UNITED STATES 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, 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 Registrant had 26,963,522 shares of Common Stock outstanding as of August 1, 2008.

 

 

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 OPERATIONS

 

 

See Notes to Condensed Consolidated Financial Statements.

BOWNE & CO., INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

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 June 30, 2008 and for the three and six month periods ended June 30, 2008 and 2007 has been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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, 2007. Operating results for the three and six months ended June 30, 2008 may not be indicative of the results that may be expected for the full year.

 

As discussed further in Note 14, during the first quarter of 2008, the Company changed the way it reports and evaluates segment information. The Company had previously reported two reportable segments: Financial Communications and Marketing & Business Communications. The Company now has one reportable segment, which is consistent with how the Company is structured and managed. The Company’s previous years’ segment information has been restated to conform to the current year’s presentation.

 

 

Rapid Solutions Group

 

On April 9, 2008, the Company acquired the digital print business of Rapid Solutions Group (“RSG”), a subsidiary of Janus Capital Group Inc., for $14.5 million in cash, which included working capital estimated at approximately $5.0 million. The amount of the purchased working capital is preliminary and is pending finalization. The Company estimates that the final working capital calculation could result in the payment of additional consideration up to $4.0 million. The net cash outlay for the acquisition as of June 30, 2008 was $15.0 million, which includes acquisition costs of approximately $0.5 million. Based upon preliminary estimates, approximately $8.1 million has been allocated to customer relationships and is being amortized over an average estimated useful life of 15 years, and approximately $3.9 million has been allocated to property and equipment, and is being depreciated over a weighted average estimated useful life of 4 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 EITF Issue No. 95-03, “Recognition of Liabilities in Connection with a Purchase Business Combination” (“EITF 95-03”), the Company accrued $3,250 as of the acquisition date related to integration costs associated with the acquisition of this business. These costs include estimated severance related to the elimination of redundant functions associated with RSG’s operations and costs related to the closure of the RSG facilities. This amount is included in the preliminary purchase price allocation. As of June 30, 2008, the total balance remains accrued. The balance is expected to be paid by the end of 2008.

 

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

 

GCom² Solutions, Inc.

 

On February 29, 2008, the Company acquired GCom² Solutions, Inc. (“GCom”) for $46,317 in cash, which included working capital valued at $3,817. The net cash outlay for the acquisition as of June 30, 2008 was $47,540 which includes acquisition costs of $1,223. Based upon preliminary estimates, the excess purchase price over identifiable net tangible assets of $43,295 is reflected as part of goodwill, intangible assets, and property, plant, and

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

equipment in the Condensed Consolidated Balance Sheet as of June 30, 2008. A total of $7,195 has been allocated to goodwill, $2,700 has been allocated to trade names, $25,500 has been allocated to customer relationships and is being amortized over a weighted average estimated useful life of 13 years, and $7,900 has been allocated to computer software and is being depreciated over 5 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 EITF 95-03, the Company accrued $500 related to integration costs associated with the acquisition of this business. These costs include estimated severance related to the elimination of redundant functions associated with GCom’s operations. This amount is included in the preliminary purchase price allocation. As of June 30, 2008, $378 remains accrued. The balance is expected to be paid by the end of 2008.

 

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed as of the date of acquisition. The allocation of the purchase price is subject to refinement.

 

 

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

 

Alliance Data Mail Services

 

As described in more detail in Note 2 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007, 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 $7.8 million (which reflects a final working capital adjustment of approximately $1.5 million that was received by the Company in June 2008), for total consideration of $10.8 million. The net cash outlay as of June 30, 2008 for this acquisition was $11,347, which includes acquisition costs of $529.

 

In accordance with EITF 95-03, the Company accrued $1.7 million related to integration costs associated with the acquisition of this business. These costs include estimated severance related to the elimination of redundant functions associated with the Alliance Data Mail Services operations. This amount is included in the preliminary purchase price allocation. As of June 30, 2008, $1.3 million remains accrued. The balance is expected to be paid by the end of 2008.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of acquisition. The allocation of the purchase price is subject to refinement.

 

 

The unaudited pro forma financial information related to this acquisition for the years ended December 31, 2007 and 2006 was presented in Note 2 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007.

