FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended July 4, 1999
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Commission File Number 1-6714
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THE WASHINGTON POST COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 53-0182885
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1150 15th Street, N.W., Washington, D.C. 20071
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 202-334-6000
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Shares outstanding at August 10, 1999:
Class A Common Stock 1,739,250 Shares
Class B Common Stock 8,323,138 Shares
2
THE WASHINGTON POST COMPANY
Index to Form 10-Q
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited) for the Thirteen and Twenty-six
Weeks Ended July 4, 1999 and
June 28, 1998.........................................3
Condensed Consolidated Statements of Comprehensive
Income (Unaudited) for the Thirteen and
Twenty-six Weeks Ended July 4, 1999 and
June 28, 1998.........................................4
Condensed Consolidated Balance Sheets
at July 4, 1999 (Unaudited) and January 3, 1999.......5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Twenty-six Weeks Ended
July 4, 1999 and June 28, 1998........................6
Notes to Condensed Consolidated Financial Statements
(Unaudited)...........................................7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition...................12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......22
Item 6. Exhibits and Reports on Form 8-K..........................23
Signatures..........................................................24
Exhibit 11
Exhibit 27 (Electronic Filing Only)
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Washington Post Company
Condensed Consolidated Statements of Income (Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
July 4, June 28, July 4, June 28,
(In thousands, except per share amounts) 1999 1998 1999 1998
-------------------- ----------------------
Operating revenues
Advertising $341,602 $342,247 $ 641,604 $ 634,932
Circulation and subscriber 142,854 133,365 284,285 263,705
Other 72,739 50,145 151,703 111,075
557,195 525,757 1,077,592 1,009,712
Operating costs and expenses
Operating 294,172 276,399 580,756 543,986
Selling, general and administrative 116,414 111,005 233,410 220,935
Depreciation of property, plant
and equipment 25,305 20,731 50,423 41,113
Amortization of goodwill and other
intangibles 14,619 11,129 29,044 21,868
450,510 419,264 893,633 827,902
Income from operations 106,685 106,493 183,959 181,810
Other income (expense)
Equity in earnings (losses)of affiliates 731 (71) (1,779) 917
Interest income 213 385 459 592
Interest expense (5,441) (330) (12,254) (2,574)
Other 9,471 (1,594) 15,613 256,512
Income before income taxes 111,659 104,883 185,998 437,257
Provision for income taxes 43,750 41,100 72,900 165,600
Net income 67,909 63,783 113,098 271,657
Redeemable preferred stock dividends (237) (239) (712) (717)
Net income available for common shares $ 67,672 $ 63,544 $ 112,386 $ 270,940
Basic earnings per common share $ 6.70 $ 6.30 $ 11.13 $ 26.86
Diluted earnings per common share $ 6.67 $ 6.27 $ 11.08 $ 26.74
Dividends declared per common share $ 1.30 $ 1.25 $ 3.90 $ 3.75
Basic average number of common shares
outstanding 10,098 10,088 10,098 10,086
Diluted average number of common shares
outstanding 10,140 10,136 10,141 10,132
4
The Washington Post Company
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
July 4, June 28, July 4, June 28,
(In thousands) 1999 1998 1999 1998
Net income $ 67,909 $ 63,783 $113,098 $271,657
Other comprehensive income (loss)
Foreign currency translation adjustment (239) (1,189) (3,348) (1,485)
Change in unrealized gain on
available-for-sale securities (20,385) 2,720 (12,420) 3,108
Less: reclassification adjustment
for realized gains included in
net income (7,258) -- (5,832) --
(27,882) 1,531 (21,600) 1,623
Income tax benefit (expense) related to
other comprehensive (loss) income 10,781 (1,061) 7,112 (1,212)
( 17,101) 470 (14,488) 411
Comprehensive income $ 50,808 $ 64,253 $98,610 $272,068
5
The Washington Post Company
Condensed Consolidated Balance Sheets
(In thousands) July 4,
1999 January 3,
(unaudited) 1999
Assets
Current assets
Cash and cash equivalents $ 17,707 $ 15,190
Investments in marketable equity securities 56,530 71,676
Accounts receivable, net 259,566 236,514
Federal and state income taxes receivable 29,117 35,395
Inventories 21,270 20,154
Other current assets 27,533 25,949
411,723 404,878
Property, plant and equipment
Buildings 253,285 248,764
Machinery, equipment and fixtures 986,101 977,710
Leasehold improvements 54,193 50,556
1,293,579 1,277,030
Less accumulated depreciation (602,058) (566,616)
691,521 710,414
Land 41,475 41,191
Construction in progress 123,104 89,457
856,100 841,062
Investments in marketable equity securities 183,383 184,440
Investments in affiliates 60,081 68,530
Goodwill and other intangibles,
less accumulated amortization 881,941 883,232
Prepaid pension cost 296,493 256,134
Deferred charges and other assets 108,629 91,385
$2,798,350 $2,729,661
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 265,560 $ 245,068
Deferred subscription revenue 81,677 85,649
Dividends declared 13,366 --
Short-term borrowings 33,247 58,362
393,850 389,079
Other liabilities 270,717 261,896
Deferred income taxes 83,015 83,710
Long-term debt 397,490 395,000
1,145,072 1,129,685
Redeemable preferred stock 11,873 11,873
Preferred stock -- --
Common shareholders' equity
