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" or the "Company"), 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 operates 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.
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.
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 Westlaw.
BNA International Inc. publishes international tax and intellectual property information in print and electronic formats, and is BNA's sales agent outside of North America for its U.S. products.
BNA Software, a division of Tax Management Inc., develops and markets tax, financial planning, and fixed asset management software. Sales are made to accountants, lawyers, tax and financial planners, corporations, government agencies, and others. The products are marketed through numerous channels including direct mail, e-mail, the Web, and space advertising. Products are sold through the division’s dedicated sales representatives, field representatives of BNA, and approved resellers. STF Services Corporation, a subsidiary company, converts government-approved forms into interactive electronic forms that are marketed directly to end users through BNA Software and licensed to publishers, including BNA and Tax Management, for resale.
The McArdle Printing Co., Inc. (McArdle), 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 22 percent of its business is derived from the BNA publishing companies.
Continued
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 quality, comprehensiveness, timeliness, product line breadth, brand reputation, variety of format offerings, price, and customer service.
BNA Software competes with a number of tax compliance, financial planning, and fixed asset management software providers. STF competes with the leading tax research publishers, tax compliance software vendors, and government agencies. Both software entities compete on the basis of product features and functions, quality and reliability, timeliness of product updates, ease of use, brand recognition, customer support and price.
McArdle competes with a number of commercial and financial printers for 78 percent of its business. McArdle competes on the basis of the breadth of its print capabilities and related services, price, and customer service.
The number of employees of BNA and its subsidiary companies was 1,728 on December 31, 2006.
BNA stock may be purchased only by active employees, and may be held only by employees, and former employees, or 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 1A.
Item 1A. Risk Factors
There are a wide range of risks and uncertainties that could adversely affect the Company’s businesses and its overall financial performance. In addition to other disclosures included in this Annual Report on Form 10-K, the Company believes the more significant of such risks and uncertainties include the following:
Negative Economic Conditions
A recession or severe slow-down in the U.S. economic growth would affect all of the Company’s businesses to some degree as customers and prospective customers reduced their spending levels.
Competition
Nearly all of the Company’s businesses have significant competition in the markets they serve. The Company’s competitors could introduce new products and services that would adversely affect the relative utility of the Company’s products and services. In addition, competitors could take pricing actions that would adversely affect the relative value prospect of the Company’s products and services.
Technological Changes
Advances in information technology affect the Company in both positive and negative ways. The Company continues to invest heavily in upgrading its electronic distribution systems and its information databases. There is no assurance that these investments can be made quickly enough so that product offerings do not become obsolete relative to that of competitors who are also upgrading their product offerings.
In addition, the relatively low barriers to entry inherent in an internet environment have spawned non-traditional competition. These include governmental organizations providing information on their websites, and small new competitors providing basic information, either of which certain sectors of the Company’s markets may consider to be good-enough information.
Legal And Regulatory Changes
The value of the Company’s publishing and software products depend on the existence of, and changes in, certain legal and regulatory requirements for which the Company’s customers must be informed. If the pace of change slowed a significant degree, that could lessen the perceived need for the Company’s products. Additionally, if certain requirements were significantly reduced, such as the eliminated estates and gift taxes or the adoption of a federal flat tax, the perceived value of the Company’s products could be substantially reduced.
Distribution Arrangements
The Company licenses some of its information databases to certain online vendors. While the collective royalty revenues from these licenses are not significant, their contribution to profit is. If all or most of these licenses were discontinued, profits would be adversely affected.
Employment Costs
Employment costs are the majority of the Company’s costs. The Company employs highly competent people to achieve the high quality for which its product and service are known. The Company provides competitive compensation and benefits to attract and retain its employees. If general employment conditions tighten, the Company could have difficulty in filling critical positions, or its employment costs could grow at a faster rate than revenue growth thereby compressing profit margins.
Outside Authors
The Company utilizes outside authors to provide content for certain publishing products and to provide updated programs for certain software products. Delays or failures to deliver content and/or programs would negatively affect revenues.
Item1B. Unresolved Staff Comments
None.
Item 2
Item 2 Properties
BNA Washington Inc., a wholly owned subsidiary, 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.
BNA has entered into agreements to sell its Washington, D.C., properties and to purchase a newly renovated building in Arlington, Virginia. The transactions are expected to be completed in the third quarter of 2007, at which time the operations currently housed in Washington, D.C., will be relocated to the Virginia facility.
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.
Item 3
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.
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, 2006.
Item X. EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons were executive officers of The Bureau of National Affairs, Inc., at December 31, 2006. 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
Vice President and Corporate Secretary
Corporate Secretary since 1995
and vice president since 2002. Joined
BNA in 1972
Eunice L. Bumgardner
Vice President & General Counsel
Vice president since 1996 and
general counsel since 1995. Joined
BNA in 1994.
Carol A. Clark
Vice President
Vice president since 2001
Previously served as technology director
since 1997. Joined BNA in 1983.
Sandra C. Degler
Chairman of the Board
Chairman since 2004 and vice chairman
1998-2004. Served as president of
Tax Management Inc. from 1983 to 2000.
Joined BNA in 1963.
George J. Korphage
Vice President and Chief Financial Officer
Vice president since 1988 and chief financial
officer since 1989. Joined BNA in 1972.
Gilbert S. Lavine
Treasurer
Treasurer since 1998. Joined BNA in 1985.
