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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number 2-28286
The Bureau of National Affairs, Inc.
A Delaware Corporation 53-0040540
(I.R.S. Employer Identification No.)
1231 25th St., N. W., (202)452-4200
Washington, D.C. 20037 (telephone number)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A common
stock, $1.00 par value.
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
Indicate by check mark whether the registrant is an accelerated filer, (as
defined in Rule 12b-2 of the Act). Yes (X)
The market value of the Class A voting stock held by non-affiliates of the
registrant as of February 26, 2005 was $152,431,632. All voting stock is owned
by employees of the registrant and its subsidiaries. The market value of the
Class B and Class C non-voting stock held by non-affiliates as of February 26,
2005 was $208,759,128 and $0, respectively. In determining the above, The
Bureau of National Affairs, Inc. (the "Company"), has assumed that all of its
officers, directors, and persons known to the Company to be the beneficial
owners of more than five percent of each class of the Company's common stock are
affiliates. Such assumption should not be deemed conclusive for any other
purpose.
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 26, 2005 was 13,624,898 Class A common shares,
17,914,599 Class B common shares, and 12,440 Class C common shares.
Page 1 of 56
2
FORWARD -LOOKING STATEMENTS
This Annual Report contains and incorporates by reference certain statements
that are not statements of historical fact but are forward-looking statements.
The use of such words as "believes," "expects," "estimates," "could," "should,"
and "will," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement, to be filed with the
SEC on or about March 25, 2005, are incorporated by reference into Part III of
this Form 10-K.
The Bureau of National Affairs, Inc.
Index to Form 10-K
For the fiscal year ended December 31, 2004
Page No.
PART I.
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
Item X. Executive Officers of the Registrant........................ 12
PART II.
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters................................... 14
Item 6. Selected Financial Data and Selected Quarterly Data......... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 17
Item7a Quantitative and Qualitative Disclosures About Market Risk.. 21
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................... 46
Item 9a. Controls and Procedures .................................... 46
Item 9b. Other Information .......................................... 46
PART III.
Item 10. Directors and Executive Officers of Registrant.............. 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Beneficial Owners and Management...... 47
Item 13. Certain Relationships and Related Transactions.............. 47
Item 14. Principal Accounting Fees and Services...................... 47
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and
Report on Form 8-K........................................ 48
SIGNATURES.............................................................. 50
EXHIBIT INDEX........................................................... 51
3
PART I
Item 1. Business
--------
General Development of Business and Narrative Description of Business
Business of BNA and Subsidiary Companies
The Bureau of National Affairs, Inc. (BNA) is a leading publisher of legal and
regulatory information. BNA was founded in 1929, and was incorporated in its
present form as an employee-owned company in 1946. BNA is independent, for
profit, and is the oldest fully employee-owned company in the United States.
BNA and its publishing subsidiary companies, Tax Management Inc., Institute of
Management and Administration, Inc. (IOMA), and Kennedy Information, Inc.,
provide legal, regulatory, and general business advisory information in labor,
economic, tax, health care, environment and safety, consulting, recruiting, and
other markets to business, professional, and academic users. They prepare,
publish, and market subscription information products in print, compact disc,
and online formats, books, magazines, and research and advisory reports, and
hold conferences.
Sales are made principally in the United States through field sales
representatives who are supported by direct mail, space advertising, and
telemarketing. Customers include lawyers, accountants, business executives,
human resource professionals, health care administrative professionals,
consultants, labor unions, trade associations, educational institutions,
government agencies, and libraries mostly in the United States.
The Company provides most of its products for electronic delivery via the Web
and Lotus Notes. Online products also are available through online services such
as LexisNexis and West Group.
BNA International Inc. publishes international tax and intellectual property
information in print and electronic formats, and is BNA's agent outside of North
America for sale of its U.S. products.
BNA Software, a division of Tax Management Inc., develops, produces, and markets
tax and financial planning software. Sales are made to accountants, lawyers, tax
and financial planners, government agencies, and others. The products are
marketed through direct mail, space advertising, telesales, and BNA field sales
representatives. STF Services Corporation, a subsidiary company, converts
government-approved paper forms into interactive electronic forms that are
marketed directly and licensed to publishers, including BNA and Tax Management.
The McArdle Printing Co., Inc. provides printing services to mid-Atlantic area
customers. Its customers include publishers, trade associations, professional
societies, other non-profit organizations, financial institutions, and
governmental organizations. Approximately 29 percent of its business is derived
from the BNA publishing companies.
Continued
4
Review Of Operations
2004 was a very good year for BNA. All-time highs were achieved for revenues,
operating profit, and earnings per share. The positive trends evident at the end
of 2003, continued strong cost management, and an improved business climate
combined to produce these results. Net income finished the year at $22.6
million, up 40 percent over 2003, and earnings per share jumped 50 percent to
$.69.
Consolidated revenues were $321.3 million in 2004, an increase of $9.4 million.
Publishing revenues increased $2.9 million due mostly to strong Tax Management
renewal sales and IOMA's successful new revenue channels. Printing revenues
jumped $5.5 million in 2004, reflecting business from new customers and
additional job awards from existing customers. Software revenues were up $1.1
million with product-related services providing most of the growth.
The 2004 consolidated operating profit of nearly $38 million, a BNA record by a
wide margin, was up $12.4 million or 48.5 percent over the prior year. The
advance was widespread, as nine of the eleven business units improved their
operating results. In addition to the revenue growth, pervasive cost containment
efforts were a major factor in 2004's success. Consolidated operating expenses
were down $3.0 million in total. Although McArdle and IOMA incurred large
fulfillment cost increases related to their large revenue gains, eight business
units had lower expenses in 2004 while the other one had only a small increase.
Total non-operating income declined $1.6 million due mostly to lower gains from
sales of investments and other assets.
Stock purchases by employees remained strong, but continued to be exceeded by
stock redemptions--predominately mandatory tenders by Class B and C
stockholders. Net stock repurchases during 2004, including $4.8 million for
Class C shares, were $22.1 million, reducing outstanding shares by 5.7 percent.
Over the last eight years, BNA has paid $113 million for net repurchases that
have reduced outstanding shares by 28 percent. Repurchases of Class C shares,
which are essentially complete, totaled $20 million during this period. Net
repurchases of stock, due to Class B stock tenders, are expected to continue.
Operating cash flows have usually provided most of the cash needed for the net
buybacks and are expected to continue to do so, with financial reserves
providing the balance.
BNA's cash and financial investments decreased nearly $5 million in 2004 due to
the heavy stock repurchases, but stood at a healthy $120 million at year-end.
The liquidity provided by these financial reserves, as well as the strong
operating cash flows generated annually by the businesses, keeps BNA prepared to
respond to business challenges and opportunities, to make the investments
necessary to ensure future growth, to satisfy debt retirement obligations, and
to make stock repurchases in support of continued employee ownership.
Reviews of the parent and subsidiary companies' operations follow.
Parent Company
A slightly improved business climate and strong cost management led the parent
company to post another record operating profit in 2004. Operating profit grew
more than 7 percent as managers across the company continued to carefully
monitor expenditures and increase productivity.
The parent company also took a bold step in addressing lackluster new sales by
instituting a major restructuring of the core business's selling approach.
Launched in late April 2004, the new sales organization now consists of three
customer-centric segmented divisions: Corporate, Legal, and Tax & Accounting.
For the first time, BNA customers are sold to by sales professionals who
specialize in a given customer's market.
5
The list of new products in 2004 included few traditional news and reference
offerings. Instead, product development focused heavily on custom content
management and delivery capabilities in response to customer input. Significant
enhancements included adding indexes and redesigning the notification platform's
search interface; providing the capabilities to track regulatory developments by
citation and to build links from third-party information management systems to
BNA reference content; and creating, on BNA's new Web delivery platform, the
ability to produce customized websites with content and graphics meeting client
specifications.
The parent's Legal & Business Publishing Unit recorded another year of growth in
both revenues and profits, thanks to successful product launches and
enhancements to existing products. Strategic alliances also have continued to
prove beneficial, and the unit's already strong renewal rates improved in 2004.
The segmentation of the sales force is paying dividends for the Legal & Business
Publishing Unit. In 2004, the large law program expanded from eight to 21
specialized sales professionals spread throughout the country. These
professionals focus on the large law firm market and the top-200 corporate
market, driving both new sales and retention of existing revenues. In addition,
a new specialized sales force was introduced for the small and mid-sized law
firm and corporate counsel markets.
To help legal account executives further penetrate the corporate counsel market,
the unit launched Corporate Counsel Library, a subset of the Corporate Practice
Series. The portfolios selected for this series are designed to answer the needs
of corporate counsel in smaller corporations who do not need the full portfolio
package.
During 2004, the unit worked on developing electronic versions of three
reference file products. Web versions of the BNA/ACCA Compliance Manual,
Corporate Governance Manual, and Health Care Program Compliance Guide will be
launched in early 2005, and are expected to do very well in this climate of
heightened awareness of corporate governance and compliance concerns.
Also, development of a significantly revised version of Labor and Employment Law
Library has begun. The new version will include an enhanced search engine
specifically designed for the legal market, as well as increased visibility of
the service's unique system of classifying and headnoting court decisions.
The Environment, Health & Safety (EHS) Publishing Unit addressed a continuing
revenue erosion by expanding its international and domestic offerings and
further developing its relationships with new business partners. The Global EHS
Library, a reference service providing detailed coverage of 30 jurisdictions
around the world, was launched in February. In December, EHS Legislative Alert
was launched, providing daily coverage of state legislatures.
In addition, a multinational semiconductor manufacturer became the unit's second
large customer for custom, citation-based monitoring of regulatory activity. The
first client, a multinational oil and gas company, expanded its contract for
custom monitoring in 2004. The EHS unit also held the first of its new audio
conferences late in 2004, with several new audio conferences scheduled for the
first quarter of 2005.
Alliances also were central to the EHS unit's activities in 2004. EHS and a
strategic partner formally launched a citation-based system to monitor changes
in state and federal EHS regulations. A contract to develop a similar product
was signed late in 2004 with another provider of environmental management
systems. And in the spring of 2004, the unit forged an alliance with NAEM, a
leading environmental association, to survey environmental companies. The survey
was published in October.
6
The restructuring of the Human Resources & Payroll Publishing Unit and the
revamping of major products over the past two years paid handsome dividends in
2004. Despite a decline in revenues, profitability was up 53 percent over the
prior year.
Significant upgrades to the unit's major reference products have added popular
features such as a "Fast Answers" section, enhanced usability, and a common user
interface. The products are now presented to the market as a unified suite with
bundled and simplified pricing to encourage larger transaction size. The unit
has expanded its target market beyond end-user HR practitioners to make more
sales to HR advisors and intermediaries who are licensing BNA-hosted websites to
provide to their clients. Another growing revenue source is transactional sales
of reports and audio conferences.
Revenues for the Health Care Publishing Unit again showed good growth in 2004,
due in large part to the continued success of Pharmaceutical Law & Industry
Report and Health Care Daily Report. In October, Medicare Drug Watch was
launched in response to the new Medicare prescription drug benefit program. The
service, a daily Web-only product, moves into somewhat new territory for the
division by adding access to key documents and customized Web news searches to
BNA's standard news reporting.
BNA Books
The Book Division experienced another busy and profitable year, closing out 2004
with the release in December of 20 titles. The division's operating margin
exceeded 31 percent in 2004, despite revenues finishing below 2003's record
level.
The division published a total of 46 titles in 2004, including three new titles:
Tortious Interference: A State-by-State Survey and Wage and Hour Laws: A
State-by-State Survey, both co-published with the ABA Labor and Employment Law
Section, and Patent Infringement Remedies. The publication of a fourth edition
of Covenants Not to Compete: A State-by-State Survey, a respected BNA/ABA title,
was highly anticipated and well received, and contributed heavily toward
revenues.
New editions of Drafting Patent License Agreements; McCarthy's Desk Encyclopedia
of Intellectual Property; Patent, Trademark, and Copyright Laws; Equal
Employment Law Update; Whistleblowing: The Law of Retaliatory Discharge; and
International Labor and Employment Laws were very successful as well. The
division also published annual supplements to its list of established treatises.