 

 

As described in more detail in Note 3 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007, the Company determined during the fourth quarter of 2007 that the assets of its JFS Litigators’ Notebook^® (“JFS”) business no longer met the criteria of being classified as held for sale and therefore the assets and liabilities related to this business were reclassified as held and used and the results of operations for the JFS business have been reclassified and are included in the results from continuing operations. The results for the three and six months ended June 30, 2007 have been reclassified to reflect the current presentation of the JFS business.

 

The Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 include $5,262 and $5,681, respectively, related to an accrual for the present value of deferred rent for facilities formerly occupied by the Company’s discontinued businesses, as described further in Note 3 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007. As of June 30, 2008 and December 31, 2007, $1,034 and $913, respectively, are included in accrued expenses and other obligations and $4,228 and $4,768, respectively, are included in deferred rent.

 

The Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 also include $3,162 and $3,678, respectively, in accrued expenses and other obligations related primarily to estimated indemnification liabilities associated with the sale of the Company’s discontinued globalization and outsourcing businesses, which are described more fully in Note 3 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007. The total accrual related to the discontinued globalization business amounted to $2,614 and $3,130 as of June 30, 2008 and December 31, 2007, respectively, and the total accrual related to the discontinued outsourcing business amounted to $548 as of June 30, 2008 and December 31, 2007, respectively.

 

The loss from discontinued operations before income taxes for the three and six months ended June 30, 2008 was $152 and $351, respectively, which includes adjustments related to the estimated indemnification liabilities associated with the discontinued businesses and interest expense related to deferred rent associated with leased facilities formerly occupied by discontinued businesses. There was a loss from discontinued operations before

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

income taxes of $221 for the three months ended June 30, 2007 and income from discontinued operations before income taxes of $584 for the six months ended June 30, 2007.

 

 

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 as of June 30, 2008 and December 31, 2007 consist primarily of investments in auction rate securities of approximately $4.9 million and $38.7 million, respectively. These securities are municipal debt obligations issued with a variable interest rate that was reset every 7, 28, or 35 days via a Dutch auction. 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 a portion of these auction rate securities and is receiving interest at a higher rate than similar securities for which auctions have cleared.

 

During the six months ended June 30, 2008, the Company liquidated approximately $33.6 million of its auction rate securities at par and received all of its principal. The remaining investments in auction rate securities had a par value of approximately $5.1 million as of August 1, 2008, and are insured against loss of principal and interest. Due to the uncertainty in the market as to when these auction rate securities will be refinanced or the auctions will resume, the Company has classified these securities as noncurrent assets as of June 30, 2008. The Company has recorded an unrealized loss related to its auction rate securities of $324 ($199 after tax) for the six months ended June 30, 2008. In addition, during the second quarter of 2008, the Company reclassified previously recorded unrealized losses of $92 ($57 after tax) due to the liquidation of certain auction rate securities (at par) during the second quarter of 2008, resulting in a net unrealized loss on these securities of $232 ($142 after tax) as of June 30, 2008.

 

 

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, (“SFAS 157”) for financial assets and liabilities effective January 1, 2008. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, however, it applies to all other accounting pronouncements that require or permit fair value measurements. This standard does not apply to measurements related to share-based payments, nor does it apply to measurements related to inventory. The Company elected not to adopt the provisions of SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities,” for its financial instruments that are not required to be measured at fair value.

 

The Company defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The fair value estimates presented in the table below are based on information available to the Company as of June 30, 2008 and December 31, 2007.

 

SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The standard utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

The carrying value and fair value of the Company’s significant financial assets and liabilities and the necessary disclosures for the periods are presented as follows:

 

 

 

 

The following assumptions were used by the Company in order to measure the estimated fair value of its financial assets and liabilities as of June 30, 2008: (i) the carrying value of cash and cash equivalents approximates fair value because of the short term maturity of those instruments; (ii) the Company’s marketable securities are carried at estimated fair value as described further in Note 4 to the Condensed Consolidated Financial Statements; (iii) the carrying value of the liability under the revolving credit agreement, which is described in more detail in Note 11 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007, approximates fair value since this facility has a variable interest rate similar to those that are currently available to the Company and is reflective of current market conditions; and (iv) the carrying value of the Company’s convertible debentures are carried at historical cost, the fair value disclosed is based on publicly listed dealer prices.

