SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-6311
WAVERLY, INC.
(Exact name of Registrant as specified in its charter)
Maryland 52-0523730
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
351 West Camden Street
Baltimore, Maryland 21201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 410-528-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $2 par value Nasdaq Stock Market
Indicate by check mark whether the Registrant (1) : has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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 ]
[Cover page 1 of 2 pages.]
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $144,616,875, or $39.00 per share as of February 14, 1998. The
number of shares outstanding of the Registrant's Common Stock was 9,039,576 as
of February 14, 1998.
[Cover page 2 of 2 pages.]
<PAGE>
PART I
Item 1. Business
General Description
Waverly, Inc. ( "Waverly" or the "Company" ) is a worldwide publisher of
books, periodicals and electronic media in the fields of medicine, allied health
and related disciplines. Products are distributed to students, practitioners,
institutions and companies engaged in the health care industry. The Company
has operating offices in the United States , Europe, the Far East, and South
America.
The Company was established in 1890 originally as a printer of periodicals for
medical and scientific associations. In 1908 the Company entered the medical
publishing marketplace under the trade name Williams & Wilkins which continues
to be the flagship name for the Company's publishing operations. From 1988
through 1990 the Company acquired other publishing businesses that carried
distinct trademark names, including Lea & Febiger and Urban & Schwarzenberg.
Prior to November, 1993 the Company was also a major printer of periodicals
principally for medical and scientific associations. The Company sold its
printing operations in November, 1993.
The Company's products are sold to customers in over 50 countries. The Company
markets and distributes its products in several ways including direct mail,
internet marketing, telemarketing, field sales forces and independent
distributors.
Financial disclosure of sales by geographical area for the three years ending
December 31, 1997 appears in Note 13 - Revenues by Geographic Areas incorporated
herein in Item 8 of this Form 10-K Annual Report.
The Company is incorporated in Maryland and its principal executive offices are
located at 351 W. Camden Street, Baltimore, Maryland 21201.
Agreement and Plan of Merger with Wolters Kluwer U.S. Corporation.
On February 10, 1998, the Company, entered into an Agreement
and Plan of Merger, dated as of February 10, 1998 (the "Merger Agreement"), with
Wolters Kluwer U.S. Corporation, a Delaware corporation ("Wolters Kluwer"), and
MP Acquisition Corp., a Maryland corporation and an indirect wholly owned
subsidiary of Wolters Kluwer ("Newco"), providing for the acquisition of the
Company by Wolters Kluwer. Pursuant to the Merger Agreement, among other things,
on February 18, 1998, Newco commenced a tender offer for all outstanding shares
of common stock, par value $2.00 per share (the "Shares"), of the Company at
$39.00 per Share net to the seller in cash (the "Offer"). The obligation of
Newco to purchase Shares tendered in the Offer is conditioned upon, among other
things, two thirds of the outstanding Shares on a fully diluted basis being
tendered in the Offer and applicable waiting periods under United States and
relevant foreign antitrust laws having expired or terminated. The Company's
Schedule 14D-9 related to the Offer was filed with the Securities and Exchange
Commission on February 18, 1998, and mailed to the Company's stockholders of
record shortly thereafter, and is incorporated by reference herein.
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Upon consummation of the Offer, the Merger Agreement further provides that,
subject to the conditions set forth therein, Newco will be merged (the "Merger")
with and into the Company, with the Company being the surviving corporation (the
"Surviving Corporation") and becoming a wholly owned subsidiary of Wolters
Kluwer. After the effective time of the Merger, each issued and outstanding
Share (other than treasury Shares, Shares owned by Wolters Kluwer, Newco or any
wholly owned subsidiaries of Wolters Kluwer or the Company) will be canceled and
converted into the right to receive $39.00 in cash (or any higher price paid per
Share pursuant to the Offer). Each issued and outstanding share of Newco common
stock will be converted into and become one fully paid and nonassessable share
of common stock of the Surviving Corporation. The Merger Agreement further
provides that prior to the effective time of the Merger, the Company shall pay
to the holder of each outstanding stock option, whether or not then exercisable,
an amount in respect thereof equal to the product of (A) the excess, if any, of
the Offer Price over the per Share exercise price of such option and (B) the
number of Shares subject to such option. In the Merger Agreement, the Company,
Wolters Kluwer and Newco have made customary representations and warranties and
additional covenants in order to effectuate the Merger. Wolters Kluwer, nv, a
corporation organized under the laws of the Netherlands and the ultimate parent
corporation of Wolters Kluwer and Newco, has guaranteed the performance of the
obligations of Wolters Kluwer and Newco under the terms of the Merger Agreement.
As previously reported the Merger is undergoing routine review by the Department
of Justice, Antitrust Division, under the Hart-Scott-Rodinao Antitrust
Improvements Act of 1976 ("HSR"). Wolters Kluwer has received a request for
additional information under HSR, and the Company has received a parallel
request under the Department of Justice's Civil Investigative Demand Authority.
The HSR waiting period which was set to expire on March 4, 1998, will be
extended until 10 days after Wolters kluwer substantially complies with its
request.
On March 17, 1998, Wolters kluwer announced that the expiration of the Offer had
been extended to April 30, 1998. The Offer had been previously scheduled to
expire on march 17, 1998.
In connection with the Merger Agreement, certain stockholders of the Company,
including certain directors and officers of the Company (collectively, the
"Stockholders"), have entered into a Stock Option and Tender Agreement (the
"Stock Option Agreement") with Wolters Kluwer and Newco dated as of February 10,
1998. Pursuant to the Stock Option Agreement, the Stockholders have agreed to
tender their Shares in the Offer and have granted Wolters Kluwer and Newco an
option (a "Stock Option") to purchase 5,338,680 Shares (representing
approximately 53.3% of the Shares outstanding) owned by the Stockholders at a
purchase price equal to the Offer Price (or any higher price paid per Share
pursuant to the Offer). The Stock Option becomes exercisable in the event that
the Offer is terminated by Wolters Kluwer under certain circumstances set forth
in the Stock Option Agreement or the Offer expires without the purchase of
Shares thereunder under certain circumstances set forth in the Stock Option
Agreement. Pursuant to the Stock Option Agreement, the Stockholders have agreed
to vote all their Shares (i) in favor of the Merger, the Merger Agreement and
the transactions contemplated thereby, (ii) against any action or agreement that
would result in a material breach of a covenant, representation or warranty or
other obligation of the Company under the Merger Agreement and (iii) against any
action or agreement that would materially impede, interfere with or attempt to
discourage the Offer or the Merger. In the event that certain of the
Stockholders do not vote as described above, such Stockholders shall be deemed
to have granted Wolters Kluwer a proxy to vote his, her or its Shares.
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Description of Specific
Publishing Businesses
Waverly publishes periodicals, books and electronic media to the health care
market. Products are sold to students and schools in medicine and other
healthcare programs, practitioners, pharmaceutical firms, health care
institutions, medical equipment companies, as well as other firms in the general
information and publishing business.
A. Periodical Publishing
The Company publishes periodicals under the trade name of Williams & Wilkins (
"W&W" ) . The Company considers itself to be a leading publisher in the fields
of medicine, allied health, and related disciplines. Although there does not
exist an official source of market statistics to verify market share, the
Company believes that it ranks within the top five medical publishers in the
United States.
Waverly publishes periodicals for major medical and scientific societies ("
society publishing ") with whom they jointly share in certain editorial and
publishing responsibilities. Profits from each periodical are shared by the
Company and the society as dictated by the contract terms. The majority of these
publications are linked to prestigious international organizations including the
American Urological Association, the American Society of Plastic and
Reconstructive Surgeons and the Congress of Neurological Surgeons. The Company
typically works under long-term contracts with these organizations ( three to
five years in duration ) . Waverly has been successful over the years in
renewing such contracts. It's average retention rate over the last ten years is
in excess of 75%. Some of the societies have contracted with the Company for
over twenty-five years. The Company currently publishes 48 society periodicals.
Waverly believes that the relationship with the medical associations and their
members are an important link in its ability to attract new authors for its
periodical publications as well as for its book and electronic publishing
programs. The Company also publishes periodicals which are directly owned by
Waverly ( " proprietary periodicals " ) . In 1997, Waverly published 29 such
periodicals.
In 1980 the Company published 36 periodicals compared to the current roster of
77 publications. Circulation of subscription based periodicals ranges from 500
for new or narrowly specialized publications to over 20,000 for leading
publications in broader based disciplines. Approximately 20% of the subscribers
are located in foreign countries.
Approximately 65% of the periodicals are published for subscribers in the fields
of medicine, including disciplines such as obstetrics and gynecology,
psychiatry, nephrology, urology, anesthesia and neurology. The remaining 35% of
the publications are directed at the fields of allied health, including nursing,
physical and respiratory therapy, audiology and chiropractic.
Historically, more than 75% of the subscribers to periodicals renew their
subscriptions. The Company uses both direct mail campaigns as well as
independent subscription agents throughout the world to secure renewals. At
December 31, 1997 and 1996 the Company's paid subscriber base was approximately
389,000 and 381,000 respectively.
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Revenues generated from periodical publishing come from three principal sources.
Subscription fees account for approximately 57% of the total. Advertising
revenues, principally from pharmaceutical and medical equipment manufacturers,
contribute approximately 24% of the total. The remaining 19% is derived from
sales of reprint articles, mail lists, annual bound volumes and special
supplement insert issues from pharmaceutical firms. The Company publishes three
periodicals ( commonly referred to as "controlled circulation" journals ) which
rely entirely on advertising revenue for its income source.
B. Book Publishing
1. General Information
The Company publishes and distributes worldwide over 1,300 titles to students,
practitioners, institutions and health care firms. Although no definitive
industry statistics are available, the Company believes that it is one of the
top ten medical book publishers in the world.
In the United States, the Company publishes principally under the name of
Williams & Wilkins although other imprints or brand names are used for strategic
reasons. Other imprints include Lea & Febiger, National Medical Series, and
Stedman's Word Book Series. In Munich, Germany the Company owns a publishing
firm which operates under the trade name Urban & Schwarzenberg.
The Company publishes approximately 45% of its titles for the student
marketplace while the remaining 55% of titles are directed to medical
practitioners and others engaged in the health care industry. Over the years the
Company has successfully built a base of product that continues in updated
revised editions. It is not uncommon for some titles to continue for 10-15 years
beyond its initial publication, particularly for subjects in basic sciences,
atlases and reference products. In 1997 approximately 40% of the Company's book
products have extended beyond the first edition life cycle.
The Company publishes approximately 900 English language books and 400 German
language books. On average, the Company introduces annually 150 - 200 new titles
or new editions of existing titles ( commonly referred to as frontlist titles )
. During the past three years, book publishing revenues consist of approximately
30% frontlist titles, 55% backlist titles and 15% from special sales to the
pharmaceutical industry.
2. Marketing & Distribution
In the United States the Company markets and distributes its publications
through several channels including direct mail, conventions, internet marketing,
telemarketing, field sales, independent distributors and joint venture sales
groups. Approximately 55% of the product line is sold through retail outlets at
college, medical and trade bookstores as well as institutional libraries. The
balance comes through the direct sales and marketing channels.
The Company promotes and distributes its English language products to
international markets through a separate dedicated division. The division
maintains offices in Baltimore, London, Buenos Aires , Hong Kong and Bangkok.
The Company is a partner in two distribution companies located in Sydney and
Tokyo and also has distribution agreements with partners in Barcelona and Paris.
4
<PAGE>
The Company promotes and distributes German language publications through direct
mail, bookstores, and commissioned sales agents. In addition, the Company owns a
direct mail order firm in Munich, Germany which sells medical and scientific
books of varied subject matter to professionals and nonprofessionals. The
Company also operates a publishing firm in Wroclaw, Poland to translate both
English and German language books into the local language.
The Company participates in a number of co-publishing ventures with foreign
publishers located in South America, Europe, Asia and the Middle East to
translate the Company's English language titles into local language. Under these
arrangements the Company retains ownership rights to the translated titles.
Separately, the Company also sells outright translation rights to certain book
titles. At this time over 559 titles have been translated into non-English
language versions.
C. Electronic Media Publishing
The Professional Learning System Division ( " PLS " ) publishes non-print
products for use in education, training and productivity improvement for
students and practitioners in nursing, medicine and in other health care related
industries. Products are marketed under various the trade names including
Williams & Wilkins , Medi-Sim, Stedman's, LifeArt, and de'MEDICI.
Approximately 400 products are sold in various types of formats including print,
software, video, computer assisted instruction ("CAI " ), and CD ROM formats.
The Company develops original products for electronic format and in certain
cases will convert existing print product into electronic format for sale.
The Company also participates in certain development and distribution projects
with other firms to share in technology and market expertise.
The Company believes that the non-print product demand will increase rapidly
over the next several years . The Company believes it is a leader in the medical
publishing industry for providing such non-print products.
D. Competition in Medical Publishing
Medical publishing is a highly competitive business. While there is no
conclusive marketing data available to rely on, it is reasonable to ascertain
that approximately 10 -15 medical publishing firms control over 70% of the
global medical publishing marketplace, with four firms currently accounting for
at least 40% of total revenues. There are well over 150 smaller publishing firms
that publish for a narrowly targeted audience of medical professionals.
Over the past twenty years a number of large publishing firms, not previously
engaged in medical publishing, have entered the marketplace through the
acquisitions of one or more medical publishing firms. The principal competitors
of the Company are owned by larger corporations with substantial financial
resources who engage in broad range of publishing activities.
The Company believes that it can compete effectively in the current market
environment. Key competitive industry capabilities continue to be the ability
(1) to correctly identify educational,
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training , and other professional learning needs of the customer, (2) to attract
quality authors and acquire and develop valuable publication properties, (3) to
publish products faster and more cost efficiently, particularly through evolving
electronic processes, (4) effectively market and distribute products throughout
the world.
