1
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 October 1, 2000 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)
(202) 334-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
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Shares outstanding at November 1, 2000:
Class A Common Stock 1,739,250 Shares
Class B Common Stock 7,709,250 Shares
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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 Thirty-nine
Weeks Ended October 1, 2000 and
October 3, 1999................................................................................3
Condensed Consolidated Statements of Comprehensive
Income (Unaudited) for the Thirteen and
Thirty-nine Weeks Ended October 1, 2000 and
October 3, 1999................................................................................4
Condensed Consolidated Balance Sheets
at October 1, 2000 (Unaudited) and January 2, 2000.............................................5
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Thirty-nine Weeks Ended
October 1, 2000 and October 3, 1999............................................................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 6. Exhibits and Reports on Form 8-K..........................................................................22
Signatures ..........................................................................................................24
Exhibit 11
Exhibit 27 (Electronic Filing Only)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Washington Post Company
Condensed Consolidated Statements of Income (Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------------- ----------------------------------
October 1, October 3, October 1, October 3,
(In thousands, except per share amounts) 2000 1999 2000 1999
----------- ----------- ----------- -----------
Operating revenues
Advertising $ 338,428 $ 311,891 $ 1,010,807 $ 953,494
Circulation and subscriber 151,144 147,016 447,639 431,301
Education 99,428 67,522 240,261 174,824
Other 13,452 13,151 42,057 57,552
----------- ----------- ----------- -----------
602,452 539,580 1,740,764 1,617,171
----------- ----------- ----------- -----------
Operating costs and expenses
Operating 340,733 293,948 953,031 874,765
Selling, general and administrative 131,206 118,198 405,332 351,546
Depreciation of property, plant
and equipment 30,019 26,265 87,043 76,687
Amortization of goodwill and other
intangibles 15,937 14,813 45,430 43,857
----------- ----------- ----------- -----------
517,895 453,224 1,490,836 1,346,855
----------- ----------- ----------- -----------
Income from operations 84,557 86,356 249,928 270,316
Other income (expense)
Equity in losses of affiliates, net (8,890) (59) (29,666) (1,839)
Interest income 228 186 726 646
Interest expense (14,617) (6,473) (39,757) (18,728)
Other 238 8,279 (5,169) 23,893
----------- ----------- ----------- -----------
Income before income taxes 61,516 88,289 176,062 274,288
----------- ----------- ----------- -----------
Provision for income taxes 28,000 36,600 77,300 109,500
----------- ----------- ----------- -----------
Net income 33,516 51,689 98,762 164,788
Redeemable preferred stock dividends (263) (237) (1,026) (950)
----------- ----------- ----------- -----------
Net income available for common shares $ 33,253 $ 51,452 $ 97,736 $ 163,838
=========== =========== =========== ===========
Basic earnings per common share $ 3.52 $ 5.12 $ 10.35 $ 16.25
=========== =========== =========== ===========
Diluted earnings per common share $ 3.51 $ 5.10 $ 10.33 $ 16.18
=========== =========== =========== ===========
Dividends declared per common share $ 1.35 $ 1.30 $ 5.40 $ 5.20
=========== =========== =========== ===========
Basic average number of common shares
outstanding 9,448 10,060 9,443 10,085
Diluted average number of common shares
outstanding 9,463 10,101 9,459 10,127
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The Washington Post Company
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------- ----------------------------
October 1, October 3, October 1, October 3,
(In thousands) 2000 1999 2000 1999
-------- -------- -------- --------
Net income $ 33,516 $ 51,689 $ 98,762 $ 164,788
--------- --------- --------- ---------
Other comprehensive income (loss)
Foreign currency translation adjustment (2,266) 811 (3,445) (2,536)
Change in unrealized gain on
available-for-sale securities 30,296 (42,480) 1,876 (60,167)
Less: reclassification adjustment
for realized gains included in
net income - (11,430) (197) (11,996)
--------- --------- --------- ---------
28,030 (53,099) (1,766) (74,699)
Income tax (expense) benefit related
to other comprehensive loss (11,757) 21,025 (564) 28,138
--------- --------- --------- ---------
16,273 (32,074) (2,330) (46,561)
--------- --------- --------- ---------
Comprehensive income $ 49,789 $ 19,615 $ 96,432 $ 118,227
========= ========= ========= =========
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The Washington Post Company
Condensed Consolidated Balance Sheets
October 1,
2000 January 2,
(unaudited) 2000
----------- ----------
Assets
Current assets
Cash and cash equivalents $ 29,759 $ 75,479
Investments in marketable equity securities 19,441 37,228
Accounts receivable, net 315,449 270,264
Federal and state income taxes receivable 30,738 48,597
Inventories 33,074 13,890
Other current assets 33,603 30,701
----------- -----------
462,064 476,159
Property, plant and equipment
Buildings 258,754 249,957
Machinery, equipment and fixtures 1,174,922 1,081,787
Leasehold improvements 63,362 53,048
