UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission File No. 1-5842

 

Bowne & Co., Inc.

(Exact name of Registrant as specified in its charter)

 

 

(212) 924-5500

(Registrant’s telephone number, including area code)

 

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

 

 

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

None

(Title of class)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  Yes o     No þ

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 aggregate market value of the Common Stock issued and outstanding and held by non-affiliates of the registrant as of March 31, 2006, based upon the closing price for the Common Stock on the New York Stock Exchange on June 30, 2005, was $440,384,462. For purposes of the foregoing calculation, the registrant’s 401(K) Savings Plan and its Global Employees Stock Purchase Plan are deemed to be affiliates of the registrant.

 

The registrant had 31,735,306 shares of Common Stock outstanding as of March 31, 2006.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

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

 

 

 

TABLE OF CONTENTS

 

 

Bowne & Co., Inc. (Bowne and its subsidiaries are hereinafter collectively referred to as “Bowne”, the “Company”, “We” or “Our” unless otherwise noted), established in 1775, is the world’s largest financial printer and a global leader in providing 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 and marketing collateral. Our services span the entire document lifecycle and involve both electronic and printed media: we help our clients typeset 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 a comprehensive suite of litigation support services for 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 now classified into the following reportable business 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 previous years’ segment information has been restated to conform to the new presentation. The services of each of the Company’s segments are described further below:

 

Financial Print — Bowne Financial Print offers a comprehensive array of services to create, manage, translate and distribute transactional and compliance-related documents. Bowne provides these services to its clients in connection with capital market and corporate transactions, such as equity and debt issuances and mergers and acquisitions, which the Company calls “transactional financial printing”. Bowne also provides these services to public corporations in connection with their compliance obligations to produce and deliver periodic and other reports under applicable laws and regulations, which the Company calls “compliance reporting.” Bowne provides services to mutual fund clients in connection with their compliance obligations, as well as services in connection with general commercial and other printing needs.

 

Overall, the financial print segment generated revenue of approximately $625.1 million in 2005 and $598.8 million in 2004, representing approximately 90% and 89% of total Company revenue, respectively. The largest class of service in this segment, transactional financial printing, accounted for approximately $250 million, or 36%, of total 2005 Company revenue. The Company’s financial print segment generated segment profit of approximately $78.8 million and $80.5 million in 2005 and 2004, respectively. The Company’s segment profit is measured as gross margin (revenue less cost of revenue) less selling and administrative expenses.

 

Marketing and Business Communications (“MBC”) — 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, enrollment kits and sales and marketing collateral. Bowne provides these services primarily to the financial services, commercial banking, healthcare, insurance, gaming, and travel and leisure industries to support their document-based, variable communications processes. In January 2006, the Company completed the acquisition of the Marketing and Business Communications division of Vestcom International, Inc. That division is a leading provider of marketing and business communications services, including data mining, print-on-demand, web-to-print, and specialized marketing services to the financial services, commercial banking, healthcare, insurance, gaming, and travel and leisure industries. The division will be integrated with Bowne’s similar digital print and personalized communications business, and the combined entity will operate as a separate reportable segment under the name Bowne Marketing and Business Communications. Bowne’s operations in this segment generated revenue of approximately $41.8 million in 2005, and $38.7 million in 2004, representing approximately 6% of Bowne’s total revenue for both 2005 and 2004. The Bowne operations in this segment experienced segment losses of approximately $7.9 million in 2005, and $11.4 million in 2004. These results do not include the results of the Marketing and Business Communications division of Vestcom International, Inc. Pro forma 2005 segment revenue including the acquisition would have been approximately $120 million.

Litigation Solutions — This segment consists of DecisionQuest^® and JFS Litigator’s Notebook^®, providing consulting and software solutions. The Litigation Solutions segment generated revenue of approximately $27.2 million in 2005 and $33.9 million in 2004, representing approximately 4% and 5% of total Company revenue, respectively. The segment generated a segment profit of approximately $3.3 million in 2005 and $4.9 million in 2004. The DecisionQuest Discovery Services component of this business was sold in January 2006.

 

On September 1, 2005, the Company completed the sale of its globalization business, Bowne Global Solutions (“BGS”) to Lionbridge Technologies, Inc., (“Lionbridge”). The globalization business and the DecisionQuest Discovery Services business are reflected as discontinued operations in the accompanying consolidated financial statements. All prior period information has been reclassified to reflect this presentation.

 

Further information regarding segment revenue, operating results, identifiable assets and capital spending attributable to the Company’s operations for the calendar years 2005, 2004 and 2003, as well as a reconciliation of segment profit to pre-tax income (loss) from continuing operations, are shown in Note 19 of the Notes to the Consolidated Financial Statements.

 

Industry Overview

 

Through Bowne’s business units, the Company competes in a number of related industries, namely financial printing, marketing and business communications, and litigation support services.

 

The printing industry is highly fragmented, with hundreds of independent printers that provide a full range of traditional printing services. However, specific to transactional and compliance reporting, there are three primary companies, including Bowne, and regional financial printers that participate in a material way. Transactional financial printing volume tends to be cyclical with the capital markets for new debt and equity issuances and public mergers and acquisitions activity. Compliance reporting volume is less sensitive to market changes and represents a recurring periodic activity, with seasonality linked to significant filing deadlines imposed by law on public reporting companies and mutual funds. Volume is also impacted by changing regulatory and corporate disclosure requirements.

 

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

 

The litigation support services industry has numerous competitors in the United States that compete for clients among law firms and medium-sized to large corporations with significant litigation support services needs. Bowne is currently a leader in providing litigation support services to the legal industry. The services generally fall into the following categories:

 

 

The Company

 

Financial Print

 

The Company’s transactional financial printing includes registration statements, prospectuses, bankruptcy solicitation materials, special proxy statements, offering circulars, tender offer materials and other documents related to corporate financings, acquisitions and mergers. The Company’s compliance reporting includes annual and interim reports, regular proxy materials and other periodic reports that public companies are required to file with the SEC or other regulatory bodies around the world. Bowne Financial Print is also a leading filing agent for EDGAR, the SEC’s electronic filing system. The Company provides both full-service and self-service filing, the latter through Internet-based filing products: BowneFile16^®, 8-K Express^tm, and 6-K Express^tm. Mutual fund printing includes regulatory and shareholder communications such as annual or interim reports, prospectuses, information statements and marketing-related documents. Bowne Financial Print also provides some commercial printing, which consists of annual reports, sales and marketing literature, point of purchase materials, research reports, newsletters and other custom-printed matter. The Company also provides language translation services in connection with its financial print operations. Over the past few years, Bowne has expanded its financial print capabilities within all phases of the document life-cycle, including electronic receipt and dissemination of client documents, composition, content management, conversion, translation, assembly, packaging, output, delivery, and archiving. The Company also offers a hosted on-line data room capability, a secure and convenient means for clients to permit due diligence of documents in connection with transactions.

