UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

Commission File No. 1-5842

Bowne & Co., Inc.

(Exact name of Registrant as specified in its charter)

 

 

(212) 924-5500

 

(Registrant’s telephone number, including area code)

 

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

 

 

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

None

 

(Title of Class)

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

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

 

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

 

(Do not check if a smaller reporting company)

 

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

 

The aggregate market value of the Common Stock issued and outstanding and held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $166.5 million. For purposes of the foregoing calculation, the registrant’s 401(K) Savings Plan is deemed to be an affiliate of the registrant.

 

The registrant had 40,094,746 shares of Common Stock outstanding as of March 1, 2010.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

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

 

Notice of Annual Meeting of Stockholders and Proxy Statement anticipated to be dated April 15, 2010. Part III, Items 10-12

 

 

TABLE OF CONTENTS

 

 

 

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

 

The Company made several significant changes to its organizational structure and manufacturing capabilities over the past several years to consolidate its business units into a unified model that supports and markets Bowne’s full range of service offerings, from transactional services to corporate compliance reporting to investment management solutions and personalized digital marketing communications. Essentially, the Company has integrated its customer-facing resources to provide all Bowne services to all clients and prospects; the Company has unified its manufacturing footprint to provide the best quality and most cost-effective technology regardless of timing and location; and has consolidated all administrative and support functions so that best practices and economic advantages are being leveraged across the enterprise. These modifications were made in response to the evolving needs of our clients, who are increasingly asking for services that can span Bowne’s full range of offerings. These changes have significantly reduced costs and improved profitability in 2009 and have well positioned the Company to further realize the benefits of these changes as market conditions continue to recover. The Company has one reportable segment, which is consistent with how the Company is structured and managed.

 

Overall, the Company generated revenue of approximately $675.8 million in 2009, $766.6 million in 2008, and $850.6 million in 2007. Further information regarding revenue and identifiable assets attributable to the Company’s operations for the calendar years 2009, 2008 and 2007 are shown in Note 20 to the Consolidated Financial Statements.

 

On February 23, 2010, Bowne & Co., Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with R.R. Donnelley & Sons Company, a Delaware corporation (“R.R. Donnelley”), and Snoopy Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of R.R. Donnelley. The all-cash deal provides for a purchase price of $11.50 per share. The Merger Agreement has been approved by the Boards of Directors of the parties to the Merger Agreement. Consummation of the merger is subject to various customary conditions, including approval of the merger by the Company’s shareholders, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, other applicable regulatory approvals and the absence of certain legal impediments to the consummation of the Merger. The Merger Agreement also contains covenants with respect to the operation of the Company’s business between signing of the Merger Agreement and closing of the Merger. Pending consummation of the merger, the Company will operate its business in the ordinary and usual course, except for certain actions which would require R.R. Donnelley’s approval. Such actions include mergers and acquisitions, issuance of stock, incurring debt in excess of $60 million, payment of dividends other than the regular quarterly dividend, incurring capital expenditures in excess of budgeted amounts, entering into long-term arrangements, amending or terminating contracts, establishing new employee benefits or amending existing employee benefits, and certain other spending limits.

 

Industry Overview

 

The document management services industry is highly fragmented, with hundreds of independent service companies that provide a full range of document management services and with a wide range of technology and software providers. Specific to capital markets services and compliance reporting, there are many companies, including Bowne, that participate in a material way. Demand for capital markets services tends to be cyclically

related to new debt and equity issuances and public mergers and acquisitions activity. Demand for compliance reporting is less sensitive to capital market changes and represents a recurring periodic activity, with seasonality linked to significant filing deadlines imposed by law on public reporting companies and mutual funds. Demand is also impacted by changing regulatory and corporate disclosure requirements.

 

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

 

The Company

 

The Company provides a full-range of services consisting of the following: capital markets services, shareholder reporting services, marketing communications and commercial printing.

 

Capital markets services

 

Capital markets services include a comprehensive array of services to create, manage, translate, file and distribute shareholder and investor-related documents. Bowne provides these services to its clients in connection with capital market transactions, such as equity and debt issuances and mergers and acquisitions. The Company’s capital markets services apply to registration statements, prospectuses, bankruptcy solicitation materials, special proxy statements, offering circulars, tender offer materials and other documents related to corporate financings, acquisitions and mergers. The Company also offers Bowne Virtual Dataroom^tm (“VDR”), a hosted online data room capability, which provides a secure and convenient means for clients to permit due diligence of documents in connection with securities offerings, mergers and acquisitions and other corporate transactions. This service is offered through an alliance with BMC Group Inc., an information management and technology service provider to corporate, legal and financial professionals.

 

Shareholder reporting services

 

Shareholder reporting services include compliance reporting, investment management services and translations services revenue. Bowne provides services to public corporations in connection with their compliance obligations to produce, file and deliver periodic and other reports under applicable laws and regulations, which the Company calls “compliance reporting services.”

 

The Company’s compliance reporting services apply to annual and interim reports, regular proxy materials and other periodic reports that public companies are required to file with the Securities and Exchange Commission (“SEC”) or other regulatory bodies around the world. Bowne is at the forefront of XBRL technology and has made significant enhancements to its suite of XBRL solutions during the past year, which assists clients in meeting its SEC filing requirements. Bowne is also a leading filing agent for EDGAR, the SEC’s electronic filing system. The Company provides both full-service and self-service filing options, the latter through Internet-based filing products: BowneFile16^®, 8-K Express^tm and 6-K Express^®. In recent years, the Company has launched new innovative products, services and technology solutions to assist clients as they shift toward increased use of technology, e-delivery and content management capabilities. These service offerings include: Pure Compliance^tm, an EDGAR-only filing service that offers clients a balance of fixed pricing, rapid turnaround, and high quality HTML output to meet their regulatory filing requirements; Bowne’s electronic proxy service, Bowne ePod^tm, which assists public

companies in responding to the SEC’s rule enabling issuers to furnish proxy materials to shareholders through an electronic notice and access delivery model; and Bowne Compliance Driver^sm, an automated financial statement reporting tool, through a strategic alliance with Clarity Systems, Inc.

 

Investment management services apply to regulatory and shareholder communications such as annual or interim reports, prospectuses, information statements and marketing-related documents. The Company offers Customized Investor Books, which empowers investment managers to tailor the information they provide to their shareholders and contract holders, reducing costs and creating a better customer experience.

 

In addition, the Company provides customized translation services to financial, legal, advertising, consulting and corporate communications professionals.

 

Marketing communications

 

Marketing communications include a portfolio of services to create, manage and distribute personalized communications, including financial statements, enrollment kits and sales and marketing collateral, to help companies communicate with their customers. Bowne provides these services primarily to the financial services, commercial banking, health care, insurance, gaming, and travel and leisure industries.

 

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

 

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

 

 

Bowne services help clients create, manage and distribute critical information, such as statements, trade confirmations, welcome and enrollment kits, sales kits and marketing collateral. With the ability to provide personalized and targeted communications, rather than the conventionally printed generic information, clients are able to achieve higher returns on their marketing dollars and reduce waste. Because of the integration of systems between Bowne and its clients, these services tend to involve longer-term relationships. The primary clients for these services include mutual funds, stock brokerage firms, defined contribution providers, investment banks, insurance companies, commercial banks, health care providers and educational services.

 

Commercial printing

 

Bowne also provides commercial printing, which consists of annual reports, sales and marketing literature, point of purchase materials, research reports, newsletters and other custom-printed matter.

Operations

 

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

 

 

 

Other Information

 

The percentage of revenue by class of service for the past three fiscal years is as follows

 

 

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

 

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

 

The Company’s composing and its manufacturing platforms are operated as centralized and fully distributive models. This provides Bowne with the ability to maximize efficiency, increase utilization and better meet its customers’ needs.

 

During 2008, the Company reduced the number of conference rooms it maintains for use by clients while transactions are in progress. This reduction was in response to decreased client demand; however, these amenities are still provided in high density markets. On-site customer service professionals work directly with clients, which promotes speed and ease of editorial changes and otherwise facilitates the completion of clients’ documents. In addition, the Company uses an extensive electronic communications network, which facilitates data handling and makes collaboration practicable among clients at different sites.

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

 

Competition

 

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

 

In capital market services and shareholder reporting services, the Company competes primarily with several global competitors and regional service providers having similar degrees of specialization. Some of these organizations operate at multiple locations and some are subsidiaries or divisions of companies having greater financial resources than those of the Company. As the Company has launched new innovative services and technology solutions, the Company’s competitors increasingly include technologically focused competitors, some of whom have greater financial resources than those of the Company. Based upon the most recently available published information, the Company is a market leader in capital markets services. The Company has experienced competition for sales, customer service and production personnel in addition to its customer base.

 

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

 

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

 

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

 

Revenue from capital markets services accounted for approximately 26% of the Company’s revenue in 2009. This revenue stream is driven by transactional or financing events and is affected by various factors including conditions in the world’s capital markets. Transactional revenue and net income depends upon the volume of public financings, particularly equity offerings, as well as merger and acquisitions activity. Activity in the capital markets is influenced by corporate funding needs, stock market fluctuations, credit availability and prevailing interest rates, and general economic and political conditions. The Company experienced a significant decline in revenue from capital markets services during 2008 and the first half of 2009 primarily resulting from the global economic crisis. During the second half of 2009 overall market conditions showed improvement, particularly in the U.S. and Asia. If market conditions deteriorate, they could potentially have a significant impact on customers’ demand for the Company’s capital market services, which could result in a decrease in revenue in future periods.

 

Revenue from all other lines of service besides capital markets accounted for approximately 74% of Bowne’s revenue and tends to be more recurring in nature and includes revenue from shareholder reporting services as well as revenue from marketing communications product offerings.

 

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

A small portion of revenue originates in the insurance industry related to statutory reporting which is seasonal, with most of this business occurring during the first quarter ending March 31. In addition, the portion of revenue from marketing communications services relating to enrollment kits is seasonal, as it relates to employee benefits open enrollment activity which typically occurs during the fourth quarter ending December 31.

 

Research and Development

 

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

 

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

 

As the oldest and one of the largest shareholder and marketing communication companies in the world, Bowne’s extensive experience allows it to proactively identify clients’ needs. Bowne understands the ever-changing aspect of technology in this business, and continues to be on the cutting edge in researching, developing and implementing technological breakthroughs to better serve 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. The Company invests in the latest technologies and equipment to constantly improve services and remain on the leading edge. With a technology team comprised of over 200 professionals (in solutions management, application development and technology operations departments) as of December 31, 2009, Bowne is constantly engaged in numerous and valuable systems enhancements.

