SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

 

Commission File Number 1-5842

 

Bowne & Co., Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

(212) 924-5500

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year,

if changed since last report)

 

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

 

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

 

The Registrant had 31,790,855 shares of Common Stock outstanding as of May 1, 2006.

 

TABLE OF CONTENTS

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See Notes to Condensed Consolidated Financial Statements

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

See Notes to Condensed Consolidated Financial Statements

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

See Notes to Condensed Consolidated Financial Statements

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See Notes to Condensed Consolidated Financial Statements

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share information and where noted)

 

 

The financial information as of March 31, 2006 and for the three month periods ended March 31, 2006 and 2005 has been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the consolidated financial position, results of operations and of cash flows for each period presented have been made on a consistent basis. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the Company’s annual report on Form 10-K and consolidated financial statements for the year ended December 31, 2005. The Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements have been presented to reflect the reclassification of the discontinued document scanning and coding business in the statements of operations and cash flows for the three months ended March 31, 2006 and 2005, and the reclassification of the discontinued globalization business in the statements of operations and cash flows for the three months ended March 31, 2005, as described more fully in the Company’s annual report on Form 10-K for the year ended December 31, 2005. Operating results for the three months ended March 31, 2006 may not be indicative of the results that may be expected for the full year.

 

 

As previously reported in the Company’s annual report on Form 10-K for the year ended December 31, 2005, the Company’s results for the three months ended March 31, 2005 have been restated to correct errors in accounting for income taxes. The impact of these corrections was a decrease in net income of $1,342 ($.04 per share.) In addition, the previously reported 2005 results have been reclassified to reflect the discontinued globalization and document scanning and coding businesses. A summary of restated financial information for the three months ended March 31, 2005 is as follows:

 

 

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

In January 2006, the Company completed the acquisition of the Marketing and Business Communications division of Vestcom International, Inc. (“Vestcom”) that was announced in December 2005, for approximately $30 million. During the quarter ended March 31, 2006, the Company began to integrate Vestcom’s Marketing and Business Communications division with its similar digital print business, and the combined entity is operating as a separate reportable segment under the name Bowne Marketing & Business Communications (“MBC”). In addition, the Vestcom Montreal business, consisting primarily of commercial print operations, has been integrated with the Canadian operations of the Financial Print segment. With the acquisition, the Company has expanded its geographic coverage with a broad distributed print-on-demand network, improved its portfolio of services, and diversified into the healthcare, gaming, and travel and leisure markets.

 

The net cash outlay was approximately $30.9 million, which includes acquisition costs of approximately $0.9 million. The excess purchase price over identifiable net tangible assets, which totaled $15.2 million is reflected as part of goodwill and intangible assets in the Condensed Consolidated Balance Sheet as of March 31, 2006. Based upon preliminary estimates, $4.9 million has been allocated to the value of customer lists and will be amortized over the estimated useful life of nine years. Further refinements to the purchase price allocation are possible. The final purchase price allocation is not expected to have a material effect on the Company’s financial statements.

 

In accordance with Emerging Issues Task Force (“EITF”) Issue No. 95-03, the Company accrued approximately $1.4 million related to integration costs associated with the acquisition of this business. These costs include estimated severance and facility related costs which are expected to eliminate redundant functions and excess facilities related to the Vestcom MBC business. This amount was reflected in the goodwill balance related to this acquisition.

 

Pro forma financial information related to the acquisition has not been provided, as it is not material to the Company’s results of operations.

 

 

In January 2006, the Company completed the sale of DecisionQuest Discovery Services, its document scanning and coding business that was previously included in the Litigation Solutions segment, for approximately $500. The assets and liabilities of this business were written down as of December 31, 2005 to reflect the fair value as determined in the asset purchase agreement and accordingly the Company did not recognize a gain or loss on the sale of this business. In accordance with the sale agreement, the Company retained the accounts receivable, accounts payable and accrued expenses related to this business. The results for the three months ended March 31, 2005 have been reclassified to reflect this presentation.