----------- -----------
1,497,038 1,384,792
Less accumulated depreciation (716,450) (626,899)
----------- -----------
780,588 757,893
Land 37,893 37,301
Construction in progress 77,050 59,712
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895,531 854,906
Investments in marketable equity securities 190,009 165,784
Investments in affiliates 125,636 140,669
Goodwill and other intangibles,
less accumulated amortization 1,008,866 886,060
Prepaid pension cost 383,032 337,818
Deferred charges and other assets 160,476 125,548
----------- -----------
$ 3,225,614 $ 2,986,944
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 287,348 $ 254,105
Deferred subscription revenue 82,798 80,766
Dividends declared 13,000 --
Short-term borrowings 125,000 487,677
----------- -----------
508,146 822,548
Other liabilities 314,388 273,110
Deferred income taxes 149,491 114,003
Long-term debt 811,018 397,620
----------- -----------
1,783,043 1,607,281
----------- -----------
Redeemable preferred stock 13,148 11,873
----------- -----------
Preferred stock -- --
----------- -----------
Common shareholders' equity
Common stock 20,000 20,000
Capital in excess of par value 124,883 108,867
Retained earnings 2,816,433 2,769,676
Accumulated other comprehensive income (losses)
Cumulative foreign currency translation
adjustment (8,334) (4,889)
Unrealized gain on available-for-sale
securities 6,384 5,269
Cost of Class B common stock held in treasury (1,529,943) (1,531,133)
----------- -----------
1,429,423 1,367,790
----------- -----------
$ 3,225,614 $ 2,986,944
=========== ===========
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The Washington Post Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
Thirty-nine Weeks Ended
-------------------------
October 1, October 3,
(In thousands) 2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 98,762 $ 164,788
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 87,043 76,687
Amortization of goodwill and other intangibles 45,430 43,857
Net pension benefit (45,000) (63,000)
Gain on sale of marketable equity securities (4,900) (36,174)
Provision for deferred income taxes 26,222 9,335
Equity in losses of affiliates, net of
distributions 29,666 1,839
Change in assets and liabilities:
Increase in accounts receivable, net (31,263) (25,179)
Increase in inventories (19,184) (2,196)
Increase in accounts payable and
accrued liabilities 27,174 7,337
Decrease in income taxes receivable 20,037 16,487
Decrease (increase) in other assets and other
liabilities, net 25,939 (18,247)
Other (4,469) 11,830
--------- ---------
Net cash provided by operating activities 255,457 187,364
--------- ---------
Cash flows from investing activities:
Net proceeds from sale of business 1,000 2,000
Purchases of property, plant and equipment (108,585) (92,198)
Investments in certain businesses (197,061) (48,491)
Proceeds from sale of marketable securities 6,287 51,820
Purchase of marketable securities -- (23,332)
Other (14,879) (10,456)
--------- ---------
Net cash used in investing activities (313,238) (120,657)
--------- ---------
Cash flows from financing activities:
Principal payments on debt -- (387,740)
Issuance of debt 47,306 397,425
Dividends paid (39,006) (40,034)
Common shares repurchased (253) (36,083)
Proceeds from exercise of stock options 4,014 4,304
--------- ---------
Net cash provided by (used in) financing activities 12,061 (62,128)
--------- ---------
Net (decrease) increase in cash and cash equivalents (45,720) 4,579
Beginning cash and cash equivalents 75,479 15,190
--------- ---------
Ending cash and cash equivalents $ 29,759 $ 19,769
========= =========
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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 nine months of 2000, the company acquired Quest
Education Corporation (on August 2, 2000) for approximately $177.7 million,
including assumed debt and related acquisition expenses, and two cable systems
serving approximately 8,500 subscribers in South Sioux City, NE (in June 2000)
and Diamondhead, MS (in August 2000) for approximately $16.2 million.
The acquisition of Quest Education Corporation (Quest) was completed
through an all cash tender offer in which the company purchased substantially
all the outstanding stock of Quest for $18.35 per share. The acquisition was
financed through the issuance of additional short-term borrowings. The operating
results of Quest from the date of acquisition have been included in the
Education segment.
Quest, headquartered in Atlanta, Ga., is a leading provider of
post-secondary education, currently serving more than 13,400 students in 30
schools located in 11 states. Quest's schools offer bachelor degrees, associate
degrees, and diploma programs designed to provide students with the knowledge
and skills necessary to qualify them for entry-level employment, primarily in
the fields of health care, business and information technology.
During the first nine months of 1999, the company acquired various
businesses for approximately $48.5 million, including an accredited distance
education institute that offers degrees in paralegal studies and legal nurse
consulting, a provider of test preparation services for the United States
Medical Licensing Exam, and a leading producer of interactive testing and
certification programs for information technology professionals.
Dispositions. There were no business dispositions during the first nine months
of 2000. In June 1999, the company sold the assets of Legi-Slate, Inc. No
significant gain or loss arose from the sale.