 

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

 

Historically, transactional financial printing has been the largest contributor to the Company’s total revenue. However, this line of business is cyclical with the financial markets and experienced a marked downturn from 2001 through 2005. In response, the Company reduced fixed costs and increased the flexibility of its financial print segment to respond to market fluctuations. The Company has reorganized its regional operations and closed or consolidated eleven of its U.S. offices and facilities. While the Company maintains its own printing capabilities, Bowne also outsources some printing needs to independent printers, especially during times of peak demand. This outsourcing allow the Company to preserve flexibility while reducing its staffing, maintenance and operating expense of underutilized facilities, and is in line with industry practice. In addition, since November 2000, Bowne has significantly reduced its financial print workforce. The Company also has arrangements with companies in India to perform some of its composition processing and related functions. Importantly, in preceding years the Company invested significantly in new technologies that it now leverages to perform the same volume of high-quality service for its clients despite the reductions in its workforce. This has allowed the Company to permanently reduce its fixed and direct labor costs. As a result of the flexibility Bowne has achieved in the last few years, the Company expects that its cost savings will be long term and that it will not need to replace most personnel or otherwise incur such costs as the business expands.

 

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

 

 

 

Marketing and Business Communication

 

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

 

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

 

 

MBC services help clients create, manage and distribute important information, such as statements, enrollment kits, sales kits and marketing collateral. With the ability to provide personalized communications, rather than the conventionally printed generic information, clients are able to achieve higher returns on their marketing dollars and reduce waste. Because of the extensive integration of systems between MBC and its clients, these services tend to involve longer-term relationships. The primary clients for these services include mutual funds, stock brokerage firms, defined contribution providers, investment banks, insurance companies, commercial banks, healthcare providers, and educational services. The acquisition of Vestcom’s Marketing and Business Communications division expands Bowne’s portfolio of services to include data mining and content management, and allows the Company to expand in their current market segments, and to diversify into new industries such as gaming and travel and leisure.

 

Litigation Solutions

 

The Company’s litigation solution business consists of DecisionQuest and JFS Litigator’s Notebook^® (“JFS”). DecisionQuest is a strategic communications firm which provides trial consulting and jury research, strategic communications, courtroom graphics and presentation technologies, litigation support and case evaluation software, and custom case strategy Web sites. DecisionQuest also owns a 50% interest in CaseSoft, Ltd., which develops software tools used primarily by litigators, litigation paralegals, and investigators. JFS provides custom

database management and litigation software application support and training which helps litigation teams work with evidence retrieved from the underlying documents and transcript databases.

 

The Company’s litigation solutions leverage technology and litigation services expertise to add structure and support to our clients’ litigation process, allowing them to better focus on winning cases instead of managing support services. Our litigation solutions provide legal professionals with a single, expert resource to assist them throughout the entire litigation process — from pre-case strategy development to post-trial support.

 

Other Information

 

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

 

 

We have facilities to serve customers throughout the United States, Canada, Europe, Central America, South America and Asia.

 

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

 

The Company maintains conference rooms and telecommunications capabilities at all of its financial print offices for use by clients while transactions are in progress. On-site conveniences are also provided to clients, which promote speed and ease of editorial changes and otherwise facilitate the completion of our clients’ documents. In addition, the Company uses an extensive electronic communications network, which facilitates data handling and makes collaboration practicable among clients at different sites.

 

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

 

Competition

 

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

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

 

In commercial printing, the Company competes with general commercial printers, which are far more numerous than those in the financial printing market.

 

The marketing and business communications unit faces diverse competition from a variety of companies including other printers, transfer agents, banks, internet systems integration consultants direct marketing agencies, software providers and other consultants.

 

Competition in the litigation solutions industry comes primarily from two national competitors and from regional/local competitors as well. The Company believes it is currently a leader in providing trial consulting services to the legal industry.

 

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

 

The Company’s transactional financial printing service is affected by conditions in the world’s capital markets. Revenue and net income depend upon the volume of public financings, particularly equity offerings, as well as merger and acquisitions activity. Activity in the capital markets is influenced by corporate funding needs, stock market fluctuations, prevailing interest rates, and general economic and political conditions.

 

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

 

Revenue from the MBC segment is somewhat cyclical based upon capital market activity, and to a lesser extent, trends in the healthcare and travel and leisure industries. The revenue from the insurance industry is seasonal since most of this business occurs during the first quarter of the year.

 

Research and Development

 

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

 

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

 

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

 

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

 

Bowne invests in the latest technologies and equipment to constantly improve services and remain on the leading edge. With a technology team comprised of over 300 members (in solutions management, application

development and technology operations departments), Bowne is constantly engaged in numerous and valuable systems enhancements.

 

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

 

The Company strives to ensure the confidentiality, integrity and availability of our clients’ data. We developed a secure mechanism that, through software logic, secure gateways, and firewalls provides a system that is secure and reliable with full disaster-recovery capability for our clients.

 

Bowne has been recognized for its technological innovation:

 

 

Patents and Other Rights

 

The Company has no significant patents, licenses, franchises, concessions or similar rights other than certain trademarks. Except for a proprietary computer composition and telecommunication system, the Company does not have significant specialized machinery, facilities or contracts which are unavailable to other firms providing the same or similar services to customers. The Company and its affiliates utilize many trademarks and service marks worldwide, most of which are registered or pending registration. The most significant of these is the trademark and trade name Bowne^®. The Company also uses the following service marks: ExpressStart^sm and QuickPath^sm, and trademarks: BowneFax^tm, BowneFile16^®, BowneLink^®, CaseMap^®, Dealroom Express^tm, DecisionQuest^®, 8-K Express^tm, 6-K Express^tm, FundSmith^®, Litigation Lifecycle^®, JFS Litigator’s Notebook^®, RapidView^tm, SecuritiesConnect^®, TimeMap^tm, and XMark^tm.

 

Sales and Marketing

 

The Company employs approximately 250 sales and marketing personnel. In addition to soliciting business from existing and prospective customers by building relationships and delivering customized solutions, the sales personnel act as a liaison between the customer and the Company’s customer service operations. They also provide advice and assistance to customers. The Company periodically advertises in trade publications and other media, and conducts sales promotions by mail, by presentations at seminars and trade shows and by direct delivery of marketing collateral material to customers.