The Book Division's partnership with the American Bar Association continues to
be a mutually beneficial one. BNA Books is the official publisher for three ABA
Sections--Labor and Employment Law, Intellectual Property Law, and Health Law.
In 2004, several contracts for new titles were signed with each of the sections.
In addition, the division partnered with Google to be part of the experimental
"Google Print" program. The program makes the division's titles more available
to Web searchers with a direct link for purchase on the division's website.
The year was both challenging and successful for the division. BNA Books
continues to add highly regarded experts in their fields to its list of authors,
and the division's reputation for being the treatise publisher of choice
continues to grow.
7
Tax Management Inc.
Growing revenues and lower operating expenses led Tax Management to record
profitability in 2004. Revenues, including BNA Software, grew nearly 5 percent
for the year.
Strong renewals of TM services fueled the increase, and more than compensated
for lower new service sales. New sales, which were affected by a mid-year
restructuring of the field sales force, are expected to rebound in 2005.
TM Portfolios Plus on the Web and Tax Practice Series were the top-selling
products for 2004. TM's federal and state portfolio libraries continued to
expand, with the addition of 11 new federal titles and two new state titles. In
addition, the two new federal tax acts passed last fall necessitated substantial
updates to the federal portfolios and Tax Practice Series, as well as to various
BNA Software programs.
The usability of TM's Web-based tax library was significantly improved,
particularly site navigation. The library now allows subscribers to initiate
research by Internal Revenue Code section or by Treasury Regulation and link
directly to relevant portfolios and analysis.
Tax Management remains the leading analytical service in a highly competitive
tax market. Competitive pricing, strong marketing, better integration with the
parent company's tax products, and a leveraging of the segmented field sales
force should lead to continued growth in 2005.
BNA Software
BNA Software's operating profit rebounded significantly in 2004 to its highest
level since 2000. Both revenue growth and cost containment efforts were
responsible for the turnaround.
BNA Software's revenues grew more than 7 percent in 2004 due to strong sales of
services associated with BNA Corporate Tax Audit Analyzer and BNA Fixed Assets.
New sales goals were exceeded in the BNA Estate Tax Planner product family as
BNA captured share from competitors exiting this market. BNA Fixed Asset Web
continued to gain momentum as revenues nearly doubled from 2003.
Total operating expenses declined more than 14 percent. Lower staffing and
amortization expenses resulted in a large reduction in editorial expenses. The
unit lowered production and distribution expenses by implementing Web-based
product updates and expanding online documentation. Selling expenses also
declined as business growth from cost-effective channels increased.
BNA Software continued to extend its distribution channels with new national
reseller agreements for Income Tax Planner and Fixed Assets. Management will
focus in 2005 on growing revenues from these agreements and pursuing new
alliances.
BNA International Inc.
Despite a challenging sales environment, a restructuring of its sales effort,
and a transformation of its product line, BNA International grew its revenues
and improved its operating profit in 2004.
8
With an increasingly Web-based product line, the company reduced its direct
marketing costs and increased the number of sales representatives. These changes
led to significant increases in site license sales and higher sales of BNA
services. An improved Web platform, the addition of country-by-country
portfolios to the tax product line, and the launch of Corporate Restructuring
aided the increased sales effort. Additional BNAI products on LexisNexis and
Westlaw resulted in licensing revenues that exceeded expectations and, going
forward, more products will be made available on these platforms.
Future product development efforts will be guided by the results of extensive
research carried out in 2004 among existing and past subscribers. A number of
new products and enhancements to existing products will emerge from this
project.
BNAI recognized the need to enhance its products and change its sales approach
to satisfy the needs of its increasingly demanding markets. Now, with many of
these changes in place, and more planned for 2005, the company faces the future
confident in its ability to maintain its profitability.
BNA Washington Inc.
BNA's facilities in downtown Washington and suburban Maryland operated safely
and efficiently during 2004. There were no interruptions to facility operations
at the downtown offices, and the new emergency generator at the Rockville,
Maryland, facility ensured the uninterrupted operation of BNA's Customer Contact
Center during occasional power outages caused by severe summer storms. Higher
maintenance costs for operating BNA's aging facilities, combined with utility
rate increases which went into effect much sooner than anticipated, pushed
building expenses slightly above the prior year's level.
BNA Washington's largest outside tenant signed a 12-year renewal on a lease that
will continue to contribute substantial revenues. Lease renewal negotiations
with the smaller food service tenant were initiated, and an agreement is
expected during the first quarter of 2005.
A new subtenant was added at the 23rd Street location during the second quarter
of 2004. At year-end, nearly 75 percent of BNA space available on the sublease
market was occupied, with active interest in the remaining space.
The evaluation of options for BNA's long-term real estate needs remained a top
priority throughout 2004. A BNA management task force worked with real estate
and engineering experts to analyze key operational and financial factors for
options ranging from overhauling BNA's existing buildings to relocating to other
facilities in the Washington metropolitan area. The number of potential options
has been narrowed significantly. Work will continue in 2005 toward the goal of
recommending to the BNA Board of Directors the option that best supports the
future operational and economic success of the company.
The McArdle Printing Company, Inc.
The McArdle Printing Company, faced with a very competitive printing market and
continuing declines in BNA printing needs, still achieved double-digit revenue
growth in 2004. Commercial sales increased 25.7 percent, while intercompany
sales decreased 13 percent compared to 2003. This revenue growth in turn led an
improved profit performance that exceeded expectations.
Excess capacity, aggressive pricing, and consolidation combined to make printing
a challenging industry in 2004. McArdle recognized the need to differentiate its
services from competitors, and began positioning itself as a provider of
customized communications solutions to its clients, and improving its
traditional print services while adding design, fulfillment, and expanded
mailing capabilities to its offerings. These services played a key role in the
significant increase in new customers, and in the increased revenues from
existing customers.
9
Going forward, McArdle will focus on enhancing its services, growing its revenue
base, and improving its profitability, while continuing to serve BNA's still
substantial printing needs.
Pike & Fischer, Inc.
Change and new product development were constants at Pike & Fischer in 2004, as
the company continued to redefine itself following the August termination of a
60-year-old contract to provide editorial services to another publishing
company.
In 2003, Pike & Fischer had restructured its operations and divested a number of
smaller publications. Strong performance by its remaining product line and
greater than expected royalty revenues, however, mitigated the effect of the
divestitures on total revenues. The restructured operations resulted in a
substantial reduction in expenses, and led to greatly improved profitability in
2004.
Pike & Fischer's newly-formed Communications Media Analysis Group also had a
strong year, doubling the circulation of its flagship product Broadband Daily,
launching VoIP Monitor, publishing a series of special reports and producing
ancillary audio conferences, and providing consulting services for high-end
telecommunications clients. The CMA Group is well positioned for continued
growth in 2005.
On the more traditional legal publishing front, the company redesigned and
re-launched its five Web reference services and e-letters, and produced a series
of successful books and audio conferences.
On January 1, 2005, Pike & Fischer was merged into IOMA, where it will operate
as a division of IOMA. With the myriad strategic and organizational changes
effected over the last two years now complete, Pike & Fischer is well positioned
to cover the fast-changing telecommunications front for the industry and for
professionals who specialize in the field.
Institute of Management and Administration, Inc.
IOMA's continued creation and development of new revenue streams resulted in
revenue growth of more than 8 percent in 2004, and allowed the company to
maintain the operating profit level it achieved in 2003 despite higher expenses.
While 53 percent of IOMA revenues still came from traditional subscriptions to
newsletters and guides, the company generated nearly $6 million from product
lines that have been developed in the last three years. IOMA is now profitably
creating and selling conferences, audio conferences, an expanded list of
reference guides, custom and published research, consulting, site and
third-party licenses, and professional certification programs. All of these
programs leverage existing IOMA management content in its core markets.
The growth of these ancillary distribution channels allows IOMA to attract new
customers and then cross-market heavily. Besides $300 newsletters, IOMA offered
information products at price points from $8 to more than $85,000 in 2004.
IOMA Conference Division, which grew substantially in 2003, grew 47 percent in
2004. Audioconference Division revenues grew 146 percent in 2004, and the
division now averages four new programs a week. IOMA's new Research and
Consulting Division, created in 2004, will be a key part of corporate growth in
2005. These successes were partially offset by decreasing subscription revenues
and royalties. Essential steps to stop this decline have shown signs of success;
renewal rates are now the highest in the company's history and subscription
marketing results are improving.
9
The year-end merger of IOMA and Pike & Fischer creates the potential to leverage
resources and distribution channels more effectively and should result in cost
savings and enhanced market opportunities.
Kennedy Information, Inc.
Kennedy Information and its core markets, consulting and recruiting, began to
recover in 2004. Revenues grew by 7.5 percent and operating results showed
substantial improvement.
Kennedy's four market-focused business units - Consulting, Recruiting, Consumer
Careers, and Business & Finance - made great progress despite challenging market
conditions. The Consulting Unit, Kennedy Information Research Group, had an
outstanding year, increasing revenues by 7.5 percent and profits by 33 percent.
The Recruiting Unit, however, continued to feel the effects of slow job creation
in the overall economy. As job creation strengthens, this unit is positioned to
improve. The Business & Finance Unit successfully launched the Senior IR
Leadership Network (SIRLN). This high-value, subscription-based network for top
investor relations officers at large public companies had more than 30 corporate
members by year-end. A Global IR Leadership Network, focusing on top European
companies, was established in early 2005, and it holds great promise for future
growth. Finally, the Consumer Career Unit's Executive Agent and
ExecutiveRegistry services showed good growth during 2004, and both are
profitable. Efforts to increase revenue growth for these services will be the
focus in 2005. An agreement signed in late 2004, with CareerBuilder.com(TM), is
an important step in that direction, expanding on the Consumer Unit's existing
partnerships with Business Week, The Wall Street Journal, and Monster.com(TM).
Magazine advertising began an erratic recovery in 2004. Online advertising grew
rapidly, although from a small base, while print advertising recovered modestly.
The magazine group is focusing on selling advertising campaigns that include
print and online ads, bundled with sponsored Web events, seminars, and audio
conferences.
Overall, the company is well positioned for growth in revenues and profit in the
coming years.
STF Services Corporation
STF's operating margin remained among the highest of the BNA companies in 2004,
despite declines in royalties from its two largest licensees.
New product sales were a focus during 2004. SuperForm Sales Tax Rates/Forms,
launched in late 2003, was aggressively marketed during 2004, and significant
revenues were generated from retail sales and a new licensing agreement for this
product. SuperForm Doing Business Forms, consisting of forms filed over a
business's life cycle, was launched very successfully in late 2004. New product
development will continue in 2005, with an emphasis in the sales tax area.
STF continued an aggressive licensing program, with two new major licensees
signed during 2004. These agreements will begin producing revenues in early
2005. At the end of 2004, several additional agreements were in advanced
negotiations. These include traditional private label agreements as well as
licenses to embed STF forms technology directly into customer workflow.
11
Item 1. Business
--------
General Development of Business and Narrative Description of Business, Continued
The Bureau of National Affairs, Inc. ("BNA" or the "Company"), operates
primarily in the publishing, printing, and software industries. Publishing
operations consist of the production and marketing of information products in
print and electronic form. Printing operations consist of printing services to
internal and commercial customers. Software operations consist of the production
and marketing of software programs and interactive electronic forms. Activities
in other industry segments are less than ten percent of total revenue.
Publishing of legal, regulatory, and business advisory information is very
competitive. Some of the Company's publishing competitors are much larger and
have greater resources. The internet provides ready access to business
information made available by direct and indirect commercial competitors, and
government agencies. The Company produces value-added information and competes
on the basis of comprehensiveness and timeliness (quality), product line
breadth, brand reputation, variety of format offerings, price, and customer
service.
The Company's subsidiary, The McArdle Printing Company, Inc. (McArdle), competes
with a number of commercial and financial printers for 71 percent of its
business. McArdle competes on the basis of the breadth of its print capabilities
and related services, price, and customer service.