As is common in the publishing business, substantially all of the Company's
books and periodicals are protected by copyrights.
Item 2. Properties
In June 1995 the Company relocated it's corporate headquarters to Camden Yards
South Warehouse located on 351 West Camden Street, Baltimore, Maryland 21201.
Details of this lease between Waverly, Inc. and the Maryland Stadium Authority
is incorporated by reference to Exhibit 10H filed with the 1994 Annual Report on
Form 10-K.
As of December 31, 1997, the Company had leases at the following principal
locations:
<TABLE>
<CAPTION>
Square Feet (000's) Annual Expiration Dates
Location Use Cost
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Camden Yards South Office space 72,400 $1,046 in 1996 2005
Warehouse increasing to a
351 W. Camden Street maximum of $1,182
Baltimore, Md. 21201 in 2004.
Urban & Schwarzenberg - Europe Office space, 40,812 592 Various with
Warehouse and earliest in 1998
Bookstores
Waverly Europe - London Office space 3,700 70 2002
Media, Pennsylvania Office space 7,500 165 1999
Williams & Wilkins Asia Pacific Office space and 11,700 154 1998
Limited - Hong Kong Warehouse
Williams & Wilkins Asia Pacific Office space 710 23 1998
Limited - Thailand
</TABLE>
Item 3. Legal Proceedings.
As of the date of this report, there were no material legal proceedings pending
against the Company or any of its subsidiaries. No material lawsuits or
proceedings were terminated in the fourth quarter of 1997.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1997.
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<PAGE>
Part II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters.
The common stock of Waverly is traded on the over-the-counter market, with daily
quotations reported in the NASDAQ quotation system. As of February 14, 1998,
there were 9,039,576 shares outstanding (10,013,326 if adjusted for stock
options exercisable within 60 days after the record date). Including stock
options exercisable within 60 days, 3,951,649, or 43.2%, are owned by members of
the Passano family, 802,500 shares, or 8.8%, are owned by Michael Urban, and
495,000 shares, or 5.4%, are owned by various members of the Spahr family, all
of whom participate in voting trusts with terms similar to those of the voting
trust of certain members of the Passano family. There are 414 record holders of
the common stock as of February 14, 1998. The following table sets forth the
range of high and low prices of the Company's common stock, and the dividends
paid in each of the four quarters of the last two years.
<TABLE>
<CAPTION>
-------------------1997----------------- ------------------1996-----------------
Quarter High Low Dividends High Low Dividends
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $ 25.25 $ 17.75 $.065 $ 24.50 $ 20.00 $.060
Second 22.50 19.63 .070 24.50 19.75 .065
Third 25.63 21.25 .070 26.25 20.00 .065
Fourth 47.25 24.00 .070 29.50 22.75 .065
- ------------------------------------------------------------------------------------------------------------
Year $ 47.25 $ 17.75 $.275 $ 29.50 $ 19.75 $.255
============================================================================================================
</TABLE>
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<TABLE>
Item 6. Selected Financial Data.
Key Financial Data
Five-Year Financial History*
(in thousands of dollars except ratios and per share amounts)
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues $ 172,386 $ 170,961 $ 156,329 $ 132,064 $ 121,684
Income (loss) from continuing
operations 7,096 6,347 5,305 4,888 (2,615)
Discontinued printing operations - - - (228) (607)
Net income (loss) 7,096 6,347 5,305 4,660 (2,008)
Data Per Common Share:
Income (loss) from continuing
operations - basic $ .79 $ .71 $ .60 $ .56 $ (.30)
Discontinued printing operations - basic - - - (0.03) 0.07
Net income (loss) - basic $ .79 $ .71 $ .60 $ .53 $ (.23)
Income (loss) from continuing
operations - diluted $ .75 $ .68 $ .57 $ .54 $ (.30)
Discontinued printing operations -
diluted - - - (.03) .07
Net income (loss) - diluted $ .71 $ .68 $ .57 $ .51 $ (.23)
Shareholders' equity (book value) $ 6.52 $ 6.05 $ 5.64 $ 5.10 $ 4.65
Cash dividends paid $ .275 $ .255 $ .235 $ .220 $ .220
Average common shares - Basic (thousands) 8,943 8,902 8,844 8,720 8,674
Average common shares - Diluted (thousands) 9,449 9,355 9,245 9,052 8,674
Balance Sheet Data:
Total assets $ 127,477 $ 126,597 $ 125,905 $ 120,635 $ 114,376
Investment in discontinued
printing operations - - - 1,000 2,903
Working capital 29,633 26,713 22,211 25,832 26,495
Current ratio 1.6 1.5 1.4 1.5 1.5
Long-term debt 1,196 2,595 3,680 7,348 8,435
Shareholders' equity 58,522 54,004 49,896 44,444 40,298
===================================================================================================================
<FN>
* This financial data should be read in conjunction with the Consolidated Financial Statements and
related Footnotes on pages 21 through 37.
</FN>
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
1997 COMPARED WITH 1996
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Total revenues in 1997 were $172.4 million compared with $171.0 million in 1996,
an increase of approximately 1%. Reported revenues were affected by the
significant decline in the value of the German mark to the U.S. dollar, which
dropped 13% from the prior-year period. Without the impact of foreign currency
total worldwide revenues increased 4%.
Book Publishing revenues were $100.3 million in 1997 compared with $105.8
million in 1996, a decline of 5%. Without the effect of the foreign currency
valuation, Book Publishing revenues were equal to the prior year. Revenues
increased 2% in domestic markets, in part because of the acquisition of certain
medical titles from Igaku-Shoin Medical Publishers, Ltd., a New York-based
publisher. Book Publishing revenues from international markets declined 11%
owing to the aforementioned currency factor and the difficult market conditions
in the Far East.
Periodical Publishing revenues were $63.4 million in 1997 compared with $57.8
million in 1996, an increase of nearly 10%. Subcription-based revenue increased
8% because of price increases. Advertising revenues advanced 14% due to a
greater volume of business, while other journal publishing revenue increased by
8%. The Company acquired certain newsletters in 1997, which contributed
nominally to growth this year. Professional Learning Systems Division ( "PLS" )
revenues were $8.7 million in 1997 compared with $7.3 million in 1996, an
increase of 20%. The increase came from new releases of established products and
the further penetration of its new product line, de'MEDICI Systems, a
hospital-based interactive training system.
Cost of Sales was $102.9 million in 1997 and $102.0 million in 1996. As a
percent of sales, costs were 59.7% for both years. Book Publishing cost of sales
was 57.5% in 1997 and 58.8% in 1996. The year-to-year improvement came from cost
efficiencies in textbook publishing and lower obsolescence in clinical book
publishing. Periodical Publishing cost of sales was 68.0% in 1997 and 67.3% in
1996. The slightly higher cost margin in 1997 is due principally to startup
costs associated with the signing of a five-year publishing contract with the
American Heart Association, which is scheduled to begin in 1998. PLS cost margin
was 32.1% in 1997 and 33.6% in 1996. Margins improved from the sales of new
releases of established product lines.
Selling and distribution expenses were $40.7 million, or 23.6% of revenues, in
1997 compared with $40.5 million, or 23.7% of revenues, in 1996. Domestic Book
Publishing incurred lower costs because of the timing of promotion for new
publications. International Book Publishing incurred higher cost margins because
of lower volume. Periodical publishing cost margins were equal to last year. PLS
Group costs increased because of the expansion of the sales force.
General and Administrative expenses were $10.4 million in 1997 and $12.9 million
in 1996. As a percent of revenue, expenses were 6.0% in 1997 and 7.5% in 1996.
Lower employee benefit costs and bad debt expense in 1997 and the absence of
certain onetime costs and legal fees charged in 1996 are the principal factors
for the year-to-year reductions in expense.
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Other Income was $92,000 in 1997 and $234,000 in 1996. Loss on foreign exchange
transactions in 1997 is the principal factor for the lower income. Interest
expense was $0.8 million in 1997 and $1.1 million in 1996. Average borrowings
for short-term financing were lower in 1997, and principal repayments on
long-term debt reduced borrowing costs.
Equity in earnings of affiliated entities was $183,000 in 1997 and $906,000 in
1996. New joint ventures in Europe incurred startup losses in 1997. In addition,
existing entities in Japan and Germany recorded lower profits because of
difficult market conditions and lower foreign currency valuations.
Income taxes were $4.0 million in 1997 and $3.2 million in 1996. The effective
tax rate was 36.4% in 1997 and 36.8% in 1996.
Net income was $7.1 million in 1997 and $6.3 million in 1996. Domestic-based
publishing operations improved significantly over the prior year. Earnings from
international-based operations were below last year because of difficult market
conditions in Southeast Asia and Germany.
1996 COMPARED WITH 1995
- -----------------------
Company revenues for 1996 totaled $171.0 million, an increase of $14.6 million,
or 9%, compared with 1995. Revenues of the Company's three major business
segments all produced increases over the prior year. Book Publishing revenues
were $105.8 million in 1996 compared with $98.3 million in 1995, an increase of
8%. Domestic Book Publishing revenues increased 16% primarily because of an
increase in the number of new products published and a substantial year-to-year
increase in industry sales, principally to pharmaceutical companies.
International book sales, which include export sales of English language books
and sales of German language books and account for 53% of total book revenues,
were essentially unchanged from the prior year. Export sales of English language
books increased 13% while sales of German language books declined 3%. Were it
not for lower currency valuations, sales of German language books would have
remained unchanged from the prior year. Softness in industry sales in Germany
account for the lack of growth in 1996.
Periodical Publishing revenues were $57.8 million in 1996 compared with $52.1
million in 1995, an increase of 11%. Subscription-based revenues increased 7%
because of rate increases. Advertising-related revenues increased 17% over 1995.
Professional Learning Systems Division (PLS) revenues were $7.3 million in 1996
compared with $6.0 million in 1995, an increase of 22% over 1995. Gains in
revenues came entirely from the full-year inclusion of de'MEDICI systems, a
hospital-based interactive training system purchased by The Company in June,
1995.
Cost of sales was $102.0 million in 1996 compared with $94.0 million in 1995, an
increase of 9%. As a percentage of sales, costs were 59.7% in 1996 and 60.1% in
1995. Cost margins for Book Publishing were 58.7% in 1996 compared with 58.0% in
1995. In 1996, The Company published a large number of comprehensive reference
titles, which carry higher initial composition and printing costs in the first
print run. Periodical Publishing cost margins were 67.2% in 1996 compared with
68.9% in 1995. A healthy increase in higher margin advertising revenues coupled
with subscription rate increases, which outpaced manufacturing cost increases,
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led to the favorable margin improvement in 1996. PLS cost margin was 33.6% in
1996 compared with 30.2% in 1995.
Selling and distribution expenses were $40.5 million in 1996 and $37.1 million
in 1995, an increase of 9%. As a percentage of sales, expenses were 23.7% in
1996 and 23.8% in 1995. Expenses as a percentage of sales were unchanged in the
Book Publishing group, while in the Periodical Publishing group, expenses
decreased as a percent of sales because of an increased revenue base. PLS
experienced an increase as a percentage of sales because of the national
roll-out of de'MEDICI systems.
General and administrative expenses were $12.9 million in 1996 and $11.9 million
in 1995, an increase of 8%. As a percentage of sales, expenses were 7.5% in 1996
and 7.6% in 1995. Although pension expense increased $0.9 million from year to
year, lower costs in other areas coupled with an expanded revenue base resulted
in comparable cost ratio for both years.
Other income was $0.2 million in 1996 and $0.8 million in 1995. Interest earned
on invested cash was down from the prior year due to use of cash in the second
half of 1995 for acquisitions. Foreign currency transaction gains realized in
1995 in the amount of $0.2 million also attributed to the year-to-year decrease.
Interest expense was $1.1 million 1996 and $1.2 million in 1995.
Equity in earnings of affiliated entities was $906,000 in 1996 compared with
$316,000 in 1995. Improved results from all foreign affiliated entities and the
recognition of deferred tax benefits associated with Quality Medical Publishing
were the reasons for the year-to-year increase.
Income taxes were $3.2 million in 1996 and $2.6 million in 1995. The effective
tax rate was 36.8% in 1995 and 33.9% in 1994.
Net income was $6.3 million, or $.68 per share, in 1996 compared with $5.3
million, or $.57 per share, in 1995, an increase of 19%. The year-to-year
increase in earnings from ongoing operations is a result of the substantial gain
in profits realized by Periodical Publishing, while Book Publishing and PLS
declined from the prior year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operations was $7.7 million in 1997 compared with $7.6
million in 1996. Net income before noncash charges such as depreciation,
amortization, and deferred taxes generated $15.5 million in 1997 compared with
$11.8 million in 1996. Increases in current assets, net of increases in current
liabilities, were $7.7 million in 1997 compared with $4.0 million in 1996.
Increases in trade receivables and early contractual payments to societies for
journal editorial and royalty advances in 1997 are the principal reasons for the
use of cash. The Company spent $2.3 million on capital expenditures in 1997,
primarily to upgrade and enhance computer hardware and communication systems.
At December 31, 1997 the Company carried total short-term and long-term
borrowings of $3.7 million compared with $6.4 million at December 31, 1996. The
Company maintains bank lines of $39.2 million worldwide and believes these
amounts are adequate to provide necessary working capital for future growth.
During 1998 the Company will retire $1.2 million of long-term debt and expects
to have a single long-term bank note equal to $1.2 million outstanding at the
end of 1998.
11
<PAGE>
At December 31, 1997 the Company recorded $2.9 million of deferred tax assets
having to do with future tax benefits related to postretirement obligations and
inventory-associated deductions. Based on the Company's long-term earnings
performance, the deferred tax asset was recorded free of any valuation
allowance.