 

Customers and Backlog of Orders

 

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

 

During the fiscal year ended December 31, 2005, no customer accounted for 10% or more of the Company’s sales. The Company has no backlog, within the common meaning of that term, which is normal throughout the service offerings in which the Company is focused. However, within its financial print segment, the Company maintains a backlog of customers preparing for financial offerings. This backlog is greatly affected by capital market activity.

Employees

 

At December 31, 2005, the Company had approximately 3,100 full-time employees. Relations with the Company’s employees are considered to be good. Approximately two percent of the Company’s employees are members of various unions. The Company provides pension, 401(k), profit-sharing, certain insurance and other benefits to most non-union employees.

 

Suppliers

 

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

 

International Sales

 

The Company conducts operations in Canada, Europe, Central America, South America and Asia. In addition, the Company has affiliations with firms providing similar services abroad. Revenues derived from foreign countries other than Canada were approximately 9% of the Company’s total revenues in 2005, 8% in 2004 and 6% in 2003. During 2005, 2004 and 2003, revenues derived from foreign countries other than Canada totaled $60 million, $57 million and $36 million, respectively, which were all generated from the financial print segment. Canadian revenues were approximately 10%, 8% and 7% of the Company’s total sales in 2005, 2004 and 2003, respectively. During 2005, 2004, and 2003, revenues derived from Canada totaled $68 million, $55 million, and $42 million, respectively.

 

Our strategy to increase revenue through enhancement and streamlining our operations and acquiring businesses that complement our existing businesses may not be successful, which could adversely affect results and may negatively affect earnings.

 

36% of our revenue is derived from transactional financial printing services, which are dependent upon the transactional capital markets. We are pursuing strategies designed to improve our transactional financial print product and service offerings, streamline our operations and reduce our costs and grow our non-transactional businesses, including compliance reporting, mutual fund reporting and our digital and personalization business. At the same time we are pursuing a strategy of acquisitions of complementary products and service offerings. We also believe that pursing complementary acquisition opportunities will lead to more stable and diverse recurring revenue. This strategy has many risks, including the following:

 

 

If we are unsuccessful in continuing to enhance our products and services and acquire products and services, we will continue to be subject to the sometimes volatile swings in the capital markets that directly impact the demand for transactional financial printing services. Furthermore, if we are unable to provide value-added services in areas of document management other than traditional composition and printing, our results may be adversely affected if an increasing number of clients handle this process in-house, to the extent that new technologies allow

this process to be conducted internally. We believe that if we are not successful in achieving our strategic objectives within transactional financial printing, growth of our other businesses and acquiring complementary product and service offerings, we may experience decreases in profitability and volume. If this decline in profitability were to continue, without offsetting increases in revenues from other products and services, our business and results of operations would be materially and adversely affected.

 

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

 

We anticipate that our financial print business segment will continue to contribute a material amount to our operating results. The financial print business contributed 90% and 89% of total revenue during 2005 and 2004, respectively. The market for these services depends in part on the demand for printed financial documents, which is driven largely by capital markets activity and the requirements of the SEC and other regulatory bodies. Any rulemaking substantially affecting the content of documents to be filed and the method of their delivery could have an adverse effect on our business. In addition, evolving market practices in light of regulatory developments, such as postings of documents on Internet web pages and electronic delivery of offering documents, may adversely affect the demand for printed financial documents and reports.

 

Recent regulatory developments in the United States and abroad have sought to change the method of dissemination of financial documents to investors and shareholders through electronic delivery rather than through delivery of paper documents. On December 1, 2005, the SEC adopted “access equals delivery” rules which eliminate the requirement to deliver a printed final prospectus, unless requested by the investor. The SEC has also recently proposed rules for the dissemination of proxy materials to shareholders electronically. Regulatory developments which decrease the delivery of printed transactional or compliance documents could harm our business and adversely affect our operating results.

 

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

 

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

 

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

 

Competition in our businesses is intense. The speed and accuracy with which we can meet client needs, the price of our services and the quality of our products and supporting services are factors in this competition. In financial print, we compete directly with a number of other financial printers having similar degrees of specialization. Some of those financial printers are subsidiaries or divisions of companies having greater financial resources than those of the Company.

 

Our digital printing unit faces diverse competition from a variety of industries including, other printers, transfer agents, banks, Internet systems integration consultants, direct marketing agencies, software providers and other consultants. In commercial printing, we compete with general commercial printers, which are far more numerous than those in the financial printing market.

 

These competitive pressures could reduce our revenue and earnings.

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

 

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

 

We have made significant investments in developing our capabilities and in the purchase of the marketing and business communications division of Vestcom, which was completed in January 2006.

 

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

 

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

 

As part of our business strategy, we have and may continue to acquire other businesses that complement our core capabilities. Our acquisition in January 2006 of the marketing and business communications division of Vestcom and its integration with our existing print on demand and personalization business to form Bowne Marketing and Business Communications (MBC) is reflective of that strategy. The benefits of an acquisition may often take considerable time to develop and may not be realized. Acquisitions involve a number of risks, including:

 

 

The acquisition of the business and marketing communications division of Vestcom will require substantial integration and management efforts. As a result of the aforementioned and other risks, we may not realize anticipated benefits from this or other acquisitions, which could adversely affect our business.

 

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

 

We derive approximately 19% of our revenues from various foreign sources, and a significant part of our current operations are outside of the United States. We conduct operations in Canada, Europe, Central America, South America and Asia. In addition, we have affiliations with certain firms providing similar services abroad. As a result, our business is subject to political and economic instability and currency fluctuations in various countries.

The maintenance of our international operations and entry into additional international markets require significant management attention and financial resources. In addition, there are many barriers to competing successfully in the international arena, including:

 

 

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

 

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

 

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

 

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

 

Our ability to grow and our future success will depend to a significant extent on the continued contributions of our senior management. In addition, many of our individual technical and sales personnel have extensive experience in our business operations and/or have valuable client relationships and would be difficult to replace. Their departure from the company, if unexpected and unplanned for, could cause a disruption to our business. Our future success also depends in large part on our ability to identify, attract and retain other highly qualified managerial, technical, sales and marketing and customer service personnel. Competition for these individuals is intense, especially in the markets in which we operate. We may not succeed in identifying, attracting and retaining these personnel. Further, competitors and other entities have in the past recruited and may in the future attempt to recruit our employees, particularly our sales personnel. The loss of the services of our key personnel, the inability to identify, attract and retain qualified personnel in the future or delays in hiring qualified personnel, particularly

technical and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as the timely introduction of new technology-based products and services, which could harm our business, financial condition and operating results.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

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

 

Information regarding the material facilities of the Company, as of December 31, 2005, seven of which were leased and seven of which were owned, is set forth below.