Common stock 20,000 20,000
Capital in excess of par value 47,942 46,199
Retained earnings 2,670,231 2,597,217
Accumulated other comprehensive income (losses)
Cumulative foreign currency translation
adjustment (4,948) (1,600)
Unrealized gain on available-for-sale
securities 30,840 41,980
Cost of Class B common stock held in treasury (1,122,660) (1,115,693)
1,641,405 1,588,103
$2,798,350 $2,729,661
6
The Washington Post Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
Twenty-six Weeks Ended
July 4, June 28,
(In thousands) 1999 1998
Cash flows from operating activities:
Net income $113,098 $271,657
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 50,423 41,113
Amortization of goodwill and other intangibles 29,044 21,868
Net pension benefit (43,000) (28,500)
Gain on disposition of business -- (258,436)
Gain on disposition of marketable equity securities (17,013) --
Provision for deferred income taxes 6,448 129
Equity in earnings of affiliates, net of
distributions 1,779 (255)
Change in assets and liabilities:
Increase in accounts receivable, net (20,902) (23,140)
Increase in inventories (1,116) (12,085)
Increase in accounts payable and
accrued liabilities 7,879 9,426
Increase in income taxes payable -- 13,590
Decrease in income taxes receivable 6,278 --
Decrease in other assets and other
liabilities, net 2,505 9,737
Other 1,165 8,057
Net cash provided by operating activities 136,588 53,161
Cash flows from investing activities:
Net proceeds from sale of business 2,000 330,473
Purchases of property, plant and equipment (64,951) (86,380)
Investments in certain businesses (28,431) (132,483)
Proceeds from sale of marketable securities 27,379 5,009
Purchase of marketable securities (3,370) --
Other (12,107) (664)
Net cash (used in) provided by investing activities (79,480) 115,955
Cash flows from financing activities:
Principal payments on debt (420,115) (296,394)
Issuance of debt 397,425 156,984
Dividends paid (26,719) (25,695)
Common shares repurchased (8,424) (7,809)
Proceeds from exercise of stock options 3,242 4,359
Net cash used in financing activities (54,591) (168,555)
Net increase in cash and cash equivalents 2,517 561
Beginning cash and cash equivalents 15,190 21,117
Ending cash and cash equivalents $ 17,707 $ 21,678
7
The Washington Post Company
Notes to Condensed Consolidated Financial Statements (Unaudited)
Results of operations, when examined on a quarterly basis,
reflect the seasonality of advertising that affects the
newspaper, magazine and broadcasting operations. Advertising
revenues in the second and fourth quarters are typically higher
than first and third quarter revenues. All adjustments reflected
in the interim financial statements are of a normal recurring
nature.
Note 1: Acquisitions and Dispositions
Acquisitions. During the first six months of 1999, the company
acquired various businesses for approximately $28.4 million,
including an accredited distance education institute that offers
degrees in paralegal studies and legal nurse consulting, and a
provider of test preparation services for the United States
Medical Licensing Exam.
During the first six months of 1998, the company acquired an
educational services company that provides English language study
programs (in January 1998 for $16.1 million) and a 36,000
subscriber cable system serving Anniston, Alabama (in June 1998
for $66.5 million). In addition, the company acquired various
other small businesses throughout the first six months of 1998
for $49.9 million (principally consisting of a cable system in
Grenada, Mississippi serving approximately 7,400 subscribers and
a provider of customized information technology training).
Dispositions. In June 1999, the company sold Legi-Slate, Inc.
No significant gain or loss arose from the sale of Legi-Slate.
In March 1998, Cowles Media Company ("Cowles") and McClatchy
Newspapers, Inc. ("McClatchy") completed a series of transactions
resulting in the merger of Cowles and McClatchy. In the merger,
each share of Cowles common stock was converted (based upon
elections of Cowles stockholders) into shares of McClatchy stock
or a combination of cash and McClatchy stock. As of the date
of the Cowles and McClatchy merger transaction, a wholly-owned
subsidiary of the company owned 3,893,796 (equal to about 28%) of
the outstanding common stock of Cowles, most of which was
acquired in 1985. As a result of this transaction, the company's
subsidiary received $330.5 million in cash from McClatchy and
730,525 shares of McClatchy Class A common stock. The market
value of the McClatchy stock received approximated $21.6 million.
The gain resulting from this transaction, which is included in
"Other, net" in the Condensed Consolidated Statements of Income,
increased net income by approximately $162.8 million and basic
and diluted earnings per share by $16.14 and $16.07,
respectively.
Note 2: Investments in Marketable Securities
Investments in marketable equity securities at July 4, 1999 and
January 3, 1999 consist of the following (in thousands):
July 4, January 3,
1999 1999
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Total cost $189,356 $187,297
Gross unrealized gains 50,557 68,819
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Total fair value $239,913 $256,116
======== ========
During the second quarter and first six months of 1999,
proceeds from sales of marketable equity securities were $16.9
million and $27.4 million, respectively. Gross realized gains on
such sales were $10.3 million and $17.0 million, respectively.
