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Post Co. Offers to Buy Kaplan Options

By Christopher Stern
Washington Post Staff Writer
Tuesday, September 30, 2003; Page E03

The Washington Post Co. announced yesterday that it had offered $138 million to buy 55 percent of the stock options owned by senior managers of its educational testing subsidiary, Kaplan Inc.

The buyout offer allows The Post Co. to limit some of its liability under a 1997 stock option plan, while allowing Kaplan executives to lock in gains. The offer was priced at a 10 percent premium over the current estimated value of Kaplan's non-public shares. It effectively values Kaplan at up to $2.5 billion, said John B. Morse Jr., The Post Co.'s chief financial officer.

After leading all Post Co. divisions in growth for the past seven years, Kaplan is on track to report 2003 revenue that exceeds that of The Washington Post, the company's flagship newspaper.

Only 64 Kaplan executives, including chief executive Jonathan Grayer, participate in the plan. Although Grayer is a key beneficiary of the compensation plan, The Post Co. declined to detail how much each individual could receive for selling the options. Ninety percent of Kaplan's eligible shares must be offered for repurchase by Oct. 28 or the offer will expire.

Donald E. Graham, The Post's chairman and chief executive, said yesterday that the buyout will allow Kaplan to put a new compensation plan in place that provides for broader participation among the managers of the growing educational division, which has more than 4,000 employees. "Kaplan is a hell of a lot bigger business than it was in '97 when we put this compensation plan into effect," Graham said.

In a letter to shareholders dated yesterday, Graham cited Kaplan's strong performance in defending the buyout.

"At the time we established the plan, we never in our wildest dreams thought Kaplan could grow so fast in revenues and profits," Graham wrote. "While the payments we propose today are large, we believe they are well-justified by Kaplan's results and prospects."

For the first six months of 2003, Kaplan reported revenue of $373.3 million, a 26 percent increase over the first six months of 2002. Last year, the company reported operating income of $20.5 million, up from a loss of $28.3 million in 2001. For the first six months of this year, the company has already reported operating income of $19.5 million.

Kaplan is a wholly owned Post subsidiary that does not have its own separately traded stock. It is not uncommon for companies to grant options in such shares, commonly referred to as "phantom" stock, according to Edward Soule, a professor of business ethics at Georgetown University.

The cost of the options, which are valued by The Post Co.'s compensation committee on the advice of an outside firm, has risen along with the value of Kaplan. In last year's annual report, The Post Co. reported that one share of Kaplan was worth approximately $861. Under terms of the offer made to Kaplan's management, a share of the company is now valued at approximately $1,600, Morse said.

"From our standpoint, the liability has grown and it's pretty substantial. To minimize the upward cost potential is very beneficial to our shareholders," Morse said.

At the same time, Kaplan's managers have an opportunity to cash out some of their holdings when publicly traded educational companies are highly valued on Wall Street. For instance, shares of Arlington-based Strayer Education Inc. closed yesterday at $96.80, up more than 100 percent from their 52-week low of $47.34.

Post Co. shares rose $15.50, or 2.3 percent, to close at $676.

The Post Co. acquired Kaplan in 1984 from founder Stanley Kaplan for $45 million. At the time, Kaplan earned about $8 million a year. Kaplan's roots are in providing test preparation for standardized examinations, but it has expanded in recent years with after-school education centers, professional training and online degree programs.

After struggling for several years, the company began to turn around in 1994 after Grayer, then 29, was appointed chief executive. According to recent filings, much of the increased revenue has come from the acquisition of other companies, including London-based Financial Trading Corp. for $87.4 million in March of this year.