 

Bowne has established document management capacity that is flexible and aligned with customer demand. Technology plays a key role in this strategy through the extension of the composition network with vendors in India. This allows the Company to efficiently and seamlessly outsource EDGAR conversions and composition work as needed. In addition, other technology services are outsourced in instances where it can be done at substantial cost savings and added flexibility.

 

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

 

Patents and Other Rights

 

The Company has no significant patents, licenses, franchises, concessions or similar rights other than certain trademarks. Except for a proprietary computer composition and telecommunication system, the Company does not have significant specialized machinery, facilities or contracts which are unavailable to other firms providing the same or similar services to customers. The Company and its affiliates utilize many trademarks and service marks worldwide, many of which are registered or pending registration. The most significant of these is the trademark and trade name Bowne^®. The Company also uses the following service marks and trademarks: Bowne Compliance Driver^sm, Bowne Compliance Plus^®, Bowne ComplianceTrak^tm, Bowne ComplianceTrak Adviser^tm, Bowne ePod^®, Bowne 8-K Express^®, BowneFax^tm, BowneFile16^®, BowneImpressions^®, BowneLink^®, Bowne 6-K Express^®, Bowne Tagger^tm, Bowne Virtual Dataroom^tm, Deal Room Express^®, DealTrans^tm, E2 Express^tm, Express Start^tm, FundAlign^®, FundSmith^®, ProspectusNow^®, Pure Compliance^®, QuickPath^tm, SecuritiesConnect^®, smartapps^tm, smartforum^tm, smartedgar^tm, smartproof^tm, We Own the X^tm, Xchanger^® and XMark^tm.

Sales and Marketing

 

The Company employs over 200 sales and marketing personnel. The Company has a unified client-facing sales organization which leverages the Company’s regional field sales management to sell and support all Bowne services. 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, 2009, no single customer accounted for 10% or more of the Company’s sales. The Company has no backlog, within the common meaning of that term, which is normal throughout the service offerings in which the Company is focused. However, within its capital markets services, the Company usually has a backlog of customers preparing for financial offerings. This backlog is greatly affected by capital market activity.

 

Employees

 

At December 31, 2009, the Company had approximately 2,800 full-time employees. The Company believes relations with its employees are excellent. Less than one percent of the Company’s employees are members of various unions covered by collective bargaining agreements. The Company provides pension, 401(k), profit-sharing, certain insurance and other benefits to most non-union employees.

 

Suppliers

 

The Company purchases or leases various materials and services from a number of suppliers, of which the most important items are paper, air and ground delivery services, computer hardware, copiers and printing equipment, software and peripherals, communication equipment and services, outsourced printing and composition 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’s international business offers similar services as those delivered by its domestic operations. International capabilities are delivered primarily by the Company or in some areas through strategic relationships. 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 10% of the Company’s total revenues in 2009, 11% in 2008 and 13% in 2007. During 2009, 2008 and 2007, revenues derived from foreign countries other than Canada totaled $62 million, $85 million and $110 million, respectively. Canadian revenues were approximately 7%, 8% and 10% of the Company’s total sales in 2009, 2008 and 2007, respectively. During 2009, 2008 and 2007, revenues derived from Canada totaled $50 million, $63 million, and $83 million, respectively.

 

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

 

Recent global economic conditions created turmoil in credit and capital markets that, if they persist or deteriorate, could have a significant adverse impact on the Company’s operations.

 

Worldwide economic conditions resulted in an extraordinary tightening of credit markets and contractions in the capital markets. These economic conditions have resulted in negative impacts on businesses and financial institutions and financial services entities in particular. They have also resulted in unprecedented intervention in financial institutions and markets by governments throughout the world, including the enactment in the United States of the Emergency Economic Stabilization Act of 2008. These economic conditions were characterized in news reports as a global economic crisis, and have also had a significant negative impact on the Company’s operations during the second half of 2008 and first half of 2009. Although economic conditions improved during the second half of 2009 and early 2010, if these conditions deteriorate, they could potentially have a more significant impact on operations in future periods by:

 

 

Declines in the Company’s stock price or expected profitability could result in impairment of assets, including goodwill, other long-lived assets and deferred tax assets.

 

The global economic crisis experienced in 2008 and the first half of 2009 has impacted the stock prices of many companies. If the price of Bowne common stock declines, it could result in an impairment of the Company’s goodwill. Bowne’s stock value is dependent upon continued future growth in demand for the Company’s services and products. If such growth does not materialize or if the Company’s profitability is significantly reduced, the Company could be required to recognize an impairment of its goodwill and other long-lived assets or write-off a portion of its deferred tax assets through a valuation allowance. Such changes could have an adverse effect on Bowne’s financial position and results of operations.

 

The Company performed its annual goodwill impairment assessment as of December 31, 2009. Based on the analysis, it concluded that the fair value of the Company’s reporting unit exceeds the carrying amount and therefore goodwill is not considered impaired. When the assessment was performed, market capitalization, which is an indicator of fair value, was above the carrying value of the reporting unit. To the extent Bowne’s stock price declines, or its strategies change, it is possible that the conclusion regarding goodwill impairment could change.

 

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

 

Approximately 26% of the Company’s revenue was derived from capital market services in 2009, which are dependent upon capital markets transactional activity. Bowne is pursuing strategies designed to improve our capital markets service offerings and grow non-capital markets businesses (which represented about 74% of Bowne’s revenue in 2009), including compliance reporting services, investment management services and the Company’s digital and personalization business. At the same time Bowne has pursued a strategy of acquisitions and strategic

alliances for complementary products and service offerings. The Company also believes that pursuing complementary acquisition opportunities will lead to more stable and diverse recurring revenue. This strategy has many risks, including the following:

 

 

If the Company is unsuccessful in continuing to enhance its non-transactional products and services and acquire complementary products and services, it will not be able to continue to diversify its revenues and will remain subject to the sometimes volatile swings in the capital markets that directly impact the demand for transactional capital markets services. Furthermore, if the Company is unable to provide value-added services in areas of document management other than traditional composition and printing, its 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. The Company believes that if it is not successful in achieving its strategic objectives within transactional capital markets services, growing its other business lines and acquiring complementary product and service offerings, Bowne 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, the Company’s business and results of operations would be materially and adversely affected.

 

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

 

The market for these services depends in part on the demand for printed shareholder and investor documents, which is driven largely by capital markets activity and the requirements of the SEC and other regulatory bodies. Any rulemaking substantially affecting the content of documents to be filed and the method of their delivery could have an adverse effect on Bowne’s business. In addition, evolving market practices in light of regulatory developments, such as postings of documents on Internet web pages and electronic delivery of offering documents, may adversely affect the demand for printed financial documents and reports.

 

Recent regulatory developments in the United States and abroad have sought to change the method of dissemination of financial documents to investors and shareholders through electronic delivery rather than through delivery of paper documents. The SEC’s “access equals delivery” rules which eliminate the requirement to deliver a printed final prospectus unless requested by the investor, its rules for the dissemination of proxy materials to shareholders electronically and for the dissemination of mutual fund prospectuses electronically, unless a printed prospectus is requested by the investor, are reflective of these regulatory developments. Regulatory developments which decrease the delivery of printed transactional or compliance documents could harm Bowne’s business and adversely affect its 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 the Company’s ability to meet client’s needs in times of peak demand, or may cause clients to try to exercise more control over their filings by performing those functions in-house.

 

The Company’s revenue may be adversely affected as clients implement technologies enabling them to produce and disseminate documents on their own. For example, 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 clients to handle all or a portion of their periodic filings without the need for Bowne’s services. The Company’s abilities to realize revenue opportunities relating to its XBRL and other recent service offerings may be adversely impacted by

a variety of factors, including changing regulatory requirements and rapid technology innovations by software companies and other competitors.

 

The environment in which Bowne competes is highly competitive, which creates adverse pricing pressures and may harm the Company’s business and operating results if it cannot compete effectively.

 

Competition in the Company’s various services is intense. The speed and accuracy with which Bowne can meet client needs, the price of its services and the quality of its products and supporting services are factors in this competition. In the capital markets, shareholder reporting and commercial printing lines of service, the Company competes directly with several other service providers having similar degrees of specialization. One of these service providers is a division of a company that has greater financial resources than those of Bowne.

 

The Company’s marketing communications services face diverse competition from a variety of companies including commercial printers, in-house print operations, direct marketing agencies, facilities management companies, software providers and other consultants. In commercial printing services, the Company competes with general commercial printers, which are far more numerous than those in the financial printing market.

 

These competitive pressures could reduce Bowne’s revenue and earnings.

 

The market for marketing communications services is relatively new and the Company may not realize the anticipated benefits of its 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.

 

Bowne has made significant investments in developing its capabilities through recent acquisitions. If the Company is unable to adequately implement its solutions, generate sufficient customer interest in those solutions or capitalize on sales opportunities, it may not be able to realize the return on its investments that were anticipated. Failure to recover an investment or the inability to realize sufficient return on its investment may adversely affect the Company’s results of operations as well as its efforts to diversify the Company’s businesses.

 

Bowne’s business could be harmed if it does not successfully manage the integration of businesses that are acquired.

 

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

 

 

 

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

 

The Company is exposed to risks associated with operations outside of the United States.

 

Bowne derived approximately 17% of its revenues in 2009 from various foreign sources, and a significant part of its current operations are outside of the United States. The Company conducts operations in Canada, Europe, Central America, South America and Asia. In addition, Bowne has affiliations with certain firms providing similar services abroad. As a result, the Company’s business is subject to political and economic instability and currency fluctuations in various countries. The maintenance of Bowne’s 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:

 

 

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

 

The Company does not have long-term service agreements in the capital markets services business, which may make it difficult to achieve steady earnings growth on a quarterly basis and lead to adverse movements in the price of its common stock.

 

A majority of Bowne’s revenue from its capital markets services is derived from individual projects rather than long-term service agreements. Therefore, the Company cannot assure that a client will engage Bowne 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 the Company’s future revenue. As a result, Bowne’s financial results may fluctuate from period to period based on the timing and scope of the engagement with its clients which could, in turn, lead to adverse movements in the price of the Company’s common stock or increased volatility in its stock price generally. Bowne has no backlog, within the common meaning of that term; however, within its capital markets services, it usually has 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. During 2008 and 2009, the IPO market experienced a severe reduction in activity.