BNA Software competes with a number of tax and financial planning software
publishers. It competes on the basis of product features and functions, quality
and reliability, timeliness of product updates, ease of use, brand recognition,
customer support, and price. STF is the dominant provider of electronic forms
with little direct competition.
The number of employees of BNA and its subsidiary companies was 1,802 on
December 31, 2004.
BNA stock may be purchased only by active employees, and may be held only by
employees, former employees, and by their heirs. Therefore, financial
information and reports filed with the Securities and Exchange Commission (SEC)
are not available to the general public on BNA's corporate internet website,
www.bna.com. The Company provides paper copies of filings to stockholders upon
request, free of charge.
Item 2. Properties
----------
BNA Washington Inc. owns and manages four buildings used by BNA and Tax
Management Inc. Principal operations are conducted in three adjacent owned
buildings on 25th Street, N.W., Washington, D.C, one of which is partially
leased out. BNA also leases office space for its use on 23rd Street, N.W.,
Washington, D.C. BNA's Subscriber Relations Group operates in an owned facility
in Rockville, Maryland.
IOMA conducts its operations from leased offices in New York, New York. Pike &
Fischer, a division of IOMA, leases office space for its operations in Silver
Spring, Maryland. Kennedy Information, Inc. conducts its operations from leased
offices in Peterborough, New Hampshire. STF Services Corporation leases office
space for its operations in East Syracuse, New York. BNA International Inc.
conducts its operations from leased offices in London, England. The McArdle
Printing Co., Inc. owns its office and plant facilities in Upper Marlboro,
Maryland.
12
Item 3. Legal Proceedings
-----------------
The Company is involved in certain legal actions arising in the ordinary course
of business. In the opinion of management the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2004.
Item X. EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The following persons were executive officers of The Bureau of National Affairs,
Inc., at December 31, 2004. Executive officers are elected annually by the Board
of Directors and serve until their successors are elected.
Name Age Present position and prior experience
- --------------------------------------------------------------------------------
Cynthia J. Bolbach 57 Vice President and Corporate Secretary
Elected corporate secretary in 1995
and vice president in 2002. Joined
BNA in 1972.
Eunice L. Bumgardner 44 Vice President and General Counsel
Elected vice president in 1996 and
general counsel in 1995. Joined
BNA in 1994.
Carol A. Clark 48 Vice President
Elected vice president in 2001.
Previously served as Technology
Director since 1997.
Joined BNA in 1983.
Sandra C. Degler 65 Chairman of the Board
Elected chairman in 2004 and vice
chairman in 1998. Served as president
of Tax Management Inc. from 1983 to
2000. Joined BNA in 1963.
George J. Korphage 58 Vice President and Chief Financial
Officer
Elected vice president in 1988 and
chief financial officer in 1989.
Joined BNA in 1972.
Gilbert S. Lavine 53 Treasurer
Elected to present position in 1998.
Joined BNA in 1985.
13
Item X. EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
------------------------------------
Name Age Present position and prior experience
Gregory C. McCaffery 44 Vice President and Chief Operating
Officer
Elected vice president in 2000
and chief operating officer in
2003. Previously was director of
marketing and product development
since 1996. Joined BNA in 1986.
Robert L. Velte 57 Vice President
Elected vice president in 1995.
Joined BNA in 1976.
Paul N. Wojcik 56 Vice Chariman, President and Chief
Executive Officer
Elected vice chairman in 2004,
president in 1995 and CEO in 1997.
Joined BNA in 1972.
14
PART II
Item 5. Market for the Registrant's Common Stock and Related
----------------------------------------------------
Security Holder Matters
-----------------------
Market Information, Holders, and Dividends
The principal market for trading of voting shares of common stock of The Bureau
of National Affairs, Inc., is through the Trustee of the Stock Purchase and
Transfer Plan.
There is no established public trading market for any of BNA's three classes of
stock, but the Stock Purchase and Transfer Plan provides a market through which
Class A stock can be bought and sold.
The Board of Directors semi-annually establishes the price at which Class A
shares can be bought and sold through the Stock Purchase and Transfer Plan and
declares cash dividends. In accordance with the corporation's bylaws, the price
and dividends on non-voting Class B and Class C stock are the same as on Class A
stock. Dividends have been paid continuously for 54 years, and they are expected
to continue.
As of February 26, 2005, there were 1,378 Class A shareholders, 325 Class B
shareholders, and 3 Class C shareholders. During 2004, the Company repurchased
1,255,756 shares of Class B stock and 426,653 shares of Class C stock from
former employees.
Established stock price and dividends declared during 2004 and 2003 were as
follows:
Stock Price
January 1, 2003 - March 23, 2003 $10.50
March 24, 2003 - September 21, 2003 11.00
September 22, 2003 - March 21, 2004 11.25
March 22, 2004 - September 19, 2004 11.75
September 20, 2004 - December 31, 2004 12.00
Record Date and Dividend Amount
March 22, 2003 $.15
September 20, 2003 .15
March 20, 2004 .15
September 18, 2004 .16
15
PART II
Item 6. Selected Financial Data
-----------------------
The Bureau of National Affairs, Inc.
Consolidated Operating and Financial Summary: 2004-2000
(Dollar amounts in thousands, except per share and profit margin data)
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Operating Revenues $321,256 $311,824 $309,790 $305,965 $297,399
Operating Expenses 283,304 286,274 281,900 291,489 269,365
- -------------------------------------------------------------------------------
Operating Profit 37,952 25,550 27,890 14,476 28,034
Non-operating Income:
Investment Income 3,713 4,644 6,235 8,542 9,327
Interest Expense (5,620) (5,710) (5,829) (6,000) (1,654)
Other Income (Expense) (44) 724 191 4,421 (1,200)
- -------------------------------------------------------------------------------
Income Before Income Taxes
and Cumulative Effect of
Accounting Changes 36,001 25,208 28,487 21,439 34,507
Income Taxes 13,442 9,123 9,670 8,177 11,353
------------------------------------------------
Income from Operations 22,559 16,085 18,817 13,262 23,154
Cumulative Effect of
Accounting Changes (a) -- -- (4,440) -- (7,470)
------------------------------------------------
Net Income $ 22,559 $ 16,085 $ 14,377 $ 13,262 $ 15,684
- -------------------------------================================================
Profit Margins (% of revenues):
Operating Profit 11.8 8.2 9.0 4.7 9.4
Earnings (b) 7.0 5.2 6.1 4.3 7.8
- -------------------------------------------------------------------------------
Earnings Per Share from Operations $.69 $.46 $.53 $.35 $.59
Cumulative Effect of
Accounting Changes (a) -- -- (.12) -- (.19)
------------------------------------------------
Total Earnings Per Share $.69 $.46 $.41 $.35 $.40
================================================
Dividends Per Share $.31 $.30 $.30 $.30 $.28
- -------------------------------================================================
Balance Sheet Data:
Total Assets $318,347 $330,282 $340,293 $376,423 $358,552
Long-Term Debt-
less current portion 62,500 70,000 75,000 84,000 59,000
- -------------------------------================================================
Employee Data:
Number of Employees 1,802 1,878 1,999 2,121 2,085
Total Employment Costs $172,595 $174,363 $166,005 $162,060 $150,345
- -------------------------------================================================
Stockholder Data at Year-End:
Number of Stockholders 1,711 1,786 1,834 1,807 1,782
Common Shares Outstanding
(In thousands) 31,719 33,653 34,922 37,492 38,797
- -------------------------------================================================
Per share figures and number of shares outstanding have been adjusted to reflect
the five-for-one stock split effective September 23, 2001.
(a) Includes the cumulative effects of the changes in accounting for goodwill in
2002, and for selling expenses in 2000.
(b) Based on net income excluding the cumulative effects of the accounting
changes.
16
Selected Quarterly Data
The following is quarterly financial information (unaudited) for 2004 and 2003
(in thousands of dollars).
First Second Third Fourth
2004 Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 27 June 19 Sept. 11 Dec. 31
- ------------------------------------------------------------------------------
Revenues $69,913 $69,901 $72,994 $108,448
Gross Profit 31,143 31,744 34,755 56,134
Net Income 3,701 3,435 5,954 9,469
Earnings Per Share $ .11 $ .11 $.18 $.29
Quarter Quarter Quarter Quarter
2003 Ended Ended Ended Ended
March 22 June 14 Sept. 6 Dec. 31
- ------------------------------------------------------------------------------
Revenues $65,860 $69,725 $74,936 $101,303
Gross Profit 27,708 31,319 36,180 45,020
Net Income 2,310 2,266 6,116 5,393
Earnings Per Share $ .07 $ .06 $.18 $ .15
17
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
FORWARD -LOOKING STATEMENTS
This Annual Report contains and incorporates by reference certain statements
that are not statements of historical fact but are forward-looking statements.
The use of such words as "believes," "expects," "estimates," "could," "should,"
and "will," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ from those projected. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof.
2004 vs. 2003
- -------------
BNA financial results for 2004 showed strong improvement through the entire
year. Consolidated operating profit and net income exceeded last year's results,
due to large improvements in all three segments' operating results.
Consolidated revenues increased 3.0 percent to $321.3 million, while operating
expenses were down 1.0 percent. As a result, the consolidated operating profit
was up 48 percent to $38.0 million. Net income was $22.6 million, a 40 percent
increase over 2003. Earnings per share were $.69, up 50 percent, due to the
improved net income and fewer outstanding shares. As explained below,
year-to-year comparisons for both the Publishing and Software segments were
favorably affected by certain 2003 events.
The publishing segment -which aggregates the Parent with Tax Management Inc.
(excluding BNA Software), IOMA, Pike & Fischer, Inc., BNA International Inc.,
Kennedy Information, Inc., and BNA Washington Inc.- generated 84 percent of
consolidated revenues. Publishing revenues were up 1.1 percent in 2004 to $269.3
million. Parent and Tax Management combined subscription and online revenues
were up 0.7 percent. Legal and tax products continued to generate respectable
revenue gains, while revenues from the other major market lines continued to
decline, albeit at a slower rate. Nearly all the other publishing units had
higher revenues. Publishing revenues are expected to grow by a low single-digit
percentage rate in 2005. Publishing operating expenses were down 1.8 percent
compared to last year, which had included a $1.6 million net expense for a
voluntary early retirement program (recorded in general and administrative
expenses). Excluding this one-time 2003 expense, operating expenses were down
1.2 percent, despite higher staffing expenses, due to lower fulfillment and
selling costs. Six new products were launched in 2004. Identifiable development
expenses for new products and improvements on existing products were $8.0
million in 2004 and $8.3 million in 2003. Operating expenses in 2004 also
include an identifiable $4.8 million for developing improved business and
publishing systems, compared to $4.9 million in 2003. The publishing segment's
operating profit was up 22 percent compared to 2003, excluding the one-time
expense.
The printing segment, which includes results of The McArdle Printing Company,
Inc., grew revenues by 11.4 percent in 2004. Intersegment revenues, expected to
decline as publishing segment subscribers continue to migrate from print to
electronic products, were down 13.0 percent. But commercial sales were up 26
percent, despite a very price-sensitive competitive environment, due mostly to
an upturn in financial printing work. Total printing revenues in 2005 are
expected to show little change. Operating expenses were up 9.3 percent,
reflecting higher variable costs. The segment operating profit was $392,000 in
2004 compared to a $283,000 loss in 2003.
18
The software segment combines BNA Software, a division of Tax Management Inc.,
with STF Services Corporation. Software segment revenues were up 3.3 percent in
2004 and operating expenses decreased 14.0 percent. BNA Software revenues were
up 7.3 percent and ongoing expenses decreased 5.4 percent due to lower
fulfillment costs and cost containment efforts. BNA Software recorded a $4.1
million operating profit in 2004; it posted a $1.8 million profit in 2003,
excluding a $1.8 million writedown of capitalized development costs (recorded as
an editorial expense). STF experienced lower revenues from both intersegment and
external customers, resulting in a 6.3 percent decline in total STF revenues
compared to 2003. Operating expenses decreased 12.2 percent due to lower
amortization and staffing costs, and STF achieved a 19.6 percent increase in its
operating profit. The total software segment recorded a $5.8 million operating
profit in 2004 compared to a $1.4 million profit in 2003. Software revenues are
expected to grow by a low single-digit percentage in 2005.
