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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 September 27, 1998 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 2, 1998:
Class A Common Stock 1,739,250 Shares
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Class B Common Stock 8,338,940 Shares
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2.
THE WASHINGTON POST COMPANY
INDEX TO FORM 10-Q
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited) for the Thirteen and Thirty-nine
Weeks Ended September 27, 1998 and
September 28, 1997.......................................................3
Condensed Consolidated Balance Sheets at
September 27, 1998 (Unaudited) and December 28, 1997.....................4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Thirty-nine Weeks Ended
September 27, 1998 and September 28, 1997................................5
Notes to Condensed Consolidated Financial Statements
(Unaudited)..............................................................6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.......................................9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................................19
Signatures.............................................................................20
Exhibit 11
Exhibit 27 (Electronic Filing Only)
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3.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The Washington Post Company
Condensed Consolidated Statements of Income (Unaudited)
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Thirteen Weeks Ended Thirty-nine Weeks Ended
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Sept 27, Sept 28, Sept 27, Sept 28,
(In thousands, except per share amounts) 1998 1997 1998 1997
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Operating revenues
Advertising $293,277 $286,074 $ 928,209 $ 892,551
Circulation and subscriber 138,783 134,238 402,489 386,814
Other 77,221 58,063 188,296 154,486
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509,281 478,375 1,518,994 1,433,851
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Operating costs and expenses
Operating 278,241 253,565 822,226 743,547
Selling, general and administrative 107,533 107,186 328,468 332,947
Depreciation and amortization of
property, plant and equipment 22,058 18,007 63,169 53,668
Amortization of goodwill and other
intangibles 13,853 8,382 35,724 24,549
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421,685 387,140 1,249,587 1,154,711
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Income from operations 87,596 91,235 269,407 279,140
Other income (expense)
Equity in (losses) earnings of affiliates (4,060) 4,712 (3,143) 8,168
Interest income 217 725 809 2,917
Interest expense (2,246) (182) (4,821) (505)
Other 50,241 23,471 306,752 24,292
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Income before income taxes 131,748 119,961 569,004 314,012
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Provision for income taxes
Current 41,598 44,866 207,069 117,109
Deferred 8,302 3,544 8,431 6,301
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49,900 48,410 215,500 123,410
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Net income 81,848 71,551 353,504 190,602
Redeemable preferred stock dividends (239) (239) (956) (956)
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Net income available for common shares $ 81,609 $ 71,312 $ 352,548 $ 189,646
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Basic earnings per common share $ 8.09 $ 6.66 $ 34.95 $ 17.62
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Diluted earnings per common share $ 8.05 $ 6.64 $ 34.79 $ 17.57
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Dividends declared per common share $ 1.25 $ 1.20 $ 5.00 $ 4.80
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Basic average number of common shares
outstanding 10,093 10,708 10,088 10,766
Diluted average number of common shares
outstanding 10,139 10,743 10,132 10,794
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4.
The Washington Post Company
Condensed Consolidated Balance Sheets
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September 27,
1998 December 28,
(In thousands) (Unaudited) 1997
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Assets
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Current assets
Cash and cash equivalents $ 4,517 $ 21,117
Accounts receivable, less estimated returns,
doubtful accounts and allowances 266,443 244,203
Inventories 26,525 19,213
Other current assets 22,918 23,959
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320,403 308,492
Investment in marketable equity securities 121,423 3,366
Investments in affiliates 62,859 154,791
Property, plant and equipment
Buildings 190,327 188,836
Machinery, equipment and fixtures 859,321 800,435
Leasehold improvements 46,539 39,017
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1,096,187 1,028,288
Less accumulated depreciation and amortization (625,587) (577,445)
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470,600 450,843
Land 33,953 33,953
Construction in progress 288,573 168,954
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793,126 653,750
Goodwill and other intangibles,
less accumulated amortization 876,775 679,714
Deferred charges and other assets 330,840 277,204
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$2,505,426 $2,077,317
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Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 248,529 $ 213,824
Federal and state income taxes 6,852 18,352
Deferred subscription revenue 80,196 80,186
Dividends declared 12,845 --
Short-term borrowings 380,505 296,394
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728,927 608,756
Other liabilities 259,178 241,234
Deferred income taxes 34,337 31,306
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1,022,442 881,296
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Redeemable preferred stock 11,873 11,947
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Preferred stock -- --
Common shareholders' equity
Common stock 20,000 20,000
Capital in excess of par value 37,293 33,415
Retained earnings 2,533,449 2,231,341
Accumulated other comprehensive income (losses)
Cumulative foreign currency translation adjustment (1,213) (464)
Unrealized (loss) gain on available-for-sale
securities (6,153) 31
Cost of Class B common stock held in treasury (1,112,265) (1,100,249)
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1,471,111 1,184,074
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$2,505,426 $2,077,317
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5.
