SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1998, Commission File No. 0-6311
WAVERLY, INC.
Incorporated in the State of Maryland
I. R. S. Employer Identification No. 52-0523730
351 West Camden Street, Baltimore, Maryland 21201
Telephone Number: (410) 528-4000
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve 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
As of March 31, 1998, there were 9,039,576 shares of the Registrant's Common
Stock outstanding.
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Page No. 2
Waverly, Inc.
PART I. Financial Information
Item 1. Financial Statements
Index:
Page No.
--------
Unaudited Condensed Consolidated Statements of Income 3
Unaudited Condensed Consolidated 4
Unaudited Condensed Consolidated Statements of Cash Flows 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Results of Operations 10
Liquidity and Capital Resources 11
Part II. OTHER INFORMATION
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit 27 - Financial Data Schedule 16
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Waverly, Inc.
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Income (Unaudited)
(in thousands of dollars - except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Revenues $38,316 100.% $39,213 100.%
Costs and expenses
Cost of sales 25,449 66.4 24,335 62.1
Selling and distribution 10,880 28.4 9,595 24.5
General and administrative 2,538 6.6 2,942 7.5
Depreciation and amortization 1,639 4.3 1,652 4.2
Acquisition costs 929 2.4 0 0.0
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 41,435 108.1 38,524 98.2
Income (loss) from operations (3,119) (8.1) 689 1.8
Other income (expense)
Other income 55 0.1 136 0.3
Interest expense (89) (0.2) (151) (0.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and earnings of affiliated entities (3,153) (8.2) 674 1.7
Income tax benefit (expense) 1,170 3.1 (284) (0.7)
Equity in the earnings of affiliated entities 378 1.0 294 0.7
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) ($1,605) (4.2) $684 1.7
===================================================================================================================================
Earnings (Loss) per common share and common share equivalents:
Basic ($0.18) $0.08
Diluted ($0.18) $0.07
===================================================================================================================================
Cash dividends declared per share $0.070 $0.065
===================================================================================================================================
Average number of common shares outstanding 9,027,403 8,926,342
Dilutive potential common shares - 426,401
- -----------------------------------------------------------------------------------------------------------------------------------
Adjusted weighted-average shares 9,027,403 9,352,743
===================================================================================================================================
<FN>
See accompanying notes to the condensed consolidated financial statements
</FN>
</TABLE>
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Waverly, Inc.
<TABLE>
<CAPTION>
Condensed Consolidated Balance Sheets
(in thousands of dollars except per share amounts)
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, December 31, March 31,
1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $2,655 $1,575 $1,759
Accounts receivable, less allowance for doubtful
accounts ($1,238, $1,438 and $1,488 respectively) 38,511 43,843 37,099
Inventories 29,446 29,512 28,257
Prepaid expenses & other current assets 10,674 5,115 5,777
Current deferred income taxes 2,399 2,429 3,057
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 83,685 82,474 75,949
Net property and equipment 7,408 7,017 7,514
Other noncurrent assets 38,046 37,986 39,250
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $129,139 $127,477 $122,713
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit borrowings $168 $1,293 $1,665
Current portion of long-term debt - 1,200 2,400
Accounts payable 18,008 18,014 13,034
Accrued expenses 2,244 3,550 3,425
Royalties payable 4,833 9,296 5,079
Unearned subscription revenues 31,645 18,418 25,869
Income taxes payable - 1,070 1,270
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 56,898 52,841 52,742
- ----------------------------------------------------------------------------------------------------------------------------------
Long term debt 1,163 1,196 1,269
Unfunded pension obligation 2,884 2,932 3,159
Postretirement benefit obligation 11,584 11,525 11,767
Other liabilities 422 461 579
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 72,951 68,955 69,516
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock-500,000 shares authorized; none issued
Common stock-$2 par value; 12,000,000 shares
authorized, 9,039,576, 9,000,450 and 8,928,722 shares
issued and outstanding, respectively 18,079 18,001 17,857
Additional paid-in capital 14,165 13,936 12,623
Retained earnings 25,461 27,698 23,166
Foreign currency translation adjustment (1,517) (1,113) (449)
- ----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 56,188 58,522 53,197
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $129,139 $127,477 $122,713
==================================================================================================================================
<FN>
See accompanying notes to the condensed consolidated financial statements
</FN>
</TABLE>
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Waverly, Inc.