 

The assets and liabilities attributable to this business have been classified in the Condensed Consolidated Balance Sheet as of December 31, 2005 as assets and liabilities held for sale and consist of the following:

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Results of the discontinued operations from the document scanning and coding business are as follows:

 

 

In September 2005, the Company sold its globalization business, as described more fully in Note 3 to the Company’s annual report on Form 10-K for the year ended December 31, 2005. The Company has recorded various liabilities related to the sale of this business in accrued expenses and other obligations in the accompanying Condensed Consolidated Balance Sheets. The amounts included in accrued expenses and other obligations are approximately $3,824 and $6,743 as of March 31, 2006 and December 31, 2005, respectively. These amounts are primarily related to accrued employee compensation and estimated indemnification liabilities associated with the discontinued globalization business. The results for the three months ended March 31, 2005 have been reclassified to reflect the presentation of the globalization business as discontinued operations.

 

Results of the discontinued operations from the globalization business for the three months ended March 31, 2005 are as follows:

 

 

The Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005 include $3,287 in accrued expenses and other obligations related to estimated indemnification liabilities associated with the Company’s document outsourcing business, which was sold in November 2004.

 

 

The Company classifies its investments in marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Marketable securities at March 31, 2006 and December 31, 2005 consist primarily of short-term securities including auction rate securities of approximately $45.0 million and $88.0 million, respectively. These underlying securities are fixed income securities such as long-term corporate bonds or municipal notes issued with a variable interest rate that is reset every 7, 28, or 35 days via a Dutch auction.

 

 

On July 29, 2005, the Company entered into a $35 million, Rule 10b5-1 trading plan with a broker to facilitate the repurchase of shares of its common stock. On December 15, 2005, the program was amended to permit the repurchase of an additional $75 million of the Company’s common stock, of which approximately $15 million was authorized to be acquired under a Rule 10b5-1 trading plan. Repurchases can 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. Subsequent to March 31, 2006, the Company authorized an additional $10 million to be acquired under the Rule 10b5-1 trading plan. The program may be discontinued at any time.

 

During the quarter ended March 31, 2006, the Company repurchased 761,500 shares of its common stock for approximately $11.4 million, at an average price of $15.01 per share. As of March 31, 2006, total shares purchased under the program amounted to 3,167,900, at an average price of $14.33 per share. As of March 31, 2006, there was approximately $4.7 million available for share repurchases under the 10b5-1 trading plan.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The Company has several stock-based employee compensation plans, which are described below. In January 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)) which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS 123) and supersedes APB 25, “Accounting for Stock Issued to Employees,” (APB 25). SFAS 123(R) eliminates the use of APB 25 and the intrinsic method of accounting, and requires all share-based payments, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company adopted SFAS 123(R) using the modified prospective method, and accordingly, prior period results have not been restated to reflect the fair value method of recognizing compensation cost relating to stock options. All new awards are subject to the provisions of SFAS 123(R). Estimated compensation expense for the unvested portion of stock option awards outstanding at the adoption date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS 123. Compensation expense related to deferred stock awards and restricted stock awards was recognized by the Company prior to the adoption of SFAS 123(R). The Company has used the “long-haul” method as described in SFAS 123(R) to determine the pool of tax benefits available on the adoption date to offset potential future shortfalls.

 

In accordance with SFAS 123(R), the Company has measured the share-based compensation cost for stock options granted during the quarter ended March 31, 2006 at the grant date, based on the estimated fair value of the award, and is recognizing the compensation expense over the award’s requisite service period. The Company has not granted stock options with market or performance conditions. The weighted-average fair value of stock options granted during the three months ended March 31, 2006 was $5.27 and was calculated using the Black-Scholes-Merton option pricing model. The following weighted-average assumptions were used to determine the fair value of the stock options granted during the three months ended March 31, 2006:

 

 