The Washington Post Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
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Thirty-nine Weeks Ended
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Sept 27, Sept 28,
(In thousands) 1998 1997
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Cash flows from operating activities:
Net income $353,504 $190,602
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property, plant
and equipment 63,169 53,668
Amortization of goodwill and other intangibles 35,724 24,549
Gain on disposition of businesses (310,010) (24,805)
(Decrease) increase in income taxes payable (11,500) 7,155
Provision for deferred income taxes 8,431 6,301
Equity in losses (earnings) of affiliates, net
of distributions 3,805 (6,550)
Change in assets and liabilities:
Increase in accounts receivable, net (23,943) (8,024)
Increase in inventories (8,727) (2,504)
Increase in accounts payable and
accrued liabilities 35,421 35,216
Increase in other assets and other
liabilities, net (42,244) (20,723)
Other 8,510 (1,151)
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Net cash provided by operating activities 112,140 253,734
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Cash flows from investing activities:
Net proceeds from sale of businesses 376,677 27,417
Purchases of property, plant and equipment (154,300) (135,985)
Investments in certain businesses (307,940) (83,616)
Investments in marketable equity securities (93,588) --
Proceeds from sale of marketable equity securities 13,414 --
Other 269 9,591
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Net cash used in investing activities (165,468) (182,593)
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Cash flows from financing activities:
Principal payments on debt (296,394) --
Short term borrowings 380,505 --
Issuance of note receivable -- (12,417)
Dividends paid (38,550) (39,529)
Common shares repurchased (14,890) (87,271)
Other 6,057 --
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Net cash provided by (used in) financing activities 36,728 (139,217)
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Net decrease in cash and cash equivalents (16,600) (68,076)
Beginning cash and cash equivalents 21,117 102,278
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Ending cash and cash equivalents $ 4,517 $ 34,202
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6.
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, Exchanges and Dispositions
Acquisitions
In January and June of 1998, the company acquired cable systems in
Grenada, Mississippi and Anniston, Alabama serving approximately 7,400 and
36,000 subscribers, respectively. The aggregate purchase price for these cable
system acquisitions totaled $78.0 million. In July 1998, the company acquired
cable systems in Mississippi, Texas and Oklahoma serving approximately 72,000
subscribers for $129.5 million.
In January 1998, the company acquired an educational services company that
provides English language study programs. In June 1998, the company acquired a
provider of customized information technology training, consulting and support
services to law firms, financial institutions and other large corporations. The
aggregate purchase price for these two educational services companies was $34.8
million. In July 1998, the company acquired Dearborn Publishing Group, Inc., a
publisher and provider of licensing training for securities, insurance and real
estate professionals, for $35.0 million.
The company also spent approximately $25.7 million during the first nine
months of 1998 for other small businesses.
In February 1997, the company purchased a cable system in Cleveland,
Mississippi serving about 16,000 subscribers for approximately $23.0 million.
Exchanges
In June 1997, the company exchanged the assets of certain cable systems
with Tele-Communications, Inc. This trade resulted in an increase of about
21,000 subscribers for the company.
In September 1997, the company completed a transaction with Meredith
Corporation whereby the company exchanged the assets of WFSB-TV, the CBS
affiliate in Hartford, Connecticut and approximately $60.0 million for the
assets of WCPX-TV, the CBS affiliate in Orlando, Florida.
Dispositions
On March 20, 1998, Cowles Media Company ("Cowles") and McClatchy
Newspapers, Inc. ("McClatchy") completed a series of transactions resulting in
the merger of Cowles and McClatchy. In the merger, each share of Cowles common
stock was converted (based upon elections of Cowles stockholders) into shares
of McClatchy stock or a combination of cash and McClatchy stock. As of the date
of the Cowles and McClatchy merger transaction, a wholly-owned subsidiary of
the company owned 3,893,796 (equal to about 28%) of the outstanding common
stock of Cowles, most of which was acquired in 1985. As a result of this
transaction, the company's subsidiary received $330.5 million in cash from
McClatchy and 730,525 shares of McClatchy Class A common stock. The market
value of the McClatchy stock received approximated $21.6 million. The gain
resulting from this transaction, which is included in 1998 "Other, net" in the
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7.