Note 2: Investments in Marketable Securities
Investments in marketable equity securities at October 1, 2000 and
January 2, 2000 consist of the following (in thousands):
October 1, January 2,
2000 2000
-------- ----------
Total cost $199,123 $194,364
Gross unrealized gains 10,327 8,648
-------- --------
Total fair value $209,450 $203,012
======== ========
During the third quarter and first nine months of 2000, proceeds from
sales of marketable equity securities were $0.7 million and $6.3 million,
respectively. Gross realized gains on such sales were $0.6 million and $4.9
million, respectively. During the third quarter and first nine months of 1999,
proceeds from sales of marketable equity securities were $24.4 million and $51.8
million, respectively. Gross realized gains on such sales were $19.2 million and
$36.2 million,
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respectively. Gross realized gains upon the sale of marketable equity securities
are included in "Other, net" in the Condensed Consolidated Statements of Income.
Note 3: Borrowings
During the third quarter and first nine months of 2000, the company had
average borrowings outstanding of approximately $883.2 million and $845.3
million, respectively, at average interest rates of approximately 6.4 percent
and 6.0 percent, respectively. During the third quarter and first nine months of
1999, the company had average borrowings outstanding of approximately $446.4
million and $441.9 million, respectively, at average interest rates of
approximately 5.7 percent and 5.6 percent, respectively.
The company's borrowings outstanding at October 1, 2000 consist of $400.0
million 5.5 percent unsecured notes due February 15, 2009 and $536.0 million in
commercial paper borrowings. At October 1, 2000, the company has classified
$411.0 million of its commercial paper borrowings as long-term debt in its
condensed consolidated balance sheet as the company has the ability and intent
to finance such borrowings on a long-term basis under its credit agreements.
During the first nine months of 2000 and 1999, the company incurred
interest costs on borrowings of $38.4 million and $18.6 million, respectively,
of which $1.7 million was capitalized in 1999. No significant interest costs
were capitalized in 2000. Interest costs for construction and upgrade of
qualifying assets are capitalized.
On September 20, 2000, the company added to its existing $500 million
revolving credit facility with a one-year $250 million revolving credit
facility. The primary purpose of the company's revolving credit facilities is to
support the issuance of commercial paper borrowings. Under the terms of the $250
million revolving credit facility, interest on borrowings are at floating rates,
and the company is required to pay a variable facility fee, ranging from 0.03
percent to 0.05 percent per annum, on the used and unused portion of the
facility. The credit facility also contains certain covenants, including a
financial covenant that the company maintain at least $850.0 million of
consolidated shareholder's equity.
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Note 4: Business Segments.
The following table summarizes financial information related to each of
the company's business segments. The 2000 and 1999 asset information is as of
October 1, 2000 and January 2, 2000.
Third Quarter Period
- --------------------
(in thousands) Other
Businesses
Newspaper Television Magazine Cable and Corporate
Publishing Broadcasting Publishing Television Education Office Consolidated
---------- ------------ ---------- ---------- ------------- -------------- ------------
2000
- ----
Operating revenues $227,634 $ 88,857 $ 95,911 $ 90,622 $ 99,428 $ - $ 602,452
Income (loss) from
operations $ 34,994 $ 41,906 $ 4,577 $ 15,923 $ (6,668) $ (6,175) $ 84,557
Equity in losses of
affiliates (8,890)
Interest expense, net (14,389)
Other income, net 238
----------
Income before income
taxes $ 61,516
==========
Depreciation expense $ 9,683 $ 3,335 $ 1,270 $ 11,945 $ 3,786 $ - $ 30,019
Amortization expense $ 389 $ 3,534 $ 1,697 $ 7,401 $ 2,916 $ - $ 15,937
Pension credit (expense) $ 4,572 $ 1,346 $ 9,001 $ (170) $ (172) $ - $ 14,577
Identifiable assets $714,847 $437,394 $438,543 $729,951 $466,895 $ 102,898 $2,890,528
Investments in
marketable equity
securities 209,450
Investments in
affiliates 125,636
----------
Total assets $3,225,614
==========
Other
Businesses
Newspaper Television Magazine Cable and Corporate
Publishing Broadcasting Publishing Television Education Office Consolidated
---------- ------------ ---------- ---------- ------------- ----- ------------
1999
- ----
Operating revenues $212,459 $ 76,677 $ 91,850 $ 84,799 $ 73,795 $ - $ 539,580
Income (loss) from
operations $ 38,738 $ 34,166 $ 15,156 $ 17,584 $(13,674) $ (5,614) $ 86,356
Equity in losses of
affiliates (59)
Interest expense, net (6,287)
Other expense, net 8,279
---------
Income before income
taxes $ 88,289
=========
Depreciation expense $ 8,659 $ 2,958 $ 1,219 $ 10,816 $ 2,505 $ 108 $ 26,265
Amortization expense $ 388 $ 3,570 $ 1,478 $ 7,501 $ 1,876 $ - $ 14,813
Pension credit (expense) $ 7,200 $ 2,246 $ 12,212 $ (149) $ (151) $ (14) $ 21,344
Identifiable assets $672,609 $444,372 $409,404 $718,230 $265,960 $132,688 $2,643,263
Investments in
marketable equity
securities 203,012
