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INTEROFFICE MEMORANDUM
DATE: March 28, 1995
TO: Board of Directors
Management Committee
FR: Paul Wojcik
RE: Resolution on Employee Ownership
I have divided this response into six major points upon which John
Sukenik seems to be basing his argument that the shareholders would be better
off if the Company were sold.
I. CORPORATE FINANCIAL PERFORMANCE
-------------------------------
It is hard to know where to begin in challenging the financial
picture John Sukenik paints of the Corporation. His picture seems to
be one of a corporation that, until 1989, enjoyed uninterrupted success.
At that point he seems to imply that unprecedented and irrational
spending, combined with a shrinking growth rate, has led to a rapid
deterioration in operating profits and a company whose value has been
diminished and is in danger of disappearing entirely.
Let's examine those premises. In 1989, the operating profit was
indeed nearly $15 million. That, however, was not the result of a long
steady climb to that healthy operating margin. 1989 was an exceptional
year for a couple of reasons. One, it was the culmination of go-go
'80s, and business nationwide was strong and renewal rates were high.
Two, and perhaps more important to BNA's operating margin, there were
no new services launched in 1988 and only one in 1989. That all
important investment in new products was the missing "cost". That
formula is a great prescription for short-term success and long-term
disaster. The lack of new product activity in those two years, along
with other factors such as a down-turn in the nation's economy and an
increasingly competitive marketplace no doubt contributed to a decrease
in revenue growth.
Since 1989, the general business and specific industry environment
has been tougher. The recession and corporate restructuring among our
<PAGE> 3
customers affected our renewal rates (and those of our competitors).
Increased product development and new service launches ensured continued
growth but required large investments. The development and enhancement
of electronic products to protect our subscriber base and provide
opportunities for market expansion has also been costly. Investments
to improve the publishing and business infrastructure have been
undertaken with the knowledge that in the short-term they would have a
negative impact on profitability. Health care claims jumped 88 percent
in the 1990-91 period (since then, the PPO plan has essentially halted
the increases); and there were several required accounting changes which
had an extremely negative impact on operating earnings (between $3
million and $4 million each year since 1992) although they did not
require the expenditure of any actual money.
Despite those negative factors, the Company's performance has been
healthy. A revenue jump of 7.3 percent in 1994 was the highest since
1990. Despite decisions to make large investments in new products and
infrastructure, and the negative effect of accounting changes, increases
in operating expenses the last five years have been, in percentage
terms, well below those of the five years preceding 1989. And the
business is healthy; the wisdom of the investment in new products has
been confirmed by three straight record breaking sales years, and an
unbroken string of annual increases in revenues - during the five most
tumultuous, revolutionary years our industry has ever been through.
Despite Mr. Sukenik's prediction that "it appears impossible that the
Company will report any material improvement in profitability for 1994,"
the Company's operating profit increased 13.5 percent. If you were to
factor in the effect of accounting changes on operating earnings from
1992 to 1994, the results would be even more impressive.
So has the Company been devalued? No. The renewable BNA/TM
subscription business increased from $130.8 million at the end of 1989
to $187.7 million at the end of 1994, a 43.5 percent increase over five
years. The amount of renewable business on the books is probably THE
most important factor any potential acquiror would consider. Over the
same period, the Corporation's debt went from $12 million to zero. Cash
and investments, on the other hand, increased from $57.7 million to
$85.7 million. During that same time period, we built a new printing
plant and upgraded the older D.C. buildings increasing their
functionality. It is simply absurd to say that BNA is worth less now
than it was five years ago.
Mr. Sukenik also seems to argue that dividends are too high and
not justified by corporate performance. With the dividend payout ratio
near 70 percent, dividends are at the high end of the 40-70 percent
payout policy the Board set in the mid-70's. But, too high compared to
what? We have all the cash necessary to fund the projects critical to
our future, and our total financial reserves are adequately covering
corporate obligations. So, although the dividend rate is high, it is
not to the detriment of the Company, and it is to the benefit of
shareholders.
<PAGE> 4
It is also implied that BNA is too small to keep up with changing
technology. This is, of course, conjecture which cannot be proven one
way or the other. There recently has been, and continues to be, more
change than we have historically experienced. But change brings both
risk and opportunity, and we have capitalized on the opportunity. Each
of our CD products has resulted in double-digit increases in the revenue
base of the combined CD/print products that would not have happened
without the CD product. In fact, because of the availability of CD
products from other companies, it is probably safe to assume that that
revenue base would have declined without our investment in these types
of products. Our investment in new technology-based products has
contributed to the growth in renewable business noted above. In short,
there is no evidence that supports the implication that BNA is too
small.
II. EFFECT OF SALE
--------------
Mr. Sukenik has assured people that guarantees about jobs and
benefits could be written in to any contract for the sale of BNA. In
fact, he says, they would have to be in order to get shareholder
approval.
Conditions on a sale of the Company could perhaps be negotiated
into a purchase agreement. They certainly have in the past. The real
question is what protection does this language, even if obtainable,
give. Speculation on this is of course just that, speculative. But
let's look at some examples from recent history.
One has only to go back in our own history to the Thomson offer
of 1982. At that time, Thomson was just beginning its acquisition
program in this country. They assured us that they were a small
management team and that their plan was to leave BNA alone to operate
as it always had. Now that company has a long history of acquisitions,
and can anyone point to a Thomson company that has maintained the status
quo? Mr. Sukenik in fact used the purchase by Thomson of Bancroft-
Whitney as an example of where a company was sold and the employees got
all kinds of guarantees. Thomson did guarantee as part of that buy-out
that no one would lose their job as a result of the purchase for three
years, according to an employee who recently applied for a job at BNA.
Three years to the day later, according to that applicant, Thomson
terminated everyone but a handful of managing editors; the former rank-
and-file still performed their same editorial functions, he reported,
however they now work as consultants without benefits. This is not to
single out Thomson as a "bad guy." They are just doing what every
company does when they pay a premium for an acquisition. Reed Elsevier,
the new owner of Lexis, recently fired the entire senior staff and
announced that the rest of the staff would be reduced by 20 percent.
Veterans of Matthew Bender report staff reductions after that company
was acquired by Times Mirror. Restructuring following acquisition is
a fact of life.
<PAGE> 5
Those who find comfort in Mr. Sukenik's arguments that there are
ways other than employees to cut costs would do well to look at the
chart on the inside front cover of BNA's 1994 Annual Report which shows
how BNA spends every dollar of revenue. 56 cents of every dollar goes
to employee compensation and fringes. The next highest expense is space
and equipment at 9 cents. Cutting costs at a significant level at BNA
can mean only one thing, cutting employees.
One final note. Several federal court opinions recently described
in news reports have reversed a relatively recent legal trend.
According to these new decisions, companies may indeed have wide
latitude in adjusting or curtailing retiree benefits such as health
insurance if justified by business necessity. This increases the
possibility that if BNA ceased to be employee-owned, retirees may lose
more than a solid and rewarding investment; they may lose benefits they
have come to expect and rely on.
In a related matter, Mr. Sukenik has said that the Board could,
in weighing offers to purchase the Company, take into account things
other than the highest bid, such as which offeror guarantees the best
protections for employees. We have been advised by outside counsel
that, under Delaware law, this is true if the Board were considering an
unsolicited offer. However, if the Board itself initiates an active
bidding process, then it would be under a fiduciary obligation, in
counsel's view, to submit the highest offer to the shareholders
regardless of factors not affecting the value to the shareholders.
III. EMPLOYEE OWNERSHIP AS DETRIMENTAL TO GOOD BUSINESS
--------------------------------------------------
Mr. Sukenik claims that the Board's freedom to act in a wise way
is somehow curtailed by employee ownership. He gives two reasons for
this. The first is that the entire Board is subservient to Bill as
Chairman and as their "boss". This renders them incapable of acting as
true directors. This is insulting to anyone who has ever served as a
Director for the Company. John Stewart used to greet each new Director
with the admonition that once they entered the board room on Board
business, they were to act as directors and not employees. BNA
Directors take that admonition and their role as shareholder
representatives very seriously.
His second point is that since the shareholders are employees,
having employee/shareholders vote for the Board of Directors once a year
is intimidating to the Directors because they have to consider the
owners' interests when they make their business decisions. This is a
curious argument indeed; Directors are representatives of the
shareholders and if they have to temper their opinions by the fact that
shareholders will not agree with them, that would seem to be a healthy
thing. BNA has been in business for 48 years and has, during that time,
but especially during the last five years, had to confront a number of
different business environments. Decisions, hard decisions unpopular
<PAGE> 6
with many people, have been made many times throughout the years. BNA's
employee-owners have always been wise enough to understand the basis of
actions that may impact negatively on them as employees or individuals.
BNA Directors do consider employees more than most other corporate
directors in their decision making. This is because the employees are
the owners. This identity between employees and owners is not a burden
that hampers good management, it is the strength that has redounded to
the benefit of all employees and shareholders throughout the years.
This is not a weakness during economic hard times, it is especially
during those times that employee ownership is most useful. The owners
of BNA should in fact derive a great deal of security from the fact that
the Board of Directors has to answer so directly and so frequently to
its employee/owners.