 

 

All of the properties described above are well maintained, in good condition and suitable for all presently anticipated requirements of the Company. The majority of the Company’s equipment is owned outright. In January 2006, the Company completed the relocation of its New York City offices from 345 Hudson Street to 55 Water Street and in February 2006, the Company entered into a 15-year lease agreement for approximately 16,500 square feet of office space at 1 London Wall, London, England. The Company will be relocating its customer service center and offices currently located at 60 Queen Victoria Street, London, England during the first half of 2006. Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information regarding property and equipment leases.

 

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

 

No matters were submitted to a vote of stockholders during the fourth quarter of fiscal year 2005.

 

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

 

 

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

 

Share Prices

 

The Company’s common stock is traded on the New York Stock Exchange under the symbol “BNE.” The following are the high and low share prices as reported by the New York Stock Exchange, and dividends paid per share for calendar 2005 and 2004 by year and quarters.

 

 

The closing price of the Company’s common stock on March 31, 2006 was $16.67 per share, and the number of holders of record on that date was approximately 1,011.

 

Stock Repurchase

 

During the fourth quarter of 2004, the Company’s Board of Directors authorized, and the Company entered into, an Overnight Share Repurchase program with Bank of America and repurchased 2,530,000 shares of the Company’s common stock for approximately $40.2 million. The program was completed on May 24, 2005, at which time the Company received a price adjustment of approximately $2.1 million in the form of 166,161 additional shares. The price adjustment represents the difference between the original share purchase price of $15.75 and the average volume-weighted adjusted share price of $15.00 for the actual purchases made, plus interest. In accordance with this program the Company effected the purchase of 2,696,161 shares of common stock at an average price of $14.85 per share.

 

During the fourth quarter of 2004, the Company’s Board of Directors also authorized an ongoing stock repurchase program to repurchase up to $35 million of the Company’s common stock. On July 29, 2005, the Company entered into a 10b5-1 trading plan with a broker to facilitate the purchases of shares of common stock under this program. On December 15, 2005, the program was revised to permit the repurchase of an additional $75 million in shares of the Company’s common stock from time to time in both privately negotiated and open market transactions during a period of up to two years, subject to management’s evaluation of market conditions, terms of private transactions, applicable legal requirements and other factors. Approximately $15 million of the additional $75 million authorized for the repurchase program is expected to be acquired under a Rule 10b5-1 trading plan. The program may be discontinued at any time. As of December 31, 2005 the Company repurchased approximately 2.4 million shares of its common stock under this plan for approximately $34.0 million (an average price of $14.12 per share) and through March 31, 2006 the Company has repurchased an additional 0.8 million shares of its common stock under this plan for approximately $11.4 million bringing the average price to $14.33 per share.

 

Five Year Financial Summary

 

 

 

The financial information for the years prior to fiscal 2005 has been restated to reflect corrections of errors in current and deferred income tax liabilities for these periods, as more fully described in Note 2 to the Consolidated Financial Statements. The restatement had no impact on previously reported revenue, income from continuing operations before income taxes, segment results and net cash flows.

 

In January 2006, the Company sold its document scanning and coding business, the results of this business are reflected as a discontinued operation and all prior year amounts have been reclassified to reflect this presentation.

 

In September 2005, the Company sold its globalization business, Bowne Global Solutions (BGS) to Lionbridge. The results of this business are reflected as a discontinued operation and all prior year amounts have been reclassified to reflect this presentation.

 

The Company sold its document outsourcing business to Williams Lea in November of 2004. The results from this business are also reported as a discontinued operation and all prior years amounts have been reclassified to reflect this presentation. Refer to Note 3 of the Notes to the Consolidated Financial Statements for additional information regarding the sale of the Company’s globalization and document outsourcing business. Also refer to Items Affecting Comparability in Management’s Discussion and Analysis of Financial Condition and Results of Operations for other items affecting the comparability of the financial information presented above.

 

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 for the year ended December 31, 2005 were impacted by a decrease in revenue from transactional financial print services and an increase in non-transactional revenue compared to the year ended December 31, 2004. The decline in revenue from transactional financial printing was consistent with the overall decline in capital market activity as measured by the number of SEC filings in 2005 as compared to 2004. While overall transactional revenue decreased compared to the prior year, transactional revenue for the second half of 2005 exceeded transactional revenue for the second half of 2004 by $3,350, or 2.5%, as capital market activity increased during the last half of 2005. Transactional revenue for the second half of 2005 was also higher than transactional revenue for the first half of 2005 by $23,416, or 20.7%.

The Company continued to execute on its strategy of focusing on its core financial print and digital print businesses, strengthening its balance sheet, and returning value to its shareholders. On September 1, 2005, the Company sold its globalization business, Bowne Global Solutions (BGS) to Lionbridge Technologies, Inc. (Lionbridge) for total consideration of $193,262, consisting of $130 million in cash and 9.4 million shares of Lionbridge common stock valued at $63,262 on the date of closing. The Company recognized a net gain on the sale of BGS of approximately $671 during 2005. Included in the gain was the recognition of the cumulative foreign currency translation amount related to BGS of approximately $22,617 which was previously included in accumulated other comprehensive income. During the fourth quarter of 2005, the Company sold the 9.4 million shares of Lionbridge common stock for net proceeds of $55.4 million and recognized a loss on the sale of approximately $7.9 million. The globalization business is reflected as a discontinued operation in the accompanying consolidated financial statements, while the loss on the sale of the Lionbridge common stock is reflected in continuing operations. All prior period results have been reclassified to reflect this presentation.

 

With the proceeds from the sale of BGS in September 2005, and the sale of Bowne Business Solutions in November 2004, the Company repurchased 5.1 million shares for a total of $74.2 million, including 2.4 million shares in 2005 for $34.0 million. On December 15, 2005, the Company’s Board of Directors revised the stock repurchase program to permit the repurchase of an additional $75 million in shares of the Company’s common stock from time to time during a period of up to two years.

 

The Company also restructured its organization during the year to better align its operations with the needs of its business and allow local teams to meet clients’ needs more quickly and efficiently. During the fourth quarter of 2005, the Company implemented a plan to achieve $10 million in annualized cost savings, primarily as a result of a reduction in workforce. The Company incurred restructuring expenses of approximately $4.7 million in the fourth quarter associated with these actions.

 

In January 2006, the Company brought scale to its digital print and personalization business through the acquisition of Vestcom International, Inc.’s Marketing and Business Communications division for $30 million, which is a leading provider of direct marketing and business communications services, including data mining, print-on-demand, web-to-print, and specialized marketing services primarily to the financial services, commercial banking, healthcare insurance, gaming, and travel and leisure industries. Vestcom’s Marketing and Business Communications division will be integrated with Bowne’s similar digital print business, and the combined entity will operate as a separate reportable segment under the name Bowne Marketing and Business Communications (“MBC”). MBC is an important component of the Company’s strategy. The digital print-on-demand business is complementary to the financial print business and is the fastest growing segment of the printing industry. 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 gaming and travel and leisure markets.