Investments in
affiliates 140,669
---------
Total assets $2,986,944
=========
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Nine Month Period
- -----------------
(in thousands) Other
Businesses
Newspaper Television Magazine Cable and Corporate
Publishing Broadcasting Publishing Television Education Office Consolidated
---------- ------------ ---------- ---------- ------------- -------------- ------------
2000
- ----
Operating revenues $680,448 $ 257,017 $ 296,225 $ 266,813 $ 240,261 $ - $ 1,740,764
Income (loss) from
operations $108,456 $ 117,050 $ 28,012 $ 46,652 $ (32,650) $ (17,592) $ 249,928
Equity in losses of
affiliates (29,666)
Interest expense, net (39,031)
Other expense, net (5,169)
-----------
Income before income
taxes $ 176,062
===========
Depreciation expense $ 28,739 $ 9,676 $ 3,847 $ 35,525 $ 9,256 $ - $ 87,043
Amortization expense $ 1,170 $ 10,601 $ 5,091 $ 22,204 $ 6,364 $ - $ 45,430
Pension credit (expense) $ 13,715 $ 4,037 $ 27,004 $ (510) $ (516) $ - $ 43,730
Other
Businesses
Newspaper Television Magazine Cable and Corporate
Publishing Broadcasting Publishing Television Education Office Consolidated
---------- ------------ ---------- ---------- -------------- -------------- ------------
1999
- ----
Operating revenues $ 641,211 $ 247,995 $ 283,152 $ 248,718 $ 192,252 $ 3,843 $ 1,617,171
Income (loss) from
operations $ 114,729 $ 114,536 $ 41,845 $ 47,975 $ (28,010) $ (20,759) $ 270,316
Equity in losses of
affiliates (1,839)
Interest expense, net (18,082)
Other income, net 23,893
-----------
Income before income
taxes $ 274,288
===========
Depreciation expense $ 25,235 $ 8,571 $ 3,726 $ 32,325 $ 6,510 $ 320 $ 76,687
Amortization expense $ 1,147 $ 10,689 $ 4,434 $ 22,394 $ 5,193 $ - $ 43,857
Pension credit (expense) $ 21,600 $ 6,738 $ 36,636 $ (447) $ (453) $ (42) $ 64,032
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, recycling operations and the company's
electronic media publishing business (primarily washingtonpost.com).
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, the publication of Arthur Frommer's Budget Travel, and the publication
of business periodicals for the computer services industry and the
Washington-area technology community.
Cable television operations consist of over 50 cable systems offering
basic cable and pay television services to 735,700 subscribers in midwestern,
western, and southern states.
Educational products and services are provided through the company's
wholly-owned subsidiary Kaplan, Inc. Kaplan's five major lines of businesses
include Test Preparation and Admissions, providing test preparation services for
college and graduate school entrance exams; Quest Education Corporation, a
provider of post-secondary education offering bachelor degrees, associate
degrees and diploma programs primarily in the fields of health care, business
and information technology; Kaplan Professional, providing education services to
business people and other professionals; SCORE!, offering multi-media learning
and private tutoring to children in kindergarten through twelfth grade; and
Kaplancollege.com, Kaplan's distance learning business, including Concord
University School of Law, the country's first online law school.
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Other businesses and corporate office for 2000 includes the expenses of
the company's corporate office. Through the first half of 1999, the other
businesses and corporate office segment also includes the result of Legi-Slate,
Inc., which was sold in June 1999.
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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.
THIRD QUARTER COMPARISONS
Net income for the third quarter of 2000 was $33.5 million ($3.51 per
share), a decrease of $18.2 million, or 35 percent, from net income of $51.7
million ($5.10 per share) in the third quarter last year. The decline in third
quarter earnings was primarily caused by increased costs associated with the
development of new businesses (impact of $4.0 million or $0.53 per share),
higher interest expense (impact of $4.9 million or $0.54 per share), a reduced
pension credit (impact of $3.6 million or $0.30 per share) and lower earnings at
the magazine publishing division (impact of $4.5 million or $0.46 per share).
These declines were offset in part by higher operating income at the company's
television broadcasting operations. In addition, the third quarter of 1999
included gains from the sale of marketable equity securities which did not recur
in 2000 (impact of $3.7 million or $0.35 per share).
Revenue for the third quarter of 2000 was $602.5 million, up 12 percent
from $539.6 million in 1999. Advertising and circulation and subscriber revenues
increased 9 percent and 3 percent, respectively, as compared to last year.
Education revenues increased 47 percent over 1999. The increase in advertising
revenues is primarily attributable to the contribution of political and Olympic
advertising at the company's television broadcasting subsidiary, as well as
advertising gains at The Washington Post newspaper, Newsweek magazine and
washingtonpost.com. The increase in circulation and subscriber revenues is
primarily attributable to higher subscriber revenues at Cable One, mainly due to
rate increases established to offset the rising cost of programming.