 

Due to current market conditions related to auction rate securities, the Company has reclassified its auction rate securities held as of June 30, 2008 to a Level 2 fair value measurement classification from a Level 1 classification as of December 31, 2007.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

In accordance with SFAS No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123(R)”), the Company has measured the share-based compensation expense for stock options granted during the six months ended June 30, 2008 and 2007 based upon the estimated fair value of the award on the date of grant and recognizes the compensation expense over the award’s requisite service period. The Company has not granted stock options with market or performance conditions. The Company did not grant any options during the three and six months ended June 30, 2008, respectively. The weighted-average fair value of stock options granted during the three and six months ended June 30, 2007 was $5.30 and $5.01, respectively. The weighted-average fair values were calculated using the Black-Scholes-Merton option pricing model. The following assumptions were used to determine the weighted-average fair value of the stock options granted in 2007:

 

 

The Company uses 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 is based on the history of exercises and cancellations of past grants made by the Company. In accordance with SFAS 123(R), the Company recorded compensation expense for the three and six months ended June 30, 2007, net of pre-vesting forfeitures for the options granted, which was based on the historical experience of the vesting and forfeitures of stock options granted in prior years.

 

The Company recorded compensation expense related to stock options of $188 and $400 for the three and six months ended June 30, 2008, respectively, and $303 and $605 for the three and six months ended June 30, 2007, respectively, which is included in selling and administrative expenses in the Condensed Consolidated Statement of Operations. As of June 30, 2008, there was approximately $721 of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 1.2 years.

 

Stock Option Plans

 

The Company has the following stock incentive plans: a 1997 Plan, a 1999 Plan (which was amended in May 2006) and a 2000 Plan, which are described more fully in Note 17 of the Notes to Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007. All of the plans except the 2000 Plan have been approved by shareholders. The 2000 Plan did not require shareholder approval. 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.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The details of the stock option activity for the six months ended June 30, 2008 is as follows:

 

 

The total intrinsic value of the options exercised during the three and six months ended June 30, 2008 was $212 and $215, respectively, and $3,883 and $3,984 for the three and six months ended June 30, 2007, respectively. The amount of cash received from the exercise of stock options was $732 and $10,780 for the six months ended June 30, 2008 and 2007, respectively. The tax benefit recognized related to compensation expense for stock options amounted to $19 and $42 for the three and six months ended June 30, 2008, respectively, and $20 and $39 for the three and six months ended June 30, 2007, respectively. The actual tax benefits realized from stock option exercises were $72 and $73 for the three and six months ended June 30, 2008, respectively, and $1,495 and $1,530 for the three and six months ended June 30, 2007, respectively. The excess tax benefits related to stock option exercises resulted in cash flows from financing activities of $11 and $621 for the six months ended June 30, 2008 and 2007, respectively.

 

The following table summarizes weighted-average option exercise price information as of June 30, 2008:

 

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes information about nonvested stock option awards as of June 30, 2008:

 

 

Total compensation expense recognized for stock options that vested during the three and six months ended June 30, 2008 amounted to $21 and $41, respectively. Total compensation expense recognized for stock options that vested during the three and six months ended June 30, 2007 amounted to $11 and $19.

 

Deferred Stock Awards

 

The Company maintains a program for certain key executives and directors that provides 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. As of June 30, 2008 and December 31, 2007, the amounts included in stockholders’ equity for these units were $5,502 and $5,199, respectively. As of June 30, 2008 and December 31, 2007, there were 499,025 and 471,340 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 to be paid in either cash, 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 $2,251 and $2,221 as of June 30, 2008 and December 31, 2007, 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. As of June 30, 2008 and December 31, 2007, 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. As of June 30, 2008 and December 31, 2007, there were 182,639 and 179,862, respectively, 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.

 

Compensation expense related to deferred stock awards amounted to $292 and $587 for the three and six months ended June 30, 2008, respectively and $279 and $538 for the three and six months ended June 30, 2007, respectively.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Restricted Stock and Restricted Stock Units (excluding awards under the 2008 Equity Incentive Plan)

 

In accordance with the 1999 Incentive Compensation Plan, the Company has granted certain senior executives restricted stock awards. 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 is determined based on the fair value of the Company’s stock at the date of grant and is charged to compensation expense over the requisite service periods.

 

A summary of the restricted stock activity as of June 30, 2008 is as follows:

 

 

Compensation expense related to restricted stock awards amounted to $246 and $369 for the three and six months ended June 30, 2008, respectively, and $108 and $217 for the three and six months ended June 30, 2007, respectively. As of June 30, 2008 unrecognized compensation expense related to restricted stock grants amounted to $1,471, which will be recognized over a weighted-average period of 1.7 years.