Condensed Consolidated Statements of Income, increased net income by
approximately $162.8 million and basic and diluted earnings per share by $16.14
and $16.07, respectively.
On July 29, 1998, the company completed the sale of 14 small cable systems
in Texas, Missouri and Kansas serving approximately 29,000 subscribers for
approximately $41.9 million. The gain resulting from this transaction, which is
included in 1998 "Other, net" in the Condensed Consolidated Statements of
Income, increased net income by approximately $17.3 million and basic and
diluted earnings per share by $1.71.
On August 12, 1998, Junglee Corporation ("Junglee") merged with a wholly
owned subsidiary of Amazon.com Inc. ("Amazon.com"). As a result, each share of
Junglee common and preferred stock was converted into shares of Amazon.com. On
the date of the merger, a wholly-owned subsidiary of the company owned 750,000
common shares and 750,000 preferred shares of Junglee. As a result of the
merger, the company's subsidiary received 202,961 shares of Amazon.com common
stock. The market value of the Amazon.com stock received approximated $25.2
million on the date of the merger. The gain resulting from this transaction,
which is included in 1998 "Other, net" in the Condensed Consolidated Statements
of Income, increased net income by approximately $14.3 million and basic and
diluted earnings per share by $1.42 and $1.41, respectively.
On July 17, 1998, the company completed the sale of its 80 percent
interest in Moffet, Larson and Johnson ("MLJ"), a telecommunications consulting
firm; no significant gain or loss was realized as a result of this transaction.
In the third quarter of 1997, the company sold the assets of its PASS
Sports subsidiary and terminated its regional sports network. The gain from this
transaction, which is included in 1997 "Other, net" in the Condensed
Consolidated Statements of Income, increased net income by approximately $16.0
million and basic and diluted earnings per share by $1.49.
Note 2: Investments in Marketable Equity Securities
Investments in marketable equity securities are as follows ($ in thousands):
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September 27, December 31,
1998 1997
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Total cost $131,510 $3,315
Gross unrealized gains $ 1,661 51
Gross unrealized losses (11,748) -
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Total fair value $121,423 $3,366
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The company's investments in marketable equity securities are held for an
indefinite period of time and therefore are classified as available-for-sale.
Available-for-sale securities are recorded at fair value in the consolidated
balance sheet, with the change in fair value during the period excluded from
earnings and recorded net of tax as a separate component of equity.
The company's investments in marketable equity securities at September 27,
1998 includes 411,200 shares of General Re Corporation ("General Re") common
stock which was acquired by the company throughout the third quarter of 1998
from the open market for a total cost of $93.6 million. The unrealized loss on
the General Re common stock, net of tax, totaled $5.2 million at September 27,
1998.
Subsequent to September 27, 1998 and through November 2, 1998, the company
purchased 147,900 additional shares of General Re common stock, bringing the
total General Re shares purchased in 1998 to 559,100 shares for a total cost of
$123.7
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8.
million; more purchases may be made in the future. As of November 2, 1998, the
unrealized loss on the General Re common stock, net of tax, totaled $0.4
million.
General Re is a holding company for global reinsurance and related risk
management operations. On June 19, 1998, Berkshire Hathaway Inc. ("Berkshire")
announced that it had signed a merger agreement with General Re. Under the terms
of the agreement, which has been approved by the shareholders of both Berkshire
and General Re but is still subject to certain regulatory approvals, General Re
shareholders will receive at their election either 0.0035 shares of Berkshire
Class A Common Stock or 0.105 shares of Berkshire Class B Common Stock for each
share of General Re common stock owned at the time the transaction is
consummated.
Berkshire owns approximately 17% of the common stock of the company. The
chairman, chief executive officer and largest shareholder of Berkshire, Mr.
Warren Buffet, is a member of the company's Board of Directors. Neither
Berkshire nor Mr. Buffet participated in the company's evaluation, approval or
execution of its decision to invest in General Re common stock. The company's
holdings in General Re common stock are less than 2% of the consolidated equity
of General Re and on a converted basis, less than 1% of the consolidated equity
of Berkshire.
Note 3: Borrowings
During the third quarter and first nine months of 1998, the company had
average short-term borrowings outstanding of approximately $260.0 million and
$182.0 million, respectively, at an average interest rate of approximately 5.6
percent. During the first nine months of 1998, the company incurred interest
costs on short-term borrowings of $7.6 million of which $4.3 million was
capitalized. Interest costs for construction and upgrade of qualifying assets
are capitalized. At September 27, 1998, $380.5 million in borrowings were
outstanding under the company's commercial paper program which is supported by a
five-year $500.0 million revolving credit facility.