The Company used historical data to estimate the expected dividend yield and expected volatility of the Company’s stock in determining the fair value of the stock options. The risk-free interest rate is based on the U.S. treasury yield in effect at the time of grant and the expected life of the options represents the estimated length of time the options are expected to remain outstanding, which was based on the history of exercises and cancellations of past grants made by the Company. In accordance with SFAS 123(R), the Company estimated pre-vesting forfeitures of approximately 12.5% for the options granted during the three months ended March 31, 2006, which was based on the historical experience of the vesting and forfeitures of stock options granted in prior years.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company recorded compensation expense related to stock options of $281 during the quarter ended March 31, 2006, which is included in selling and administrative expenses in the Condensed Consolidated Statement of Operations. As of March 31, 2006, there was approximately $1.6 million of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 1.5 years. The following table illustrates the impact of adopting SFAS 123(R) on the Company’s income from continuing operations before income taxes, income from continuing operations, net income, earnings per share from continuing operations, and earnings per share for the three months ended March 31, 2006:

 

 

Prior to the adoption of SFAS 123(R), the Company accounted for stock options using the intrinsic method prescribed by APB 25. No stock-based employee compensation cost related to stock options was reflected in the results of operations, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on income from continuing operations, earnings per share from continuing operations, loss from discontinued operations, loss per share from discontinued operations, net income, and earnings per share for the quarter ended March 31, 2005, as if the Company had applied the fair value recognition provisions of SFAS 123(R).

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The Company did not grant any options during the three months ended March 31, 2005.

 

Stock Option Plans

 

The Company has four stock incentive plans: a 1992 Plan, a 1997 Plan, a 1999 Plan, and a 2000 Plan. All except the 2000 Plan have been approved by shareholders. The 2000 Plan did not require shareholder approval.

 

During the fourth quarter of 2004, the Company transferred 409,550 shares remaining under the 1992 Plan and 996,550 shares remaining under the 1997 Plan (that either had not previously been issued or were not subject to outstanding awards) to the 1999 Plan. As a result of these transfers, the Company’s 1992 and 1997 Stock Option Plans provided for the granting of options to purchase 1,290,450 and 732,050 shares, respectively, to officers and key employees at a price not less than the fair market value on the date each option is granted. The 1992 Plan expired December 19, 2001 except as to options then outstanding. The Company’s 1999 Incentive Compensation Plan provides for the granting of options to purchase 4,827,500 shares to officers, key employees, non-employee

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

directors, and others who provide substantial services to the Company, also at a price not less than the fair market value on the date each option is granted. Of these 4,827,500 shares reserved under the 1999 Plan, 300,000 may be issued as awards other than options and stock appreciation rights (“SARs”). The Company’s 2000 Incentive Compensation Plan provides for the granting of options to purchase 3,000,000 shares to officers, key employees, non-employee directors, and others who provide substantial services to the Company, also at a price not less than the fair market value on the date each option is granted. Of these 3,000,000 shares reserved under the 2000 Plan, 300,000 may be issued as awards other than options and SARs.

 

All plans, except the 2000 Plan, permit grants of either Incentive Stock Options or Nonqualified Options. Options become exercisable as determined at the date of grant by a committee of the Board of Directors. Options granted have a term of seven or ten years depending on the date of grant. The 1997 Plan permits the issuance of SARs, limited stock appreciation rights (“LSARs”) and awards that are valued in whole or in part on the fair value of the shares. SARs and LSARs may be paid in shares, cash or combinations thereof. The 1999 Plan allows for those awards previously mentioned under the 1997 Plan, as well as restricted stock, deferred stock, stock granted as a bonus, dividend equivalent, performance award or annual incentive award. The 2000 Plan permits the issuance of Nonqualified Options, SARs, LSARs, restricted stock, deferred stock, stock granted as a bonus, dividend equivalent, other stock-based award or performance award. The Compensation and Management Development Committee of the Board (the “Committee”) governs most of the parameters of the 1999 and 2000 Plans including grant dates, expiration dates, and other awards.

 

The Company uses treasury shares to satisfy stock option exercises from the 2000 Plan, deferred stock units, and restricted stock awards. To the extent treasury shares are not used, shares are issued from the Company’s authorized and unissued shares.