 

If the Company is unable to retain key employees and attract and retain other qualified personnel, its business could suffer.

 

Bowne’s ability to grow and its future success will depend to a significant extent on the continued contributions of key executives, managers and employees. In addition, many of Bowne’s individual technical and sales personnel have extensive experience in the Company’s business operations and/or have valuable client relationships that would be difficult to replace. Their departure from the Company, if unexpected and unplanned for, could cause a disruption to Bowne’s business. The Company’s future success also depends in large part on its 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 Bowne operates. The Company 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 Bowne employees, particularly its sales personnel. The loss of the services of the Company’s 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 Bowne to manage its business and meet key objectives, such as the timely introduction of new technology-based products and services, which could harm Bowne’s business, financial condition and operating results.

 

If the Company fails to keep clients’ information confidential or if it handles their information improperly, Bowne’s business and reputation could be significantly and adversely affected.

 

The Company manages private and confidential information and documentation related to its 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 Bowne, or its vendors and subcontractors, fail to keep clients’ proprietary information and documentation confidential, the Company 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. The Company may also become subject to civil claims by its clients or other third parties or criminal investigations by appropriate authorities.

 

The Company has indebtedness and this indebtedness and its costs may increase.

 

As of December 31, 2009, Bowne had approximately $14.3 million of total debt outstanding. In the future, it may incur additional debt to finance its business operations. If the Company’s level of indebtedness increases, there may be an increased risk of a credit rating downgrade or a default on its obligations that could adversely affect Bowne’s financial condition and results of operations.

 

The failure to comply with the covenants in the Company’s credit facility or declines in the borrowing base availability could adversely affect its financial condition.

 

The Company had $5.0 million outstanding under its $123.0 million credit facility as of December 31, 2009. Bowne’s credit facility contains customary restrictions, requirements and other limitations on its ability to incur indebtedness. The Company’s ability to borrow under its facility is subject to compliance with certain financial and other covenants. Failure to comply with covenants could cause a default under the facility, and Bowne may then be required to repay such debt, or negotiate an amendment. Under those circumstances, other sources of capital may not be available to us, or be available only on unattractive terms.

 

Borrowings under the facility are also subject to periodic borrowing base determinations. The borrowing base consists primarily of certain eligible accounts receivable and inventories in North America. Borrowings under the facility are based on predetermined advance rates based on assets (generally up to 85% of billed receivables, 80% of eligible unbilled receivables and 50% of certain inventories including work-in-process). Declines in available borrowings based on the borrowing base determination could also cause the Company to require additional sources of capital that may not be available to us, or be available only on unattractive terms.

The Company relies on debt financing, including borrowings under its credit facility to finance working capital and acquisitions. If Bowne is unable to obtain debt financing from this or other sources, or refinance existing indebtedness upon maturity, its financial condition and results of operations would likely be adversely affected. If Bowne breaches covenants in its debt agreements, the lenders can declare a default, which would adversely affect the Company’s operations and financial condition.

 

Seasonality and credit crises may decrease Bowne’s available cash.

 

The Company’s cash flow requirements are impacted by the seasonal nature of operations, especially its compliance services business. Ordinarily, Bowne’s cash flow needs are highest during the first half of the year and decrease during the remainder of the year as a result of the collection of receivables for services rendered. If the Company’s cash flow requirements increase, or if it is unable to receive timely payment of a substantial portion of its receivables, or if it is unable to obtain additional credit to meet cash flow requirements, Bowne’s operations would likely be materially adversely affected.

 

Current market conditions could adversely affect the funded status of the Company’s defined benefit pension plan.

 

The funded status of the Company’s defined benefit pension plan (the “Plan”) is dependent upon many factors, including returns on invested assets and the level of certain market interest rates. The recent global economic crisis has impacted the prices of many investments. During 2008, the Plan investments experienced a significant decline in market value, which resulted in a significant reduction of the Plan’s funded status. Although market conditions recovered somewhat in 2009, further declines in the market value of the Company’s Plan investments could adversely affect the Plan’s funded status, and may require the Company to make additional contributions in future years. In addition, decreases in the discount rate used to value the year-end benefit obligations would increase the pension liability, which would also adversely impact the Plan’s funded status.

 

Costs to provide health care and other benefits to the Company’s employees and retirees may increase.

 

The Company provides health care and other benefits to both employees and retirees. In recent years, costs for health care have increased more rapidly than general inflation in the U.S. economy. If this trend in health care costs continues, the Company’s cost to provide such benefits could increase, adversely impacting the Company’s profitability.

 

The Company’s services depend on the reliability of computer systems maintained by the Company and its outsourcing vendors and the ability to implement and maintain information technology and security measures.

 

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

 

Bowne’s services depend on third-parties to provide or support some of its services and its business and reputation could suffer if these third-parties fail to perform satisfactorily.

 

The Company outsources a portion of its non-computer services to third parties, both domestically and internationally. For example, its EDGAR document conversion services of SEC filings and its XBRL data tagging services substantially rely on independent contractors to provide an increasing portion of this work. If these third

parties do not perform their services satisfactorily or confidentially, if they decide not to continue to provide such services to Bowne on commercially reasonable terms or if they decide to service competitors, or compete directly with Bowne, the Company’s business could be adversely affected. The Company could also experience delays in providing products and services, which could negatively affect Bowne’s business until comparable third-party service providers, if available, were identified and obtained. Any service interruptions experienced by clients could negatively impact Bowne’s reputation, resulting in lost clients and limited ability to attract new clients and the Company may become subject to civil claims by its clients or other third parties. In addition, the Company could face increased costs by using substitute third-party service providers.

 

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

 

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

 

 

The Company believes that these trends will continue into the foreseeable future, and its success will depend, in part, upon its ability to:

 

 

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

 

 

Further, the Company’s 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 the Company’s business.

 

Bowne’s success depends in part 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 its business. These systems, applications, and tools are generally “off the shelf” software that are generally available and may be obtained on competitive terms and conditions, or are developed by employees, or are available from a limited number of vendors or licensors on negotiated terms and conditions. The Company’s technologies or service offerings may become subject to intellectual property claims by others which, even if unfounded, could be costly, or harm the Company’s business. The Company’s future success will increasingly depend in part on its ability to identify, obtain and retain intellectual property rights to technology, both for its internal use as well as for its clients’ direct use, either through internal development, acquisition or licensing from others, or alliances with others. The inability to identify, obtain and retain rights to certain technology on favorable terms and conditions would make it difficult for Bowne to conduct business, or to timely introduce new and innovative technology-based products and services, which could harm the Company’s business, financial condition and operating results.

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

 

Bowne’s business is subject to risks associated with the cost and availability of paper, ink, other raw materials, and energy. Consolidation of supplier markets or 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 customers’ demand for printing and related services. A severe paper, multi-market energy shortage, or delivery delays could have an adverse effect upon many of the Company’s operations.

 

The Company may fail to achieve its financial forecasts due to inaccurate sales forecasts or other factors.

 

Our revenues and particularly revenue from new services are difficult to forecast, and, as a result, our future operating results can fluctuate substantially. For example, expected revenue to be generated from our XBRL filings business are based on a number of factors, including technology innovation and additional changes to the SEC mandate. If competitors develop enhanced solutions that are perceived to be superior to our XBRL services, or if the SEC changes or delays the mandate as it now stands, the Company’s revenue opportunity could be significantly restricted. Such a restriction could have a materially negative impact on the Company’s revenues and financial results.

 

Our pending merger with R.R. Donnelley & Sons Company may cause disruption in our business and, if the pending merger does not occur, we will have incurred significant expenses, may need to pay a termination fee under the merger agreement and our stock price may decline.

 

We have entered into a merger agreement with R.R. Donnelley & Sons Company (“R.R. Donnelley”) and Snoopy Acquisition, Inc. (“Merger Sub”), dated February 23, 2010, pursuant to which Merger Sub will merge with and into the Company, with the Company surviving the merger (the “Merger”) as a wholly-owned subsidiary of R.R. Donnelley. Under the terms of the merger agreement, each outstanding share of common stock of the Company will be cancelled and converted into the right to receive cash in the amount of $11.50 per share.

 

The announcement of the pending merger, whether or not consummated, may result in a loss of key personnel and may disrupt our sales and operations, which may have an impact on our financial performance. The merger agreement generally requires us to operate our business in the ordinary course pending consummation of the merger, but includes certain contractual restrictions on the conduct of our business that may affect our ability to execute on our business strategies and attain our financial goals. Additionally, the announcement of the pending merger, whether or not consummated, may impact our relationships with third parties.

 

Consummation of the Merger is subject to various customary conditions, including approval of the Merger by the Company’s shareholders, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, other applicable regulatory approvals and the absence of certain legal impediments to the consummation of the Merger. The merger agreement is subject to termination if the Merger is not completed by October 23, 2010 (which date can be extended to January 23, 2011 if antitrust approval has not been obtained but all other conditions have been met). In addition, the merger agreement contains certain other termination rights for both the Company and R.R. Donnelley and further provides that, upon termination of the merger agreement under specified circumstances, the Company may be obligated to pay R.R. Donnelley a termination fee of $14.5 million.

 

We cannot predict whether the closing conditions for the pending merger set forth in the merger agreement will be satisfied. As a result, there can be no assurance that the pending merger will be completed. If the closing conditions for the pending merger set forth in the merger agreement are not satisfied or waived pursuant to the merger agreement, or if the Merger is not completed for any other reason, the market price of our common stock may decline.

 

These matters, alone or in combination, could have a material adverse effect on our business, financial condition, results of operations and stock price.

 

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

 

 

Information regarding the significant facilities of the Company, as of December 31, 2009, nine of which were leased and six of which were owned, is set forth below.

 

 

All of the properties described above are well maintained, in good condition and suitable for all presently anticipated requirements of the Company. The majority of the Company’s equipment is owned outright.

 

Refer to Note 16 to the 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 2009.

 

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 year 2009 and 2008, by year and by quarters.

 

 

 

 

The number of holders on record as of December 31, 2009 was 1,078.

 

During the first three quarters of 2009, the Company suspended the payment of cash dividends, and issued stock dividends to its shareholders. The payment of cash dividends was restricted under the covenants of the Company’s Revolving Credit Facility (“Facility”), which was amended in March 2009. In October 2009, the Company further amended and extended its Facility. Under the terms of the amended Facility the Company is able to pay cash dividends of $2.5 million per quarter with an increase in the amount of up to $15.0 million in any fiscal year provided that no default or event of default has occurred and is continuing, the fixed charge coverage ratio is 1.25x or greater and excess revolver availability is $30.0 million. The Facility is discussed in more detail in Note 12 to the Consolidated Financial Statements. In November 2009 the Company reinstated the payment of cash dividends.