Note 4: Stock Repurchases
During the first nine months of 1998 and 1997 the company repurchased
30,260 and 245,390 shares of its Class B common stock at a cost of approximately
$14.9 and $87.0 million, respectively.
Note 5: Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income is the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. For the thirteen weeks ended September 27, 1998 and
September 28, 1997, comprehensive income totaled $74.5 million and $71.1
million, respectively. For the thirty-nine weeks ended September 27, 1998 and
September 28, 1997, comprehensive income totaled $346.6 million and $184.3
million, respectively. Comprehensive income includes net income, foreign
currency translation adjustments and the change in unrealized gain (loss) on
available-for-sale securities.
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9.
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 1998 was $81.8 million, an increase of
14 percent from net income of $71.6 million in the third quarter last year.
Diluted earnings per share increased 21 percent to $8.05, from $6.64 in the
third quarter of 1997, with fewer average shares outstanding.
The company's 1998 third quarter net income included $30.9 million ($3.05
per share - diluted basis) arising primarily from the sale of 14 small cable
systems in Texas, Missouri and Kansas and the disposition of the company's
interest in Junglee, a facilitator of internet commerce. Net income for the
third quarter of 1997 included $16.0 million ($1.49 per share - diluted basis)
from the sale of the assets of the company's PASS Sports subsidiary and the
termination of its regional sports network. Excluding these non-recurring items,
net income decreased $4.7 million, or 8 percent; diluted earnings per share
decreased 3 percent to $5.00, from $5.15 in the third quarter of 1997.
Revenues for the third quarter of 1998 rose 6 percent to $509.3 million,
from $478.4 million in the same period last year. Advertising revenues and
circulation and subscriber revenues each increased 3 percent. Other revenues
increased 33 percent over the third quarter of 1997. Excluding the effect of
acquisitions and dispositions completed in 1997 and 1998, total third quarter
revenue increased 1 percent. Third quarter revenues for 1998 were adversely
affected by one less special Newsweek issue and a decline in advertising in
Newsweek and at the company's television stations by General Motors Corporation
during the recent autoworkers' strike.
Costs and expenses for the third quarter of 1998 increased 9 percent to
$421.7 million, from $387.1 million in the third quarter of 1997. Third quarter
1998 operating expenses increased 10 percent, selling general and administrative
expenses remained flat, depreciation expense rose 22 percent and amortization
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10.
expense increased 65 percent. Excluding the effect of acquisitions and
dispositions completed in 1997 and 1998, total costs and expenses for the third
quarter increased 1 percent. The 1 percent increase in total costs and expenses
is due to normal expense growth, new media spending and expenses arising from
the expansion of the printing facilities of The Washington Post, offset
partially by an increase in the company's pension credit.
In the third quarter of 1998, operating income declined to $87.6 million,
a 4 percent decrease from $91.2 million in 1997. Excluding the effect of
acquisitions and dispositions completed in 1997 and 1998, operating income for
the third quarter of 1998 remained substantially unchanged as compared to the
third quarter of 1997.
NEWSPAPER DIVISION. At the newspaper division, revenues increased 3 percent in
the third quarter of 1998. Advertising revenues for the division rose 3 percent
in 1998 due principally to higher ad rates. Advertising volume at The Washington
Post totaled 734,600 inches in the third quarter of 1998 as compared to 746,300
inches in 1997. Preprint advertising volume at The Post increased 3 percent to
382 million pieces, compared to 370 million pieces in 1997. Circulation revenues
for the division decreased 2 percent in comparison to the same period last year
as a result of a 1 percent decrease in both Sunday and daily circulation at The
Washington Post.
Newsprint expense at the Post increased 8 percent in the third quarter of
1998 compared to the third quarter of last year.
BROADCAST DIVISION. Revenues at the broadcast division increased 2 percent in
the third quarter of 1998. The increase in revenue is attributable to a 13
percent increase in local advertising revenue, partially offset by a 12 percent
decrease in both national advertising revenue and network compensation. The
decline in national advertising revenue reflects the previously mentioned third
quarter decline in automotive advertising.
MAGAZINE DIVISION. Revenues at the magazine division decreased 3 percent in the
third quarter of 1998. The decrease is primarily attributable to one less
special issue at Newsweek, as well as a decline in automotive advertising and
softness in advertising at the international edition of Newsweek. These revenue
declines were partially offset by increased revenue from the trade periodicals
acquired in the fourth quarter of 1997.