Approximately 75 percent of the growth in education revenue is attributable to
acquisitions (principally Quest -- acquired August 2, 2000). The remaining
increase in education revenue is due to growth at Score! and higher sales at
Kaplan, Inc.'s test preparation division.
Costs and expenses for the third quarter of 2000 increased 14 percent to
$517.9 million, from $453.2 million in the third quarter of 1999. The increase
in costs and expenses is attributable to acquisitions completed after September
1999, increased spending for
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new business initiatives, higher depreciation expense and a lower pension
credit.
The increased spending for new business initiatives occurred mainly at
Kaplan, Inc., and Washingtonpost.Newsweek Interactive. At Kaplan, new business
spending was focused on the build-out of various distance learning websites
(including kaptest.com and kaplancollege.com) and the marketing and expansion of
Score! Educational Centers. In addition, Kaplan continued the development and
marketing of eScore.com, an educational services website designed to help
parents with the academic advancement of their children. At
Washingtonpost.Newsweek Interactive, increased spending was dedicated
principally to marketing and sales initiatives.
The increase in depreciation expense is mainly due to capital spending at
Cable One, The Washington Post, and Kaplan. The company's operating expenses for
the third quarter of 2000 were reduced by $15.0 million of pension credits,
compared to $21.0 million during the third quarter of 1999. The decline in the
2000 pension credit is mostly attributable to lower investment returns generated
by pension funds in 1999.
Operating income declined 2 percent to $84.6 million from $86.4 million
in 1999.
NEWSPAPER PUBLISHING. At the newspaper division, revenues increased 7 percent in
the third quarter of 2000 to $227.6 million; division operating income for the
third quarter declined 10 percent to $35.0 million. The overall decline in
division operating income is attributable to increased spending for the
marketing and advancement of washingtonpost.com, lower pension credits and
higher newsprint expense, offset in part by higher print and on-line advertising
revenues. Newsprint expense increased 21 percent in the third quarter of 2000
mostly due to price increases.
Print advertising revenues at The Washington Post newspaper increased 6
percent for the third quarter of 2000, due principally to rate increases.
Advertising volume at The Washington Post totaled 814,100 inches in the third
quarter of 2000, up 1 percent from 806,900 inches in the third quarter of 1999.
Online advertising revenues increased approximately 130 percent. For the third
quarter of 2000, Post daily and Sunday circulation declined 1.5 percent as
compared to the third quarter of 1999.
TELEVISION BROADCASTING. Revenues at the broadcast division totaled $88.9
million for the third quarter of 2000, a 16 percent increase over the third
quarter of 1999. Division operating income for the quarter totaled $41.9
million, an increase of 23 percent over the prior year. Political and Olympics
advertising in the third quarter
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of 2000 totaled approximately $16 million, accounting for most of the
improvement in the 2000 operating results.
MAGAZINE PUBLISHING. Revenues at the magazine division were $95.9 million for
the third quarter of 2000, a 4 percent increase over the third quarter of 1999;
division operating income for the third quarter of 2000 declined 70 percent to
$4.6 million. The 70 percent decline in third quarter operating results occurred
primarily at Newsweek, where reduced pension credits and higher subscription
acquisition costs outpaced improvements in domestic and international edition
advertising revenues.
CABLE TELEVISION. At the cable division, third quarter 2000 revenues of $90.6
million were 7 percent higher than 1999; division cash flow (operating income
excluding depreciation and amortization expense) for the quarter totaled $35.3
million, a 2 percent decline from the third quarter of last year.
Cable division operating income decreased 9 percent in the third quarter.
The decline in operating income is mostly due to an increase in programming
expense, additional costs associated with the launch of new services, and higher
depreciation expense. These factors were offset in part by higher subscriber
revenues.
The increase in depreciation expense is due to capital spending for
system rebuilds and upgrades which will enable the cable division to offer new
digital and high-speed cable modem services to its subscribers. The cable
division began its roll-out plan for these services in the second and third
quarters of this year.
At the end of the third quarter of 2000, there were 735,700 basic
subscribers, an increase of 1 percent compared to 730,200 basic subscribers at
the end of the third quarter of 1999.
EDUCATION. Educational products and services are provided through the company's
wholly-owned subsidiary Kaplan, Inc. Kaplan's five major lines of business
include: Test Preparation and Admissions, providing test preparation services
for college and graduate school entrance exams; Quest Education Corporation
(acquired August 2, 2000), a provider of post-secondary education offering
bachelor degrees, associate degrees and diploma programs primarily in the fields
of health care, business and information technology; Kaplan Professional,
providing education services to business people and other professionals; SCORE!,
offering multi-media learning and private tutoring to children in kindergarten
through twelfth grade; and Kaplancollege.com, Kaplan's distance learning
business, including Concord University School of Law, the country's first online
law school.