<TABLE>
<CAPTION>
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands of dollars)
- -----------------------------------------------------------------------------------------------------------------------------------
For the three months ended March 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ($1,605) $684
Adjustments to reconcile net income to
net cash used in operating activities
Postretirement benefit obligation expense 141 86
Equity in the earnings of affiliated entities (378) (294)
Depreciation and amortization 1,639 1,652
Deferred income taxes (136) (335)
Net periodic pension expense(credit) (19) 117
Other - 30
Change in assets and liabilities adjusting
for the effect of acquisitions
Accounts receivable 5,848 3,250
Inventories (220) 2,278
Prepaid expenses (5,425) (4,340)
Accounts payable (845) (1,973)
Accrued expenses (1,266) (2,142)
Income taxes payable (1,063) (24)
Royalties payable (4,424) (5,333)
Unearned subscription revenues 13,227 8,080
Other long-term liabilities (121) (389)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 5,353 1,347
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Purchase of property and equipment (958) (659)
Capitalized electronic product development costs (371) (448)
Acquisition of publishing properties - (2,373)
Dividends received from affiliated entities 13 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (1,316) (3,480)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net borrowings under short-term lines of credit (1,105) 392
Repayment of long-term debt (1,200) (1,212)
Common stock dividends paid (633) (581)
Proceeds from exercise of stock options - 59
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flows used in financing activities (2,938) (1,342)
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents 1,099 (3,475)
Effect of exchange rates on cash and cash equivalents (19) (93)
Cash and cash equivalents at January 1, 1,575 5,327
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at March 31, $2,655 $1,759
===================================================================================================================================
<FN>
See accompanying notes to the condensed consolidated financial statements
</FN>
</TABLE>
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Page No. 6
Waverly, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) (amounts in
thousands of dollars except earnings per share)
1. Condensed Consolidated Financial Statements
Waverly and its subsidiaries (the Company) are worldwide publishers of print and
electronic media in the fields of medicine, allied health, and related
disciplines. Products are distributed worldwide and the Company has operating
offices in the United States and foreign locations.
The condensed consolidated balance sheets as of March 31, 1998 and March 31,
1997, the condensed consolidated statements of operations for the three month
periods ended March 31, 1998 and March 31, 1997, and the condensed consolidated
statements of cash flows for the three month periods ended March 31, 1998 and
March 31, 1997 have been prepared by the Company, without audit.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position at
March 31, 1998 and the results of operations and changes in cash flows for all
periods presented have been made.
This financial information should be read in conjunction with the Company's
annual report on Form 10-K. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The results of
operations for the period ended March 31, 1998, are not necessarily indicative
of the operating results for the full year.
2. New Accounting Standard
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131) was issued in June 1997.
The disclosures required by this statement must be reported by the Company in
1998. The Company is reviewing the financial statement impact of SFAS 131 and
will adopt them by the required date.
3. Reclassifications
Certain amounts in the prior period consolidated financial statements have been
reclassified to conform to the current period presentation.
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Waverly, Inc.
<TABLE>
<CAPTION>
4. (a) Inventories
Inventories consist of the following:
- ---------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
March 31, December 31, March 31,
(in thousands) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finished goods $23,071 $23,092 $21,814
Work-in-process 6,026 6,255 6,040
Raw materials 349 165 403
- ---------------------------------------------------------------------------------------------------------------
$29,446 $29,512 $28,257
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
4. (b) Property and equipment
- ----------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
March 31, December 31, March 31,
(in thousands) 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $659 $678 $728
Buildings 2,344 2,188 2,280
Office equipment, computers,
and related software 13,197 12,434 11,601
- ----------------------------------------------------------------------------------------------------------------
Total, at cost 16,200 15,300 14,609
Less: accumulated depreciation (8,792) (8,283) (7,095)
- ----------------------------------------------------------------------------------------------------------------
Net property and equipment $7,408 $7,017 $7,514
================================================================================================================
</TABLE>
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Waverly, Inc.