 

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 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 previous years’ segment information has been restated to conform to the new presentation. The results of the Company’s three reporting segments are discussed below:

 

 

 

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 three years to reduce fixed costs, eliminate redundancies, and better position the Company to respond to market pressures or unfavorable economic conditions.

 

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

 

 

The actions taken in the year ended December 31, 2005 reflect (i) a reduction in workforce that was implemented in the fourth quarter of 2005, which included the reduction of headcount within the financial print and MBC segments and certain corporate management and administrative functions, (ii) revisions to estimates of costs associated with leased facilities which were exited in prior periods, (iii) the impairment of costs associated with the redesign of the Company’s Intranet and costs associated with internally developed software, and (iv) 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 in a prior period. Further discussion of the restructuring, integration, and asset impairment activities are included in the segment information which follows, as well as in Note 10 to the Consolidated Financial Statements.

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

 

In the fourth quarter of 2005, the Company sold the 9.4 million shares of Lionbridge common stock that were included in the consideration received from the sale of BGS, recognizing a loss on the sale of approximately $5.0 million after tax, or $0.15 per share.

 

In the third quarter of 2005, the Company sold its globalization business to Lionbridge for approximately $193 million, recognizing a gain on the sale of approximately $.7 million after tax, or $0.02 per share. The results of this business have been reflected as a discontinued operation in the consolidated financial statements for all periods presented.

 

In the fourth quarter of 2004, the Company sold its document outsourcing business to Williams Lea for $180 million, recognizing a gain of approximately $32.1 million after tax, or $0.89 per share. The results of this business have been reflected as a discontinued operation in the consolidated financial statements for all periods presented.

 

In the fourth quarter of 2004, the Company prepaid its private placement senior notes, incurring a loss of $5.6 million after tax, or $0.16 per share, primarily related to the make-whole payment.

 

During 2004, the Company incurred legal and settlement expenses related to the discontinued document outsourcing business of $0.6 million after taxes, or $0.02 per share.

 

In May 2004, the Company sold its financial print facility in Dominguez Hills, California for net proceeds of $6.7 million, recognizing a gain on the sale of $0.5 million after tax, or $0.02 per share, during the quarter ended June 30, 2004. The Company moved to a new leased facility in Southern California in September 2004.

 

In the third quarter of 2003, the Company recognized a gain on the disposition of long-term investments of $0.4 million after tax, or $0.01 per share.

 

In the third quarter of 2003, the Company incurred expenses of $0.5 million after tax, or $0.01 per share, related to the prepayment and amendment of the Company’s Revolving Credit Facility and certain private placement notes.

 

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 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 previous years’ 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 Consolidated Financial Statements, income tax expense for the years ended December 31, 2004 and 2003 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.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

 

Financial Print

 

 

Financial print revenue increased 4% for the year ended December 31, 2005, with the largest class of service in this segment, transactional financial printing, down 8% as compared to the year ended December 31, 2004. This decline in revenue from transactional financial printing is consistent with the overall decline in capital market activity as measured by the number of SEC filings, which also declined year over year. Offsetting the decrease in transactional financial printing revenue was the increase in revenue generated from non-transactional printing services, including mutual fund and compliance reporting revenue. Compliance reporting revenue increased 12% for the year ended December 31, 2005, as compared to the year ended December 31, 2004, due in part to the new SEC regulations and more extensive disclosure requirements. Mutual fund services revenue increased 18%, and commercial revenue increased 14% for the year ended December 31, 2005 compared to the same period 2004, primarily due to the addition of several new clients and additional work from existing clients.

 

Revenue from the international markets increased 13% to approximately $127,603 for the year ended December 31, 2005, as compared to $112,429 for the year ended December 31, 2004. This increase is primarily due to increases in transactional financial printing and compliance reporting revenue from Europe, Canada, and Asia. 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 10% for the year ended December 31, 2005 compared to 2004.

 

Gross margin of the financial print segment decreased slightly and the margin percentage decreased by approximately 2%. The decreased activity in transactional financial printing negatively impacts gross margins since, historically, transactional financial printing is our most profitable class of service. The growth in non-transactional work also impacts gross margin percentage since this work is not as profitable as transactional work. Gross margins were also negatively impacted due to competitive pricing pressure.

 

Selling and administrative expenses remained relatively constant from 2004 to 2005 and as a percentage of revenue decreased approximately one percentage point to 25% for the year ended December 31, 2005, as compared to the year ended December 31, 2004. This decrease is primarily due to lower incentive compensation, professional fees, and bad debt expense, due to the collection of approximately $2.0 million of amounts which had previously

been written off to bad debt expense. Also contributing to the decrease in selling and administrative costs are lower selling costs associated with the lower margin mutual fund and compliance reporting revenue, compared to the higher margin transactional financial printing revenue.

 

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 2005, the Company incurred additional restructuring charges within its financial print segment related to the reduction in workforce announced in the fourth quarter of 2005, the reduction of certain administrative positions which will not be replaced, and revisions to estimates of costs associated with leased facilities which were exited in prior periods, including costs related to the relocation of the London financial print facility. In addition, the Company incurred a $0.9 million impairment charge related to a noncurrent, non-trade receivable related to the sale of assets in a prior period. Total restructuring and asset impairment charges related to the financial print segment for the year ended December 31, 2005 were $6,114, compared to $3,028 for the year ended December 31, 2004.

 

In May 2004, the Company sold its financial print facility in Dominguez Hills, California for net proceeds of $6,731, recognizing a gain on the sale of $896 during the year ended December 31, 2004. The Company relocated to a new leased facility in Southern California in September 2004.

 

As a result of the foregoing, segment profit (as defined in Note 19 to the Consolidated Financial Statements) from this segment decreased 2% for 2005 as compared to 2004, primarily as a result of the decrease in revenue from transactional print services. Segment profit as a percentage of revenue decreased one percentage point to approximately 13% which reflects the decrease in higher margin transactional print revenue. Refer to Note 19 of the Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes.

 

Marketing and Business Communications

 

 

Revenue increased 8% for the year ended December 31, 2005 as compared to 2004 primarily related to increases in personalization and fulfillment revenue as a result of several new clients, an increase in revenue from existing clients and the continued growth of this segment of the printing industry. Gross margin increased slightly, while the gross margin percentage remained constant at approximately 4% for the year ended December 31, 2005 as compared to 2004, due to the increase in revenue in 2005 as compared to 2004.