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Excluding the operating results of the career fair and HireSystems
businesses from 1999 (these businesses were contributed to BrassRing in the
third quarter of 1999), education division revenues increased 48 percent to
$99.4 million from $67.3 million in 1999. Operating losses for the quarter
totaled $6.7 million, compared to operating income of $7.1 million in the third
quarter 1999. Approximately 75 percent of the increase in revenue is attributed
to acquisitions (principally Quest -- acquired August 2, 2000). The remaining
improvement in revenue is mostly due to growth at Score! and the test
preparation business. The decline in operating income is primarily attributable
to marketing and expansion activities at Score!, start-up costs associated with
eScore.com and the development of various distance learning initiatives
(primarily kaplancollege.com and kaptest.com). These factors were offset in part
by operating income generated by acquisitions completed after the third quarter
of 1999 and the test preparation business.
At the end of September 2000, Score! operated 115 learning centers,
compared to 81 centers at the end of September 1999.
Including the results of the career fair businesses and HireSystems,
division revenues totaled $99.4 million, a 35 percent increase in division
revenues of $73.8 million last year. Division operating losses totaled $6.7
million in the third quarter of 2000 compared to operating losses of $13.7
million in 1999.
OTHER BUSINESSES AND CORPORATE OFFICE. Operating losses for the third quarter of
2000 totaled $6.2 million, representing a 10 percent improvement as compared to
the third quarter of last year. The reduction in 2000 losses is primarily
attributable to reduced spending at the company's corporate office.
EQUITY IN LOSSES OF AFFILIATES. The company's equity in losses of affiliates in
the third quarter of 2000 was $8.9 million, compared to losses of $0.1 million
for the third quarter of 1999. The company's affiliate investments consist of a
42 percent interest in BrassRing, Inc. (formed in late September 1999), a 50
percent interest in the International Herald Tribune (IHT) and a 49 percent
interest in Bowater Mersey Paper Company Limited. The decline in 2000 affiliate
results is primarily attributable to BrassRing, Inc., which is in the
integration and marketing phase of its operations. BrassRing accounted for
approximately $9.8 million of the total 2000 third quarter equity in losses of
affiliates.
NON-OPERATING ITEMS. The company recorded other non-operating income of $0.2
million for the third quarter of 2000, compared to $8.3 million in the third
quarter of 1999. The company's 1999 other non-operating income consists
principally of gains on the sale of marketable securities (mostly various
Internet-related securities).
16
NET INTEREST EXPENSE. For the third quarter of 2000, the company incurred net
interest expense of $14.4 million, compared to net interest expense of $6.3
million for the same period in the prior year. At October 1, 2000, the company
had $936.0 million in borrowings outstanding.
INCOME TAXES. The effective tax rate in the third quarter of 2000 was 45.5
percent, compared to 41.5 percent in 1999. The increase in the effective tax
rate is principally due to the non-recognition of benefits from state net
operating loss carryforwards generated by certain of the company's new business
start-up activities.
EARNINGS PER SHARE. The calculation of diluted earnings per share for the third
quarter of 2000 was based on 9,463,000 weighted average shares outstanding,
compared to 10,101,000 for the third quarter of 1999. The company made no
significant repurchases of its stock during the third quarter of 2000.
NINE MONTH COMPARISONS
For the first nine months of 2000, net income totaled $98.8 million
(10.33 per share), compared with net income of $164.8 million ($16.18 per share)
for the same period of 1999. Consistent with the company's results for the third
quarter of 2000, the decline in the company's nine-month earnings was primarily
the result of new business development, the absence of non-recurring gains from
the sale of marketable securities which occurred in 1999, higher interest
expense, a reduced pension credit and lower earnings at the magazine publishing
division. These factors were offset in part by increased operating income at The
Washington Post newspaper and the company's broadcast operations.
Revenues for the first nine months of 2000 were $1,740.8 million, up 8
percent over revenue of $1,617.2 million in the first nine months of 1999.
Advertising revenues increased 6 percent and circulation and subscriber revenues
increased 4 percent over the prior year. Education revenues increased 37
percent, while other operating revenues decreased 27 percent as compared to last
year. The increase in advertising revenues is due principally to increased
advertising at The Washington Post newspaper, washingtonpost.com and the
company's broadcast television stations. The increase in circulation and
subscriber revenues is attributable to higher cable subscriber revenues (mainly
due to rate increases). Approximately one-half of the growth in education
revenues arose from acquisitions completed after September 1999, with the
remaining increase due mostly to growth at Score! and Kaplan's test preparation
business. The decrease in other revenues is primarily due to the absence of
revenue generated by Kaplan's career fair business (contributed to BrassRing in
September 1999) and Legi-Slate (sold in June 1999).
17
Costs and expenses for the first nine months of 2000 increased 11 percent
to $1,490.8 million, from $1,346.9 million in 1999. The increase in costs and
expenses is attributable to acquisitions completed after September 1999
(principally Quest), increased spending for new business initiatives, higher
depreciation expense and lower pension credits.
