UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission File No. 1-5842

 

Bowne & Co., Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

(212) 924-5500

 

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes þ     No o

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 o     No þ

 

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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

                                                     (Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o     No þ

 

The aggregate market value of the Common Stock issued and outstanding and held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $528 million. For purposes of the foregoing calculation, the registrant’s 401(K) Savings Plan and its Global Employees Stock Purchase Plan are deemed to be affiliates of the registrant.

 

The registrant had 26,307,627 shares of Common Stock outstanding as of February 29, 2008.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the documents of the registrant listed below have been incorporated by reference into the indicated parts of this Annual Report on Form 10-K:

 

Notice of Annual Meeting of Stockholders and Proxy Statement anticipated to be dated April 11, 2008. Part III, Items 10-12

 

 

TABLE OF CONTENTS

 

 

 

Bowne & Co., Inc. (Bowne and its subsidiaries are hereinafter collectively referred to as “Bowne”, the “Company”, “We” or “Our” unless otherwise noted), established in 1775, is a global leader in providing business services that help companies produce and manage their shareholder, investor, marketing and business communications. These communications include, but are not limited to, regulatory and compliance documents; personalized financial statements; enrollment kits; and sales and marketing collateral. Our services span the entire document lifecycle and involve both electronic and printed media: we help clients create, edit and compose their documents; manage the content, translate the documents when necessary; personalize the documents, prepare the documents and in many cases perform the filing; and print and distribute the documents, both through the mail and electronically.

 

In 2007 and 2006, the Company conducted its business in two distinct operating segments: Financial Communications and Marketing & Business Communications. Each segment had its own sales force, marketing and customer service organizations as well as research and development, product development, technology support and manufacturing. However, the fundamentals behind these two segments are rapidly converging. Clients for all of the services increasingly overlap; the technology for serving them, and the marketing and channel requirements for reaching them are similar or virtually identical. No longer is there a parallel set of distinct customers, services and channels; rather, there is an increasing cross-over between clients, application needs, sales and marketing requirements.

 

Bowne announced several significant internal changes during 2007 in order to more effectively and competitively address these market dynamics. Essentially, we are integrating our customer-facing resources so that we can provide all Bowne services to all clients and prospects; we are unifying our manufacturing footprint to provide the best quality and cost-effective technology to our clients regardless of timing and location; and we are consolidating our administrative and support functions so that best practices and economic advantages are leveraged across the enterprise.

 

These changes announced during the latter part of 2007 are expected to have a positive impact on the Company during 2008 and as such, will change how we report our financial results. During 2007, however, the management of the Company was structured to support these two reportable business segments whose services and operating results are described below:

 

Financial Communications — in 2007 this segment included a comprehensive array of services to create, manage, translate, file and distribute shareholder and investor-related documents. Bowne provides these services to its clients in connection with capital market and transactions, such as equity and debt issuances and mergers and acquisitions, which the Company calls “transactional services”. Bowne also provides these services to public corporations in connection with their compliance obligations to produce, file and deliver periodic and other reports under applicable laws and regulations, which the Company calls “compliance reporting services.” Bowne provides mutual fund services to investment management firms relating to regulatory and shareholder communications such as annual or interim reports, prospectuses, information statements and marketing-related documents. Bowne also provides general commercial print services as client and capacity opportunities emerge.

 

Overall, the Financial Communications segment generated revenue of approximately $729.1 million in 2007 and $705.9 million in 2006, representing approximately 86% and 85% of total Company revenue, respectively. The Company’s Financial Communications segment generated segment profit of approximately $120.3 million and $102.4 million in 2007 and 2006, respectively. The Company’s segment profit is defined as gross margin (revenue less cost of revenue) less selling and administrative expenses.

 

Marketing & Business Communications — during 2007 this segment included a portfolio of services to create, manage and distribute personalized communications, including financial statements, enrollment kits and sales and marketing collateral, to help companies communicate with their customers. Bowne provides these services primarily to the financial services, commercial banking, healthcare, insurance, gaming, and

travel and leisure industries. This segment generated revenue of approximately $121.5 million in 2007, and $127.8 million in 2006, representing approximately 14% and 15% of Bowne’s total revenue for 2007 and 2006, respectively. This segment reported a segment profit of $0.2 million in 2007 and a segment loss of $0.6 million in 2006.

 

In January 2007, the Company acquired St Ives Financial, a division of St Ives plc, which is based in the United Kingdom. The integration of St Ives Financial was completed in 2007. The acquisition expanded Bowne’s position in the Public Limited Company market and the European investment management marketplace, where St Ives Financial has a well-established reputation among significant blue-chip clients. The acquisition also gave Bowne an immediate presence in Luxembourg and expanded the Company’s presence in Philadelphia, an important domestic market. In this transaction Bowne also acquired two software-based products: Smartapps^tm, a Java-based system for content management used by mutual funds; and DealTrans^tm, a system which allows mutual and hedge funds to communicate and track exchanges among their staff as well as with their clients.

 

In November 2007, the Company announced the opening of an office in Moscow. The new facility expands the Company’s European footprint, enabling Bowne to locally serve the growing marketplace in Russia and Eastern Europe.

 

In November 2007, Bowne acquired ADS MB Corporation (“Alliance Data Mail Services”), an affiliate of Alliance Data Systems Corporation. Alliance Data Mail Services provides personalized marketing communications services plus intelligent inserting and commingling capabilities to its clients in the financial services, healthcare, retail, government and utilities industries. It also provides clients with advanced technology tools that enable the monitoring of a project’s status and reporting in real-time. With facilities in Dallas, Texas, Alliance Data Mail Services will be integrated into the Company’s existing distributive print network, which includes digital and offset printing, binding, mail services and fulfillment capabilities.

 

During 2007, Bowne announced several significant changes to its organizational structure and manufacturing capabilities to support the consolidation of its divisions into a unified model that supports and markets Bowne’s full range of service offerings, from transactional services and corporate compliance reporting to investment management solutions and personalized, digital marketing and business communications. In August, the Company announced plans to integrate its manufacturing capabilities to create a robust platform that includes digital and offset printing, binding, mail service and fulfillment capabilities. This new model is designed to allow the Company to realize operating efficiencies through streamlined workflows and work sharing between sites during peak periods. As the first major step in the execution of this plan, the Company consolidated its Milwaukee, Wisconsin digital print facility with its existing print facility in South Bend, Indiana, making it the Company’s first fully-integrated manufacturing facility, with digital and offset print capabilities. The closure of the Company’s Milwaukee facility was substantially completed during the fourth quarter of 2007. The Company continues to evaluate other facilities where future consolidations are appropriate, and is seeking to complete the integration of all of its manufacturing capabilities by 2009. In November, the Company announced plans to create a unified client-facing organization which will leverage the Company’s regional field sales management to sell and support all Bowne services and products. These modifications were made in response to the evolving needs of our clients, who are increasingly asking for services that span Bowne’s full range of offerings. As the first major step in executing this plan, Bowne announced the promotion of William P. Penders to the position of President, responsible for sales and service operations across all of Bowne’s lines of services, customers and geographies.

 

In February 2008, the Company signed a definitive agreement to acquire the assets and operating business of GCom² Solutions, Inc. (“GCom”) for $45 million in cash. GCom is a leading provider of proprietary financial administration and reporting software and solutions to the global investment management industry. The transaction closed on February 29, 2008. GCom offers a robust, innovative suite of scalable software products that provide investment administrators easy-to-use, intuitive solutions, offering significant cost savings, while addressing their reporting and shareholder communication challenges. GCom’s products will be integrated with Bowne’s existing automated composing tools and output capabilities that file and print shareholder communications. As a result, Bowne will be the only firm providing the investment management industry a true end-to-end solution. GCom operates in the United States, the United Kingdom, Ireland and Luxembourg.

As the Company completes the changes to its organizational structure, moves away from operating itself as two separate business units and realigns toward operating as a unified company, our intent is to change our reportable segments to be consistent with the way the Company is to be managed.

 

Further information regarding segment revenue, operating results, identifiable assets and capital spending attributable to the Company’s operations for the calendar years 2007, 2006 and 2005, as well as a reconciliation of segment profit to pre-tax income (loss) from continuing operations, are shown in Note 19 to the Consolidated Financial Statements.

 

Industry Overview

 

The business services industry is highly fragmented, with hundreds of independent service companies that provide a full range of document management services and with a wide range of technology and software providers. Specific to transactional and compliance reporting, there are many companies, including Bowne, that participate in a material way. Demand for transactional services tends to be cyclical with the capital markets for new debt and equity issuances and public mergers and acquisitions activity. Demand for compliance reporting is less sensitive to capital market changes and represents a recurring periodic activity, with seasonality linked to significant filing deadlines imposed by law on public reporting companies and mutual funds. Demand is also impacted by changing regulatory and corporate disclosure requirements.

 

The market for digital personalized communications is currently fragmented with a large number of active participants providing a wide range of services. The primary competitors provide end-to-end, digital services ranging from message design services, to technical solutions design and implementation, to printing and distribution via mail or on-line delivery. Bowne is focused on providing the full range of services required to support clients with data integration, document creation, production, distribution and management solutions that address the growing variable personalized communications needs of many industries. Companies are increasingly looking to digital, variable, data-driven solutions to help streamline their communications and increase their competitive edge. For example, a firm’s ability to create relevant, engaging, and targeted communications to both customers and prospective customers can help increase customer retention and sales, as well as protect brand integrity. Bowne’s depth of experience in digital variable document production coupled with the technologies that provide clients with an end-to-end solution for business and marketing communications, supported by Bowne’s reputation for quality, integrity, and overall production experience in a number of industries, uniquely position Bowne in this emerging marketplace.

 

The Company

 

Financial Communications

 

Historically, transactional services have been the single largest contributor to the Company’s total revenue and in 2007 represented approximately 36% of our total revenue. The Company’s transactional services apply to registration statements, prospectuses, bankruptcy solicitation materials, special proxy statements, offering circulars, tender offer materials and other documents related to corporate financings, acquisitions and mergers. The Company’s compliance reporting services apply to annual and interim reports, regular proxy materials and other periodic reports that public companies are required to file with the Securities and Exchange Commission (“SEC”) or other regulatory bodies around the world. Bowne is also a leading filing agent for EDGAR, the SEC’s electronic filing system. The Company provides both full-service and self-service filing, the latter through Internet-based filing products: BowneFile16^®, 8-K Express^tm, and 6-K Express^tm. In 2006, the Company expanded its compliance service offerings to include Pure Compliance^tm, an EDGAR-only filing service that offers clients a balance of fixed pricing, rapid turnaround, and high quality HTML output to meet their regulatory filing requirements. In 2007, the Company launched its electronic Proxy service, ePod^tm, to assist public companies in responding to the SEC’s rule enabling issuers to furnish proxy materials to shareholders through an electronic Notice and Access delivery model. The Company is also an active member of XBRL International, a not-for-profit steering group of over 500 firms dedicated to the development and advancement of XBRL. The Company continues to position itself at the forefront of this emerging technology. Bowne serves as a strategic partner to those companies interested in participating in the SEC pilot programs in preparation for the mandated use of XBRL. Mutual fund services apply to regulatory and

shareholder communications such as annual or interim reports, prospectuses, information statements and marketing-related documents.

 

Bowne also provides commercial printing, which consists of annual reports, sales and marketing literature, point of purchase materials, research reports, newsletters and other custom-printed matter. In addition, the Company provides language translation services for legal and financial documents being prepared by our clients. Over the past few years, Bowne has expanded its capabilities across all phases of the document life-cycle, including electronic receipt and dissemination of client documents, composition, content management, conversion, translation, assembly, packaging, output, delivery, and archiving. The Company also offers Bowne Virtual Dataroom^tm, a hosted on-line data room capability, which provides a secure and convenient means for clients to permit due diligence of documents in connection with securities offerings, mergers and acquisitions and other corporate transactions. This service offering was recently expanded through an alliance with BMC Group Inc., an information management and technology service provider to corporate, legal and financial professionals.

 

The Company’s international business offers similar services as those delivered by its domestic operations. International capabilities are delivered primarily by the Company or in some areas through strategic relationships.

 

Over the last several years, the Company has focused on improving its cost structure and operating efficiencies by reducing fixed costs and increasing flexibility to better respond to market fluctuations. The Company has reorganized its regional operations and closed or consolidated a portion of its U.S. offices and facilities. While the Company maintains its own printing capabilities in North America, Bowne also outsources some printing to independent printers, especially during times of peak demand. This outsourcing allows the Company to preserve flexibility while reducing its staffing, maintenance and operating expense of underutilized facilities, and is in line with industry practice. The Company also has arrangements with companies in India to perform some of its composition processing and related functions. Importantly, in preceding years the Company invested significantly in new technologies that it now leverages to perform the same volume of high-quality service for its clients despite the reductions in its workforce. This has allowed the Company to permanently reduce its fixed and direct labor costs. As a result of the increased flexibility Bowne has achieved in the last few years, the Company expects that its cost savings will be long-term and that it will not need to add back most of the personnel and related costs as the business expands.

