The acclaim Newsweek received for its coverage of September 11 and subsequent events culminated last week with the National Magazine Award for General Excellence, the industry's most sought-after prize.

In making the award, the judges said: "Through its coverage of September 11 and the weeks that followed, Newsweek demonstrated that the weekly news magazine is not only a vital form but something of a miracle. The magazine offered instant perspective on incomprehensible horror; it broke news, reliably, amid a frenzy of misinformation; and it captured both the tragedy and the renewal of hope, in words and glorious photographs. This was the year in which weeklies had the opportunity to rise to greatness - and Newsweek truly did."

The Post had an excellent year as well. It won two Pulitzers this spring, in national reporting for its coverage of the war on terrorism, and in investigative reporting, for a series on the failures of the DC child protective system. The Post had five other Pulitzer finalists.

It was a gratifying conclusion to a year when The Post, under Bo Jones's leadership, reacted to a drastic downturn in revenues very differently from the rest of the industry. The Post was one of a handful of papers that laid off no one and made only minimal cuts in newshole, though there were newspaper-wide efforts at expense control. The Pulitzers were a gratifying recognition of what the newspaper's staff does at its best.

Turning to business matters: The course we're on as a company has been the same for the 30 years we've been public. But it is now so different from that of most public companies that perhaps our first principles deserve yet another repetition.

This is a company you should invest in if you're looking for one that is seeking to build value for shareholders over the long term, under the scrutiny of a Board of very tough graders.

This is not a company you should invest in if you are primarily interested in short-term results or short-term movement in the price of the stock.

Our excellent division management in each of five different businesses has given us a small advantage: when cash is available, we can make acquisitions in any of the five different fields, depending on where value is best and without a preconceived notion of where we want to grow, but with complete confidence that our managers can run acquired companies well.

At the same time, however, we don't make acquisitions - or do anything else - with the purpose of creating short-term movement in our stock price.

We've taken the heretical view that it isn't an important part of company management's job to seek the highest stock price today. It is emphatically our job to create the highest value possible for the company in the long term, and this definitely, if achieved, ought to affect the stock price.

We continually remind shareholders of this, since it leads us to behave very differently from many other public companies in a number of ways:

First, we don't put any particular emphasis on quarterly operating results and never ask divisional management to try to change results in any way to affect what we report for a given quarter.

We don't forecast quarterly or annual results ever, and we pay no attention to the forecasts of others.

We try to make sure that our shareholders first and foremost - and others to the extent they're interested - know of everything important we're doing. But we don't randomly seek publicity about the company.

This philosophy has brought us a shareholder base that also is very unusual for a public company. Most of our stock is owned by people who've held it for years and who understand our corporate aims.

In the last five years, much of our effort to build long-term value as a company has been in growing the results of Cable ONE and Kaplan. As I indicated in the 2001 annual report, those efforts didn't directly lead to improved profits in either division last year. But 2002 looks like a different matter.

In the case of Cable ONE, under Tom Might's absolutely brilliant leadership, I'm very pleased to report that operating income growth is turning out to be even better than we expected. It was up 4 percent in the first quarter. At the same time, capital spending was down 25 percent - and will be down well over 50 percent by the end of the year. (By the way, Cable ONE's capital spending for the past four years was the lowest, per sub, of all major cable companies.)

Many cable companies report their results in "cash flow." We don't because capital spending is so large and so necessary in this business. But if you take free cash flow - cash flow from operations minus capital expenditures - Cable ONE's results improved by $13.9 million in the first quarter.

The annual report chronicled Cable ONE's unique strategy that provided the foundation for the strong cash flow growth we are experiencing now and will continue to experience for several more years. It is a company built around having the best customer service in its industry. Today I'd like to discuss three key aspects of its strategy because of their likely impact on cash flow growth rates.

First, digital cable. As you know, Cable ONE was the next-to-last major MSO to launch digital cable, two to three years after most others. But by launching with superior technology and product - including about 200 channels - and the boldest marketing plan that the industry may ever see, Cable ONE finished 2001 with the highest digital penetration in the industry, 32 percent. And they did it in just 16 months. It has taken the rest of the industry four years to reach 25 percent digital penetration.

You may recall that the bold and expensive marketing strategy consisted of giving away digital cable service free for 12 months to customers willing to self-install it. This saved millions in marketing and millions in installation truck roll expense.

The offer expired at the end of 2001. Renewal rates since the free year started expiring have been right on target and digital penetration has held at 32 percent throughout the first quarter. Currently 36 percent of our digital customers are in a paying status. We expect an additional 6 percent of the base to roll over to a paying status each month.

Second, cable modems. Cable ONE also was the last major MSO to launch cable modem service. But by the end of 2001, Cableone.net's availability, 89 percent of homes passed, exceeded all other MSOs except Cox. The usual range is 60 to 70 percent.