CABLE DIVISION. At the cable division, third quarter 1998 revenues were 18
percent higher than 1997. Higher subscriber levels, resulting mainly from recent
acquisitions, as well as
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11.
slightly higher rates accounted for the increase. At the end of the third
quarter, the number of basic subscribers totaled approximately 730,000, 15
percent higher than the subscriber levels at the same time last year.
OTHER BUSINESSES. In the third quarter of 1998, revenues from other businesses
- -- principally Kaplan Educational Centers, Legi-Slate, Washingtonpost.Newsweek
Interactive, MLJ (Moffet, Larson & Johnson - sold in July, 1998), and PASS
Sports (1997 only) -- increased 31 percent over the prior year. Excluding PASS
Sports and MLJ, which were sold in the third quarter of 1997 and 1998,
respectively, revenue from other businesses increased 54 percent over the third
quarter of 1997. Growth at Kaplan Educational Centers produced most of the
increase, with acquisitions accounting for most of the gain.
EQUITY IN (LOSSES) EARNINGS OF AFFILIATES. The company's equity in losses of
affiliates in the third quarter of 1998 was $4.1 million, compared with income
of $4.7 million in the third quarter of 1997. The decrease resulted principally
from increased spending at the company's new media joint ventures and the
company's sale of its 35 percent interest in Bear Island Paper Company and Bear
Island Timberlands Company in November 1997 and the disposition of the company's
28 percent interest in Cowles Media Company, which occurred in March 1998.
NON-OPERATING ITEMS. Interest expense, net of interest income, was $2.0 million
in the third quarter of 1998, compared with net interest income of $0.5 million
in the third quarter of 1997. There were no borrowings outstanding during the
third quarter of 1997.
Included in other, net for the third quarter of 1998 are pre-tax gains of
$51.2 million related to the sale of cable systems in Texas, Missouri and Kansas
and the disposition of the company's interest in Junlgee, a facilitator of
internet commerce. For the third quarter of 1997, other, net includes pre-tax
gains of $24.8 million resulting from the sale of the assets of the company's
PASS Sports subsidiary and the termination of its regional sports network.
INCOME TAXES. The effective tax rate in the third quarter of 1998 decreased to
37.9 percent, from 40.4 percent in 1997. The decrease in the effective tax rate
is the result of certain one-time transactions in the third quarter of 1998
being subject to state tax in jurisdictions with lower tax rates.
<PAGE> 12
12.
NINE MONTH COMPARISONS
Net income for the first nine months of 1998 was $353.5 million, an
increase of $162.9 million from net income of $190.6 million in the first nine
months of 1997. Diluted earnings per share for the first three quarters of the
year were $34.79, compared to $17.57 in 1997.
The company's 1998 net income included $193.7 million ($19.12 per share -
diluted basis) from non-recurring gain transactions which include the first
quarter disposition of the company's 28 percent interest in Cowles Media Company
and the previously mentioned cable system and Junglee transactions. The
company's 1997 net income includes $16.0 million ($1.49 per share - diluted
basis) from the sale of the assets of PASS Sports and termination of its
regional sports network. Excluding the effect of these dispositions, net income
decreased 8 percent; diluted earnings per share decreased 3 percent to $15.67,
from $16.08 in the first nine months of 1997, with fewer average shares
outstanding.
Revenues for the first nine months of 1998 increased 6 percent to $1,519.0
million, from $1,433.9 million in the comparable period last year. Advertising
revenues increased 4 percent, circulation and subscriber revenues increased 4
percent and other revenues increased 22 percent. Excluding the effect of
acquisitions and dispositions completed in 1997 and 1998, total revenue for the
first nine months of 1998 increased 3 percent as compared to the same period in
1997.
Costs and expenses increased 8 percent during the first three quarters of
1998 to $1,249.6 million, from $1,154.7 million in the corresponding period of
1997. During the first nine months of 1998, operating expenses increased 11
percent, selling general and administrative expenses were flat, depreciation
expense increased 18 percent and amortization expense increased 46 percent.
Excluding the effect of acquisitions and dispositions completed in 1997 and
1998, total costs and expenses increased 4 percent. This 4 percent increase in
total costs and expenses was primarily attributable to normal expense growth and
increases in newsprint expense, new media spending and expenses arising from the
expansion of the printing facilities of The Washington Post, offset in part by
an increase in the company's pension credit.
In the first nine months of 1998 operating income declined 3 percent to
$269.4 million from $279.1 million in the same period last year. Excluding the
effect of acquisitions and dispositions completed in 1997 and 1998, operating
income for the first nine months of 1998 decreased 2 percent from the same
period in 1997.
<PAGE> 13
13.