 

Long-Term Equity Incentive Plan

 

The Company’s Board of Directors approved a Long-Term Equity Incentive Plan (“LTEIP”) which became effective retroactive to January 1, 2006 upon the approval of the 1999 Amended Incentive Compensation Plan on May 25, 2006. In accordance with the 1999 Amended Incentive Plan, certain officers and key employees were granted restricted stock units (“RSUs”) at a target level based on certain criteria. The actual amount of RSUs earned was based on the level of performance achieved relative to established goals for the three-year performance cycle beginning January 1, 2006 through December 31, 2008 and ranged from 0% to 200% of the target RSUs granted. The performance goal was based on the average return on invested capital (“ROIC”) for the three-year performance cycle. The LTEIP provided for accelerated payout if the maximum average ROIC performance target was attained within the initial two-years of the three-year performance cycle. The awards were subject to certain terms and restrictions in accordance with the agreements. The fair value of the RSUs granted was determined based on the fair value of the Company’s stock at the date of grant and was charged to compensation expense for most employees based on the date of grant through the payment date.

 

As discussed in further detail in Note 17 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007, the maximum average ROIC performance target was attained in 2007, and as such, the Company recognized compensation expense reflecting the accelerated payout at 200%. The Company recorded compensation expense related to the LTEIP of $0 and $1,044 for the three months ended June 30, 2008 and 2007, respectively, and $1,122 and $2,306 for the six months ended June 30, 2008 and 2007, respectively. The compensation expense recognized under the LTEIP for the six months ended June 30, 2008,

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

represents the remaining compensation through the payment date of the awards, which occurred in March 2008. The total amount of shares awarded in March 2008 related to the settlement of the LTEIP was approximately 938,000.

 

2008 Equity Incentive Plan

 

In April 2008, the Company’s Compensation and Management Development Committee of the Board of Directors approved the 2008 Equity Incentive Plan (“EIP”). In accordance with the EIP, certain officers and key employees were granted RSUs at a target level during the second quarter of 2008. The actual amount of RSUs earned will be based on the level of performance achieved relative to established goals for the one-year performance period beginning January 1, 2008 through December 31, 2008 and range from 0% to 200% of the target RSUs granted. The performance goal is based on the Company’s ROIC for the one-year performance period. The Company granted 205,000 RSUs in accordance with the EIP during the second quarter of 2008. The awards are subject to certain terms and restrictions in accordance with the agreements. The fair value of the RSUs granted is determined based on the fair value of the Company’s stock at the date of grant and is being charged to compensation expense for most employees based on the date of grant through the expected payment date. The compensation expense related to RSUs amounted to $363 for the three and six months ended June 30, 2008, respectively, based on an estimated performance level through the end of the performance cycle. The unrecognized compensation expense based on the current expected performance level for these grants amounted to $1,296, which will be recognized through March 2009. The total number of unvested RSUs as of June 30, 2008 was 205,000 at target, with a weighted-average grant date fair value of $16.18.

 

 

Shares used in the calculation of basic earnings per share are based on the weighted-average number of shares outstanding. Shares used in the calculation of diluted earnings per share are based on the weighted-average number of shares outstanding adjusted for the assumed exercise of all potentially dilutive stock options and other stock-based awards. Basic and diluted earnings per share are calculated by dividing the net income by the weighted-average number of shares outstanding during each period. The weighted-average diluted shares outstanding for the three months ended June 30, 2008 and 2007 excludes the dilutive effect of 367,391 and 365,284 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. The weighted-average diluted shares outstanding for the six months ended June 30, 2008 and 2007 excludes the dilutive effect of 731,159 and 395,336 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 Issue No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share” the weighted-average diluted shares outstanding for the three and six months ended June 30, 2007 includes the effect of 4,058,445 shares that could be issued upon the conversion of the Company’s convertible subordinated debentures under certain circumstances, and the numerator used in the calculation of diluted earnings per share was increased by an amount equal to the interest cost, net of tax, on the convertible subordinate debentures of $577 and $1,154 for the three and six months ended June 30, 2007, respectively, since the effects are dilutive to the earnings per share calculation for these periods. The weighted average diluted earnings per share for the three and six months ended June 30, 2008 excludes the effect of the 4,058,445 shares that could be issued upon the conversion of the Company’s convertible subordinated debentures under certain circumstances, since the effects are anti-dilutive to the earnings per share calculation for these periods.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

 

 

 

 

Inventories of $27,197 as of June 30, 2008 included raw materials of $9,871 and work-in-process and finished goods of $17,326. As of December 31, 2007, inventories of $28,789 included raw materials of $11,641 and work-in-process and finished goods of $17,148.