The growth rate of cable modem customers has jumped dramatically, from a 2 percent penetration annual rate one year ago, to a 7 percent rate year-to-date. Cable ONE just passed the 50,000 cable modem customer milestone and is adding at a rate of about 50,000 incremental modem customers per year.

Many other MSOs wrote off hundreds of millions of dollars in the past six months rushing to re-launch their Internet services before their bankrupt partner, @Home, ceased operating on February 28. @Home is the third cable ISP partner to go out of business in the past year. Fortunately, Washington Post shareholders have escaped these expenses.

One of the unique elements of Cable ONE's high-speed modem launch is that we were the only MSO to figure out how to launch totally on our own, without revenue sharing technology and content partners. @Home, for instance, took 50 percent of revenues from cable companies - we don't pay a cent to anyone.

The other unique element of the Cable ONE modem strategy, which supports the high cash flow rate, is 100 percent self-installation, saving millions in truck roll expense once again. I want to report that the self-install concept is still working fine and is now emulated by many other MSOs.

Finally, Idaho. I told you that a year ago we traded higher-profit systems in California and Indiana for a larger number of lower-profit subscribers in Idaho in the belief that we'd bring those systems up to Cable ONE profit standards. Indeed, we expect that the net cash flow running rate will turn positive in the second quarter of 2002, just one year after closing.

As I have often pointed out, Cable ONE is not a typical cable company. It focuses on large non-urban markets almost exclusively and provides extraordinary levels of customer service with unique strategies. Fortunately for shareholders, Cable ONE is different in a few other ways, too.

While Wall Street is starting to question the debt structure and cash flow accounting of many cable companies, no one needs to question Cable ONE's. Unlike its peers, who have had to borrow extensively, Cable ONE has funded all of its acquisitions and its capital expenditures through internally generated funds.

As for cash flow accounting, Cable ONE uses very conservative practices when capitalizing any expenses and when booking any programming launch incentives. In both cases, practices are much more conservative than the industry norm - and right in line with standard Washington Post Company practice. I cannot give too much credit to Tom for the unique way Cable ONE has gone about its business.

Kaplan, in which we've been investing heavily for the past four years, is blasting ahead on all cylinders. All five of Kaplan's major business units made budget for each of the three months of the first quarter - a good sign indeed. And April was strong, too.

Kaplan's principal businesses include Test Prep, Kaplan Professional, Score, and the Higher Education Division, including both the proprietary colleges we acquired with Quest in the summer of 2000 and our large and growing online efforts.

Again, this is a business built by a team of remarkable managers headed by Jonathan Grayer, who cannot be with us this morning in the aftermath of a boating accident, but who will return to work soon. Andy Rosen, Kaplan's president, is here.

I want to focus on higher education for a moment this morning, although it is worth noting that Test Prep has continued to bull ahead at an astounding rate (revenues were up 15 percent in the first quarter). The flight back to graduate school continues in the aftermath of the dot.com collapse and we gain some incremental market share from competitors.

Kaplan Professional, a business built entirely through acquisitions Kaplan made between 1998 and 2001, grew revenue by 4 percent in the first quarter, despite relative softness in the securities trading area which, in the long run, will be one of Kaplan Professional's largest markets.

After all we've said to you about Score for the past few years, it's gratifying to report this wonderful small business was ahead of budget in the first quarter and on its way to a year when we hope to narrow its losses substantially.

But progress in the Higher Education Division has been very significant indeed. With the acquisitions Kaplan closed in January, for three small private colleges in Texas, Ohio, and Pennsylvania, the Higher Education Division has passed Kaplan Professional and Test Prep as the most profitable division within Kaplan.

Ever since we acquired Quest, Gary Kerber has shown he continues to run these colleges successfully in every way and also is an able evaluator of acquisition opportunities. Here, revenues were up 35 percent for the quarter (some from acquisitions), and profits were up 90 percent.

Just this week Kaplan announced that it had acquired Tesst, another fine group of four schools here in the Washington-Baltimore area.

Turning to our advertising-based businesses, as we discussed in the annual report, 2001 was a very poor year. Operating income for the broadcast division declined 26 percent. Newspaper division operating income also was down 26 percent - and that's deceptively low, since 2000 results were affected by a large buyout at the paper. Magazine publishing operating income fell 48 percent.

With the first quarter of 2002 under our belts, the financial news is mixed. Post-Newsweek Stations is having a pretty good year under Alan Frank's leadership. Operating income in the first quarter was up 5 percent. Despite a significant drop in network compensation, total revenue advanced 1.6 percent. Net spot revenues grew 6.4 percent, though the pace is slackening. Our revenue increases year-to-date are outpacing industry averages.

The key factor in the division's performance was the Olympics. Our two largest stations, WDIV in Detroit and KPRC in Houston, carried the Winter Olympics from Salt Lake City.

As usual, they generated significant, non-recurring incremental revenues -- $4.9 million, net. The combined revenues of our non-Olympics stations were flat in the first quarter, as expected.