 

The Company believes that its technology investments have produced one of the most flexible and efficient composition, printing and distribution systems in the industry, for example:

 

 

 

Marketing & Business Communication

 

The marketing and business communications services offered by the Company use advanced database technology, coupled with high-speed digital printing, to help clients reach their customers with more targeted levels of customized and personalized communications. Using a model that begins with extensive consultation to ascertain clients’ communications challenges, Bowne delivers quality technology-based applications that integrate document creation, content management, digital printing, and electronic and physical delivery.

 

Bowne has developed unique technology solutions that provide the framework to customize each document to meet a client’s unique needs, while maintaining the controls and standards to ensure each personalized communication produced and delivered on our client’s behalf is consistently accurate and of the highest quality, from creation to delivery.

 

 

Bowne services help clients create, manage and distribute important information, such as statements, trade confirmations, welcome and enrollment kits, sales kits and marketing collateral. With the ability to provide personalized and targeted communications, rather than the conventionally printed generic information, clients are able to achieve higher returns on their marketing dollars and reduce waste. Because of the integration of systems

between Bowne and its clients, these services tend to involve longer-term relationships. The primary clients for these services include mutual funds, stock brokerage firms, defined contribution providers, investment banks, insurance companies, commercial banks, healthcare providers, and educational services. Most of these clients already use or are prime candidates for Bowne’s financial communications services.

 

Other Information

 

For each of the past three fiscal years, the Company’s Financial Communications segment has accounted for the largest share of consolidated total revenue, as shown below:

 

 

The Company has facilities to serve customers throughout the United States, Canada, Europe, Central America, South America and Asia.

 

Although investment in equipment and facilities is required, the Company’s business is principally service-oriented. In all of our activities, speed, accuracy, quality of customer service, and the need to preserve the confidentiality of the customers’ information is paramount.

 

The Company’s composing platform and its manufacturing platform are operated as a centralized and fully distributive model. This provides us with the ability to maximize efficiency, increase utilization and better service our customers’ needs.

 

The Company maintains conference rooms and telecommunications capabilities in most of its offices for use by clients while transactions are in progress. On-site customer service professionals work with our clients, which promotes speed and ease of editorial changes and otherwise facilitates the completion of our clients’ documents. In addition, the Company uses an extensive electronic communications network, which facilitates data handling and makes collaboration practicable among clients at different sites.

 

The Company was established in 1775, incorporated in 1909, reincorporated in 1968 in the State of New York, and reincorporated again in 1998 in the State of Delaware. The Company’s corporate offices are located at 55 Water Street, New York, NY 10041, telephone (212) 924-5500. The Company’s website is www.bowne.com. Our website contains electronic copies of Bowne news releases and SEC filings, as well as descriptions of Bowne’s corporate governance structure, products and services, and other information about the Company. This information is available free of charge. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this document.

 

Competition

 

The Company believes that it offers a unique array of services and solutions for its clients. However, competition in the various individual services described above is intense. Factors in this competition include not only the speed and accuracy with which the Company can meet customer needs, but also the price of the services, quality of the product and supporting services.

In transactional, compliance reporting and mutual fund services, the Company competes primarily with several global competitors and regional service providers having similar degrees of specialization. Some of these organizations operate at multiple locations and some are subsidiaries or divisions of companies having greater financial resources than those of the Company. Based upon the most recently available published information, the Company is the largest in terms of sales volume in the financial communications market. In addition to its customer base, the Company has experienced competition for sales, customer service and production personnel in financial printing.

 

In commercial printing, the Company competes with general commercial printers, which are far more numerous than those in the financial communications market and some of whom have far greater financial resources than those of the company.

 

In the digital personalized communications market, Bowne competes with diverse competition from a variety of companies, including commercial printers, in-house departments, direct marketing agencies, facilities management companies, software providers and other consultants.

 

Cyclical, Seasonal and Other Factors Affecting the Company’s Business

 

Revenue from transactional services accounted for approximately 36% of the Company’s revenue in 2007. This revenue stream is driven by a transactional or financing event and is affected by various factors including conditions in the world’s capital markets. Transactional revenue and net income depends upon the volume of public financings, particularly equity offerings, as well as merger and acquisitions activity. Activity in the capital markets is influenced by corporate funding needs, stock market fluctuations, credit availability and prevailing interest rates, and general economic and political conditions.

 

Revenue from all other services which we call non-transactional, accounted for approximately 64% of Bowne’s revenue and tend to be more recurring in nature and includes revenue from compliance and mutual fund services as well as revenue from marketing and business communications product offerings.

 

Revenue derived from compliance reporting and mutual fund services is seasonal, with the greatest number of proxy statements and regulatory reports required during the Company’s first fiscal quarter ending March 31 and the early part of the Company’s second quarter ending June 30. Because of these cyclical and seasonal factors, coupled with the general need to complete certain printing jobs quickly after delivery of copy by the customers, the Company must maintain physical plant and customer service staff sufficient to meet peak work loads. However, mutual fund, commercial and digital printing are not considered to be as cyclical as transactional services.

 

A small portion of revenue originates in the insurance industry related to statutory reporting which is seasonal, with most of this business occurring during the first quarter ending March 31.

 

Research and Development

 

The Company evaluates, on an ongoing basis, advances in computer software, hardware and peripherals, computer networking, telecommunications systems and Internet-related technologies as they relate to the Company’s business and to the development and deployment of enhancements to the Company’s proprietary systems.

 

The Company utilizes a computerized composition and telecommunications system in the process of preparing financial communication documents. The Company continues to research and develop its digital print technology, enhancing the services as there are advances in software, hardware, and other related technologies.

 

As the oldest and one of the largest shareholder and marketing communication companies in the world, our extensive experience allows us to proactively identify our clients’ needs. Bowne understands the ever-changing aspect of technology in our business, and continues to be on the cutting edge in researching, developing and implementing technological breakthroughs to better serve our clients. Capital investments are made as needed, and technology and equipment is updated as necessary.

 

Bowne works with industry-leading hardware and software vendors to support the technology infrastructure. Various software tools and programming languages are used within the technical development environment.

Bowne invests in the latest technologies and equipment to constantly improve services and remain on the leading edge. With a technology team comprised of over 250 professionals (in solutions management, application development and technology operations departments), Bowne is constantly engaged in numerous and valuable systems enhancements.

 

Bowne has established document management capacity that can be flexed with customer demand. Technology plays a key role in this strategy through the extension of the composition network with vendors in India. This allows the Company to efficiently and seamlessly outsource EDGAR conversions and composition work as needed.

 

The Company strives to ensure the confidentiality, integrity and availability of our clients’ data. Bowne developed a secure mechanism that, through software logic, secure gateways, and firewalls provides a system that is designed for security and reliability with substantial disaster-recovery capability for our clients. The Company continually seeks to improve these systems.

 

Patents and Other Rights

 

The Company has no significant patents, licenses, franchises, concessions or similar rights other than certain trademarks. Except for a proprietary computer composition and telecommunication system, the Company does not have significant specialized machinery, facilities or contracts which are unavailable to other firms providing the same or similar services to customers. The Company and its affiliates utilize many trademarks and service marks worldwide, many of which are registered or pending registration. The most significant of these is the trademark and trade name Bowne^®. The Company also uses the following service marks: ExpressStart^sm and QuickPath^sm, and trademarks: BowneFax^tm, BowneFile16^®, BowneLink^®, Deal Room Express^tm, DealTrans^tm, 8-K Express^tm, 6-K Express^tm, ePod^tm, FundSmith^®, JFS Litigator’s Notebook^®, SecuritiesConnect^®, XMark^tm, E2 Express^tm, Bowne Virtual Dataroom^tm, FundAlign^tm, Smartapps^tm, Smart Forum^tm, SmartEdgar^tm, SmartProof^tm, Pure Compliance^tm, and BowneImpressions^tm.

 

Sales and Marketing

 

The Company employs approximately 270 sales and marketing personnel. In addition to soliciting business from existing and prospective customers by building relationships and delivering customized solutions, the sales personnel act as a liaison between the customer and the Company’s customer service operations. They also provide advice and assistance to customers. The Company periodically advertises in trade publications and other media, and conducts sales promotions by mail, by presentations at seminars and trade shows and by direct delivery of marketing collateral material to customers.

 

Customers and Backlog of Orders

 

The Company’s customers include a wide variety of corporations, law firms, investment banks, insurance companies, bond dealers, mutual funds and other financial institutions.

 

During the fiscal year ended December 31, 2007, no single customer accounted for 10% or more of the Company’s sales. The Company has no backlog, within the common meaning of that term, which is normal throughout the service offerings in which the Company is focused. However, within its Financial Communications segment, the Company maintains a backlog of customers preparing for financial offerings. This backlog is greatly affected by capital market activity.

 

Employees

 

At December 31, 2007, the Company had approximately 3,600 full-time employees. We believe relations with the Company’s employees are excellent. Less than one percent of the Company’s employees are members of various unions covered by collective bargaining agreements. The Company provides pension, 401(k), profit-sharing, certain insurance and other benefits to most non-union employees.

Suppliers

 

The Company purchases or leases various materials and services from a number of suppliers, of which the most important items are paper, computer hardware, copiers, software and peripherals, communication equipment and services, and electrical energy. The Company purchases paper from paper mills and paper merchants. The Company has experienced no difficulty to date in obtaining an adequate supply of these materials and services. Alternate sources of supply are presently available.

 

International Sales

 

The Company conducts operations in Canada, Europe, Central America, South America and Asia. In addition, the Company has affiliations with firms providing similar services abroad. Revenues derived from foreign countries other than Canada were approximately 12% of the Company’s total revenues in 2007, 11% in 2006 and 9% in 2005. During 2007, 2006 and 2005, revenues derived from foreign countries other than Canada totaled $103 million, $93 million and $62 million, respectively, which were all generated from the Financial Communications segment. Canadian revenues were approximately 10%, 11% and 10% of the Company’s total sales in 2007, 2006 and 2005, respectively. During 2007, 2006 and 2005, revenues derived from Canada totaled $83 million, $89 million, and $68 million, respectively.

 

 

The Company’s consolidated results of operations, financial condition and cash flows can be adversely affected by various risks. These risks include, but are not limited to, the principal factors listed below and the other matters set forth in this annual report on Form 10-K. You should carefully consider all of these risks.

 

Our strategy to increase revenue through introducing new products and services and acquiring businesses that complement our existing businesses may not be successful, which could adversely affect results and may negatively affect earnings.

 

Approximately 36% of our revenue is derived from transactional services, which are dependent upon the transactional capital markets. We are pursuing strategies designed to improve our transactional service offerings and grow our non-transactional businesses (which currently represents about 64% of our revenue), including compliance reporting services, mutual fund services and our digital and personalization business. At the same time we are pursuing a strategy of acquisitions of complementary products and service offerings. For example, in 2007, the Company completed the acquisitions of St Ives Financial and Alliance Data Mail Services and during the first quarter of 2008 we completed the acquisition of GCom. We also believe that pursuing complementary acquisition opportunities will lead to more stable and diverse recurring revenue. This strategy has many risks, including the following:

 

 

If we are unsuccessful in continuing to enhance our non-transactional products and services and acquire complementary products and services, we will not be able to continue to diversify our revenues and will remain subject to the sometimes volatile swings in the capital markets that directly impact the demand for transactional services. Furthermore, if we are unable to provide value-added services in areas of document management other than traditional composition and printing, our results may be adversely affected if an increasing number of clients handle this process in-house, to the extent that new technologies allow this process to be conducted internally. We believe that if we are not successful in achieving our strategic objectives within transactional services, growth of our other businesses and acquiring complementary product and service offerings, we may experience decreases in

profitability and volume. If this decline in profitability were to continue, without offsetting increases in revenues from other products and services, our business and results of operations would be materially and adversely affected.

 

Revenue from printed shareholder documents is subject to regulatory changes and volatility in demand, which could adversely affect our operating results.

 

We anticipate that our financial communications business will continue to contribute a material amount to our operating results. The financial communications business contributed 86% and 85% of total revenue during 2007 and 2006, respectively. The market for these services depends in part on the demand for printed shareholder and investor documents, which is driven largely by capital markets activity and the requirements of the SEC and other regulatory bodies. Any rulemaking substantially affecting the content of documents to be filed and the method of their delivery could have an adverse effect on our business. In addition, evolving market practices in light of regulatory developments, such as postings of documents on Internet web pages and electronic delivery of offering documents, may adversely affect the demand for printed financial documents and reports.

 

Recent regulatory developments in the United States and abroad have sought to change the method of dissemination of financial documents to investors and shareholders through electronic delivery rather than through delivery of paper documents. The SEC’s “access equals delivery” rules which eliminate the requirement to deliver a printed final prospectus, unless requested by the investor, its recently adopted rules for the dissemination of proxy materials to shareholders electronically, and its proposal for the dissemination of mutual fund prospectuses electronically, unless a printed prospectus is requested by the investor, are reflective of these regulatory developments. Regulatory developments which decrease the delivery of printed transactional or compliance documents could harm our business and adversely affect our operating results.

 

Regulatory developments in the United States have also accelerated the timing for filing periodic compliance reports, such as public company annual reports and interim quarterly reports, and also have changed some of the content requirements requiring greater disclosure in those reports. The combination of shorter deadlines for public company reports and more content may adversely affect our ability to meet our client’s needs in times of peak demand, or may cause our clients to try to exercise more control over their filings by performing those functions in-house.