 

The following table summarizes the number of securities to be issued upon exercise of outstanding options, vesting of restricted stock and conversion of deferred stock units into shares of stock, and the number of securities remaining available for future issuance under the Company’s plans:

 

 

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The details of the stock option activity for the three months ended March 31, 2006 is as follows:

 

 

The total intrinsic value of the options exercised during the three months ended March 31, 2006 and 2005 was $1,417 and $1,635, respectively. During the three months ended March 31, 2006 and 2005, the amount of cash received from the exercise of stock options was $7,773 and $5,633, respectively with related tax benefits of $553 and $629, respectively.

 

The following table summarizes weighted-average option exercise price information:

 

 

The following table summarizes information about nonvested stock option awards as of March 31, 2006:

 

 

Deferred Stock Awards

 

In 1996, the Company initiated a program for certain key executives, and in 1997 for directors, that provided for the conversion of a portion of their cash bonuses or directors’ fees into deferred stock units. These units are convertible into the Company’s common stock on a one-for-one basis, generally at the time of retirement or earlier under certain specific circumstances, and are included as shares outstanding in computing the Company’s basic and diluted earnings per share. At March 31, 2006 and December 31, 2005, the amounts included in stockholders’ equity for these units were $6,488 and $6,932, respectively. At March 31, 2006 and December 31, 2005, there were 572,447 and 602,955 units outstanding, respectively.

 

Additionally, the Company has a Deferred Sales Compensation Plan for certain sales personnel. This plan allows a salesperson to defer payment of commissions to a future date. Participants may elect to defer commissions

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to be paid in either cash or a deferred stock equivalent (the value of which is based upon the value of the Company’s common stock), or a combination of cash or deferred stock equivalents. The amounts deferred, plus any matching contribution made by the Company, will be paid upon retirement, termination or in certain hardship situations. Amounts accrued which the employees participating in the Plan have elected to be paid in deferred stock equivalents amounted to $2,313 and $2,390 at March 31, 2006 and December 31, 2005, respectively. In January 2004, the Plan was amended to require that the amounts to be paid in deferred stock equivalents would be paid solely in the Company’s common stock. At March 31, 2006 and December 31, 2005, these amounts are a component of additional paid in capital in stockholders’ equity. In the event of a change of control or if the Company’s net worth, as defined, falls below $100 million, then the payment of certain vested employer matching amounts due under the plan may be accelerated. At March 31, 2006 and December 31, 2005, respectively, there were 180,431 and 194,654 deferred stock equivalents outstanding under this Plan. These awards are included as shares outstanding in computing the Company’s basic and diluted earnings per share.

 

As previously disclosed, the Company recognized compensation expense related to deferred stock awards prior to the adoption of SFAS 123(R). Compensation expense related to deferred stock awards amounted to $249 and $178 for the three months ended March 31, 2006 and 2005, respectively.

 

Restricted Stock Awards

 

In accordance with the 1999 Incentive Compensation Plan, the Company granted certain senior executives restricted stock awards during 2005 and 2004. There were no restricted stock awards granted during the three months ended March 31, 2006. The shares have various vesting conditions and are subject to certain terms and restrictions in accordance with the agreements. The fair value of the restricted shares was determined based on the fair value of the Company’s stock at the date of grant and is being charged to compensation expense over the respective service periods. As of March 31, 2006 unrecognized compensation expense related to these grants amounted to $1,119 which will be recognized over a weighted-average period of 1.3 years. As of March 31, 2006 there were 97,001 nonvested shares of restricted stock.

 

As previously disclosed, the Company recognized compensation expense related to restricted stock awards prior to the adoption of SFAS 123(R). Compensation expense related to restricted stock awards amounted to $230 and $95 for the three months ended March 31, 2006 and 2005, respectively.