NEWSPAPER DIVISION. Newspaper division revenues were up 4 percent in the first
nine months of 1998 over the comparable period of 1997. Advertising revenues for
the division rose 4 percent in the period due mainly to increased rates.
Advertising volume at The Washington Post totaled 2,312,800 inches, declining 1
percent from 2,328,000 inches in the first nine months of 1997. Circulation
revenues at the Newspaper division for the first nine months of 1998 declined 2
percent as compared to the same period in the prior year, principally as a
result of a 1 percent decline in both daily and Sunday circulation at The Post.
Newsprint expense at The Post increased 11 percent in 1998 as compared to
the first nine months of 1997.
BROADCAST DIVISION. Revenues at the broadcast division increased 5 percent over
the first nine months of 1997. The overall increase in broadcast division
revenue is the result of a 6 percent increase in both national and local
advertising revenue partially offset by a 13 percent decrease in network
compensation.
MAGAZINE DIVISION. Magazine division revenue increased 3 percent in the first
nine months of the year. The increase is attributable to the trade periodicals
acquired in the fourth quarter of 1997, partially offset by a 6 percent decline
in revenue at Newsweek. One less Newsweek special issue, lower domestic edition
ad pages and the continuing economic crisis in Asia resulted in the Newsweek
revenue decline.
CABLE DIVISION. Cable division revenues increased 14 percent in the first nine
months of 1998. Higher subscriber levels, resulting mainly from system
acquisitions and exchanges, as well as slightly higher rates, accounted for the
increase.
OTHER BUSINESSES. At the company's other businesses - principally Kaplan
Educational Centers, Legi-Slate, Washingtonpost.Newsweek Interactive, MLJ
(Moffet, Larson & Johnson - sold in July, 1998), and PASS Sports (for 1997 only)
- -- revenues rose 14 percent in the first nine months of 1998. Excluding PASS
Sports and MLJ, which were sold in the third quarter of 1997 and 1998,
respectively, revenue from other businesses increased 41 percent. Growth at
Kaplan Educational Centers produced most of the increase, with acquisitions
accounting for about two-thirds of the gain.
EQUITY IN (LOSSES) EARNINGS OF AFFILIATES. The company's equity in losses of
affiliates during the first three quarters of 1998 was $3.1 million, compared
with income of $8.2 million in the first nine months of 1997. The decline in
earnings of affiliates
<PAGE> 14
14.
resulted principally from increased spending at the company's new media joint
ventures and the company's sale of its 35 percent interest in Bear Island Paper
Company and Bear Island Timberlands Company in November 1997 and the disposition
of the company's 28 percent interest in Cowles Media Company, which occurred in
March of 1998.
NON-OPERATING ITEMS. Interest expense, net of interest income, was $4.0 million
in the first nine months of 1998, compared to net interest income of $2.4
million in 1997. The increase in net interest expense is due to borrowings
outstanding for the majority of the first nine months of 1998. There were no
borrowings outstanding during the first nine months of 1997.
Included in 1998 other, net are gains of $258.4 million resulting from the
disposition of the company's 28 percent interest in Cowles Media Company and
$51.2 million related to the sale of cable systems in Texas, Missouri and Kansas
and the disposition of the company's interest in Junglee, a facilitator of
internet commerce. Other, net in 1997 includes gains of $24.8 million resulting
from the sale of the assets of the company's PASS Sports subsidiary and the
termination of its regional sports network.
INCOME TAXES. The effective tax rate in 1998 was approximately 37.9 percent as
compared to 39.3 percent in 1997. The lower state tax rate applicable to the
Cowles and Junglee transactions resulted in the overall decline in the effective
tax rate.
FINANCIAL CONDITION: CAPITAL RESOURCES AND LIQUIDITY
In the first nine months of 1998, the company acquired various businesses
for approximately $303.0 million as detailed in Note 1 to the third quarter
condensed financial statements.
For the first nine months of 1998, the company's capital expenditures
totaled $154.3 million, the majority of which related to the replacement of the
printing facilities at The Washington Post and plant upgrades at the company's
cable subsidiary.
As discussed in Note 2 to the third quarter condensed financial
statements, the company acquired 411,200 shares of General Re Corporation common
stock throughout the third quarter of 1998 for a total cost of approximately
$93.6 million.
During the first nine months of 1998, the company repurchased 30,260
shares of its Class B common stock at a cost of approximately $14.9 million.
Approximately 785,000 Class B
<PAGE> 15
15.
common shares remain available for repurchases under a November 13, 1997
authorization by the Board of Directors.