 

Our financial communications revenue may be adversely affected as clients implement technologies enabling them to produce and disseminate documents on their own. For example, our clients and their financial advisors have increasingly relied on web-based distributions for prospectuses and other printed materials. Also, the migration from an ASCII-based EDGAR system to an HTML format for SEC public filings eventually may enable more of our clients to handle all or a portion of their periodic filings without the need for our services.

 

The environment in which we compete is highly competitive, which creates adverse pricing pressures and may harm our business and operating results if we cannot compete effectively.

 

Competition in our businesses is intense. The speed and accuracy with which we can meet client needs, the price of our services and the quality of our products and supporting services are factors in this competition. In financial communications, we compete directly with several other service providers having similar degrees of specialization. One of these service providers is a division of a company that has greater financial resources than those of Bowne.

 

Our marketing and business communications unit faces diverse competition from a variety of companies including commercial printers, in-house print operations, direct marketing agencies, facilities management companies, software providers and other consultants. In commercial printing services, we compete with general commercial printers, which are far more numerous than those in the financial printing market.

 

These competitive pressures could reduce our revenue and earnings.

The market for our marketing and business communications services is relatively new and we may not realize the anticipated benefits of our investment.

 

The personalized communications market is loosely defined with a wide variety of different types of services and product offerings. Moreover, customer acceptance of the diverse solutions for these services and products remains to be proven in the long-term, and demand for discrete services and products remains difficult to predict.

 

We have made significant investments in developing our capabilities and through the purchase of the marketing and business communications division of Vestcom, which was completed in January 2006 and the acquisition of Alliance Data Mail Services, which was completed in November 2007.

 

If we are unable to adequately implement our solutions, generate sufficient customer interest in our solutions or capitalize on sales opportunities, we may not be able to realize the return on our investments that we anticipated. Failure to recover our investment or to not realize sufficient return on our investment may adversely affect our results of operations as well as our efforts to diversify our businesses.

 

Our business could be harmed if we do not successfully manage the integration of businesses that we acquire.

 

As part of our business strategy, we have and may continue to acquire other businesses that complement our core capabilities. Our recent acquisitions are reflective of that strategy. The benefits of an acquisition may often take considerable time to develop and may not be realized. Acquisitions involve a number of risks, including:

 

 

As a result of the aforementioned and other risks, we may not realize anticipated benefits from acquisitions, which could adversely affect our business.

 

We are exposed to risks associated with operations outside of the United States.

 

We derived approximately 22% of our revenues from various foreign sources, and a significant part of our current operations are outside of the United States. We conduct operations in Canada, Europe, Central America, South America and Asia. In addition, we have affiliations with certain firms providing similar services abroad. As a result, our business is subject to political and economic instability and currency fluctuations in various countries. The maintenance of our international operations and entry into additional international markets require significant

management attention and financial resources. In addition, there are many barriers to competing successfully in the international arena, including:

 

 

We cannot assure that our investments in other countries will produce desired levels of revenue or that one or more of the factors listed above will not harm our business.

 

We do not have long-term service agreements in the transactional services business, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and lead to adverse movements in the price of our common stock.

 

A majority of our revenue in our transactional services business is derived from individual projects rather than long-term service agreements. Therefore, we cannot assure you that a client will engage us for further services once a project is completed or that a client will not unilaterally reduce the scope of, or terminate, existing projects. The absence of long-term service agreements makes it difficult to predict our future revenue. As a result, our financial results may fluctuate from quarter to quarter based on the timing and scope of the engagement with our clients which could, in turn, lead to adverse movements in the price of our common stock or increased volatility in our stock price generally. We have no backlog, within the common meaning of that term; however, within our Financial Communications segment, we maintain a backlog of clients preparing for initial public offerings, or IPOs. This IPO backlog is highly dependent on the capital markets for new issues, which can be volatile.

 

If we are unable to retain our key employees and attract and retain other qualified personnel, our business could suffer.

 

Our ability to grow and our future success will depend to a significant extent on the continued contributions of our key executives, managers and employees. In addition, many of our individual technical and sales personnel have extensive experience in our business operations and/or have valuable client relationships that would be difficult to replace. Their departure from the Company, if unexpected and unplanned for, could cause a disruption to our business. Our future success also depends in large part on our ability to identify, attract and retain other highly qualified managerial, technical, sales and marketing and customer service personnel. Competition for these individuals is intense, especially in the markets in which we operate. We may not succeed in identifying, attracting and retaining these personnel. Further, competitors and other entities have in the past recruited and may in the future attempt to recruit our employees, particularly our sales personnel. The loss of the services of our key personnel, the inability to identify, attract and retain qualified personnel in the future or delays in hiring qualified personnel, particularly technical and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as the timely introduction of new technology-based products and services, which could harm our business, financial condition and operating results.

If we fail to keep our clients’ information confidential or if we handle their information improperly, our business and reputation could be significantly and adversely affected.

 

We manage private and confidential information and documentation related to our clients’ finances and transactions, often prior to public dissemination. The use of insider information is highly regulated in the United States and abroad, and violations of securities laws and regulations may result in civil and criminal penalties. If we fail to keep our clients’ proprietary information and documentation confidential, we may lose existing clients and potential new clients and may expose them to significant loss of revenue based on the premature release of confidential information. We may also become subject to civil claims by our clients or other third parties or criminal investigations by appropriate authorities.

 

Our services depend on the reliability of our computer systems and our ability to implement and maintain information technology and security measures.

 

Our global platform of services depends on the ability of our computer systems to operate efficiently and reliably at all times. Certain emergencies or contingencies could occur, such as a computer virus attack, a natural disaster, a significant power outage covering multiple cities or a terrorist attack, which could temporarily shut down our facilities and computer systems. Maintaining up to date and effective security measures requires extensive capital expenditures. In addition, the ability to implement further technological advances and to maintain effective information technology and security measures is important to each of our business segments. If our technological and operations platforms become outdated, we will be at a disadvantage when competing in our industry. Furthermore, if the security measures protecting our computer systems and operating platforms are breached, we may lose our clients’ business and become subject to civil claims by our clients or other third parties.

 

Our services depend on third-parties to provide or support some of our services and our business and reputation could suffer if these third-parties fail to perform satisfactorily.

 

We outsource some of our services to third parties both domestically and internationally. For example, our EDGAR document conversion services of SEC filings substantially rely on independent contractors to provide a portion of this work. If these third parties do not perform their services satisfactorily or confidentially, if they decide not to continue to provide such services to us on commercially reasonable terms or if they decide to compete directly with us, our business could be adversely affected. We could also experience delays in providing our products and services, which could negatively affect our business until comparable third-party service providers, if available, were identified and obtained. Any service interruptions experienced by our clients could negatively impact our reputation, cause us to lose clients and limit our ability to attract new clients and we may become subject to civil claims by our clients or other third parties. In addition, we could face increased costs by using substitute third-party service providers.

 

We must adapt to rapid changes in technology and client requirements to remain competitive.

 

The market and demand for our products and services, to a varying extent, have been characterized by:

 

 

We believe that these trends will continue into the foreseeable future. Our success will depend, in part, upon our ability to:

 

 

To achieve these goals, we will need to continue to make substantial investments in development and marketing. We may not:

 

 

Further, our products and services may be rendered obsolete or uncompetitive by new industry standards or changing technology.

 

The inability to identify, obtain and retain important intellectual property rights to technology could harm our business.

 

We rely upon the development, acquisition, licensing and enhancement of document composition, creation, production and job management systems, applications, tools and other information technology software to conduct our business. These systems, applications, and tools are “off the shelf” software that are generally available and may be obtained on competitive terms and conditions, or are developed by our employees, or are available from a limited number of vendors or licensors on negotiated terms and conditions. Our future success depends in part on our ability to identify, obtain and retain intellectual property rights to technology, either through internal development or through acquisition or licensing from others. The inability to identify, obtain and retain rights to certain technology on favorable terms and conditions would make it difficult for us to conduct our business or to timely introduce new technology-based products and services, which could harm our business, financial condition and operating results.

 

Fluctuations in the costs of paper, ink, energy, and other raw materials may adversely impact the Company.

 

Our business is subject to risks associated with the cost and availability of paper, ink, other raw materials, and energy. Increases in the costs of these items may increase the Company’s costs, and the Company may not be able to pass these costs on to customers through higher prices. Increases in the costs of materials may adversely impact our customers’ demand for printing and related services. A severe paper or multi-market energy shortage could have an adverse effect upon many of the Company’s operations.

 

 

As of the filing of this annual report on Form 10-K, there were no unresolved comments from the staff of the SEC.

 

Information regarding the significant facilities of the Company, as of December 31, 2007, eleven of which were leased and seven of which were owned, is set forth below.

 

 

All of the properties described above are well maintained, in good condition and suitable for all presently anticipated requirements of the Company. The majority of the Company’s equipment is owned outright. Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information regarding property and equipment leases.

 

The Company is not involved in any material pending legal proceedings other than routine litigation incidental to the conduct of its business.

 

 

No matters were submitted to a vote of stockholders during the fourth quarter of fiscal year 2007.

 

 

The following information is included in accordance with the provisions of Part III, Item 10 of Form 10-K. The executive officers of the Company and their recent business experience are as follows:

 

 

There are no family relationships among any of the executive officers, and there are no arrangements or understandings between any of the executive officers and any other person pursuant to which any of such officers was selected. The executive officers are normally elected by the Board of Directors at its first meeting following the Annual Meeting of Stockholders for a one-year term or until their respective successors are duly elected and qualify.

 

 

Share Prices

 

The Company’s common stock is traded on the New York Stock Exchange under the symbol “BNE.” The following are the high and low share prices as reported by the New York Stock Exchange, and dividends paid per share for calendar 2007 and 2006 by year and quarters.

 

 

The closing price of the Company’s common stock on February 29, 2008 was $13.27 per share, and the number of holders of record on that date was approximately 1,026.

Comparison of Five-Year Cumulative Return

 

The following graph shows yearly changes in the total return on investment in Bowne common stock on a cumulative basis for the Company’s last five fiscal years. The graph also shows two other measures of performance: total return on the Standard & Poor’s 500 Index, and total return on the Standard & Poor’s 500 Diversified Commercial & Professional Services Index. For convenience, we refer to these two comparison measures as “S&P 500” and “S&P Services Index,” respectively.

 

The Company chose the S&P 500 because it is a broad index of the equity markets. We chose the S&P Services Index as our own peer group because it represents the capital-weighted performance results of companies in specialized commercial consumer services. The S&P 500 includes the companies represented in the S&P Services Index.

 

We calculated the yearly change in Bowne’s return in the same way that both the S&P 500 and the S&P Services Index calculate change. In each case, we assumed an initial investment of $100 on December 31, 2002. In order to measure the cumulative yearly change in that investment over the next five years, we first calculated the difference between, on one hand, the price per share of the respective securities on December 31, 2002 and, on the other hand, the price per share at the end of each succeeding fiscal year. Throughout the five years we assumed that all dividends paid were reinvested into the same securities. Finally, we turned the result into a percentage of change by dividing that result by the difference between the price per share on December 31, 2002 and the price per share at the end of each later fiscal year.

 

 

 

Stock Repurchase

 

During the fourth quarter of 2004, the Company’s Board of Directors authorized, and the Company entered into, an Overnight Share Repurchase program and repurchased 2.5 million shares of the Company’s common stock for approximately $40.2 million. The program was completed in May 2005, at which time the Company received a price adjustment of approximately $2.1 million in the form of 166,161 additional shares. The price adjustment represented the difference between the original share purchase price of $15.75 and the average volume-weighted adjusted share price of $15.00 for the actual purchases made, plus interest. In accordance with this program the Company effected the purchase of 2.7 million shares of common stock at an average price of $14.85 per share.

During the fourth quarter of 2004, the Company’s Board of Directors also authorized an ongoing stock repurchase program to repurchase up to $35 million of the Company’s common stock. In December 2005, the program was revised to permit the repurchase of an additional $75 million in shares of the Company’s common stock from time to time in both privately negotiated and open market transactions during a period of up to two years, subject to management’s evaluation of market conditions, terms of private transactions, applicable legal requirements and other factors. During 2005, the Company repurchased approximately 2.4 million shares of its common stock under this plan for approximately $34.0 million at an average price of $14.12 per share.

 

During the second quarter of 2006, the Company’s Board of Directors authorized an increase of $45 million to the Company’s existing stock repurchase program described above. In June 2006, the Company entered into a 10b5-1 trading plan with a broker for the repurchase of up to $50 million of its common stock. Repurchases were able to be made from time to time in both privately negotiated and open market transactions during a period of up to two years, subject to management’s evaluation of market conditions, terms of private transactions, applicable legal requirements, and other factors. In November 2006, the 10b5-1 trading plan was amended to authorize the broker to repurchase up to an additional $15 million of the Company’s common stock. During 2006, the Company repurchased approximately 4.7 million shares of its common stock under this plan for approximately $68.6 million at an average price of $14.60 per share.