Investment income and net other income fell $1.6 million due to lower gains from
sales of securities and other assets. Interest expense decreased $90,000 due to
less debt and higher capitalized interest. Other comprehensive income reflected
a smaller unrealized holding gain in 2004 compared to 2003.
The consolidated federal, state, and local effective income tax rate increased
to 37.3 percent in 2004 from 36.2 percent in 2003, mainly due to lower exempt
interest income.
2003 vs. 2002
- -------------
The weak business climate continued to adversely affect BNA's revenues, asset
valuations, and investment income, particularly in the first half of the year.
Although there were improvements in the last half, they weren't strong enough to
impact 2003 results to a significant degree. Cost containment efforts mitigated
a sharp increase in employee benefit expenses, but consolidated profits declined
from comparable prior year levels.
Consolidated revenues increased 0.7 percent to $311.8 million, while operating
expenses increased 1.6 percent. As a result, the consolidating operating profit
was down 8.4 percent, reflecting lower Printing and Software segment results.
Excluding the effect of a 2002 change in accounting, net income declined 14.5
percent in 2003 to $16.1 million, and earnings per share were down 13.2 percent
to $.46.
The publishing segment generated 85 percent of consolidated revenues. Publishing
revenues were up 1.3 percent. Publishing revenues in 2003 benefited from a large
one-year increase from new contracts with online partners. Operating expenses
increased just $1.2 million in total, despite a $7.5 million increase in health
care and postretirement expenses and a $1.8 million charge for a voluntary early
retirement program. Depreciation and amortization expenses were down $1.7
million from 2002, which had included a larger intangible asset writedown. Cost
containment efforts, including staff reductions, and lower fulfillment costs,
reflecting the continuing migration of subscribers to electronic products, held
the total publishing segment expenses to only a 0.5 percent increase. Ten new
products were launched in 2003. Identifiable development expenses for new
products and improvements on existing products were $8.3 million in 2003 and
$5.7 million in 2002. Operating expenses in 2003 also include an identifiable
$4.9 million for developing improved business and publishing systems, compared
to $3.3 million in 2002. Publishing operating profit was up 10.3 percent
compared to 2002.
The printing segment experienced a 6.1 percent decrease in sales, reflecting a
2.3 percent decrease from commercial customers and an 11.9 percent decrease in
intersegment revenues. Sales to commercial customers suffered from the general
economic slowdown and industry-wide excess capacity. Intercompany revenues
continue to decline as publishing segment subscribers migrate from print to
electronic products. Operating expenses decreased 3.3 percent, reflecting lower
variable costs and workforce reductions. Printing operating loss was $283,000 in
2003, compared to a profit of $748,000 in 2002.
19
The software segment's revenues were down $1.1 million compared to 2002, which
had included a one-time $1.3 million STF contract termination settlement. BNA
Software revenues increased 3.9 percent reflecting strong demand for its tax and
financial planning products, but STF revenues were lower due to the terminated
contract. The segment operating expenses increased 13.0 percent over 2002, which
had included a $450,000 credit for a tax penalty abatement. Marketing expense,
primarily related to new products, increased $0.7 million and amortization
expenses, including a writedown of capitalized product development costs, were
up $0.8 million. The segment recorded a $1.4 million operating profit in 2003
compared to a $5.0 million operating profit in 2002.
Non-operating income decreased from $597,000 in 2002 to a $342,000 net expense
in 2003. Other income reflected higher gains from asset sales, but investment
income was lower due to lower investment balances and lower market yields.
Interest expense was slightly lower.
The consolidated federal, state, and local effective income tax rate increased
to 36.2 percent in 2003 from 33.9 percent in 2002, mainly due to higher state
and local taxes.
Cash Flows, Liquidity, and Financial Resources
- ----------------------------------------------
The Company maintains its financial reserves in cash and investment securities
which, along with its operating cash flows, are sufficient to fund ongoing
expenditures for operations and to support employee ownership. Cash provided by
operating activities increased $5.8 million in 2004 to $38.4 million, reflecting
a 3.5 percent increase in collections, and a 1.8 percent reduction in operating
expenditures.
Cash used for investing activities netted to $11.2 million. Capital expenditures
netted to $5.2 million. Capital expenditures for 2005 are expected to be
approximately $5 million. Cash used for the investment portfolio was $6.0
million.
Cash used for financing activities netted to $37.3 million. Capital stock
repurchases amounted to $29.2 million, including mandatory tenders. Debt
principal repayments amounted to $5 million, and the Company paid cash dividends
of $10.2 million in 2003. Sales of Class A capital stock to employees totaled
$7.1 million.
The Company's stockholders, when selling stock, are required to first tender
them to the Company or to its employee stock purchase plan. The Company has
supported the continuance of employee ownership through its practice of
repurchasing stock tendered by stockholders, but is not required to do so.
Capital stock with a market value of $5.4 million as of December 31, 2004, is
known or expected to be tendered in 2005. The actual amount repurchased will
likely be higher.
Contractual cash obligations as of December 31, 2004, were as follows (in
thousands of dollars):
Payments Due by Period
------------------------------------------------------
Contruactural Less than 1-3 4-5 After 5
Obligations: Total 1 Year Years Years Years
- ------------------------------------------------------------------------------
Term Debt $ 70,000 $ 7,500 $ 18,000 $ 21,000 $ 23,500
Operating Leases 16,716 6,462 8,245 1,491 518
Deferred Real Estate Tax 6,382 -- 6,382 -- --
- ------------------------------------------------------------------------------
Total $ 93,098 $ 13,962 $ 32,627 $ 22,491 $ 24,018
20
With over $120 million in cash and investment portfolios, the financial position
and liquidity of the Company remains very strong. The cash flows from
operations, along with existing financial reserves and proceeds from the sales
of capital stock, have been sufficient in past years to meet all operational
needs, new product introductions, debt repayments, most capital expenditures,
and, in addition, provide funds for dividend payments and the repurchase of
stock tendered by shareholders. Should more funding become necessary or
desirable in the future, the Company believes that it has additional debt
capacity based on its operating cash flows and real estate equity.
Other Disclosures
- -----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company evaluates its estimates and assumptions on an
ongoing basis using a combination of historical information and other
information that is believed to be relevant. Actual results may differ from
these estimates based on different assumptions or conditions. The Company
believes the critical accounting policies that most impact the consolidated
financial statements are described below.
The Company has $73.5 million of goodwill at year-end 2004. The carrying amount
of goodwill is subject to annual testing. Goodwill that is not supported by
measures of fair value must be written down, resulting in an impairment expense.
The Company updated its analysis of goodwill as of December 31, 2004, and
determined that there was no impairment.
The Company has $23.2 million of intangible assets at year-end 2004, as
summarized in Note 9 to the Company's financial statements. Most of this is
software that is used internally. In addition, intangible assets include
identified assets of Kennedy and STF at the time of their respective
acquisitions. The Company periodically evaluates the recoverability of the
intangible assets, which are amortized, and their estimated remaining lives. If
an impairment in value occurs, an impairment expense must be recorded, and
amortization periods may be reduced. Amortization expense was $6.6 million in
2004, and $10.2 million in 2003 including $2.4 million in impairment charges.
Kennedy has goodwill and intangible assets amounting to $35.5 million. Operating
losses or other revenue base deterioration could result in future impairment
losses.
The Company has recorded $31.5 million of net deferred income tax assets as of
year-end 2004, as described in Note 8 to the consolidated financial statements.
The ultimate realization of deferred tax assets is dependent upon future taxable
income during the periods in which those temporary differences become
deductible. The Company has consistently achieved profitability and taxable
income. In the opinion of management, this trend will continue, and it is more
likely than not that the recorded deferred income tax assets will be fully
realized.
The Company has pension and other postretirement benefit liabilities totaling
$77.0 million at year-end 2004, as described in Note 4 to the Company's
financial statements. Independent actuaries use a number of assumptions to
compute these liabilities, the accumulated benefit obligations, and the related
benefit expenses. These include life expectancies, retirement ages, health care
cost trends, compensation increases, discount rates, and returns on plan assets.
Changes in these assumptions can and do change the amounts of postretirement
benefit liabilities and related expenses. The Company, in consultation with the
actuaries, periodically reviews the assumptions and revises them when
appropriate. Total expenses for the postretirement benefits that were subject to
estimates and assumptions were $19.3 million in 2004 and $18.1 million in 2003.
21
Accounting Pronouncements
- -------------------------
In response to the enactment of the American Job Creation Act of 2004 (the "Jobs
Act"), the FASB issued FASB Staff Position (FSP) No. 109-1, "Application of FASB
Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided
to U.S. Based Manufacturers" (FSP 109-1), and FSP No.109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the
American Jobs Creation Act of 2004".
FSP No. 109-1 clarifies how to apply SFAS No. 109 to the new law's tax deduction
for income attributable to "domestic production activities." The fully phased-in
tax deduction is up to nine percent of the lesser of taxable income or
"qualified production activities income," as defined by the Jobs Act. The staff
position requires that the deduction be accounted for as a special deduction in
the period earned, not as a tax-rate reduction. As a result, a reduction in
income tax expense for the domestic production activities will be recognized in
the quarterly period(s) in which expenses are eligible for the deduction.
The FASB also recently issued the following pronouncements: SFAS No. 151,
Inventory Costs--An Amendment of ARB No. 43, Chapter 4; and SFAS No. 123
(revised 2004), Share-Based Payment. The adoption of these accounting standards
is not expected to have an impact on the Company's financial position.
Item 7a. Quantitative And Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to interest rate risks in its investment portfolio. A
hypothetical ten percent increase in market interest rates would result in a
decline in the market value of the Company's fixed-income securities.
The maturity dates and average interest yields for fixed-income securities debt
held in the Company's investment portfolio as of December 31, 2004, was as
follows (in thousands of dollars):
Expected Maturity Date
- --------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter
- --------------------------------------------------------------------------------
Municipal Bonds $11,919 $18,969 $25,327 $ 5,873 $ 7,074 $22,731
Average Interest Yield 2.5% 4.9% 4.9% 6.0% 5.0% 4.9%
Corporate Debt -- -- $672 $495 -- --
Average Interest Yield 2.8% 3.5%
- --------------------------------------------------------------------------------
The expected yield from $2,390,000 invested in corporate debt mutual funds with
no fixed maturity date is 7.6 percent.
The Company manages interest rate risk in its investment portfolio by
diversifying the maturities of its fixed-income investments. Approximately 74
percent of these instruments at year-end 2004 mature within five years.
Shorter-term maturity investments reduce the risk that an increase in market
interest rates will have a permanent adverse effect on the Company's financial
position. The Company does not hold securities for trading purposes, or use
derivative financial instruments.
22
PART II
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
THE BUREAU OF NATIONAL AFFAIRS, INC.
Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(With Independent Auditors' Report Thereon)
23
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
The Bureau of National Affairs, Inc.:
We have audited the accompanying consolidated balance sheets of The Bureau of
National Affairs, Inc. and subsidiaries ("the Company") as of December 31, 2004
and 2003, and the related consolidated statements of income, shareholders'
equity and comprehensive income, cash flows and the consolidated financial
statement schedule included as Item 15(a)(2) on the Company's Form 10-K for each
of the years in the three-year period ended December 31, 2004. These
consolidated financial statements and related consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and the
related consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Bureau of
National Affairs, Inc. and subsidiaries as of December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of The Bureau of
National Affairs, Inc. and subsidiaries' internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 11,
2005 expressed an unqualified opinion on management's assessment of, and the
effective operation of, internal control over financial reporting.
s/ KPMG LLP
-----------
KPMG LLP
McLean, Virginia
March 11, 2005
24
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
The Bureau of National Affairs, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, included in
Item 9a to The Bureau of National Affairs, Inc. and subsidiaries' ("the
Company") 2004 Form 10-K, that the Company maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that The Bureau of National Affairs,
Inc. and subsidiaries maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all material respects,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, The Bureau of National Affairs, Inc. and subsidiaries
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
The Bureau of National Affairs, Inc. and subsidiaries as of December 31, 2004
and 2003, and the related consolidated statements of income, shareholders'
equity and comprehensive income, cash flows and the consolidated financial
statement schedule for each of the years in the three-year period ended December
31, 2004. Our report dated March 11, 2005 expressed an unqualified opinion on
those consolidated financial statements and the related consolidated financial
statement schedule.
s\ KPMG LLP
-----------
KPMG LLP
McLean, Virginia
March 11, 2005
25
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(In thousands of dollars, except per share amounts)
Percent of Operating
Revenue
--------------------
2004 2003 2002 2004 2003 2002
-------- -------- -------- ------ ------ ------
Operating Revenues (Note 3) $321,256 $311,824 $309,790 100.0% 100.0% 100.0%
-------- -------- -------- ------ ------ ------
Operating Expenses
(Notes 3,4,9, and 11):
Editorial, production, and
distribution 171,300 171,597 166,775 53.3 55.0 53.8
Selling 55,316 56,698 55,354 17.2 18.2 17.9
General and administrative 56,688 57,979 59,771 17.7 18.6 19.3
-------- -------- -------- ------ ------ ------
Total Operating Expenses 283,304 286,274 281,900 88.2 91.8 91.0
-------- -------- -------- ------ ------ ------
Operating Profit 37,952 25,550 27,890 11.8 8.2 9.0
-------- -------- -------- ------ ------ ------
Non-Operating Income:
Investment income (Note 5) 3,713 4,644 6,235 1.1 1.5 2.0
Interest expense (Note 10) (5,620) (5,710) (5,829) (1.7) (1.8) (1.9)
Other income(expense)(Note 6) (44) 724 191 -- 0.2 0.1
-------- -------- -------- ------ ------ ------
Total Non-Operating Income (1,951) (342) 597 (0.6) (0.1) 0.2
-------- -------- -------- ------ ------ ------
Income Before Income Taxes 36,001 25,208 28,487 11.2 8.1 9.2
Provision for income taxes
(Note 8) 13,442 9,123 9,670 4.2 2.9 3.1
-------- -------- -------- ------ ------ ------
Income before cumulative
effect of accounting change 22,559 16,085 18,817 7.0% 5.2% 6.1%
====== ====== ======
Cumulative effect of accounting
change (Note 7) -- -- (4,440)
-------- -------- --------
Net Income $ 22,559 $ 16,085 $ 14,377
======== ======== ========
Earnings Per Share (Note 12)
Income before cumulative
effect of accounting change $ .69 $ .46 $ .53
Cumulative effect of accounting
change (Note 7) -- -- (.12)
-------- -------- --------
Net Income Per Share $ .69 $ .46 $ .41
======== ======== ========
See accompanying notes to consolidated financial statements.
26
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In thousands of dollars)
ASSETS
December 31,
--------------------------
2004 2003
---------- -----------
Current Assets:
Cash and cash equivalents (Note 5) $ 8,442 $ 18,488
Short-term investments (Note 5) 11,752 25,450
Receivables (Note 9) 30,827 32,260
Inventories (Note 9) 3,535 3,802
Prepaid expenses 3,864 4,560
Deferred selling expenses (Note 3) 3,474 4,625
Deferred income taxes (Note 8) 8,554 8,197
---------- -----------
Total Current Assets 70,448 97,382
Marketable Securities (Note 5) 99,817 80,985
Property and Equipment (Note 9) 28,297 30,519
Deferred Income Taxes (Note 8) 22,955 23,368
Goodwill (Note 7) 73,452 73,852
Intangible and Other Assets (Note 9) 23,378 24,176
---------- -----------
Total Assets $ 318,347 $ 330,282
========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
27
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(In thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
--------------------------
2004 2003
---------- -----------
Current Liabilities:
Current portion of long-term debt (Note 10) $ 7,500 $ 5,000
Payables and accrued liabilities (Note 9) 44,963 43,730
Deferred revenues (Note 3) 112,085 114,954
---------- -----------
Total Current Liabilities 164,548 163,684
Long-Term Debt, less current portion (Note 10) 62,500 70,000
Postretirement Benefits, less current portion
(Note 4) 67,518 64,302
Other Liabilities 8,682 7,793
---------- -----------
Total Liabilities 303,248 305,779
---------- -----------
Commitments and Contingencies (Notes 11 and 12)
Stockholders' Equity (Note 12):
Common stock issued, $1.00 par value --
Class A - 30,000,000 shares 30,000 30,000
Class B - 24,634,865 shares 24,635 24,635
Class C - 2,531,680 shares 2,532 2,532
Additional paid-in capital 15,910 11,350
Retained earnings 108,030 95,631
Treasury stock, at cost (166,154) (139,470)
Elements of other comprehensive income:
Net unrealized gain (loss) on
marketable securities 354 (17)
Foreign currency translation adjustment (208) (158)
---------- -----------
Total Stockholders' Equity 15,099 24,503
---------- -----------
Total Liabilities and Stockholders' Equity $ 318,347 $ 330,282
========== ===========
See accompanying notes to consolidated financial statements.
28
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(In thousands of dollars)
2004 2003 2002
---------- ---------- ----------
Cash Flows from Operating Activities:
Net income $ 22,559 $ 16,085 $ 14,377
Items with different cash requirements
than that reflected in net income -
Cumulative effect of accounting change -- -- 4,440
Depreciation and amortization 10,282 14,292 15,117
(Gain) on sales of securities (314) (1,174) (1,629)
(Gain) loss on sales of assets 44 (724) (191)
Capitalized interest (367) (195) (62)
Others 1,140 1,079 580
Changes in operating assets and liabilities -
Receivables 2,026 2,919 1,845
Deferred revenues (2,824) (4,215) (4,642)
Payables and accrued liabilities 1,754 1,822 (4,647)
Postretirement benefits 2,333 3,923 (940)
Deferred income taxes (116) (2,390) 114
Deferred selling expenses 1,151 1,199 441
Inventories 267 (207) 128
Other assets and liabilities - net 494 197 1,266
---------- ---------- ----------
Net cash provided by operating activities 38,429 32,611 26,197
---------- ---------- ----------
Cash Flows from Investing Activities:
Capital expenditures -
Purchase of equipment and furnishings (1,706) (903) (1,414)
Capitalized software (3,884) (3,347) (3,060)
Building improvements (69) (585) (183)
Business purchase price adjustments 400 (447) (753)
Proceeds from sales of assets 175 523 48
Purchase of publishing assets (102) (136) (358)
---------- ---------- ----------
Net cash (used for) capital expenditures (5,186) (4,895) (5,720)
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
(Continued)
29
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(In thousands of dollars)
2004 2003 2002
---------- ---------- ----------
Investment securities -
Proceeds from sales and maturities 83,806 122,471 130,355
Purchases (89,811) (113,473) (119,683)
---------- ---------- ----------
Net cash provided by (used for)
investment securities (6,005) 8,998 10,672
---------- ---------- ----------
Net cash provided by (used for)
investing activities (11,191) 4,103 4,952
---------- ---------- ----------
Cash Flows from Financing Activities:
Sales of capital stock to employees 7,118 8,497 7,056
Purchases of treasury stock (29,242) (22,782) (32,959)
Dividends paid (10,160) (10,471) (10,733)
Repayment of borrowings (5,000) (5,000) (4,000)
---------- ---------- ----------
Net cash (used for) financing activities (37,284) (29,756) (40,636)
---------- ---------- ----------
Net Increase (Decrease) in Cash
and Cash Equivalents (10,046) 6,958 (9,487)
Cash and Cash Equivalents,
beginning of year 18,488 11,530 21,017
---------- ---------- ----------
Cash and Cash Equivalents, end of year $ 8,442 $ 18,488 $ 11,530
========== ========== ==========
Supplemental Cash Flow Information:
Interest paid $ 5,588 $ 5,597 $ 5,802
Income taxes paid 13,650 10,325 9,360
See accompanying notes to consolidated financial statements.
30
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(In thousands of dollars)
Comprehensive Capital Additional Accum. Other
Income Stock Paid-In Retained Treasury Comprehensive
(Note 13) Issued Capital Earnings Stock Income
------------- ------- ---------- --------- ---------- -------------
Balance, January 1, 2002 $57,167 $ 1,249 $ 86,373 $ (89,181) $ (732)
Net Income $ 14,377 -- -- 14,377 -- --
Other Comprehensive Income, net
of tax:
Unrealized (loss) on marketable
securities (1,092) -- -- -- -- (1,092)
Currency translation adjustment (66) -- -- -- -- (66)
-------------
Comprehensive Income $ 13,219
=============
Sales of Class A treasury shares
to employees -- 4,614 -- 2,442 --
Repurchases of shares -- -- -- (32,959) --
Cash dividends--$.30 per share -- -- (10,733) -- --
------------- ------- ---------- --------- ---------- -------------
Balance, December 31, 2002 57,167 5,863 90,017 (119,698) (1,890)
Net Income $ 16,085 -- -- 16,085 -- --
Other Comprehensive Income, net
of tax:
Unrealized gain on marketable
securities 1,794 -- -- -- -- 1,794
Currency translation adjustment (79) -- -- -- -- (79)
-------------
Comprehensive Income $ 17,800
=============
Sales of Class A treasury shares
to employees -- 5,487 -- 3,010 --
Repurchases of shares -- -- -- (22,782) --
Cash dividends--$.30 per share -- -- (10,471) -- --
------------- ------- ---------- --------- ---------- -------------
Balance, December 31, 2003 57,167 11,350 95,631 (139,470) (175)
Net Income $ 22,559 -- -- 22,559 -- --
Other Comprehensive Income, net
of tax:
Unrealized gain on marketable
securities 371 -- -- -- -- 371
Currency translation adjustment (50) -- -- -- -- (50)
-------------
Comprehensive Income $ 22,880
=============
Sales of Class A treasury shares
to employees -- 4,560 -- 2,558 --
Repurchases of shares -- -- -- (29,242) --
Cash dividends--$.31 per share -- -- (10,160) -- --
------- ---------- --------- ---------- ------------
Balance, December 31, 2004 $57,167 $ 15,910 $108,030 $(166,154) $ 146
======= ========== ========= ========== ============
See accompanying notes to consolidated financial statements.
31
THE BUREAU OF NATIONAL AFFAIRS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
The Bureau of National Affairs, Inc. (the Parent) and its subsidiary
companies (consolidated, the Company). Material intercompany transactions
and balances have been eliminated. Certain prior year balances have been
reclassified to conform to the current year presentation.
The carrying value of financial assets and liabilities reported in the
financial statements, other than long-term debt, approximates fair value.
The reported amounts of some assets and liabilities and the disclosures of
contingent assets and liabilities result from management estimates and
assumptions, which are required to prepare financial statements in
conformity with accounting principles generally accepted in the United
States of America. Estimates and assumptions are used for measuring such
items as postretirement benefits, deferred tax assets, and the allowance
for doubtful accounts, and for evaluating the possible impairment of
intangible assets and goodwill. Estimates and assumptions may also affect
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(2) ACQUISITIONS
During 2002, the Company purchased publishing assets, primarily customer
lists, from another publisher. The total cost was $846,000, consisting of
$772,000 in cash, payable over four years, and the balance in assumed
liabilities. In 2003, the Company purchased customer lists for $38,000.
(3) RECOGNITION OF REVENUES AND SELLING EXPENSES
Revenues, net of appropriate reserve for returns, are recognized when
products are delivered to customers. Deferred revenues consist almost
entirely of deferred subscription revenues. Subscription revenues and
related sales commission expenses are deferred and amortized over the
subscription terms, which are primarily for one year.
Advertising costs are expensed as incurred and were $6,797,000, $7,524,000,
and $7,478,000 in 2004, 2003, and 2002 respectively.
(4) EMPLOYEE BENEFIT PLANS
The Company has noncontributory defined benefit pension plans covering
employees of the Parent. Benefits are based on years of service and average
annual compensation. The plans provide for five-year cliff vesting. In
addition to providing pension benefits, the Company extends certain health
care and life insurance benefits (other postretirement benefits) to retired
employees of the Parent.
