Contact: Rima Calderon For Immediate Release
202-334-6617 September 29, 2003
THE WASHINGTON POST COMPANY
OFFERS TO REPURCHASE KAPLAN OPTION SHARES
WASHINGTON -- The Washington Post Company (NYSE: WPO) today offered $138
million for approximately 55% of the option shares held by managers in the
stock-option plan of its subsidiary, Kaplan, Inc.
The company's offer to Kaplan shareholders included a 10% premium over
the current valuation if 90% of the eligible shares are tendered by October
28, 2003. If fewer shares are tendered, the offer will lapse.
Post Company CEO Donald Graham wrote the following letter to shareholders
explaining the transaction.
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September 29, 2003
TO OUR SHAREHOLDERS:
Today we are offering to repurchase about 55% of the option shares in the
stock option compensation plan of our subsidiary Kaplan, Inc. (about 6% of
Kaplan's total stock). I write about this offer at some length because the
Kaplan compensation plan is both complex and significant to the company.
If our offer is successful, the company will spend approximately $138
million to buyout these options, including a 10% premium over the share price,
contingent upon the tendering of the 90% of eligible shares. Most of this will
be paid out in the fourth quarter of 2003 from cash generated by operations or
from commercial paper borrowings.
As of June 30, 2003, the company had accrued approximately $103 million
to meet the estimated liabilities of the whole plan. The company will record
additional accruals of approximately $75 million and $13 million in the third
and fourth quarters, respectively.
Jonathan Grayer, Kaplan's CEO, and a small number of other key Kaplan
executives will continue to hold some options in the Kaplan compensation plan.
Roughly half of the remaining options expire in 2007, half in 2011.
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The Post Company bought Kaplan from its founder, Stanley Kaplan, in 1984
for $45 million. At the time, Kaplan was earning about $8 million a year.
Strong competition and less-than-successful attempts at finding the right
manager to succeed Stanley affected our results, and by the early `90s, Kaplan
was losing money. In 1994, the 29-year-old Jonathan Grayer became CEO. Kaplan
immediately started taking aggressive steps to improve the business.
In 1997, although losses were continuing, Post Company management was
satisfied enough with the trends of the business to implement the Kaplan
compensation plan. Good young managers were at a premium and we wanted the
best possible chance of keeping our team together. The program allowed 64
current Kaplan employees the option to acquire stock in Kaplan. Fifteen
percent of the stock of Kaplan was optioned (subsequent equity purchases by
The Washington Post Company to finance growth reduced this to 10.6%).
The Post Company Compensation Committee, advised by an outside firm,
values the stock annually as if Kaplan were a public company. After a vesting
period, Kaplan option holders can exercise their options and sell the stock to
us at any time. Because there is no public market for the stock, we are
required by GAAP to expense a "stock compensation charge." The Committee
establishes the annual valuation of Kaplan by considering several factors,
including Kaplan's budget for the forthcoming year, its earnings for the
previous years, and the price/earnings multiples of comparable publicly traded
education companies, which can affect valuations meaningfully.
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Kaplan's revenues and operating results have improved quite rapidly.
KAPLAN'S REVENUES AND OPERATING RESULTS
(in millions)
2000 2001 2002 2003 (6 months)
---- ---- ---- ---------------
Revenues $353.8 $493.7 $621.1 $373.3
Operating (loss)/income ($35.8) ($3.0) $55.0 $49.5
before stock compensation charge*
Stock compensation charge ($6.0) ($25.3) ($34.5) ($30.0)
Operating (loss)/income ($41.8) ($28.3) $20.5 $19.5
*Results before stock compensation expenses are not GAAP figures, but we
include them because they are one important way we measure Kaplan's operating
results.
At the time we established the plan, we never in our wildest dreams
thought Kaplan could grow so fast in revenues and profits. This year Kaplan's
revenues are expected to be greater than those of The Washington Post
newspaper. While the payments we propose today are large, we believe they are
well-justified by Kaplan's results and prospects. This offer provides both
sides with a couple of valuable benefits.
For Post Company shareholders, these payments reduce the impact of a
possible higher valuation caused not only by improvement in our own business,
but by still-higher multiples at education companies. Likewise, Kaplan option
holders realize a high price, and, for most, their future incentive
compensation will depend on Kaplan's own results, not on someone else's
multiple.
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Post Company earnings will still be affected by the annual valuation, and
charges for the cost of the plan (albeit 55% smaller than they would have
been) will still be recorded. As usual, what motivates us is not the effect on
Kaplan's reported numbers. (These should improve.) The potential impact on our
company's real economic value caused by gyrations in some other company's
stock price will be greatly diminished. If the offer is accepted, The
Washington Post Company will own approximately 95% of Kaplan on a
fully-diluted basis. We intend to have no further dilution in the future.
Under the compensation plan, Kaplan's management team did indeed stay
together almost completely. From the discussions we've had, the company
expects Kaplan will be run by Jonathan and today's top management team for
years to come.
Donald E. Graham
Chairman and Chief Executive Officer
The Washington Post Company
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