 

 

Shares used in the calculation of basic earnings per share are based on the weighted-average number of shares outstanding, and for diluted earnings per share after adjustment for the assumed exercise of all potentially dilutive stock options. Basic and diluted loss per share is calculated by dividing the net loss by the weighted-average number of shares outstanding during each period. The weighted-average diluted shares outstanding for the three months ended March 31, 2006 and 2005 excludes the dilutive effect of approximately 758,539 and 1,112,497 stock options, respectively, since such options have an exercise price in excess of the average market value of the Company’s common stock during the respective periods. In accordance with EITF 04-08, the weighted-average diluted shares outstanding for three months ended March 31, 2006 and 2005 also excludes the effect of 4,058,445 shares that could be issued upon the conversion of the Company’s convertible subordinated debentures under certain circumstances, since the effect of EITF 04-08 are anti-dilutive to the earnings per share calculation for both periods.

 

The following table sets forth the basic and diluted average share amounts:

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Inventories of $40,160 at March 31, 2006 included raw materials of $6,691, and work-in-process of $33,469. At December 31, 2005, inventories of $25,957 included raw materials of $3,500 and work-in-process of $22,457.

 

Note 10. — Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the quarter ended March 31, 2006 is as follows:

 

 

The gross amounts and accumulated amortization of identifiable intangible assets are as follows:

 

 

The increase in customer lists as of March 31, 2006 is a result of the acquisition of MBC which was completed in January 2006.

 

 

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 and the resulting variability in transactional financial printing 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. As a result of these steps, the Company incurred restructuring charges for severance and personnel-related costs related to headcount reductions, and costs associated with closing down and consolidating facilities.

 

In the fourth quarter of 2005 the Company recorded restructuring charges of approximately $5.7 million primarily as a result of a reduction in workforce within the financial print and MBC segments and certain corporate management and administrative functions. The workforce reduction represented approximately 3% of the Company’s total workforce. In 2005, the Company also incurred restructuring and impairment charges related to revisions to estimates of costs associated with leased facilities which were exited in prior periods, impairment charges related to costs associated with the redesign of the Company’s Intranet and costs associated with internally

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

developed software, and an impairment charge of $0.9 million related to the impairment of a noncurrent, non-trade receivable related to the sale of assets in the financial print segment which occurred in a prior year. These actions resulted in restructuring, integration, and asset impairment charges totaling $10,410 for the year ended December 31, 2005.

 

During the first quarter of 2006, the Company continued to implement further cost reductions. These restructuring charges included severance and integration costs of approximately $871 related to the integration of Vestcom’s MBC division into Bowne’s MBC business and additional workforce reductions at certain financial print locations. In addition, the Company incurred an asset impairment charge of $2,300 related to the consolidation of MBC facilities which is expected to occur in the second quarter of 2006. These actions resulted in restructuring, integration and asset impairment charges totaling $4,051 for the three months ended March 31, 2006.

 

The following information summarizes the costs incurred with respect to asset impairments and restructuring activities initiated during the first quarter of 2006:

 

 

The activity pertaining to the Company’s accruals related to restructuring charges and integration costs (excluding non-cash asset impairment charges) since December 31, 2004, including additions and payments made, are summarized below.

 

 

The majority of the remaining accrued severance and personnel-related costs are expected to be paid by the end of 2006.

 

The Company also accrued $1,350 of costs associated with the acquisition of Vestcom’s MBC operations during the three months ended March 31, 2006, which were accounted for as part of the cost of the acquisition under the provisions of EITF 95-03. These costs are primarily related to estimated severance and personnel related costs associated with the termination of certain employees from the Vestcom component of the MBC business and estimated costs related to the elimination of excess facilities and the consolidation of certain existing facilities related to the Vestcom component of the MBC business. The balance remaining on this accrual at March 31, 2006 was $1,282 and is expected to be paid by 2007.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The components of debt at March 31, 2006 and December 31, 2005 are as follows:

 

 

The Company had all of the borrowings available under its $150 million five-year senior, unsecured revolving credit facility, which is more fully described in Note 12 of the Company’s annual report on Form 10-K for the year ended December 31, 2005. The terms of the revolving credit agreement provide certain limitations on additional indebtedness, liens, restricted payments, asset sales and certain other transactions. Additionally, the Company is subject to certain financial covenants based on its results of operations. The Company was in compliance with all loan covenants as of March 31, 2006, and based upon its current projections, the Company believes it will be in compliance with the quarterly loan covenants for the remainder of fiscal year 2006. The Company is not subject to any financial covenants under the convertible subordinated debentures.