Post-Newsweek's ongoing expense-control efforts also are producing good results. Expenses in the first quarter were down 2 percent from the same period a year ago, excluding the pension credit. PNS expects expenses for this year to end up at the same level as 1998.

As many of you know, in early April we announced that WJXT in Jacksonville would not be renewing its 50-plus year affiliate relationship with CBS. We tried unsuccessfully for almost two years to come to a new agreement that would work well for both parties. In the end, our analysis of WJXT's options made it clear that our best choice would be to go independent. WJXT is confident and excited about its prospects going forward.

The station will build on its local presence, already among the most successful in the nation, by doubling the amount of local news it produces. JXT also will expand its successful use of syndicated programming.

Of course, we'll experience some additional costs due to an anticipated increase in staff for the ramp-up in local news, and we'll have some additional programming costs. WJXT also will incur some one-time transition costs this year.

However, because of the station's strong local presence and the additional spot inventories of an independent station, WXJT fully expects that its revenues will continue to grow.

It pains me to see WJXT's relationship with CBS end. The relationship has always been a good one for both sides. I should add that Mel Karmazin and Les Moonves were thoroughly professional in their dealings with us throughout the negotiations, in the tradition of their excellent network.

However, CBS definitely wants to move to a different model in its relations with affiliates, and we felt WJXT is too good a station for us to completely change the model that served us both well for more than half a century.

As we've reported to you, our affiliate contract between NBC and our stations in Detroit and Houston has been renewed through 2011. Our network agreements for San Antonio, Miami, and Orlando don't expire until 2005.

The Washington Post newspaper continues to suffer along with the rest of the industry. Reflecting the economic downturn's lingering impact on advertisers, Post operating income was off 31 percent in the first quarter. Most of this drop stemmed from the decline in print recruitment advertising revenue, off 46 percent from the prior year.

Other classified categories showed signs of strength, particularly real estate, property management, and automotive. However, retail and general each were off.

Intense focus on expense control helped offset the decline in ad revenues. Total expenses in the first quarter were down 5 percent. Newsprint costs were down 21 percent due to price reductions, declining consumption and less waste. Non-newsprint costs declined slightly as The Post reduced payroll and other expenses.

Circulation for the six months ending March 31 showed a gain in Monday-to-Friday sales of about 0.7 percent, while Sunday sales were down 0.4 percent. The ten-cent per copy daily price increase for newsstand papers, introduced on December 31, 2001, is expected to add more than $1 million in circulation revenue each quarter.

Turning to electronic media, washingtonpost.com traffic, which peaked at an extraordinary 257 million page views in the weeks immediately following September 11, now stands at about 170 million page views per month - 44 percent higher than last year. Monthly unique users have maintained their steady, impressive growth and now stand at 5.4 million.
For much of the last year, washingtonpost.com has been ranked as the most highly penetrated site in any local market, and it's also consistently ranked as a top national news site - a remarkable feat, given that we are not associated with a television network or nationally distributed newspaper, like virtually all of the other top news sites.

The success of WPNI continues to be of great importance to the company, but we still have a way to go in business results.

At Newsweek, we're seeing hints of a modest advertising recovery in ad pages - at least compared to most magazines measured by PIB. While the numbers are anything but robust - and first quarter ad revenue was down 15 percent -- the magazine is running virtually even with last year's pace through the first four months of the year. Rick Smith reports that he hasn't seen enough swallows to declare it a summer, but at least he's seeing a lot of birds in the air.

On the expense side, Newsweek has taken a number of steps to lower its cost base even further. In the first quarter, the magazine announced a voluntary early retirement program for 85 employees. Sixty-two chose to participate at a cost to Newsweek of $10.3 million.

We recently expanded the offer to include 25 more Newsweek employees, and we are looking at similar options in our international operations.

In closing, we approach the remainder of this year feeling no certainty whatever about an advertising recovery, but we're quite confident our company as a whole is ready for good things.

Kaplan and Cable ONE alone are capable of driving us forward nicely in earnings. And if advertising starts to recover as many other companies are saying it will (although we've never had any success predicting these things), we could have a good couple of years.

Kaplan and Cable ONE both are highly complex businesses. A full explanation of what is driving them would take a more extensive discussion than we can offer this morning. In addition, the future of the newspaper and the future of our Internet site are clearly subjects important to the future of the company and need to be discussed in detail.

In order to do this, we've decided to hold a second Shareholders Day on Friday, November 15, here in Washington. We want to invite all of you to attend.

Like the first Shareholders Day, it will be for shareholders only, and discussion will be limited to business issues. No editorial questions will be entertained. But we continue to feel the need to provide a detailed explanation of today's somewhat changed Washington Post Company to shareholders.

In this communications objective, we are different from most public companies, whose primary aim is to communicate with Wall Street and the investment analyst community. We will certainly fulfill all our communications requirements in that direction as a company like ours should.

But we take our first job to be communicating with you, and we're going to do it on Shareholders Day in at least as much detail as you can stand. Certainly you will have all the information you need to evaluate your investment in the company. Thank you.

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