 

Selling and administrative expenses decreased 26% for the year ended December 31, 2005 as compared to 2004, and as a percentage of revenue decreased eleven percentage points. The reduction in selling and administrative expenses is primarily related to the favorable impact of a reduction in the administrative cost base and changes in the sales commission plan for this segment.

 

Restructuring charges related to this segment amounted to $415 and $2,771 for the years ended December 31, 2005 and 2004, respectively. The costs incurred in 2005 were primarily related to the Company-wide reduction in workforce that was implemented during the fourth quarter of 2005. The restructuring and integration charges that

were incurred in 2004 were primary related to costs associated with the consolidation of the Company’s fulfillment operations with its digital print facility, which began in 2003.

 

As a result of the foregoing, segment loss (as defined in Note 19 to the Consolidated Financial Statements) for this segment improved 31% for the year ended December 31, 2005 as compared to 2004. Segment loss as a percentage of revenue improved eleven percentage points to 19% for the year ended December 31, 2005. Refer to Note 19 of the Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes.

 

Litigation Solutions

 

 

Revenue decreased 20% and gross margin decreased 41% for the year ended December 31, 2005 compared to 2004. The gross margin percentage decreased seven percentage points to approximately 22% for the year ended December 31, 2005 as compared to 2004. The decline in revenue and gross margin is due to a decrease in higher margin transactional consulting services revenue in 2005, partially offset by an increase in graphics services revenue. In addition, two large consulting projects completed in June and November of 2004 were not replaced in 2005. Gross margin was negatively impacted in 2005 as a result of the decrease in transactional consulting revenue and the absence of large projects similar to the jobs completed in 2004.

 

Selling and administrative expenses decreased 36% for the year ended December 31, 2005 compared to 2004, while decreasing four percentage points as a percentage of revenue. The reduction in selling and administrative expenses is primarily due to lower headcount, as well as a reduction in rent expense and discretionary spending. Also contributing to the decrease in 2005, as compared to 2004 was a decrease in marketing expenses at DecisionQuest due to expenses incurred in 2004 related to the launch of a new marketing and promotional campaign. The decrease in selling and administrative expenses is also generally related to reductions in those expenses directly associated with sales, such as selling expenses (including commissions and bonuses), and certain variable administrative expenses.

 

Other income increased 37%, primarily related to the increase in income from the Company’s equity share of income associated with the CaseSoft joint venture investment for the year ended December 31, 2005 as compared to the year ended December 31, 2004.

 

During the second half of 2005, the Company recognized a goodwill impairment charge of $2.2 million related to its document scanning and coding business. As described in Note 3 to the Consolidated Financial Statements, this business was sold in January 2006 and the impairment charge is included in the results from discontinued operations for 2005.

 

As a result of the foregoing, segment profit (as defined in Note 19 to the Consolidated Financial Statements) for this segment decreased $1,590, or 33%, for the year ended December 31, 2005, compared to the year ended December 31, 2004. Segment profit as a percentage of revenue decreased two percentage points to 12% for the year

ended December 31, 2005. Refer to Note 19 of the Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes.

 

Summary

 

Overall revenue increased $22,789, or 3%, to $694,140 for 2005. The increase is largely attributed to the increase in financial printing, specifically non-transactional financial printing, which includes mutual fund and compliance reporting revenue. Offsetting the increase in non-transactional financial print revenue was a decrease in transactional financial print revenue due to slow capital market activity in 2005 and decreases in revenue from the litigation solutions segment in 2005 as compared to 2004. There was a $5,268, or 2% decrease in gross margin, and the gross margin percentage decreased approximately 2% which is primarily due to the decrease in higher margin transactional print revenue in 2005.

 

Selling and administrative expenses on a company-wide basis decreased by approximately $8,113, or 4%, to $190,629. This decrease is primarily due to lower incentive compensation, consulting fees, and bad debt expense, due to the collection of approximately $2.0 million of amounts that had previously been written off to bad debt expense. Also contributing to the decrease in selling and administrative costs are lower selling costs associated with the lower margin mutual fund and compliance reporting revenue, compared to the higher transactional financial printing revenue. The decrease in selling and administrative expenses is also due to lower labor costs, rent expense, marketing and discretionary costs in the litigations solutions business, and the Company’s continual effort to manage expenses. Shared corporate expenses were approximately $19.2 million in 2005 as compared to approximately $22.1 million in 2004, a decrease of approximately $2.9 million, primarily due to lower incentive compensation and decreases in professional fees and consulting fees associated with the Company’s compliance with Section 404 of the Sarbanes-Oxley Act. These fees were higher in 2004 since that was the initial year of compliance. As a percentage of revenue, overall selling and administrative expenses decreased three percentage points to 27% in 2005.

 

Depreciation expense remained constant in 2005 as compared to 2004.

 

There were approximately $10,410 in restructuring, integration, and asset impairment charges during 2005, as compared to $8,132 in 2004, as discussed in Note 10 to the Consolidated Financial Statements.

 

Interest expense decreased $5,276, or 51%, primarily the result of the Company’s early retirement of its senior notes in December 2004, as described in Note 12 in the Consolidated Financial Statements. Interest expense related to those notes was approximately $4.7 million for the year ended December 31, 2004. Also contributing to the decrease in interest expense was a decrease in the amortization of deferred financing costs in 2005 as compared to 2004, also related to the early retirement of the Company’s senior notes, and less borrowings on the revolving credit facility in 2005 as compared to 2004.

 

Loss on sale of marketable securities resulted from the sale of the 9.4 million shares of Lionbridge common stock that were included in the consideration received from the sale of BGS as discussed in Note 6 to the Consolidated Financial Statements.

 

Loss on extinguishment of debt in 2004 resulted from the early retirement of the Company’s senior notes in December 2004. The loss represents the make-whole payment required in accordance with the debt agreement and the write-off of approximately $272 of deferred costs that were previously being amortized over the life of the senior notes, as discussed in Note 12 to the Consolidated Financial Statements.

 

The gain on the sale of building of $896 for 2004 relates to the sale of the Company’s printing facility in California as discussed in Note 9 to the Consolidated Financial Statements.

 

Other income was $2,839 for the year ended December 31, 2005 as compared to $860 for the year ended December 31, 2004. Other income increased primarily as a result of an increase in interest income resulting from the increase in cash and cash equivalents and investments in marketable securities in 2005 as compared to 2004.

 

Income tax expense for 2005 was $5,292 on pre-tax income from continuing operations of $6,066 compared to a tax expense in 2004 of $1,052 on pre-tax loss from continuing operations of $1,310. The size of the non-deductible

expenses, primarily meals and entertainment, are relatively unchanged from year to year, and the rate applied to U.S. taxable income was approximately 39% for both years.