There were no sales of marketable equity securities during the
first six months of 1998. Gross realized gains upon the sale of
8
marketable equity securities are included in "Other, net" in the
Condensed Consolidated Statements of Income.
Note 3: Borrowings
On February 15, 1999, the company completed the issuance of
$400.0 million 5.5 percent unsecured notes due February 15, 2009.
The company is required to pay interest related to these notes on
February 15 and August 15 of each year. The first interest
payment of approximately $11.0 million is due on August 15, 1999.
During the second quarter and first half of 1999, the company
had average borrowings outstanding of approximately $425.7
million and $437.7 million, respectively, at average interest
rates of approximately 5.7 percent and 5.6 percent, respectively.
During the second quarter and first half of 1998, the company had
average borrowings outstanding of approximately $15.2 million and
$143.6 million, respectively, at an average interest rate of
approximately 5.6 percent.
During the first half of 1999 and 1998, the company incurred
interest costs on borrowings of $12.3 million and $4.1 million,
respectively, of which $1.2 million and $2.2 million was
capitalized. Interest costs for construction and upgrade of
qualifying assets are capitalized.
9
Note 4: Business Segments.
The following table summarizes financial information related to
each of the company's business segments. The 1999 and 1998 asset
information is as of July 4, 1999 and June 28, 1999,
respectively.
Second Quarter Period
- ---------------------
(in thousands)
Education Other
and Businesses
Newspaper Television Magazine Cable Career and Corporate
Publishing Broadcasting Publishing Television Services Office Consolidated
---------- ------------ ---------- ---------- --------- ------------- ------------
1999
Operating revenues $219,017 $ 91,022 $100,586 $ 83,120 $ 61,045 $ 2,405 $ 557,195
Income (loss) from
operations $ 50,067 $ 45,942 $ 17,719 $ 15,573 $ (6,958) $(15,658) $ 106,685
Equity in losses of
affiliates 731
Interest expense, net (5,228)
Other income, net 9,471
Income before income
taxes $ 111,659
Depreciation expense $ 7,678 $ 2,825 $ 1,244 $ 10,754 $ 2,012 $ 792 $ 25,305
Amortization expense $ 380 $ 3,559 $ 1,478 $ 7,446 $ 1,756 $ -- $ 14,619
Identifiable assets $642,078 $437,583 $371,163 $703,240 $250,765 $ 93,527 $2,498,356
Investments in
marketable equity
securities 239,913
Investments in
affiliates 60,081
Total assets $2,798,350
Education Other
and Businesses
Newspaper Television Magazine Cable Career and Corporate
Publishing Broadcasting Publishing Television Services Office Consolidated
---------- ------------ ---------- ---------- --------- ------------- ------------
1998
Operating revenues $214,841 $ 95,423 $107,623 $ 70,888 $ 34,404 $ 2,578 $ 525,757
Income (loss) from
operations $ 44,835 $ 48,999 $ 16,996 $ 15,095 $ (7,338) $(12,094) $ 106,493
Equity in losses of
affiliates (71)
Interest income, net 55
Other income, net (1,594)
Income before income
taxes $ 104,883
Depreciation expense $ 5,363 $ 2,809 $ 1,242 $ 9,261 $ 1,214 $ 842 $ 20,731
Amortization expense $ 397 $ 3,534 $ 1,468 $ 4,874 $ 856 $ -- $ 11,129
Identifiable assets $634,882 $437,506 $355,176 $710,641 $196,702 $ 70,108 $2,405,015
Investments in
marketable equity
securities 256,116
Investments in
affiliates 68,530
Total assets $2,729,661
10
Six Month Period
- ----------------
(in thousands)
Education Other
and Businesses
Newspaper Television Magazine Cable Career and Corporate
Publishing Broadcasting Publishing Television Services Office Consolidated
---------- ------------ ---------- ---------- --------- ------------- ------------
1999
Operating revenues $427,479 $171,319 $191,302 $163,919 $118,457 $ 5,116 $ 1,077,592
Income (loss) from
operations $ 89,569 $ 80,370 $ 26,689 $ 30,391 $(14,336) $(28,724) $ 183,959
Equity in losses of
affiliates (1,779)
Interest expense, net (11,795)
Other income, net 15,613
Income before income
taxes $ 185,998
Depreciation expense $ 15,260 $ 5,613 $ 2,507 $ 21,508 $ 4,005 $ 1,530 $ 50,423
Amortization expense $ 760 $ 7,119 $ 2,956 $ 14,892 $ 3,317 $ -- $ 29,044
Education Other
and Businesses
Newspaper Television Magazine Cable Career and Corporate
Publishing Broadcasting Publishing Television Services Office Consolidated
---------- ------------ ---------- ---------- --------- ------------- ------------
1998
Operating revenues $418,721 $174,480 $199,477 $138,192 $ 73,970 $ 4,872 $ 1,009,712
Income (loss) from
operations $ 87,284 $ 82,999 $ 23,287 $ 27,189 $(11,450) $(27,499) $ 181,810
Equity in losses of
affiliates 917
Interest expense, net (1,982)
Other income, net 256,512
Income before income
taxes $ 437,257
Depreciation expense $ 10,411 $ 5,614 $ 2,486 $ 18,553 $ 2,475 $ 1,574 $ 41,113
Amortization expense $ 615 $ 7,067 $ 2,950 $ 9,748 $ 1,488 $ -- $ 21,868
Newspaper publishing includes the publication of newspapers in
the Washington, D.C. area (The Washington Post and the Gazette
community newspapers) and Everett, Washington (The Everett
Herald). This business division also includes newsprint
warehousing and recycling operations.