 

For the year ended December 31, 2007, the Company repurchased approximately 3.1 million shares of its common stock for approximately $51.7 million (an average price of $16.52 per share). Since inception of the Company’s share repurchase program in December 2004 through December 31, 2007, the Company has effected the repurchase of approximately 12.9 million shares of its common stock at an average price of $15.18 per share for an aggregate purchase price of approximately $196.3 million. The program was completed in December 2007.

 

The following table provides information with respect to the repurchase of shares of the Company’s common stock by or on behalf of the Company, in accordance with the stock repurchase program described above, for the quarter ended December 31, 2007.

 

 

Five-Year Financial Summary

 

 

The information included in the five-year financial summary has been reclassified to present the results of JFS as part of continuing operations. JFS had previously been reported as discontinued operations, as described in further detail in Note 3 to the Company’s Consolidated Financial Statements. Also refer to Items Affecting Comparability in Management’s Discussion and Analysis of Financial Condition and Results of Operations for other items affecting the comparability of the financial information presented above.

 

The Company’s $75 million convertible subordinated debentures are included in current liabilities as of December 31, 2007 since the debentures may be redeemed by the Company, or the holders of the debentures may require the Company to repurchase the debentures on October 1, 2008. This amount is classified as a non current liability for all other periods presented. Excluding this classification in 2007, working capital would be $183,949, and the current ratio would be 2.46 to 1. The Company believes it would be able to refinance the debentures on similar terms or could borrow under its revolving credit facility (which expires in May 2010), if the debentures are redeemed by the Company or repurchased from the holders in October 2008. The classification of the convertible subordinated debentures is discussed in more detail in Note 11 to the Consolidated Financial Statements.

 

 

Cautionary Statement Concerning Forward Looking Statements

 

The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “1995 Act”). The 1995 Act provides a “safe harbor” for forward-looking statements to encourage companies to provide information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected.

 

This report includes and incorporates by reference forward-looking statements within the meaning of the 1995 Act. These statements are included throughout this report, and in the documents incorporated by reference in this report, and relate to, among other things, projections of revenues, earnings, earnings per share, cash flows, capital expenditures, working capital or other financial items, output, expectations regarding acquisitions, discussions of estimated future revenue enhancements, potential dispositions and cost savings. These statements also relate to the Company’s business strategy, goals and expectations concerning the Company’s market position, future operations, margins, profitability, liquidity and capital resources. The words “anticipate”, “believe”, “could”, “estimate”,

“expect”, “intend”, “may”, “plan”, “predict”, “project”, “will” and similar terms and phrases identify forward-looking statements in this report and in the documents incorporated by reference in this report.

 

Although the Company believes the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The Company’s operations involve risks and uncertainties, many of which are outside the Company’s control, and any one of which, or a combination of which, could materially affect the Company’s results of operations and whether the forward-looking statements ultimately prove to be correct.

 

Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements depending on a variety of factors including, but not limited to:

 

 

Many of these factors are described in greater detail in the Company’s filings with the SEC, including those discussed elsewhere in this report or incorporated by reference in this report. All future written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by the previous statements.

 

Overview

 

The Company’s results from continuing operations improved in 2007 as compared to 2006. For the year ended December 31, 2007, revenue increased 2.0% to $850.6 million from $833.7 million in 2006, and diluted earnings per share from continuing operations improved to $0.90 for the year ended December 31, 2007 from $0.39 in the year ended December 31, 2006.

 

The Company’s results of operations for the year ended December 31, 2007 are a direct effect of the increased revenue in the Financial Communications segment, the favorable impact of the strategic initiatives implemented by the Company including cost saving measures, and improved profitability in the Marketing & Business Communications (“MBC”) segment.

 

During 2007, Bowne announced several significant changes to its organizational structure and manufacturing capabilities to support the consolidation of its divisions into a unified model that supports and markets Bowne’s full range of service offerings, from transactional services and corporate compliance reporting to investment

management solutions and personalized, digital marketing and business communications. In August, the Company announced plans to integrate its manufacturing capabilities to create a robust platform that includes digital and offset printing, binding, mail service and fulfillment capabilities. This new model is designed to allow the Company to realize operating efficiencies through streamlined workflows and work sharing between sites during peak periods. As the first major step in the execution of this plan, the Company consolidated its Milwaukee, Wisconsin digital print facility with its existing print facility in South Bend, Indiana, making it the Company’s first fully-integrated manufacturing facility, with digital and offset print capabilities. The closure of the Company’s Milwaukee facility was substantially completed during the fourth quarter of 2007, and is expected to result in annualized cost savings of approximately $2.5 million to $3.0 million. The Company continues to evaluate other facilities where future consolidations are appropriate, and is seeking to complete the integration of all of its manufacturing capabilities by 2009. In November, the Company announced plans to create a unified client-facing organization which will leverage the Company’s regional field sales management to sell and support all Bowne services and products. These modifications were made in response to the evolving needs of our clients, who are increasingly asking for services that span Bowne’s full range of offerings. As the first major step in executing this plan, Bowne announced the promotion of William P. Penders to the position of President, responsible for sales and service operations across all of Bowne’s lines of services, customers and geographies.

 

As the Company completes the changes to its organizational structure, moves away from operating itself as two separate business units and realigns toward operating as a unified company, our intent is to change our reportable segments to be consistent with the way the Company is to be managed.

 

The Company continues to focus on acquiring companies that complement its existing service model and as such, acquired the following businesses:

 

In January 2007, the Company acquired St Ives Financial, a division of St Ives plc, for approximately $9.6 million in cash, which includes a $1.4 million working capital adjustment. The integration of the St Ives Financial business was substantially completed during the first quarter of 2007. The acquisition expanded Bowne’s position in the Public Limited Company market and the European investment management marketplace, where St Ives Financial has a well-established reputation among significant blue-chip clients. The transaction also gave Bowne an immediate presence in Luxembourg and expanded the Company’s presence in Philadelphia, an important domestic market.

 

In November 2007, the Company acquired ADS MB Corporation (“Alliance Data Mail Services”), an affiliate of Alliance Data Systems Corporation, for $3.0 million in cash, plus the purchase of working capital for an estimated $9.3 million, for total consideration of $12.3 million. The balance of the purchased working capital is preliminary and is pending finalization. The Company estimates that the final working capital calculation could result in a reduction of the purchase consideration in the range of $2.0 million to $4.0 million. Alliance Data Mail Services provides personalized customer communications and intelligent inserting and commingling capabilities to its clients in the financial services, healthcare, retail, government and utilities industries. It also provides clients with advanced technology tools that enable the monitoring of a project’s status and reporting in real-time. With facilities in Dallas, Texas, Alliance Data Mail Services will be integrated into the Company’s existing distributive print network, which includes digital and offset printing, binding, mail services and fulfillment capabilities.

 

In February 2008, the Company signed a definitive agreement to acquire the assets and operating business of GCom² Solutions, Inc. (“GCom”) for $45 million in cash. GCom is a leading provider of proprietary financial administration and reporting software and solutions to the global investment management industry. The transaction closed on February 29, 2008. With estimated annual revenue of approximately $25 million to $30 million, GCom offers a robust, innovative suite of scalable software products that provide investment administrators easy-to-use, intuitive solutions, offering significant cost savings, while addressing their reporting and shareholder communication challenges. GCom’s products will be integrated with Bowne’s existing automated composing tools and output capabilities that file and print shareholder communications. As a result, Bowne will be the only firm providing the investment management industry a true end-to-end solution. GCom operates in the United States, the United Kingdom, Ireland and Luxembourg.

The results of the Company’s two reporting segments are discussed below:

 

 

As discussed further in Note 3 to the Consolidated Financial Statements, during the fourth quarter of 2007 the Company determined that its JFS business no longer met the criteria of being classified as held for sale and therefore the results of operations for the JFS business have been reclassified and are now included in continuing operations. The results for all periods presented have been reclassified to reflect this current presentation of the JFS business. The results of the JFS business are included in the results of the Financial Communications segment.

 

Items Affecting Comparability

 

The Company continually reviews its business, manages costs, and aligns its resources with market demand, especially in light of the volatility of the capital markets experienced over the last several years and the resulting variability in transactional services activity. As a result, the Company took several steps over the last several years to reduce fixed costs, eliminate redundancies, and better position the Company to respond to market pressures or unfavorable economic conditions.

 

The following table summarizes the expenses incurred for restructuring, integration and asset impairment charges for each segment over the last three years:

 

 

The charges recorded in 2007 primarily represent: (i) severance costs associated with the consolidation of the Company’s digital print facility in Milwaukee, Wisconsin with its existing print facility in South Bend, Indiana,

(ii) facility exit costs and asset impairment charges related to the reduction of leased space at the Company’s New York City facility, (iii) severance and integration costs related to the integration of the St Ives Financial business, (iv) additional company-wide workforce reductions, (v) facility exit costs and an asset impairment charge related to the consolidation of the Company’s financial communications facility in Philadelphia with the Philadelphia facility previously occupied by St Ives Financial, (vi) facility exit costs and impairment charges related to the Financial Communications and MBC segments, and (vii) an asset impairment charge of $2.1 million related to the goodwill associated with the Company’s JFS business. The amounts above include certain non-cash asset impairments amounting to $6,588, $2,550 and $3,523 for the years ended December 31, 2007, 2006 and 2005, respectively. As a result of the restructuring activities noted above, the Company expects to realize annualized cost savings of approximately $13.0 million to $14.0 million. Further discussion of the restructuring, integration, and asset impairment activities are included in the segment information, which follows, as well as in Note 9 to the Consolidated Financial Statements.

 

Some other transactions that affect the comparability of results from year to year are as follows:

 

During 2007, the Company recognized non-cash compensation expense of $11.2 million (approximately $6.9 million after tax), or $0.21 per share, related to its Long-Term Equity Incentive Plan (“LTEIP”), which includes compensation expense of approximately $5.3 million (approximately $3.3 million after tax), or $0.10 per share, as a result of the acceleration of the expected payout of the awards under the LTEIP. This compares to approximately $1.5 million of expense recognized during 2006, the year the plan went into effect. The LTEIP is described further in Note 17 to the Consolidated Financial Statements.

 

During 2007, the Company sold its shares of an equity investment and recognized a gain on the sale of $9.2 million (approximately $5.7 million after tax), or $0.17 per share, which is described further in Note 8 to the Consolidated Financial Statements.

 

During 2007, the Company recorded a curtailment gain of approximately $1.7 million (approximately $1.1 million after tax), or $0.03 per share, related to plan modifications associated with its postretirement benefit plan for its Canadian subsidiary, which is described further in Note 12 to the Consolidated Financial Statements.

 

During 2007, the Company recognized tax benefits of approximately $6.7 million, or $0.20 per share, related to completion of audits of the 2001 through 2004 federal income tax returns and recognition of previously unrecognized tax benefits, which is described further in Note 10 to the Consolidated Financial Statements.

 

During 2006, the Company recorded a charge of $958 (approximately $584 after tax), or $0.02 per share, related to purchased in-process research and development which is based on an allocation of the purchase price related to the Company’s acquisition of certain technology assets of PLUM Computer Consulting, Inc. (“PLUM”).

 

Results of Operations

 

Management evaluates the performance of its operating segments separately to monitor the different factors affecting financial results. Each segment is subject to review and evaluation as management monitors current market conditions, market opportunities and available resources. The performance of each segment is discussed over the next few pages.

 

Management uses segment profit to evaluate the performance of its operating segments. Segment profit is defined as gross margin (revenue less cost of revenue) less selling and administrative expenses. Segment performance is evaluated exclusive of interest, income taxes, depreciation, amortization, certain shared corporate expenses, restructuring, integration and asset impairment charges, purchased in-process research and development, and other expenses and other income. Segment profit is measured because management believes that such information is useful in evaluating the results of certain segments relative to other entities that operate within these industries and to its affiliated segments.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

 

Financial Communications

 

 

Financial Communications revenue increased 3% for the year ended December 31, 2007 as compared to 2006, with transactional services up 2% compared to the year ended December 31, 2006 primarily due to an increase in IPO activity in 2007 as compared to 2006. Compliance reporting services revenue increased 6% for the year ended December 31, 2007, as compared to 2006, due in part to new SEC regulations and more extensive disclosure requirements, including the new executive compensation proxy rules. Mutual fund services revenue increased 3% for the year ended December 31, 2007 compared to 2006, primarily due to the addition of several new clients and additional work from existing clients. Commercial printing services revenue decreased 10% for the year ended December 31, 2007, as compared to 2006, primarily due to the loss of certain accounts, reduced volumes and one-time jobs in 2006 which did not occur in the current year. Other revenue increased 42% due primarily to increases in virtual dataroom services and translation services in 2007. The results for the year ended December 31, 2007 include revenue of approximately $17.0 million from the St Ives Financial business.