(Continued)
32
The following table sets forth the obligations and funded status of the
plans as of December 31 (in thousands of dollars):
Other
Postretirement
Pension Benefits Benefits
------------------- -------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Change in projected benefit obligation:
Benefit obligation - January 1 $160,697 $136,022 $ 87,168 $ 68,689
Service cost 7,677 6,974 4,345 3,140
Voluntary early retirement program -- 1,760 -- --
Interest cost 9,451 8,784 6,294 4,599
Plan amendment -- 699 -- --
Actuarial loss 6,944 11,394 34,141 12,754
Benefits paid (7,726) (4,936) (2,816) (2,014)
Curtailments -- --- (388) --
--------- --------- --------- ---------
Benefit obligation - December 31 177,043 160,697 128,744 87,168
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets -
January 1 - 106,557 85,126 21,934 17,269
Actual return on plan assets 13,915 14,202 2,153 4,665
Employer contribution 14,000 12,000 -- --
Benefits paid (7,552) (4,771) -- --
--------- --------- --------- ---------
Fair value of plan assets -
December 31 126,920 106,557 24,087 21,934
--------- --------- --------- ---------
Funded status (50,123) (54,140) (104,657) (65,234)
Unrecognized net loss 30,892 30,291 46,375 13,895
Unrecognized prior service cost 681 743 (125) (179)
--------- --------- --------- ---------
Net amount recognized (18,550) (23,106) (58,407) (51,518)
Less current portion (6,633) (8,287) (2,806) (2,035)
--------- --------- --------- ---------
Long-term portion $(11,917) $(14,819) $(55,601) $(49,483)
========= ========= ========= =========
Assumed discount rate 5.7% 6.0% 5.7% 6.0%
Assumed rate of compensation increase 5.0% 5.0% -- --
The Company's funding practice for the pension plan is to contribute
amounts which, at a minimum, satisfy ERISA requirements. The Company
contributed $14,000,000 in 2004, $12,000,000 in 2003, and $9,198,000 in
2002. The Company's policy with respect to other postretirement benefits is
to fund these benefits as claims and premiums are paid or through a
Voluntary Employees' Beneficiary Association (VEBA) trust. Pending
actuarially computed requirements, the Company expects to contribute $12
million to its pension plan and none to its other postretirement benefit
plan in 2005.
(Continued)
33
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands of dollars):
Other
Pension Postretirement
Benefits Benefits
----------- --------------
2005 $ 7,673 $ 3,126
2006 8,000 3,591
2007 8,508 4,117
2008 9,323 4,609
2009 10,184 5,196
Years 2010 - 2014 64,895 34,759
Pension accounting requires the calculation of two benefit obligation
amounts. The projected benefit obligation is the present value cost of the
Plan providing future benefits, calculated by using years of service as of
the measurement date and assuming future compensation increases. The
accumulated benefit obligation is similar, but it is calculated using
current compensation levels. The following shows pension benefit
obligations, as calculated by an independent actuary, and plan assets (in
thousands of dollars):
Pension Benefits
--------------------------
2004 2003
---------- -----------
Projected benefit obligation $ 177,043 $ 160,697
Accumulated benefit obligation 139,611 125,006
Fair value of plan assets 126,920 106,557
Components of pension expense, based on the actuarial study as of January 1
for each year, were as follows (in thousands of dollars):
2004 2003 2002
--------- --------- ---------
Service cost -- benefits earned
during the year $ 7,677 $ 6,974 $ 5,807
Interest cost 9,451 8,784 8,024
Expected return on plan assets (8,822) (7,042) (7,172)
Voluntary early retirement program -- 1,760 --
Amortization of net actuarial loss 1,250 1,261 --
Amortization of prior service cost 62 62 --
Amortization of transition assets -- -- (334)
--------- --------- ---------
Pension expense $ 9,618 $ 11,799 $ 6,325
========= ========= =========
Assumed discount rate 6.0% 6.5% 7.0%
Assumed rate of compensation increase 5.0% 5.0% 5.0%
Expected long-term return on plan assets 8.5% 8.5% 8.5%
(Continued)
34
In addition, some subsidiary companies have defined contribution pension
plans and union-sponsored multi-employer pension plans. Contributions under
some of these plans are at the discretion of the Board of Directors of the
respective subsidiary companies. Pension expense for these plans was
$1,206,000 in 2004, $1,342,000 in 2003, and $1,460,000 in 2002.
Components of other postretirement benefit expense, based on the actuarial
study as of January 1 for each year, were as follows (in thousands of
dollars):
2004 2003 2002
--------- --------- ---------
Service cost -- benefits earned
during the year $ 4,345 $ 3,140 $ 2,185
Interest cost 6,294 4,599 3,688
Expected return on plan assets (1,864) (1,382) (1,612)
Amortization of net actuarial (gain)loss 1,393 -- (505)
Amortization of prior service cost (54) (54) (54)
Curtailments (388) -- --
--------- --------- ---------
Other postretirement benefits expense $ 9,726 $ 6,303 $ 3,702
========= ========= =========
Assumed discount rate 6.0% 6.5% 7.0%
Expected long-term return on plan assets 8.5% 8.5% 8.5%
The postretirement benefit obligation as of year-end 2004 was determined
using an assumed health care cost trend rate of 10 percent for 2005,
gradually declining to 4.5 percent in 2010 and threreafter. A one percent
increase in the assumed health care cost trend rate for each year would
increase the 2004 year-end postretirement benefit obligation by $24.5
million and the 2004 postretirement benefit service and interest expense by
$2.6 million. A one percent decrease in the assumed health care cost trend
rate would decrease the postretirement benefit obligation by $19.4 million
and the postretirement benefit service and interest cost by $2.0 million.
In developing the long-term rate of return assumptions for pension and
other postretirement plan assets, the Company considers the historical
average long-term rate of earnings, and the expected future long-term
performance of individual asset categories. The Company assumes an average
annual long-term return of 8.5 percent based on an asset allocation of 60
percent in equity assets with an expected long-term return of 10 percent,
and 40 percent in fixed income assets with an expected long-term return of
6.5 percent.
Plan assets allocations as of December 31, were as follows:
Other
Postretirement
Pension Benefits Benefits
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Equity securities 64% 62% 69% 66%
Fixed income securities 29 30 27 30
Cash equivalents 7 8 4 4
-------- -------- -------- --------
Total 100% 100% 100% 100%
======== ======== ======== ========
(Continued)
35
The pension plan assets are actively managed by equity and fixed income
investment professionals emphasizing a long-term horizon. The authorized
allocation range for the equity portfolio is 35-70 percent of plan assets,
although the typical range is 50-70 percent, with the balance of assets
allocated to the fixed income portfolio. Up to 15 percent of the assets may
be invested in international equity funds. Risk is managed by maintaining
broadly diversified portfolios as well as by reallocating assets between
the equity and fixed income portfolios.
The postretirement benefits plan assets are actively managed by equity and
fixed income investment professionals emphasizing a long-term horizon. The
authorized allocation range for the equity portfolio is 40-75 percent of
plan assets, although the typical range is 50-70 percent, with the balance
of assets allocated to the fixed income portfolio. Risk is managed by
maintaining broadly diversified portfolios as well as by reallocating
assets between the equity and fixed income portfolios.
(5) INVESTMENTS AND INVESTMENT INCOME
Cash and investments consisted of the following (in thousands of dollars):
December 31,
--------------------------
2004 2003
----------- -----------
Cash and cash equivalents $ 8,442 $ 18,488
Short-term investments 11,752 25,450
Marketable securities 99,817 80,985
----------- -----------
Total $ 120,011 $ 124,923
=========== ===========
Cash equivalents consist of short-term investments, with a maturity of
three months or less at the time of purchase. Short-term investments
consist of other fixed-income investments, maturing in one year or less.
Marketable securities consist of fixed-income securities maturing in more
than one year and equity securities.
Investment income consisted of the following (in thousands of dollars):
2004 2003 2002
--------- --------- ---------
Interest income $ 2,859 $ 2,882 $ 3,771
Dividend income 540 588 835
Net gain on sales of securities 314 1,174 1,629
--------- --------- ---------
Total $ 3,713 $ 4,644 $ 6,235
========= ========= =========
Proceeds from the sales and maturities of securities were $83,806,000,
$122,471,000, and $130,355,000 in 2004, 2003, and 2002 respectively. Gross
realized gains and (losses) from these sales were $371,000 and $(57,000) in
2004, $1,247,000 and $(73,000) in 2003, and $1,717,000 and $(88,000) in
2002. The specific identification method is used in computing realized
gains and losses.
(Continued)
36
The Company's investment securities are classified as available-for-sale
and are reported at their fair values (quoted market price), which were as
follows (in thousands of dollars):
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2004 Cost Gains Losses Value
----------------- ---------- ---------- ---------- ----------
Equity securities $ 15,667 $ 1,081 $ (629) $ 16,119
Municipal bonds 91,941 780 (828) 91,893
Corporate debt 3,418 151 (12) 3,557
---------- ---------- ---------- ----------
Total $ 111,026 $ 2,012 $ (1,469) $ 111,569
========== ========== ========== ==========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2003 Cost Gains Losses Value
----------------- ---------- ---------- ---------- ----------
Equity securities $ 14,198 $ 398 $ (1,039) $ 13,557
Municipal bonds 88,034 1,218 (732) 88,520
Corporate debt 4,230 128 -- 4,358
---------- ---------- ---------- ----------
Total $ 106,462 $ 1,744 $ (1,771) $ 106,435
========== ========== ========== ==========
Fair values of the Company's fixed-income securities are inversely affected
by changes in market interest rates. Generally, the longer the maturity of
fixed-income securities, the larger the exposure to the risks and rewards
resulting from changes in market interest rates. Contractual maturities of
the fixed-income securities as of December 31, 2004, were as follows (in
thousands of dollars):
Amortized Fair
Cost Value
----------- -----------
Within one year $ 11,923 $ 11,919
One through five years 58,889 58,410
Five through ten years 9,972 10,216
Over ten years 12,334 12,515
No fixed maturity date 2,241 2,390
----------- -----------
Total $ 95,359 $ 95,450
=========== ===========
(6) OTHER INCOME (EXPENSE)
Other income consisted of the following (in thousands of dollars):
2004 2003 2002
--------- ---------- ----------
Gain on sales of publishing assets $ 59 $ 739 $ 160
Gains (losses) on disposals of asset (103) (15) 31
--------- ---------- ----------
Total $ (44) $ 724 $ 191
========= ========== ==========
The revenues and operating expenses of publications sold were not
significant.
37
(7) GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS
142), which revised the accounting and financial reporting standards for
acquired goodwill and other intangible assets. Under SFAS 142, goodwill and
indefinite-lived intangible assets are no longer amortized but instead are
subject to an annual test for impairment, which could result in a charge to
operations when their carrying amount exceeds their estimated fair value.
Under the provisions of SFAS 142, a transition test of the $77 million of
goodwill as of January 1, 2002, resulted in a writedown of $4.4 million;
this was recorded on the consolidated statements of income as a Cumulative
Effect of Accounting Change.
The Company updated its analysis of goodwill impairment as of December 31,
2004, and determined that there was no further impairment because the
estimated fair value of applicable reporting units was in excess of their
carrying amount.