 

 

The changes in the carrying amount of goodwill as of June 30, 2008 are as follows:

 

 

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

 

 

The increase in customer relationships and trade names as of June 30, 2008 is primarily attributable to the preliminary allocation of the purchase price related to the acquisitions of GCom and RSG as described in more detail in Note 2.

 

 

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 capital markets services revenue. As a result, the Company took several steps over the past several years to reduce fixed costs, eliminate

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 accordance with the Company’s reorganization plan that was announced in May 2008, during the second quarter of 2008 the Company reduced its headcount by approximately 270 positions, excluding the impact of headcount reductions associated with recent acquisitions. The reduction in workforce included a broad range of functions and was enterprise-wide. The Company also closed its digital print facilities in Wilmington, MA and Sacramento, CA and its manufacturing and composition operations in Atlanta, GA. Work that was produced in these facilities has been transferred to the Company’s other facilities or moved to outsourcing providers. The related restructuring charges resulting from these actions resulted in a second quarter pre-tax charge of approximately $13.7 million. The other significant charges incurred during the first half of 2008 primarily represent integration costs of approximately $4.9 million related to the acquisitions of Alliance Data Mail Services, GCom and RSG which were acquired in November 2007, February 2008 and April 2008, respectively, and costs associated with the consolidation of the Company’s digital print facility in Milwaukee, WI with its existing facility in South Bend, IN. Total restructuring, integration, and asset impairment charges amounted to $17,479 for the three months ended June 30, 2008 and $20,034 for the six months ended June 30, 2008.

 

The following information summarizes the costs incurred with respect to restructuring, integration and asset impairment charges during the three and six months ended June 30, 2008:

 

 

The activity pertaining to the Company’s accruals related to restructuring and integration charges (excluding non-cash asset impairment charges) since December 31, 2006, 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 June 2009.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The components of debt at June 30, 2008 and December 31, 2007 are as follows:

 

 

As of June 30, 2008, the Company had $48.0 million of borrowings outstanding under its $150 million five-year senior, unsecured revolving credit facility. During the six months ended June 30, 2008, the weighted-average interest rate on this line of credit approximated 3.87%. There were no borrowings outstanding as of December 31, 2007. 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 financial loan covenants as of June 30, 2008 and based upon its current projections, the Company believes it will be in compliance with the quarterly financial loan covenants for the remainder of fiscal year 2008. Amounts outstanding under this facility are classified as long-term debt since the facility expires in May 2010.

 

The Company’s $75.0 million Convertible Subordinated Debentures (the “Notes”) are classified as current debt as of June 30, 2008 and December 31, 2007, as a result of the redemption/repurchase feature in October 2008, which is described in more detail below and in Note 11 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007. The Company is not subject to any financial covenants under the Notes.

 

October 1, 2008 marks the five year anniversary of the Notes that were put in place on October 1, 2003. This is also the first day on which the “put” and “call” option is exercisable.

 

On October 1, 2008 the holders of the Notes have the right to put the Notes to Bowne which would require the Company to redeem the Notes (at par) for a $75.0 million cash payment, plus accrued interest, if any. Likewise, on October 1, 2008 Bowne has the right to call the Notes which would enable Bowne to redeem the Notes (at par) for a $75.0 million cash payment, plus accrued interest, if any.

 

Based upon the current convertible bond market conditions the Company believes it is highly probable that the holders of the Notes will exercise their “put” rights on October 1, 2008 and require that Bowne redeem the Notes for cash. Bowne is currently evaluating its options to address this situation including the possibility of an offer to amend the existing Indenture to encourage Note holders not to exercise their put option on October 1, 2008, of which the exact nature and terms of the amendment are still under consideration. The Company can also use the revolving credit facility that is in place to fund the redemption of the Notes. This is a permitted use of the revolver facility and will allow the Company to fund the redemption of the entire $75.0 million or the portion thereof related to the exercise of the put option on the part of the existing Note holders.

 

The Company also has various capital lease obligations which are included in long-term debt.