 

Revenue from the international markets increased 2% to $186,153 for the year ended December 31, 2007, as compared to $182,576 in 2006 primarily due to the weakness in the U.S. dollar compared to foreign currencies. Revenue from international markets reflects an increase in non-transactional services in Europe and transactional services in Brazil during the year ended December 31, 2007 as compared to 2006. This increase is partially offset by a decrease in Canada during 2007 as compared to 2006, primarily due to a decline in revenue from commercial printing services and mutual fund services. In 2006, Canada results benefited from the change in mutual fund disclosure regulations that required all mutual fund companies to include a management report on fund performance in their fund reports. It also allowed the mutual fund companies to request from the fund holders the ability to continue receiving the annual/semi-annual fund reports (including the new management report). As a result, Canada experienced a significant increase in its mutual fund services business in 2006 but experienced a decline in 2007 due to several fund holders electing not to continue to receive the management report. At constant exchange rates, revenue from international markets decreased 4% for the year ended December 31, 2007 compared to 2006.

 

Gross margin of the Financial Communications segment increased by $28,197, or 11%, over 2006, and the gross margin percentage increased to 39% for the year ended December 31, 2007, up from 36% in 2006. The increase in gross margin was primarily due to the favorable impact of strategic initiatives implemented by the Company, including cost savings measures. The results for 2007 also includes the favorable impact of the decrease

in pension costs and the curtailment gain related to the Canadian postretirement benefit plan, as discussed further in Note 12 to the Consolidated Financial Statements.

 

Selling and administrative expenses increased 7% for the year ended December 31, 2007, compared to 2006, and as a percentage of revenue, increased two percentage points to 23% in 2007, as compared to 2006. This increase is primarily due to increases in expenses directly associated with sales, such as selling expenses (including commissions and bonuses) and certain variable administrative expenses. Also contributing to the increase are labor costs associated with the addition of St Ives Financial sales staff. Partially offsetting the increase were higher facility costs in the New York City office during the year ended December 31, 2006, due to higher rental costs, duplicate facility costs resulting from overlapping leases and costs associated with the move of our corporate office and New York City based operations. In addition, bad debt expense for this segment decreased by approximately $1.1 million in 2007 as compared to 2006, a direct result of improved billing and collection efforts.

 

As a result of the foregoing, segment profit (as defined in Note 19 to the Consolidated Financial Statements) from the Financial Communications business increased 17% for the year ended December 31, 2007 as compared to 2006 and segment profit as a percentage of revenue increased one percentage point to approximately 16% for the year ended December 31, 2007 as compared to 2006. The increase in segment profit is primarily a result of the increase in revenue and the favorable impact of strategic initiatives implemented by the Company, including cost saving measures. Refer to Note 19 of the Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit to income from continuing operations before income taxes.

 

Total restructuring charges related to the Financial Communications segment for the year ended December 31, 2007 were $13,455 as compared to $3,330 in 2006. The charges incurred in 2007 consisted of: (i) facility exit costs and asset impairment charges related to the reduction of leased space at the Company’s New York City facility, (ii) severance and integration costs related to the integration of the St Ives Financial business, (iii) additional workforce reductions, (iv) facility exit costs and asset impairment charges, including the consolidation of the Company’s former facility in Philadelphia with the newly acquired Philadelphia facility previously occupied by St Ives, and (v) an asset impairment charge of $2.1 million related to the goodwill associated with the Company’s JFS business. The Company expects these restructuring activities will result in annualized cost savings of approximately $9.0 million. The charges incurred in 2006 primarily represent costs related to additional workforce reductions in certain locations and the closing of a portion of the Company’s facility in Washington, D.C.

 

Marketing & Business Communications

 

 

MBC revenue decreased by approximately 5% for the year ended December 31, 2007 as compared to 2006. The 2006 results included approximately $5.8 million of non-recurring revenue related to the initial rollout of the Medicare Part D open enrollment program. In addition, results for the year ended December 31, 2006 included approximately $5.8 million of revenue from Vestcom’s retail customers that transferred back to Vestcom as part of our transition services agreement, and other non-recurring Vestcom transition revenue. Partially offsetting the decrease in revenue from 2006 was approximately $4.8 million of revenue resulting from Alliance Data Mail

Services since its acquisition in November 2007 and approximately $1.3 million of revenue related to projects within the insurance industry in 2007 as a result of the acquisition of St Ives Financial. The gross margin percentage for the years ended December 31, 2007 and 2006 were approximately 15%.

 

Selling and administrative expenses decreased $891 for the year ended December 31, 2007 as compared to 2006, primarily due to a decrease in those expenses directly associated with sales, such as selling expenses (including commissions) and certain variable administrative expenses. Also contributing to the decrease in these expenses is the integration of the workforces related to the acquisition of Vestcom’s Marketing and Business Communications business and workforce reductions. As a percentage of revenue, selling and administrative expenses decreased approximately one percentage point to 15% in 2007 as compared to 16% in 2006.

 

As a result of the foregoing, segment profit (as defined in Note 19 to the Consolidated Financial Statements) for this segment improved $830 for the year ended December 31, 2007 as compared to 2006 and as a percentage of revenue improved to breakeven in 2007 up from a loss of 1% in 2006. Segment profit for 2007 includes a loss of approximately $0.8 million related to the operations of Alliance Data Mail Services since its acquisition in November 2007. Excluding the results of Alliance Data Mail Services, segment profit for 2007 was $1.0 million. Management expects Alliance Data Mail Services to make a positive contribution to segment profit in 2008 as we expect to realize approximately $10.0 million of annualized synergies from the consolidation of manufacturing facilities and back office operations. Refer to Note 19 of the Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit to income from continuing operations before income taxes.

 

Restructuring, integration and asset impairment charges were $3,099 for the year ended December 31, 2007 as compared to $10,114 in 2006. The costs incurred in 2007 were primarily related to: (i) the consolidation of the Company’s digital print facility in Milwaukee, Wisconsin with its existing print facility in South Bend, Indiana, (ii) headcount reductions, (iii) costs associated with the acquisition of St Ives Financial, and (iv) facility exit costs related to leased warehouse space. The Company expects these restructuring activities will result in annualized cost savings of approximately $4.0 million to $5.0 million. The costs incurred in 2006 were primarily related to an asset impairment charge related to the consolidation of MBC facilities, and severance and integration costs associated with the integration of the workforce.

 

Summary

 

Overall revenue increased $16,883, or 2%, to $850,617 for the year ended December 31, 2007 as compared to 2006. The increase in revenue is primarily attributed to the increase in revenue from the Financial Communications segment, both transactional and non-transactional services revenue, including the addition of approximately $17.0 million of revenue resulting from the acquisition of the St Ives Financial business. Partially offsetting the increase in revenue from the Financial Communications segment was a decrease in revenue from the MBC segment for the year ended December 31, 2007 as compared to 2006. Gross margin increased $29,155, or 10%, for the year ended December 31, 2007 as compared to 2006, and the gross margin percentage increased approximately three percentage points to 38% for the year ended December 31, 2007 as compared to 2006. The increase in gross margin percentage is primarily due to the favorable impact of the strategic initiatives implemented by the Company, including cost saving measures. The results for 2007 also includes the favorable impact of the decrease in pension costs and the curtailment gain related to the Canadian postretirement benefit plan, as discussed further in Note 12 to the Consolidated Financial Statements.

 

Selling and administrative expenses on a company-wide basis increased by approximately $18,107, or 8%, to $242,118 for the year ended December 31, 2007 as compared to 2006. The increase is primarily the result of expenses that are directly associated with sales, such as selling expenses (including commissions and bonuses) and costs associated with the addition of the St Ives Financial sales staff. As a percentage of revenue, overall selling and administrative expenses increased to 28% for the year ended December 31, 2007 as compared to 27% in 2006. Shared corporate expenses were $31,979 for the year ended December 31, 2007, as compared to $34,079 in 2006. The decrease in shared corporate expenses is primarily due to decreases in facility expenses and professional fees. Selling and administrative expenses include the non-cash stock compensation expenses associated with the long-term equity incentive compensation plan, which went into effect in July 2006. The expenses associated with the long-term equity incentive compensation plan increased approximately $9.8 million to $11.2 million in 2007 due to

an increase in the amounts earned under the plan as a result of the improved results of operations in 2007 as compared to 2006. The 2007 expense also includes approximately $5.3 million as a result of the acceleration of the expected payout of the awards as described further in Note 17 to the Consolidated Financial Statements. Partially offsetting the increase in selling and administrative expenses in 2007 were higher facility costs in 2006 related to higher rental costs, duplicate facility costs resulting from overlapping leases and costs associated with the move of our corporate office and New York City based operations. In addition, bad debt expense decreased approximately $1.2 million in 2007 as compared to 2006, a direct result of improved billing and collection efforts.

 

Depreciation expense increased for the year ended December 31, 2007, compared to 2006 due primarily to recent acquisitions and the increase in capital expenditures in recent years.

 

The Company recognized a gain of $9,210 in 2007 related to the sale of its shares of an equity investment, as discussed in Note 8 to the Consolidated Financial Statements.

 

The Company recorded a charge of $958 related to purchased in-process research and development during the year ended December 31, 2006 which is based on an allocation of the purchase price related to the Company’s acquisition of certain technology assets of PLUM.

 

There were approximately $17,001 in restructuring, integration, and asset impairment charges during the year ended December 31, 2007, as compared to $14,159 in 2006, as discussed in Note 9 to the Consolidated Financial Statements.

 

Other income decreased $2,213 for the year ended December 31, 2007 as compared to 2006 primarily due to foreign currency losses in 2007 driven by the weakness in the U.S. dollar compared to other currencies. In addition, there was a decrease in interest income received from the Company’s investments in short-term marketable securities due to a decrease in the average balance of interest bearing cash and short-term marketable securities in 2007 as compared to 2006.

 

Income tax expense for the year ended December 31, 2007 was $9,002 on pre-tax income from continuing operations of $36,329 compared to $10,800 on pre-tax income from continuing operations of $23,036 in 2006. The effective tax rate for the year ended December 31, 2007 was 24.8%, which was significantly lower than the effective tax rate for the year ended December 31, 2006 of 46.9%, primarily due to tax benefits of approximately $6,681 related to completion of audits of the 2001 through 2004 federal income tax returns and recognition of previously unrecognized tax benefits.

 

The 2007 results from discontinued operations primarily include adjustments to accruals related to the Company’s discontinued litigation solutions and globalization businesses. The 2006 results from discontinued operations include: (i) the net gain on the sale of the assets of the Company’s joint venture investment in CaseSoft, (ii) the net loss on the sale of DecisionQuest, (iii) the operating results of DecisionQuest until its sale, including an asset impairment charge related to the impairment of its goodwill, (iv) the exit costs associated with leased facilities formerly occupied by discontinued businesses, and (v) the operating results of the document scanning and coding business until its sale.

 

As a result of the foregoing, net income for the year ended December 31, 2007 was $27,104 as compared to net loss of $1,768 for the year ended December 31, 2006.

Domestic Versus International Results of Operations

 

The Company has operations in the United States, Canada, Europe, Central America, South America and Asia. The Company’s international operations are all in its Financial Communications segment. Domestic (U.S.) and international components of income from continuing operations before income taxes for 2007 and 2006 are as follows:

 

 

The increase in domestic and international pre-tax income from continuing operations is primarily due to the favorable impact of the cost savings and strategic initiatives implemented by the Company. Also contributing to the increase in domestic pre-tax income is the improvement in segment profit of the MBC segment for the year ended December 31, 2007 as compared to 2006 and the gain of $9.2 million in 2007 related to the Company’s sale of an equity investment, as previously discussed.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

 

Financial Communications

 

 

Financial Communications revenue increased 13% for the year ended December 31, 2006 as compared to the year ended December 31, 2005, with the largest class of service in this segment, transactional services, up 19% as compared to the year ended December 31, 2005. The increase in transactional services revenue was a result of the positive trends in capital market activity that began during the fourth quarter of 2005 and continued into 2006, and strong merger and acquisition performance during the second quarter of 2006, as well as increased IPO market share. Compliance reporting services revenue increased 7% as compared to 2005. This increase was due in part to new SEC regulations and more extensive disclosure requirements. Commercial printing services revenue increased 44% for the year ended December 31, 2006 compared to 2005, primarily due to the addition of several new clients and additional work from existing clients. In addition, approximately $8,614 of the increase in commercial printing services revenue relates to the addition of the commercial business of Vestcom Montreal, which is included in the Financial Communications segment. Mutual fund services revenue decreased 1% for the year ended December 31, 2006 as compared to the 2005 period due to the Company’s decision not to bid or accept several low margin mutual fund projects.

 

Revenue from the international markets increased 40% to approximately $182,576 for the year ended December 31, 2006, as compared to $130,108 in 2005. This increase was primarily due to increases in transactional services in Europe and Asia, and increases in commercial printing services and mutual fund services revenue in Canada, partly due to the addition of the Vestcom Montreal commercial business as discussed above. Also in 2006, Canada results benefitted from the change in mutual fund disclosure regulations that required all mutual fund companies to include a management report on fund performance in their fund reports. It also allowed the mutual fund companies to request from the fund holders the ability to continue receiving the annual/semi-annual fund reports (including the new management report). As a result, Canada experienced a significant increase in its mutual fund services business in 2006. The increase in revenue from international markets was also partially due to the weakness in the U.S. dollar compared to foreign currencies. At constant exchange rates, revenue from international markets increased 35% for the year ended December 31, 2006 compared to 2005.