Television broadcasting operations are conducted through six
VHF, network-affiliated television stations serving the Detroit,
Houston, Miami, San Antonio, Orlando and Jacksonville television
markets.
The magazine publishing division consists of the publication of
a weekly news magazine, Newsweek, which has one domestic and
three international editions, and the publication of business
periodicals for the computer services industry and the Washington-
area technology community.
Cable television operations consist of over 53 cable systems
offering basic cable and pay television services to approximately
735,200 subscribers in midwestern, western, and southern states.
Education and career services are provided through the
Company's wholly owned subsidiary Kaplan Educational Center, Inc.
Kaplan's six operating divisions include Test Preparation and
Admissions; Score! Educational Centers, offering K-8 after-
school programs; Kaplan Learning Services, providing customized
education services and professional development at schools and
universities; Publishing, which produces educational books and
software; Kaplan Professional, providing recruitment,
assessment, training and certification services; and Kaplan
University, offering distance learning programs.
Other businesses and corporate office include a digital media
and electronic information services provider and the company's
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corporate office. Through the first six months of 1999, the
other businesses and corporate office segment also includes the
result of Legi-Slate, Inc., which was sold in June 1999. The
1998 results for other businesses and corporate office include
Moffet, Larson & Johnson, which was sold in July 1998.
Income from operations includes actuarially determined net
pension credits, which are significant to the magazine and
newspaper publishing divisions. These pension credits totaled
$12.2 million and $24.4 million for the magazine division in the
second quarter and first six months of 1999, respectively,
compared to $9.2 million and $17.8 million during the second
quarter and first six month of 1998. Net pension credits
recorded by the newspaper division totaled $7.5 million and $14.7
million during the second quarter and first six months of 1999,
respectively, compared to $4.7 million and $6.8 million during
the second quarter and first six months of 1998.
The company maintains stock option and stock appreciation right
plans at its Kaplan subsidiary that provide for the issuance of
stock options representing 10 percent of Kaplan's stock and the
issuance of stock appreciation rights to certain members of
Kaplan's management. The options and appreciation rights vest
ratably over five years from issuance. For the second quarter of
1999 and 1998, the education and career services operating
results include a non-cash charge of $1.7 and $1.5 million,
respectively, related to these plans; for the first six months of
1999 and 1998, the charge related to these plans was $3.7 million
and $3.0 million, respectively.
12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
This analysis should be read in conjunction with the
consolidated financial statements and the notes thereto.
Revenues and expenses in the first and third quarters are
customarily lower than those in the second and fourth quarters
because of significant seasonal fluctuations in advertising
volume. For that reason, the results of operations for each
quarter are compared with those of the corresponding quarter in
the preceding year.
Second Quarter Comparisons
Net income for the second quarter of 1999 was $67.9 million,
an increase of 6 percent from net income of $63.8 million in the
second quarter last year. Diluted earnings per share increased 6
percent to $6.67, from $6.27 in the second quarter of 1998.
Revenues for the second quarter of 1999 rose 6 percent to
$557.2 million, from $525.8 million in the same period last year.
Advertising revenues remained flat, while circulation and
subscriber revenues increased 7 percent as compared to last year.
Other revenues increased 45 percent over the second quarter of
1998. The increase in circulation and subscriber revenues is due
to growth at the cable division, resulting mostly from
acquisitions completed after June 1998. Growth at Kaplan
Educational Centers accounted for the majority of the increase in
other operating revenues.
Costs and expenses for the second quarter of 1999 increased
7 percent to $450.5 million, from $419.3 million in the second
quarter of 1998. The increase in costs and expenses is
attributable to expenses arising from companies acquired after
June 1998 (including amortization expense), higher depreciation
expense, and increased spending for internet-related operations.
These expense increases were partially offset by growth in the
Company's pension credit and a 20 percent decline in newsprint
expense at the newspaper division. The increase in depreciation
expense is principally due to the recently completed expansion of
The Washington Post's printing facilities.
In the second quarter of 1999, operating income of $106.7
remained relatively unchanged as compared to the second quarter
of 1998.
Newspaper Division. At the newspaper division, revenues
increased 2 percent in the second quarter of 1999 to $219.0
million; division operating income for the second quarter
increased 12 percent to $50.1 million.