<TABLE>
<CAPTION>
4. (c) Other noncurrent assets
- -------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
March 31, December 31, March 31,
(in thousands of dollars) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Publication agreements $23,336 $23,113 $22,772
Goodwill 11,568 11,568 11,494
Other intangible assets 3,397 3,397 2,480
- -------------------------------------------------------------------------------------------------------------------
Subtotal 38,301 38,078 36,746
Accumulated amortization (15,266) (14,476) (12,008)
- -------------------------------------------------------------------------------------------------------------------
23,035 23,602 24,738
Prepaid pension 6,305 6,141 5,807
Noncurrent deferred income taxes 552 459 830
Equity investment in affiliated entities 3,189 2,875 3,193
Electronic product development assets
(net of accumulated amortization of
$5,677, $5,357 and $3,894, respectively)
respectively) 4,643 4,593 4,525
Other 322 316 157
- -------------------------------------------------------------------------------------------------------------------
Total other noncurrent assets $38,046 $37,986 $39,250
===================================================================================================================
</TABLE>
5. Earnings Per Share
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. For the three month period ended
March 31, 1998, common stock equivalents are excluded from the diluted earnings
per share calculation because of their anti-dilutive effect.
6. Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" is effective for the three months ended March 31, 1998. SFAS 130
establishes standards for reporting comprehensive income on an annual basis in
a full set of general purpose financial statements either in the statement of
income or in a separate statement. For the three months
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Page No. 9
Waverly, Inc.
ended March 31, 1998 and March 31, 1997, the Company had a comprehensive loss of
$2,009,000 and $286,000, respectively. The difference, between the comprehensive
loss and the net income (loss) as reported on the Statements of Income, related
to foreign currency translation adjustments.
7. Sale of Company
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 antitrust 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.
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Page No. 10
Waverly, Inc.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations: Three Months Ended March 31, 1998 Compared With
The Three Months Ended March 31, 1997
Net Revenues were $38.3 million, a decrease of $ 0.9 million or 2.3% from the
prior-year period. Periodical Publishing revenues were $19.1 million, an
increase of 26% over the prior-year. The increase is principally due to the
inclusion of one new large publishing account, the American Heart Association.
Book Publishing revenues were $17.2 million, a decrease of 22% from the
prior-year period. In the U.S., revenues were lower because of higher returns
from wholesalers. In overseas markets, revenues suffered from lower demand in
southeast Asia and the effect of lower currency valuation in Germany.
Professional Learning System revenue was $1.8 million, a 3% increase over the
same period last year.
Cost of Sales were $25.4 million in 1998 compared with $24.3 million in 1997, an
increase of 5%. As a percent of sales, costs were 66.4% in 1998 and 62.1% in
1997. Periodical Publishing costs were 69.4 % of sales compared with 66.7% in
the prior-year period. The inclusion of the American Heart Association is the
principal factor. Book Publishing costs were 66.4% this period compared with
61.7% last year. The increase in cost margin is caused by a reduction in
revenues without a corresponding rate of decrease for certain semi-variable
expenses. Professional Learning System cost of sales was 43.4% in the current
year and 38.0% in the prior-year period. The costs were higher in the current
year because of inventory write-offs for spoilage and obsolescence.
Selling and Distribution expenses were $10.9 million for the current period and
$9.6 million for the same period last year. As a percent of sales, expenses were
28.4% this period compared with 24.5% for the prior-year period. The increase in
spending came principally from the inclusion of the new American Heart
Association account. As a percent of sales, the increase is also attributable to
the decline in book publishing revenues measured against certain fixed marketing
and sales expenses.
General and Administrative expenses were $2.5 million this year, equal to 6.6%
of sales, compared with $2.9 million or 7.5% for the same period last year.
Expenses were lower in the current period on account of the absence of bonus
accrual based on earnings, the inclusion of severance payments in the prior
year, and lower MIS support costs.
Depreciation and Amortization expenses were $1.6 million this year compared with
$1.6 million for the same period last year. As a percent of sales, the costs are
substantially the same for both periods.
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Waverly, Inc.
Acquisition Charges were $0.9 million this year. These charges are for legal,
accounting, and investment banking fees incurred by the Company in conjunction
with the previously announced sale of 100% of the Company stock to Wolters
Kluwer, an Dutch-based international publisher.
Other Income was $55,000 this year compared with income of $136,000 for the same
period last year. The timing of miscellaneous income from purchase discounts and
rental income in Germany are the principal factors.
Interest Expense was $89,000 this year compared with expense of $151,000 for the
same period last year. The lower expense is due to less short-term borrowing
required to support working capital needs.