 

Gross margin of the Financial Communications segment increased by $31,976, or 14%, over 2005, and the gross margin percentage increased by one percentage point to 36% in 2006 as compared to 35% in 2005. The increase in gross margin was primarily due to the increase in revenue, especially the growth in transactional services

which historically is the Company’s most profitable class of service, the results of cost savings initiatives and the reduction in revenue from low margin mutual fund work during 2006.

 

Selling and administrative expenses increased 13% for the year ended December 31, 2006, compared to 2005, and as a percentage of revenue, remained constant at 21% for the year ended December 31, 2006, as compared to 2005. The increase in these expenses was primarily due to increases in expenses directly associated with sales, such as selling expenses (including commissions and bonuses) and certain variable administrative expenses. In addition, facility costs in the New York City office during the year ended December 31, 2006 related to the Financial Communications segment were approximately $2.5 million higher than in 2005 due to higher rental costs, duplicate facility costs resulting from overlapping leases and costs associated with the move of our corporate office and New York City based operations from 345 Hudson Street to 55 Water Street, New York, New York. The Company also incurred approximately $0.4 million of non-recurring expenses related to its acquisition of certain technology assets of PLUM.

 

As a result of the foregoing, segment profit (as defined in Note 19 to the Consolidated Financial Statements) from the Financial Communications business increased 16% for the year ended December 31, 2006 as compared to 2005 and segment profit as a percentage of revenue increased one percentage point to approximately 15% for the year ended December 31, 2006 as compared to 2005. Refer to Note 19 to the Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit to income from continuing operations before income taxes.

 

Total restructuring charges related to the Financial Communications segment for the year ended December 31, 2006 were $3,330 as compared to $6,114 in 2005. The charges incurred during the year ended December 31, 2006 were primarily associated with additional workforce reductions in certain locations and the closure of a portion of its Washington D.C. facility. The charges incurred during the year ended December 31, 2005 primarily represent adjustments to the costs related to the relocation of the London facility.

 

Marketing & Business Communications

 

 

Revenue and gross margin increased significantly for the year ended December 31, 2006 as compared to 2005 as a result of the acquisition and integration of the Marketing and Business Communications division of Vestcom within the MBC segment and an increase in revenue from new and existing clients. Results for the year ended December 31, 2006 include approximately $5.8 million of non-recurring revenue related to the initial rollout of the Medicare Part D open enrollment program. In addition, results for the year ended December 31, 2006 included approximately $5.8 million of revenue from Vestcom’s retail customers that transferred back to Vestcom as part of our transition services agreement, and other non-recurring Vestcom transition revenue. The segment operating results for the year ended December 31, 2006 were burdened with incremental operating costs associated with the integration of the operations of the Vestcom digital print business into Bowne, the consolidation of our production facilities in New Jersey, and the creation of certain new production capabilities in other locations.

Selling and administrative expenses increased significantly for the year ended December 31, 2006 as compared to 2005 primarily as a result of the increased size of MBC’s operations. As a percentage of revenue, selling and administrative expenses improved by two percentage points to 16% which was related to the favorable impact of the economies realized from integrating the workforces of Vestcom and Bowne.

 

As a result of the foregoing, segment loss (as defined in Note 19 to the Consolidated Financial Statements) for the MBC segment improved by approximately $6.4 million for the year ended December 31, 2006 as compared to 2005. Segment loss as a percentage of revenue improved by 16 percentage points to 1% for the year ended December 31, 2006. Refer to Note 19 to the Consolidated Financial Statements for additional segment financial information and reconciliation of segment loss to income from continuing operations before income taxes.

 

Restructuring, integration and asset impairment charges related to this segment were $10,114 for the year ended December 31, 2006 in comparison to $415 for the year ended December 31, 2005. The costs incurred in 2006 were primarily related to the integration of the workforce and consolidation of facilities, including an impairment charge of $2,550 related to the consolidation of the New Jersey facilities. As a result of these integration and restructuring activities, the Company estimates that it has achieved approximately $11.0 million of annualized cost savings of the combined companies, including approximately $7.0 million which were realized during 2006.

 

Summary

 

Overall revenue increased $165,067, or 25%, to $833,734 for the year ended December 31, 2006 as compared to 2005. The increase in revenue is primarily attributed to the acquisition and integration of the Marketing and Business Communications division of Vestcom within the MBC segment and an increase in revenue from the Financial Communications segment in 2006 as compared to 2005. Gross margin increased $50,867, or 21%, for the year ended December 31, 2006 as compared to 2005, while the gross margin percentage decreased approximately one percentage point to 35% for the year ended December 31, 2006, which was primarily due to the increase in revenue from the MBC segment which generated a lower margin as compared to revenue from the Financial Communications segment.

 

Selling and administrative expenses on a company-wide basis increased by approximately $36,860, or 20%, to $224,011 for the year ended December 31, 2006 as compared to 2005. Approximately $11.8 million of this overall increase was related to the MBC business, which includes the acquisition and integration of the Marketing and Business Communications division of Vestcom. The increase was also the result of expenses that are directly associated with higher sales levels, such as selling expenses (including commissions and bonuses). In addition, facility related expenses were approximately $4.5 million higher in 2006 as compared to 2005 as a result of the Company’s relocation of its corporate office and New York City based operations. Also contributing to the increase in selling and administrative expenses in 2006 as compared to 2005 was the recognition of $1.1 million of compensation expense related to stock options in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Accounting for Stock-Based Compensation,” (“SFAS 123(R)”) and an additional $1.5 million in compensation expense related to long-term equity incentive compensation expense. As a percentage of revenue, overall selling and administrative expenses improved one percentage point to 27% for the year ended December 31, 2006 as compared to 28% in 2005.

 

Depreciation expense remained constant for the year ended December 31, 2006 as compared to the same period in 2005.

 

The Company recorded a charge of $958 related to purchased in-process research and development during 2006 which was based on an allocation of the purchase price related to the Company’s acquisition of certain technology assets of PLUM.

 

There were approximately $14,159 in restructuring, integration and asset impairment charges during the year ended December 31, 2006, as compared to $10,410 in 2005, as discussed in Note 9 to the Consolidated Financial Statements.

 

Other income increased $1,803 for the year ended December 31, 2006 as compared to 2005 primarily due to interest income received from the Company’s investments in short-term marketable securities and a larger average balance of interest bearing cash in 2006 as compared to 2005.

Income tax expense for the year ended December 31, 2006 was $10,800 on pre-tax income from continuing operations of $23,036 compared to a tax expense in 2005 of $4,501 on pre-tax income from continuing operations of $4,651. The high effective tax rate is due to non-deductible expenses, primarily meals and entertainment.

 

The 2006 results from discontinued operations include the net gain on the sale of the assets of the Company’s joint venture investment in CaseSoft which occurred in May 2006, the net loss on the sale of DecisionQuest which occurred in September 2006, the operating results of DecisionQuest until its sale, the exit costs associated with leased facilities formerly occupied by discontinued businesses and the operating results of the document scanning and coding business until its sale in January 2006. Included in the operating results of DecisionQuest for 2006 is an asset impairment charge of $13,334 related to the impairment of goodwill which is described in more detail in Note 3 to the Consolidated Financial Statements. The 2005 results from discontinued operations include the results of DecisionQuest, the document scanning and coding business, the net gain on the sale of the discontinued globalization business, which was sold in September 2005, and the operating results of the discontinued globalization business until its date of sale.

 

As a result of the foregoing, net loss for the year ended December 31, 2006 was $1,768 as compared to a net loss of $604 for the year ended December 31, 2005.

 

Domestic Versus International Results of Operations

 

The Company has operations in the United States, Canada, Europe, Central America, South America and Asia. The Company’s international operations are all in its Financial Communications segment. Domestic (U.S.) and international components of income (loss) from continuing operations before income taxes for 2006 and 2005 are as follows:

 

 

International pre-tax income from continuing operations increased significantly for the year ended December 31, 2006, compared to 2005 due to increases in transactional services in Europe and Asia, and increases in commercial printing services and mutual fund services revenue in Canada, partly due to the addition of the Vestcom Montreal commercial business. Also contributing to the increase in international pre-tax income from continuing operations was a decrease in restructuring charges in 2006 as compared to 2005. The international results for 2005 included approximately $3.8 million in restructuring charges which were related to the relocation of the London facility, headcount reductions in London and Toronto and an asset impairment charge of $0.9 million related to the impairment of a non-current, non-trade receivable. The increase in the domestic pre-tax income from continuing operations was primarily due to the increase in transactional services in 2006 as compared to 2005. The increase was partially offset by the increase in restructuring, integration and asset impairment charges related to the MBC segment during the year ended December 31, 2006 as compared to 2005.

2008 Outlook

 

The following statements and certain statements made elsewhere in this document are based upon current expectations. These statements are forward looking and are subject to factors that could cause actual results to differ materially from those suggested here, including, without limitation, demand for and acceptance of the Company’s services, new technological developments, competition and general economic or market conditions, particularly in the domestic and international capital markets, and excludes the impact from future share repurchases, if any. Except for the impact of ten months of results from the acquisition of GCom, which was completed February 29, 2008, the 2008 Outlook does not reflect any additional acquisitions. Refer also to the Cautionary Statement Concerning Forward Looking Statements included at the beginning of this Item 7.

 

 

Liquidity and Capital Resources

 

 

Overall working capital decreased $60.8 million as of December 31, 2007 compared to December 31, 2006. The change in working capital is primarily attributable to the classification of the $75 million convertible subordinated debentures as current debt as of December 31, 2007 compared to a non current debt classification as of December 31, 2006. This debt is classified as current as of December 31, 2007 since the debentures may be redeemed by the Company, or the holders of the debentures may require the Company to repurchase the debentures on October 1, 2008, as further described in Note 11 to the Consolidated Financial Statements. The Company believes it would be able to refinance the debentures on similar terms or could borrow under its revolving credit facility (which expires in May 2010), if the debentures are redeemed by the Company or repurchased from the holders in October 2008.

 

Excluding this reclassification of the convertible debentures, overall working capital increased $14.2 million as of December 31, 2007 compared to December 31, 2006. This increase in working capital is primarily attributable

to improved operating results and an increase in the collection of accounts receivable balances in 2007 as compared to 2006, which is a direct result of improved billing and collection efforts. Offsetting the increase in working capital in 2007 was cash used to repurchase shares of the Company’s common stock in 2007, cash used to pay restructuring and integration related expenses, and cash used in the acquisitions of St Ives Financial and Alliance Data Mail Services in 2007 and an additional $3.0 million payment related to the acquisition of certain technology assets of PLUM.

 

For the year ended December 31, 2007, the Company repurchased approximately 3.1 million shares of its common stock for approximately $51.7 million (an average price of $16.52 per share). Since inception of the Company’s share repurchase program in December 2004 through December 31, 2007, the Company has effected the repurchase of approximately 12.9 million shares of its common stock at an average price of $15.18 per share for an aggregate purchase price of approximately $196.3 million. The program was completed in December 2007.

 

In September 2007, the Company amended its defined benefit pension plan (the “Plan”) to change the Plan to a cash balance plan (the “Amended Plan”), which is described in more detail in Note 12 to the Consolidated Financial Statements. The Plan was amended to change the plan to a cash balance plan effective January 1, 2008. The amendment to the Plan resulted in a reduction to the projected benefit obligations of approximately $22.8 million and will reduce the future funding requirements for the Amended Plan. The Company contributed $3.3 million to the Plan in September 2007 and will continue to contribute an amount necessary to meet the ERISA minimum funding requirements. As a result of the Plan amendment, the pension expense for the fourth quarter of 2007 reflects a cost savings of approximately $1.4 million.

 

In June 2007, the Company entered into a modification (the “Lease Amendment”) of its existing lease (the “Lease”) dated as of February 24, 2005 with New Water Street Corp. (“Landlord”) for its office facilities at 55 Water Street, New York, New York. Pursuant to the Lease Amendment, which became effective on signing, the leased space under the Lease was reduced by approximately 61,000 square feet (the “Terminated Space”). In consideration of entering into the Lease Amendment, the Company made a payment to the Landlord of $2.0 million. In conjunction with the Lease Amendment, the Company entered into an agreement with the successor tenant of the Landlord for the Terminated Space. In consideration of entering into the agreement, the successor tenant paid the Company $0.8 million to vacate the Terminated Space and for limited rights to use certain of the Company’s conference room facilities, which will be charged at the Company’s standard rates in effect from time to time. The Company incurred restructuring and non-cash asset impairment charges of approximately $6.0 million as a result of entering into the Lease Amendment. These charges consist of non-cash asset impairments of approximately $3.3 million primarily related to the write-off of leasehold improvements associated with the Terminated Space, exit costs of approximately $1.5 million primarily consisting of broker fees associated with the Lease Amendment, and the $2.0 million payment to the Landlord reduced by the $0.8 million received from the successor tenant. As a result of the Lease Amendment, the fixed rent payable and the related operating expense reduction are expected to result in cost savings over the remainder of the term of the Lease (through May 2026) of approximately $50.0 million, or approximately $2.6 million on an annual basis. In addition, the letter of credit issued in favor of the Landlord in connection with the lease was reduced by $2.8 million, to $6.6 million. As a result of this transaction, the Company’s future operating lease commitments were reduced by approximately $39.0 million, which represents the reduction in the future minimum rent payments over the remaining life of the lease (through May 2026).