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Advertising revenues for the division rose 4 percent in 1999
due principally to higher ad rates. Advertising volume at The
Washington Post totaled 807,400 inches in the second quarter of
1999 as compared to 814,600 inches in 1998. Preprint advertising
volume at The Post increased 7 percent to 422.4 million pieces,
compared to 393.6 million pieces in 1998. Circulation revenues
for the division decreased 1 percent in comparison to the same
period last year as a result of a 1 percent decrease in Sunday
circulation at The Washington Post; daily circulation at The Post
remained relatively unchanged.
The Post's second quarter operating expenses benefited from
a 20 percent decline in newsprint expense and additional pension
credits. These expense reductions were offset by higher
depreciation expense (arising from the recently completed
expansion of The Post's printing facilities) and other general
expense increases including increased promotion and marketing
expenses.
Broadcast Division. Revenues at the broadcast division totaled
$91.0 million for the second quarter of 1999, a 5 percent decline
from the second quarter of 1998. Division operating income for
the quarter totaled $45.9 million, a decrease of 6 percent from
the prior year. The decline in second quarter 1999 operating
results is primarily attributable to softness in national
advertising revenues offset in part by growth in local
advertising revenues.
Magazine Division. Revenues at the magazine division were $100.6
million for the second quarter of 1999, a 7 percent decline from
the second quarter of 1998; division operating income for the
second quarter of 1999 improved 4 percent to $17.7 million.
The 7 percent decrease in revenues is attributable to one
less special issue in the second quarter of 1999 at the domestic
edition of Newsweek and lower revenues from the international
editions of Newsweek. The 4 percent increase in operating income
is attributable to improved results at the company's trade
periodicals unit as well as additional pension credits at
Newsweek.
Cable Division. At the cable division, second quarter 1999
revenues of $83.1 million were 17 percent higher than 1998;
division operating income before amortization expense for the
second quarter of $23.0 million was 15 percent higher than the
same period last year.
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Higher subscriber levels, resulting mainly from recent
acquisitions, as well as slightly higher rates accounted for the
increase in revenue and operating income before amortization
expense. At the end of the second quarter, the number of basic
subscribers totaled approximately 735,200, 7 percent higher than
the subscriber levels at the same time last year.
Education and Career Services. The company provides education
and career services through its subsidiary, Kaplan Educational
Centers. Kaplan provides test preparation programs in the U.S.
and abroad for individuals taking admissions and professional
licensing exams. Kaplan also provides on-site educational
programs to students and teachers at elementary, secondary and
post-secondary institutions, and offers a growing number of
distance learning programs. In addition, Kaplan publishes books,
software and other materials. For career services, Kaplan is the
leading provider of career fairs in North America, bringing
together technical, sales and diversity candidates with corporate
recruiters.
Completing the business offerings of Kaplan are two
subsidiaries that are in the early growth phase of their
operations. Score! Learning Centers is a provider of after-
school learning opportunities for students in kindergarten
through the eighth grade. Score! presently operates 72 Score!
centers (most opened within the last two years) and plans to open
an additional 28 centers in the remainder of 1999. HireSystems
provides corporate clients with Web-based tools to streamline the
recruitment and hiring process. HireSystems established its
products during 1998 and plans to spend significant resources in
1999 developing its customer base.
At the education and career services division, second
quarter 1999 revenues totaled $61.0 million, a 77 percent
increase over 1998. Most of the revenue increase is attributable
to businesses acquired subsequent to the second quarter of 1998.
Classroom test preparation revenue grew over 30 percent in the
second quarter of 1999 (approximately 12 percent on a comparable
basis excluding acquisitions). Growth in Score! revenue also
contributed to the revenue increase.
Division operating losses of $7.0 million in the second
quarter of 1999 represent a 5 percent improvement over 1998 and
were in line with management's expectations. Division operating
losses include approximately $4.4 million in losses arising from
the opening of new Score! centers and HireSystems' expansion of
its customer base. Operating results were also adversely
affected by amortization expense arising from acquisitions.
Test preparation revenues, which comprise approximately half
of Kaplan's annual revenues, are seasonally strongest in the
third and fourth quarters while test preparation operating
expenses are relatively consistent throughout the year.
Other Businesses and Corporate Office. Revenues for other
businesses totaled $2.4 million and $2.6 million in the second
quarter of 1999 and 1998, respectively. Operating losses for
other businesses and corporate office were $15.7 million for the
second quarter of 1999 and $12.1 million for the second quarter
15
of 1998. The increase in operating losses in the second quarter
of 1999 is due to additional spending for internet-related
operations.
The 1998 operating results include Moffet, Larson & Johnson,
which was sold in July 1998. In June 1999 the company sold Legi-
Slate. No significant gain or loss arose from the sale of these
businesses.
Equity in Earnings and Losses of Affiliates. The company's
equity in earnings of affiliates in the second quarter of 1999
totaled $0.7 million, compared to losses of $0.1 million for the
second quarter of 1998. Improved results at the International
Herald Tribune, in which the company holds a 50 percent interest,
contributed to the increase in second quarter equity earnings.
Non-Operating Items. Interest expense, net of interest income,
was $5.2 million, compared to net interest income of $0.1 million
for the second quarters of 1999 and 1998, respectively.