Comparison of Five-Year Cumulative Return

 

The following graph shows yearly changes in the total return on investment in Bowne common stock on a cumulative basis for the Company’s last five fiscal years. The graph also shows two other measures of performance: total return on the Standard & Poor’s 500 Index, and total return on the Standard & Poor’s 1500 Commercial Printing Index. For convenience, we refer to these two comparison measures as “S&P 500” and “S&P 1500”, respectively.

 

As discussed in more detail in Item 5 of the Company’s annual reports on Form 10-K for the year ended December 31, 2008, the Company selected the S&P 1500 to replace the S&P Diversified Commercial and Professional Services Index (“S&P Services Index”) as our peer group, since the S&P Services Index was discontinued in 2008 and no longer available to use as of December 31, 2008. We believe that the S&P 1500 is an appropriate published industry index that measures the performance of other companies within our industry. In addition, Bowne is included in the companies represented in the S&P 1500. The Company chose the S&P 500 because it is a broad index of the equity markets.

 

We calculated the yearly change in Bowne’s return in the same way that both the S&P 500 and the S&P 1500 calculate change. In each case, we assumed an initial investment of $100 on December 31, 2004. In order to measure the cumulative yearly change in that investment over the next five years, we first calculated the difference between, on one hand, the price per share of the respective securities on December 31, 2004 and, on the other hand, the price per share at the end of each succeeding fiscal year. Throughout the five years we assumed that all dividends paid were reinvested into the same securities. Next, we turned the result into a percentage of change by dividing that result by the difference between the price per share on December 31, 2004 and the price per share at the end of each later fiscal year. Finally, we calculated the price per share at the end of each subsequent fiscal year based on a percentage of change multiplied by the price per share at each prior fiscal year end.

 

Comparison of five-year cumulative total return

 

 

 

A listing of the companies included in the S&P 1500 is available through publications from Standard & Poor’s and other licensed providers.

Equity Offering

 

In August 2009, the Company completed a public equity offering of 12.1 million shares of its common stock at an offering price of $5.96 per share. The net proceeds from the equity offering were approximately $67.8 million, which is net of issuance costs of $4.1 million. The net proceeds from the equity offering were used to repay the Company’s $24.2 million term loans in their entirety, and to repay a portion of the Company’s borrowings under its revolving credit facility. The 12.1 million shares issued in accordance with this equity offering were reissued from the Company’s treasury stock.

 

Stock Repurchase

 

Since the inception of the Company’s share repurchase program in December 2004 through December 31, 2007, the Company effected the repurchase of approximately 12.9 million shares of its common stock at an average price of $15.18 per share for an aggregate purchase price of approximately $196.3 million, which is described in more detail in the Company’s annual report on Form 10-K for the year ended December 31, 2008. During the year ended December 31, 2007, the Company repurchased approximately 3.1 million shares of its common stock for approximately $51.7 million (an average price of $16.52 per share). This program was completed in December 2007, and there were no repurchases of common stock by the Company during 2008 and 2009.

 

Five-Year Financial Summary

 

 

 

 

The remaining portion of the Company’s $75.0 million convertible subordinated debentures (the “Notes” — approximately $8.3 million) is classified as current debt as of December 31, 2009 and was classified as noncurrent liabilities as of December 31, 2008, since the earliest that the redemption and repurchase features can occur are on October 1, 2010. The Notes were included in current liabilities as of December 31, 2007 as a result of the redemption and repurchase features that were able to occur on October 1, 2008. This amount was classified as a noncurrent liability for 2005 and 2006. The classification of the debentures is discussed in more detail in Note 12 to the Consolidated Financial Statements.

 

Also refer to Items Affecting Comparability in Management’s Discussion and Analysis of Financial Condition and Results of Operations for other items affecting the comparability of the financial information presented above.

 

 

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, 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. Refer also to the Risk Factors included in Item 1A.

 

Overview

 

The operating results for 2009 were impacted by the global economic crisis that began during the second half of 2008. Overall capital markets activity was down in 2009 as compared to recent years and the size of the deals (as measured by total dollars) occurring in 2009 has been less than the size of the deals, which occurred in recent years. Total revenue in 2009 declined approximately $90.9 million, or 12%, as compared to the same period in 2008. Despite the decline in total revenue in 2009 as compared to 2008, the Company’s overall profitability improved significantly from the prior year as a result of the impact of the recent cost savings measures implemented by the Company. During the second half of 2009, overall market conditions showed improvement, particularly in the U.S. and Asia. The Company is cautiously optimistic regarding its 2010 operating results based on recent increased momentum in the capital markets, in particular initial public offerings (“IPO”) activity, and its improved efficiency and profitability. The Company is well positioned to further realize the benefits of its more efficient operating model as market conditions continue to recover.

 

Capital markets services revenue, which historically has been the Company’s most profitable service offering, decreased $31.3 million, or 15%, for the year ended December 31, 2009, as compared to the same period in 2008, primarily due to declines in overall IPO and merger and acquisition (“M&A”) activity, which were particularly pronounced in Europe and Canada. Shareholder reporting services revenue, which includes revenue from compliance reporting, investment management services and translation services, decreased $26.2 million for the year ended December 31, 2009, as compared to the same period in 2008, and marketing communications services revenue for the year ended December 31, 2009 decreased by approximately $21.6 million, or 13%, as compared to the same period in 2008. Diluted loss per share from continuing operations was ($0.52) for the year ended December 31, 2009, as compared to diluted loss per share of ($1.07) for the same period in 2008, an improvement of approximately 51%.

On February 23, 2010, Bowne & Co., Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with R.R. Donnelley & Sons Company, a Delaware corporation (“R.R. Donnelley”), and Snoopy Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of R.R. Donnelley. The all-cash deal provides for a purchase price of $11.50 per share. The Merger Agreement has been approved by the Boards of Directors of the parties to the Merger Agreement. Consummation of the merger is subject to various customary conditions, including approval of the merger by the Company’s shareholders, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements of 1976, other regulatory approvals and the absence of certain legal impediments to the consummation of the Merger. The Merger Agreement also contains covenants with respect to the operation of the Company’s business between signing of the Merger Agreement and closing of the Merger. Pending consummation of the merger, the Company will operate its business in the ordinary and usual course, except for certain actions which would require R.R. Donnelley’s approval. Such actions include mergers and acquisitions, issuance of stock, incurring debt in excess of $60 million, payment of dividends other than the regular quarterly dividend, incurring capital expenditures in excess of budgeted amounts, entering into long-term arrangements, amending or terminating contracts, establishing new employee benefits or amending existing employee benefits, and certain other spending limits.

 

In August 2009, the Company completed a public equity offering of 12.1 million shares of its common stock, at an offering price of $5.96 per share. The net proceeds from the equity offering were approximately $67.8 million, which is net of issuance costs of $4.1 million. The net proceeds from the equity offering were used to repay the Company’s term loans in their entirety, and to repay a portion of the Company’s borrowings under its revolving credit facility.

 

In March 2009, the Company amended its $150.0 million credit facility and extended its maturity to May 31, 2011. The amended facility was restructured as an asset-based loan consisting of term loans of $27.0 million (which have been repaid in their entirety using the proceeds from the aforementioned equity offering) and a revolving credit facility of $123.0 million. In October 2009, the $123.0 million revolving credit facility was amended and extended through May 2013. The amended credit facility is discussed in more detail in Note 12 to the Consolidated Financial Statements. As of December 31, 2009, the Company had $5.0 million outstanding under this credit facility. The completion of the equity offering coupled with the amendment and extension of the credit facility created a much improved capital structure and a very strong balance sheet and also provides the Company with improved financial flexibility and liquidity. The Company is confident that it has the capital structure and liquidity in place to successfully execute its plan for organic growth.

 

The Company continues to be proactive in reducing its fixed costs and consolidating operations, which positions the Company to respond to changing economic conditions and to compete more effectively. During 2009, the Company implemented additional cost reduction initiatives. These actions were primarily a continuation of the cost reduction initiatives that were implemented during 2008 and consisted of the following:

 

In January 2009, the Company reduced its workforce by approximately 200 positions, or 6% of the Company’s total headcount. The reduction in workforce included a broad range of functions and was enterprise-wide. The actions taken during the first quarter of 2009 resulted in estimated annualized cost savings of approximately $13.0 million. The Company recorded approximately $4.3 million of severance related costs associated with these workforce reductions during the first quarter of 2009.

 

During the second quarter of 2009, the Company implemented initiatives to achieve approximately $20.0 million in annualized cost savings through further reductions in its workforce and facility costs. These cost reductions included the elimination of a total of approximately 250 positions, or approximately 8% of the Company’s total headcount. The Company recorded approximately $5.6 million of severance related costs associated with these workforce reductions during the second quarter of 2009.

 

In addition, during 2009 the Company incurred restructuring costs of approximately $3.8 million related to the closure and reduction of leased space of certain facilities, and costs of approximately $3.2 million related to the closure of the Company’s datacenter facilities and transition of these operations to a third-party services provider in an effort to reduce costs and streamline its operations. The Company also began outsourcing its computer desktop support operations during 2009.

The Company estimates that the incremental cost savings achieved in 2009 as a result of the cost savings measures implemented during 2008 and 2009 were approximately $60.0 million and estimates that the incremental cost savings in 2010 related to these actions will be approximately $10.0 million.

 

Items Affecting Comparability

 

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

 

 

The charges recorded in 2009 primarily represent costs related to the Company’s headcount reductions and facility closures, as previously discussed, and integration costs of approximately $2.1 million related to the Company’s acquisitions which are discussed in more detail in Note 2 to the Consolidated Financial Statements. In addition, the amounts above include certain non-cash asset impairments amounting to $3,693, $631 and $6,588 for the years ended December 31, 2009, 2008 and 2007, respectively. Further discussion of the restructuring, integration and asset impairment charges is included in the results of operations, which follows, as well as in Note 10 to the Consolidated Financial Statements.