 

The Company had no borrowings outstanding under its $150 million five-year senior, unsecured revolving credit facility as of December 31, 2007. The facility expires in May 2010. The components of the Company’s debt and available borrowings are described more fully in Note 11 to the Consolidated Financial Statements.

 

Capital expenditures for the year ended December 31, 2007 were $20.8 million, which includes approximately $3.0 million related to the consolidation and build-out of the existing space at 55 Water Street as a result of the lease modification described above. Capital expenditures for the year ended December 31, 2006 were $28.7 million, which includes approximately $2.7 million associated with the relocation of the Company’s corporate office and New York City based operations to 55 Water Street, which occurred in January 2006, and approximately $3.3 million related to the relocation of its London facility during the second quarter of 2006. In addition, capital expenditures for the year ended December 31, 2006 includes approximately $5.6 million related to the integration of the Marketing and Business Communications division of Vestcom.

It is expected that the cash generated from operations, working capital, and the Company’s borrowing capacity will be sufficient to fund its development needs (both foreign and domestic), finance future acquisitions, if any, and fund capital expenditures, provide for the payment of dividends and meet its debt service requirements. The Company experiences certain seasonal factors with respect to its working capital; the heaviest period for utilization of working capital is normally the second quarter. The Company’s existing borrowing capacity provides for this seasonal increase.

 

Cash Flows

 

The Company continues to focus on cash management, including managing receivables and inventory. Our average days sales outstanding was 68 in 2007 as compared to 73 days in 2006. The Company had net cash provided by operating activities of $98,399, $3,574 and $17,806 for the years ending December 31, 2007, 2006 and 2005, respectively. The increase in cash provided by operating activities from 2006 to 2007 was impacted by the improvement in operating results and by the change in accounts receivable resulting from higher collections of receivables during 2007 as compared to 2006, as a result of improved billing and collection efforts. In addition, the increase in cash provided by operations was also attributable to the funding of costs related to the Company’s relocation of its corporate office and New York City based operations in 2006, a decrease in income taxes paid during 2007 of approximately $9.0 million as compared to 2006 and a decrease in the funding of the Company’s pension plans in 2007 as compared to 2006. The decrease in cash provided by operating activities from 2005 to 2006 was impacted by the increase in operating activity in 2006, an increase in the cash used to pay for restructuring related accruals in 2006 as compared to 2005 resulting from the reduction in workforce that occurred during the fourth quarter of 2005 and integration expenses related to the MBC segment, an increase in bonus payments in 2006 as compared to 2005 directly related to improved performance levels, and the funding of costs related to the Company’s New York City office relocation as previously discussed.

 

Net cash (used in) provided by investing activities was ($30,224), $6,128 and $51,170 for the years ended December 31, 2007, 2006 and 2005, respectively. The increase in net cash used in investing activities from 2006 to 2007 was primarily due to the decrease in the net proceeds from the sale of marketable securities in 2007 and the cash provided by discontinued operations in 2006 of $12,519, related to the proceeds received from the sale of the assets of the Company’s joint venture investment in CaseSoft which occurred in May 2006. The change was partially offset by a decrease in the cash used to fund acquisitions in 2007 as compared to 2006 and the proceeds received from the sale of an equity investment by the Company that occurred during the fourth quarter of 2007. The net proceeds from the sale of marketable securities was $3,800 in 2007 as compared to $48,214 in 2006, due to the decrease in the purchase of marketable securities in 2007 as compared to 2006. The results for 2007 include net cash used for acquisitions of $25,791, which consists of the acquisitions of St Ives Financial and Alliance Data Mail Services and an additional $3,000 related to the acquisition of certain technology assets of PLUM, compared to the net cash used for acquisitions in 2006 of approximately $32,923, which includes net cash used in the acquisition of Vestcom’s Marketing and Business Communications division of $30,829 and $2,094 used in the acquisition of certain technology assets of PLUM. In addition, there was a decrease in capital expenditures in 2007 as compared to 2006. Capital expenditures for 2007 were $20,756 as compared to $28,668 in 2006. The decrease in net cash provided by investing activities from 2005 to 2006 was primarily the result of: (i) total proceeds of $164.3 million received in 2005 from the sale of the globalization business and the ultimate sale of the Lionbridge common stock received in the sale, compared to the net proceeds received of approximately $19.4 million in 2006 related primarily to the sale of DecisionQuest and the sale of the assets of the Company’s joint venture investment in CaseSoft, (ii) cash used in the acquisition of Vestcom’s Marketing and Business Communications division, and (iii) cash used in the acquisition of certain technology assets of PLUM in 2006. Offsetting the decrease in cash provided by investing activities in 2006 as compared to 2005 was a decrease in capital expenditures in 2006 as compared to 2005, primarily due to capital expenditures in 2005 of approximately $25.2 million related to the relocation of the Company’s corporate office and New York City based operations and a decrease in the net purchase of marketable securities due to the decrease in auction rate securities in 2006 as compared to 2005.

 

Net cash used in financing activities was $46,220, $63,555 and $33,359 for the years ended December 31, 2007, 2006 and 2005, respectively. The decrease in net cash used in financing activities in 2007 as compared to 2006 primarily resulted from a decrease in the repurchase of the Company’s common stock in 2007 as compared to 2006,

and a slight decrease in the cash received from stock option exercises in 2007 as compared to 2006. The increase in net cash used in financing activities in 2006 as compared to 2005 primarily resulted from the increase in the repurchase of the Company’s common stock in 2006 as compared to 2005. Offsetting the increase in cash used in financing activities was an increase in the cash received from the exercise of stock options during 2006 as compared to 2005.

 

Contractual Obligations, Commercial Commitments, and Off-Balance Sheet Arrangements

 

The Company’s debt consists primarily of the convertible subordinated debentures issued in September 2003. The Company also leases equipment under leases that are accounted for as capital leases, where the equipment and related lease obligation are recorded on the Company’s balance sheet.

 

The Company and its subsidiaries also occupy premises and utilize equipment under operating leases that expire at various dates through 2026. In accordance with generally accepted accounting principles, the obligations under these operating leases are not recorded on the Company’s balance sheet. Many of these leases provide for payment of certain expenses and contain renewal and purchase options.

 

In May 2007, the Company’s synthetic lease for printing equipment matured. At the end of the facility term, the Company had the option of purchasing the equipment for the estimated residual value of $6.3 million. The Company exercised its option to purchase the equipment by refinancing $4.9 million through a four-year operating lease and purchasing the remaining equipment for $1.4 million outright. The future minimum operating lease payments associated with the refinanced equipment as of December 31, 2007 are included in the operating lease obligations summarized in the table below.

 

As previously disclosed, the Company amended its lease for its office facilities at 55 Water Street, New York, New York in June 2007. As a result of the amendment, the Company’s future operating lease commitments were reduced by approximately $39.0 million, which represents the reduction in the future minimum rent payments over the remaining life of the lease (through May 2026).

 

The Company’s contractual obligations and commercial commitments are summarized in the table below:

 

 

 

 

As discussed in Note 13 to the Consolidated Financial Statements, the Company has long-term liabilities for deferred employee compensation, including pension, supplemental retirement plan, and deferred compensation. The payments related to the supplemental retirement plan and deferred compensation are not included above since

they are dependent upon when the employee retires or leaves the Company, and whether the employee elects lump-sum or annuity payments. In addition, minimum pension funding requirements are not included above as such amounts are not available for all periods presented. The Company is not required to make any contributions to its pension plan in 2008. Funding requirements for subsequent years are uncertain and will significantly depend on whether the plan’s actuary changes any assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any new legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes the Company may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law. The Company estimates it will contribute approximately $2.4 million to its supplemental retirement plan in 2008. During 2007, the Company made approximately $6.5 million in pension and supplemental retirement plan contributions. As previously discussed, the pension plan was amended in September 2007. The amendment to the Plan resulted in a reduction to the projected benefit obligations of approximately $22.8 million and will reduce the future funding requirements for the Amended Plan.

 

As discussed further in Note 10 to the Consolidated Financial Statements, the Company had total liabilities for unrecognized tax benefits of approximately $9.3 million as of December 31, 2007, which were excluded from the table above. The Company believes that it is reasonably possible that up to approximately $4.6 million of its currently unrecognized tax benefits may be recognized by the end of 2008.

 

The Company has issued standby letters of credit in the ordinary course of business totaling $3,584. These letters of credit primarily expire in 2008. In addition, pursuant to the terms of the lease entered into in February 2005 for the relocation of its primary New York City offices, the Company delivered to the landlord a letter of credit for approximately $9.4 million to secure the Company’s performance of its obligations under the lease. This letter of credit was reduced in 2007 by approximately $2.8 million, to $6.6 million as a result of the lease modification previously disclosed. The remaining amount of the letter of credit will be reduced in equal amounts annually until 2016, at which point the Company shall have no further obligation to post the letter of credit, provided no event of default has occurred and is continuing. The letter of credit obligation shall also be terminated if the entire amount of the Company’s 5% Convertible Subordinated Debentures due October 1, 2033 are converted into stock of the Company, or repaid and refinanced either upon repayment or as a result of a subsequent refinancing for a term ending beyond October 1, 2010, or remain outstanding beyond October 1, 2008.

 

The Company has issued a guarantee, pursuant to the terms of the lease entered into in February 2006 for its London facility. The term of the lease is 15 years and the rent commencement date is February 1, 2009. The guarantee is effective through the term of the lease, which expires in 2021.

 

The Company does not use derivatives, variable interest entities, or any other form of off-balance sheet financing.

 

Critical Accounting Policies and Estimates

 

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States. The Company’s significant accounting polices are disclosed in Note 1 to the Consolidated Financial Statements. The selection and application of these accounting principles and methods requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. On an ongoing basis, the Company evaluates its estimates, including those related to the recognition of revenue, allowance for doubtful accounts, valuation of goodwill and other intangible assets, income tax provision and deferred taxes, restructuring costs, actuarial assumptions for employee benefit plans, and contingent liabilities related to litigation and other claims and assessments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. While management believes that the estimates and assumptions it uses in preparing the financial statements are appropriate, these estimates and assumptions are subject to a number of factors and uncertainties regarding their ultimate outcome, and therefore, actual results could differ from these estimates.

The Company has identified its critical accounting policies and estimates below. These are policies and estimates that the Company believes are the most important in portraying the Company’s financial condition and results, and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has discussed the development, selection and disclosure of these critical accounting policies and estimates with the Audit Committee of the Company’s Board of Directors.

 

Accounting for Goodwill and Intangible Assets — Two issues arise with respect to these assets that require significant management estimates and judgment: a) the valuation in connection with the initial purchase price allocation, and b) the ongoing evaluation for impairment.

 

In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 141 “Business Combinations,” the Company allocates the cost of acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. Certain intangible assets, such as customer relationships, are amortized to expense over time, while purchase price allocated to in-process research and development, if any, is recorded as a charge at the acquisition date if it is determined that it has no alternative future use. The Company’s future operating performance will be impacted by the future amortization of identifiable intangible assets and potential impairment charges related to goodwill and other indefinite lived intangible assets. Accordingly, the allocation of the purchase price to intangible assets and goodwill has a significant impact on the Company’s future operating results. The allocation of the purchase price of the acquired companies to intangible assets and goodwill requires management to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate to value these cash flows. Should different conditions prevail, material write-downs of net intangible assets and/or goodwill could occur.

 

The Company has acquired certain identifiable intangible assets in connection with its acquisitions of St Ives Financial in January 2007, Vestcom’s Marketing and Business Communications division in January 2006 and the acquisition of certain technology assets of PLUM in April 2006. These identifiable intangible assets primarily consist of the value associated with customer relationships, technology, covenants not to compete, and in-process research and development. The valuation of these identifiable intangible assets is subjective and requires a great deal of expertise and judgment. For these reasons, the Company has used independent third party valuation firms to value these assets. The values of the customer relationships were primarily derived using estimates of future cash flows to be generated from the customer relationships. This approach was used since the inherent value of the customer relationship is its ability to generate current and future income. The value of the covenants not to compete was determined using a discounted cash flow methodology. The value of the technology and in-process research and development were primarily derived using the income approach based on future revenue projections. The Company determined that the amount attributable to the in-process research and development did not contain significant future value to the Company and accordingly the amount was expensed as of the date of acquisition. While different amounts would have been reported using different methods or using different assumptions, the Company believes that the methods selected and the assumptions used are the most appropriate for each asset analyzed.

 

Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), requires annual impairment testing of goodwill based upon the estimated fair value of the Company’s reporting units. At December 31, 2007, our goodwill balance was $35,835.

 

In testing for potential impairment of goodwill, SFAS 142 requires the Company to: 1) allocate goodwill to the reporting units to which the acquired goodwill relates, 2) estimate the fair value of those reporting units to which goodwill relates, and 3) determine the carrying value (book value) of those reporting units. Furthermore, if the estimated fair value is less than the carrying value for a particular reporting unit, then we are required to estimate the fair value of all identifiable assets and liabilities of the reporting unit in a manner similar to a purchase price allocation for an acquired business. Only after this process is completed is the amount of goodwill impairment determined.