 

Loss from discontinued operations was $1,378 in 2005 as compared to income of $29,586 in 2004. The 2005 results from discontinued operations include a net gain on the sale of the globalization business of $671 that occurred in September 2005, the results of the discontinued globalization segment until the date of sale, and the results of the document scanning and coding business which was sold in January 2006. The results from discontinued operations for 2004 include the results of the discontinued globalization and document outsourcing businesses, the net gain on the sale of the document outsourcing businesses to Williams Lea in November 2004, and the results of the discontinued document scanning and coding business.

 

As a result of the foregoing, net loss for 2005 was $604 as compared to net income of $27,224 for 2004.

 

Domestic Versus International Results of Operations

 

The Company has operations in the United States, Canada, Europe, Central America, South America and Asia. The Company’s international operations are all in its financial print segment. Domestic (U.S.) and international components of income (loss) from continuing operations before income taxes for 2005 and 2004 are as follows:

 

 

Income from continuing operations before taxes improved in 2005 as compared to 2004. International pre-tax income from continuing operations improved significantly in 2005 as compared to 2004 primarily due to increases in transactional financial printing and compliance reporting revenue from Europe, Canada, and Asia. The international results for 2004 included approximately $1.1 million of restructuring charges, which were primarily related to headcount reductions at the financial print facilities in Paris and Toronto. The international results for 2005 include approximately $3.8 million of restructuring charges which are related to the relocation of the London financial print facility, headcount reductions in London and Toronto and an asset impairment charge of $0.9 million related to the impairment of a noncurrent, non-trade receivable. The improvement in domestic pre-tax income from continuing operations was primarily due to the increase in non-transactional financial printing revenue and was partially offset by a decrease in transactional financial printing revenue within the financial print segment in 2005 as compared to 2004. The domestic results for 2005 included approximately $6.6 million in restructuring charges, integration charges and asset impairment charges related to (i) the impairment of costs associated with the redesign of the Company’s Intranet, (ii) the impairment of internally developed software, and (iii) a reduction in workforce in the financial print segment and certain corporate management and administrative functions that will not be replaced. Also included in the domestic results for 2005 was the loss of approximately $7.9 million related to the sale of the 9.4 million shares of Lionbridge common stock which occurred in the fourth quarter of 2005. The domestic results for 2004 included approximately $7.0 million in restructuring charges, integration charges and asset impairment charges primarily related to the consolidation of certain administrative functions, the relocation of its Southern California financial print facility, and the consolidation of the Company’s fulfillment operations with its digital print facility. The 2004 domestic results also include approximately $8.8 million related to the loss on extinguishment of debt as a result of the early retirement of the Company’s senior notes in December 2004.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

 

Financial Print

 

 

Financial print revenue increased 8% for the year ended December 31, 2004 compared to the year ended December 31, 2003, with the largest class of service in this segment, transactional financial printing, up 11% in 2004. There was increased transactional activity in the first half of 2004 over the same period in 2003. This was partially offset by lower activity in the second half of 2004 compared to that of 2003. Revenue from the international market increased 44% to approximately $112,429 for the year ended December 31, 2004, as compared to $78,016 for the year ended December 31, 2003. This increase was primarily due to increased transactional market activity in all international markets, as well as increases in mutual fund and commercial revenue during 2004 as compared to 2003. Some of the increase in revenue was also attributable to the weakness in the U.S. dollar compared to foreign currencies. At constant exchange rates, revenue from international markets increased 35% for the year ended December 31, 2004 compared to 2003. The increase in the international markets was driven primarily by higher revenue in Asia, which rebounded from the impact of the SARS outbreak and its effect on the Asian capital markets in 2003. In addition, the Company provided services on three large projects in Asia in the fourth quarter which accounted for approximately 11% of the total revenue from international markets for the year.

 

Compliance reporting revenue increased 4% for the year ended December 31, 2004 as compared to 2003. Improvement in compliance reporting revenue was linked to the new SEC regulations and the extensive disclosure requirements under which the Company’s clients are required to comply.

 

Mutual fund services revenue increased 3% for the year ended December 31, 2004, despite tightened spending by certain mutual fund clients and the loss of some clients due to pressure from competitive pricing. The increase was due to the addition of several new clients and additional work from existing clients.

 

Gross margin of the financial print segment increased by 6%, and the margin percentage remained constant at approximately 40%. The increased activity in transactional financial printing positively impacts gross margins since, historically, transactional financial printing is our most profitable class of service. Gross margins were negatively impacted due to the competitive pricing pressure in the IPO market along with higher employee compensation and benefit costs.

Selling and administrative expenses increased 8%. This increase is primarily the result of expenses that were directly associated with sales, such as selling expenses (including commissions and bonuses) and certain variable administrative expenses, along with higher employee benefit costs. As a percent of revenue, selling and administrative expenses remained constant at approximately 26% for the year ended December 31, 2004 compared to 2003.

 

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 2004, the Company initiated cost reductions aimed at increasing operational efficiencies, including the consolidation of certain administrative functions, and the relocation of its Southern California financial print facility. Total restructuring and asset impairment charges related to the financial print segment for the year ended December 31, 2004 were $3,028 compared to $14,471 for the year ended December 31, 2003.

 

In May 2004, the Company sold its financial print facility in Dominguez Hills, California for net proceeds of $6,731, recognizing a gain on the sale of $896 during the year ended December 31, 2004. The Company relocated to a new leased facility in Southern California in September 2004.

 

As a result of the foregoing, segment profit (as defined in Note 19 to the Consolidated Financial Statements) from this segment increased 2% for 2004 as compared to 2003 primarily as a result of increased revenue. Segment profit as a percentage of revenue remained flat at approximately 14% for both years. Refer to Note 19 of the Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes.

 

Marketing and Business Communications

 

 

Revenue increased 10% for the year ended December 31, 2004 as compared to 2003, primarily related to increases in personalization revenue due to the addition of several new clients in the financial services industry resulting from investments made to improve the product offering. The increase in personalization revenue was offset slightly by a decrease in fulfillment revenue. Gross margin improved significantly and the gross margin percentage increased seven percentage points to approximately 4% for the year ended December 31, 2004 as compared to 2003. The improvements in gross margin and gross margin percentage are primarily attributable to the consolidation of the Company’s fulfillment operations with its digital print facility in 2004, which was aimed at improving efficiency.

 

Selling and administrative expenses decreased 19% for the year ended December 31, 2004 as compared to 2003, and as a percentage of revenue decreased twelve percentage points to 34% for 2004. The reduction in selling and administrative expenses is primarily related to the favorable impact of a reduction in the sales and administrative cost bases.