 

The following non-recurring transactions also affect the comparability of results from year to year:

 

Upon the repayment of the Term Loans in August 2009, the Company recorded a loss from extinguishment of debt of approximately $0.8 million ($0.5 million after tax), or $0.01 per share, which resulted from the write off of the unamortized portion of the deferred financing costs directly attributed to the issuance of the Term Loans. Further discussion of the loss from extinguishment of debt for the year ended December 31, 2009 is included in the results of operations, which follows.

 

During 2009, the Company recorded a curtailment gain on its defined benefit pension plan of approximately $1.6 million (approximately $0.9 million after tax), or $0.03 per share, related to the accelerated recognition of unrecognized prior service cost resulting from the reduction of the Company’s workforce during the first half of 2009. This plan is described further in Note 13 to the Consolidated Financial Statements.

 

During 2008, the Company recognized non-cash compensation expense of $1.1 million (approximately $0.7 million after tax), or $0.02 per share, related to its Long-Term Equity Incentive Plan (“LTEIP”) that went into effect in 2006. This amount represented the remaining compensation to be vested through the settlement of the awards in March 2008, which was based on the level of performance achieved in 2007. The plan had a three-year performance cycle with an acceleration clause that was met as of December 31, 2007 based on the 2007 operating results. During 2007, the Company recognized non-cash compensation expense of $11.2 million (approximately $6.9 million after tax), or $0.23 per share, related to the LTEIP. There was no compensation expense recognized by the Company related to the LTEIP in 2009. This plan is described further in Note 18 to the Consolidated Financial Statements.

 

During 2008, the Company recorded a curtailment gain on its defined benefit pension plan of approximately $1.8 million (approximately $1.1 million after tax), or $0.04 per share, resulting from reductions in the Company’s workforce during 2008, which is described in more detail in Note 13 to the Consolidated Financial Statements.

 

During 2007, the Company sold its shares of an equity investment and recognized a gain on the sale of $9.2 million (approximately $5.7 million after tax), or $0.19 per share, which is described further in Note 9 to the Consolidated Financial Statements.

 

During 2007, the Company recorded a curtailment gain of approximately $1.7 million (approximately $1.1 million after tax), or $0.04 per share, related to plan modifications associated with its postretirement benefit plan for its Canadian subsidiary, which is described further in Note 13 to the Consolidated Financial Statements.

During 2007, the Company recognized tax benefits of approximately $6.7 million, or $0.22 per share, related to the completion of audits of the 2001 through 2004 federal income tax returns and recognition of previously unrecognized tax benefits.

 

Results of Operations

 

Year Ended December 31, 2009 compared to Year Ended December 31, 2008

 

 

Revenue

 

Total revenue decreased $90,848, or 12%, to $675,797 for the year ended December 31, 2009 as compared to 2008. The decline in revenue is partially attributed to a significant decrease in capital markets revenue in the first half of 2009, which reflected a reduction in overall capital market activity resulting from reduced levels of IPO and M&A transactions. In addition, the Company experienced increased pricing pressure in 2009 as compared to 2008, and the size of the deals (as measured by total dollars) occurring in 2009 was less than the size of the deals occurring in 2008. As such, revenue from capital markets decreased $31,345, or 15%, during the year ended December 31, 2009 as compared to 2008. Capital markets services revenue in 2009 was negatively impacted by the significant decline in capital markets activity and revenue levels that were experienced during the first half of 2009. During the second half of 2009, capital markets activity showed signs of improvement, particularly in the U.S. and Asia.

Revenue from capital markets services increased for the third and fourth quarters of 2009 by approximately 4% and 56%, respectively, as compared to the same periods in 2008, and revenue from capital markets services increased by approximately $26.7 million, or 31%, for the second half of 2009, as compared to the same period in 2008. During the fourth quarter of 2009, 34 priced IPOs were completed and priced as compared to only one priced IPO during the fourth quarter of 2008. Bowne was awarded 15, or 44% of these deals during the fourth quarter of 2009. In addition, the Company was awarded 2 of the 4 largest M&A jobs that were awarded to service providers during the fourth quarter of 2009.

 

Capital markets services revenue from the U.S. markets decreased approximately $4.1 million, or 3%, during the year ended December 31, 2009 as compared to 2008. Capital markets services from our international markets declined approximately $27.2 million, or 40%, for the year ended December 31, 2009 as compared to 2008. The decline in revenue from our international markets is primarily due to the lack of large transactions occurring in Europe and Canada in 2009 as compared to 2008 and is also negatively impacted by approximately $0.8 million as a result of the fluctuations in the U.S. dollar during 2009 as compared to 2008.

 

Included in capital markets revenue for the year ended December 31, 2009 is $13,078 of revenue related to the Company’s VDR services, which slightly decreased for the year ended December 31, 2009 as compared to 2008, as a result of the overall decline in IPO and M&A activity.

 

Shareholder reporting services revenue decreased $26,229, or 7%, to $335,400 as compared to 2008. Compliance reporting services revenue decreased approximately 8% for the year ended December 31, 2009 as compared to 2008. The decrease in revenue from compliance reporting services was primarily attributable to: (i) fewer public filings; (ii) non-recurring jobs in 2008; (iii) competitive pricing pressure; and (iv) lower print volumes from existing customers. The decline in the number of filings in 2009 was primarily related to: (i) the significant decline in filings related to asset-backed securities; (ii) overall consolidation of public companies; and (iii) fewer companies going public given the recent economic conditions. The decrease in compliance reporting services revenue was partially offset by increases in revenue from the Company’s new compliance services in 2009, particularly Bowne Compliance Driver^sm, Pure Compliance^sm and XBRL related services. Investment management services revenue decreased approximately 4% for the year ended December 31, 2009 as compared to 2008, primarily resulting from lower revenue due to competitive pricing pressure, reduced print volumes and non-recurring work in 2008. These declines were partially offset by the addition of new clients and increased services for certain existing customers in 2009. Translation services revenue decreased 35% for the year ended December 31, 2009 as compared to 2008, primarily a result of competitive pricing pressure and less activity in 2009. In addition, revenue from shareholder reporting services from the Company’s international markets (primarily Canada) was also negatively impacted by approximately $6.7 million as a result of fluctuations in the U.S. dollar compared to certain foreign currencies during 2009 as compared to 2008. The Company anticipates new revenue growth from shareholder reporting services in 2010 driven by new regulatory initiatives, as well as the implementation of new products and services that were introduced in 2010.

 

Marketing communications services revenue decreased $21,558, or 13%, for the year ended December 31, 2009 as compared to 2008, primarily due to: the loss of certain accounts; lower activity levels and volumes from existing customers, as companies reduced marketing spending in the recent economic downturn; and declines in client enrollment activities for health care and financial products, such as 401(k) enrollments as unemployment levels increased.

 

Commercial printing and other revenue decreased approximately $11,716, or 34%, as compared to 2008, primarily due to price pressure and lower volumes and activity levels as a result of the recent economic conditions.

 

Revenue from the domestic market decreased 9% to $563,586 for the year ended December 31, 2009, compared to $618,709 for the year ended December 31, 2008. This decrease is primarily due to the factors discussed above.

 

Revenue from the international markets decreased 24% to $112,211 for the year ended December 31, 2009, as compared to $147,936 for the year ended December 31, 2008. Revenue from the international markets primarily reflects a reduction in capital markets services revenue, particularly in Europe and Canada, and a decline in revenue from shareholder reporting services from international markets in 2009 as compared to 2008, particularly in Canada. Also contributing to the decrease in revenue from international markets were the fluctuations in the U.S. dollar during 2009 as compared to 2008. At constant exchange rates, revenue from the international markets decreased $27,412, or 19%, for the year ended December 31, 2009 as compared to 2008.

 

Cost of Revenue

 

Cost of revenue declined $74,965, or 14%, for the year ended December 31, 2009 as compared to 2008. The cost of revenue as a percentage of revenue improved approximately 200 basis points to 67% in 2009 as compared to 69% in 2008. The decrease in cost of revenue was primarily due to the decline in total revenue in 2009 as compared to 2008, as previously discussed. The improvement in cost of revenue as a percentage of revenue in 2009 as compared to 2008 is primarily due to the improvement in operating efficiencies resulting from the Company’s recent cost savings measures, as described above. In addition, the cost of revenue as a percentage of revenue in 2008 was slightly burdened with a higher cost of revenue as a percentage of revenue from the businesses that were acquired in 2008 which included a high cost structure that remained in place for part of 2008, as the Company was in the process of completing the integration of these acquired businesses. These integrations were substantially completed in the latter part of 2008, and the Company’s cost of revenue as a percentage of revenue improved during 2009, as it realized the benefit of the consolidation of its facilities and operations and the completion of its integrated manufacturing platform including the integration of its recent acquisitions. Based on the Company’s recent cost reductions, including its focus on reducing fixed costs, the Company is optimistic that it is well positioned to further realize the benefits of its more efficient operating model as market conditions continue to recover.

 

Selling and Administrative Expenses

 

Selling and administrative expenses decreased $28,711, or 14%, for the year ended December 31, 2009 as compared to 2008. The decrease is primarily due to the favorable impact of the Company’s recent cost savings measures, which includes; (i) a decrease in payroll and certain fringe benefits as a result of the headcount reductions occurring in 2008 and 2009; (ii) decreases in facility costs as a result of the recent facility reductions and consolidations; (iii) savings resulting from the suspension of the Company’s matching contribution to the 401(k) Savings Plan for the 2009 plan year; (iv) decreases in consulting and professional fees; and (v) a significant reduction in travel and entertainment spending in 2009 as compared to 2008. In addition there was a decrease in certain expenses directly associated with sales in 2009 as compared to 2008, such as commissions and marketing related costs, and a decrease in bad debt expense in 2009 as compared to 2008 primarily due to the collection of a $1.4 million receivable during the fourth quarter of 2009 that was billed in 2005 and was deemed uncollectible and written off in prior years. Non-cash compensation related to stock options and restricted stock/restricted stock units decreased approximately $1.1 million in 2009 as compared to 2008 primarily as a result of the Company recognizing costs of approximately $1.1 million under the Company’s Long-Term Equity Incentive Plan (the “LTEIP”) during 2008. The LTEIP was settled in March 2008. There were no such payments in 2009 under the Company’s 2008 Equity Incentive Plan. The Company’s stock-based compensation is discussed further in Note 18 to the Consolidated Financial Statements. Partially offsetting the decrease in selling and administrative expenses was an increase in incentive compensation, which is based on the overall improved 2009 operating results, and higher medical benefit costs in 2009 as compared to 2008. In addition, pension expense related to the Company’s defined benefit pension plan increased approximately $5.5 million for the year ended December 31, 2009 as compared to 2008, primarily due to the impact of negative asset returns in 2008, which reduced its pension plan asset balance and lowered the expected return on assets used to offset 2009 pension costs. This plan is discussed further in Note 13 to the Consolidated Financial Statements. As a percentage of revenue, overall selling and administrative expense remained constant at 27% for the years ended December 31, 2009 and 2008.