 

 

The Company sponsors a defined benefit pension plan (the “Plan”) which covers certain United States employees not covered by union agreements. In September 2007, the Company amended its Plan, which is described in more detail in Note 12 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007. The Plan was amended to change the plan to a cash balance plan (the “Amended Plan”) effective January 1, 2008. The Plan benefits were frozen effective December 31, 2007 and no

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

further benefits are currently accrued under the pre-existing benefit calculation. The provisions of the Amended Plan allow for all eligible employees that were previously not able to participate in the Plan to participate in the Amended Plan after the completion of one year of eligible service. Under the Amended Plan, the participants will accrue monthly benefits equal to 3% of their eligible compensation, as defined by the Amended Plan. In addition, each participant account will be credited interest at the 10-year Treasury Rate. The participants’ accrued benefits will vest over three years of credited service. The Company will continue to contribute an amount necessary to meet the ERISA minimum funding requirements.

 

The Company also has an unfunded supplemental executive retirement plan (“SERP”) for certain executive management employees. The SERP is described more fully in Note 12 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007. Also, certain non-union international employees are covered by other retirement plans.

 

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

 

 

 

The amortization of the transition (asset)/liability, prior service (credit)/cost and actuarial loss for the three and six months ended June 30, 2008, included in the above tables, have been recognized in the net periodic benefit cost and included in other comprehensive income, net of tax.

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company will remeasure and record the plans’ funded status as of December 31, 2008, the measurement date, and will adjust the balance in accumulated comprehensive income during the fourth quarter of 2008.

 

 

Income tax expense for the three months ended June 30, 2008 was $1,692 on pre-tax income from continuing operations of $3,735 compared to $7,267 on pre-tax income from continuing operations of $23,100 for the same period in 2007. The effective tax rates for the three months ended June 30, 2008 and 2007 were 45.3% and 31.5%, respectively. The higher effective tax rate for the three months ended June 30, 2008 as compared to the same period in 2007 is primarily due to the favorable impact in 2007 resulting from tax benefits of $2,734 related to the completion of an Internal Revenue Services (“IRS”) audit of our 2002 through 2004 federal income tax returns, and the related recognition of previously unrecognized tax benefits.

 

Income tax expense for the six months ended June 30, 2008 was $2,005 on pre-tax income from continuing operations of $5,861 compared to $8,520 on pre-tax income from continuing operations of $34,537 for the same period in 2007. The effective tax rates for the six months ended June 30, 2008 and 2007 were 34.2% and 24.7%, respectively. The higher effective tax rate for the six months ended June 30, 2008 as compared to the same period in 2007 is primarily due to the favorable impact in 2007 resulting from tax benefits of $6,681 related to the completion of the aforementioned IRS audits of our 2002 through 2004 federal income tax returns, settlement of the audit of the 2001 federal income tax return and the related recognition of previously unrecognized tax benefits.

 

The total gross amount of unrecognized tax benefits included in the Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 is $9,195 and $9,283, respectively, which includes estimated interest and penalties of $1,652 and $1,550, respectively. There were no significant changes to the Company’s unrecognized tax benefits during the three and six months ended June 30, 2008.

 

Audits of the Company’s U.S. federal income tax returns for 2001 through 2004 were completed in 2007, and are described in more detail in Note 10 to the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007. The Company’s 2005 and 2006 U.S. federal income tax returns are in the process of being audited by the IRS. The Company’s income tax returns filed in state and local and foreign jurisdictions have been audited at various times.

 

 

As discussed in further detail in the Company’s annual report on Form 10-K for the year ended December 31, 2007, during 2007 the Company announced several significant changes to its organizational structure to support the consolidation of its divisions into a unified model that supports Bowne’s full range of service offerings, from services related to capital markets and compliance reporting to investment management solutions and personalized, digital marketing and business communications. 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 a result of these changes, we evaluated the impact on segment reporting and made certain changes to our segment reporting in the first quarter of 2008. As such, the Company now has one reportable segment, which is consistent with how the Company is structured and managed. The Company had previously reported two reportable segments: Financial Communications and Marketing & Business Communications. The condensed consolidated financial statements for the three and six months ended June 30, 2008 and 2007 have been presented to reflect one reportable segment in accordance with SFAS No. 131.

 

The Company’s 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. Segment performance is evaluated exclusive of interest, income taxes, depreciation, amortization, 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 Company’s results relative to other entities that operate within our industry. Segment profit is also used as the primary financial measure for

 

BOWNE & CO., INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

purposes of evaluating financial performance under the Company’s annual incentive plan. The information presented below reconciles segment profit to income from continuing operations before income taxes.