Income taxes. The effective tax rate in the second quarter of
1999 and 1998 was 39.2 percent.
Six Month Comparisons
For the first six months of 1999 net income was $113.1
million, compared with net income of $271.7 million for the same
period of 1998. The company's 1998 net income includes $162.8
million ($16.07 per share) from the March 1998 disposition of its
28 percent interest in Cowles Media Company. Excluding the
effect of the prior year's disposition, net income for the first
half of 1999 increased $4.2 million, or 4 percent; earnings per
share also increased 4 percent to $11.08, from $10.67 in the
first half of 1998.
Revenues for the first half of 1999 increased 7 percent to
$1,077.6 million, from $1,009.7 million in the comparable period
last year. Advertising revenues increased 1 percent, circulation
and subscriber revenues increased 8 percent and other revenues
increased 37 percent. The increase in circulation and subscriber
revenues is due to growth at the cable division, resulting mostly
from acquisitions completed after June 1998. Growth at Kaplan
Educational Centers accounted for the majority of the increase
in other operating revenues.
Costs and expenses increased 8 percent during the first half
of 1999 to $893.6 million from the corresponding period of 1998.
The increase in costs and expenses is attributable to expenses
arising from companies acquired after June 1998 (including
amortization expense), increased spending for internet related
operations and new business initiatives at the company's
education and career services division, and higher depreciation
16
expense. These expense increases were offset in part by an
increase in the Company's pension credit and a 20 percent
reduction in newsprint expense. The increase in depreciation
expense is primarily due to the recently competed expansion of
The Washington Post's printing facilities.
In the first half of 1999 operating income improved 1
percent to $184.0 million from $181.8 million in the same period
last year.
Newspaper Division. Newspaper division revenues of $427.5
million in the first half of 1999 were up 2 percent over the
comparable period of 1998; division operating income for the
first half of 1999 totaled $89.6 million, a 3 percent increase
over the prior year.
Advertising revenues for the division rose 2 percent in the
period due mainly to increased rates. Advertising volume at The
Washington Post totaled 1,559,400 inches, a 1 percent decline
from 1,578,200 inches in the first half of 1998. Circulation
revenues for the division declined 1 percent as compared to the
same period in the prior year. Sunday circulation at The Post
both declined 1 percent, while daily circulation remained
essentially unchanged.
Operating expenses at the newspaper division benefited from
a 20 percent decline in newsprint expense as compared to the
first six months of 1998 due primarily to a decline in newsprint
prices. This benefit was partially offset by an increase in
depreciation expense due to the recently completed expansion of
the printing facilities of The Washington Post.
Broadcast Division. Revenues at the broadcast division of $171.3
million were 2 percent less than revenues for the first six
months of 1998; division operating income through the first six
months of 1999 totaled $80.4 million, a decline of 3 percent as
compared to the same period in 1998. The overall decrease in
broadcast division operating results is due to softness in
national advertising revenue partially offset by an increase in
local advertising revenue.
Magazine Division. Magazine division revenue totaled $191.3
million for the first six months in 1999, a decrease of 4 percent
for the first half of the year. Magazine division operating
income for the first six months of 1999 totaled $26.7 million, a
15 percent increase over 1998.
The 4 percent decrease in revenue is attributable to one
less special issue in 1999 at the domestic edition of Newsweek
and lower revenues from the international editions of Newsweek.
The 15 percent increase in operating income is attributable to
additional pension credits and other favorable cost experience at
Newsweek.
Cable Division. Cable division revenues of $163.9 million
increased 19 percent in the first half of 1999; division
17
operating income before amortization expense of $45.3 million
increased 23 percent over 1998. Division operating income after
amortization expense improved 12 percent over the first half of
1998. The increase in operating income after amortization
expense is due to higher subscriber levels, resulting mainly from
system acquisitions, and slightly higher rates, offset in part by
increased expenses from systems acquired after June 1998
(including amortization expense).
Education and Career Services. For the first six months of 1999,
revenues totaled $118.5 million, an increase of 60 percent over
1998. The increase in revenues is mostly attributable to
businesses acquired subsequent to the second quarter of 1998.
Division operating losses of $14.3 million during the first
half of 1999 represent a 25 percent decrease from 1998. Division
operating losses include approximately $8.8 million in losses
arising from the opening of new Score! centers and HireSystems'
expansion of its customer base. Operating results were also
adversely affected by expenses arising from acquisitions,
including amortization expense.
Other Businesses and Corporate Office. Revenues for other
businesses totaled $5.1 million and $4.9 million in the first
half of 1999 and 1998, respectively. Operating losses for other
businesses and corporate office were $28.7 million for the first
half of 1999 and $27.5 million for the first half of 1998. The
increase in operating losses over 1998 is primarily due to
additional spending for internet-related operations.
The 1998 operating results include Moffet, Larson & Johnson,
which was sold in July 1998. In June 1999 the company sold Legi-
Slate. No significant gain or loss arose from the sale of these
businesses.
Equity in Earnings and Losses of Affiliates. The company's
equity in losses of affiliates during the first half of 1999 was
$1.8 million, compared with earnings of $0.9 million in the first
six months of 1998. The decline in earnings of affiliates
resulted primarily from the disposition of the company's 28
percent interest in Cowles Media Company, which occurred in March
of 1998.