Other Factors Affecting Net Income

 

Depreciation expense decreased 4% for the year ended December 31, 2009 as compared to 2008, primarily due to the facilities closed in connection with the consolidation of the Company’s manufacturing platform and the reorganization that has occurred over the past two years.

 

Amortization expense increased slightly for the year ended December 31, 2009 as compared to 2008, primarily due to the timing of the recognition of the amortization expense related to the intangible assets associated with the Company’s acquisitions that occurred during 2008. These acquisitions are discussed in more detail in Note 2 to the Consolidated Financial Statements.

 

Restructuring, integration and asset impairment charges for the year ended December 31, 2009 were $24,560 as compared to $39,329 in 2008. The charges incurred during the year ended December 31, 2009 primarily represent costs related to the Company’s headcount reductions and facility closures and consolidations, as previously discussed, integration costs of approximately $2.1 million related to the Company’s acquisitions that occurred in 2008 and noncash asset impairments of approximately $3.7 million primarily related to impaired assets associated with the closure and consolidation of certain facilities and the impairment of costs incurred for certain software development projects. The charges incurred during the year ended December 31, 2008 consisted of: (i) costs related to the Company’s workforce reductions that were implemented during 2008; (ii) integration costs of approximately $14.1 million primarily related to the Company’s acquisitions that occurred in 2008; (iii) costs related to the closure of the Company’s digital print facilities in Wilmington, MA and Sacramento, CA and its manufacturing and composition operations in Atlanta, GA; and (iv) costs associated with the consolidation of the Company’s digital print facility in Milwaukee, WI with its existing facility in South Bend, IN. The Company’s restructuring, integration and asset impairment activities are discussed in more detail in Note 10 to the Consolidated Financial Statements.

 

Interest expense decreased $2,350, or 28%, for the year ended December 31, 2009 as compared to 2008, primarily due to a decrease in interest expense on the Company’s convertible debt, as a result of the redemption and repurchase of approximately $66.7 million of the Notes in October 2008, as discussed in more detail in Note 12 to the Consolidated Financial Statements. Interest expense for the year ended December 31, 2009 consisted primarily of interest on the Company’s borrowings under its credit facility, which had a lower average effective interest rate than the Company’s convertible debt that was outstanding during 2008. The weighted-average interest rate on the Company’s borrowings under its credit facility was approximately 4.06% during the year ended December 31, 2009. In addition, the Company’s average outstanding debt balance for the year ended December 31, 2009 was significantly lower than the average outstanding debt balance in 2008 as a result of the repayment of the Term Loans and payment of a portion of the Company’s borrowing under its revolving credit facility during 2009.

 

The loss from extinguishment of the debt for the year ended December 31, 2009 represents the write off of the unamortized portion of the deferred financing costs directly attributed to the issuance of the Term Loans upon the repayment of the Term Loans in August 2009. There was no such loss in 2008.

 

Other income (expense) decreased $8,146 to an expense of ($2,585) for the year ended December 31, 2009 as compared to income of $5,561 in 2008, primarily due to non-cash foreign currency translation losses of approximately ($2.4) million for the year ended December 31, 2009 as compared to non-cash foreign currency translation gains of approximately $2.8 million in 2008. The foreign currency losses in 2009 are a result of the weakness in the U.S. dollar as compared to other currencies for the year ended December 31, 2009 as compared to 2008. Also contributing to the decrease in other income was a decline in interest income in 2009 resulting from a decrease in interest bearing cash and short-term investments and a decline in interest rates for the year ended December 31, 2009 as compared to 2008. Other income for the year ended December 31, 2008 also includes the reduction of legal reserves resulting from the withdrawal of an outstanding legal claim in the prior year. In addition, included in other expenses for the year ended December 31, 2009 is a loss of approximately $0.3 million resulting from the sale of the Company’s operations in Milan, Italy which occurred during the fourth quarter of 2009, and is discussed in more detail in Note 9 to the Consolidated Financial Statements.

 

Income tax benefit for the year ended December 31, 2009 was $3,659 on pre-tax loss from continuing operations of ($20,763) as compared to $11,728 on pre-tax loss from continuing operations of ($42,136) in 2008.

The effective tax rates for the year ended December 31, 2009 and 2008 were 17.6% and 27.8%, respectively. Income tax benefit for the year ended December 31, 2009 reflects a favorable impact of $474 related to the reconciliation of the Company’s 2008 estimated tax provision to the Company’s 2008 federal tax return that was filed during the third quarter of 2009, a substantial portion of which relates to additional tax credits generated.

 

Income from discontinued operations for the year ended December 31, 2009 was $514 as compared to $5,719 in 2008. Income from discontinued operations for the year ended December 31, 2008 primarily consisted of the recognition of previously unrecognized tax benefits of approximately $5.8 million related to the Company’s discontinued outsourcing and globalization business, which is discussed further in Note 4 to the Consolidated Financial Statements. The results from discontinued operations for the year ended December 31, 2009 primarily reflect adjustments related to the estimated indemnification liabilities associated with the Company’s discontinued businesses, interest expense related to the deferred rent associated with leased facilities formerly occupied by discontinued businesses and income tax expense associated with the discontinued operations.

 

As a result of the foregoing, net loss for the year ended December 31, 2009 was $16,590 as compared to $24,689 for the year ended December 31, 2008.

 

Domestic Versus International Results of Operations

 

The Company has operations in the United States, Canada, Europe, Central America, South America and Asia. Domestic and international components of loss from continuing operations before income taxes for the years ended December 31, 2009 and 2008 are as follows:

 

 

The improvement in domestic results from continuing operations is primarily due to the improvement in operating efficiencies resulting from the Company’s cost savings measures implemented over the past two years and a decline in restructuring, integration and asset impairment charges. Although total domestic revenue decreased by approximately $55.1 million, or 9%, for the year ended December 31, 2009 as compared to 2008, pre-tax loss from domestic operations improved by approximately $31.5 million, or 69%. The domestic results for the year ended December 31, 2009 and 2008 include approximately $22.5 million and $36.8 million, respectively, of restructuring, integration and asset impairment charges. Domestic results of operations include shared corporate expenses such as administrative, legal, finance and other support services that primarily are not allocated to the Company’s international operations.

 

The increase in pre-tax loss from international operations is primarily due to the significant declines in revenue from the Company’s international subsidiaries, particularly Canada and Europe. The international results for the year ended December 31, 2009 and 2008 include approximately $2.1 million and $2.5 million, respectively, of restructuring, integration and asset impairment charges.

Year Ended December 31, 2008 compared to Year Ended December 31, 2007

 

 

Revenue

 

Total revenue decreased $83,972, or 10%, to $766,645 for the year ended December 31, 2008 as compared to 2007. The decline in revenue was primarily attributed to the decrease in capital markets services revenue which reflected a reduction in overall capital market activity in 2008 as compared to 2007. Overall capital market activity in 2008 reflected a decrease in overall filing activity of approximately 25% and a 78% decrease in the number of IPOs that were completed and priced in 2008 as compared to 2007. The number of market-wide priced IPOs decreased from 264 in 2007 to 59 in 2008, with only one priced IPO occurring during the fourth quarter of 2008. This overall market decline significantly impacted Bowne’s capital markets services revenue. As such, revenue from capital markets services decreased $110,165, or 35%, during the year ended December 31, 2008 as compared to 2007. In addition, transactional revenue from capital markets activity in the third and fourth quarters of 2008 also represented some of the lowest quarterly levels the Company had experienced since the mid 1990’s. Included in capital markets services revenue for the year ended December 31, 2008 is $13,714 of revenue related to the Company’s VDR services, which increased 49% as compared to 2007. The increase in VDR revenue was a direct result of the Company’s focus on the sales and marketing of its new products, including an increase in the VDR services sales force in 2008. Included in capital markets services revenue was $2,915 of revenue related to the acquisition of Capital Systems Inc (“Capital”).

Shareholder reporting services revenue decreased slightly to $361,629 during the year ended December 31, 2008 as compared to 2007. Compliance reporting revenue decreased approximately 8% for the year ended December 31, 2008 as compared to the same period in 2007. The decrease was partially offset by increases in investment management services revenue and translation services revenue of $12,236, or 8%, and $2,378, or 16%, respectively, during the year ended December 31, 2008 as compared to 2007. The decrease in compliance reporting revenue was due to several factors, including: (i) non-recurring jobs in 2007; (ii) fewer filings; and (iii) competitive pricing pressure. Compliance reporting revenue in 2007 benefited from new SEC regulations regarding executive compensation proxy disclosures, resulting in more extensive disclosure requirements and an increased amount of work related to the initial preparation of these new disclosures. Compliance reporting revenue in 2007 also benefited from larger non-recurring special notice and proxy jobs in 2007 as compared to 2008. In addition, compliance reporting revenue in 2008 was partially impacted by electronic delivery of compliance documents, resulting in lower print volumes and activity levels for certain clients in 2008 as compared to 2007. Included in compliance revenue was $2,041 of revenue related to the acquisition of Capital. The increase in investment management revenue was primarily a result of the addition of $18,126 of revenue from the acquisitions of GCom² Solutions, Inc. (“GCom”) and Capital. The increase in translation services revenue was due to the addition of new clients and increased work from existing clients, primarily in the European market during 2008.

 

Marketing communications services revenue increased $35,861, or 27%, during the year ended December 31, 2008 as compared to 2007, primarily due to the addition of $56,215 of combined revenue from the Company’s acquisitions, including Alliance Data Mail Services, GCom and Rapid Solutions Group. The increase in revenue from these acquisitions was partially offset by a decline in revenue generated by the legacy business due to lower activity levels from existing customers and the loss of certain accounts in 2008, as compared to 2007.

 

Commercial printing and other revenue decreased approximately 21% for the year ended December 31, 2008 as compared to 2007, primarily due to lower activity levels in 2008, as a result of the general downturn in the economy, and competitive pricing pressure.

 

 

Revenue from the domestic market decreased 6% to $618,709 for the year ended December 31, 2008, compared to $658,158 for the year ended December 31, 2007. This decrease was primarily due to a substantial reduction in capital markets services revenue, and was partially offset by revenue associated with the Company’s acquisitions, as discussed above.