 

The Company’s Canadian subsidiary has a $4.3 million Canadian dollar credit facility. There was no balance on this credit facility as of March 31, 2006 and December 31, 2005.

 

 

The Company sponsors a defined benefit pension plan which covers certain United States employees not covered by union agreements. Benefits are based upon salary and years of service. The Company’s policy is to contribute an amount necessary to meet the ERISA minimum funding requirements. This plan has been closed to new participants effective January 1, 2003. In addition, effective January 1, 2003, benefits for current participants in the plan are computed at a reduced accrual rate for credited service after January 1, 2003, except for certain employees who continue to accrue benefits under the pre-January 1, 2003 formula if they satisfy certain age and years of service requirements. The Company also has an unfunded supplemental executive retirement plan (SERP) for certain executive management employees. The defined benefit pension plan and SERP are described more fully in Note 13 to the Company’s annual report on Form 10-K for the year ending December 31, 2005. Also, certain non-union international employees are covered by other retirement plans.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The components of the net periodic benefit cost are as follows:

 

 

The company is not required to make any contribution to its pension plan in 2006.

 

 

Income tax expense for the three months ended March 31, 2006 was $2,174 on pre-tax income from continuing operations of $3,875, compared to income tax expense for the same period in 2005 of $4,749 on pre-tax income from continuing operations of $8,150. As discussed in Note 2 of the Condensed Consolidated Financial Statements, income tax expense for the three months ended March 31, 2005 has been restated.

 

 

The components of accumulated other comprehensive loss are summarized as follows:

 

 

 

The Company provides financial print and other services that help companies produce and manage their investor communications and their marketing and business communications — including, but not limited to, regulatory and compliance documents, personalized financial statements, enrollment books and sales collateral. Our services span the entire document lifecycle and involve both electronic and printed media: we help our clients compose their documents, manage the content and finalize the documents, translate the documents when necessary, prepare the documents for filing, personalize the documents, and print and distribute the documents, both through the mail and electronically. The Company also provides litigation support services to law firms and corporate law departments.

 

During the fourth quarter of 2005, the Company changed the way it reports and evaluates segment information. The Company’s operations are classified into the following reportable business segments: financial print, marketing

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and business communications, and litigation solutions. The Company had previously reported the marketing and business communications business (formerly known as Bowne Enterprise Solutions) within its financial print segment. The Company’s 2005 segment information has been reclassified to conform to the new presentation. The services of each of the Company’s segments are described further below:

 

Financial Print — transactional financial printing, compliance reporting, mutual fund printing, and commercial printing. The services of the financial print segment are marketed throughout the world.

 

Marketing & Business Communications — Bowne’s digital print and personalized communications segment provides a portfolio of services to create, manage and distribute personalized communications, including financial and healthcare statements, pre- and post-enrollment kits, marketing material, and direct mail.

 

Litigation Solutions — consulting and software solutions, including DecisionQuest^®, one of the nation’s leading trial research firms.

 

As discussed in Note 3, the Company acquired the Marketing and Business Communications division of Vestcom International, Inc., in January 2006. The domestic digital print business is a component of Bowne’s Marketing & Business Communications segment. In addition, the Vestcom Montreal business, consisting primarily of commercial print operations, has been integrated with the Canadian operations of the Financial Print segment.

 

As discussed in Note 4, the Company sold its globalization business in September 2005 and its document scanning and coding business within its litigation solutions segment in January 2006. The results from these businesses are not included in the segment results presented below. Segment information for the prior period has been reclassified to reflect this presentation.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Information regarding the operations of each business segment is set forth below. Performance is evaluated based on several factors, of which the primary financial measure is segment profit. Segment profit is defined as gross margin (revenue less cost of revenue) less selling and administrative expenses, plus the Company’s equity share of income (loss) associated with a joint venture investment in the Litigation Solutions segment. Segment performance is evaluated exclusive of interest, income taxes, depreciation, amortization, certain shared corporate expenses, restructuring, integration and asset impairment charges, gain on the sale of building, loss on extinguishment of debt, loss on sale of marketable securities, other expenses and other income. Therefore, this information is presented in order to reconcile to income from continuing operations before income taxes. The Corporate/Other category includes (i) corporate expenses for shared administrative, legal, finance and other support services which are not directly attributable to the operating segments, (ii) restructuring, integration and asset impairment charges, and (iii) other expenses and income.