Gregory C. McCaffery
Vice President and Chief Operating Officer
Vice president since 2000 and chief operating
officer since 2003. Joined BNA in
Item X. EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Name
Age
Present position and prior experience
James R. Schneble
Controller
Controller since 1990. Joined BNA in 1985.
Paul N. Wojcik
Vice Chairman, President and Chief
Executive Officer
Vice chairman since 2004,
president since 1995 and CEO since 1997.
Joined BNA in 1972.
PART II
Item 5.
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. However, employees may purchase the Company’s Class A stock through its Stock Purchase and Transfer Plan and the BNA 401(k) plan.
Semi-annually, the Board of Directors establishes the price at which Class A shares can be bought 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 56 years, and they are expected to continue.
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, at the same price established for selling shares, stock tendered by stockholders, but is not required to do so.
As of February 24, 2007, there were 1,248 Class A shareholders, 361 Class B shareholders, and 3 Class C shareholders. During 2006, the Company repurchased 499,976 shares of Class B stock and 0 shares of Class C stock from former employees.
Established stock price and dividends declared during 2006 and 2005 were as follows:
During the sixteen weeks ended December 31, 2006, the Company purchased shares of its common stock, as noted in the table below. The Company is not engaged in share repurchases related to a publicly announced plan or program.
PART II
Item 6.
Item 6. Selected Financial Data
The Bureau of National Affairs, Inc.
Consolidated Operating and Financial Summary: 2006-2002
(Dollar amounts in thousands, except per share data)
(a) Includes goodwill impairment charge of $11,576,000 in 2006.
(b) Includes the cumulative effect of the changes in accounting for goodwill in 2002.
(c) Net income excluding the cumulative effect of the accounting change.
Selected Quarterly Data
Selected quarterly data is contained in the Consolidated Financial Statements in the Notes to Consolidated Financial Statements, Note 15, “Selected Quarterly Data.”
PART II
Item 7.
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.
Overview
BNA operates in three business segments-publishing, printing, and software. The publishing segment, which generated 81 percent of 2006 consolidated revenues, provides 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. Sales are made principally through field sales representatives. The printing segment provides services to mid-Atlantic area customers, including the BNA publishing segment, other publishers, financial institutions, trade associations, professional societies, other non-profit organizations, and governmental organizations. The software segment provides tax and financial planning software to accountants, lawyers, tax and financial planners, government agencies, corporations, and others. Critical factors for BNA’s ongoing success include: the quality of its products and services; continuing changes in legal, regulatory, and business practices and trends which require an ongoing need for information; highly trained and motivated employees; and key relationships with suppliers.
In addition to ongoing efforts to improve and provide more product offerings and to operate more efficiently, BNA has been engaged in several multi-year strategic initiatives related to its major publishing activities.
One initiative has been the development of a next-generation Web platform for BNA's electronic information products and the migration of products to it. In 2001, BNA released its first product hosted on BNA's Web Delivery System (BWD), an internally developed Web platform. The functionality of BWD continued to be developed over the next several years, and migration of products to the new platform during this period was careful and deliberate. With BWD development essentially completed by late 2005 and with electronic products at over percent of BNA's legal and regulatory subscription base, a decision was made to add substantial resources to the migration effort with the aim of substantial completion by the end of 2007. This migration investment increases expenses in the interim.
BNA pursues a platform-neutral policy in its information content offerings, allowing customers to choose their format preference. BNA's products have been available for transactional access on the major legal online services -- Lexis and Westlaw -- for many years. Beginning in 2003, based on revised license agreements, BNA began to sell subscriptions to subject libraries on these networks, and these have been very popular with major law firms and law schools. In addition, as a result of new license agreements, BNA began to sell subscriptions to its tax content products on CCH's tax network in late 2005 and on RIA's tax network in early 2006. These networks, in addition to BNA's online networks and print, provide customers with a variety of options.
Another major initiative to improve revenue growth was a realignment of the field sales force. In 2004, BNA reorganized its geographically-based, general field sales force into three customer-centric segmented divisions: Corporate, Legal, and Tax & Accounting. The transition was difficult, but subscription business growth in 2005-06, also enhanced by the license agreements, was the highest since 1998.
BNA has been engaged in a multi-year effort to replace its aging customer business system with a new system which will provide many more features than the legacy system. All customer accounts have now been migrated to the new system, and all related applications maintained on the legacy mainframe system have been replaced.
As described in Note 2 to the financial statements, BNA will relocate its corporate headquarters and principal operations in 2007. When the relocation is complete, BNA will have lower real estate expenses.
Results of Operations.
vs. 2005
A large year-end goodwill impairment expense more than offset what would otherwise have been double-digit growth in net income and earnings per share on substantially improved non-operating income, and resulted in a decline in BNA’s profits for 2006.
Consolidated revenues increased 4.8 percent to $344.9 million, but operating expenses, including an $11.6 million goodwill impairment charge, were up 9.4 percent. As a result, the consolidated operating profit was down 26 percent to $31.0 million. Net income was $19.4 million, down 19.8 percent from 2005. Earnings per share were $.64, down 16.9 percent due to the lower net income and fewer outstanding shares.
The publishing segment -- which aggregates the Parent (including BNA Books) with Tax Management Inc. (excluding BNA Software), IOMA, BNA International Inc., Kennedy Information, Inc., and BNA Washington Inc. -- generated 81 percent of consolidated revenues. Publishing revenues were up 2.4 percent in 2006, to $279.2 million. Parent and Tax Management combined subscription and royalty revenues were up 2.6 percent due to stronger renewal sales and price increases and BNA Books revenues grew 13.6 percent due to more title releases. BNA International recorded a modest revenue increase, and the other publishing groups had lower revenues. Publishing revenues are expected to grow by a mid single-digit percent in 2007. Publishing operating expenses, were up 8.5 percent compared to last year. Excluding the impairment expense, operating expenses were up 3.7 percent, mostly due to higher employment costs, auditing expenses, and costs to accelerate the migration of web products to BWD. Five new products were launched in 2006. Identifiable development expenses for new products and improvements on existing products were $10.9 million in 2006 and $9.0 million in 2005. Operating expenses in 2006 also included an identifiable $5.4 million for developing improved business and publishing systems, compared to $5.3 million in 2005. The Company expects to spend an additional $2.9 million in 2007 for the BWD acceleration project. The publishing segment’s operating profit was down 43 percent compared to 2005.
The printing segment, which includes results of The McArdle Printing Company, Inc., grew total revenues by 16.2 percent in 2006 to $48.6 million. Commercial sales were up 22.1 percent, reflecting business from new customers and additional work from existing customers. Intersegment revenues, expected to decline as publishing segment subscribers continue to migrate from print to electronic products, were down 0.9 percent. Total printing revenues in 2007 are projected to be lower by a mid-single digit percentage, as the Company plans to accept less high volume, but low margin commercial work. Operating expenses were up 17.2 percent, reflecting higher production and selling costs. The segment operating profit was $3.1 million in 2006 compared to $3.0 million in 2005.
The software segment combines BNA Software, a division of Tax Management Inc., with STF Services Corporation. Software segment total revenues were up 10.9 percent in 2006 to $30.9 million, and operating expenses were up 1.7 percent. BNA Software revenues were up 10.7 percent due to business growth and the recognition of revenues deferred from 2005 due to a specified upgrade. Expenses increased 7.0 percent due to higher royalties, program migration costs, and administrative expenses. BNA Software recorded a $4.8 million operating profit in 2006 compared to $3.7 million profit in 2005. STF total revenues increased 11.2 percent due in part to higher intersegment sales. Amortization expenses on intangible assets decreased from $760,000 in 2005 to $63,000 in 2006, and other operating expenses decreased 3.0 percent. STF recorded a 64 percent increase in its operating profit; excluding amortization expenses, operating profit was up 29 percent. STF expects lower revenues in 2007 due mainly to the fourth-quarter loss of a contract for forms production with a tax publisher. The total software segment recorded a $9.0 million operating profit in 2006 compared to a $6.4 million profit in 2005. Software revenues are expected to decrease in 2007 by a low single-digit percentage due to the terminated contract and lower intersegment sales.
Investment income and net other income increased $1.8 million due to higher investment balances and market yields. Interest expense decreased $0.3 million compared to 2005 due to less debt.
The consolidated federal, state, and local effective income tax rate was 38.0 percent in 2006 and 40.0 percent in 2005 (37.1 percent excluding the 2005 charge for reduced net deferred tax assets).
vs. 2004
BNA's consolidated operating results exceeded those of last year, primarily due to higher revenues and operating profits for the printing and software segments.
Consolidated revenues increased 2.0 percent to $329.0 million, while operating expenses were up just 1.4 percent. As a result, the consolidated operating profit was up 6.3 percent to $42.0 million. Net income was $24.2 million, a 2.9 percent increase over 2004. Earnings per share were $.77, up 6.9 percent due to the improved net income and fewer outstanding shares.
The publishing segment generated 83 percent of consolidated revenues. Publishing revenues were unchanged in 2005, at $272.6 million. Parent and Tax Management combined subscription and royalty revenues were down 0.4 percent due to lower royalty revenues and IOMA’s loss of a highly profitable editorial services contract. Offsetting these declines, Kennedy Information revenues grew 9.2 percent due to stronger sales in most of its markets, and BNA Books revenues grew 10.2 percent due to more title releases. The other publishing units recorded modest revenue increases. Publishing operating expenses were up 1.0 percent compared to 2004. Selling expenses declined, reflecting lower field and home office staffing costs resulting from the restructuring of the selling function. Higher general and administrative expenses included operating expenses for the new business system, higher legal expenses related to employment litigation, and relocation-related expenses. Five new products were launched in 2005. Identifiable development expenses for new products and improvements on existing products were $9.0 million in 2005 and $8.0 million in 2004. Operating expenses in 2005 also included an identifiable $5.3 million for developing improved business and publishing systems, compared to $4.8 million in 2004. The publishing segment’s operating profit was up 1.1 percent compared to 2004.
The printing segment grew total revenues by 10.8 percent in 2005 to $41.8 million. Commercial sales were up 15.7 percent, reflecting increased business from financial and publishing customers, and business from new customers. Intersegment revenues, expected to decline as publishing segment subscribers continue to migrate from print to electronic products, were down 1.2 percent. Operating expenses were up 3.9 percent, reflecting higher variable costs mitigated by staffing and materials efficiencies. The segment operating profit was $3.0 million in 2005 compared to $0.4 million in 2004.
Software segment total revenues were up 9.2 percent in 2005 to $27.8 million, while operating expenses were flat. BNA Software revenues were up 11.7 percent due mainly to recognizing revenues deferred from 2004 due to later shipping dates. Expenses increased 5.0 percent due to higher selling costs and initial expenses to migrate its products to a new programming language. BNA Software recorded a $3.7 million operating profit in 2005 compared to $2.4 million profit in 2004. STF total revenues increased 2.8 percent due to higher intersegment sales and higher revenues from external customers. Amortization expenses on intangible assets decreased from $1,348,000 in 2004 to $760,000 in 2005, and other operating expenses decreased 1.9 percent. STF recorded a 50.1 percent increase in its operating profit, but excluding amortization expenses, operating profit was up 9.3 percent. The total software segment recorded a $6.4 million operating profit in 2005 compared to a $4.1 million profit in 2004.
Investment income and net other income increased $435,000 due to higher investment balances and market yields. Interest expense, which had been lowered by capitalized interest related to the development of the new business system in 2004, was up $287,000.
During the fourth quarter of 2005, the Company determined that the future transactions described in Note 2 were more likely to occur than not, and reduced net deferred tax assets by $1.2 million due to lower future state income tax rates. The consolidated federal, state, and local effective income tax rate, excluding that charge, was 37.1 percent in 2005, and 37.6 percent in 2004.
Cash Flows, Liquidity, and Financial Resources
Cash provided by operating activities increased $5.3 million in 2006 to $44.7 million, reflecting a 4.9 percent increase in collections and a 3.7 percent increase in operating expenditures.
Cash used for investing activities netted to $10.6 million. Capital expenditures netted to $6.0 million, including a $2.6 million deposit for a new printing press to be installed in 2007. Capital expenditures for 2007 are expected to be approximately $13.7 million. Cash used for the investment portfolio was $4.6 million.
Cash used for financing activities netted to $19.1 million. Capital stock repurchases were $13.9 million. Debt principal repayments amounted to $7.5 million, and the Company paid cash dividends of $10.3 million in 2006. Receipts for sales of Class A capital stock to employees totaled $12.6 million.
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 $7.4 million as of December 31, 2006 is known or expected to be tendered in 2007. The actual value of shares tendered will likely be higher.
Contractual cash obligations as of December 31, 2006, were as follows (in thousands of dollars):
With nearly $142 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, pension contributions, 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.
Critical Accounting Policies
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 $61.8 million of goodwill at year-end 2006. The carrying amount of goodwill is subject to annual impairment testing which includes the use of estimates and assumptions, including future business prospects and discount rates. 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, 2006, and recorded an impairment expense as described in Note 7 to the financial statements.
The Company has $13.7 million of intangible assets at year-end 2006, 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 at the time of its acquisition. The Company evaluates the recoverability of the intangible assets when events and circumstances indicate an impairment may have occurred, using estimates and assumptions including future revenues, cash flows, and discount rates. If an impairment in value occurs, an impairment expense must be recorded, and amortization periods may be reduced. Amortization expense was $5.3 million in 2006, $6.4 million in 2005, and $6.6 million in 2004.
The Company has recorded $31.5 million of net deferred income tax assets as of year-end 2006, 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 $85.9 million at year-end 2006, as described in Note 4 to the Company’s financial statements. A number of actuarial assumptions are used to compute these liabilities, the accumulated benefit obligations, and the related benefit expenses. The assumed discount rates are based on annualized Moody’s AA Corporate long-term bond yield averages. Other assumptions include life expectancies, retirement ages, health care cost trends, compensation increases, 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 its actuaries, periodically reviews the assumptions and revises them when appropriate. Total expenses for the postretirement benefits that were subject to estimates and assumptions were $22.4 million in 2006, $20.9 million in 2005, and $19.3 million in 2004.
Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” FIN 48 clarifies the way that companies account for uncertainty in income taxes by prescribing a minimum recognition threshold, as well as establishing criteria for subsequently recognizing, derecognizing, reporting, and measuring such tax positions for financial statement purposes. FIN 48 is effective for years beginning after December 15, 2006. The Company is currently evaluating the effects of adopting FIN 48 on the consolidated financial statements, but does not expect its adoption will have a material impact.
In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (FAS 157). FAS 157 establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. FAS 157 is effective for years beginning after November 15, 2007. The Company has not yet determined the effect, if any, of adopting FAS 157 on the consolidated financial statements.
In September 2006, the FASB issued FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans” (FAS 158). FAS 158 requires the recognition of the overfunded or underfunded status of defined benefit pension and other postretirement benefit plans as an asset or liability in the statement of financial position and the recognition of changes in that funded status in the year in which the changes occur through comprehensive income. FAS 158 is effective for the Company as of the end of 2007. The Company expects that the effects of adopting FAS 158 on the consolidated financial statements will be to substantially increase the recognized postretirement benefit liabilities, and to substantially reduce stockholders’ equity, net of deferred taxes.
Item 7A.
Item 7A.. Quantitative And Qualitative Disclosures About Market Risk
The Company is exposed to interest rate risks in its investment portfolio. An 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, 2006, was as follows (in thousands of dollars):
The current yield from $1,661,000 invested in corporate debt mutual funds with no fixed maturity date is 7.3 percent.
The Company manages interest rate risk in its investment portfolio by diversifying the maturities of its fixed-income investments. Approximately 54 percent of these instruments at year-end 2006 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.
PART II
Item 8.
Item 8. Financial Statements and Supplementary Data
THE BUREAU OF NATIONAL AFFAIRS, INC.
Consolidated Financial Statements
December 31, 2006 and 2005
(With Independent Auditors' Report Thereon)
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
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, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ 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, 2006. These consolidated financial statements and 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 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, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related 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.
As discussed in Note 12 to the Consolidated Financial Statements, effective January 1, 2006, the Company adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment.
s\ KPMG LLP
KPMG LLP
McLean, Virginia
March 26, 2007
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(In thousands of dollars, except per share amounts)
See accompanying notes to consolidated financial statements.
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
(In thousands of dollars )
ASSETS
See accompanying notes to consolidated financial statements.
(Continued)
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
(In thousands of dollars )
LIABILITIES AND STOCKHOLDERS’ EQUITY
See accompanying notes to consolidated financial statements.
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(In thousands of dollars)
See accompanying notes to consolidated financial statements.
(Continued)
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006 2005, AND 2004
(In thousands of dollars)
See accompanying notes to consolidated financial statements.
THE BUREAU OF NATIONAL AFFAIRS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(In thousands of dollars, except per share amounts)
See accompanying notes to consolidated financial statements
THE BUREAU OF NATIONAL AFFAIRS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2006, 2005, 2004
(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) MAJOR FUTURE TRANSACTION
In February 2006, the Company entered into agreements to sell its three Washington, D.C., headquarters buildings for $111 million to affiliates of Vornado Realty Trust, Inc. The pre-tax gain on the sales is projected to be $91-93 million, after closing and related costs. The parties also entered into an agreement whereby the Company will purchase, for an estimated $103 million, a newly renovated building in Arlington, Virginia, that will become its new headquarters. The simultaneous transactions are expected to be completed during the summer of 2007, subject to customary closing conditions.
The property sales and purchase is expected to be accomplished through a tax-deferred “like-kind” exchange pursuant to Section 1031 of the Internal Revenue Code. Net proceeds from the building sales are projected to be sufficient to fully fund the building purchase.
(3) RECOGNITION OF REVENUES, DEFERRED REVENUES, AND SELLING EXPENSES
The Company derives revenues from publishing and software product sales and from printing and other services.
The majority of publishing sales are by subscription, primarily for one year. Subscription revenues and related sales commission expenses are deferred and amortized over the subscription terms. The Company licenses information content to certain online service providers for access by their customers, and is paid royalties based on usage measurements. Revenues related to multi-year arrangements that included minimum annual usage royalties were recognized evenly over the entire contract term from the point at which they became fixed and determinable, and amounts received in excess of the minimum amounts were recognized when earned. In the fourth quarter of 2006, the Company and its licensees agreed to eliminate minimum annual royalties so that, on a prospective basis, revenues from these arrangements are based on usage. Revenues from other publishing products, such as books, research reports, and special reports are recognized when the products are shipped, net of a reserve for returns when the right of return exists.
The majority of software sales are bundled arrangements which include a one-year software program license term and post-sale support, including telephone support and program updates (when and if available) during the license term. Revenues, and related commissions and royalty expenses, are deferred and recognized ratably over the license and post-sale support term. However, revenue is deferred when the sale includes a specified upgrade (a specific future program enhancement promised to customers) until that specified upgrade is delivered. Revenues from sales of software products with updates provided periodically over a license term, typically one year, are recognized ratably over the license terms.
Revenues from printing services are recognized when the materials are shipped or, if delivery is deferred at the customer’s request, when title and risk-of-loss transfer. Revenues from consulting, software data conversion, and training are recognized when the services have been completed. Revenues from event-related activities, such as conferences, are recognized when the event has been completed.
Deferred revenues consist almost entirely of deferred subscription and software license revenues.
Advertising costs are expensed as incurred and were $7,224,000, $7,475,000, and $6,797,000 in 2006, 2005, and 2004 respectively.
(4) EMPLOYEE BENEFIT PLANS
The Company has two noncontributory defined benefit pension plans covering employees of the Parent. Benefits are based on years of service and average annual compensation. One plan is ERISA-qualified, the other is a supplemental plan for certain employees whose benefits are limited under the qualified plan. The Company also provides other postretirement benefits, consisting of health care and life insurance benefits, to retired employees of the Parent.
The following table sets forth the obligations and funded status of the plans as of December 31, (In thousands of dollars):
The amounts recognized in the accompanying consolidated balance sheets as of December 31, were as follows (in thousands of dollars):
In September 2006, the FASB issued FAS No. 158,“Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans” (FAS 158). FAS 158 requires the recognition of the overfunded or underfunded status of defined benefit pension and other postretirement benefit plans as an asset or liability in the statement of financial position and the recognition of changes in that funded status in the year in which the changes occur through comprehensive income. FAS 158 is effective for the Company as of the end of 2007. If FAS 158 had been adopted as of year-end 2006, the Company would have recorded an increase in non-current “Postretirement Benefits” liabilities of nearly $58 million, and a charge to “Accumulated other comprehensive income (loss)” of $34 million (net of deferred taxes).
The Company’s funding practice for the qualified pension plan is to contribute amounts which, at a minimum, satisfy ERISA requirements. The Company contributed $14,000,000 in 2006, $14,000,000 in 2005, and $14,000,000 in 2004. The supplemental plan’s benefits are paid from the Company’s general assets. 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 $14 million to its pension plan and none to its other postretirement benefit plan in 2007.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands of dollars):
Pension accounting requires the calculation of two benefit obligation amounts. The projected benefit obligation is the present value cost of 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):
Components of pension expense, based on the actuarial study as of January 1 for each year, were as follows (in thousands of dollars):
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 $1,071,000 in 2006, $1,016,000 in 2005, and $1,206,000 in 2004.
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):
The Company received a federal subsidy of $154,000 in 2006 related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare D Subsidy). As of December 31, 2006, the gross amount of federal subsidies expected to be received were as follows: 2007 - $157,000; 2008 - $186,000; - $213,000; 2010 - $241,000; 2011 - $281,000; 2012-2016 - $2,129,000.
The postretirement benefit obligation as of year-end 2006 was determined using an assumed health care cost trend rate of 10 percent for 2007, gradually declining to 5 percent in 2012 and thereafter. A one percent increase in the assumed health care cost trend rate for each year would increase the 2006 year-end postretirement benefit obligation by $25.8 million and the 2006 postretirement benefit service and interest expense by $2.7 million. A one percent decrease in the assumed health care cost trend rate would decrease the postretirement benefit obligation by $20.6 million and the postretirement benefit service and interest cost by $2.1 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 asset allocations as of December 31, were as follows:
Both the pension plan and postretirement benefits plan assets are actively managed by equity and fixed income investment professionals emphasizing a long-term horizon. For the pension plan, 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.
For the postretirement benefits plan, 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):
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):
Proceeds from the sales and maturities of securities were $66,821,000, $57,282,000, and $83,806,000 in 2006, 2005, and 2004 respectively. Gross realized gains and (losses) from these sales were $1,484,000 and $(137,000) in 2006, $460,000 and $(113,000) in 2005, and $371,000 and $(57,000) in 2004. The specific identification method is used in computing realized gains and losses.
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):
The following table summarizes investments with gross unrealized losses by the length of time those investments have been continuously in a loss position (in thousands of dollars):
The Company reviews investment securities that have unrealized losses to determine if those losses are other than temporary. Consideration is given to the credit quality and maturities of the fixed income securities, the financial condition and near-term prospects of the issuers of the equity securities, general market conditions, the length of time and extent to which fair values have been below amortized cost, and the Company’s ability and intent to hold the security to allow for anticipated recovery. If a decline in fair value is determined to be other than temporary, an impairment charge is recorded and a new cost basis in the security is established. At December 31, 2006, 32 securities had an aggregated unrealized loss of 1.1 percent from their amortized cost. At December 31, 2005, 54 securities had an aggregated unrealized loss of 1.4 percent from their amortized cost. These securities were reviewed in accordance with the criteria noted above, and their declines in fair value were determined to be not other than temporary.
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, 2006, were as follows (in thousands of dollars):
(6) OTHER INCOME (EXPENSE)
Other income consisted of the following (in thousands of dollars):
The revenues and operating expenses of publishing assets sold were not significant.
(7) GOODWILL
The carrying amount of goodwill is subject to annual testing at the reporting unit level. Any excess in the carrying value of the reporting units over their fair value is an indication of a potential goodwill impairment, which would require further analysis to measure the amount of the impairment expense, if any. The Company performs year-end impairment tests and, for 2006, it was determined that an impairment had occurred. The fair value of the Company’s subsidiary, Kennedy Information, Inc. (Kennedy), was determined by discounting its projected future cash flows. The assumptions used for Kennedy’s future cash flow growth were reduced for the 2006 valuation, based on its recent financial results. The lower growth expectations resulted in a measure of fair value that was less than Kennedy's carrying value. Valuation specialists were retained to assist in revaluing Kennedy’s intangible assets and determining the implied fair value of its goodwill as of December 31, 2006. As a result of these revaluations, a goodwill impairment expense of $11,576,000 was recorded for 2006.
Goodwill assigned to the reportable segments and the changes in the carrying amount of goodwill for the three years ended December 31, 2006, are as follows:
The and 2005 changes in goodwill resulted from a business acquisition agreement that provided for a sellers' tax equalization adjustment.
(8) INCOME TAXES
Income tax expense (benefit) was allocated as follows (in thousands of dollars):
The provision for income taxes consisted of the following (in thousands of dollars):
Reconciliation of the U.S. statutory rate to the Company’s consolidated effective income tax rate was as follows:
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):
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. During the fourth quarter of 2005, the Company determined that the future transactions described in Note 2 were more likely to occur than not, and reduced net deferred tax assets by $1.2 million due to lower future state income tax rates. The Company has consistently achieved profitability and taxable income. In the opinion of management, based on expected future taxable income and available tax planning strategies, it is more likely than not that the deferred tax assets will be fully utilized.
(9) OTHER BALANCE SHEET INFORMATION
Certain year-end balances consisted of the following (in thousands of dollars):
Inventories are valued at the lower of cost (principally average cost method) or market.
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 expenses were $3,201,000 in 2006, $3,336,000 in 2005, and $3,728,000 in 2004. Expenditures for maintenance and repairs are expensed, while major replacements and improvements are capitalized.
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. In 2006, as a result of the revaluation of Kennedy’s intangible assets, as described in Note 7, an impairment loss of $120,000 was recorded for Kennedy’s customer lists. This loss is included in general and administrative expenses of the Publishing segment.
Amortization expenses for intangible assets were $5,333,000 in 2006, $6,426,000 in 2005, and $6,554,000 in 2004. Amortizable assets are expensed evenly over their respective estimated lives, ranging from three to 10 years. As of December 31, 2006, future estimated amortization expenses were as follows: 2007 - $3,473,000; 2008 - $2,985,000; 2009 - $2,674,000; 2010 - $2,218,000; 2011 - $1,091,000.
Other assets at year-end 2006 included $3,250,000 for a printing press received, but not yet placed in operation.
(10) TERM DEBT
Term debt consisted of the following (in thousands of dollars):
Maturities of term debt are as follows: 2007 through 2010, $10,500,000 each; 2011, $13,000,000. Notes payable are subject to certain financial covenants and other customary restrictions, including indebtedness and business combinations. As of December 31, 2006, the Company is in compliance with all covenants. 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 $57,610,000 in 2006, and $66,630,000 in 2005.
The Company also has a $3.5 million unsecured line of credit, of which $2.8 million is being used to secure letters of credit.
(11) COMMITMENTS, CONTINGENCIES, AND RELATED-PARTY TRANSACTIONS
The Company has non-cancelable operating leases for office space, equipment, and vehicles. Total rent expense was $7,217,000 in 2006, $7,311,000 in 2005, and $7,597,000 in 2004. As of December 31, 2006, future minimum lease payments under non-cancelable operating leases were as follows: 2007 - $5,356,000; 2008 - $1,334,000; 2009 - $751,000; 2010 - $515,000; 2011 - $60,000.
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. The Company indemnifies certain of its customers for potential copyright infringement lawsuits related to the use of its products. Any exposure related to these indemnifications is believed to be remote.
A director of one of the Company's subsidiaries is a shareholder of a law firm that provides the subsidiary with editorial services. Fees incurred for these services were $5,718,000, $5,363,000, and $4,791,000 in 2006, 2005, and respectively.
(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 Company’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, 2006, authorized shares of Class A, Class B, and Class C were 30,000,000, 30,000,000, and 5,000,000 respectively.
There is no established public trading market for any of BNA's three classes of stock. However, employees may purchase the Company’s Class A stock through its Stock Purchase and Transfer Plan and the BNA 401(k) plan (the Plans). Semiannually, the Board of Directors establishes the price at which shares can be bought or sold.
Prior to January 1, 2006, the Company accounted for the sale of stock to its employees as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Under the provisions of APB 25, the sales of these shares were noncompensatory and, accordingly, the Company did not record any compensation expense related to the sale of stock. FASB Statement No. 123, Accounting for Stock-Based Compensation (FAS 123) and FASB Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123, established new accounting and disclosure requirements for stock sales to employees. The Company’s sales of shares to employees under its stock plans did not meet the criteria established by FAS 123 to be considered noncompensatory. As permitted, the Company elected to continue to apply the provisions of APB 25 to the sales of stock to employees. The accounting for the sales of stock to employees under the provisions of FAS 123 would not have resulted in a material difference to net income and earnings per share for 2005 and 2004.
Effective January 1, 2006, the Company adopted FASB Statement No. 123R, Share-Based Payment (FAS 123R), which supersedes APB 25. The Company has determined that the sale of its shares to employees under the Plans do not meet the criteria established under FAS 123R to be considered noncompensatory. The Company has also determined that under FAS 123R, certain shares issued under the Plans are required to be classified as liabilities on the Company’s balance sheet and carried at the estimated fair value at each reporting period. At December 31, 2006, 449,145 shares with an estimated fair value of $6.3 million are classified as liabilities. Further, for 2006, the Company recorded compensation expense of $445,000 related to these liability classified shares and other equity classified shares.
Treasury share transactions were as follows:
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 $7.4 million as of December 31, 2006, is known or expected to be tendered in 2007. The actual value of the shares tendered will likely be higher.
Earnings per share have been computed based on the weighted average of all outstanding shares of stock, which was 30,074,220 in 2006, 31,362,350 in 2005, and 32,502,117 in 2004.
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. The amount of a pension plan’s accumulated benefit obligation in excess of pension plan assets, that has not been recorded by pension expense accounting, is reported, net of taxes, as a component of Stockholders’ Equity.
(13) 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):
(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, products, and customers.
The Company has 10 operating segments that are aggregated into three reportable 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.
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):
Reconciliation of items differing from consolidated totals are shown below
(in thousands of dollars):
(15) SELECTED QUARTERLY DATA
The following is quarterly financial information (unaudited) for 2006 and 2005 (in thousands of dollars, except per share amounts):
The Company’s financial reporting is based on 13 four-week periods. There are three periods in each of the first three fiscal quarters and four periods in the fourth fiscal quarter. Earnings per share amounts for each quarter are required to be computed independently, and may not equal the amount computed for the full year.
Three major items affected the financial results for the fourth quarter of 2006.The elimination of the annual minimum royalties, as described in Note 3, resulted in the recognition of $3.8 million of previously deferred royalty revenues, increasing net income by $2.3 million and earnings per share by $0.08. An updated software program, which included specified upgrades, was delivered to customers and $3.7 million of previously deferred revenues were recognized, increasing net income by $1.7 million and earnings per share by $0.06. The Company recorded a goodwill impairment expense of $11.6 million, as described in Note 7, reducing net income by $7.5 million and earnings per share by $0.25.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
THE BUREAU OF NATIONAL AFFAIRS, INC.
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
(In Thousands of Dollars)
Notes:
(a) Charged to deferred subscription revenue; portion of allowance for doubtful accounts receivable not included in revenues.
(b) Net accounts written off.
PART II
Item 9.
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, 2006 or through the date of this Form 10K.
Item 9A.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company has evaluated, under the supervision of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), the effectiveness of its disclosure controls and procedures as of December 31, 2006. It was determined that there were two material weaknesses in internal control over financial reporting. The Company lacked adequate personnel with technical expertise to identify complex sales transactions that require an in-depth technical accounting analysis to ensure that revenues are accounted for in accordance with generally accepted accounting principles. In addition, the Company lacked sufficient general controls over its computerized information systems to ensure the proper operation of those systems as it relates to the Company’s reporting process. As a result, the Company’s CEO and CFO concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were ineffective.
Management’s Report on Internal Control over Financial Reporting
The Company is a non-accelerated filer and therefore this annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report thereon by our independent registered public accounting firm because these are not required of non-accelerated filers for 2006.
Changes in Internal Control Over Financial Reporting.
During the fiscal quarter ended December 31, 2006, the Company implemented organizational changes to ensure that its accounting group has greater knowledge of the operations of its software division. Specifically, the Company’s Corporate Controller is now a member of the software division’s management committee which reviews operating plans, activities, and results. Accordingly, the Company considers a previously identified material weakness regarding its accounting group’s lack of knowledge of the software division’s operations, in order to account for revenues in accordance with generally accepted accounting principles, to have been remedied as of December 31, 2006.
Item 9B.
Item 9B. Other Information
None.
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, 2006. Such information is incorporated herein by reference.
Item 10.
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.
Item 11. Executive Compensation
The information required under this Item 11 is contained in the Proxy Statement under the headings "IV. Executive Compensation" and is incorporated herein by reference.
Item 12.
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.
Item 13. Certain Relationships and Related Transactions
The information required under this Item 13 is contained in the Proxy Statement under the heading "IV. Executive Compensation" and is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
The information required under this Item 14 is contained in the Proxy Statement under the heading "V. Audit Committee Disclosure" and is incorporated herein by reference.
PART IV
Item 15.
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
Consolidated Statements of Income for the years
ended December 31, 2006, 2005 , and 2004
Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Cash Flows and Consolidated
Statements of Changes in Stockholders' Equity and
Comprehensive Income for each of the years
ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
(2)
Financial Statement Schedule:
II
Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 2006, 2005, and 2004
(a) (3)
Exhibits
3.1
Certificate of Incorporation, as amended*
3.2
By laws, as amended.**
Statement re: Computation of Per Share Earnings is contained in the
Consolidated Financial Statements in the Notes to Consolidated Financial Statements,
Note 12, "Stockholders' Equity"
Subsidiaries of Registrant.***
23.1 Consent of Independent Registered Public Accounting Firm
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 21, 2007****
*
Incorporated by reference to the Company’s 2001 Form 10-K
Commission File Number 2-28286, filed on March 29, 2002.
The exhibit number indicated above corresponds to the
exhibit number in that filing.
**
Incorporated by reference to the 8K filed by the Company on
September 8, 2005. The exhibit number indicated above corresponds
to the exhibit number 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, 2006.
Upon written or oral request to the Company’s General Counsel, a copy
of any of the above exhibits will be furnished at cost.
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 28,
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,
President and Chief Executive Officer Vice President and Chief Financial Officer
Director (Chief Accounting Officer)
Director
Date: March 28, 2007 Date: March 28,
By: s/Sandra Degler
March 28, 2007
By: s/Gregory C. McCaffrey
March 28, 2007
Sandra C. Degler
Date Gregory C. McCaffrey Date
Chairman of the Board of Directors
Director
By: s/Paul A. Blakely March 28, 2007
By: s/Jonathan Newcomb
March 28, 2007
Paul A. Blakely Date Jonathan Newcomb Date
Director
Director
By: s/Cynthia J. Bolbach March 28, 2007 By: s/Susan E. Rice March 28, 2007
Cynthia J. Bolbach Date
Susan E. Rice
Date
Director
Director
By: s/Eunice Lin Bumgardner March 28, 2007 By: s/Ellen Taus March 28, 2007
Eunice Lin Bumgardner Date Ellen Taus Date
Director
Director
By: s/Neil R. Froemming March 28, 2007 By: s/Daniel W. Toohey March 28, 2007
Neil R. Froemming Date Daniel W. Toohey Date
Director
Director
By: s/Gerald S. Hobbs March 28, 2007 By: s/Robert L. Velte March 28, 2007
Gerald S. Hobbs Date Robert L. Velte Date
Director
Director
By: s/Margaret S. Hullinger March 28, 2007
Margaret S. Hullinger Date
Director
Number
Exhibit Description
Sequential Page
Number
3.1
Certificate of Incorporation, as amended
*
3.2
By laws, as amended
* *
Statement re: Computation of Per Share Earnings is contained in the
Consolidated financial Statements in the Notes to Consolidated Financial
Statements , Note 12 "Stockholders Equity,"
Subsidiaries of Registrant
23.1
Consent of Independent Registered Public Accounting Firm
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 Stockholders to be held on April 21, 2007
**
*
Incorporated by reference to the Company’s 2001 Form 10-K
Commission File Number 2-28286, filed on March 29, 2002.
The exhibit number indicated above corresponds to the
exhibit number in that filing.
**
The Definitive Proxy Statement is expected to be filed with
the SEC within 120 days of December 31, 2006.