 

Revenue from the international markets decreased 23% to $147,936 for the year ended December 31, 2008, as compared to $192,459 for the year ended December 31, 2007. Revenue from the international markets primarily reflected a reduction in capital markets services revenue, as a result of lower overall capital markets activity in 2008 and a large non-recurring job in Europe that occurred in 2007. These decreases were partially offset by an increase in translation services revenue in Europe as a result of the addition of new clients and the addition of revenue resulting from the acquisition of GCom. The change in exchange rate did not significantly impact total revenue from international markets for the year ended December 31, 2008 as compared to the prior year.

 

Cost of Revenue

 

Cost of revenue decreased $6,183, or 1%, for the year ended December 31, 2008 as compared to 2007. The cost of revenue as a percentage of revenue increased to approximately 69% for the year ended December 31, 2008 as compared to 62% for the year ended December 31, 2007. The increase in cost of revenue as a percentage of revenue was primarily due to the decrease in capital markets services revenue, which historically is the Company’s most profitable class of service. Also contributing to the increase in cost of revenue as a percentage of revenue was the impact of the Company’s acquisitions, which generated higher costs as a percentage of revenue in 2008 than the

Company’s historical revenue streams. Combined revenue for these acquisitions during the year ended December 31, 2008 was $80,639 with cost of revenue of $69,369, or approximately 86%. The higher cost of revenue as a percentage of revenue from these acquired businesses included a high cost structure that remained in place for part of 2008, as the Company was in the process of completing the integration of these acquired businesses. These integrations were substantially completed in the latter part of 2008, and the Company’s cost of revenue as a percentage of revenue improved during 2009, as it realized the benefit of the consolidation of its facilities and operations and the completion of its integrated manufacturing platform including the integration of its acquisitions.

 

Selling and Administrative Expenses

 

Selling and administrative expenses decreased $33,744, or 14%, for the year ended December 31, 2008 as compared to 2007. The decrease was primarily due to decreases in incentive compensation and expenses directly associated with sales, such as bonuses and commissions, and the favorable impact of recent cost savings measures, including the Company’s headcount reductions that occurred during 2008, the reduction of leased space at the Company’s New York City facility, and cost savings related to the decrease in pension costs. The Company did not pay bonuses for 2008 under its annual incentive plan based on the 2008 results of operations. Also contributing to the decrease in selling and administrative expenses was a decrease in stock-based compensation expense for the year ended December 31, 2008 as compared to 2007, primarily related to the reduction in compensation expense recognized under the Company’s equity incentive compensation plans, which is discussed further in Note 18 to the Consolidated Financial Statements. In addition, selling and administrative expenses for the year ended December 31, 2008 was reduced by a curtailment gain of approximately $1.8 million recognized by the Company related to its defined benefit pension plan, which resulted from reductions in the Company’s workforce during 2008. Partially offsetting the decrease in selling and administrative expenses for the year ended December 31, 2008 as compared to 2007 was an increase in costs associated with increasing the VDR and translation services sales force during 2008 and increased labor costs as a result of the Company’s acquisitions. In addition, bad debt expense for the year ended December 31, 2008 increased by approximately $3.3 million, primarily as a result of the challenging economic conditions occurring during 2008. As a percentage of revenue, overall selling and administrative expenses improved to 27% for the year ended December 31, 2008 as compared to 29% in 2007.

 

Other Factors Affecting Net Income

 

Depreciation and amortization expense increased for the year ended December 31, 2008 as compared to the same period in 2007 primarily due to depreciation and amortization expense recognized in 2008 related to the Company’s acquisitions. The increases in depreciation expense were partially offset by decreases in depreciation expense recognized for the year ended December 31, 2007 for facilities that were subsequently closed in connection with the consolidation of the Company’s manufacturing platform.

 

Restructuring, integration and asset impairment charges for the year ended December 31, 2008 were $39,329 as compared to $17,001 in 2007. The charges incurred during the year ended December 31, 2008 consisted of: (i) costs related to the Company’s workforce reductions that were implemented during 2008; (ii) integration costs of approximately $14.1 million primarily related to the Company’s acquisitions; (iii) costs related to the closure of the Company’s digital print facilities in Wilmington, MA and Sacramento, CA and its manufacturing and composition operations in Atlanta, GA; and (iv) costs associated with the consolidation of the Company’s digital print facility in Milwaukee, WI with its existing facility in South Bend, IN. The charges incurred for the year ended December 31, 2007 primarily consisted of: (i) severance and integration costs related to the integration of the St Ives Financial Business; (ii) facility exit costs and asset impairment charges related to the reduction of leased space at the Company’s New York City facility; (iii) facility exit costs related to leased warehouse space; (iv) Company-wide workforce reductions; and (v) an asset impairment charge of $2.1 million related to the goodwill associated with the Company’s JFS Litigators Notebook^® (“JFS”) business. The JFS business was sold in September 2008 for approximately $400, and the Company recognized a pre tax loss on the sale of approximately $132 in 2008.

 

Interest expense increased $175, or 2%, for the year ended December 31, 2008 as compared to 2007, primarily due to interest resulting from borrowings on the Company’s revolving credit facility during 2008. Offsetting the increase in interest expense was a decrease in the interest expense accrued under the Company’s convertible

subordinated debentures (the “Notes”) during the fourth quarter of 2008, as a result of the redemption of approximately $66.7 million of the Notes on October 1, 2008.

 

Other income increased $4,434 for the year ended December 31, 2008 as compared to 2007, primarily due to non-cash foreign currency translation gains of $2,822 for the year ended December 31, 2008 as compared to non-cash foreign currency translation losses of $1,526 in 2007, as a result of the improvement in the U.S. dollar compared to other currencies during the second half of 2008. Also contributing to the increase in other income was the reduction of legal reserves in 2008 resulting from the withdrawal of outstanding legal claims from prior years. Other income in 2008 was negatively impacted by a decrease in interest income for the year ended December 31, 2008 as compared to the same period in 2007, primarily due to a decrease in the average balance of interest bearing cash in 2008 as compared to 2007 and the liquidation of approximately $35.6 million of the Company’s short-term marketable securities during 2008, which is discussed in more detail in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

 

Income tax benefit for the year ended December 31, 2008 was $11,728 on pre-tax loss from continuing operations of ($42,136) compared to income tax expense of $7,890 on pre-tax income from continuing operations of $33,442 in 2007. The effective tax rates for the year ended December 31, 2008 and 2007 were 27.8% and 23.6%, respectively.

 

Income from discontinued operations for the year ended December 31, 2008 was $5,719 as compared to a loss from discontinued operations of ($223) in 2007. This increase is primarily due to the recognition of previously unrecognized tax benefits of approximately $5.8 million related to the Company’s discontinued outsourcing and globalization businesses during the third quarter of 2008, which is discussed further in Note 10 to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

 

As a result of the foregoing, net loss for the year ended December 31, 2008 was ($24,689) as compared to net income of $25,329 for the year ended December 31, 2007.

 

Domestic Versus International Results of Operations

 

Domestic and international components of (loss) income from continuing operations before income taxes for the years ended December 31, 2008 and 2007 were as follows:

 

 

The decrease in domestic and international pre-tax income from continuing operations was primarily due to the substantial reduction in capital markets services revenue for the year ended December 31, 2008, as previously discussed. In addition, the domestic and international results for the year ended December 31, 2008 included approximately $36.8 million and $2.5 million, respectively, of restructuring and integration costs. Domestic results of operations include shared corporate expenses such as administrative, legal, finance and other support services that primarily are not allocated to the Company’s international operations.

Liquidity and Capital Resources

 

 

Overall working capital decreased by approximately $8.0 million at December 31, 2009 as compared to December 31, 2008. The change in working capital from December 31, 2008 to December 31, 2009 is primarily attributed to: (i) the reclassification of the Company’s Notes (approximately $7.9 million) to current debt as of December 31, 2009 from noncurrent liabilities at December 31, 2008 as discussed below; (ii) an increase in accrued bonuses as of December 31, 2009, which is based on the overall improved 2009 operating results; (iii) cash contributions of approximately $5.0 million to the Company’s defined benefit pension plan in 2009, which is discussed further in Note 13 to the Consolidated Financial Statements; and (iv) cash used to pay restructuring and integration related expenses, which is discussed in more detail in Note 10 to the Consolidated Financial Statements. These decreases are partially offset by an increase in cash provided by operating activities during 2009 due to the overall improved operating results in 2009 as compared to 2008, and decreases in cash used for acquisitions and capital expenditure in 2009 as compared to 2008.

 

In August 2009, the Company completed a public equity offering of 12.1 million shares of its common stock, at an offering price of $5.96 per share. The net proceeds from the equity offering were approximately $67.8 million, which is net of issuance costs of approximately $4.1 million. The net proceeds from the equity offering were used to repay the Company’s Term Loans in their entirety, and repay a portion of the Company’s borrowings under its revolving credit facility.

 

In March 2009, the Company amended its $150.0 million five-year senior, unsecured Facility and extended its maturity to May 31, 2011. The $150.0 million Facility was restructured as an asset-based loan consisting of a revolving credit facility of $123.0 million (the “Revolver”) and $27.0 million in Term Loans. In October 2009 the Company amended and extended its Revolver through May 2013. The Facility was initially entered into in May 2005 and was due to expire in May 2010.

 

The $123.0 million Revolver has an interest rate based on the London InterBank Offered Rate (“LIBOR”) plus 4.00% in the case of Eurodollar loans or a base rate plus 3.00% in the case of Base Rate loans. The Company also pays facility fees on a quarterly basis, regardless of borrowing activity under the Facility. The Revolver is secured by substantially all assets of the Company as well as by pledges of stock and guaranties of certain operating subsidiaries. The Revolver includes a $15.0 million sub-facility which is available to the Company’s Canadian subsidiary. The Revolver also includes a $25.0 million sub-limit for letters of credit and a $14.0 million sub-limit for swing line loans. The Company’s ability to borrow under the $123.0 million Revolver is subject to periodic borrowing base determinations. The borrowing base consists primarily of certain eligible accounts receivable and inventories. Borrowings under the Revolver are based on predetermined advance rates based on assets (generally up to 85% of billed receivables, 80% of eligible unbilled receivables and 50% of certain inventories including work-in-process). As of December 31, 2009, the Company had $5.0 million outstanding under the Revolver, which is classified as long-term debt since the Revolver expires in May 2013. The Company had $79.5 million of borrowings outstanding under this revolving credit facility as of December 31, 2008.