 

 

 

 

On June 26, 2008, the Company entered into a definitive agreement to acquire the US-based assets and operating business of Capital Systems, Inc. (“Capital”), a leading provider of financial communications based in midtown New York City. Capital’s former office in midtown New York City complements the Company’s existing facility in the downtown New York City financial district. Capital enables Bowne to further extend its reach into key existing verticals: investment management, compliance reporting and capital markets services. Capital provides mutual fund quarterly and annual reporting and disclosure documents, such as SEC filings, including proxy statements and 10-Ks, as well as capital markets services for equity offerings, debt deals, securitizations, and mergers and acquisitions. The Company completed the acquisition on July 1, 2008 for approximately $13.0 million.

 

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 Securities and Exchange Commission (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 for the three and six months ended June 30, 2008 reflect a significant decline in capital markets activity as compared to the same periods in 2007. Total revenue declined approximately $25.2 million, or 10%, and $28.5 million, or 6%, respectively, as compared to the same periods in 2007. Capital markets services revenue, which historically has been the Company’s most profitable service offering, decreased $16.1 million, or 20%, and $28.1 million, or 19%, for the three and six months ended June 30, 2008, respectively, as compared to the same periods in 2007. Shareholder reporting services revenue, which includes revenue from compliance reporting, investment management services and translation services decreased $15.9 million, or 12%, and $11.9 million, or 5%, for the three and six months ended June 30, 2008, respectively, as compared to the same periods in 2007. These decreases were partially offset by increases in marketing and business communications services revenue for the three and six months ended June 30, 2008 as compared to the same periods in 2007, primarily a result of the addition of revenue associated with the Company’s recent acquisitions. Diluted earnings per share from continuing operations was $0.07 for the three months ended June 30, 2008 as compared to $0.49 for the same period in 2007 and $0.14 for the six months ended June 30, 2008 as compared to $0.82 for the same period in 2007.

 

During the first half of 2008, the Company acquired the following businesses:

 

In February 2008, the Company acquired GCom² Solutions, Inc. (“GCom”) for $46.3 million in cash. The acquisition included working capital valued at approximately $3.8 million. The integration of GCom was substantially completed during the second quarter of 2008. This acquisition expands the Company’s shareholder reporting services offerings in the United States, the United Kingdom, Ireland and Luxembourg.

 

In April 2008, the Company acquired the digital print business of Rapid Solutions Group (“RSG”), a subsidiary of Janus Capital Group Inc., for $14.5 million in cash. The acquisition included working capital valued at approximately $5.0 million. The amount of the purchased working capital is preliminary and is pending finalization. The Company estimates that the final working capital calculation could result in the payment of additional consideration up to $4.0 million. RSG is a provider of end-to-end solutions for marketing and business communications clients in the financial services and healthcare industries, which will enable the Company to further expand its presence in those markets. The RSG business was substantially integrated into the Company’s existing distributive print network during the second quarter of 2008.

 

In June 2008, the Company entered into a definitive agreement to acquire the US-based assets and operating business of Capital Systems, Inc. (“Capital”), a leading provider of financial communications based in midtown New York City. Capital’s former office in midtown New York City complements the Company’s existing facility in the downtown New York City financial district. Capital enables Bowne to further extend its reach into key existing verticals: investment management, compliance reporting and capital markets services. Capital provides mutual fund quarterly and annual reporting and disclosure documents, such as SEC filings, including proxy statements and 10-Ks, as well as capital markets services for equity offerings, debt deals, securitizations, and mergers and acquisitions. The Company completed the acquisition on July 1, 2008 for approximately $13.0 million. The Company expects Capital to contribute approximately $15.0 million in revenue during the second half of 2008. The integration of this business was substantially completed during July 2008.

 

The annualized revenue from the three completed acquisitions discussed above and the acquisition of Alliance Data Mail Services, which was acquired in November 2007, is expected to approximate $110.0 million to $120.0 million. These acquisitions support the Company’s strategy to diversify its revenue stream and reduce its dependency on the capital markets and also expands the Company’s presence in the New York City market. The Company also believes that these acquisitions provide it with the ability to realize significant operating efficiencies and cost synergies by integrating these businesses into Bowne’s existing operations. It is estimated that these acquisitions will generate incremental annualized segment profit of approximately $25.0 million to $30.0 million. These acquisitions are discussed in more detail in Note 2 to the Condensed Consolidated Financial Statements.