Restructuring, integration and asset impairment charges related to this segment amounted to $2,771 and $1,206 for the years ended December 31, 2004 and 2003, respectively. The costs incurred in 2004 and 2003 were primarily related to the consolidation of the Company’s fulfillment operations with its digital print facility.

 

As a result of the foregoing, segment loss (as defined in Note 19 to the Consolidated Financial Statements) for this segment declined 33% for the year ended December 31, 2004 as compared to 2003. Segment loss as a percentage of revenue improved nineteen percentage points to (30)% for the year ended December 31, 2005. Refer to Note 19 of the Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes.

 

Litigation Solutions

 

 

Revenue decreased 10% for the year ended December 31, 2004 compared to 2003 and gross margin percentage increased four percentage points to 29% for the year ended December 31, 2004 as compared to 2003. The decrease in revenue is primarily due to the loss of a large client in the fourth quarter of 2003 and a reduction in graphics services revenue in 2004. Gross margin was positively impacted in 2004 by improved utilization of in-house staff in lieu of contractors.

 

Selling and administrative expenses increased 15% for the year ended December 31, 2004 compared to 2003. The increase in selling and administrative expenses is primarily due to an increase in marketing expenses at DecisionQuest due to expenses incurred in 2004 related to the launch of a new marketing and promotional campaign.

 

Other income increased significantly due to the income from the Company’s equity share of income associated with the CaseSoft joint venture investment for the year ended December 31, 2004 as compared to the year ended December 31, 2003.

 

As a result of the foregoing, segment profit (as defined in Note 19 to the Consolidated Financial Statements) for this segment increased $1,031 or 27% for the year ended December 31, 2004, compared to the year ended December 31, 2003. Segment profit as a percentage of revenue increased four percentage points to 14% for the year ended December 31, 2004. Refer to Note 19 of the Consolidated Financial Statements for additional segment financial information and reconciliation of segment profit (loss) to income (loss) from continuing operations before income taxes.

 

Summary

 

Overall revenue increased $42,960, or 7%, to $671,351 for 2004, compared to 2003. The increase is largely attributed to the increase in financial printing, specifically transactional financial printing during the first half of 2004, which was offset significantly by the unfavorable results in the second half of 2004 as compared to the same

period in 2003. There was a $17,251, or 7%, increase in gross margin, and the gross margin percentage remained flat at approximately 37%.

 

Selling and administrative expenses on a company-wide basis increased by approximately $16,515, or 9%, to $198,742. This increase is primarily the result of expenses that are directly associated with sales, such as selling expenses (including commissions and bonuses) and certain variable administrative expenses. The increase is also due to higher professional fees, marketing, and travel-related expenses, offset by decreases in pension and bad debt expense. The increase in professional fees is primarily from consulting projects related to long-term strategic planning initiatives, recruiting fees, legal fees, and Sarbanes-Oxley compliance costs. Shared corporate expenses were approximately $22,062 in 2004 as compared to approximately $15,655 in 2003, an increase of approximately $6.4 million, primarily due to increased incentive compensation and consulting expenses, offset by reduced salaries due to headcount reductions. As a percentage of revenue, overall selling and administration expenses remained constant at 29%.

 

Depreciation decreased approximately $3,833 primarily as a result of reduced capital expenditures in recent years.

 

There were approximately $8,132 in restructuring, integration, and asset impairment charges during 2004, as compared to $14,471 in 2003, as discussed in Note 10 to the Consolidated Financial Statements.

 

Interest expense decreased $764, or 7%, primarily as a result of lower average borrowings in 2004 ($147 million for the year ending December 31, 2004, as compared to $175 million for the year ending December 31, 2003) offset by a slightly higher average interest rate in 2004 (6.2% for the year ended December 31, 2004, as compared to 5.6% for the year ended December 31, 2003).

 

Loss on extinguishment of debt resulted from the early retirement of the Company’s senior notes in December 2004. The loss represents the make-whole payment required in accordance with the debt agreement and the write-off of approximately $272 of deferred costs that were previously being amortized over the life of the senior notes, as discussed in Note 12 to the Consolidated Financial Statements.

 

Other income (expense), net, was $860 for the year ended December 31, 2004 as compared to $(1,679) for the year ended December 31, 2003. The change was primarily due to fluctuations in foreign currency translations gains and losses, and legal settlement expenses incurred during the year ended December 31, 2003.

 

Income tax expense for 2004 was $1,052 on a pre-tax loss from continuing operations of $1,310, compared to a tax expense in 2003 of $2,709 on a pre-tax loss from continuing operations of $6,565. The size of the non-deductible expenses, primarily meals and entertainment, is relatively unchanged from year to year, and the rate applied to U.S. taxable income (loss) was approximately 39% for both years.

 

Net income from discontinued operations in 2004 was $29,586 as compared to a net loss of $2,786 for 2003. The increase is primarily due to the gain on the sale of the document outsourcing business to Williams Lea in November 2004, as described in Note 3 to the Consolidated Financial Statements. The results from discontinued operations for 2004 and 2003 include the results of the discontinued document outsourcing, document scanning and coding, and globalization businesses.

 

As a result of the foregoing, net income for 2004 was $27,224 as compared to a net loss of $12,060 for 2003.

Domestic Versus International Results of Operations

 

The Company’s international operations are all in its financial print segment. Domestic (U.S.) and international components of (loss) income from continuing operations before income taxes for 2004 and 2003 are as follows:

 

 

Pre-tax loss from domestic operations increased significantly in 2004 due to the loss on the early retirement of the senior notes, and increased corporate spending.

 

International pre-tax income (loss) from continuing operations improved in 2004 compared to 2003 primarily due to the improvement in the financial print segment’s results due to the increased transactional market activity in international markets during 2004. In addition, the international results for 2003 included restructuring charges of approximately $7.2 million primarily associated with the closing of the London financial printing facility and a portion of the London financial printing customer service center.

 

2006 Outlook

 

The following statements and certain statements made elsewhere in this document are based upon current expectations. These statements are forward looking and are subject to factors that could cause actual results to differ materially from those suggested here, including, without limitation, demand for and acceptance of the Company’s services, new technological developments, competition and general economic or market conditions, particularly in the domestic and international capital markets, and excludes the effect of potential dilution from the Convertible Subordinated Debentures and the impact from any future purchases under our share repurchase program. Refer also to the Cautionary Statement Concerning Forward Looking Statements included at the beginning of this Item 7.

 

The results of the Marketing and Business Communications segment include the results of the January 2006 acquisition of the marketing and business communications division of Vestcom International, Inc.

 

Liquidity and Capital Resources