 

 

 

On April 25, 2006, the Company acquired certain assets of PLUM Computer Consulting, Inc., (“PLUM”) a software development and consulting firm with a service offering for the investment management industry, for $2 million in cash, plus an additional $3 million to be paid upon the receipt of certain deliverables. The purchase price also provides for the payment of additional consideration based upon a percentage of revenue over a five-year period. PLUM has developed a content management system that provides mutual fund and investment management firms with the means to collaborate throughout the process of creating, composing and distributing critical communications such as prospectuses and shareholder reports.

 

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 of operations for the quarter ended March 31, 2006 were impacted by the acquisition of Vestcom’s Marketing and Business Communications division in January 2006. The acquisition and integration of Vestcom’s Marketing and Business Communications division with Bowne’s similar digital print business was announced in the fourth quarter of 2005, and the combined entity now operates as a separate reportable segment under the name Bowne Marketing & Business Communications. In addition, the Vestcom Montreal business, consisting primarily of commercial print operations, has been integrated with the Canadian operations of the Financial Print segment. With the acquisition, the Company has expanded its geographic coverage with a broad distributed print-on-demand network, improved its portfolio of services, and diversified into the gaming and travel and leisure markets.

 

Also impacting the results of operations for the quarter ended March 31, 2006 was an increase in revenue from transactional financial print services and the continued increase in non-transactional financial print revenue.

 

As previously discussed in Note 16 to the Condensed Consolidated Financial Statements, during the fourth quarter of 2005, the Company changed the way it reports and evaluates segment information. The Company’s operations are classified into the following reportable segments: financial print, marketing and business communications, and litigation solutions. The Company had previously reported the marketing and business communications business (formerly known as Bowne Enterprise Solutions) within its financial print segment. The Company’s results for the quarter ended March 31, 2005 have been restated to conform to this presentation.

 

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

 

 

As discussed in further detail in Note 4 to the Condensed Consolidated Financial Statements, the Company sold its globalization business in September 2005. The Company’s results of operations for the quarter ended March 31, 2005 have been reclassified to present the results of this business as a discontinued operation.

 

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 financial printing 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 during the quarters ended March 31, 2006 and 2005:

 

 

The actions taken in the quarter ended March 31, 2006 reflect (i) an asset impairment charge of $2,300 related to the consolidation of MBC facilities which is expected to occur in the second quarter of 2006, (ii) severance and integration costs of approximately $871 related to the integration of Vestcom’s MBC division into Bowne’s MBC business, and (iii)  additional workforce reductions at certain financial print locations. Further discussion of the restructuring, integration, and asset impairment activities are included in the segment information which follows, as well as in Note 11 to the Condensed Consolidated Financial Statements.

 

The Company expects to incur total restructuring and integration charges for the full-year 2006 of approximately $12 million to $16 million.

 

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. As previously mentioned, during the fourth quarter of 2005, the Company changed the way it reports and evaluates segment information. The Company’s operations are now classified into the following reportable segments: financial print, marketing & business communications, and litigation solutions. The Company had previously reported the marketing & business communications business (formerly known as Bowne Enterprise Solutions) within its financial print segment. The Company’s 2005 segment information has been restated to conform to the new presentation.

 

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, plus the Company’s equity share of income (losses) associated with a joint venture investment in the Litigation Solutions segment. Segment performance is evaluated exclusive of interest, income taxes, depreciation, amortization, certain shared corporate expenses, restructuring, integration and asset impairment charges, 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.