IV. THE RESOLUTION'S MEANING
------------------------
The Board substituted its resolution for Mr. Sukenik's for one
simple reason. It wanted shareholders to understand as clearly as they
could what they were being asked to vote on. Mr. Sukenik's original
proposal did not make clear that this was a proposal on whether to
maintain employee ownership. Initial discussion of his proposal
indicated that some people interpreted it as a harmless way to appraise
the worth of the Company, and others as a way to express dissatisfaction
with management. Hiring a broker to solicit bids for the Company is a
costly, intrusive, and legally delicate undertaking. Under Delaware
law, the fiduciary duties of a board of directors that hires a broker
to solicit bids for the company could be interpreted as requiring the
board to submit the highest bid to the shareholders. Hiring a broker
is not an exploratory step; it is a very real first step in a process
that entails legal obligations and high cost.
Shareholders do not have the authority under Delaware law to order
directors to take steps that are otherwise within their discretion under
Delaware law. However, as a Director, if the shareholders do not vote
to reaffirm employee ownership, I will interpret that vote not as a
desire to find out what the Company is worth or as a referendum on
specific management actions, but as a real desire of the shareholders
to sell the Company. That is a valid interpretation of a vote against
this resolution and in fact is probably the most conservative
interpretation of such a vote. Such a message from the shareholders
would not only have a great impact on my view of whether the Company
should be sold, but could well affect my view of the appropriate balance
between long-term growth and short-term profitability in making
immediate business decisions. In short, if the shareholders reject the
concept of employee ownership, it may well have substantial and
immediate effects on the operations of the business. If as a
shareholder, your intent is to get a harmless appraisal of the Company's
worth or register a dissent from recent management decisions and
actions, voting against this resolution is NOT the way to do it. Voting
against this resolution is a vote to end employee ownership and
everything it means.
V. VOTING SHARES
-------------
Mr. Sukenik has raised the fact that only Class A shares will be
voting as an indication that the Board has no respect for shareholder
rights. A number of Class B shareholders have responded at his urgings,
seeing the matter as a fairness issue.
It is not a fairness issue, it is a corporate governance issue.
The Board is not free to decide what classes of stock are the voting
stock of the Corporation. The Articles of Incorporation make it clear
that Class A shares are the voting shares. There is only one way that
those Articles can be changed, and that is by a vote of the voting
shares of the Corporation, that is, the Class A shareholders themselves.
The right to vote is a significant protection that the Class A
shareholders have. It is the only right that Class A shareholders have
that the other classes of stock do not have. It would be unwise, and
possibly illegal, for the Board to give that right away without the
approval of the Class A shareholders. The Board has heard from
approximately 10 Class B or Class C shareholders who desire the right
to vote on this resolution. It is significant, however, that despite
sending the same appeal to approximately 250 Class A shareholders, Mr.
Sukenik has not motivated a single Class A shareholder to urge the Board
to give away the Class A voting rights.
The Articles of Incorporation, in granting Class A shareholders
voting rights, do not provide for the granting of voting rights to other
classes if the issue is important, the issue involves ownership, or if
the other classes own a majority of the outstanding stock. If the
Articles of Incorporation were not so clear, and the issue was simply
one of "fairness", those factors would indeed be things to consider.
The Articles of Incorporation are not ambiguous, however, and the intent
of their language is clear: while retirees and employees of a sold
subsidiary are entitled to continue to hold BNA stock, voting rights are
to be retained solely by the Class A shareholders.
VI. THE BUSINESS OUTLOOK
--------------------
Underlying Mr. Sukenik's message is the theory that BNA cannot
compete in today's industry. There is nothing to support this view.
Over the last ten years, corporate revenue has increased every year.
New sales records, by substantial margins, were set in each of the last
three years. Despite large reinvestment in the business, our assets
have grown. The value of the subscriptions on the books has grown
continually, increasing almost 12 percent last year. It does not take
a fortune teller to know that CDs are not the end of the technological
line, the industry is increasingly competitive, that our market is
volatile and unstable. We are not going to succeed by resting on our
laurels or by doing things like we've always done them. But no one at
BNA assumes that we could. We will succeed because we have the
financial strength, energy, talent, desire, and wisdom that we have
<PAGE> 8
demonstrated throughout 48 years in this business, but never more so
than in the last five years. I urge you to look at what we have
achieved and if you have questions, ask those who are in a position to
know. Don't blindly accept the interpretation of one former employee
who has less than two years left to maximize his investment. His
interests are unlikely to be the same as yours.
<PAGE> 9
EMPLOYEE OWNERSHIP
The resolution included on the ballot received by shareholders for
voting at this year's annual meeting reaffirms employee ownership. If you
want BNA to continue as an employee-owned company and not be put up for sale,
vote FOR the proposal. The Board urges you to do so.
PLEASE VOTE. Not returning your ballot has the effect of voting to put
---
the company up for sale.
3/28/95