In March 1998, the company received approximately $330.5 million in cash
and 730,525 shares of McClatchy Class A common stock as a result of the Cowles
and McClatchy merger transaction, as previously described. The market value of
the McClatchy stock received approximated $21.6 million, based upon publicly
quoted market prices. During the second and third quarters of 1998, the company
sold 410,500 shares of the McClatchy stock for approximately $13.6 million; no
significant gain or loss was realized upon the liquidation of these shares.
In July 1998, the company completed the sale of 14 small cable systems in
Texas, Missouri and Kansas serving approximately 29,000 subscribers for $41.9
million.
In August 1998, the company received 202,961 shares of Amazon.com common
stock as a result of the merger of Amazon.com and Junglee. The market value of
the Amazon.com common stock received approximated $25.2 million, based upon
publicly quoted market prices.
At the end of the first quarter of 1998, the company utilized the cash
generated from the previously mentioned Cowles transaction to repay its then
outstanding borrowings totaling $296.4 million. Since the end of the first
quarter the company has made short term borrowings to fund acquisitions and
certain capital expenditures.
During the third quarter and first nine months of 1998, the company had
average short-term borrowings outstanding of approximately $260.0 million and
$182.0 million, respectively, at an average interest rate of 5.6 percent. At
September 27, 1998, $380.5 million in short-term borrowings were outstanding
that are supported by a 5-year, $500.0 million revolving credit facility.
The company has experienced no other significant changes in its financial
condition since the end of 1997.
Year 2000 Update
The company's assessment, remediation, testing and contingency planning
efforts surrounding Year 2000 readiness are proceeding on schedule with
completion of all project phases projected for the fall of 1999. To date, the
assessment of internal systems and equipment has been virtually completed and
the company has made substantial progress in completing the remediation, testing
and contingency planning phases of its Year 2000 readiness project.
<PAGE> 16
16.
Most of the company's significant internal systems and equipment,
including equipment with embedded controls, have been determined to be Year 2000
compliant. Certain critical internal systems, however, have been identified as
incapable of processing transactions beyond the Year 2000; the most significant
of which include some of the revenue related business systems at The Washington
Post and Newsweek. For each of the non-compliant systems, the remediation
efforts, which principally include systems replacement and software repair, are
well under way and are expected to be completed and tested in the summer of
1999. The majority of the non-compliant internal systems were scheduled to be
replaced prior to Year 2000 for operating efficiency reasons, and although the
approaching Year 2000 increases the importance of replacing such systems, it has
not caused a significant acceleration in the established replacement timetable.
For critical internal systems and equipment determined to be compliant
during the assessment phase of the project, and for non-compliant equipment that
has been repaired or replaced, the company has devised and commenced a testing
plan to provide additional compliance assurance. To date, the results of the
company's Year 2000 compliance testing program have not revealed any new
problems, or ineffective remediation. The Year 2000 testing phase for internal
systems and equipment is estimated to be approximately 40% complete as of the
end of October 1998.
The company's Year 2000 readiness project also includes procedures
designed to identify and assess Year 2000 business interruption which may occur
as a result of the company's dependency on third parties. Vendors, suppliers,
service providers, customers and governmental entities that are believed to be
critical to the company's business operations after January 1, 2000 ("key
business partners") have been identified and significant progress has been made
in ascertaining their stage of Year 2000 readiness. These efforts include, among
others, circularization of Year 2000 compliance confirmations and conducting
interviews and on-site reviews.
The company could potentially experience disruptions as a result of
non-compliant systems utilized by some of its key business partners or unrelated
third party governmental and business entities. Contingency plans are under
development to mitigate these potential disruptions to business operations.
These contingency plans include, but are not limited to, identification of
alternative suppliers, vendors and service providers and planned accumulation of
inventory to ensure production capability. The company is also developing
contingency plans for its internal critical business systems.
<PAGE> 17
17.
These contingency planning activities are intended to reduce risk, but cannot
eliminate the potential for business disruption caused by third party failures.
The company now estimates that its total Year 2000 compliance costs will
approximate $25 million. Approximately $15 million of the estimated costs are
attributable to assessment, repair and testing activities and will be expensed
as incurred (approximately $7 million in 1998 and $8 million in 1999). The
remaining $10 million represents the estimated cost to replace non-compliant
systems and will be capitalized and amortized over periods ranging between five
to ten years. The company anticipates that the funds needed to complete the Year
2000 compliance efforts and referenced system replacements will be provided
primarily from the company's operating cash flows.
For the first nine months of 1998, the company has recorded approximately
$5 million in expense related to Year 2000 compliance. Year 2000 project
expenses incurred prior to 1998 were not significant.
Based upon the activities described above, the company does not believe
that the Year 2000 problem is likely to have a material adverse effect on the
company's business or results of operations.
The above discussion contains forward-looking statements that reflect the
company's current expectations or beliefs concerning future results and events.
These statements are made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Readers are cautioned that
forward-looking statements contained in the Year 2000 discussion should be read
in conjunction with the following disclosures of the company.
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
These forward-looking statements, which the company believes to be
reasonable and are made in good faith, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, the
company.
<PAGE> 18
18.
Taking into account the foregoing, the following are identified as
important risk factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of, the
company:
The dates on which the company believes its Year 2000 readiness project
will be completed are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. Unanticipated failures by critical vendors, as well as a failure by the
company to execute successfully its own remediation efforts, however, could have
a material adverse effect on the costs associated with the Year 2000 readiness
project and on its completion. Some important factors that might cause
differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas, the
ability to locate and correct all relevant computer code, the timely and
accurate responses to and correction by third-parties and suppliers, the ability
to implement interfaces between the new systems and the systems not being
replaced and similar uncertainties. Due to the general uncertainty inherent in
the Year 2000 problem, the company cannot ensure its ability to timely and
cost-effectively resolve problems associated with the Year 2000 issue that may
affect its operations and business or expose it to third-party liability.
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as exhibits to this report:
EXHIBIT
NUMBER DESCRIPTION
11 Calculation of Earnings Per Share of
Common Stock
27 Financial Data Schedule (Electronic Filing Only)
(b) No reports on Form 8-K were filed during the period covered by this
report.
<PAGE> 20
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 6, 1998 /s/ Donald E. Graham
---------------- -----------------------------------------
Donald E. Graham, Chairman &
Chief Executive Officer
(Principal Executive Officer)
Date: November 6, 1998 /s/ John B. Morse, Jr.
----------------- -----------------------------------------
John B. Morse, Jr., Vice President-Finance
(Principal Financial Officer)
<PAGE> 1
Exhibit 11
CALCULATION OF EARNINGS
PER SHARE OF COMMON STOCK
(In thousands of shares)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------------- --------------------------
Sept 27, Sept 28, Sept 27, Sept 28,
1998 1997 1998 1997
----------------- ------------ --------------- --------
<S> <C> <C> <C> <C>
Number of shares of
Class A and Class B
Common stock outstanding
at beginning of
period 10,093 10,715 10,089 10,910
Issuance of shares of
Class B common stock
(weighted), net of
forfeiture of re-
stricted stock awards 2 - 12 19
Repurchase of Class B
common stock (weighted) (2) (7) (13) (163)
----- ----- ------ ------
Shares used in the computation
of basic earnings per share 10,093 10,708 10,088 10,766
Adjustment to reflect
dilution from common stock
equivalents 46 35 44 28
------ ------ ------ -------
Shares used in the computation
Of diluted earnings per share 10,139 10,743 10,132 10,794
------ ------ ------ -------
Net income available for
common shares $81,609 $71,312 $352,548 $189,646
------ ------ ------- -------
Basic earnings per common
share $8.09 $ 6.66 $34.95 $17.62
---- ----- ----- -----
Diluted earnings
per common share $8.05 $ 6.64 $34.79 $17.57
---- ----- ----- -----
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Income for the thirty-nine weeks ended
September 27, 1998 and the Condensed Consolidated Balance Sheet as of September
27, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-3-1999
<PERIOD-END> SEP-27-1998
<CASH> 4,517
<SECURITIES> 0
<RECEIVABLES> 319,620
<ALLOWANCES> 53,177
<INVENTORY> 26,525
<CURRENT-ASSETS> 320,403
<PP&E> 1,418,713
<DEPRECIATION> 625,587
<TOTAL-ASSETS> 2,505,426
<CURRENT-LIABILITIES> 728,927
<BONDS> 0
11,873
0
<COMMON> 20,000
<OTHER-SE> 1,451,111
<TOTAL-LIABILITY-AND-EQUITY> 2,505,426
<SALES> 0
<TOTAL-REVENUES> 1,518,994
<CGS> 0
<TOTAL-COSTS> 822,226
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50,069
<INTEREST-EXPENSE> 4,821
<INCOME-PRETAX> 569,004
<INCOME-TAX> 215,500
<INCOME-CONTINUING> 353,504
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 353,504
<EPS-PRIMARY> 34.95
<EPS-DILUTED> 34.79
</TABLE>