Income Tax Expense is a credit of $1.2 million this year equal to 37.1% of
pretax losses. In the prior-year period, the Company recorded tax expense of
$284,000, equal to 42.1% of pretax income. Tax expense is recorded based on the
expected full-year effective rate. In 1997, the effective rate was higher
because of the greater proportion of earnings from German operations, which
carry a higher effective tax rate than earnings recorded in the United States.
Equity in Earnings of Affiliated Entities was $378,000 in the current year and
$294,000 in the prior-year period. Higher earnings from the joint venture in
Japan is the principal factor in the year-to-year increase.
Net Loss was $1.6 million in the current period compared with net income of
$684,000 for the same period last year. The reduction in earnings is principally
due to lower sales in Book Publishing in both U.S. and international markets.
The Company also incurred unusual expenses in connection with the pending sale
of the Company.
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Waverly, Inc.
Liquidity and Capital Resources
Total assets were $129.1 million at March 31, 1998 compared to $127.5 million at
December 31, 1997 and $122.7 million at March 31, 1997. Working capital ratio is
1.5 to 1 at March 31, 1998, 1.6 to 1 at December 31, 1997, and 1.4 to 1 at March
31, 1997.
At March 31, 1998, the Company carried a net cash position [defined as cash less
short-term and long-term borrowings] of $1.3 million compared with net borrowing
positions of $3.6 million at March 31, 1997 and $2.1 million at December 31,
1997. The increase in cash since the start of the year is due to payments
received for unearned subscription revenue associated with the five-year
publishing contract with the American Heart Association which started in
January, 1998.
The Company's long-term debt, net of the current portion, was $1.2 million (2%
of shareholders' equity) at March 31, 1998 and December 31, 1997. The Company
currently pays a dividend of $0.07 per share per quarter, equal to an annual
rate of $0.28 per share.
In 1998, the Company expects to fund capital expenditures for existing
operations and payment of dividends from internally generated cash flows. The
seasonal trend in subscription renewals and domestic book publishing cause
certain fluctuations in the Company's cash position during the year and impact
the use of credit lines. The Company expects to have minimal line-of-credit
borrowings at December 31, 1998.
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Waverly, Inc.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
No change
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
As previously disclosed in the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 and the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, as amended, 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").
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
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Page No. 14
Waverly, Inc.
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. 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 disclosed on
April 29, 1998, Wolters Kluwer announced that the Offer had been
extended until midnight (EST), Tuesday, May 19, 1998 (the
"Extension"). The Extension (as well as a prior extension from the
original expiration date of March 17, 1998, until April 30, 1998)
was made in order to allow Wolters Kluwer to fully meet a routine
request for information as part of a Hart-Scott-Rodino review by
the Department of Justice. Both Waverly and Wolters Kluwer have
filed all the necessary documents requested by the Government and
anticipate that the Hart-Scott-Rodino waiting period will expire
at 11:59 p.m. on Sunday, May 17, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits required by Item 601 of Regulation
S-K are filed herewith:
Exhibit 27 - Financial Data Schedule
(b) The reports on Form 8K for the quarter ended March 31, 1998:
None
All other items are omitted because they are not applicable or the answers are
none.
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Page No. 15
Waverly, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
statement is being signed by a duly authorized officer of the Registrant and in
the capacity as the principal financial officer.
WAVERLY, INC.
Date: May 15, 1998 /s/E. Philip Hanlon
-------------------
E. Philip Hanlon
Vice President, Finance
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2655
<SECURITIES> 0
<RECEIVABLES> 39749
<ALLOWANCES> (1238)
<INVENTORY> 29446
<CURRENT-ASSETS> 83685
<PP&E> 16200
<DEPRECIATION> (8792)
<TOTAL-ASSETS> 129139
<CURRENT-LIABILITIES> 56898
<BONDS> 0
0
0
<COMMON> 18079
<OTHER-SE> 38109
<TOTAL-LIABILITY-AND-EQUITY> 129139
<SALES> 38316
<TOTAL-REVENUES> 38749
<CGS> 25449
<TOTAL-COSTS> 41435
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 89
<INCOME-PRETAX> (2775)
<INCOME-TAX> (1170)
<INCOME-CONTINUING> (1605)
<DISCONTINUED> 0
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<NET-INCOME> (1605)
<EPS-PRIMARY> (.18)
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</TABLE>