Goodwill assigned to the operating segments and the changes in the carrying
amount of goodwill for the three years ended December 31, 2004, are as
follows:
Publishing Printing Software Total
----------------------------- ---------- -------- --------- --------
Balance, January 1, 2002 $ 54,047 $ 917 $ 21,736 $ 76,700
Reclass assembled workforce 411 -- -- 411
Subscriber list writeoff (20) -- -- (20)
Business acquisition purchase
price adjustments -- -- 1,131 1,131
Impairment charge (4,440) -- -- (4,440)
--------- --------- ---------- --------
Balance, December 31, 2002 49,998 917 22,867 73,782
Business acquisition purchase
price adjustments -- -- 70 70
--------- --------- --------- ---------
Balance, December 31, 2003 49,998 917 22,937 73,852
Business acquisition purchase
price adjustment -- -- (400) (400)
--------- --------- --------- ---------
Balance, December 31, 2004 $ 49,998 $ 917 $ 22,537 $ 73,452
========= ========= ========= =========
38
(8) INCOME TAXES
Income tax expense (benefit) was allocated as follows (in thousands of
dollars):
2004 2003 2002
-------- -------- --------
Income Statement Provision for Income Taxes $ 13,442 $ 9,123 $ 9,670
Stockholders' Equity -- Change in:
Unrealized gain (loss) on
marketable securities 199 963 (587)
Foreign currency translation adjustment (27) (43) (36)
-------- -------- --------
Total $ 13,614 $ 10,043 $ 9,047
======== ======== ========
The provision for income taxes consisted of the following (in thousands of
dollars):
2004 2003 2002
--------- --------- ---------
Taxes currently payable:
Federal $ 11,132 $ 9,407 $ 8,127
State and local 2,402 2,269 1,373
--------- --------- ---------
13,534 11,676 9,500
--------- --------- ---------
Deferred tax provision:
Federal (170) (2,090) 338
State and local 78 (463) (168)
--------- --------- ---------
(92) (2,553) 170
--------- --------- ---------
Total $ 13,442 $ 9,123 $ 9,670
========= ========= =========
Reconciliation of the U.S. statutory rate to the Company's consolidated
effective income tax rate was as follows:
Percent of Pretax Income
---------------------------------
2004 2003 2002
--------- --------- ---------
Federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net
of federal income tax benefit 4.5 4.7 2.7
Others 0.6 0.6 0.3
Tax exempt interest exclusion (2.5) (3.7) (3.6)
Dividends received exclusion (0.3) (0.4) (0.5)
-------- -------- --------
Total 37.3% 36.2% 33.9%
======== ======== ========
(Continued)
39
Deferred tax assets and liabilities are the future tax effects of temporary
differences between assets and liabilities as reported in the financial
statements and as reported on tax returns. They are estimated by using
enacted tax rates expected to apply in the years in which those temporary
differences are expected to be recovered or settled. Changes in tax rates
are recognized in income in the period that includes the enactment date.
The tax effects of temporary differences that gave rise to the deferred tax
assets and liabilities were as follows (in thousands of dollars):
December 31,
--------------------------
2004 2003
----------- -----------
Deferred tax assets:
Other postretirement benefits $ 23,676 $ 20,891
Pension benefits 7,602 9,462
Inventories 1,533 1,688
Annual leave 2,354 2,045
Amortization of acquired intangible assets 397 1,161
Accounts receivable allowances 603 599
Medical claims 1,179 1,093
Others 1,711 1,723
----------- -----------
Total deferred tax assets 39,055 38,662
----------- -----------
Deferred tax liabilities:
Capitalized software (4,441) (3,852)
Deferred selling expenses (1,377) (1,843)
Others (1,728) (1,402)
----------- -----------
Total deferred tax liabilities (7,546) (7,097)
----------- -----------
Net deferred tax assets $ 31,509 $ 31,565
=========== ===========
The ultimate realization of deferred tax assets is dependent upon future
taxable income during the periods in which those temporary differences
become deductible. Uncertainties surrounding income tax law changes, shifts
in operations between state taxing jurisdictions, and future operating
income levels may affect the ultimate realization of all or some of these
deferred tax assets. The Company has consistently achieved profitability
and taxable income. In the opinion of management, based on expected future
earnings and available tax planning strategies, it is more likely than not
that the deferred tax assets, which are recorded net of $473,000 and
$430,000 valuation allowances in 2004 and 2003, respectively, will be fully
utilized.
(9) OTHER BALANCE SHEET INFORMATION
Certain year-end balances consisted of the following (in thousands of
dollars):
2004 2003
----------- -----------
Receivables:
Customers $ 29,738 $ 30,527
Others 3,186 3,868
Allowance for doubtful accounts (2,097) (2,135)
----------- -----------
Total $ 30,827 $ 32,260
=========== ===========
(Continued)
40
2004 2003
----------- -----------
Inventories:
Materials and supplies $ 2,130 $ 2,089
Work in process 304 436
Finished goods 1,101 1,277
----------- -----------
Total $ 3,535 $ 3,802
=========== ===========
Inventories are valued at the lower of cost (principally average cost
method) or market.
2004 2003
----------- -----------
Property and equipment, at cost:
Land $ 4,250 $ 4,250
Buildings and improvements 51,759 51,690
Furniture and equipment 46,693 49,007
Accumulated depreciation (74,405) (74,428)
----------- -----------
Total $ 28,297 $ 30,519
=========== ===========
The Company uses the straight-line method of depreciation based on
estimated useful lives ranging from five to 45 years for buildings and
improvements, and three to 10 years for furniture and equipment.
Depreciation expense was $3,728,000 in 2004, $4,140,000 in 2003, and
$4,843,000 in 2002. Expenditures for maintenance and repairs are expensed,
while major replacements and improvements are capitalized.
Intangible and other assets
Amortizable assets: 2004 2003
----------- -----------
Gross carrying amount--
Software $ 29,199 $ 25,040
Customer lists 14,292 14,638
Copyrights 9,145 9,145
Others 2,182 4,801
----------- -----------
54,818 53,624
----------- -----------
Accumulated amortization--
Software (15,546) (13,057)
Customer lists (11,190) (9,464)
Copyrights (3,801) (2,887)
Others (1,044) (4,279)
----------- -----------
(31,581) (29,687)
----------- -----------
Net intangible assets 23,237 23,937
Other receivables 141 239
----------- -----------
Total $ 23,378 $ 24,176
=========== ===========
(Continued)
41
Events and changes in circumstances can indicate that the value of some
intangible assets may have been impaired. When this occurs, the assets are
revalued based on projected future profit contributions and any resulting
impairment losses are recorded as amortization expense. In 2003, the
Company's subsidiary, Kennedy Information, Inc. (Kennedy) reduced its
magazine publishing schedules due to continuing weak advertising revenues,
resulting in an impairment loss of $617,000 in its advertiser base. In
2002, Kennedy incurred lower than expected newsletter renewal sales due to
the poor economy and to the liquidation of a significant customer,
resulting in an impairment loss of $1,916,000 in its customer lists. These
losses are included in general and administrative expenses of the
Publishing segment. Also in 2003, BNA Software experienced lower sales of
its Web-based application software product than previously expected and
reduced its expectations of future sales, resulting in an impairment loss
of $1,803,000 in the carrying value of the related capitalized development
costs. This loss is included in editorial expenses of the Software segment.
Amortization expenses for intangible assets were $6,554,000 in 2004,
$10,152,000 in 2003, and $10,274,000 in 2002. Amortizable assets are
expensed evenly over their respective estimated lives, ranging from three
to 10 years. As of December 31, 2004, future estimated amortization
expenses were as follows: 2005 - $6,302,000; 2006 - $4,965,000; 2007 -
$3,200,000; 2008 - $2,711,000; 2009 - $2,365,000.
2004 2003
----------- -----------
Payables and accrued liabilities:
Accounts payable $ 18,324 $ 15,848
Employee compensation and benefits 15,239 15,507
Postretirement benefits, current portion 9,439 10,322
Income taxes 1,961 2,053
----------- -----------
Total $ 44,963 $ 43,730
=========== ===========
(10) TERM DEBT
Term debt consisted of the following (in thousands of dollars):
December 31,
--------------------------
2004 2003
----------- -----------
Note payable, unsecured, variable interest
(LIBOR plus 0.2%; 1.6% for 2004
and 1.5% for 2003) $ -- $ 5,000
Notes payable, unsecured, 8.15%, due 2005-2010 45,000 45,000
Notes payable, unsecured, 6.99%, due 2007-2011 25,000 25,000
----------- -----------
Total 70,000 75,000
Less current portion (7,500) (5,000)
----------- -----------
Long-term portion $ 62,500 $ 70,000
=========== ===========
Maturities of term debt are as follows: 2005 and 2006, $7,500,000 each;
2007 through 2010, $10,500,000 each; 2011, $13,000,000. Based on the
borrowing rates available to the Company for loans with similar terms and
average maturities, the fair value of total term debt was $77,720,000 in
2004, and $84,270,000 in 2003.
The Company also has a $1.5 million unsecured line of credit, of which
$993,000 is being used to secure letters of credit.
(Continued)
42
(11) COMMITMENTS AND CONTINGENCIES
The Company has non-cancelable operating leases for office space,
equipment, and vehicles. Total rent expense was $7,597,000 in 2004,
$8,115,000 in 2003, and $8,012,000 in 2002.As of December 31, 2004, future
minimum lease payments under non-cancelable operating leases were as
follows: 2005 - $6,462,000; 2006 - $5,649,000; 2007 - $2,596,000; 2008 -
$969,000; 2009 - $522,000; thereafter - $518,000.
The Company is involved in certain legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition
of these matters will not have a material adverse effect on the
consolidated financial statements.
(12) STOCKHOLDERS' EQUITY
Ownership and transferability of Class A, Class B, and Class C stock are
substantially restricted to current and former employees by the Parent's
articles of incorporation. Ownership of Class A stock, which is voting, is
restricted to active employees. Class B stock and Class C stock are
nonvoting. No class of stock has preference over another upon declaration
of dividends or liquidation. As of December 31, 2004, authorized shares of
Class A, Class B, and Class C were 30,000,000, 30,000,000, and 5,000,000
respectively.
Treasury share transactions were as follows:
Treasury Stock Shares
----------------------------------
Class A Class B Class C
---------- ---------- ----------
Balance, January 1, 2002 14,365,542 4,213,038 1,095,610
Sales to employees (689,055) --- ---
Repurchases 226,956 2,898,819 133,749
Conversions of Class A to Class B 761,408 (761,408) --
----------- ---------- ----------
Balance, December 31, 2002 14,664,851 6,350,449 1,229,359
Sales to employees (776,526) -- --
Repurchases 464,773 717,614 863,228
Conversions of Class A to Class B 1,266,913 (1,266,913) --
----------- ---------- ----------
Balance, December 31, 2003 15,620,011 5,801,150 2,092,587
Sales to employees (560,355) -- --
Repurchases 812,230 1,255,756 426,653
Conversions of Class A to Class B 473,375 (473,375) --
----------- ---------- ----------
Balance, December 31, 2004 16,345,261 6,583,531 2,519,240
=========== ========== ==========
The Company's stockholders, when selling stock, are required to first
tender them to the Company. The Company has supported the continuance of
employee ownership through its practice of repurchasing stock tendered by
stockholders, but is not required to do so. Capital stock with a market
value of $5.4 million as of December 31, 2004, is known or expected to be
tendered in 2005. The actual amount repurchased will likely be higher.
Earnings per share have been computed based on the weighted average of all
outstanding shares of stock, which was 32,502,117 in 2004, 34,642,462 in
2003, and 35,490,169 in 2002.
(Continued)
43
The differences between amortized cost and fair value of the Company's
investment securities result in unrealized gains or losses, which are
reported, net of tax, as a component of Stockholders' Equity. Assets and
liabilities of the Company's United Kingdom subsidiary are denominated in
British pounds and translated into U.S. dollars at year-end exchange rates.
Any resulting gain or loss is reported, net of taxes, as a component of
Stockholders' Equity.
(13) OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income encompasses all changes in Stockholders' Equity except
those arising from transactions with shareholders, and includes net income
and other comprehensive income.
Elements of other comprehensive income (loss) are shown below (in thousands
of dollars):
2004 2003 2002
--------- --------- ---------
Holding gains (losses) on securities
arising during the year $ 884 $ 3,931 $ (50)
Less net gains included in net income 314 1,174 1,629
--------- --------- ---------
Changes in unrealized gains (losses) 570 2,757 (1,679)
Less income taxes 199 963 (587)
--------- --------- ---------
Net unrealized gains (losses) 371 1,794 (1,092)
--------- --------- ---------
Currency translation gains (losses) (77) (122) (102)
Less income taxes (27) (43) (36)
--------- --------- ---------
Net currency translation gains (losses) (50) (79) (66)
--------- --------- ---------
Other comprehensive income (loss) $ 321 $ 1,715 $ (1,158)
========= ========= =========
(14) SEGMENTS
Operating segments are components of an enterprise whose separate financial
information is reviewed regularly by the chief operating decision-maker in
deciding how to allocate resources and in assessing performance. Operating
segments may be aggregated for presentation purposes if they have similar
economic characteristics.