 

Accordingly, the process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. The fair value of the Company’s reporting units was estimated based on discounted expected future cash flows. Additionally, an assumed terminal growth rate was used

to project future cash flows beyond base years. The estimates and assumptions regarding expected cash flows, terminal growth rates and the discount rate require considerable judgment and are based upon historical experience, financial forecasts, and industry trends and conditions. These assumptions are consistent with the plans and estimates we use to manage the underlying business.

 

A decline in expected cash flows or the estimated terminal value could cause reporting units to be valued differently. If the reporting units do not meet projected operating results, then this analysis could potentially result in a non-cash goodwill impairment charge, depending on the estimated value of the Company’s reporting units. Additionally, an increase in the assumed discount rate could also result in goodwill impairment. Based on our analysis as of December 31, 2007, the Company has concluded that the goodwill related to its JFS business was impaired and recorded an impairment charge of $2.1 million in 2007.

 

Revenue Recognition — The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” which requires that: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the sales price is fixed or determinable, and (iv) collectibility is reasonably assured. The Company recognizes revenue when services are completed or when the printed documents are shipped to customers. Revenue from virtual dataroom services is recognized when the documents are loaded into the dataroom. Revenue for completed but unbilled work is recognized based on the Company’s historical standard pricing for type of service and is adjusted to actual when billed. The Company accounts for sales and other use taxes on a net basis in accordance with Emerging Issues Task Force Issue No. 06-3 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.” Therefore, these taxes are excluded from revenue and cost of revenue in the Consolidated Statements of Operations.

 

Allowance for Doubtful Accounts and Sales Credits — The Company realizes that it will be unable to collect all amounts that it bills to its customers. Therefore, it estimates the amount of billed receivables that it will be unable to collect and provides an allowance for doubtful accounts and sales credits during each accounting period. A considerable amount of judgment is required in assessing the realization of these receivables. The Company’s estimates are based on, among other things, the aging of its account receivables, its past experience collecting receivables, information about the ability of individual customers to pay, and current economic conditions. While such estimates have been within our expectations and the provisions established, a change in financial condition of specific customers or in overall trends experienced may result in future adjustments of our estimates of recoverability of our receivables. As of December 31, 2007, the Company had an allowance for doubtful accounts and sales credits of $4,302.

 

Accounting for Income Taxes — Accounting for taxes requires significant judgments in the development of estimates used in income tax calculations. Such judgments include, but are not limited to, the likelihood the Company would realize the benefits of net operating loss carryforwards, the adequacy of valuation allowances, and the rates used to measure transactions with foreign subsidiaries. As part of the process of preparing the Company’s financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which the Company operates. The judgments and estimates used are subject to challenge by domestic and foreign taxing authorities. It is possible that either domestic or foreign taxing authorities could challenge those judgments and estimates and draw conclusions that would cause the Company to incur liabilities in excess of those currently recorded. The Company uses an estimate of its annual effective tax rate at each interim period based upon the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. Changes in the geographical mix or estimated amount of annual pre-tax income could impact the Company’s overall effective tax rate.

 

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standard No. 109 “Accounting for Income Taxes,” (“SFAS 109”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

 

At December 31, 2007 and 2006, the Company had deferred tax assets in excess of deferred tax liabilities of $37,900 and $51,410, respectively. At December 31, 2007 and 2006, management determined that it is more likely

than not that $35,954 and $49,189, respectively, of such assets will be realized, resulting in a valuation allowance of $1,946 and $2,221, respectively, which are related to certain foreign net operating losses and foreign capital losses which may not be utilized in future years.

 

The Company evaluates quarterly the realization of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The primary factor used to assess the likelihood of realization is the Company’s forecast of future taxable income. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. In management’s opinion, adequate provisions for income taxes have been made for all years presented.

 

Accounting for Pensions — The Company sponsors a defined benefit pension plan in the United States. The Company accounts for its defined benefit pension plan in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Retirement Plans,” (“SFAS 158”) which was adopted in December 2006. These standards require that expenses and liabilities recognized in financial statements be actuarially calculated. Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and the future performance of plan assets. According to SFAS 158, the Company is required to recognize the funded status of the plans as an asset or liability in the financial statements, measure defined benefit postretirement plan assets and obligations as of the end of the employer’s fiscal year, and recognize the change in the funded status of defined benefit postretirement plans in other comprehensive income. The primary assumptions used in calculating pension expense and liability are related to the discount rate at which the future obligations are discounted to value the liability, expected rate of return on plan assets, and projected salary increases. These rates are estimated annually as of December 31.

 

The discount rate assumption is tied to a long-term high quality bond index and is therefore subject to annual fluctuations. A lower discount rate increases the present value of the pension obligations, which results in higher pension expense. The discount rate was 6.0% at December 31, 2007 and December 31, 2006, and was 5.75% at December 31, 2005. A discount rate of 6.25% was used to calculate the 2007 pension expense. Each 0.25 percentage point change in the discount rate would result in an $3.5 million change in the projected pension benefit obligation and a $0.4 million change in annual pension expense.

 

The expected rate of return on plan assets assumption is based on the long-term expected returns for the investment mix of assets currently in the portfolio. Management uses historic return trends of the asset portfolio combined with anticipated future market conditions to estimate the rate of return. For 2004 through 2007 the Company’s expected return on plan assets has remained at 8.5%. Each 0.25 percentage point change in the assumed long-term rate of return would result in a $0.3 million change in annual pension expense.

 

The projected salary increase assumption is based upon historical trends and comparisons of the external market. Higher rates of increase result in higher pension expenses. As this rate is also a long-term expected rate, it is less likely to change on an annual basis. Management has used the rate of 4.0% for the past several years.

 

Restructuring Accrual — During fiscal years 2007, 2006 and 2005, the Company recorded significant restructuring charges. The Company accounts for these charges in accordance with Statement of Financial Accounting Standard No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Accounting for costs associated with exiting leased facilities is based on estimates of current facility costs and is offset by estimates of projected sublease income expected to be recovered over the remainder of the lease. These estimates are based on a variety of factors including the location and condition of the facility, as well as the overall real estate market. The actual sublease terms could vary from the estimates used to calculate the initial restructuring accrual, resulting in potential adjustments in future periods. In management’s opinion, the Company has made reasonable estimates of these restructuring accruals based upon available information. The Company’s accrued restructuring is discussed in more detail in Note 9 to the Consolidated Financial Statements.

Recent Accounting Pronouncements

 

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), which became effective for us beginning in 2007. The Company adopted FIN 48 in January 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in financial statements. Under FIN 48, the Company has recognized tax benefits from uncertain tax positions only when it is more-likely-than-not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized for such positions are measured based on that level of benefit that has a greater than fifty percent likelihood of being effectively settled. The impact of adopting FIN 48 resulted in the Company recognizing a $590 decrease to its unrecognized tax benefits which is reflected as an adjustment to retained earnings as of January 1, 2007. The total amount of unrecognized tax benefits included in the Consolidated Balance Sheet as of the date of adoption was $11,281, including estimated interest and penalties of $1,520. The total amount of unrecognized tax benefits as of December 31, 2007 is $9,283, including estimated interest and penalties of $1,550. The recognition of previously unrecognized tax benefits since the date of adoption primarily reflects settlements and effective closures of income tax audits as well as the lapse of applicable statutes of limitations, and is included in the Company’s tax provision for the year ended December 31, 2007. The adoption of FIN 48 is discussed in more detail in Note 10 to the Consolidated Financial Statements.

 

In May 2007, the FASB issued FASB Staff Position FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP FIN 48-1”). FSP FIN 48-1 amends FIN 48, by providing guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective upon the initial adoption of FIN 48, which the Company adopted as of January 1, 2007. The implementation of this standard did not have a material impact on the Company’s financial statements.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. Under SFAS 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop the assumptions that market participants would use when pricing the asset or liability. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. In addition, SFAS 157 requires that fair value measurements be separately disclosed by level within the fair value hierarchy. SFAS 157 does not require new fair value measurements and is effective for financial assets and financial liabilities within its scope for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company will adopt SFAS 157 for financial assets and financial liabilities within its scope during the first quarter of 2008 and does not anticipate the adoption to have a material impact on its financial statements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which defers the effective date of SFAS 157 for all non-financial assets and non-financial liabilities for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of FSP FAS 157-2. The Company does not anticipate that the adoption of this standard for non-financial assets and non-financial liabilities will have a material impact on its financial statements.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that currently are not required to be measured at fair value. This Statement is effective no later than fiscal years beginning on or after November 15, 2007. The Company has the option of adopting this standard by the first quarter of 2008. The Company does not anticipate that this standard will have a material impact on its financial statements because the Company does not expect to apply the provisions of SFAS 159 to any existing financial instruments.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 outlines the accounting and reporting for ownership interests in a subsidiary held by parties other than the parent. This standard is effective for fiscal years beginning on or after December 15, 2008. The Company does not anticipate that this standard will have a material impact on its financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”. This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. This statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This Statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. The Company will adopt this standard during the first quarter of 2009 and is currently evaluating the impact this standard will have on its financial statements.

 

 

The Company’s market risk is principally associated with trends in the domestic and international capital markets, particularly in the Financial Communications segment. This includes trends in the initial public offerings and mergers and acquisitions markets, both important components of the Financial Communications segment. The Company also has market risk tied to interest rate fluctuations related to its debt obligations and fluctuations in foreign currency, as discussed below.

 

Interest Rate Risk

 

The Company’s exposure to market risk for changes in interest rates relates primarily to its short-term investment portfolio, long-term debt obligations, revolving credit agreement and synthetic lease agreement.

 

The Company does not use derivative instruments in its short-term investment portfolio. The Company’s debentures issued in September 2003 are fixed rate instruments, and therefore, would not be impacted by changes in interest rates. The debentures have a fixed interest rate of 5%. The Company’s five-year $150 million senior unsecured revolving credit facility bears interest at LIBOR plus a premium that can range from 67.5 basis points to 137.5 basis points depending on certain leverage ratios. During the year ended December 31, 2007, there was no average outstanding balance under the revolving credit facility and no balance outstanding as of December 31, 2007, therefore, there is no significant impact from a hypothetical increase in the interest rate related to the revolving credit facility during the year ended December 31, 2007.

 

Foreign Exchange Rates

 

The Company derives a portion of its revenues from various foreign sources. Revenue from the Company’s international operations is denominated in foreign currencies, while some of its costs are denominated in U.S. dollars. The Company does not use foreign currency hedging instruments to reduce its exposure to foreign exchange fluctuations. The Company has reflected translation adjustments of $7,579, $737 and $14,573 in its Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2007, 2006 and 2005, respectively. These adjustments are primarily attributed to the fluctuation in value between the U.S. dollar and the euro, pound sterling and Canadian dollar.

 

Equity Price Risk

 

The Company’s investments in marketable securities were approximately $38.8 million as of December 31, 2007, primarily consisting of auction rate securities. These securities are fixed income municipal debt obligations issued with a variable interest rate that is reset every 7, 28, or 35 days via a Dutch auction. Despite the long-term nature of their stated contractual maturities, we have generally been able to liquidate such securities during the scheduled auctions.

 

As a result of recent uncertainties in the auction rate securities markets, we have reduced our exposure to those investments. The Company had investments in auction rate securities of $38.7 million as of December 31, 2007 and subsequently has liquidated approximately $26.5 million of those securities at par and received all of its principal. Additionally, the Company’s investments in auction rate securities subsequent to December 31, 2007 have repriced at least one time. As of February 29, 2008, our investments in auction rate securities were $12.2 million. These securities had market values which were quoted at par and interest rates which were reset to the maximum rate as specified in the security.

The recent uncertainties in the credit markets have prevented the Company and other investors from liquidating some holdings of auction rate securities in recent auctions because the amount of securities submitted for sale has exceeded the amount of purchase orders. Accordingly, the Company still holds these auction rate securities and is receiving interest at a higher rate than similar securities for which auctions have cleared. These investments are insured against loss of principal and interest. In addition, the underlying securities or the monoline insurers have credit ratings of A - AAA, as rated by Standard and Poor’s.

 

Based on our ability to access cash and other short-term investments, our expected operating cash flows and our other sources of cash, we do not anticipate the current lack of liquidity of these investments will have a material effect on our liquidity or working capital.

 

The Company’s defined benefit pension plan holds investments in both equity and fixed income securities. The amount of the Company’s annual contribution to the plan is dependent upon, among other things, the return on the plan’s assets. To the extent there are fluctuations in equity values, the amount of the Company’s annual contribution could be affected. For example, a decrease in equity prices could increase the amount of the Company’s annual contributions to the plan.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Bowne & Co., Inc.:

 

We have audited the accompanying consolidated balance sheets of Bowne & Co., Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we also audited the consolidated financial statement schedule listed in Item 15(a)(2). These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bowne & Co., Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Bowne & Co., Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

As discussed in the notes to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Shared-Based Payment” as of January 1, 2006, Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” as of December 31, 2006, Securities and Exchange Commission Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” as of December 31, 2006, and Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” as of January 1, 2007.

 

/s/ KPMG LLP

New York, New York

 

March 12, 2008

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS