of prior service credit
|
(4,860 | ) | (2,551 | ) | (588 | ) | ||||||
Recognized actuarial gain
|
(1,671 | ) | (864 | ) | (1,061 | ) | ||||||
Total cost for the year
|
$ | 1,859 | $ | 8,466 | $ | 11,811 | ||||||
Other changes in plan assets and benefit obligations
recognized in other comprehensive income:
|
||||||||||||
Current year actuarial gain
|
(329 | ) | ||||||||||
Current year prior service credit
|
(4,234 | ) | ||||||||||
Amortization of prior service credit
|
4,860 | |||||||||||
Recognized actuarial gain
|
1,671 | |||||||||||
Total recognized in other comprehensive income (before tax
effects)
|
$ | 1,968 | ||||||||||
Total recognized in net periodic cost and other comprehensive
income (before tax effects)
|
$ | 3,827 | $ | 8,466 | $ | 11,811 | ||||||
The costs for the Companys postretirement plans are
actuarially determined. The discount rates utilized to determine
periodic cost for the years ended December 30, 2007,
December 31, 2006 and January 1, 2006 were 5.85%,
5.60% and 5.75%, respectively.
At December 30, 2007 and December 31, 2006,
accumulated other comprehensive income (AOCI) included the
following components of unrecognized net periodic benefit for
the postretirement plans, respectively (in thousands):
December 30, |
December 31, |
|||||||
2007 | 2006 | |||||||
Unrecognized actuarial gain
|
$ | (13,061 | ) | $ | (14,403 | ) | ||
Unrecognized prior service credit
|
(52,115 | ) | (52,741 | ) | ||||
Gross amount
|
(65,176 | ) | (67,144 | ) | ||||
Deferred tax liability
|
26,070 | 26,858 | ||||||
Net amount
|
$ | (39,106 | ) | $ | (40,286 | ) | ||
During 2008, the Company expects to recognize the following
amortization components of net periodic cost for the
postretirement plans (in thousands):
2008 | ||||
Actuarial gain recognition
|
$ | (1,485 | ) | |
Prior service credit recognition
|
(5,144 | ) |
2007 FORM 10-K 73
Table of Contents
Multi-employer Pension Plans. Contributions to
multi-employer pension plans, which are generally based on hours
worked, amounted to $1.5 million in 2007, $1.6 million
in 2006 and $2.6 million in 2005.
Savings Plans. The Company recorded expense
associated with retirement benefits provided under incentive
savings plans (primarily 401(k) plans) of approximately
$20.7 million in 2007, $19.4 million in 2006 and
$18.3 million in 2005.
K. | LEASE AND OTHER COMMITMENTS |
The Company leases real property under operating agreements.
Many of the leases contain renewal options and escalation
clauses that require payments of additional rent to the extent
of increases in the related operating costs.
At December 30, 2007, future minimum rental payments under
non-cancelable operating leases approximate the following (in
thousands):
2008
|
$ | 125,526 | ||
2009
|
111,568 | |||
2010
|
98,143 | |||
2011
|
81,400 | |||
2012
|
69,358 | |||
Thereafter
|
214,206 | |||
$ | 700,201 | |||
Minimum payments have not been reduced by minimum sublease
rentals of $3.0 million due in the future under
non-cancelable subleases.
Rent expense under operating leases included in operating costs
was approximately $138.7 million, $116.9 million and
$113.0 million in 2007, 2006 and 2005, respectively.
Sublease income was approximately $1.9 million,
$1.9 million and $0.8 million in 2007, 2006 and 2005,
respectively.
The Companys broadcast subsidiaries are parties to certain
agreements that commit them to purchase programming to be
produced in future years. At December 30, 2007, such
commitments amounted to approximately $139.2 million. If
such programs are not produced, the Companys commitment
would expire without obligation.
L. | OTHER NON-OPERATING INCOME (EXPENSE) |
The Company recorded other non-operating income, net, of
$10.8 million in 2007, $73.5 million in 2006 and
$9.0 million in 2005. The 2006 non-operating income, net,
comprises a $43.2 million pre-tax gain from the sale of the
Companys 49% interest in BrassRing, a $33.8 million
pre-tax gain from the sale of marketable equity securities and
foreign currency gains of $11.9 million, offset by
$15.1 million of write-downs on investments.
A summary of non-operating income (expense) for the years ended
December 30, 2007, December 31, 2006 and
January 1, 2006, follows (in millions):
2007 | 2006 | 2005 | ||||||||||
Foreign currency gains (losses), net
|
$ | 8.8 | $ | 11.9 | $ | (8.1 | ) | |||||
Gain on sales of marketable equity securities
|
0.4 | 33.8 | 12.7 | |||||||||
Gain on sale of affiliate
|
| 43.2 | | |||||||||
Impairment write-downs on investments
|
| (15.1 | ) | (1.5 | ) | |||||||
Gain on sale of non-operating land
|
| | 5.1 | |||||||||
Other gains (losses)
|
1.6 | (0.3 | ) | 0.8 | ||||||||
Total
|
$ | 10.8 | $ | 73.5 | $ | 9.0 | ||||||
M. | CONTINGENCIES AND LOSSES |
Kaplan, Inc., a subsidiary of the Company, is a party to a
previously disclosed class action antitrust lawsuit filed on
April 29, 2005, by purchasers of BAR/BRI bar review courses
in the U.S. District Court for the Central District of
California. On February 2, 2007, the parties filed a
settlement agreement with the court together with documents
setting forth a procedure for class notice. In the fourth
quarter of 2006, the Company recorded a charge of
$13.0 million related to an agreement to settle this
lawsuit. The court approved the terms of the settlement on
July 9, 2007. However, certain class members filed an
appeal to the case to the U.S. Court of Appeals for the
Ninth Circuit, and that appeal remains pending. Effectiveness of
the settlement is subject to court approval. On February 6,
2008, Kaplan was served with a purported class action lawsuit
alleging substantially similar claims as the previously settled
lawsuit. The putative class is said to include all persons who
purchased a bar review course from BAR/BRI in the United States
since 2006 and all potential future purchasers of bar review
courses. The case is pending in the U.S. District Court for the
Central District of California. Kaplan intends to vigorously
defend this lawsuit.
The Company and its subsidiaries are parties to various other
civil lawsuits that have arisen in the ordinary course of their
businesses, including actions for libel and invasion of privacy,
violations of applicable wage and hour laws and claims involving
current and former students at the Companys schools.
Management does not believe that any litigation pending against
the Company will have a material adverse effect on its business
or financial condition.
The Companys education division derives a portion of its
net revenues from financial aid received by its students under
Title IV programs administered by the U.S. Department
of Education pursuant to the Federal Higher Education Act of
1965 (HEA), as amended. In order to participate in Title IV
programs, the Company must comply with complex standards set
forth in the HEA and the regulations promulgated thereunder (the
Regulations). Failure to comply with the requirements of HEA or
the Regulations could result in the restriction or loss of the
ability to participate in Title IV programs and subject the
Company to financial penalties. For the years ended
December 30, 2007, December 31, 2006 and
74 THE WASHINGTON POST
COMPANY
Table of Contents
January 1, 2006, approximately $745.0 million,
$580.0 million and $505.0 million, respectively, of
the Companys education division revenue was derived from
financial aid received by students under Title IV programs.
Management believes that the Companys education division
schools that participate in Title IV programs are in
material compliance with standards set forth in the HEA and the
Regulations.
Operating results for the Company in 2005 included the impact of
charges and lost revenues associated with Hurricane Katrina and
other hurricanes. Most of the impact was at the cable division,
but the television broadcasting and education divisions were
also adversely impacted. About 94,000 of the cable
divisions pre-hurricane subscribers were located on
the Gulf Coast of Mississippi, including Gulfport, Biloxi,
Pascagoula and other neighboring communities where storm damage
from Hurricane Katrina was significant. Through the end of 2005,
the cable division recorded $9.6 million in property, plant
and equipment losses; incurred an estimated $9.4 million in
incremental cleanup, repair and other expenses in connection
with the hurricane; and experienced an estimated
$9.7 million reduction in operating income from subscriber
losses and the granting of a
30-day
service credit to all of its 94,000 pre-hurricane Gulf Coast
subscribers. As of December 31, 2005, the Company had
recorded a $5.0 million receivable for recovery of a
portion of cable hurricane losses through December 31, 2005
under the Companys property and business interruption
insurance program; this recovery was recorded as a reduction of
cable division expense in the fourth quarter of 2005. An
additional $10.4 million in hurricane-related insurance
recoveries was recorded during the second quarter of 2006 as a
reduction of expense in connection with a final settlement on
cable division Hurricane Katrina insurance claims. Cable
division results in 2006 continued to include the impact of
subscriber losses and expenses as a result of Hurricane Katrina.
The Company estimates that lost revenue for 2006 was
approximately $12.4 million; variable cost savings offset a
portion of the lost revenue impact on the cable divisions
operating income. The Company also incurred an estimated
$5.4 million in incremental cleanup and repair expense in
2006.
N. | SUBSEQUENT EVENTS |
In January 2008, the Company announced a Voluntary Retirement
Incentive Program, which is being offered to certain Newsweek
employees. The program includes enhanced retirement benefits and
should be completed by the end of the first quarter; it will be
funded primarily from the assets of the Companys pension
plans.
In February 2008, the Company announced that a Voluntary
Retirement Incentive Program will be offered in 2008 to some
employees of The Washington Post newspaper and the
Companys corporate office. The cost of the program will be
funded primarily from the assets of the Companys pension
plans.
In February 2008, the Company announced that The Post will close
its College Park, MD, printing plant in early 2010, after two
presses are moved to The Posts Springfield, VA, plant.
In January and February 2008, the Company purchased
approximately $60 million in the common stock of Corinthian
Colleges, Inc.
O. | BUSINESS SEGMENTS |
Through its subsidiary Kaplan, Inc., the Company provides
educational services for individuals, schools and businesses.
The Company also operates principally in four areas of the media
business: newspaper publishing, television broadcasting,
magazine publishing and cable television.
Education products and services are provided through the
Companys subsidiary Kaplan, Inc. Kaplans businesses
include higher education services, which includes Kaplans
domestic and international post-secondary education businesses,
including fixed-facility colleges that offer bachelor degree,
associate degree and diploma programs primarily in the fields of
healthcare, business and information technology; and online
post-secondary and career programs. Kaplans businesses
also include domestic and international test preparation, which
includes Kaplans standardized test prep and
English-language course offerings, as well as K12 and Score!,
which offer multimedia learning and private tutoring to children
and educational resources to parents. Kaplans businesses
also include Kaplan professional, which provides education and
career services to business people and other professionals
domestically and internationally. For segment reporting
purposes, the education division now has three primary segments,
as compared to two primary segments in 2006. The education
divisions primary segments are higher education, test prep
and professional. Kaplan Corporate Overhead and
Other is also included; Other includes Kaplan
stock compensation expense and amortization of certain
intangibles.
In the fourth quarter of 2007, Kaplan management announced plans
to restructure the Score! business. In order to implement a
revised business model, 75 Score! centers have been closed.
After closings and consolidations, Score! has 80 centers
that focus on providing computer-assisted instruction and
small-group tutoring. The restructuring plan includes relocating
certain management and terminating certain employees from closed
centers. The Company incurred approximately $11.2 million
in expenses in the fourth quarter of 2007 related to lease
obligations, severance and accelerated depreciation of fixed
assets in connection with the Score! restructuring. Also in the
fourth quarter of 2007, Kaplan management announced plans to
restructure Kaplan Professional (U.S.). In connection with this
restructuring, product changes are being implemented and certain
operations are in the process of being decentralized, in
addition to employee terminations. A charge of $6.0 million
was recorded in the fourth quarter of 2007 related to the
write-off of an integrated software product under development
and severance costs in connection with the restructuring;
severance and other restructuring related expenses of an
estimated $3.0 million are expected to be incurred in 2008.
2007 FORM 10-K 75
Table of Contents
Newspaper publishing includes the publication of newspapers in
the Washington, D.C., area and Everett, WA; newsprint
warehousing and recycling facilities; and the Companys
electronic media publishing business (primarily
washingtonpost.com).
The magazine publishing division consists of the publication of
a weekly news magazine, Newsweek, which has one domestic and
three
English-language
international editions (and, in conjunction with others,
publishes seven
foreign-language
editions around the world) and the publication of Arthur
Frommers Budget Travel. The 2006 results of the magazine
publishing division also include revenue of $23.4 million
and an operating loss of $8.8 million for PostNewsweek Tech
Media, up to the sale date of December 22, 2006.
Revenues from both newspaper and magazine publishing operations
are derived from advertising and, to a lesser extent, from
circulation.
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) with revenues derived primarily from sales of
advertising time.
Cable television operations consist of cable systems offering
basic cable, digital cable, pay television, cable modem,
telephony and other services to subscribers in midwestern,
western and southern states. The principal source of revenue is
monthly subscription fees charged for services.
In 2007, other businesses and corporate office includes the
expenses associated with the Companys corporate office and
the operating results of CourseAdvisor since its October 2007
acquisition. In 2006 and 2005, other businesses and corporate
office includes expenses of the Companys corporate office.
CourseAdvisor is a lead generation provider for the
post-secondary education market.
The Companys foreign revenues in 2007, 2006 and 2005
totaled approximately $488 million, $347 million and
$248 million, respectively, principally from Kaplans
foreign operations and the publication of the international
editions of Newsweek. The Companys long-lived assets in
foreign countries (excluding goodwill and other intangibles),
principally in the United Kingdom, totaled approximately
$62 million at December 30, 2007 and $44 million
at December 31, 2006.
Income from operations is the excess of operating revenues over
operating expenses. In computing income from operations by
segment, the effects of equity in earnings of affiliates,
interest income, interest expense, other non-operating income
and expense items and income taxes are not included.
Identifiable assets by segment are those assets used in the
Companys operations in each business segment. Investments
in marketable equity securities are discussed in Note C.
76 THE WASHINGTON POST
COMPANY
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2007 FORM 10-K 77
Table of Contents
Other |
||||||||||||||||||||||||||||||||
Newspaper |
Television |
Magazine |
Cable |
Businesses and |
Intersegment |
|||||||||||||||||||||||||||
(In thousands) | Education | Publishing | Broadcasting | Publishing | Television | Corporate Office | Elimination | Consolidated | ||||||||||||||||||||||||
2007
|
||||||||||||||||||||||||||||||||
Operating revenues
|
$ | 2,030,889 | $ | 889,827 | $ | 339,969 | $ | 288,449 | $ | 626,446 | $ | 6,586 | $ | (1,760 | ) | $ | 4,180,406 | |||||||||||||||
Income (loss) from operations
|
$ | 149,037 | $ | 66,434 | $ | 142,092 | $ | 31,388 | $ | 123,664 | $ | (35,599 | ) | $ | | $ | 477,016 | |||||||||||||||
Equity in earnings of affiliates
|
5,975 | |||||||||||||||||||||||||||||||
Interest expense, net
|
(12,708 | ) | ||||||||||||||||||||||||||||||
Other income, net
|
10,824 | |||||||||||||||||||||||||||||||
Income before income taxes
|
$ | 481,107 | ||||||||||||||||||||||||||||||
Identifiable assets
|
$ | 1,930,525 | $ | 832,655 | $ | 464,815 | $ | 837,527 | $ | 1,205,374 | $ | 161,755 | $ | | $ | 5,432,651 | ||||||||||||||||
Investments in marketable equity securities
|
469,459 | |||||||||||||||||||||||||||||||
Investments in affiliates
|
102,399 | |||||||||||||||||||||||||||||||
Total assets
|
$ | 6,004,509 | ||||||||||||||||||||||||||||||
Depreciation of property, plant and equipment
|
$ | 60,986 | $ | 38,659 | $ | 9,489 | $ | 2,177 | $ | 108,453 | $ | 1,475 | $ | | $ | 221,239 | ||||||||||||||||
Amortization expense
|
$ | 14,670 | $ | 1,162 | $ | | $ | | $ | 442 | $ | 1,297 | $ | | $ | 17,571 | ||||||||||||||||
Pension credit (expense)
|
$ | (3,536 | ) | $ | (10,010 | ) | $ | 888 | $ | 36,343 | $ | (1,405 | ) | $ | | $ | | $ | 22,280 | |||||||||||||
Capital expenditures
|
$ | 97,123 | $ | 36,020 | $ | 17,688 | $ | 448 | $ | 138,258 | $ | 470 | $ | | $ | 290,007 | ||||||||||||||||
2006
|
||||||||||||||||||||||||||||||||
Operating revenues
|
$ | 1,684,141 | $ | 961,905 | $ | 361,904 | $ | 331,045 | $ | 565,932 | $ | | $ | | $ | 3,904,927 | ||||||||||||||||
Income (loss) from operations
|
$ | 130,189 | $ | 63,389 | $ | 160,831 | $ | 27,949 | $ | 119,974 | $ | (42,528 | ) | $ | | $ | 459,804 | |||||||||||||||
Equity in earnings of affiliates
|
790 | |||||||||||||||||||||||||||||||
Interest expense, net
|
(14,912 | ) | ||||||||||||||||||||||||||||||
Other income, net
|
73,452 | |||||||||||||||||||||||||||||||
Income before income taxes
|
$ | 519,134 | ||||||||||||||||||||||||||||||
Identifiable assets
|
$ | 1,569,404 | $ | 821,615 | $ | 458,751 | $ | 788,450 | $ | 1,178,132 | $ | 145,601 | $ | | $ | 4,961,953 | ||||||||||||||||
Investments in marketable equity securities
|
354,728 | |||||||||||||||||||||||||||||||
Investments in affiliates
|
64,691 | |||||||||||||||||||||||||||||||
Total assets
|
$ | 5,381,372 | ||||||||||||||||||||||||||||||
Depreciation of property, plant and equipment
|
$ | 51,820 | $ | 35,729 | $ | 9,915 | $ | 2,640 | $ | 103,892 | $ | 1,299 | $ | | $ | 205,295 | ||||||||||||||||
Amortization expense and impairment charge
|
$ | 5,186 | $ | 1,168 | $ | | $ | 9,864 | $ | 689 | $ | | $ | | $ | 16,907 | ||||||||||||||||
Pension credit (expense)
|
$ | (3,064 | ) | $ | (56,785 | ) | $ | 1,413 | $ | 34,704 | $ | (1,575 | ) | $ | (2,900 | ) | $ | | $ | (28,207 | ) | |||||||||||
Capital expenditures
|
$ | 74,510 | $ | 57,664 | $ | 8,800 | $ | 564 | $ | 142,484 | $ | | $ | | $ | 284,022 | ||||||||||||||||
2005
|
||||||||||||||||||||||||||||||||
Operating revenues
|
$ | 1,412,394 | $ | 957,082 | $ | 331,817 | $ | 344,894 | $ | 507,700 | $ | | $ | | $ | 3,553,887 | ||||||||||||||||
Income (loss) from operations
|
$ | 157,835 | $ | 125,359 | $ | 142,478 | $ | 45,122 | $ | 76,720 | $ | (32,600 | ) | $ | | $ | 514,914 | |||||||||||||||
Equity in losses of affiliates
|
(881 | ) | ||||||||||||||||||||||||||||||
Interest expense, net
|
(23,369 | ) | ||||||||||||||||||||||||||||||
Other income, net
|
8,980 | |||||||||||||||||||||||||||||||
Income before income taxes
|
$ | 499,644 | ||||||||||||||||||||||||||||||
Identifiable assets
|
$ | 1,256,604 | $ | 693,421 | $ | 420,154 | $ | 594,937 | $ | 1,122,654 | $ | 89,721 | $ | | $ | 4,177,491 | ||||||||||||||||
Investments in marketable equity securities
|
329,921 | |||||||||||||||||||||||||||||||
Investments in affiliates
|
77,361 | |||||||||||||||||||||||||||||||
Total assets
|
$ | 4,584,773 | ||||||||||||||||||||||||||||||
Depreciation of property, plant and equipment
|
$ | 39,453 | $ | 36,556 | $ | 10,202 | $ | 2,801 | $ | 100,031 | $ | 1,500 | $ | | $ | 190,543 | ||||||||||||||||
Amortization expense
|
$ | 5,595 | $ | 1,119 | $ | | $ | | $ | 764 | $ | | $ | | $ | 7,478 | ||||||||||||||||
Pension credit (expense)
|
$ | (2,365 | ) | $ | (784 | ) | $ | 2,939 | $ | 38,184 | $ | (1,252 | ) | $ | | $ | | $ | 36,722 | |||||||||||||
Capital expenditures
|
$ | 84,257 | $ | 33,276 | $ | 8,557 | $ | 660 | $ | 111,331 | $ | 268 | $ | | $ | 238,349 |
78 THE WASHINGTON POST
COMPANY
Table of Contents
The Companys education division comprises the following
operating segments:
Corporate |
||||||||||||||||||||||||
Higher |
Test |
Overhead |
Intersegment |
Total |
||||||||||||||||||||
(In thousands) | Education | Prep | Professional | and Other | Elimination | Education | ||||||||||||||||||
2007
|
||||||||||||||||||||||||
Operating revenues
|
$ | 1,021,595 | $ | 569,316 | $ | 439,720 | $ | 1,261 | $ | (1,003 | ) | $ | 2,030,889 | |||||||||||
Income (loss) from operations
|
$ | 125,629 | $ | 71,316 | $ | 41,073 | $ | (88,737 | ) | $ | (244 | ) | $ | 149,037 | ||||||||||
Identifiable assets
|
$ | 748,269 | $ | 380,158 | $ | 785,593 | $ | 16,505 | $ | 1,930,525 | ||||||||||||||
Depreciation of property, plant and equipment
|
$ | 29,908 | $ | 14,139 | $ | 13,562 | $ | 3,377 | $ | 60,986 | ||||||||||||||
Amortization expense
|
$ | 14,670 | $ | 14,670 | ||||||||||||||||||||
Kaplan stock-based incentive compensation
|
$ | 41,294 | $ | 41,294 | ||||||||||||||||||||
Capital expenditures
|
$ | 44,098 | $ | 18,204 | $ | 27,340 | $ | 7,481 | $ | 97,123 | ||||||||||||||
2006
|
||||||||||||||||||||||||
Operating revenues
|
$ | 855,757 | $ | 457,293 | $ | 371,091 | $ | | $ | | $ | 1,684,141 | ||||||||||||
Income (loss) from operations
|
$ | 100,690 | $ | 77,632 | $ | 35,503 | $ | (83,636 | ) | $ | | $ | 130,189 | |||||||||||
Identifiable assets
|
$ | 632,873 | $ | 341,262 | $ | 548,533 | $ | 46,736 | $ | 1,569,404 | ||||||||||||||
Depreciation of property, plant and equipment
|
$ | 26,278 | $ | 11,407 | $ | 9,582 | $ | 4,553 | $ | 51,820 | ||||||||||||||
Amortization expense
|
$ | 5,186 | $ | 5,186 | ||||||||||||||||||||
Kaplan stock-based incentive compensation
|
$ | 27,724 | $ | 27,724 | ||||||||||||||||||||
Capital expenditures
|
$ | 36,079 | $ | 16,400 | $ | 10,429 | $ | 11,602 | $ | 74,510 | ||||||||||||||
2005
|
||||||||||||||||||||||||
Operating revenues
|
$ | 707,966 | $ | 391,456 | $ | 312,972 | $ | | $ | | $ | 1,412,394 | ||||||||||||
Income (loss) from operations
|
$ | 77,728 | $ | 75,940 | $ | 46,067 | $ | (41,900 | ) | $ | | $ | 157,835 | |||||||||||
Identifiable assets
|
$ | 572,753 | $ | 203,387 | $ | 451,194 | $ | 29,270 | $ | 1,256,604 | ||||||||||||||
Depreciation of property, plant and equipment
|
$ | 20,038 | $ | 8,929 | $ | 7,206 | $ | 3,280 | $ | 39,453 | ||||||||||||||
Amortization expense
|
$ | 5,595 | $ | 5,595 | ||||||||||||||||||||
Kaplan stock-based incentive compensation
|
$ | 3,000 | $ | 3,000 | ||||||||||||||||||||
Capital expenditures
|
$ | 49,406 | $ | 18,855 | $ | 11,279 | $ | 4,717 | $ | 84,257 |
2007 FORM 10-K 79
Table of Contents
P. SUMMARY
OF QUARTERLY OPERATING RESULTS AND COMPREHENSIVE INCOME
(UNAUDITED)
Quarterly results of operations and comprehensive income for the
years ended December 30, 2007 and December 31, 2006
are as follows (in thousands, except per share amounts):
First |
Second |
Third |
Fourth |
|||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
2007 Quarterly Operating Results
|
||||||||||||||||
Operating revenues
|
||||||||||||||||
Education
|
$ | 475,781 | $ | 503,487 | $ | 514,595 | $ | 537,026 | ||||||||
Advertising
|
292,791 | 318,310 | 282,251 | 341,291 | ||||||||||||
Circulation and subscriber
|
196,751 | 202,365 | 203,307 | 215,384 | ||||||||||||
Other
|
20,285 | 22,611 | 22,351 | 31,820 | ||||||||||||
985,608 | 1,046,773 | 1,022,504 | 1,125,521 | |||||||||||||
Operating costs and expenses
|
||||||||||||||||
Operating
|
450,675 | 464,040 | 467,926 | 500,343 | ||||||||||||
Selling, general and administrative
|
386,757 | 399,099 | 384,603 | 411,137 | ||||||||||||
Depreciation of property, plant and equipment
|
53,449 | 54,060 | 55,722 | 58,008 | ||||||||||||
Amortization of intangibles
|
2,732 | 4,314 | 3,787 | 6,738 | ||||||||||||
893,613 | 921,513 | 912,038 | 976,226 | |||||||||||||
Income from operations
|
91,995 | 125,260 | 110,466 | 149,295 | ||||||||||||
Equity in earnings (losses) of affiliates
|
9,083 | (135 | ) | (622 | ) | (2,351 | ) | |||||||||
Interest income
|
3,276 | 2,705 | 3,011 | 2,346 | ||||||||||||
Interest expense
|
(5,925 | ) | (6,159 | ) | (6,014 | ) | (5,948 | ) | ||||||||
Other income (expense), net
|
801 | 4,345 | 10,121 | (4,443 | ) | |||||||||||
Income before income taxes
|
99,230 | 126,016 | 116,962 | 139,899 | ||||||||||||
Provision for income taxes
|
34,800 | 57,200 | 44,500 | 56,000 | ||||||||||||
Net income
|
64,430 | 68,816 | 72,462 | 82,899 | ||||||||||||
Redeemable preferred stock dividends
|
(485 | ) | (230 | ) | (237 | ) | | |||||||||
Net income available for common shares
|
$ | 63,945 | $ | 68,586 | $ | 72,225 | $ | 82,899 | ||||||||
Basic earnings per common share
|
$ | 6.72 | $ | 7.22 | $ | 7.62 | $ | 8.75 | ||||||||
Diluted earnings per common share
|
$ | 6.70 | $ | 7.19 | $ | 7.60 | $ | 8.71 | ||||||||
Basic average shares outstanding
|
9,513 | 9,502 | 9,473 | 9,479 | ||||||||||||
Diluted average shares outstanding
|
9,547 | 9,536 | 9,509 | 9,512 | ||||||||||||
2007 Quarterly comprehensive income
|
$ | 66,099 | $ | 80,022 | $ | 99,595 | $ | 159,866 | ||||||||
The sum of the four quarters may not necessarily be equal to the
annual amounts reported in the Consolidated Statements of Income
due to rounding.
Refer to page 82 for quarterly impact from certain unusual
items in 2007.
80 THE WASHINGTON POST
COMPANY
Table of Contents
First |
Second |
Third |
Fourth |
|||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
2006 Quarterly Operating Results
|
||||||||||||||||
Operating revenues
|
||||||||||||||||
Education
|
$ | 408,934 | $ | 409,244 | $ | 420,604 | $ | 445,359 | ||||||||
Advertising
|
327,165 | 346,390 | 312,238 | 372,946 | ||||||||||||
Circulation and subscriber
|
187,046 | 193,099 | 192,694 | 199,411 | ||||||||||||
Other
|
25,135 | 20,308 | 21,358 | 22,996 | ||||||||||||
948,280 | 969,041 | 946,894 | 1,040,712 | |||||||||||||
Operating costs and expenses
|
||||||||||||||||
Operating
|
421,423 | 415,271 | 429,564 | 472,660 | ||||||||||||
Selling, general and administrative
|
338,684 | 405,675 | 347,230 | 392,414 | ||||||||||||
Depreciation of property, plant and equipment
|
49,025 | 49,512 | 49,929 | 56,829 | ||||||||||||
Amortization of intangibles and goodwill impairment charge
|
1,389 | 1,378 | 11,525 | 2,615 | ||||||||||||
810,521 | 871,836 | 838,248 | 924,518 | |||||||||||||
Income from operations
|
137,759 | 97,205 | 108,646 | 116,194 | ||||||||||||
Equity in (losses) earnings of affiliates
|
(179 | ) | (562 | ) | (625 | ) | 2,156 | |||||||||
Interest income
|
1,603 | 2,539 | 2,967 | 3,322 | ||||||||||||
Interest expense
|
(6,259 | ) | (6,439 | ) | (6,400 | ) | (6,245 | ) | ||||||||
Other income (expense), net
|
(175 | ) | 33,701 | 4,708 | 35,218 | |||||||||||
Income before income taxes and cumulative effect of change in
accounting principle
|
132,749 | 126,444 | 109,296 | 150,645 | ||||||||||||
Provision for income taxes
|
50,800 | 47,700 | 36,000 | 55,100 | ||||||||||||
Income before cumulative effect of change in accounting principle
|
81,949 | 78,744 | 73,296 | 95,545 | ||||||||||||
Cumulative effect of change in method of accounting for
share-based payments, net of taxes
|
(5,075 | ) | | | | |||||||||||
Net income
|
76,874 | 78,744 | 73,296 | 95,545 | ||||||||||||
Redeemable preferred stock dividends
|
(491 | ) | (245 | ) | (245 | ) | | |||||||||
Net income available for common shares
|
$ | 76,383 | $ | 78,499 | $ | 73,051 | $ | 95,545 | ||||||||
Basic earnings per share:
|
||||||||||||||||
Before cumulative effect of change in accounting principle
|
$ | 8.51 | $ | 8.20 | $ | 7.62 | $ | 10.01 | ||||||||
Cumulative effect of change in accounting principle
|
(0.53 | ) | | | | |||||||||||
Net income available for common shares
|
$ | 7.98 | $ | 8.20 | $ | 7.62 | $ | 10.01 | ||||||||
Diluted earnings per share:
|
||||||||||||||||
Before cumulative effect of change in accounting principle
|
$ | 8.48 | $ | 8.17 | $ | 7.60 | $ | 9.97 | ||||||||
Cumulative effect of change in accounting principle
|
(0.53 | ) | | | | |||||||||||
Net income available for common shares
|
$ | 7.95 | $ | 8.17 | $ | 7.60 | $ | 9.97 | ||||||||
Basic average shares outstanding
|
9,570 | 9,575 | 9,581 | 9,548 | ||||||||||||
Diluted average shares outstanding
|
9,606 | 9,613 | 9,617 | 9,581 | ||||||||||||
2006 Quarterly comprehensive income
|
$ | 85,633 | $ | 71,544 | $ | 83,256 | $ | 127,977 | ||||||||
The sum of the four quarters may not necessarily be equal to the
annual amounts reported in the Consolidated Statements of Income
due to rounding.
Refer to page 82 for quarterly impact from certain unusual
items in 2006.
2007 FORM 10-K 81
Table of Contents
Quarterly impact from certain unusual items in 2007 (after-tax
and diluted EPS amounts):
First |
Second |
Third |
Fourth |
|||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Charge of additional net income tax expense of $6.6 million
as a result of a $12.9 million increase in taxes associated
with Bowater Mersey, offset by a tax benefit of
$6.3 million associated with recent changes in certain
state income tax laws
|
$ | (0.70 | ) | |||||||||||||
Charges of $6.7 million related to lease obligations,
severance and accelerated depreciation of fixed assets in
connection with Kaplans restructuring of the Score!
business
|
$ | (0.70 | ) | |||||||||||||
Charge of $3.6 million related to write-off of an
integrated software product under development and severance
costs at Kaplan Professional (U.S.)
|
$ | (0.38 | ) | |||||||||||||
Gain of $5.9 million from the sale of property at the
companys television station in Miami
|
$ | 0.62 | ||||||||||||||
Quarterly impact from certain unusual items in 2006 (after-tax
and diluted EPS amounts):
First |
Second |
Third |
Fourth |
|||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Charges of $31.7 million related to early retirement plan
buyouts ($31.4 million and $0.3 million in the second
and third quarters, respectively)
|
$ | (3.27 | ) | $ | (0.03 | ) | ||||||||||
Charge of $9.0 million for the write-down of a marketable
equity security
|
$ | (0.94 | ) | |||||||||||||
Charge of $8.3 million related to an agreement to settle a
lawsuit at Kaplan
|
$ | (0.86 | ) | |||||||||||||
Goodwill impairment charge of $6.3 million at PostNewsweek
Tech Media during the third quarter of 2006 and a
$1.0 million loss on the sale of PostNewsweek Tech Media
during the fourth quarter of 2006
|
$ | (0.65 | ) | $ | (0.10 | ) | ||||||||||
Transition costs and operating losses at Kaplan related to
acquisitions and
startups for
2006 totaled $8.0 million ($0.1 million,
$5.6 million, $0.5 million and $1.8 million in
the first, second, third and fourth quarters, respectively)
|
$ | (0.02 | ) | $ | (0.58 | ) | $ | (0.05 | ) | $ | (0.19 | ) | ||||
Charge of $5.1 million for the cumulative effect of a
change in accounting for Kaplan equity awards in connection with
the adoption of SFAS 123R
|
$ | (0.53 | ) | |||||||||||||
Gain of $27.4 million on the sale of the Companys 49%
interest in BrassRing
|
$ | 2.86 | ||||||||||||||
Insurance recoveries of $6.4 million from cable division
losses related to Hurricane Katrina
|
$ | 0.67 | ||||||||||||||
Gains of $21.1 million from the sales of marketable equity
securities ($19.6 million, $1.3 million and
$0.2 million in the second, third and fourth quarters,
respectively)
|
$ | 2.04 | $ | 0.13 | $ | 0.02 | ||||||||||
82 THE WASHINGTON POST
COMPANY
Table of Contents
SCHEDULE II
THE WASHINGTON
POST COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Column A | Column B | Column C | Column D | Column E | ||||||||||||
Additions |
||||||||||||||||
Balance at |
Charged to |
Balance at |
||||||||||||||
Beginning |
Costs and |
End of |
||||||||||||||
Description | of Period | Expenses | Deductions | Period | ||||||||||||
Year Ended January 1, 2006
|
||||||||||||||||
Allowance for doubtful accounts and returns
|
$ | 65,652,000 | $ | 127,195,000 | $ | 121,722,000 | $ | 71,125,000 | ||||||||
Allowance for advertising rate adjustments and discounts
|
5,313,000 | 14,970,000 | 13,309,000 | 6,974,000 | ||||||||||||
$ | 70,965,000 | $ | 142,165,000 | $ | 135,031,000 | $ | 78,099,000 | |||||||||
Year Ended December 31, 2006
|
||||||||||||||||
Allowance for doubtful accounts and returns
|
$ | 71,125,000 | $ | 136,663,000 | $ | 127,426,000 | $ | 80,362,000 | ||||||||
Allowance for advertising rate adjustments and discounts
|
6,974,000 | 13,222,000 | 14,331,000 | 5,865,000 | ||||||||||||
$ | 78,099,000 | $ | 149,885,000 | $ | 141,757,000 | $ | 86,227,000 | |||||||||
Year Ended December 30, 2007
|
||||||||||||||||
Allowance for doubtful accounts and returns
|
$ | 80,362,000 | $ | 135,936,000 | $ | 138,713,000 | $ | 77,585,000 | ||||||||
Allowance for advertising rate adjustments and discounts
|
5,865,000 | 13,492,000 | 15,039,000 | 4,318,000 | ||||||||||||
$ | 86,227,000 | $ | 149,428,000 | $ | 153,752,000 | $ | 81,903,000 | |||||||||
2007 FORM 10-K 83
Table of Contents
TEN-YEAR SUMMARY
OF SELECTED HISTORICAL FINANCIAL DATA
See Notes to Consolidated Financial Statements for the summary
of significant accounting policies and additional information
relative to the years 20052007. Operating results prior to
2002 include amortization of goodwill and certain other
intangible assets that are no longer amortized under
SFAS 142.
(In thousands, except per share amounts) | 2007 | 2006 | 2005 | |||||||||
Results of Operations
|
||||||||||||
Operating revenues
|
$ | 4,180,406 | $ | 3,904,927 | $ | 3,553,887 | ||||||
Income from operations
|
$ | 477,016 | $ | 459,805 | $ | 514,914 | ||||||
Income before cumulative effect of change in accounting principle
|
$ | 288,607 | $ | 329,534 | $ | 314,344 | ||||||
Cumulative effect of change in method of accounting
|
| (5,075 | ) | | ||||||||
Net income
|
$ | 288,607 | $ | 324,459 | $ | 314,344 | ||||||
Per Share Amounts
|
||||||||||||
Basic earnings per common share
|
||||||||||||
Before cumulative effect of change in accounting principle
|
$ | 30.31 | $ | 34.34 | $ | 32.66 | ||||||
Cumulative effect of change in accounting principle
|
| (0.53 | ) | | ||||||||
Net income available for common shares
|
$ | 30.31 | $ | 33.81 | $ | 32.66 | ||||||
Basic average shares outstanding
|
9,492 | 9,568 | 9,594 | |||||||||
Diluted earnings per share
|
||||||||||||
Before cumulative effect of change in accounting principle
|
$ | 30.19 | $ | 34.21 | $ | 32.59 | ||||||
Cumulative effect of change in accounting principle
|
| (0.53 | ) | | ||||||||
Net income available for common shares
|
$ | 30.19 | $ | 33.68 | $ | 32.59 | ||||||
Diluted average shares outstanding
|
9,528 | 9,606 | 9,616 | |||||||||
Cash dividends
|
$ | 8.20 | $ | 7.80 | $ | 7.40 | ||||||
Common shareholders equity
|
$ | 363.72 | $ | 331.32 | $ | 274.79 | ||||||
Financial Position
|
||||||||||||
Current assets
|
$ | 994,970 | $ | 934,825 | $ | 818,326 | ||||||
Working capital
|
(18,503 | ) | 123,184 | 123,605 | ||||||||
Property, plant and equipment
|
1,280,737 | 1,218,309 | 1,142,632 | |||||||||
Total assets
|
6,004,509 | 5,381,372 | 4,584,773 | |||||||||
Long-term debt
|
400,519 | 401,571 | 403,635 | |||||||||
Common shareholders equity
|
3,461,159 | 3,159,514 | 2,638,423 |
Impact from
certain unusual items (after-tax and diluted EPS
amounts):
2007
| charge of additional net income tax expense of $6.6 million ($0.70 per share), as the result of a $12.9 million increase in taxes associated with Bowater Mersey, offset by a tax benefit of $6.3 million associated with recent changes in certain state income tax laws. |
| charges of $6.7 million ($0.70 per share) related to lease obligations, severance and accelerated depreciation of fixed assets in connection with Kaplans restructuring of the Score! business |
| charge of $3.6 million ($0.38 per share) related to Kaplan Professionals write-off of an integrated software product under development, and severance costs at Kaplan Professional (U.S.) |
| gain of $5.9 million ($0.62 per share) from the sale of property at the Companys television station in Miami |
2006
| charge of $31.7 million ($3.30 per share) related to early retirement plan buyouts |
| charge of $9.0 million ($0.94 per share) from the write-down of a marketable equity security |
| charge of $8.3 million ($0.86 per share) related to an agreement to settle a lawsuit at Kaplan |
| goodwill impairment charge of $6.3 million ($0.65 per share) at PostNewsweek Tech Media and a loss of $1.0 million ($0.10 per share) on the sale of PostNewsweek Tech Media |
| transition costs and operating losses at Kaplan related to acquisitions and startups for 2006 of $8.0 million ($0.83 per share) |
| charge of $5.1 million ($0.53 per share) for the cumulative effect of a change in accounting for Kaplan equity awards in connection with the Companys adoption of SFAS 123R |
| gain of $27.4 million ($2.86 per share) on the sale of the Companys 49% interest in BrassRing |
| insurance recoveries of $6.4 million ($0.67 per share) from cable division losses related to Hurricane Katrina |
| gains of $21.1 million ($2.19 per share) from the sales of marketable equity securities |
2005
| charges and lost revenue of $17.3 million ($1.80 per share) associated with Hurricane Katrina and other hurricanes |
| gain of $11.2 million ($1.16 per share) from sales of non-operating land and marketable equity securities |
84 THE WASHINGTON POST
COMPANY
Table of Contents
(In thousands, except per share amounts) | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||||||||||||||
Results of Operations
|
||||||||||||||||||||||||||||||||
Operating revenues
|
$ | 3,300,104 | $ | 2,838,911 | $ | 2,584,203 | $ | 2,411,024 | $ | 2,409,633 | $ | 2,212,177 | $ | 2,107,593 | ||||||||||||||||||
Income from operations
|
$ | 563,006 | $ | 363,820 | $ | 377,590 | $ | 219,932 | $ | 339,882 | $ | 388,453 | $ | 378,897 | ||||||||||||||||||
Income before cumulative effect of change in accounting principle
|
$ | 332,732 | $ | 241,088 | $ | 216,368 | $ | 229,639 | $ | 136,470 | $ | 225,785 | $ | 417,259 | ||||||||||||||||||
Cumulative effect of change in method of accounting
|
| | (12,100 | ) | | | | | ||||||||||||||||||||||||
Net income
|
$ | 332,732 | $ | 241,088 | $ | 204,268 | $ | 229,639 | $ | 136,470 | $ | 225,785 | $ | 417,259 | ||||||||||||||||||
Per Share Amounts
|
||||||||||||||||||||||||||||||||
Basic earnings per common share
|
||||||||||||||||||||||||||||||||
Before cumulative effect of change in accounting principle
|
$ | 34.69 | $ | 25.19 | $ | 22.65 | $ | 24.10 | $ | 14.34 | $ | 22.35 | $ | 41.27 | ||||||||||||||||||
Cumulative effect of change in accounting principle
|
| | (1.27 | ) | | | | | ||||||||||||||||||||||||
Net income available for common shares
|
$ | 34.69 | $ | 25.19 | $ | 21.38 | $ | 24.10 | $ | 14.34 | $ | 22.35 | $ | 41.27 | ||||||||||||||||||
Basic average shares outstanding
|
9,563 | 9,530 | 9,504 | 9,486 | 9,445 | 10,061 | 10,087 | |||||||||||||||||||||||||
Diluted earnings per share
|
||||||||||||||||||||||||||||||||
Before cumulative effect of change in accounting principle
|
$ | 34.59 | $ | 25.12 | $ | 22.61 | $ | 24.06 | $ | 14.32 | $ | 22.30 | $ | 41.10 | ||||||||||||||||||
Cumulative effect of change in accounting principle
|
| | (1.27 | ) | | | | | ||||||||||||||||||||||||
Net income available for common shares
|
$ | 34.59 | $ | 25.12 | $ | 21.34 | $ | 24.06 | $ | 14.32 | $ | 22.30 | $ | 41.10 | ||||||||||||||||||
Diluted average shares outstanding
|
9,592 | 9,555 | 9,523 | 9,500 | 9,460 | 10,082 | 10,129 | |||||||||||||||||||||||||
Cash dividends
|
$ | 7.00 | $ | 5.80 | $ | 5.60 | $ | 5.60 | $ | 5.40 | $ | 5.20 | $ | 5.00 | ||||||||||||||||||
Common shareholders equity
|
$ | 251.11 | $ | 216.17 | $ | 192.45 | $ | 177.30 | $ | 156.55 | $ | 144.90 | $ | 157.34 | ||||||||||||||||||
Financial Position
|
||||||||||||||||||||||||||||||||
Current assets
|
$ | 750,509 | $ | 550,571 | $ | 407,347 | $ | 426,603 | $ | 405,067 | $ | 476,159 | $ | 404,878 | ||||||||||||||||||
Working capital
|
62,348 | (190,426 | ) | (356,644 | ) | (37,233 | ) | (3,730 | ) | (346,389 | ) | 15,799 | ||||||||||||||||||||
Property, plant and equipment
|
1,089,952 | 1,051,373 | 1,094,400 | 1,098,211 | 927,061 | 854,906 | 841,062 | |||||||||||||||||||||||||
Total assets
|
4,308,765 | 3,949,798 | 3,604,866 | 3,588,844 | 3,200,743 | 2,986,944 | 2,729,661 | |||||||||||||||||||||||||
Long-term debt
|
425,889 | 422,471 | 405,547 | 883,078 | 873,267 | 397,620 | 395,000 | |||||||||||||||||||||||||
Common shareholders equity
|
2,404,606 | 2,062,681 | 1,830,386 | 1,683,485 | 1,481,007 | 1,367,790 | 1,588,103 |
2003
| gain of $32.3 million ($3.38 per share) on the sale of the Companys 50% interest in the International Herald Tribune |
| gain of $25.5 million ($2.66 per share) on sale of land at The Washington Post newspaper |
| charge of $20.8 million ($2.18 per share) for early retirement programs at The Washington Post newspaper |
| Kaplan stock compensation expense of $6.4 million ($0.67 per share) for the 10% premium associated with the purchase of outstanding Kaplan stock options |
| charge of $3.9 million ($0.41 per share) in connection with the establishment of the Kaplan Educational Foundation |
2002
| gain of $16.7 million ($1.75 per share) on the exchange of certain cable systems |
| charge of $11.3 million ($1.18 per share) for early retirement programs at Newsweek and The Washington Post newspaper |
2001
| gain of $196.5 million ($20.69 per share) on the exchange of certain cable systems |
| non-cash goodwill and other intangibles impairment charge of $19.9 million ($2.10 per share) recorded in conjunction with the Companys BrassRing investment |
| charges of $18.3 million ($1.93 per share) from the write-down of a non-operating parcel of land and certain cost method investments to their estimated fair value |
2000
| charge of $16.5 million ($1.74 per share) for an early retirement program at The Washington Post newspaper |
1999
| gains of $18.6 million ($1.81 per share) on the sales of marketable equity securities |
1998
| gain of $168.0 million ($16.59 per share) on the disposition of the Companys 28% interest in Cowles Media Company |
| gain of $13.8 million ($1.36 per share) from the sale of 14 small cable systems |
| gain of $12.6 million ($1.24 per share) on the disposition of the Companys investment in Junglee, a facilitator of Internet commerce |
2007 FORM 10-K 85
Table of Contents
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86 THE WASHINGTON POST
COMPANY
Table of Contents
INDEX TO
EXHIBITS
Exhibit |
||||
Number | Description | |||
3 | .1 | Restated Certificate of Incorporation of the Company dated November 13, 2003 (incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K for the fiscal year ended December 28, 2003). | ||
3 | .2 | Certificate of Designation for the Companys Series A Preferred Stock dated September 22, 2003 (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Companys Current Report on Form 8-K dated September 22, 2003). | ||
3 | .3 | By-Laws of the Company as amended and restated through November 8, 2007 (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated November 14, 2007). | ||
4 | .1 | Form of the Companys 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 Companys 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 Companys Annual Report on Form 10-K for the fiscal year ended January 3, 1999). | ||
4 | .3 | First Supplemental Indenture dated as of September 22, 2003, among WP Company LLC, the Company and Bank One, NA, as successor to The First National Bank of Chicago, as Trustee, to the Indenture dated as of February 17, 1999, between The Washington Post Company and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated September 22, 2003). | ||
4 | .4 | Five Year Credit Agreement dated as of August 8, 2006, among the Company, Citibank, N.A., JPMorgan Chase Bank, N.A., Wachovia Bank, National Association, SunTrust Bank, The Bank of New York, PNC Bank, National Association, Bank of America, N.A. and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 4.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended July 2, 2006). | ||
10 | .1 | The Washington Post Company Incentive Compensation Plan as amended and restated on May 11, 2006, and further amended effective January 18, 2007.* | ||
10 | .2 | The Washington Post Company Stock Option Plan as amended and restated effective May 31, 2003 (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter ended September 28, 2003).* | ||
10 | .3 | The Washington Post Company Supplemental Executive Retirement Plan as amended and restated through December 2007.* | ||
10 | .4 | The Washington Post Company Deferred Compensation Plan as amended and restated through December 2007.* | ||
21 | List of subsidiaries of the Company. | |||
23 | Consent of independent registered public accounting firm. | |||
24 | Power of attorney dated February 26, 2008. | |||
31 | .1 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer. | ||
31 | .2 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer. | ||
32 | Section 1350 Certification of the Chief Executive Officer and the Chief Financial Officer. |
*A management contract or
compensatory plan or arrangement required to be included as an
exhibit hereto pursuant to Item 15(b) of
Form 10-K.
2007 FORM 10-K 87