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In the year 2000, The Washington Post Company set the table for what should be strong operating performance in the years ahead. 2001 will be another table-setting year as we expect to invest $85 million in a series of businesses at Kapln and Washingtonpost.Newsweek Interactive (down from $125 million in 2000). In addition, while it won’t significantly affect reported operating results this year (but will remind investors that they should always examine the Statements of Cash Flows), we will spend an all-time record amount of capital at the cable division. If these investments are as successful as we hope, our company should do very well indeed. We hope the new businesses we are building will take their place alongside our traditional, highly successful newspaper, broadcasting, and magazine operations.
The year was a strong one for The Washington Post newspaper. Reported results are somewhat misleading because at year-end we offered a buyout to most of our 117 printers; 114 accepted it, resulting in a one-time charge of $27.5 million against 2000 operating income. It’s hard to believe we will no longer have a large number of printers here. In the 1960s and ’70s the composing room was the largest department at the paper, reaching a peak of 743 people in 1974. That number is now down to 3! At a time of highly contentious labor relations at The Post, Kay Graham and Larry Wallace had the wisdom and foresight to reach agreements with the printers union that guaranteed lifetime jobs to the then-employees. In return, The Post received freedom to automate and the right not to replace those who retired. This newspaper, like many in the United States, was founded by a printer and owes much to the dedication and craftsmanship of hundreds of compositors who worked here over the decades. Journalistically it was a year of highly unusual recognition. Post journalists won three Pulitzer Prizes and were finalists in five of the 11 other categories. Kate Boo’s series on the treatment of mentally retarded adults in D.C. group homes, a reporting achievement among the greatest in the history of The Post, won the public service Pulitzer for the newspaper for the second year in a row. Henry Allen, one of Style’s outstanding writers, won the Pulitzer for criticism. And three Post photographers – Carol Guzy, Lucien Perkins, and Michael Williamson – won the Pulitzer for feature photography. Together these three Post photographers have won seven Pulitzer Prizes. (In addition, Tom Ricks, who had joined us early in the year to cover defense, was a key part of a Wall Street Journal team that won the Pulitzer for national reporting.) There’s more good news about a story we mentioned last year. In 1998 a Post series disclosed that the District of Columbia’s police force had shot more people consistently over many years than any other large police department in the country. The series documented the number of police shootings beyond any argument and received the Pulitzer Prize for public service. D.C. Police Chief Charles Ramsey didn’t argue with what the series proved; he implemented reforms in police firearms regulations and improvements in training, which immediately yielded dramatic reductions in woundings and deaths of citizens. For 2000 police shootings in the District were down by 78 percent from 1998 levels, and the District now has one of the lowest rates of police shootings in the country. Chief Ramsey and his department deserve great credit for this, and so do Post reporters Jeff Leen and Sari Horwitz, and the others who contributed to the series. The Post turned in improved profits in 2000, perhaps because it changed management. Bo Jones became only the fifth publisher of the paper since 1933. Bo had won the confidence and support of the staff, first as vice president and counsel, and then as general manager. He changed the paper’s edition schedule and started a new Sunday bulldog edition. We added a new KidsPost section for school-age readers. Bo also focused more resources on local news gathering.
Much of this annual report describes the extraordinary news year all our journalistic organizations experienced in 2000. In the following pages, Post executive editor Len Downie, washingtonpost.com executive editor Doug Feaver, WPLG news anchor Dwight Lauderdale, and former Newsweek managing editor Ann McDaniel recount how their operations mobilized to cover the election and its aftermath, a totally unexpected, huge story, as well as other important events of the year. In addition, you’ll see examples of the fine news photography and video images that appeared in 2000. One of the most gratifying effects of the Florida election challenge was the light it shed on the cooperation between The Post’s newsroom and washingtonpost.com. Throughout the year, washingtonpost.com had added large, important new features to its site, including a wonderful daily politics report. washingtonpost.com’s election coverage attracted a dramatically increased audience, and the site has maintained remarkably high traffic ever since. However, the creation earlier in the year of our newly expanded WashingtonJobs.com site may have been equally important to washingtonpost.com’s long-term future. WashingtonJobs.com almost tripled the site’s recruitment revenue, recording $10 million of help-wanted advertising and creating a foundation for a very healthy local recruitment business on the web. washingtonpost.com ended the year as the number one local news web site in America (sometimes trading the distinction back and forth with Cox’s excellent AccessAtlanta) and one of the country’s fastest growing national news sites. The site won the first-ever award for Excellence in Online Journalism from the National Press Foundation and five EPpy Awards, including best overall site among large newspapers. In his first full year running Washingtonpost.Newsweek Interactive, Chris Schroeder assembled and led a team that steadily increased site quality, revenue, and traffic.
Newsweek turned in another exceptional performance despite dramatically fewer advertising pages from the automotive category, our largest. It was a fine effort from Rick Smith, Harold Shain, and their team. The decline in operating income shown in the magazine publishing segment is mainly a factor of the reduced pension credit at Newsweek. For years we have been mentioning the large amount of our operating income that consists of pension credits, a component that is of lesser quality than the rest of our profits. We report it as we are required to. Shareholders will want to take note that $3.90 of earnings per share in 2000 was attributable to pension credits, and that a decline of 24 percent in the pension credit in 2000 reduced EPS by 92 cents compared to 1999. We feel the same way about the reduction as we did about the increases attributable to pension credits in every other recent year. It makes the numbers look good (or, in 2000, bad), but the pension credit is a non-cash entry, and shareholders should understand that. (It does have some importance; our generously funded pension plans enabled us, for instance, to offer the printer buyout at The Post referred to above.) Under Mark Whitaker’s leadership, Newsweek journalists again helped readers make sense of a turbulent year. The magazine’s election coverage culminated in a 60,000-word behind-thescenes account that was published less than a week after polls closed. The magazine also spoke vividly on the major political and social issues of the day, from DNA testing in death-penalty cases to the changing nature of race in America. Newsweek International managed to improve its operating results by $2 million over 1999, despite a world economy that wobbled and staggered all year long. Peter Luffman remains one of the finest managers in the entire company. Newsweek International welcomed Fareed Zakaria as editor at the end of the year.
Our television stations came through with another gain in operating income – indeed, it was the best year Post-Newsweek Stations ever had. It’s fitting the record was set in Bill Ryan’s last year as CEO. Bill has simply been the best group broadcasting executive in the United States for the last decade. He remains chairman of PNS. In addition to tripling the profitability of the group during his 12-year tenure, Bill also improved the ratings at almost every station and created one of the strongest management teams in the business. He’s being succeeded by Alan Frank, Bill’s choice and for years the highly successful general manager of WDIV in Detroit, our biggest station and the company’s largest individual profit center after The Post. Alan and Bill shared management in 2000, and both deserve credit for the excellent year. Alan’s successor at WDIV is Joe Berwanger, a longtime and highly successful broadcast executive. Another top industry veteran, Jeff Sales, became general manager at WKMG in Orlando. They join the best group of station managers around: Sherry Burns (Jacksonville), John Garwood (Miami), Jim Joslyn (San Antonio), and Steve Wasserman (Houston). They deserve credit for PNS’s margins remaining the highest of any publicly reporting group broadcaster.
Perhaps the most dramatic year-to-year difference in our business came at Cable ONE. We’ve raved to you in the past about Tom Might’s work as CEO of this division. In the year just ended, Tom completed the first phase of an arduous redefinition of our cable business and put Cable ONE on a unique course within the industry. Wish him luck, because the extent of Cable ONE’s success will have a major impact on The Post Company’s performance in 2002 and beyond. Tom would be the first to say that the lack of growth in last year’s operating income was disappointing. But Cable ONE achieved three truly remarkable things: First, J.D. Power and Associates ranked Cable ONE as the number one cable company in the U.S. in customer satisfaction, the first time we were included in their ratings. This was an enormous achievement for every single person at Cable ONE. Tom had focused the company on customer satisfaction for years. Second, in March 2001, Cable ONE traded three systems, including our two largest – Modesto and Santa Rosa, California – to AT&T Broadband for five systems in Idaho, where we are now the largest cable company in the state. The swap increased Cable ONE’s total subscriber count to 759,000. But the biggest event at Cable ONE was the adoption of a new plan for digital television. We are giving away access to 149 additional channels of digital cable programming to all existing customers who want it – free for one year. Tom is doing this in the expectation of achieving the highest penetration rate for digital television among all cable companies once the free offer expires. The industry peak is 17 percent penetration; Tom hopes that once Cable ONE’s customers have experienced digital television for a year, we’ll achieve 30 percent penetration or even better. But that’s not all. Partly because we’re offering the service for free, Cable ONE became the only company asking customers to self-install our digital service. We’ve even done the same thing with cable modems, which, along with other changes we’ve made, will greatly improve the economics of that business. While the ultimate success of this strategy remains uncertain, there’s no doubt about the cost of those free digital boxes and upgrading Cable ONE’s systems. Cable ONE’s capital expenditures leapt to $96 million in 2000 and will increase even more, to $125 million in 2001. This is extraordinarily high capital spending, but shareholders should hope we do spend it. That’s the amount we’ll spend should the free digital offer remain a ringing success throughout the year. If subscribers who were among the first to receive our offer don’t meet our adoption rate goals, we’ll cut back on this year’s capital spending and on our long-term profit expectations. Cable ONE is now a very big part of The Washington Post Company, recording over $65 million of operating income and $144 million of operating cash flow in 2000. Its growth will have important implications for our growth as a company. Obviously, in light of the free-digital strategy, cable operating income growth won’t be great in 2001, but 2002-3 will be worth watching.
Kaplan matured in 2000 and is now ready to take off as a business. Starting this year Kaplan will be our second largest division in revenue. And while development spending will continue at Score!, eScore, and The Kaplan Colleges, results from the rest of Kaplan were strong in 2000, and we have high expectations for 2001. The biggest event at Kaplan this past year was the acquisition of Quest Education Corporation in the summer. This company, founded by Gary Kerber in 1988, has been successfully educating thousands of college students annually. Quest’s 34 campuses in 13 states offer programs in technology, healthcare, business, and other fields directly important to students’ careers. A degree or certificate from one of these colleges can mean a new or better job for its recipient. Quest’s growth had been dramatic during every year of its performance as a public company, and it continued under Kaplan. We acquired four new colleges in three new states with the acquisition of Denver Paralegal Institute at year-end. Quest also has been a participant in a U.S. Department of Education demonstration program in Title IV funding for online education. The ability to offer accredited programs – to offer associate and bachelor degrees online – will be absolutely critical toKaplan's web-based initiatives in the future. Quest is only the latest of several successful acquisitions that have made Kaplan a significantly bigger company. Entrepreneurs like Andy Temte at Schweser, Richard Capezzali at The College for Professional Studies, Craig Callaway at Self Test, and Bonnie Speer McGrath at Perfect Access Speer have found a home for themselves and their companies in Kaplan's decentralized atmosphere. Meanwhile, the oldest part of Kaplan, the Test Prep and Admissions business, has continued to grow under John Polstein’s management. Test prep revenue increased 9 percent in 2000, and the enrollment numbers grew bigger almost every month as the year went along. Early in 2000, when Internet companies seemed such attractive employers, the number of students seeking business and other graduate degrees was in decline. But as dot-coms lost some of their appeal, applicants flooded back to traditional graduate programs. Whether business was weak or strong, Kaplan continued to strengthen its market share in almost every graduate program across the board. Jonathan Grayer and Andy Rosen have put together an extraordinary collection of managers who know they are building an important business – one that will bring meaningful results to Washington Post Company shareholders and one that can make a difference in society. The company that Kay Graham and Dick Simmons bought from Stanley Kaplan in 1985 had just $35 million in revenue. This year Kaplan's revenue should be over $500 million – and there’s room to grow.
Last year we devoted considerable space in the annual report to bragging about the success of our technology investments. These investments were indeed valuable for the company; what we learned from some of them propelled us ahead rapidly at washingtonpost.com. But we focused on our financial success: we had invested $40 million in 15 Internet-related companies and through the end of 1999 had realized $60 million in pre-tax gains. In addition, the company had a substantial amount of unrealized gains in the remaining portfolio, including approximately $28 million in publicly traded securities. Honesty and completeness compel us to report that this $28 million unrealized gain has since nearly evaporated. We did learn valuable lessons about the Internet from watching developments at these companies; the last year taught some financial lessons as well (at year-end our unrealized gain totaled $1.5 million). Our overall cumulative investment record remains very good because chief technology officer Ralph Terkowitz and chief financial officer Jay Morse sold off investments over the past few years in a disciplined manner as sale restrictions on these stocks lapsed.