In 1998 The Company expects to continue to invest in working capital for the
further development of new products, maintain and upgrade necessary system
computer hardware and software to support operations, and to purchase
publication rights of titles to broaden product lines. The Company expects to
finance these activities through cash flow from operations.
YEAR 2000
- ---------
The Year 2000 raises a general concern regarding the capability of the Company's
hardware and software to meet the requirements of date comparisons and
calculations across the century boundary. Therefore in 1997, the Company
established a task force, under the auspices of the Audit Committee of the Board
of Directors, to perform an analysis of its internal Year 2000 issues as well as
the external organizations whose systems may cause business interruptions to the
Company if their Year 2000 issues aren't resolved. To that end, the Company has
commenced necessary remediation programs for its internal systems and has
established procedures to identify, notify and test external organization
systems for compliance. The costs associated with this project will be expensed
as incurred. At this time, the Company does not believe this task will have a
material impact on the financial statements in future years.
Item 7A. Quanitative and Qualitative Disclosures about Market Risk.
Not Applicable.
Item 8. Financial Statements and Supplementary Data.
12
<PAGE>
Report of Independent Accountants
The Board of Directors and
Shareholders of Waverly, Inc.
We have audited the accompanying consolidated balance sheets of Waverly, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Waverly, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/Coopers & Lybrand L.L.P.
---------------------------
Baltimore, Maryland Coopers & Lybrand L.L.P.
January 30, 1998, except for Note 16,
as to which the date is February 10, 1998
13
<PAGE>
<TABLE>
Consolidated Balance Sheets
(in thousands of dollars except per share amounts)
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
At December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,575 $ 5,327
Accounts receivable, less allowance for doubtful accounts
($1,438 and $1,493, respectively) 43,843 40,385
Inventories 29,512 30,910
Current deferred taxes 2,429 2,909
Prepaid expenses 5,115 1,172
- -------------------------------------------------------------------------------------------------------------------
Total current assets 82,474 80,703
- -------------------------------------------------------------------------------------------------------------------
Property and equipment
Land 678 792
Buildings and improvements 2,188 2,393
Office and computer equipment 12,434 11,356
- -------------------------------------------------------------------------------------------------------------------
15,300 14,541
Less: accumulated depreciation (8,283) (6,701)
- -------------------------------------------------------------------------------------------------------------------
Net property and equipment 7,017 7,840
Intangible assets 23,602 23,912
Electronic product development assets 4,593 4,439
Investments in affiliated entities 2,875 3,065
Prepaid pension 6,141 5,825
Deferred taxes 459 662
Other assets 316 151
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 127,477 $ 126,597
===================================================================================================================
14
<PAGE>
- -------------------------------------------------------------------------------------------------------------------
At December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Line of credit borrowings $ 1,293 $ 1,366
Current portion of long-term debt 1,200 2,400
Accounts payable 18,014 15,232
Accrued expenses 3,550 5,299
Royalties payable 9,296 10,541
Unearned subscription revenues 18,418 17,791
Income taxes payable 1,070 1,361
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 52,841 53,990
- -------------------------------------------------------------------------------------------------------------------
Long-term debt 1,196 2,595
Unfunded pension obligation 2,932 3,369
Postretirement benefit obligation 11,525 11,719
Other liabilities 461 920
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 68,955 72,593
- -------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
Shareholders' equity
Preferred stock 500,000 shares authorized; none issued
Common stock $2 par value; 12,000,000 shares authorized,
9,000,450 and 8,923,138 shares issued and outstanding,
respectively 18,001 17,846
Additional paid-in capital 13,936 12,574
Retained earnings 27,698 23,063
Foreign currency translation adjustments (1,113) 521
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 58,522 54,004
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 127,477 $ 126,597
===================================================================================================================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
15
<PAGE>
<TABLE>
Consolidated Statements of Operations
(in thousands of dollars except per share amounts)
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 172,386 $ 170,961 $ 156,329
Costs and expenses
Cost of sales 102,909 102,027 94,015
Selling and distribution 40,700 40,540 37,133
General and administrative 10,355 12,899 11,946
Depreciation and amortization 6,880 6,053 5,292
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 160,844 161,519 148,386
- -------------------------------------------------------------------------------------------------------------------
Operating income 11,542 9,442 7,943
- -------------------------------------------------------------------------------------------------------------------
Other income 92 234 808
Interest expense (766) (1,065) (1,201)
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes and earnings of
affiliated entities 10,868 8,611 7,550
Income tax expense (3,955) (3,170) (2,561)
Equity in the earnings of affiliated entities 183 906 316
- -------------------------------------------------------------------------------------------------------------------
Net income $ 7,096 $ 6,347 $ 5,305
===================================================================================================================
Earnings per common share and common share equivalents:
Basic $ .79 $ .71 $ .60
Diluted $ .75 $ .68 $ .57
===================================================================================================================
Weighted average number of common shares
outstanding 8,943,118 8,902,020 8,844,652
Dilutive potential common shares 505,963 452,961 400,642
- -------------------------------------------------------------------------------------------------------------------
Diluted weighted-average shares outstanding 9,449,081 9,354,981 9,245,294
===================================================================================================================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
(in thousands of dollars except per share amounts)
- --------------------------------------------------------------------------------------------------------------------
For the three years ended December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Common Common Additional Currency
Stock Stock Paid-in Retained Translation
Shares Capital Earnings Adjustment Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 4,371 $ 8,741 $ 10,595 $ 24,659 $ 449 $ 44,444
Net income 5,305 5,305
Cash dividends $.235
per share (2,081) (2,081)
Exercise of stock options 61 122 937 1,059
Common stock issued
for director fees 1 3 47 50
Tax benefits related
to exercise of
atock options 364 364
Foreign currency
translation
adjustments 755 755
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 4,433 8,866 11,943 27,883 1,204 49,896
Net income 6,347 6,347
Cash dividends $.255
per share (2,272) (2,272)
Exercise of stock options 41 81 427 508
Common stock issued
for director fees 2 4 60 64
Two-for-one common
stock split (Note 2) 4,447 8,895 (8,895) -
Tax benefits related
to exercise of
stock options 144 144
Foreign currency
translation
adjustments (683) (683)
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 8,923 17,846 12,574 23,063 521 54,004
17
<PAGE>
- --------------------------------------------------------------------------------------------------------------------
Common Additional Currency
Stock Common Paid-in Retained Translation
Shares Stock Capital Earnings Adjustment Total
- --------------------------------------------------------------------------------------------------------------------
Net income 7,096 7,096
Cash dividends $.275
per share (2,461) (2,461)
Exercise of stock options 75 150 744 894
Common stock issued
for director fees 2 5 55 60
Tax benefits related
to exercise of
stock options 563 563
Foreign currency
translation
adjustments (1,634) (1,634)
adjustments
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 9,000 $ 18,001 $ 13,936 $ 27,698 $(1,113) $ 58,522
====================================================================================================================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
18
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(in thousands of dollars)
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 7,096 $ 6,347 $ 5,305
Adjustments to reconcile net income to net cash from
operating activities
Postretirement benefit obligation 350 574 665
Equity in the earnings of affiliated entities (183) (906) ( 316)
Depreciation and amortization 6,880 6,053 5,292
Deferred income taxes 1,169 (984) 2,229
Net periodic pension expense (credit) (91) 521 (395)
Other 209 180 71
Change in assets and liabilities, adjusted for
the effect of acquisitions and divestitures
Accounts receivable (4,944) (1,241) (3,098)
Inventories 227 (324) (7,173)
Prepaid expenses (3,874) (125) 36
Accounts payable 4,401 (618) 1,749
Accrued expenses (1,957) (1,314) (1,522)
Income taxes payable (220) (1,752) (193)
Royalties payable (1,010) 1,234 1,541
Unearned subscription revenues 624 981 (2,618)
Other long-term liabilities (1,002) (1,007) (627)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 7,675 7,619 946
- -------------------------------------------------------------------------------------------------------------------
19
<PAGE>
- -------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from sale of discontinued operations - - 1,000
Purchase of property and equipment (2,186) (1,579) (4,862)
Acquisition of businesses and publishing properties (3,672) (211) (6,269)
Additions to electronic product development assets (2,158) (2,364) (1,396)
Decrease in investments in affiliated entities 86 180 310
Proceeds from sale of marketable securities - - 10,312
Purchases of marketable securities - - (1,000)
- -------------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (7,930) (3,974) (1,905)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net borrowings (payments) under short-term lines of credit 128 1,166 (960)
Repayment of long-term debt (2,397) (2,475) (2,278)
Common stock dividends paid (2,461) (2,272) (2,081)
Proceeds from exercise of stock options (including tax benefit) 1,457 652 1,059
- -------------------------------------------------------------------------------------------------------------------
Net cash flows used in financing activities (3,273) (2,929) (4,260)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,528) 716 (5,219)
Effect of exchange rates on cash and cash equivalents (224) 31 197
Cash and cash equivalents beginning of year 5,327 4,580 9,602
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents end of year $ 1,575 $ 5,327 $ 4,580
===================================================================================================================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
20
<PAGE>
Notes to Consolidated Fianacial Statements
Note 1 Business Operations
Waverly and its subsidiaries (the Company) are worldwide publishers of print and
electronic media in the fields of medicine, allied health, and related health
care disciplines. Products are distributed worldwide and the Company has
operating offices in the United States and foreign locations.
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. Three of the Company's majority-owned
subsidiaries have a November 30 year end. All material intercompany accounts and
transactions have been eliminated in consolidation. All acquisitions of business
and publishing properties have been accounted for using the purchase method of
accounting.
Accounting Estimates
--------------------
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from these estimates.
Reclassifications
-----------------
Certain amounts in the prior years consolidated financial statements have been
reclassified to conform to the current years presentation.
Revenue Recognition
-------------------
Sales include the publication of books and periodicals for which sales and
related cost of sales are recognized when the book or periodical issue is
shipped to the customer. Overcopies of a periodical issue are carried in
inventory at no cost since the entire manufacturing cost of a periodical issue
is charged to cost of sales when the issue is shipped. Subscription payments
received are deferred and recorded as income in the period in which the related
issue is shipped.
Cash Equivalents
----------------
Cash equivalents consist of all highly liquid instruments with original
maturities of three months or less. The cost of these investments is equivalent
to fair value.
Inventories
-----------
Inventories are valued at the lower of cost or market. Two methods of
determining costs are used: last-in, first-out (LIFO) for domestic inventories
and first-in, first-out (FIFO) for foreign inventories. Such costs include raw
materials and subcontract composition and printing.
21
<PAGE>
Property and Equipment
----------------------
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are expensed as incurred. The cost and accumulated depreciation
applicable to assets retired or sold are removed from the respective accounts,
and gains or losses are included in the determination of income.
Depreciation is computed by the straight-line method based on the estimated
service lives of the assets. Service lives range from 10 to 35 years for
buildings and improvements and from 2 to 10 years for computers, software, and
equipment. Depreciation charged to operations amounted to $2,415,000,
$2,510,000, and $2,296,000, for 1997, 1996, and 1995, respectively.
The Company reviews property and equipment for the impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
Investment in Affiliated Entities
---------------------------------
The Company has noncontrolling equity interests in various affiliated entities.
The equity method of accounting is used for these investments.
Electronic Product Development Assets
-------------------------------------
Electronic product development costs are capitalized when incurred.
Capitalization of electronic product development costs begins upon the
establishment of product feasibility. The establishment of product feasibility
and the ongoing assessment of recoverability of capitalized electronic product
development costs require considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
revenues, estimated useful lives and changes in technology.
Amortization of capitalized electronic product development assets is provided on
a product-by-product basis using the straight-line method over the estimated
useful life of the product. Amortization charged to operations amounted to
$1,906,000, $1,234,000, and $802,000, for 1997, 1996, and 1995, respectively.
Intangible Assets and Goodwill
------------------------------
Subscription lists and noncompete agreements arising from acquisitions are
amortized on a straight-line basis over their estimated useful lives, periods
ranging from 5 to 10 years. Amortization charged to operations amounted to
$285,000, $286,000, and $310,000, for 1997, 1996, and 1995, respectively.
Publication agreements represent the fair value of the rights to publish certain
valuable publication titles acquired outright and in business combinations. The
agreements are amortized on a straight-line basis over the periods benefited,
ranging from 10 to 40 years. Amortization charged to operations amounted to
$1,668,000, $1,546,000, and $1,456,000, for 1997, 1996, and 1995, respectively.
Goodwill represents the cost in excess of fair value of the net tangible and
identifiable intangible assets of companies acquired in business combinations.
Goodwill is amortized on a straight-line basis over the periods benefited not
exceeding 40 years. Amortization charged to operations amounted to $584,000,
$416,000, and $318,000, for 1997, 1996, and 1995, respectively.
22
<PAGE>
The recoverability of publication agreements, goodwill, and other intangible
assets is assessed periodically and whenever adverse events or changes in
circumstances or business climate indicate that previously anticipated cash
flows warrant a reassessment. When such reassessments indicate the potential of
impairment, all business factors are considered and, if such assets are not
likely to be recovered from future operating cash flows, they are written down
to recoverable value for financial reporting purposes.
Concentrations of Business Risk
-------------------------------
Other than accounts receivable from major U.S. medical book distributors, which
amounted to $12,188,000 and $11,768,000 at December 31, 1997 and 1996,
respectively, the Company is not subject to any significant credit risk from
concentrations of receivables or other assets in a particular customer group or
industry segment. The Company's products and services are used generally by
health care professionals and professional societies throughout the world. In
conjunction with the 1993 sale of the Printing Division, the Company entered
into a long-term contract with the purchaser to provide a substantial portion of
all printing services for its periodicals. Such services are performed at two
separate facilities. The Company believes that, in the event of disruption of
services, work in progress could be transferred to other facilities without
lengthy interruption of production.