The Company has three operating segments, Publishing, Printing, and
Software. Publishing operations consist primarily of the creation,
production, and marketing of legal and regulatory and general business
advisory information in print and electronic formats. Publishing aggregates
the operations of the Parent with Tax Management Inc. (excluding its BNA
Software division) and also includes the Parent's other publishing
subsidiary companies. Customers are primarily lawyers, accountants, human
resource professionals, business executives, health care administrative
professionals, trade associations, educational institutions, government
agencies, and libraries.
The Printing segment is the operations of The McArdle Printing Co., Inc,
which provides printing and related services to mid-Atlantic customers. The
Software segment aggregates the operations of BNA Software, which develops,
produces, and markets tax and financial planning software, with STF
Services Corporation, which develops, produces, and markets interactive,
government- approved forms software.
(Continued)
44
Intersegment revenues approximate current market prices and are eliminated
upon consolidation. The Company did not derive 10 percent or more of its
revenues from any one customer or government agency or from foreign sales,
nor did it have 10 percent or more of its assets in foreign locations.
Operating segment information is presented below (in thousands of dollars):
Year Ended December 31, 2004 Publishing Printing Software Total
-------------------------------- ---------- -------- -------- --------
Revenues from external customers $269,312 $ 26,814 $ 25,130 $321,256
Intersegment revenues -- 10,903 2,299 13,202
Operating profit 31,727 392 5,833 37,952
Interest expense 5,717 21 -- 5,738
Identifiable assets 279,657 17,010 38,382 335,049
Depreciation and amortization 7,636 871 1,775 10,282
Capital expenditures 5,375 350 36 5,761
Year Ended December 31, 2003 Publishing Printing Software Total
-------------------------------- ---------- -------- -------- --------
Revenues from external customers $266,447 $ 21,333 $ 24,044 $311,824
Intersegment revenues -- 12,536 2,507 15,043
Operating profit (loss) 24,386 (283) 1,447 25,550
Interest expense 5,815 50 -- 5,865
Identifiable assets 286,514 17,023 35,531 339,068
Depreciation and amortization 9,034 901 4,357 14,292
Capital expenditures 4,759 183 476 5,418
Year Ended December 31, 2002 Publishing Printing Software Total
-------------------------------- ---------- -------- -------- --------
Revenues from external customers $262,929 $ 21,826 $ 25,035 $309,790
Intersegment revenues -- 14,235 2,664 16,899
Operating profit 22,099 748 5,043 27,890
Interest expense 6,037 81 5 6,123
Identifiable assets 291,873 17,454 37,424 346,751
Depreciation and amortization 10,696 913 3,508 15,117
Capital expenditures 4,538 406 824 5,768
Reconciliation of items differing from consolidated totals are shown below
(in thousands of dollars):
2004 2003 2002
------- ------- -------
Total interest expense for reportable segments $ 5,738 $ 5,865 $ 6,123
Elimination of intersegment interest expense (118) (155) (294)
------- ------- -------
Consolidated interest expense $ 5,620 $ 5,710 $ 5,829
======= ======= =======
2004 2003 2002
-------- -------- --------
Total assets for reportable segments $335,049 $339,068 $346,751
Elimination of intersegment assets (16,702) (8,786) (6,458)
-------- -------- --------
Consolidated assets $318,347 $330,282 $340,293
======== ======== ========
45
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THE BUREAU OF NATIONAL AFFAIRS, INC.
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(In Thousands of Dollars)
- --------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------
Additions
-------------------
(1) (2)
-------------------
Balance | Charged|Charged | |Balance
at |to Costs|to Other | | at
Beginning| and |Accounts-|Deductions|End of
Description of Period|Expenses|Describe |-Describe |Period
- ------------------------------- ----------|--------|---------|----------|-------
VALUATION ACCOUNTS DEDUCTED FROM
ASSETS TO WHICH THEY APPLY:
- --------------------------------
Allowance for Doubtful Accounts
Receivable:
Year ended December 31, 2004 $2,135 $ 917 $(52)(a) $903(b) $2,097
Year ended December 31, 2003 2,015 755 272 (a) 908(b) 2,135
Year ended December 31, 2002 2,197 457 178 (a) 817(b) 2,015
Allowance for Obsolete Inventory:
Year ended December 31, 2004 $ 535 $ 26 $ 561
Year ended December 31, 2003 448 87 535
Year ended December 31, 2002 657 (209) 448
Allowance for Deferred Tax Assets:
Year ended December 31, 2004 $ 430 $ 43 $ 473
Year ended December 31, 2003 317 113 430
Year ended December 31, 2002 182 135 317
Notes:
(a) Charged to deferred subscription revenue; portion of allowance for doubtful
accounts receivable not included in revenues.
(b) Net accounts written off.
46
PART II
Item 9. Changes in and Disagreements with Accountants
---------------------------------------------
on Accounting and Financial Disclosure
--------------------------------------
There were no changes in or disagreements with accountants on accounting and
financial disclosures during the three years ended December 31, 2004 or through
the date of this Form 10K.
Item 9a. Controls and Procedures
-----------------------
Conclusion regarding the Effectiveness of Disclosure Controls and Procedures
The disclosure control system was designed to ensure that information is
accumulated and communicated to the Company's management to allow timely
decisions regarding required disclosure. The Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the Company's disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of the end of the
period covered by this annual report.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting. The internal control system
was designed to provide reasonable assurance to the Company's management and
board of directors regarding the preparation and fair presentation of financial
statements.
Management, including the Company's Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2004. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on
that assessment, the Company believes that, as of December 31, 2004, its
internal control over financial reporting is effective based on those criteria.
Management's assessment of the Company's internal control over financial
reporting as of December 31,2004 has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in their report which is included
herein.
Item 9b. Other Information
-----------------
None.
47
PART III
Except as set forth in this Form 10-K under Part I, Item X, "EXECUTIVE OFFICERS
OF THE REGISTRANT," the information required by Items 10, 11, 12, 13, and 14, is
contained in the Company's definitive Proxy Statement (the "Proxy Statement")
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, to
be filed with the SEC within 120 days of December 31, 2002. Such information is
incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information required under this Item 10 is contained in the Proxy Statement
under the headings "I. Election of Directors" and "Biographical Sketches of
Nominees," and is incorporated herein by reference. Information related to
Executive Officers is omitted from the Proxy Statement in reliance on
Instruction 3 to Regulation S-K, Item 401(b), and included as Item X of Part I
of this report.
The Company has adopted a code of ethics, as defined in Regulation S-K, that
applies to the Company's Chief Executive Officer, its senior financial officers,
and any persons who perform similar functions for the Company and any of its
subsidiary companies. The code of ethics is posted on the Company's Internet
website, the address of which is www.bna.com. The Company intends to satisfy the
disclosure requirements with respect to any amendments to, and/or waivers of,
the provisions of the code of ethics by posting the required information on its
Internet website.
Item 11. Executive Compensation
----------------------
The information required under this Item 11 is contained in the Proxy Statement
under the headings "III. Executive Compensation" and "V. Employee Benefit Plans"
and is incorporated herein by reference.
Item 12. Security Ownership of Beneficial Owners and Management
------------------------------------------------------
The information required under this Item 12 is contained in the Proxy Statement
under the heading "I. Election of Directors" and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information required under this Item 13 is contained in the Proxy Statement
under the heading "III. Executive Compensation" and is incorporated herein by
reference.
Item 14. Principal Accounting Fees and Services
--------------------------------------
The information required under this Item 14 is contained in the Proxy Statement
under the heading "IV. Audit Committee Report" and is incorporated herein by
reference.
48
PART IV
Item 15. Exhibits and Financial Statement Schedules
------------------------------------------
The following documents are filed as part of this report.
(a)(1) Financial Statements: Page
Reports of Independent Registered Public Accounting Firm 23
Consolidated Statements of Income for each
of the years ended December 31, 2004, 2003, and 2002 25
Balance Sheets as of December 31, 2004 and 2003 26
Consolidated Statements of Cash Flows, and
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income for each of
the years ended December 31, 2004, 2003, and 2002 28
Notes to Consolidated Financial Statements 31
(2) Financial Statement Schedule:
II Valuation and Qualifying Accounts and Reserves For
the years ended December 31, 2004, 2003, and 2002 45
(a)(3) Exhibits:
3.1 Certificate of Incorporation, as amended.*
3.2 By laws, as amended.*
11 Statement re: Computation of Per Share Earnings is contained in the
2004 Consolidated Financial Statements in the Notes to Consolidated
Financial Statements, Note 12, "Stockholders' Equity," at page of
this Form 10-K.
21 Subsidiaries of the Registrant.**
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. section 1350.
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. section 1350.
32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. section 1350.
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. section 1350.
99.1 Proxy Statement for the Annual Meeting of security holders to be
held on April 16, 2005.***
49
* Incorporated by reference to the Company's 2001 Form 10-K,
Commission File Number 2-28286, filed on March 29, 2002. The
exhibit numbers indicated above correspond to the exhibit
numbers in that filing.
** Filed herewith.
*** Incorporated by reference to the Company's Definitive Proxy
Statement, to be filed with the SEC within 120 days of December 31,
2004.
Upon written or oral request to the Company's General Counsel, a
copy of any of the above exhibits will be furnished at cost.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 BUREAU OF NATIONAL AFFAIRS, INC.
By: s/ Paul N. Wojcik
---------------------------------------
Paul N. Wojcik, Chief Executive Officer
Date: March 10, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the dates indicated.
By: s/Paul N. Wojcik By: s/George J. Korphage
- -------------------------- ---------------------------------
Paul N. Wojcik, George J. Korphage, Vice President
President and Chief Executive and Chief Financial Officer
Director (Chief Accounting Officer)
Director
Date: March 10, 2005 Date: March 10, 2005
- --------------------------- ---------------------------------
By: s/Sandra C. Degler 3/10/05 By: s/Gregory C. McCaffery 3/10/05
- ----------------------------------- -----------------------------------
Sandra C. Degler Date Gregory C. McCaffery Date
Chairman of the Board of Directors Director
By: s/Paul A. Blakely 3/10/05 By: s/Jonathan Newcomb 3/10/05
- ----------------------------------- ------------------------------------
Paul A. Blakely Date Jonathan Newcomb Date
Director Director
By: s/Cynthia J. Bolbach 3/10/05 By: s/Susan E. Rice 3/10/05
- ----------------------------------- ------------------------------------
Cynthia J. Bolbach Date Susan E. Rice Date
Director Director
By: s/Eunice Lin Bumbardner 3/10/05 By: s/Ellen Taus 3/10/05
- ----------------------------------- ------------------------------------
Eunice Lin Bumgardner Date Ellen Taus Date
Director Director
By: s/Neil R. Froemming 3/10/05 By: s/Daniel W. Toohey 3/10/05
- ----------------------------------- ------------------------------------
Neil R. Froemming Date Daniel W. Toohey Date
Director Director
By: By: s/Robert L. Velte 3/10/05
- ----------------------------------- ------------------------------------
Gerald S. Hobbs Date Robert L. Velte Date
Director Director
51
EXHIBIT INDEX
Sequential Page
Number Exhibit Description Number
- ------ ---------------------------------------------- ---------------
3.1 Certificate of Incorporation, as amended *
3.2 By laws, as amended *
11 Statement re: Computation of Per Share Earnings
is contained in the 2004 Consolidated Financial
Statements in the Notes to Consolidated Financial
Statements, Note 12, "Stockholders' Equity," 42
21 Subsidiaries of the Registrant 52
31.1 Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. section 1350. 53
31.2 Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. section 1350. 54
32.1 Certification of the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. section 1350. 55
32.2 Certification of the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. section 1350. 56
99.1 Proxy Statement for the Annual Meeting of
Stockholders to be held on April 16, 2005 **
* Incorporated by reference to the Company's 2001 Form 10-K,
Commission File Number 2-28286, filed on March 29, 2002. The
exhibit numbers indicated above correspond to the exhibit
numbers in that filing.
** The Definitive Proxy Statement is expected to be filed with the
SEC within 120 days of December 31, 2004.