Once again consolidated corporate results were a bit confusing. Our net income was affected by the $16.5 million after-tax charge for the printer buyout at The Post, by a $11.7 million reduction in non-cash pension credits, and by an increase of $16.6 million in interest costs since debt mounted. In addition, 1999 included gains arising from the sales of marketable securities that were $18.6 million more than in 2000. Nonetheless, earnings apart from one-time items fell by 35 percent – a result we hope we prepared you for in our 1999 annual report, when we told you we would be investing $130 million in developing businesses during the year. In fact, as indicated above, the net investment amounted to $125 million; the comparable amount this year will be about $85 million. Losses will diminish at Washingtonpost.Newsweek Interactive, at Kaplan's array of businesses, and at BrassRing. More important, a couple of these businesses have developed to the point where we can say they show great promise, although none is yet a certain winner. Stockholders should be aware that Kaplan's results are affected by accruals for an incentive compensation plan somewhat equivalent to a stock option plan at a publicly traded company, although the accounting differs greatly. The accruals are non-cash today, but we’ll be paying out cash in the future (12.5 percent of Kaplan stock is under option). We do not intend to take Kaplan public. Unlike our other businesses, Kaplan has the characteristics of a turnaround. The current management team took over when the test prep business was losing $4 million a year, and it seemed to us that it was going nowhere without highly unusual management, in depth. We’ve had such management, we’ve kept it, and results have been impressive. Kaplan's reported results for 2000 include operating profit (before goodwill amortization, stock-based compensation, and corporate overhead) of about $30 million for its core test prep and professional training businesses (18 percent greater than in 1999), and $8 million for Quest, which we acquired in the summer. These profits were offset by start-up losses totaling $56 million at Score!, eScore, and kaplancollege.com. Annual accruals for the compensation plan have been on the order of $6-to-$7 million since 1998, but they could go much higher in the future if Kaplan has the results we hope for. Stockholders should hope they go very high indeed.
As 2000 ended, the advertising market for local television and newspaper recruitment softened considerably. We never try to forecast the national economy, but the slowdown we’ve seen so far will definitely affect 2001 results in a negative way.
Again in 2001 we will be spending heavily; however, development spending actually will be outweighed by huge capital spending at Cable ONE. For an unusual reason, we can feel some confidence in shareholder understanding of the reasons for this spending. Our company takes a different approach to corporate communications than most. As we’ve said in the annual report for several years, we care enormously about the profitability of our businesses, but we care nothing whatsoever about reported quarterly operating results. As we have told securities analysts consistently for years, we pay no attention to anyone’s estimates of our quarterly earnings and whether our actual earnings are above or below them. In fact, we typically don’t know what the estimates are. However, our inattention to quarterly figures will not be an excuse for nonperformance. Our focus will continue to be on trying to build the intrinsic value of the company’s businesses over time. Our success in doing this can only be measured by net income. Our goal is to build the most successful long-term business we can, consistent with The Post Company’s emphasis on quality. This is not an easy goal to achieve; freedom from the distraction of quarterly earnings can only help, but the job still needs doing. While we do not communicate nonpublic information to securities analysts focusing on our quarterly results, we do try to communicate in considerable detail with you, our shareholders. In 2000, frustrated by our limited ability to address serious business questions at our annual meeting, we invited our shareholders – and only our shareholders – to Shareholders Day. We had never had more than 50 shareholder attendees at an annual meeting and were anticipating 30 or so when we sent out invitations to Shareholders Day. To our amazement, more than 300 showed up. (We had to move it from The Post to a large nearby hotel at the last minute.) Shareholders heard the detailed business plans of Cable ONE, Kaplan, and Washingtonpost.Newsweek Interactive, and spent five hours listening and asking questions. A panel of Post and Newsweek journalists also discussed the election, which had taken place three days earlier. Shareholders Day was a great experience for everyone in the company. We won’t turn it into an annual event, but you can bet we’ll have many more Shareholders Days in our future. Because Shareholders Day gave us the chance to spell out the nature of our plans in our three fastest changing businesses, our company entered 2001 feeling that our most important business constituency understood where we hoped to go and why. Now it’s up to those of us running the company to get there. We continue to take our responsibility to you very seriously and hope you will continue to communicate questions and comments about the company to us.
This year Bill Ruane retires from our Board of Directors after reaching our mandatory retirement age of 75. Shareowners owe way more than the normal vote of thanks to Bill. Since 1977, Ruane, Cunniff & Co., Inc., has invested a substantial portion of Post pension funds, and its performance is the overwhelming reason our pension plans are among the most generously funded in the country. Year after year after year, Bill’s results have earned our pension funds a niche among the top-performing U.S. pension plans, have saved shareholders millions of dollars, and have meant that people who work here have unusual certainty about their retirement funding. Bill’s retirement is a loss to our truly remarkable Board of Directors, but we added Barry Diller, chairman and CEO of USA Networks, Inc., to this world-class group in late 2000. His experience in operating Internet businesses as well as universally known television and cable networks made him a perfect choice for our Board. Sincerely, Donald E. Graham Katharine Graham March 2, 2001
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