The increased spending for new business initiatives occurred mainly at
Kaplan, Inc., and Washingtonpost.Newsweek Interactive. At Kaplan, new business
spending was focused on the build-out of various distance learning websites
(including kaptest.com and kaplancollege.com) and the marketing and expansion of
Score! Educational Centers. In addition, Kaplan continued the development and
marketing of eSCORE.com, an educational services website designed to help
parents with the academic advancement of their children. At
Washingtonpost.Newsweek Interactive, increased spending was dedicated
principally to marketing and sales initiatives.
The increase in depreciation expense is mainly due to capital spending at
Cable One, The Washington Post, and Kaplan.
The company's expenses for the first nine months of 2000 were reduced by
$45.0 million of pension credits, compared to $63.0 million during the first
nine months of 1999. Management expects the 2000 annual pension credit will
approximate $60.0 million, compared to $81.7 million in 1999. The decline in the
2000 pension credit is mostly attributable to lower investment returns generated
by pension funds in 1999.
Operating income of $249.9 million decreased 8 percent from operating
income of $270.3 in 1999.
NEWSPAPER PUBLISHING. Newspaper division revenues of $680.4 million for the
first nine months of 2000 were up 6 percent over the comparable period of 1999;
division operating income for the first nine months of 2000 totaled $108.5
million, a 5 percent decrease from 1999. The decline in operating income for the
first nine months of 2000 is due to increased spending for the marketing and
advancement of washingtonpost.com, reduced pension credits and higher newsprint
expense, offset in part by higher print and on-line advertising revenues. For
the first nine months of 2000, newsprint expense increased 4 percent over 1999,
due to increases in price and consumption.
Print advertising revenues at The Washington Post newspaper increased 5
percent over the first nine months of 1999, due to higher rates and volume.
Advertising volume at The Washington Post totaled 2,416,800 inches for the first
nine months of 2000, up 2 percent from 2,366,300 inches in 1999. Online
advertising revenues increased approximately 130 percent.
18
For the first nine months of 2000, Post daily circulation remained
essentially unchanged, while Sunday circulation declined 1 percent.
TELEVISION BROADCASTING. Revenues at the broadcast division totaled $257.0
million through the first nine months of 2000, a 4 percent increase over 1999.
Division operating income totaled $117.0 million for the first nine months of
2000, a 2 percent improvement compared to the same period in 1999. The broadcast
division's 2000 operating results benefited from approximately $16 million of
political and Olympics advertising, which accounted for the improvement in
operating results versus last year.
MAGAZINE PUBLISHING. Magazine division revenues totaled $296.2 million for the
first nine months of 2000, a 5 percent increase over 1999. Magazine division
operating income for the first nine months of 2000 totaled $28.0 million, a 33
percent decrease from 1999. The decline in division operating results occurred
at Newsweek, where reduced pension credits and higher subscription acquisition
costs outpaced improvements in domestic and international edition advertising
revenues.
CABLE TELEVISION. Cable division revenues of $266.8 million increased 7 percent
during the first nine months of 1999; division cash flow (operating income
excluding depreciation and amortization expense) of $104.4 million increased 2
percent over last year. Cable division operating income declined 3 percent as
compared to 1999. The decline in cable division operating income is mostly due
to additional costs associated with the launch of new services, an increase in
programming expenses and higher depreciation expense, offset in part by
increased subscriber revenue.
The increase in depreciation expense is due to capital spending for
system rebuilds and upgrades which will enable the cable division to offer new
digital and high-speed cable modem services to its subscribers. The cable
division began its roll-out plan for these services in the second and third
quarters of this year.
EDUCATION. Excluding the operating results of the career fair and HireSystems
businesses from 1999 (these businesses were contributed to BrassRing in the
third quarter of 1999), education division revenue increased 37 percent to
$240.3 million for the first nine months of 2000. Operating losses through the
first nine months of 2000 totaled $32.6 million, compared to operating losses of
$6.4 million for the same period in 1999. Approximately one-half of the increase
in revenue is attributable to acquisitions (principally Quest). The remaining
improvement in revenue is mostly due to growth at Score! and Kaplan's test
preparation business. The decline in 2000 operating results is primarily
attributable to marketing and expansion
19
activities at Score!, start-up costs associated with eScore.com and the
development of various distance learning initiatives (primarily
kaplancollege.com and kaptest.com), offset in part by operating income generated
by acquisitions completed after the third quarter of 1999 and the test
preparation business.
Including the operating results of the career fair and HireSystems
businesses, revenue for the first nine months of 2000 increased 25 percent to
$240.3 million. Operating losses totaled $32.6 million for the first nine months
of 2000, compared to losses of $28.0 million in 1999.
OTHER BUSINESSES AND CORPORATE OFFICE. Operating losses for the first nine
months of 2000 totaled $17.6 million, a 15 percent improvement compared to
operating losses of $20.8 million during the same period in 1999. The reduction
in 2000 losses is primarily attributable to the absence of losses generated by
Legi-State (sold in June 1999) and reduced spending at the company's corporate
office.