During the second quarter of 2008, the Company implemented initiatives to achieve approximately $55.0 million in annualized cost reductions. These initiatives were part of the Company’s continued focus on improving its cost structure and realizing operating efficiencies, and in response to the recent downturn in capital markets activity. The cost reductions included the elimination of a total of approximately 670 positions, or approximately 16% of the Company’s total headcount. These incremental cost reductions were substantially completed in the second quarter and consist of the following:

 

 

These three initiatives are further detailed below:

 

The Company reduced its headcount by approximately 270 positions, excluding the impact of headcount reductions associated with recent acquisitions. The reduction in workforce included a broad range of functions and was enterprise-wide. The Company also has closed its digital print facilities in Wilmington, MA and Sacramento, CA and its manufacturing and composition operations in Atlanta, GA. Work that was produced in these facilities has been transferred to the Company’s other facilities or moved to outsourcing providers. The Company expects that these actions will result in annualized savings of approximately $23.0 million, including approximately $11.0 million to $13.0 million in 2008. The related restructuring charges resulting from these actions resulted in a second quarter pre-tax charge of approximately $13.7 million.

 

The cost savings measures implemented in 2006 and 2007 were designed to eliminate $35.0 million in costs over a three-year period. In the first two years of the three-year program, a total of $28.0 million in annual cost reductions was achieved. In 2008, Bowne expects to eliminate an additional $9.0 million in costs, which are estimated to result in annual savings of $37.0 million over the three-year period, exceeding the original target. These actions are a continuation of initiatives put into place in 2007, including the full year benefit of the conversion to a cash balance pension plan, the reduction in our annual lease cost at our corporate headquarters related to the downsizing of space occupied, and the integration of certain manufacturing facilities completed in the second half of 2007.

 

The Company also announced the following actions related to the integration of recently announced acquisitions:

 

 

The closure of these facilities has reduced the Company’s headcount by approximately 400 positions and has been substantially completed by July 2008. The Company believes that these actions will result in combined annualized cost savings of approximately $23.0 million, including approximately $12.0 million in the remainder of 2008. These shut downs are expected to result in estimated costs of approximately $13.5 million to $14.5 million, of which approximately $5.5 million has been accrued as part of the cost of these acquisitions and approximately

$8.0 million to $9.0 million will be included in integration expense (approximately $4.7 million has been recorded as integration expense for these acquisitions through June 30, 2008) or capitalized as a component of the Company’s property, plant and equipment.

 

In addition, the Company also expects to incur costs of approximately $2.0 million to $2.5 million related to the integration of Capital, of which a portion will be accrued as part of the acquisition and a portion will be included in integration expense. The Company expects to realize annualized cost savings of approximately $5.0 million to $6.0 million related to this integration.

 

Items Affecting Comparability

 

The Company continually reviews its business, manages its 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 capital markets services revenue. 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. In addition, the Company has incurred expenses related to the transition and integration of its recent acquisitions.

 

The following table summarizes the expenses incurred for restructuring, integration and asset impairment charges during the three and six months ended June 30, 2008 and 2007:

 

 

The charges taken during the three and six months ended June 30, 2008 primarily represent the following: (i) costs related to the Company’s headcount reductions, as previously discussed (ii) integration costs of approximately $3.8 million and $4.9 million, respectively, related to the Company’s recent acquisitions, (iii) costs related to the closure of the Company’s digital print facilities in Wilmington, MA and Sacramento, CA and its manufacturing and composition operations in Atlanta, GA and (iv) costs associated with the consolidation of the Company’s digital print facility in Milwaukee, WI with its existing facility in South Bend, IN. Further discussion of the restructuring, integration and asset impairment activities is included in the results of operations, which follows, as well as in Note 10 to the Condensed Consolidated Financial Statements.

 

Results of Operations

 

As discussed in more detail in Note 14 to the Condensed Consolidated Financial Statements, the Company has been realigned to operate as a unified company in 2008, and no longer operates itself as two separate business units. As such, the Company now has one reportable segment, which is consistent with how the Company is structured and managed. The results of operations for the three and six months ended June 30, 2008 and 2007 reflect this current presentation.

 

Management uses segment profit to evaluate Company performance. 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, 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 Company’s results relative to other entities that operate within our industry. Segment profit is also used as the primary financial measure for purposes of evaluating financial performance under the Company’s annual incentive plan.

Three Months ended June 30, 2008 compared to Three Months ended June 30, 2007