Non-Operating Items. Interest expense, net of interest income,
was $11.8 million in the first six months of 1999, compared to
$2.0 million in 1998. Included in other, net for the first half
of 1998 is a $258.4 million pre-tax gain resulting from the
disposition of the company's 28 percent interest in Cowles Media
Company.
Income Taxes. The effective tax rate through the first six
months of 1999 increased to 39.2 percent from 37.9 percent
18
through the first six months of 1998. The lower state tax rate
applicable to the company's sale of its interest Cowles Media
Company during March 1998 resulted in the overall decline in the
effective tax rate during 1998.
Financial Condition: Capital Resources and Liquidity
Acquisitions. In the first half of 1999, the company acquired
various small businesses for approximately $28.4 million,
including an accredited distance education institute that offers
degrees in paralegal studies and legal nurse consulting and a
provider of test preparation services for the United States
Medical Licensing Exam.
Investments in Marketable Equity Securities. During the first
six months of 1999, the company received $27.4 million from the
sale of certain marketable equity securities.
At July 4, 1999, the fair value of the company's investment in
marketable equity securities was $239.9 million, of which $183.4
million consists of the company's investment in the common stock
of Berkshire Hathaway, Inc. The remaining investment in
marketable equity securities consist of common stock investments
in various publicly traded companies, most of which have
concentrations in internet business activities.
Capital Expenditures. During the first six months of 1999, the
company's capital expenditures totaled approximately $65.0
million, the most significant portion of which related to plant
upgrades at the company's cable subsidiary. The company
anticipates it will spend approximately $150.0 million throughout
1999 for property and equipment, primarily for various projects
at the newspaper and cable divisions.
Stock Repurchases. During the first six months of 1999, the
company repurchased 15,318 shares of its Class B common stock at
a cost of approximately $8.4 million. Approximately 786,000
Class B common shares remain available for repurchases under a
November 13, 1997 authorization by the Board of Directors.
Liquidity. On February 15, 1999, the company completed the
issuance of $400.0 million, 5.5 percent unsecured notes due
February 15, 2009, netting approximately $395.0 million in
proceeds after discount and fees. The company used the proceeds
from the issuance of these unsecured notes to repay approximately
$395.0 million of commercial paper borrowings then outstanding.
Throughout the first six months of 1999 the company also repaid
an additional $25.1 million of commercial paper borrowings with
cash generated from operations.
19
During the first half of 1999, the company had average borrowings
outstanding of approximately $437.7 million at an average annual
interest rate of 5.6 percent.
The company expects to fund its estimated capital needs primarily
through internally generated funds, and to a lesser extent,
commercial paper borrowings. In management's opinion, the
company will have ample liquidity to meet its various cash needs
throughout 1999.
Year 2000. The company's assessment, remediation, testing and
contingency planning efforts surrounding Year 2000 readiness are
proceeding as planned with completion of the final project phases
projected for late Fall of 1999. To date, the assessment of
internal systems and equipment has been completed and the company
has made substantial progress in completing the remediation,
testing and contingency planning phases of its Year 2000
readiness project.
Most of the company's significant internal systems and equipment,
including equipment with embedded controls, have been determined
to be Year 2000 compliant. Certain critical internal systems,
however, have been identified as incapable of processing
transactions beyond the Year 2000 the most significant of which
include some of the revenue related business systems at The
Washington Post and Newsweek. At Newsweek, the non-compliant
systems have since been repaired and testing of such remediation
has been completed. For the non-compliant systems at The
Washington Post, which principally include the advertising and
circulation billing systems, the remediation efforts are
continuing and are presently expected to be completed and tested
by late Fall of 1999. The Company believes it has the ability to
perform these functions manually should the remediation efforts
not be completed according to plan.
For critical internal systems and equipment determined to be
compliant during the assessment phase of the project, and for non-
compliant equipment that has been repaired or replaced, the
company has devised and is executing a testing plan to provide
additional compliance assurance. To date, the results of the
company's Year 2000 compliance testing program have not revealed
any new problems, or ineffective remediation. The Year 2000
testing phase for internal systems and equipment is believed to be
approximately 85 percent complete as of the end of July 1999.
The company's Year 2000 readiness project also includes procedures
designed to identify and assess Year 2000 business interruption
which may occur as a result of the company's dependency on third
parties. Vendors, suppliers, service providers, customers and
governmental entities that are believed to be critical to the
company's business operations after January 1, 2000 ("key business
20
partners") have been identified and significant progress has been
made in ascertaining their stage of Year 2000 readiness. These
efforts include, among others, circularization of Year 2000
compliance confirmations and conducting interviews and on-site
reviews.
The company could potentially experience disruptions as a result
of non-compliant systems utilized by some of its key business
partners or unrelated third party governmental and business
entities. Contingency plans have been developed to mitigate these
potential disruptions to business operations. These contingency
plans include, but are not limited to, identification of
alternative suppliers, vendors and service providers and planned
accumulation of inventory to ensure production capability. The
Company has also developed contingency plans for its internal
critical business systems. These contingency planning activities
are intended to reduce risk, but cannot eliminate the potential
for business disruption caused by third party failures.
The company estimates that its total Year 2000 compliance costs
will approximate $25 million. Approximately $15 million of the
estimated costs are attributable to assessment, repair and testing
activities and will be expensed as incurred (approximately $7
million expensed in 1998 and $8 million expected to be expensed in
1999). The remaining $10 million represents the estimated cost to
replace non-compliant systems and will be capitalized and
amortized over a period ranging between five and seven years. The
company anticipates that the funds needed to complete the Year
2000 compliance efforts and referenced system replacements will be
provided primarily from the company's operating cash flows.
Based upon the activities described above, the company does not
believe that the Year 2000 problem is likely to have a material
adverse effect on the company's business or results of operations.
The above discussion contains forward-looking statements that
reflect the company's current expectations or beliefs concerning
future results and events. These statements are made pursuant to
the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that forward-looking
statements contained in the Year 2000 discussion should be read in
conjunction with the following disclosures of the Company.
Cautionary Statements Concerning Forward-Looking Statements.
Forward-looking statements, which the company believes to be
reasonable and are made in good faith, are subject to certain
risks and uncertainties that could cause actual results to differ
materially from those expressed in any forward-looking statements
made by, or on behalf of, the company.
Taking into account the foregoing, the following are identified
as important risk factors that could cause actual results to
differ from those expressed in any forward-looking statement made
by, or on behalf of, the company.
21
The dates on which the company believes its Year 2000 readiness
project will be completed are based on management's best
estimates, which were derived utilizing numerous assumptions of
future events, including the continued availability of certain
resources, third-party modification plans and other factors.
Unanticipated failures by critical vendors, as well as a failure
by the company to execute successfully its own remediation
efforts, however, could have a material adverse effect on the
costs associated with the Year 2000 readiness project and on its
completion. Some important factors that might cause differences
between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in
these areas, the ability to locate and correct all relevant
computer code, the timely and accurate responses to and
correction by third-parties and suppliers, the ability to
implement interfaces between new systems and the systems not
being replaced and similar uncertainties. Due to the general
uncertainty inherent in the Year 2000 problem, the company cannot
ensure its ability to timely and cost-effectively resolve
problems associated with the Year 2000 issue that may affect its
operations and business or expose it to third-party liability.
22
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's May 13, 1999, Annual Meeting of
Stockholders, the stockholders elected each of the nominees to its
Board of Directors named in the Company's proxy statement dated
March 31, 1999. The voting results are set forth below:
Class A Directors
-----------------
Votes Votes Broker
Nominee For Withheld Non-Votes
------- ----- -------- ---------
Warren E. Buffett 1,739,250 -0- -0-
George J. Gillespie III 1,739,250 -0- -0-
Ralph E. Gomory 1,739,250 -0- -0-
Donald E. Graham 1,739,250 -0- -0-
Katharine Graham 1,739,250 -0- -0-
William J. Ruane 1,739,250 -0- -0-
Richard D. Simmons 1,739,250 -0- -0-
Alan G. Spoon 1,739,250 -0- -0-
George W. Wilson 1,739,250 -0- -0-
Class B Directors
-----------------
Votes Votes Broker
Nominee For Withheld Non-Votes
------- ----- -------- ---------
Daniel B. Burke 6,800,816 20,740 -0-
James E. Burke 6,803,751 17,805 -0-
Donald R. Keough 6,800,786 20,770 -0-
Barbara Scott Preiskel 6,804,722 16,834 -0-
23
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as exhibits to this
report:
Exhibit
Number Description
3.1 Certificate of Incorporation of the Company as amended
through May 12, 1998, and the Certificate of Designation for the
Company's Series A Preferred Stock filed January 22, 1996
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
3.2 By-Laws of the Company as amended through September 9, 1993
(incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended October 3,
1993).
4.1 Credit Agreement dated as of March 17, 1998 among the
Company, Citibank, N.A., Wachovia Bank of Georgia, N.A., and the
other Lenders named therein (incorporated by reference to Exhibit
4.1 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 28, 1997).
4.2 Form of the Company's 5.50% Notes due February 15, 2009,
issued under the Indenture dated as of February 17, 1999,
between the Company and The First National Bank of
Chicago, as Trustee (incorporate by reference to Exhibit
4.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 3, 1999).
4.3 Indenture dated as of February 17, 1999, between the Company
and The First National Bank of Chicago, as Trustee (incorporated
by reference to Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 3, 1999).
11 Calculation of Earnings per Share of Common Stock.
27 Financial Data Schedule - July 4, 1999
(Electronic filing only).
(b) No reports on Form 8-K were filed during the period
covered by this report.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE WASHINGTON POST COMPANY
(Registrant)
Date: August 12, 1999 /s/ Donald E. Graham
--------------- ----------------------------
Donald E. Graham, Chairman &
Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1999 /s/ John B. Morse, Jr.
--------------- ----------------------------
John B. Morse, Jr., Vice
President-Finance
(Principal Financial Officer)