 

As described in Note 2 to the Condensed Consolidated Financial Statements, income tax expense for the quarter ended March 31, 2005 has been restated. The restatement had no impact on previously reported revenue, income from continuing operations before income taxes, segment results, or net cash flows.

Quarter ended March 31, 2006 compared to Quarter ended March 31, 2005

 

Financial Print

 

 

Financial Print revenue increased 13% for the quarter ended March 31, 2006 as compared to the quarter ended March 31, 2005, with the largest class of service in this segment, transactional financial printing, up 9% as compared to the quarter ended March 31, 2005. The increase in transactional print revenue is a result of the positive trends in IPO activity that began during the fourth quarter of 2005. Compliance reporting revenue increased 6% for the quarter ended March 31, 2006, as compared to the quarter ended March 31, 2005, due in part to new SEC regulations and more extensive disclosure requirements. Mutual fund services revenue increased 16%, and commercial revenue increased 52% for the quarter ended March 31, 2006 compared to the same period 2005, primarily due to the addition of several new clients and additional work from existing clients. In addition, approximately $2,161 of the increase in commercial revenue relates to the addition of the commercial business of Vestcom Montreal, which is included in the financial print segment.

 

Revenue from the international markets increased 29% to approximately $30,070 for the quarter ended March 31, 2006, as compared to $23,352 for the quarter ended March 31, 2005. This increase is primarily due to increases in transactional financial printing in Europe and Asia, and increases in commercial and mutual fund revenue in Canada, partly due to the addition of the Vestcom Montreal commercial business as discussed above. This increase is also partially due to the weakness in the U.S. dollar compared to foreign currencies. At constant exchange rates, revenue from international markets increased 26% for the quarter ended March 31, 2006 compared to 2005.

 

Gross margin of the financial print segment increased 10% over the prior period 2005, and the margin percentage decreased by approximately 1%. The increase in gross margin was due primarily to the increase in revenue, while the decrease in the margin as a percent of revenue is due to the large increases in mutual fund and commercial revenue, which have lower margins than transactional financial printing and compliance reporting. Gross margins were also negatively impacted due to competitive pricing pressure.

 

Selling and administrative expenses increased 23% for the quarter ended March 31, 2006, compared to the same period in 2005, and as a percentage of revenue, increased approximately two percentage points to 26% for the quarter ended March 31, 2006, as compared to the quarter ended March 31, 2005. The increase in these expenses is primarily due to increases in those expenses directly associated with sales, such as selling expenses (including

commissions and bonuses) and certain variable administrative expenses. Also contributing to the increase in selling and administrative costs is a $2,375 increase in bad debt expense for the three months ended March 31, 2006 as compared to the same period in 2005, due to the collection of approximately $2 million of amounts during the first quarter of 2005 that reduced bad debt expense in that period. The first quarter of 2006 did not experience similar recoveries of bad debt expense. In addition, facility costs in the New York office during the first quarter of 2006 were approximately $1.2 million higher than in the first quarter of 2005 due to higher rental costs, duplicate facility costs resulting from overlapping leases and costs associated with the move from 345 Hudson to 55 Water Street. Approximately $700 of these facility related costs are non-recurring. The Company also incurred approximately $300 of non-recurring expenses related to its acquisition of certain assets of PLUM Computer Consulting, Inc.

 

The resources that the Company commits to the transactional financial printing market are significant and management continues to balance these resources with market conditions. In 2006, the Company incurred additional restructuring charges within its financial print segment related to additional workforce reductions in certain locations. Total restructuring charges related to the financial print segment for the quarter ended March 31, 2006 were $821, compared to $720 for the quarter ended March 31, 2005.

 

As a result of the foregoing, segment profit (as defined in Note 16 to the Condensed Consolidated Financial Statements) from this segment decreased 12% for the quarter ended March 31, 2006 as compared to the same period in 2005, primarily as a result of the increase in selling and administrative expenses. Segment profit as a percentage of revenue decreased three percentage points to approximately 12% which reflects the increase in selling and administrative expenses. Refer to Note 16 of the Condensed Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit to income from continuing operations before income taxes.

 

  Marketing & Business Communications