Earnings Per Common Share
-------------------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) in 1997. Basic Earnings Per Share (EPS) is
calculated by dividing net earnings by the weighted-average common shares
outstanding during the period. Diluted EPS reflects the potential dilution to
basic EPS that could occur upon conversion or exercise of securities, options,
or other such items, to common shares using the treasury stock method based upon
the weighted-average fair value of the Company's common shares during the
period. Earnings per share for prior periods have been restated in accordance
with the provisions SFAS 128.
Common Stock Split
------------------
On April 29, 1996, the Company's Board of Directors authorized a two-for-one
stock split effected in the form of a 100% tax-free stock dividend which was
distributed on June 12, 1996, to shareholders of record as of May 28, 1996. In
this report, all references in the financial statements to the per-share amounts
and stock option data have been restated for all years presented.
Income Taxes
------------
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period and the change during the period in deferred tax
assets and liabilities.
23
<PAGE>
Foreign Currency
----------------
The assets and liabilities of the Company's foreign subsidiaries whose
functional currencies are other than the U.S. dollar are translated at current
rates of exchange. Income and expense items are translated at the weighted
average exchange rate for the year. The resulting foreign currency translation
adjustments are recorded directly into the foreign currency translation
component of shareholders equity. Gains and losses from transactions denominated
in foreign currencies are reflected in operations.
Stock-Based Compensation
------------------------
In October 1995, the FASB issued Statement of Financial Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation." As permitted under SFAS 123,
the Company has continued to account for its stock-based compensation in
accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees."
Note 3 Investments in Affiliated Entities
The Company has noncontrolling interests in various affiliated entities. The
more significant investments are in Japan, Australia, Spain, France and Germany.
<TABLE>
<CAPTION>
Equity in the earnings of affiliated entities consists of the following:
- -------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in earnings (loss)
Verlegerdienst Munchen (Germany) $ 67 $ 276 $ 215
Mosby-Williams & Wilkins Pty., Ltd.
(Australia) 22 101 37
Igaku-Shoin MYW, Ltd. (Japan) 75 200 100
Waverly Hispanica S.A. (Argentina) 138 127 25
Masson-Williams & Wilkins (France) (138) - -
Masson-Williams & Wilkins Espana (Spain) (91) - -
Quality Medical Publishing
(United States) 110 202* (61)
- -------------------------------------------------------------------------------------------------
Total equity in earnings $ 183 $ 906 $ 316
=================================================================================================
<FN>
*Represents tax benefits previously not recognized.
</FN>
</TABLE>
24
<PAGE>
Note 4 Intangible Assets
<TABLE>
<CAPTION>
Intangible assets consisted of the following at December 31:
- ---------------------------------------------------------------------------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $11,476 $10,961
Publication agreements 23,113 21,386
Subscription lists and noncompete
agreements 3,397 2,417
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Subtotal 37,986 34,764
Accumulated amortization (14,384) (10,852)
- ---------------------------------------------------------------------------------------
Total $23,602 $23,912
=======================================================================================
</TABLE>
Note 5 Inventory
<TABLE>
<CAPTION>
Inventories at December 31 consist of the following:
- ---------------------------------------------------------------------------------------
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 23,092 $ 24,318
Work-in-process 6,255 6,116
Raw materials 165 476
- ---------------------------------------------------------------------------------------
$ 29,512 $ 30,910
=======================================================================================
</TABLE>
If the FIFO method of inventory had been used by the Company for domestic
inventory, the carrying value would have been $1,285,000 higher than reported at
December 31, 1997 and $655,000 higher than reported at December 31, 1996.
The Company regularly reviews its medical book inventories on a title-by-title
basis for salability. The cost of those books determined to have impaired or no
sales value is charged to operations in the period of determination. Charges to
income amounted to $2,447,000, $2,906,000, and $2,422,000, for 1997, 1996, and
1995, respectively.
Note 6 Debt
The Company maintains uncollateralized lines of credit borrowing arrangements of
$39,200,000 with various banks. In 1997, interest rates under these agreements
ranged from 6.7% to 7.3%. At December 31, 1997 unused bank lines of credit
amounted to approximately $37,900,000. There are no compensatory balance
arrangements or commitment fees in connection with these arrangements.
25
<PAGE>
<TABLE>
<CAPTION>
Long-term debt at December 31 consists of the following:
- ----------------------------------------------------------------------------------------
(in thousands) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Term loans $ 2,312 $ 4,898
Other 84 97
- ----------------------------------------------------------------------------------------
2,396 4,995
Less current maturities (1,200) (2,400)
- ----------------------------------------------------------------------------------------
Long-term debt $ 1,196 $ 2,595
========================================================================================
</TABLE>
The Company has an uncollateralized senior term loan with a lending institution
that requires quarterly interest payments at an interest rate of 9.09% per
annum. The principal is payable in ten semiannual payments of $1,200,000, which
started in September 1993. The provisions of the financing agreement include
restrictions, without prior written consent, to incur additional borrowings,
sell assets, repurchase the Company's common stock, among others. In
addition, the financing agreement includes prepayment penalties. The
Company's German subsidiary has a loan of $1,112,000 with a lending
institution at an annual rate of 4.65%. The loan is collateralized by
Company-owned real estate with a fair market value in excess
of the principal. The loan is due to be paid in one installment on December 31,
1999. Estimated fair values of debt obligations approximate the carrying value
at December 31, 1997 and 1996, respectively.
Long-term maturities, of the term loans, in each of the two years subsequent to
December 31, 1997, are $1,200,000 in 1998 and $1,112,000 in 1999.
The Company guarantees a credit line in the amount of $512,000 for its
subsidiary, Williams & Wilkins Asia Pacific Ltd., as well as various lines of
credit not to exceed $400,000 for the affiliate, Mosby-Williams & Wilkins Pty.,
Ltd.
Cash outflows from operating activities include interest paid of $766,000,
$1,065,000, and $1,201,000, for 1997, 1996, and 1995, respectively.
Note 7 Income Taxes
<TABLE>
<CAPTION>
Income before income taxes for the years ended December 31 was taxed under the
following jurisdictions:
- ----------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $10,232 $ 6,212 $ 5,223
Foreign 636 2,399 2,327
- ----------------------------------------------------------------------------------------------
Total $10,868 $ 8,611 $ 7,550
==============================================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Income tax expense is presented below:
- ------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision
U.S. Federal $ 2,255 $ 2,124 $ 843
State 429 405 161
Foreign 588 1,828 (8)
- ------------------------------------------------------------------------------------------------
Total current 3,272 4,357 996
================================================================================================
Deferred provision
U.S. Federal 779 (185) 326
State 185 (270) 94
Foreign (281) (732) 1,145
- ------------------------------------------------------------------------------------------------
Total deferred 683 (1,187) 1,565
- ------------------------------------------------------------------------------------------------
Income tax
expense $ 3,955 $ 3,170 $ 2,561
================================================================================================
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Deferred tax assets (liabilities) arising from differences in accounting methods
for book and tax purposes at December 31 consist of the following:
- -----------------------------------------------------------------------------------------
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Postretirement obligation $ 4,495 $ 4,607
Inventory related 1,746 1,704
Property and equipment - 104
Printing Division sale 18 111
Asset provisions 885 863
NOL benefits 753 839
Group insurance 133 163
IRS settlements 396 425
Contributions - 363
Pension liability 84 147
Undistributed profits - 141
Other, net 263 275
- -----------------------------------------------------------------------------------------
Total deferred tax assets 8,773 9,742
- -----------------------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid pension (2,308) (2,181)
Excess of tax over book amortization (1,660) (1,915)
U & V gain (762) (1,129)
Inventory related (530) (631)
Property and equipment (169) -
Undistributed profits (284) (112)
Book return provision (97) (114)
Other, net (75) (89)
- -----------------------------------------------------------------------------------------
Total deferred tax liabilities (5,885) (6,171)
- -----------------------------------------------------------------------------------------
Net deferred tax asset $ 2,888 $ 3,571
=========================================================================================
</TABLE>
The measurement of tax assets and liabilities at December 31 of each year
reflects movements in temporary differences and foreign currency translation
adjustments. The net deferred tax asset related to U.S. operations is considered
to meet the test of recoverability under FAS 109.
28
<PAGE>
<TABLE>
<CAPTION>
Set forth below is a reconciliation from the applicable U.S. federal statutory
tax expense (benefit) to the effective tax rate for the years ended December 31:
- ------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal statutory
tax expense: $ 3,695 $ 2,928 $ 2,567
Increase in tax rate resulting, from state
income taxes, net of federal tax benefit 408 79 79
Effect of foreign taxes 137 473 346
Foreign sales corporation
tax benefit (325) (320) (287)
Contributions (49) (46) (37)
Other, net 89 56 (107)
- ------------------------------------------------------------------------------------------------
Income tax expense $ 3,955 $ 3,170 $ 2,561
================================================================================================
Effective tax rate 36.4% 36.8% 33.9%
================================================================================================
</TABLE>
The income tax benefit related to the exercise of stock options reduces taxes
currently payable and is credited to additional paid-in capital. The amount
approximated $563,00 for 1997, $144,000 for 1996 and $364,000 in 1995.
Cash outflows from operating activities include income taxes paid of $3,005,000,
$4,883,000, and $603,000 for 1997, 1996, and 1995, respectively.
Note 8 Employee Benefit Plans
Funded Pension Plan
-------------------
The Company has a defined benefit pension plan covering substantially all U.S.
employees. Plan benefits are determined using a career average earnings formula.
The Company's funding policy is to contribute the amount necessary to insure
that plan assets meet current plan obligations. The projected benefit
obligations at December 31, 1997, 1996, and 1995 were determined using assumed
weighted average discount rates of 6.9%, 7.7%, and 7.0%, respectively. The
assumed long-term rate of compensation increase is 5.0% for 1997, 5.0% for 1996,
and 5.5% for 1995. The assumed long-term rate of return on plan assets is 9% per
year for all periods presented. Mortality rates and turnover rates were applied
based on appropriate statistical tables and applicable Company experience. A
summary of cost components included in the net periodic pension expense (credit)
and the funded status of the plan for the years ended December 31 is presented
as follows:
29
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned
for the period $ 403 $ 430 $ 269
Interest cost on projected
benefit obligation 1,932 1,824 1,697
Amortization of loss and
prior service cost (12) (12) (12)
Return on plan assets (2,679) (2,399) (2,062)
Amortization of unrecognized net gain at date
of initial application of FAS 87 - - (680)
Amortization of unrecognized net loss 39 300 -
- ---------------------------------------------------------------------------------------------------
Net periodic pension expense (credit) $ (317) $ 143 $ (788)
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The funded status of the plan at December 31 is presented below:
- ------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $(26,392) $(23,211) $(24,249)
Nonvested benefit obligation (398) (329) (385)
- ------------------------------------------------------------------------------------------------
Accumulated benefit obligation (26,790) (23,540) (24,634)
Effect of projected actuarial increases (1,850) (1,578) (1,821)
- ------------------------------------------------------------------------------------------------
Actuarial present value of projected
benefit obligation (28,640) (25,118) (26,455)
Market value of plan
assets at end of period 35,368 30,814 27,404
- ------------------------------------------------------------------------------------------------
Excess of plan assets over liabilities 6,728 5,696 949
Unrecognized net loss (gain) (587) 129 5,018
- ------------------------------------------------------------------------------------------------
Prepaid pension expense $6,141 $5,825 $5,967
================================================================================================
</TABLE>
Unfunded Pension Obligation
---------------------------
Urban & Schwarzenberg provides supplementary retirement benefits to three
current and fifteen former employees. Such benefits are payable monthly upon
retirement at specified percentages of the retirees highest achieved salary
level. Upon the retirees death, his or her spouse or other specified
beneficiaries are entitled to receive additional benefit payments. The actuarial
present
30
<PAGE>
value of such unfunded pension obligations is computed using an interest rate of
7% per annum. The charge to income for 1997, 1996, and 1995 was $226,000,
$378,000, and 393,000, respectively.
Savings Plan
------------
The Company offers an employee savings plan qualifying under Section 401(k) of
the Internal Revenue Code. The Plan covers substantially all U.S. employees with
more than one year of service. Employees are encouraged to make contributions to
the Plan. The Company matches 25% of such contributions up to a maximum employee
contribution of 6% of annual salary. In addition, the Company, from time to
time, may at its discretion provide additional contributions to the Plan. The
Company contributed and incurred related expenses of $237,000, $213,000, and
$207,000, in 1997, 1996, and 1995, respectively.
Postretirement Benefits
-----------------------
The Company provides certain health care benefits for retired employees.
Substantially all of the Company's U.S. retirees and full-time employees are or
become eligible for these benefits if they meet minimum age and service
requirements. The cost of providing most of these benefits has been shared with
retirees in differing proportions based on length of service and retirement
date. Currently, this plan is unfunded and the Company has no immediate plans
for funding the liabilities; however, the Company will continue to pay for
retiree medical claims incurred, which were $467,000, $475,000, and $409,000, in
1997, 1996, and 1995, respectively.
Summary information on the Company's postretirement benefit plan at December 31,
1997 and 1996, is presented below:
<TABLE>
<CAPTION>
Accumulated postretirement benefit obligation:
- -------------------------------------------------------------------------------------------
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Retirees $ 6,119 $ 6,409
Fully eligible, active plan participants 5,406 5,310
- -------------------------------------------------------------------------------------------
Accrued postretirement
benefit obligation $ 11,525 $ 11,719
===========================================================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Net periodic postretirement benefit cost included the following components for
the years ended December 31:
- -------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefit earned $ 33 $ 44 $ 37
Interest cost on accumulated
postretirement benefit obligation 599 684 785
Amortization of unrecognized net actuarial gain
(282) (154) (157)
- -------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 350 $ 574 $ 665
=================================================================================================
</TABLE>
The assumed weighted average discount rate used in determining the accumulated
postretirement benefit obligation (APBO) was 7.4%, 8.0%, and 7.6% in 1997, 1996,
and 1995, respectively. The assumed health care inflation rate used in measuring
the APBO was 8% in year one, declining gradually to 5% in the sixth year and
thereafter.
If the health care cost trend rate assumption were increased by 1%, the APBO as
of December 31, 1997, would be increased by approximately $508,000. The cost
effect of this change on the sum of the service cost and interest cost
components of net periodic postretirement benefit cost for 1997 would be an
increase of approximately $36,000.
Note 9 Business and Publishing Property Acquisitions
On April 29, 1997, the Company acquired the copyrights and interest in four
medical newsletters for cash of $700,000 and $271,000 in assumed liabilities, to
be amortized using the straight-line method over 10 years. The newsletters were
acquired from Global Success Corporation, Inc. and will serve to add value to
the Company's specialty publishing areas of obstetrics and gynecology,
anesthesiology and surgery.
On January 31, 1997, the Company acquired inventory, copyrights, and interests
in all English language publications of Igaku-Shoin Medical Publishers, Inc., a
New York-based subsidiary of Igaku-Shoin Ltd., a leading publisher of Japanese
language medical books and periodicals for cash of $2.3 million. Purchase price
is allocated as follows: $1,390,000 to publishing agreements, $530,000 to
goodwill and $380,000 to net assets. Intangible assets will be amortized using
the straight-line method over 15 years.
Note 10 Incentive Plans
The Company has an incentive plan for virtually all employees under which the
amount available for bonuses is based on achievement of profit targets and
individual performance goals. Compensation earned under the Plan was $1,036,000,
$1,025,000, and $1,350,000 for 1997, 1996, and 1995, respectively.
32
<PAGE>
The Company has two stock option plans at December 31, 1997: the 1984 Employee
Stock Option Plan and the 1995 Employee Stock Option Plan. Options can no longer
be granted under the 1984 plan.
Stock options granted under the 1984 plan are 50% exercisable one year after the
date of the grant, 75% exercisable two years after the grant date, and
exercisable in full on the third anniversary of the grant date.
The options expire on the tenth anniversary of the grant date.
The 1995 plan provides for the grant of Incentive Stock Options and nonqualified
options for up to 1,500,000 shares of common stock through January 2005. Options
granted vest ratably over four years. There are 487,124 options available to
grant under the 1995 plan at December 31, 1997. The options expire on the tenth
anniversary of the grant date.
<TABLE>
<CAPTION>
A summary of the status of the Company's stock option plans as required by SFAS
123 is presented below:
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
beginning of period 972,306 $ 11.35 917,506 $ 10.04 927,402 $ 9.33
Options exercised (74,730) $11.96 (54,102) $ 9.39 (121,844) $ 8.69
Options surrendered - - (6,998) $ 16.90 (5,252) $ 10.58
Options granted 115,300 $ 21.49 115,900 $ 21.12 117,200 $ 14.25
- -------------------------------------------------------------------------------------------------------------------
Options outstanding
end of period 1,012,876 $12.46 972,306 $ 11.35 917,506 $ 10.04
===================================================================================================================
Options exercisable at
end of period 745,996 $ 10.50 721,113 $ 10.00 678,156 $ 9.88
===================================================================================================================
Weighted average fair
value of options
granted during the
period $ 2.85 $ 8.06 $ 5.99
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about stock options outstanding at
December 31, 1997:
Weighted
Weighted Average
Average Remaining
Range of Exercise Price Shares Exercise Price Contractual Life
----------------------- ------ -------------- ----------------
<S> <C> <C> <C>
$ 7.13 - 12.00 694,726 $ 9.44 3.0 years
12.01 - 17.00 102,500 14.25 7.0 years
17.01 - 21.50 215,650 21.32 8.5 years
</TABLE>
33
<PAGE>
Information regarding stock options exercisable at December 31, 1997 is
summarized as follows:
Weighted
Average
Range of Exercise Price Shares Exercise Price
----------------------- ------ --------------
$ 7.13 - 12.00 682,696 $ 9.44
12.01 - 17.00 42,750 14.25
17.01 - 21.50 20,550 21.13
If compensation expense had been recorded based on the fair value at the grant
dates for awards under the Plans consistent with the recognition method
proscribed by SFAS 123, the Company's net income and earnings per share would
have been adjusted to the pro forma amounts presented below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income
As reported $ 7,096 $ 6,347 $ 5,305
Pro forma $ 6,873 $ 5,768 $ 4,868
Earnings per common share - Basic
As reported $ 0.79 $ 0.71 $ 0.60
Pro forma $ 0.77 $ 0.65 $ 0.55
Earnings per common share - Diluted
As reported $ 0.75 $ 0.68 $ 0.57
Pro forma $ 0.73 $ 0.62 $ 0.53
==============================================================================================================
</TABLE>
The fair value of each option was estimated on the date of grant using a type of
Black-Scholes option-pricing model with the following assumptions used for
grants issued during the years ended December 31, 1997, 1996 and 1995: dividend
yield of 1.2%, expected volatility of 29%, risk-free interest rate of 5.5% in
1997, 5.9% in 1996 and 6.5% in 1995, and expected term of 1 year for options
granted in 1997 and 7 years for 1996 and 1995. Pro forma net income was recorded
net of a deferred income tax benefit of $137,000 in 1997, $355,000 in 1996 and
$268,000 in 1995.
Note 11 Related Party Transactions
The Company made payments of $50,000, $60,000, and $90,000 in 1997, 1996, and
1995, respectively, to David J. Callard, a member of the Board of Directors, for
financial advisory services related to acquisitions and development.
The Company also paid John F. Spahr, Jr., a former officer and current member of
the Company's Board of Directors, for consulting services. The payments were
$50,000 in 1997, $50,000 in 1996 and $110,000 in 1995. Mr. Spahr will receive
$50,000 per year through the year 2000 per agreement dated March 18, 1994.
34
<PAGE>
On January 30, 1998, the Company loaned William M. Passano, Jr., chairman of the
Board of Directors, $204,750 in order for him to exercise options to
purchase 26,000 shares of the Company's stock under the Company's Employee
Stock Option Plan. The Company is holding the Shares as collateral and Mr.
Passano will pay interest on the Loan at an annual rate equal to the actual
bank borrowing rate charged to the Company during the period the Loan is
outstanding.
Note 12 Commitments and Contingencies
The Company leases office facilities and equipment under noncancelable operating
leases. Related rent expense was $2,235,000, $2,260,000, and $1,731,000 for
1997, 1996, and 1995, respectively. Future minimum rental lease payments under
these lease agreements aggregate $2,485,000 in 1998, $2,114,000 in 1999,
$2,178,000 in 2000, $1,713,000 in 2001, $1,665,000 in 2002, and $3,563,000
thereafter.
The Company has entered into an agreement to sublet a portion of its leased
office property through 2000. Rental income was $237,000 in 1997. Future minimum
rental income under this sublease agreement aggregates $237,000 in 1998,
$237,000 in 1999, and $39,000 in 2000.
Note 13 Revenues by Geographic Areas
<TABLE>
<CAPTION>
Revenues by geographic area for the years ended December 31 are presented below:
- -----------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $106,310 $ 98,282 $ 88,818
Europe 48,618 55,788 54,176
Asia 9,109 9,272 6,695
North America
(excluding U.S.) 3,676 3,988 3,167
Australia 1,792 1,617 1,394
South America 2,425 1,824 1,684
Africa 456 190 395
- -----------------------------------------------------------------------------------------------------
Total $172,386 $170,961 $156,329
=====================================================================================================
</TABLE>
Revenues are composed of sales to unaffiliated customers, as reported in the
Company's consolidated income statement. No single customer accounted for 10% or
more of net sales.
Revenues for 1997, 1996, and 1995 include German-based revenues of $34,000,000,
$39,000,000, and $40,000,000, respectively; income from operations of $897,000,
$2,823,000, and $2,626,000, respectively; and identifiable assets of
$27,300,000, $29,800,000, and $32,700,000, respectively.
35
<PAGE>
Note 14 Financial Information by Quarter (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(in thousands of dollars except per share data) 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
First quarter $ 39,213 $ 37,917
Second quarter 46,482 43,349
Third quarter 38,430 39,589
Fourth quarter 48,261 50,106
- --------------------------------------------------------------------------------------------------
Full Year $172,386 $170,961
- --------------------------------------------------------------------------------------------------
Operating Income
First quarter $ 689 $ 459
Second quarter 4,499 2,864
Third quarter 1,345 1,415
Fourth quarter 5,009 4,704
- --------------------------------------------------------------------------------------------------
Full Year $ 11,542 $ 9,442
- --------------------------------------------------------------------------------------------------
Net Income
First quarter $ 684 $ 539
Second quarter 2,473 1,881
Third quarter 671 1,155
Fourth quarter 3,268 2,772
- --------------------------------------------------------------------------------------------------
Full Year $ 7,096 $ 6,347
- --------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share
First quarter $ 0.07 $ 0.06
Second quarter 0.28 0.21
Third quarter 0.08 0.13
Fourth quarter 0.36 0.31
- --------------------------------------------------------------------------------------------------
Full Year $ 0.79 $ 0.71
- --------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share
First quarter $ 0.07 $ 0.06
Second quarter 0.27 0.20
Third quarter 0.07 0.12
Fourth quarter 0.34 0.30
- --------------------------------------------------------------------------------------------------
Full Year $ 0.75 $ 0.68
- --------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Note 15 Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS 131)
were issued in June 1997. The disclosures required by these statements must be
reported by the Company in 1998. The Company is reviewing the financial
statement impact of SFAS 130 and SFAS 131 and will adopt them by the required
dates.
Note 16 Subsequent Events
The Company entered into an agreement (the "Merger Agreement") on February 11,
1998 to be acquired by Amsterdam-based Wolters Kluwer NV for $375 million, or
$39 per share. Under the agreement, a Wolters Kluwer subsidiary promptly
commenced a tender offer for all the outstanding shares of the Company's common
stock at $39 per share, net to the seller in cash. The tender offer is
conditional on Wolters Kluwer receiving tenders of at least two thirds of the
Company's outstanding common stock (on a fully diluted basis) and the expiration
of any waiting periods under the anitrust laws of the United States or of
applicable jurisdictions outside of the United States. Stockholders representing
a majority of the outstanding shares of the Company, including members of the
founding Passano family, have entered into a definitive agreement (the "Stock
Option Agreement") to tender their shares into the tender offer and vote for the
merger for $39 per share, and certain of such stockholders have granted Wolters
Kluwer a proxy to vote their shares under certain circumstances. These
shareholders have also granted Wolters Kluwer under certain circumstances an
option to purchase their shares.
For a more complete description of the Merger Agreement and the Stock Option
Agreement, see Item 1 of this Annual Report on Form 10-K.
The Company entered into an agreement on January 21, 1998 to acquire the assets
associated with LifeART Collections from TechPool Studios, Inc. for $550,000 in
cash. The LifeART product line currently contains 27 collections of 2
dimensional and 3 dimensional color art and graphics specific to medicine,
dentistry, EMS, nursing, and healthcare.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
37
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
<TABLE>
<CAPTION>
The following table sets forth certain information with respect to the current
directors of the Company as of February 14, 1998:
Director
Name and Age Other Positions with the Company and Principal Occupations Since
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
David J. Callard (59) President, Wand Partners, Inc., 1974
private investment firm, New York, NY
Edward B. Hutton, Jr. (52) President and Chief Executive Officer 1988
Michael E. Johns (56) Executive Vice President for Health Affairs; 1993
Director, Robert W. Woodruff Health Sciences Center
Emory University, Atlanta, GA
John F. Spahr, Jr. (47) Managing Director, Teton Data Systems, 1991
Jackson, WY
Michael Urban (58) President and Chief Executive Officer, Urban & 1990
Schwarzenberg Verlag fur Medizin GmbH, a subsidiary of
the Company
Barbara J. Bonnell (66) Director of Research and Information, Baltimore 1974
Development Corporation, Baltimore, MD
Donald W. Dick, Jr. (55) Principal, EuroCapital Advisors, LLC, private 1980
investment firm, Weehawken, NJ
Carolyn Manuszak (59) President, Villa Julie College, Stevenson, MD 1987
E. Magruder Passano, Jr. (55) Vice Chairman of the Board, Secretary 1972
Richard C. Riggs, Jr. (58) President and CEO, Barton-Cotton, Inc., Baltimore, MD 1995
Samuel G. Macfarlane (66) Consultant and former Vice President and Chief 1966
Financial Officer and Treasurer of Waverly, Inc.
Ackneil M. Muldrow, II (60) President and CEO, Development Credit Fund, Inc., 1992
Baltimore, MD
Joseph M. Palazzolo (48) Chairman, Gateway Investments, Inc., 1996
Muttontown, NY
William M. Passano, Jr. (69) Chairman of the Board 1965
<FN>
Mr. Samuel G. Macfarlane is the brother-in-law of Mr. William M. Passano, Jr.,
Mr. E. Magruder Passano, Jr. is the son of Mr. Edward M. Passano, Sr. and a
first cousin of Mr. William M. Passano, Jr.
</FN>
</TABLE>
38
<PAGE>
Pursuant to the Merger Agreement described in Item 1 and promptly upon the
purchase of and payment for Shares by Wolters Kluwer which represent at least
two thirds of the outstanding Shares (on a fully diluted basis), Wolters Kluwer
will be entitled to designate such number of directors, subject to compliance
with Section 14(f) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Rule 14f-1 promulgated thereunder, rounded up to the next
whole number, on the Board of Directors of the Company (the "Company Board") as
is equal to the product of the total number of directors on the Company Board
multiplied by the percentage that the aggregate number of Shares beneficially
owned by Newco, Wolters Kluwer and any of their affiliates bears to the total
number of Shares then outstanding. The Company has agreed to take all action
necessary to cause Wolters Kluwer's designees (the "Designees") to be elected or
appointed to the Company Board and to secure the resignations of such number of
its incumbent directors as is necessary to enable the Designees to be elected to
the Company Board. The Merger Agreement further provides that the Company will
cause the Designees to constitute the same percentage as such individuals
represent on the Company Board of each committee of the Company Board and each
board of directors (and committee thereof) of each subsidiary of the Company.
Prior to the effective time of the Merger, the Company will retain as members of
the Company Board at least two (2) directors that are directors of the Company
on the date of the Merger Agreement; provided, that subsequent to the purchase
of and payment for Shares pursuant to the Offer, the Designees will represent at
least a majority of the entire Company Board, subject to Section 14(f) of the
Exchange Act and Rule 14f-1 promulgated thereunder.
<TABLE>
<CAPTION>
Set forth below are the names, ages, titles and principal occupations during the
past five years of the persons who serve as executive officers of the Company:
Position and Business Experience
Name Age During Past Five Years or More
- --------------------------------------------------------------------------------------
<S> <C> <C>
William M. Passano, Jr. 69 Chairman of the Board since 1988.
Chief Executive Officer from
1971 to 1991. Director since
1965. Employed by the Company
since 1955.
E. Magruder Passano, Jr. 55 Vice Chairman, Secretary since
April, 1990. Vice President,
Administration and Corporate
Secretary from 1971 to 1990.
Director since 1972. Employed by
the Company since 1965.
Edward B. Hutton, Jr. 52 President and Director since May,
1988. Chief Executive Officer
since 1991. From 1983 to 1988 was
President of Professional
Information Group of Simon &
Schuster, Inc.
Michael Urban 58 President of Urban & Schwarzenberg
and Director since 1990. Employed
by the Company since the April 1990
acquisition of Urban &
Schwarzenberg. From 1990 has been
President, and Chief Executive
Officer.
39
<PAGE>
Position and Business Experience
Name Age During Past Five Years or More
- ------------------------------------------------------------------------------------
Arthur E. Newman 49 Executive Vice President since
1990. From 1986 through October,
1989 held various executive
positions at Simon & Schuster, Inc.
ending as Chief Operating Officer
of Prentice Hall Information
Services. This division was sold
to Maxwell MacMillan in October
1989, where he continued in the
same capacity until March, 1990.
Frederick Fusting 47 President, Professional Learning
Systems Division since January
1996. Vice President, PLS Division
from 1988 to 1995. Employed by the
Company since 1980.
Richard J. Perry 52 President, Waverly International
since January 1998. President, W &
W Marketing Division 1993 to 1997.
Executive Vice President of Lea &
Febiger from 1991 to 1992. From
1989 to 1990 was Vice President and
General Manager at Times Mirror,
Canada.
Alma J. Wills 50 President, Periodical Publishing
since 1986. Vice President, Journal
Development from 1984 to
1986. Employed by the Company
since 1976.
Stephan Joss 41 Chief Operating Officer of Urban &
Schwarzenberg since 1997.
Executive Vice President since
1992.
E. Philip Hanlon 49 Chief Financial Officer since
1992. Vice President, Finance,
since March, 1989. Vice President,
Marketing-Book division from 1987
to 1989. Controller from 1985 to
1987.
Jonas A. Ryckis 34 Treasurer, since February 1997.
Assistant Treasurer from 1995 to
1997. Employed by the Company
since 1989.
</TABLE>
Item 11. Executive Compensation.
The following Summary Compensation Table sets forth for the fiscal years ended
December 31, 1997, 1996 and 1995 information as to the total compensation
received by each of the Chief Executive Officer and the four highest paid
executive officers who received total compensation in excess of $100,000 in all
capacities.
40
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation(1) Compensation All Other
Name and ------------------------------- Awards Compen-
Principal Position Year Salary($)(2) Bonus($)(3) Options (#) sation($)(4)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William M. Passano, Jr. 1997 340,000 35,200 - 6,734
Chairman of the Board 1996 325,000 56,875 - 9,260
1995 300,000 71,800 - 8,610
Edward B. Hutton, Jr. 1997 375,000 38,800 20,000 28,813
President and CEO 1996 350,000 61,250 17,000 10,693
1995 335,000 80,200 15,000 12,952
Michael Urban
President and CEO, 1997 270,900 - - -
Urban & Schwarzenberg 1996 302,000 67,000 - -
Verlag fur Medizin 1995 313,000 52,500 - 540
GmbH (5)
Arthur E. Newman 1997 215,000 22,200 10,000 2,993
Executive Vice President 1996 205,000 35,875 9,000 2,960
1995 194,000 46,500 9,000 2,811
Alma J. Wills 1997 150,000 29,500 7,000 2,783
President, Periodical 1996 135,000 45,900 6,000 1,836
Publishing 1995 130,000 20,300 6,000 2,018
<FN>
(1) Does not include perquisites and other personal benefits where the aggregate
value of such compensation to the executive officer is less than 10% of annual
salary and bonus.
(2) Includes salary deferrals under the WISP.
(3) Comprises bonuses under the WIN Plan, which were accrued during the fiscal
year indicated but were paid in the following fiscal year.
(4) Includes life insurance premiums paid by the Company and Company matching
contributions under the WISP. Under the WISP, the Company makes matching
contributions of 25% of each participant's contribution subject to a maximum of
1.5% of an employee's compensation up to $9,240. The amounts for 1997 are as
follows:
41
<PAGE>
WISP Insurance
---- ---------
Passano, W. $2,375 $ 634
Hutton 2,375 6,743
Urban - -
Newman 2,375 618
Wills 2,375 408
(5) Dr. Urban's compensation has been converted into dollars based upon the
currency exchange rate of .5562 DM per dollar as of December 31, 1997, .6494 DM
per dollar in effect on December 31, 1996, and .6961 DM per dollar in effect
December 29, 1995.
</FN>
</TABLE>
Option Grants in Last Fiscal Year
---------------------------------
The following table sets forth information concerning the grant and exercise of
options in the last fiscal year under the Waverly, Inc. 1997 Employee Stock
Option Plan to the persons named in the Summary Compensation Table:
<TABLE>
<CAPTION>
__________________INDIVIDUAL GRANTS_____________
| |
Potential Realizable
Value at Assumed
Number % of Total Annual Rates of
of Securities Options Stock Price
Underlying Granted to Appreciation for
Options Employees in Exercise Option Term(2)
Granted(1) Fiscal year Price Expiration
Name ($/Sh) Date 0% 5% 10%
- ------------------- --------------- --------------- ------------ --------------- ----- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Passano,W. 0 0.0% $ 0.00 N/A $0 $ 0 $ 0
Hutton 20,000 17.75% $21.50 2/14/07 $0 $270,425 $685,309
Urban 0 0.0% $ 0.00 N/A $0 $ 0 $ 0
Newman 10,000 8.87% $21.50 2/14/07 $0 $135,212 $342,655
Wills 7,000 6.21% $21.50 2/14/07 $0 $ 94,649 $239,858
<FN>
(1) All options were granted with an exercise price equal to the fair market
value of the Common Stock underlying the option on the date of grant. The
options are exercisable to the extent of 25% of the shares one year from the
grant date, an additional 25% two years from the grant date, an additional 25 %
three years from the grant date, and in full four years from the grant date,
subject to such limitations as are imposed by Section 162(m) of the Internal
Revenue
42
<PAGE>
Code on qualified options, unless accelerated upon a change in control,
retirement, death or disability. These options have a term of ten years, unless
terminated sooner in connection with death, disability, retirement or
termination.
(2) Amounts are based on the 0%, 5% and 10% annual compounded rates of
appreciation of the Common Stock price, prescribed by the Securities and
Exchange Commission, and are not intended to forecast future appreciation of the
Company's Common Stock. The prices of the Common Stock, assuming such annual
compounded rates of appreciation, would be $21.50, %35.02 and $55.77,
rspectively.
</FN>
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
------------------------------------------------------------------------
The following table provides information with respect to the stock options
exercised during fiscal year ended December 31, 1997 and the value as of
December 31, 1997 of unexercised in-the-money options held by the named
executive officers. The value realized on the exercise of options is calculated
using the difference between the per share option exercise price and the market
value of a share on the date of the exercise. The value of unexercised
in-the-money options at fiscal year end is calculated using the difference
between the per share option exercise price and the market value of $47.00 per
share at fiscal year end, December 31, 1997.
<TABLE>
<CAPTION>
Number of Securities Value of Unexerc.
Underlying Unexerc. In-the-Money
Shares Options At FY-End Options At FY-End
Acquired on Value ---------------------------- -----------------------------
Exercise(3) Realized ($)
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Passano, W. 4,400 $34,650 111,000 0 $4,172,250 $ 0
Hutton 0 0 217,970 64,030 8,103,368 1,895,258
Urban 0 0 2,500 0 94,375 0
Newman 0 0 56,750 21,250 2,071,469 322,031
Wills 0 0 45,600 14,500 1,678,350 393,188
</TABLE>
43
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table lists only persons known to the Company to be holding
beneficially 5% or more of the Company's outstanding Common Stock or to have
filed a Schedule 13D or 13G as of February 14, 1998:
<TABLE>
<CAPTION>
PRINCIPAL HOLDERS OF COMMON STOCK
---------------------------------
Number Percent of Total
Name and Address of Shares(1) Outstanding
- ------------------------------------------------------------------- ------------------------------------- --------------------------
<S> <C> <C>
Life Estate under the Will of Edward B. Passano(2)(3) 3,227,822 35.7%
Michael Urban(3)(4) 802,500 8.9%
John F. Spahr, Jr., Robert N. Spahr, Christian C. Febiger
Spahr, Jr. Revocable Trust, K. Spahr Vanderbilt, N. Spahr
Bush, M. Spahr Clement, V. Spahr Heth(5) 495,000 5.5%
All members of the Passano family and their associates,
including the above(6) 5,249,149 57.3%
GeoCapital Corporation(7)
767 Fifth Avenue
New York, NY 10153 706,600 7.8%
Theodore L. Cross and certain persons(8)
200 W. 57th Street - 15th Floor
New York, NY 10019 499,912 5.5%
<FN>
(1) Includes shares issuable to the designated individuals under options exercisable within 60 days
after the record date.
(2) This is a Life Estate under the Will of Edward B. Passano presently held for
the benefit of his son, Edward M. Passano, Sr. The shares held in the Passano
Life Estate are subject to a voting trust agreement described below.
(3) The address of such person is 351 W. Camden Street, Baltimore, Maryland 21201.
(4) Includes 800,000 shares held by a corporation and which Dr. Urban is deemed
to own beneficially, which are subject to a voting trust agreement described
below.
(5) The address of the Mr. Robert Spahr, Mr. John F. Spahr, Jr., Mr. Spahr and Ms. Thomas, Trustees
under the will of John F. Spahr, Sr. for Dorothy Spahr and the Christian C. Febiger
Spahr, Jr. Revocable Trust is 351 W. Camden Street, Baltimore, MD 21201. These include 495,000
shares held collectively subject to a ten-year escrow agreement and subject to four separate voting
trust agreements (see "Spahr Voting Trusts"). Robert F. Spahr has dispositive
44
<PAGE>
power as to 155,000 shares. John F. Spahr, Jr. has dispositive power as to 155,000 shares. John
F. Spahr, Jr. and Regina O. Thomas, Trustees under the will of John F. Spahr, Sr. for Dorothy Spahr,
have dispositive power as to 85,000 shares owned by Trustees under the will of John F. Spahr, Sr., Ann
Spahr Tyler and Jay C. Rippard, Trustees, have dispositive power as to 100,000 shares owned by the
Christian C. Febiger Spahr, Jr. Revocable Trust.
(6) Includes 116,500 shares issuable under options exercisable within 60 days of
the record date.
(7) GeoCapital Corporation is an investment company. Information obtained from
GeoCapital contained in a Schedule 13G filed with the Securities and Exchange
Commission on February 23, 1998, states that GeoCapital has sole dispositive
power as to 706,600 shares. (8) Theodore Cross' principal occupation is editor
and publisher of various academic journals. Information obtained from Mr. Cross
as of December 8, 1994, contained in a statement on Schedule 13D states that Mr.
Cross has sole power to vote or to direct the vote and sole power to dispose or
direct the disposition of 357,574 shares owned by Theodore Cross. Mr. Cross is
deemed to have sole power to vote or to direct the vote and sole power to
dispose or direct the disposition of 6,500 shares owned by Management Reports,
Inc. by virtue of his ownership of 60% of the issued and outstanding stock of
Management Reports, Inc. James A. Hellmuth, as sole trustee of the Louisville
Charitable Remainder Unit Trust, has sole power to vote or to direct the vote
and sole power to dispose or direct the disposition of 5,000 shares owned by the
Louisville Trust. Mary Cross, Amanda B. Cross, Lisa W. Pownall-Gray, Ann
Fairchild Warner, Polly Mackwell and Stuart G. Warner each has sole power to
vote or to direct the vote and sole power to dispose or direct the disposition
of their respective shares.
</FN>
</TABLE>
Passano Voting Trust. The stock subject to the Passano Family Life Estate
referred to in note (2) above is voted by Edward M. Passano, Sr., William M.
Passano, Jr. and Susan P. Macfarlane, all of 351 W. Camden Street, Baltimore,
Maryland 21201, as voting trustees under a voting trust agreement (the "Passano
Voting Trust") dated July 31, 1989, which will expire on the earliest to happen
of (1) the execution of a subsequent voting trust agreement by the parties; (2)
the lapse of ten years from July 31, 1989; or (3) the death of Edward M.
Passano, Sr. The latter is entitled to a 50% vote with respect to the stock
subject to the voting trust and the other trustees are entitled to the remaining
50% vote, so that, unless the trustees are in agreement, it could happen that
the stock subject to the voting trust could be not voted at all. William M.
Passano, Jr., Susan P. Macfarlane and E. Magruder Passano, Jr., the three
grandchildren of the original testator, have agreed that upon the death of
Edward M. Passano, Sr., they will enter into a ten-year voting trust agreement
(together with the Passano Voting Trust, the "Passano Voting Trusts") pursuant
to which the stock they will then receive from the termination of the Life
Estate under Edward B. Passano's Will will be voted as a unit for that period.
The voting trustees will be those three grandchildren of the original testator
or their respective spouses.
45
<PAGE>
Urban Voting Trust. The shares referenced in note (4) above remain subject to a
voting trust (the "Urban Voting Trust") of which Mr. William M. Passano, Jr. and
Dr. Urban are the cotrustees. The address of the trustees is 351 W. Camden
Street, Baltimore, Maryland 21201. The duration of the Urban Voting Trust shall
be coterminous with that of the Passano Voting Trust described above. The shares
must be voted in the same way as the shares subject to the Passano Voting Trust
described above unless the Passano family shares are deadlocked and cannot be
voted at all, in which case Dr. Urban will have the sole right to vote the
800,000 shares.
Spahr Voting Trusts. The 495,000 shares owned collectively by Mr. Robert Spahr,
Mr. John F. Spahr, Jr., Trustees under the will of John F. Spahr, Sr. and the
Christian C. Febiger Spahr, Jr. Revocable Trust referred to in note (5) above
have been placed in voting trusts (the"Spahr Voting Trusts"). The Spahr Voting
Trusts shall expire January 9, 2001. The shares in each of the Spahr Voting
Trusts must be voted in the same way as the shares subject to the Passano Voting
Trust described above, unless the Passano family shares are deadlocked and
cannot be voted at all. In the event of a deadlock, Mr. Robert Spahr and
Mr. John F. Spahr, Jr. will have the sole right to vote their respective 155,000
shares. Mr. Passano will have the sole right to vote the 100,000 shares owned by
the Christian C. Febiger Spahr, Jr. Revocable Trust, and the 85,000 shares owned
by the Trustees under the will of John F. Spahr, Sr. for Dorothy Spahr. The
495,000 shares held collectively by Mr. Robert Spahr, Mr. John F. Spahr, Jr.,
the Trustees under the will of John F. Spahr, Sr. and the Christian C. Febiger
Spahr, Jr. Revocable Trust are subject to an escrow agreement until
January 10, 2001 to secure indemnification obligations in the agreement
relating to the acquisition of Lea & Febiger. Under the terms of the escrow
agreement, each of the Messrs. Spahr and the Christian C. Febiger Spahr, Jr.
Revocable Trust may obtain the release of up to 70,000 (adjusted for
2-for 1- stock split on June 12, 1996) shares in the event of death, disability
or divorce.
As a result of these arrangements, the Dr. Urban, Messrs. Spahr, Trustees under
the will of John F. Spahr, Sr. and the Christian C. Febiger Spahr, Jr. Revocable
Trust may be deemed to be "associates" of the Passano family, as that term is
defined in the rules and regulations of the Securities and Exchange Commission.
46
<PAGE>
The following table sets forth information regarding the beneficial ownership by
named executive officers, directors, nominee for director and all executive
officers, directors and nominee for director, as a group, of the Company's
outstanding Common Stock on February 14, 1998:
<TABLE>
<CAPTION>
SECURITY OWNERSHIP OF MANAGEMENT
--------------------------------
Shares Beneficially Percent of Total
Name Owned(1)(2)(3) Outstanding
- ---- ------------------- ----------------
<S> <C> <C>
William M. Passano, Jr., Chairman, Director 283,990(3) 3.1%
E. Magruder Passano, Jr., Vice Chairman, Director 253,765 2.8%
Edward B. Hutton, Jr., President and CEO, Director 232,777 2.5%
Arthur E. Newman, Executive Vice President 62,493 *
Michael Urban, President and CEO, Urban &
Schwarzenberg Verlag fur Medizin GmbH, Director 802,500(4) 8.9%
Alma J. Wills, President, Periodical Publishing 52,540 *
Barbara J. Bonnell, Director 6,454 *
David J. Callard, Director 71,448 *
Donald W. Dick, Jr., Director 4,978 *
Michael E. Johns, Director 1,588 *
Samuel G. Macfarlane, Director 9,120 *
Carolyn Manuszak, Director 1,827 *
Ackneil M. Muldrow, II, Director 1,883 *
Joseph M. Palazzolo, Director 118,584 1.3%
Richard C. Riggs, Jr., Director 1,050 *
John F. Spahr, Jr., Director 155,000 1.7%
All executive officers, directors and nominees for director as a group (27
persons), including the Life Estate under the Will of Edward B. Passano
(3,227,822 shares) and all shares held in the Spahr Voting Trusts (495,000
shares) and the Urban Voting Trust (800,000) 5,743,916 59.8%
<FN>
(1) Includes shares owned by trusts, spouses and minor children of the indicated
persons.
(2) Includes the following numbers of shares subject to options exercisable
within 60 days after the record date: William M. Passano, Jr., 85,000 shares; E.
Magruder Passano, Jr., 29,000 shares; Edward B. Hutton, Jr., 230,110 shares;
Arthur E. Newman, 61,478 shares; Alma J. Wills, 45,250 shares; David J. Callard,
12,500 shares; and all other executive officers, directors and nominee for
director as a group (27 persons), 571,363 shares.
(3) Excludes 3,227,822 shares held in Life Estate under the Will of Edward B.
Passano, the 800,000 shares held in the Urban Voting Trust and the 495,000
shares held in the Spahr Voting Trusts with respect to which Mr. Passano has
shared voting power by virtue of his status as a trustee of the various voting
trusts. For a description of the voting trust arrangements relating to these
shares, see the description under "Principal Holders of Common Stock."
47
<PAGE>
(4) For a description of the voting trust arrangements relating to these shares,
see the description under "Principal Holders of Common Stock."
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions.
The Company and Mr. David J. Callard have an agreement (the "Retainer
Agreement") dated December 30, 1996, pursuant to which Mr. Callard provides
financial advisory services in the area of acquisition and development ("A&D").
Under the Retainer Agreement, Mr. Callard in fiscal 1995 was granted an option
to purchase 5,000 Shares at an exercise price of $14.25 per Share, which was the
fair market value on the day of the grant. The option becomes exercisable in 25%
increments on the anniversary date of the day of the grant. Beginning in April
1996, the Company agreed to pay Mr. Callard an annual retainer of $50,000.
Pursuant to the Retainer Agreement, Mr. Callard has waived his right to
director's fees and future participation in the Company's Director Stock Plan.
On December 12, 1997, the Company renewed the Retainer Agreement for 1998 (the
"Renewal"). Under the terms of the Renewal, payments made under the Retainer
Agreement shall be deducted from the $400,000 contingent fee payable under the
terms of the Callard Engagement Letter (as defined below). The Company and Mr.
Callard have agreed that the Retainer Agreement will be terminated and canceled
at the effective time of the Merger with Wolters Kluwer.
Pursuant to a letter agreement dated November 4, 1997 (the "Callard Engagement
Letter") between the Company and Mr. Callard, Mr. Callard agreed to advise and
assist the Company in connection with the potential sale of the Company. Under
the terms of the Callard Engagement Letter, the Company has agreed to pay Mr.
Callard a contingent fee of $400,000 if (a) control of more than 55% of the
Company's common stock changes hands or (b) the Company sells a substantial
amount of its assets. The Company has further agreed to indemnify Mr. Callard
for certain costs, expenses and liabilities related to his services in
connection with the Callard Engagement Letter.
Waverly has entered into an agreement with Mr. John F. Spahr, Jr., which
replaces his prior employment agreement, pursuant to which Mr. Spahr will
provide consulting services to the Company. Under this agreement, Mr. Spahr
received $110,000 for 1995 and is entitled to receive $50,000 for each of the
years 1996 through 2000. In connection with the agreement, Mr. Spahr has waived
his right to director's fees and future participation in the Company's Director
Stock Plan.
The Company's subsidiary, Urban & Schwarzenberg Verlag fur Medizin GmbH is
indebted to Gisela Urban, Dr. Urban's mother, for 150,000 DM (approximately
$84,000) bearing interest at 5% per annum payable on demand on one year's
notice. Loan amounts have been converted into dollars based upon the currency
exchange rate of .5562 DM per dollar in effect on December 31, 1997.
On January 30, 1998, William M. Passano, Jr. exercised options to purchase
26,000 shares granted under the Company's Incentive Plan at an exercise price of
$7.875 per share and the Company loaned him the amount of the exercise price for
the 26,000 Shares, $204,750.00 (the "Loan"). The Company is holding the Shares
as collateral and William M. Passano, Jr. will pay interest on the Loan at an
annual rate equal to the actual bank borrowing rate charged to the Company
during the period the Loan is outstanding. The Loan and accrued interest is due
48
<PAGE>
no later than the time that the Shares are sold, and is callable by the Company
at such time as William M. Passano, Jr. is freely able to dispose of the shares.
<TABLE>
<CAPTION>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report: Page
----------------------------------------------------------------------------------------------------
<S> <C> <C>
(1) Financial Statements:
Report of Independent Accountants 13
Consolidated Balance Sheets at December 31, 1997 and 1996 14
Consolidated Statements of Operations for the three years ended December 16
31, 1997
Consolidated Statements of Shareholders' Equity for the three years ended 17
December 31, 1997
Consolidated Statements of Cash Flows for the three years ended December 19
31, 1997
Notes to Consolidated Financial Statements 21
(2) Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedule 50
Schedule I - Valuation and Qualifying Accounts and Reserves 51
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits
See the "Exhibit Index" on page 53.
(b) Reports on Form 8-K
The Registrant was not required to file any report on Form 8-K for the
fourth quarter of 1997.
</TABLE>
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareholders of Waverly, Inc.
Our report on the consolidated financial statements of Waverly, Inc. and
subsidiaries is included on page 13 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 49 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/Coopers & Lybrand L.L.P.
---------------------------
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
January 30, 1998, except for
Note 16, as to which the
date is February 11,1998
50
<PAGE>
Schedule I
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts and Reserves
----------------------------------------------
Deductions:
Balance at Additions: Amounts Charged off Balance at
Classification Beginning of Year Charged to Income Less Recoveries End of Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995,
Allowance for doubtful accounts $ 746 $ 841 $ 791 $ 796
Year ended December 31, 1996,
Allowance for doubtful accounts $ 796 $ 782 $ 85 $1,493
Year ended December 31, 1997,
Allowance for doubtful accounts $1,493 $ 753 $ 808 $1,438
</TABLE>
51
<PAGE>
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 and the following persons
have signed in the capacities indicated.
Waverly, Inc.
By: /s/Edward B. Hutton, Jr.
------------------------
Edward B. Hutton, Jr.
President, Chief Executive Officer
Dated: March 26, 1998
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 and on the dates indicated:
By: /s/Edward B. Hutton, Jr.
------------------------
Edward B. Hutton, Jr.
Director, President, Chief Executive Officer
(Principal Officer)
Dated: March 26, 1998
By: /s/E. Philip Hanlon
-------------------
E. Philip Hanlon
Vice President and Chief Financial Officer
Dated: March 26, 1998
Majority of Board of Directors:
Barbara J. Bonnell, David J. Callard, Donald W. Dick, Jr.,
Edward B. Hutton, Jr., Michael E. Johns, Samuel G. MacFarlane, Carolyn
Manuszak, Ackneil M. Muldrow, II, Joseph M. Palazzolo, Edward M. Passano, Sr.,
E. Magruder Passano, Jr., William M. Passano, Jr., Richard C. Riggs, Jr.,
John F. Spahr, Jr., Michael Urban.
By: /s/E. Philip Hanlon March 26, 1998
-------------------
E. Philip Hanlon
as Attorney-in-Fact
52
<PAGE>
Waverly, Inc.
1997 Annual Form 10-K
Exhibit Index
-------------
(3) Articles of Incorporation and By-Laws
A. Articles of Restatement, (incorporated by reference to Exhibit
3A filed with 1989 Annual Report of Form 10-K)
B. Amended By-Laws of the Registrant dated March 30, 1989.
(incorporated by reference to Exhibit 3B filed with the 1993
Annual Report on Form 10-K)
(9) Voting Trust Agreements
A. Agreement between Michael Urban and members of the Passano
Family Voting Trust. (incorporated by reference to Exhibit 9A,
filed with the 1992 Annual Report on Form 10-K) and Amendment
No. 1.(incorporated by reference to Exhibit 9A, filed with the
1993 Annual Report on Form 10-K)
B. Agreement between various members of the Spahr family and
members of the Passano Family Voting Trust. (incorporated by
reference to Exhibit 9B, filed with the 1992 Annual Report on
Form 10-K)
(10) Material Contracts
A. Agreement and Plan of Merger, dated as of February 10, 1998, by
and among Wolters Kluwer, Newco and the Company (incorporated
by reference to Exhibit 1 of the Schedule 14D-9 filed with the
Commission by the Company on February 18, 1998).
B. (Incorporated by reference to Exhibits 13-A to 13-F, inclusive,
of Exhibits to Registration Statement, Form S-1, No. 2-43388,
filed April 11, 1972 and Exhibit 20 to Annual report Form 10-K
filed for the year ended December 31, 1980) .
* C. Agreement with David J. Callard (the "Renewal") dated
December 12, 1997, Exhibit A ("the "Callard Engagement Letter")
dated November 4, 1997 and related agreement are filed herewith
as Exhibit 10C.
* D. Executive employment agreement between Michael Urban and
Urban & Schwarzenberg GmbH dated April 20, 1990 (incorporated
by reference to Exhibit 10C filed with the 1990 Annual Report
on Form 10-K) .
* E. Agreement between John F. Spahr, Jr. and Waverly, Inc. dated
March 18, 1994, (incorporated by reference to Exhibit 10D
filed with the 1993 Annual Report on Form 10-K) .
F. Note purchase agreement dated as of March 28, 1991 between
Waverly, Inc. and The Prudential Insurance Company of America
(incorporated by reference to Exhibit 10E filed with the 1990
Annual Report on Form 10-K) .
G. Director Stock Plan adopted April 27, 1992 (incorporated by
reference to Exhibit 10F filed with the 1992 Annual Report on
Form 10-K) .
53
<PAGE>
* H. Asset purchase agreement between Cadmus Communication Corp. and
Waverly, Inc., (incorporated by reference to Exhibit 10G filed
with the 1993 Annual Report on Form 10-K) .
I. Office space property lease between Waverly, Inc. and the
Maryland Stadium Authority dated September 30, 1994
(incorporated by reference to Exhibit 10H filed with the 1994
Annual Report on Form 10-K).
J. 1995 Employee Stock Option Plan adopted April 24, 1995
(incorporated by reference to Exhibit A filed with the 1995
Proxy Statement).
K. Loan Agreement to Purchase Stock Options, dated January
19,1998, between the Company and William M. Passano, Jr. is
filed herewith as Exhibit 10K.
(21) Subsidiaries of the Registrant, filed herewith.
(23) Consent of Independent Accountants.
(24) Power of Attorney - Incorporated by reference herein for all Directors
whose Powers of Attorney were filed with the Commission on Forms 8-K
on July 23, 1992, except for the Power of Attorney for Ackneil M.
Muldrow II whose Power of Attorney was filed with the Commission on
August 24, 1992, and Michael E. Johns whose Power of Attorney was
filed with the 1993 Annual Report on Form 10-K, Richard C. Riggs, Jr.,
whose Power of Attorney was filed with the 1994 Annual Report on Form
10-K and Joseph M. Palazzolo whose Power of Attorney was filed with
the 1995 Annual Report.
(27) Financial Data Schedule, filed herewith.
* Management contract or compensatory arrangement required to be filed
as an exhibit to this form.
54
Waverly, Inc.
1997 Annual Form 10-K
Exhibit 10(C)
Agreement Between Waverly, Inc. and David J. Callard
----------------------------------------------------
Waverly, Inc. ("Waverly") and David J. Callard (DJC") have discussed ways in
which DJC will assist Waverly in 1998. Such assistance shall include working
with senior management in the following areas: monthly review of 1998 results
and plans as well as longer range strategic plan for 1998-2000; merger,
acquisition, joint venture, financing, recapitalization and investment
opportunities involving Waverly ("Waverly acquisition and development
opportunities" or "Waverly A&D"); and active involvement in oversight of the
Waverly business through continued service as Chairman of the Executive
Committee. Waverly and DJC wish to continue the retainer relationship which has
been renewed annually since 1990.
Waverly shall retain DJC as a financial and business advisor at an annual
compensation rate of $50,000; retainer payment shall be made quarterly in
advance. Waverly and DJC will review quarterly the amount of time spent by DJC
on Waverly projects and mutually agree whether adjustment of the retainer amount
is appropriate for that quarter. Waverly shall reimburse all reasonable expenses
incurred by DJC in carrying out his duties under the retainer agreement.
Waverly shall, also, pay DJC for assistance with specific Waverly A&D projects.
Such additional payments (contingent or otherwise) will be determined by mutual
at the outset of each project and shall reflect the complexity and size of each
project and DJC's role.
Waverly shall have the right to determine whether it wants DJC to have an active
role in any Waverly A&D project. DJC and Waverly wish to ensure that Waverly
does not become obligated to pay double fees in any A&D transaction. The parties
shall designate Waverly A&D projects in which DJC shall participate by
memorandum agreement which shall, also, describe such additional compensation
arrangements as are mutually acceptable.
The retainer arrangement set forth herein shall have a term of one year from
January 1, 1998. Should DJC's future employment result in his not being
available to carry out his duties hereunder, either party may terminate the
retainer arrangement with retainer compensation prorated to date of termination
and with additional compensation paid where DJC has substantially completed work
on a Waverly A&D opportunity which is closed subsequent to termination.
Notwithstanding any other provision of this Agreement, Waverly and DJC agree
that retainer payments for services performed in 1998 pursuant to this Agreement
shall be deducted from payment of the $400,000 contingent fee provided for in
the November 4, 1997 letter agreement attached hereto as Exhibit A.
This amended agreement represents the renewal provided for in the November 1990
agreement with certain modifications which are acceptable to both parties.
/s/ David J. Callard December 12, 1997
- ---------------------- -----------------
David J. Callard Date
/s/ William M. Passano, Jr. December 12, 1997
- ---------------------------- -----------------
William M. Passano, Jr. Date
<PAGE>
EXHIBIT A
---------
November 4, 1997
David J. Callard
President
Wand Partners, Inc.
630 Fifth Avenue
Suite 2435
New York, NY 10112
Dear David:
As you know, in connection with your service as a director of Waverly,
Inc. ("Waverly" or the "Company"), you and Waverly have entered into the
agreement attached as Exhibit A. Pursuant to that Agreement and further to your
service as a director of Waverly, Waverly hereby confirms that is has requested
you to undertake an active role on behalf of the Company in advising and
assisting in the possible sale of Waverly, including by acting as a liaison
between the Company and Morgan Stanley & Co. Incorporated. In this connection,
Waverly has agreed to pay you a contingent fee of $400,000 if (a) control of
more than 55% of the Company's common stock changes hands or (b) the Company
sells a substantial amount of its assets. In addition, Waverly will reimburse
reasonable out-of-pocket expenses. Any contingent fee will be in addition to the
retainer payments provided for in Exhibit A.
As you are aware as director of Waverly you are entitled under certain
circumstances to indemnification from the Company. Without limiting such rights,
this will confirm that if those rights do not fully indemnify you from loss in
connection with your advisory services as described above, in consideration of
your agreement to act on Waverly's behalf in connection with your engagement as
described above (the "Engagement"), we agree to indemnify and hold you harmless
from and against any losses, claims, damages or liabilities related to, arising
out of or in connection with the Engagement and will reimburse you for all
expenses (including fees and expenses of counsel) as they are incurred in
connection with investigating, preparing, pursuing or defending any action,
claim, suit, investigation or proceeding related to, arising out of or in
connection with the Engagement, Whether or not pending or threatened and whether
or not you are a party. Waverly will not, however, be responsible for any
losses, claims, damages or liabilities (or expenses relating thereto) that are
finally judicially determined to have resulted from your bad faith or gross
negligence. The Company also agrees that you shall have no liability (whether
direct or indirect, in contract or tort or otherwise) to us for or in connection
with the Engagement except for any such liability for losses, claims, damages or
liabilities incurred by us that are finally judicially determined to have
resulted from your bad faith or gross negligence.
We will not, without your prior written consent, settle, compromise,
consent to the entry of any judgment in or otherwise seek to terminate any
action, claims, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not you are a party thereto) unless such
settlement, compromise, consent or termination includes a release of you from
any liabilities arising out of such action, claim, suit or proceeding. In
seeking indemnification, reimbursement or contribution under this agreement you
will not, without our prior written consent, settle, compromise, consent to the
entry of any judgment in or otherwise seek to terminate any action, claims, suit
investigation or proceeding referred to in the preceding paragraph.
<PAGE>
If the indemnification provided for in the first paragraph of this
agreement is judicially determined to be unavailable (other than in accordance
with the terms hereof) to you in respect of any losses, claims, damages or
liabilities referred to herein, then, in lieu of indemnifying you, we shall
contribute to the amount paid or payable by you as a result of such losses,
claims, damages or liabilities (and expenses relating thereto) (i) in such
proportion as is appropriate to reflect the relative benefits to you, on the one
hand, and us, on the other hand, of the Engagement or (ii) if the allocation
provided by clause (i) above is not available, in such proportion as is
appropriate to reflect not only the relative benefits referred to in such clause
(i) but also the relative fault of each of you and us, as well as any other
relevant equitable considerations; provided, however, in no event shall your
aggregate contribution to the amount paid or payable exceed the aggregate amount
of fees actually received by you under the terms of this agreement as described
above. For the purposes of this agreement, the relative benefits to us and you
of the Engagement shall be deemed to be in the same proportion as (a) the total
value paid or contemplated to be paid or received or contemplated to be received
by us or our stockholders, as the case may be, in the transaction or
transactions that are the subject of the Engagement, whether or not any such
transaction is consummated, bears to (b) the fees paid or to be paid to you as
described above.
The provisions of this agreement shall apply to the Engagement and any
modification thereof and shall remain in full force and effect regardless of any
termination by you or us or the completion of your services.
This agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts executed in and to be
performed in that state.
Very truly yours,
WAVERLY, INC.
By: /s/Edward B. Hutton Jr.
-----------------------------
Edward B. Hutton, Jr.
Accepted:
By: /s/David J. Callard
-------------------
David J. Callard
Date: November 14, 1997
<PAGE>
AGREEMENT
---------
By Mutual consent of Waverly, Inc. and David J. Callard the Agreement
between Waverly, Inc. and David J. Callard dated December 12, 1997 (the
"Retainer Agreement") is hereby terminated and canceled effective at the
Effective Time (as defined in the Merger Agreement) of the Agreement and Plan of
Merger by and among MP Acquisition Corp., Wolters Kluwer U.S. Corporation and
Waverly Inc. dated as of February 10, 1998 (the "Merger Agreement").
In the event the Effective Time fails to occur for any reason, the
Retainer Agreement will continue in full force and effect.
Agreed to and accepted:
David J. Callard
By: /s/David J. Callard
-----------------
David J. Callard
Waverly, Inc.
By: /s/William M. Passano Jr.
-----------------------
William M. Passano Jr.
Waverly, Inc.
1997 Annual Form 10-K
Exhibit 10(K)
Loan Agreement Between Waverly, Inc. and William M. Passano, Jr.
----------------------------------------------------------------
This is an agreement between Waverly, Inc.("Company") and William M. Passano,
Jr.("Stock Option Holder") dated January 19, 1998.
The Stock Option Holder wishes to exercise 26,000 option sahres as evidenced by
the attached Election Form signed by the Stock Option Holder.
The Company agrees to advance the exercise price to the Employee in the amount
of $204,750.00 (26,000 shares x $7.875 per share) referred to as "Loan".
The Stock Option Holder agrees to the following terms and conditions of the
Loan.
1. The Company will hold the shares as collateral against the Loan.
2. The Stock Option Holder will pay interest on the Loan principal at an annual
interest rate equal to the actual borrowing rate charged by First National Bank
of Maryland to Waverly, Inc. during the period the Loan is outstanding.
3. The Stock Option Holder will repay the Loan and accrued interest no later
than the time that such shares are sold. In any event, the Loan will be callable
at such time as the Stock Option Holder is freely able to dispose of such
shares. Dividends distributed during the loan period would be credited to the
Company and affset against interest due on the loan.
Signed: /s/E. Philip Hanlon Date: 1/19/98
-----------------------
Waverly, Inc.
Signed: /s/William M. Passano, Jr. Date: 1/19/98
---------------------------
Stock Option Holder
Waverly, Inc.
1997 Annual Form 10-K
Exhibit 21
Subsidiaries of the Company
---------------------------
Williams & Wilkins Sales, Inc.
351 West Camden Street
Baltimore, Maryland 21201 A Maryland Corporation
Waverly Sales, Inc.
351 West Camden Street A United States
Baltimore, Maryland 21201 Virgin Island Corporation
Waverly Europe Ltd.
Broadway House
2-6 Fulham Broadway
London SW6 1 AA England A United Kingdom Corporation
Urban & Schwarzenberg GmbH
Landwehrstrabe 61
D-8000 Munich A German Corporation
Oscar Rothacker Verlagsbuchhandlung, GmbH
Landwehrstrasse 38
Munich A German Corporation
Urban & Schwarzenberg Verlag fur Medizin, GmbH
Landwehrstrabe 61
D-8000 Munich
A German Corporation
Urban & Schwarzenberg Ges.m.b.H.
Frankgasse 4,
Vienna, Austria An Austrian Corporation
Med-Pub, Inc.
900 Market St.
Suite 200
Wilmington, Delaware 19801 A Delaware Corporation
Urban & Partner
Marii Sklodowskiej-Curie Str. 55/61
50-950 Wroclaw, Poland A Polish Corporation
Williams & Wilkins Asia-Pacific Ltd.
Room 808 Metroplaza Tower 2
223 Hing Fong Road
New Territories, Hong Kong A Hong Kong Corporation
Williams & Wilkins Asia-Pacific Ltd.
5/12 Wireless Road
Opp. Hilton Hotel
Bangkok, 10330, Thailand A Thailand Corporation
Waverly, Inc.
1997 Annual Form 10-K
Exhibit 23
Consent of Independent Accountants
----------------------------------
We consent to the incorporation by reference in the registration
statements of Waverly, Inc. and subsidiaries on Form S-8 (No.
33-41925 and No. 33-61705) of our reports dated January 30, 1998, on
our audits of the consolidated financial statements and financial
statement schedule of Waverly, Inc. and subsidiaries as of December
31, 1997, 1996 and 1995 and for the years then ended, which reports
are included in this Annual Report on Form 10-K.
/s/Coopers & Lybrand L.L.P.
---------------------------
Coopers & Lybrand L.L.P.
Baltimore, Maryland
March 25, 1998
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