EQUITY IN LOSSES OF AFFILIATES. For the first nine months of 2000, the company's
equity in losses of affiliates totaled $29.7 million, compared to losses of $1.8
million in 1999. The decline in 2000 affiliate results is primarily attributable
to BrassRing, Inc., which is in the integration and marketing phase of its
operations. BrassRing accounted for approximately $28.1 million of the total
equity in losses of affiliates during the first nine months of 2000.
NON-OPERATING ITEMS. The company recorded other non-operating expense of $5.2
million through the first nine months of 2000, compared to non-operating income
of $23.9 million for the same period of the prior year. The 1999 non-operating
income was comprised mostly of non-recurring gains arising for the sale of
marketable securities (mostly various Internet related securities).
NET INTEREST EXPENSE. Through the first nine months of 2000, the company
incurred net interest expense of $39.0 million, compared to $18.1 million for
the same period in 1999. The increase in net interest expense is attributable to
borrowings executed after the third quarter of 1999 to fund capital
improvements, business acquisitions, and common stock repurchases (principally
in December 1999).
INCOME TAXES. The effective tax rate through the first nine months of 2000
increased to 43.9 percent from 39.9 percent through the first nine months of
1999. The increase in the effective tax rate is principally due to the
non-recognition of benefits from state net operating loss carryforwards
generated by certain of the company's new business start-up activities.
20
EARNINGS PER SHARE. The calculation of diluted earnings per share for the first
nine months of 2000 was based on 9,459,000 weighted average shares outstanding,
compared to 10,127,000 for the first nine months of 1999. The company made no
significant repurchases of its stock during the first nine months of 2000.
FINANCIAL CONDITION: CAPITAL RESOURCES AND LIQUIDITY
ACQUISITIONS. In the first nine months of 2000, the company acquired various
businesses for approximately $197.1 million, principally consisting of Quest
Education Corporation (on August 2, 2000) for approximately $177.7 million,
including assumed debt and acquisition related expenses, and two cable systems
serving approximately 8,500 subscribers in South Sioux City, NE (in June 2000)
and Diamondhead, MS (in August 2000) for approximately $16.2 million.
INVESTMENTS IN MARKETABLE EQUITY SECURITIES. During the first nine months of
2000, the company received $6.3 million from the sale of certain marketable
equity securities.
At October 1, 2000, the fair value of the company's investments in
marketable equity securities was $209.5 million, of which $190.0 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 nine months of 2000, the company's
capital expenditures totaled approximately $108.6 million, the most significant
portion of which related to plant upgrades at the company's cable subsidiary.
The company anticipates it will spend approximately $155.0 million throughout
2000 for property and equipment, primarily for various projects at the cable,
newspaper and education divisions.
LIQUIDITY. During the first nine months of 2000, the company's commercial paper
borrowings, net of repayments, increased by $47.3 million. The net increase is
principally due to the Quest acquisition previously discussed.
During the first nine months of 2000, the company had average borrowings
outstanding of approximately $845.3 million at an average annual interest rate
of 6.0 percent.
On September 20, 2000, the company added to its existing $500 million
revolving credit facility with a one-year $250 million revolving credit
facility. The purpose of the company's revolving credit facilities is to support
the issuance of commercial paper borrowings.
21
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 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). This bulletin summarizes certain of the Staff's views in the application
of generally accepted accounting principles to revenue recognition in financial
statements. The required implementation of SAB 101 has been deferred until the
fourth quarter of 2000, although adoption would be as of January 1, 2000. The
company is monitoring on-going interpretations of SAB 101, but at this time
believes that there will be no material impact on the company's financial
statements.
FORWARD-LOOKING STATEMENTS
All public statements made by the company and its representatives which
are not statements of historical fact, including statements in this quarterly
report, are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are subject
to certain risks and uncertainties that could cause actual results and
achievements to differ materially from those expressed in the forward-looking
statements. These risks and uncertainties include: changes in prevailing
economic conditions, particularly in the specific geographic and other markets
served by the company; actions of competitors; changes in customer preferences;
changes in communications and broadcast technologies; and the effects of
changing cost or availability of raw materials, including changes in the cost or
availability of newsprint and magazine body paper. They also include other risks
detailed from time to time in the company's publicly-filed documents, including
the company's Annual Report on Form 10-K for the period ended January 2, 2000.
22
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).
4.4 364-Day Credit Agreement dated as of September 20, 2000, among the
company, Citibank, N.A., Suntrust Bank and the Chase Manhattan
Bank.
11 Calculation of Earnings per Share of Common Stock.
27 Financial Data Schedule - October 1, 2000
(Electronic filing only).
23
(b) On June 27, 2000, the company filed a report on Form 8-K related
to the announcement of its agreement to purchase all the
outstanding shares of Quest Education Corporation in an all cash
tender offer to be commenced by Kaplan, Inc., a wholly-owned
subsidiary of the company.
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: November 8, 2000 /s/ Donald E. Graham
---------------- ----------------------------------------------
Donald E. Graham, Chairman &
Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 2000 /s/ John B. Morse, Jr.
---------------- -----------------------------------------------
John B. Morse, Jr., Vice President-Finance
(Principal Financial Officer)