 

The $27.0 million Term Loans were comprised of a $20.0 million Term Loan and a $7.0 million Term Loan. The Term Loans were repaid in their entirety in August 2009 using the net proceeds from the Company’s equity offering which is discussed in more detail in Note 12 to the Consolidated Financial Statements. Prior to repayment,

the Term Loans had an interest rate based on LIBOR plus 4.25% in the case of Eurodollar loans or a base rate plus 3.25% in the case of Base Rate loans.

 

Prior to the amendment that occurred in October 2009, the Facility required compliance with a minimum fixed charge coverage covenant as well as customary affirmative and negative covenants including restrictions on the Company’s and its subsidiaries’ ability to pay cash dividends, incur debt and liens, and engage in mergers and acquisitions and sales of assets, among other things. However, under the terms of the amended facility, the minimum fixed charge coverage ratio shall be 1.0x at all times, and the Company is afforded increased flexibility related to cash dividends and acquisitions. The amended Facility provides that the Company may pay cash dividends of $2.5 million per quarter with an increase in the amount of up to $15.0 million in any fiscal year, provided that no default or event of default has occurred and is continuing, the fixed charge coverage ratio is 1.25x or greater and excess revolver availability is $30.0 million. In addition, acquisitions up to $50.0 million per annum are permitted if the fixed charge coverage ratio is 1.25x or greater and excess revolver availability is $40.0 million. The Company was in compliance with the Facility’s covenants as of December 31, 2009.

 

The Company paid approximately $6.9 million related to the amendment and extension of the Facility, of which approximately $5.5 million related to the amendment that occurred in March 2009, and approximately $1.4 million related to the amendment that occurred in October 2009. These costs primarily consisted of bank fees and fees paid to attorneys and other third-party professionals. Approximately $0.8 million of the unamortized fees were written off upon the repayment of the Term Loans in August 2009 and have been reported as a loss from extinguishment of debt for the year ended December 31, 2009 in the Consolidated Financial Statements.

 

As of March 1, 2010, the Company had $33.0 million outstanding under the Facility, which reflects the normal seasonal increase in borrowings that usually occurs during the first quarter. Total available borrowings under the Facility as of March 1, 2010 were approximately $34.2 million, which was based on the Company’s most recent borrowing base calculation. The Company’s next borrowing base calculation is due by March 20, 2010.

 

The remaining holders of the Company’s $8.3 million Notes may require the Company to repurchase all or any portion of that holder’s Notes on each of October 1, 2010, October 1, 2013, October 1, 2018, October 1, 2023 and October 1, 2028, or in the event of a “change in control” as that term is described in the indenture for the Notes. The terms of the Notes are described in more detail in Note 12 to the Consolidated Financial Statements. The Notes are classified as current debt as of December 31, 2009, since the earliest that the redemption and repurchase features can occur are on October 1, 2010, as discussed above. The Notes were classified as non-current debt as of December 31, 2008. The Company is not subject to any financial covenants under the Notes other than cross default provisions.

 

Capital expenditures for the year ended December 31, 2009 were $17.3 million, of which approximately 80% of the costs were related to technology driven solutions including the development of new service offerings and upgrades and improvements to existing client solutions and internal systems. Capital expenditures for the year ended December 31, 2008 were $22.1 million, which included approximately $2.4 million related to the integration of the Company’s acquisitions. Capital expenditures for the year ended December 31, 2007 were $20.8 million, which included approximately $3.0 million related to the consolidation and build-out of the existing space at 55 Water Street in New York City as a result of the lease modification that occurred in June 2007. The Company expects capital expenditures in 2010 to range from $18 million to $22 million.

 

In November 2009, the Company paid approximately $2.3 million of cash dividends to its shareholders. The payment of cash dividends for the first three quarters of 2009 was suspended, primarily due to the restrictions included in the covenants to the Company’s Facility, as described above. As such, the Company issued stock dividends to its shareholders for the first three quarters of 2009 which were consistent in value with the historical dividend payout on a per share basis. The Company has paid consecutive quarterly dividends since the Company became public in August 1968.

 

The Company experiences certain seasonal factors with respect to its working capital; the heaviest demand for utilization of working capital is normally in the first and second quarter. The Company’s existing borrowing capacity and improved financial flexibility and liquidity provide for this seasonal demand. The Company is also confident that the capital structure and liquidity that it currently has in place allow the Company to successfully execute its plan for organic growth. Although the Company believes that the level of cash flow expected from operations and the

remaining availability under its credit facility should be adequate to fund its operating needs in the foreseeable future, there are no assurances at this time that this will be the case.

 

Cash Flows

 

The Company continues to focus on cash management, including managing receivables and inventory. The Company’s average days sales outstanding improved to 69 days in 2009 as compared to 70 days in 2008. The Company had net cash provided by operating activities of $43,055, $6,740 and $94,889 for the years ended December 31, 2009, 2008 and 2007, respectively. The improvement in net cash provided by operating activities in 2009 as compared to 2008 was primarily the result of improved profitability in 2009 as compared to 2008. Also contributing to the improvement in cash provided by operating activities was the following: (i) there were no bonuses paid under the Company’s incentive plans during the year ended December 31, 2009 (based primarily on 2008 operating results), as compared to cash bonuses of approximately $13.8 million paid during the year ended December 31, 2008 (based primarily on 2007 operating results); (ii) there were net cash refunds for income taxes of approximately $8.4 million received during the year ended December 31, 2009, as compared to net cash used to pay income taxes of approximately $1.7 million for the year ended December 31, 2008; and (iii) a decrease in restructuring and integration payments during the year ended December 31, 2009 as compared to 2008. Partially offsetting the increase in cash provided by operating activities was the contribution of approximately $5.0 million to the Company’s defined benefit pension plan during the year ended December 31, 2009 as compared to no contributions being made to the pension plan in 2008. Overall, cash provided by operating activities improved by approximately $36.3 million for the year ended December 31, 2009 as compared to the year ended December 31, 2008. The decrease in cash provided by operating activities from 2007 to 2008 was due to a decrease in operating income and a decrease in the collection of accounts receivable resulting from reduced revenue and the economic conditions in 2008 as compared to 2007. In addition, the decrease in cash provided by operations was also attributable to an increase in the bonuses paid under the Company’s incentive plans during 2008, as discussed above, and an increase in cash used to pay restructuring and integration payments in 2008 as compared to 2007. These decreases were partially offset by a decrease in net cash used to pay income taxes in 2008 as compared to 2007.

 

Net cash used in investing activities was $16,682, $63,242 and $30,224 for the years ended December 31, 2009, 2008 and 2007, respectively. The decrease in net cash used in investing activities in 2009 as compared to the same period in 2008 was primarily due to the decrease in cash used for acquisitions for the year ended December 31, 2009 as compared to 2008. Net cash used for acquisitions for the year ended December 31, 2008 amounted to $79,495, and consisted of the acquisitions of GCom, Rapid Solutions Group, Capital Systems, Inc. and an offsetting net working capital adjustment related to the acquisition of Alliance Data Mail Services (“Alliance”) that was received in June 2008. During the year ended December 31, 2009, the Company paid $195 for the settlement of the working capital related to the acquisition of Capital, which was acquired in July 2008. These acquisitions are discussed in more detail in Note 2 to the Consolidated Financial Statements. Partially offsetting the decrease in cash used in investing activities were significantly higher net proceeds received from the sale of marketable securities during the year ended December 31, 2008, as a result of the Company liquidating a significant portion of its investments in auction rate securities. Capital expenditures for the year ended December 31, 2009 were $17,299 as compared to $22,119 in 2008. The decrease in capital expenditures in 2009 as compared to 2008 is primarily due to capital expenditures occurring during 2008 related to the integration of the Company’s acquired businesses and the development of the Company’s new workflow and billing system which was implemented during the fourth quarter of 2008. The increase in net cash used in investing activities in 2008 as compared to 2007 was primarily due to: (i) the increase in cash used for acquisitions in 2008, which consisted of the aforementioned acquisitions, as compared to net cash used in acquisitions in 2007 that included the acquisitions of St Ives Financial and Alliance; (ii) the additional purchase of certain technology assets in 2008 related to the acquisition of PLUM that occurred in 2007; and (ii) the increase in cash used in capital expenditures in 2008 as compared to 2007. These increases were partially offset by: (i) the increase in the net proceeds received from the sale of marketable securities in 2008 as compared to 2007; (ii) the collection of a portion of the amount due from the prior year sale of its DecisionQuest business during 2008; and (iii) the proceeds received related to the sale of certain of the Company’s equipment in 2008.

The Company had net cash (used in) provided by financing activities of ($16,518), $6,928 and ($46,220) for the years ended December 31, 2009, 2008 and 2007, respectively. The change from net cash provided by financing activities in 2008 to net cash used in financing activities in 2009 is primarily due to the net payment of borrowings under the Company’s credit facility during 2009 of approximately $81.2 million, as compared to net borrowings under the credit facility of approximately $79.5 million in 2008. A significant portion of the amounts borrowed under the revolving credit facility in 2008 were used in the redemption of the $66.7 million of Notes in October 2008, as discussed in Note 12 to the Consolidated Financial Statements. The Company received net proceeds of approximately $67.8 million from the aforementioned equity offering that occurred in August 2009. As previously discussed, these proceeds were used to repay the Company’s Term Loans in their entirety, and repay a portion of the Company’s borrowings under its credit facility. Partially offsetting the increase in net cash used in financing activities for the year ended December 31, 2009 as compared to 2008 was the decrease in cash dividends paid to shareholders, primarily due to the suspension of the payment of cash dividends for the first three quarters of 2009, as previously discussed. Cash dividends paid to shareholders were approximately $2.3 million in 2009 as compared to approximately $5.9 million in 2008. The net borrowings for the year ended December 31, 2009 have been reported net of debt issuance costs related to the amendment and extension of the Facility of approximately $6.9 million. The change from net cash used in financing activities in 2007 to net cash provided by financing activities in 2008 was primarily due to the Company’s stock repurchases that occurred in 2007 in accordance with the Company’s stock repurchase program. During the year ended December 31, 2007, the Company repurchased approximately 3.1 million shares of its common stock for $51,749. There were no share repurchases in 2008, as the program was completed in December 2007. Also contributing to the increase in cash provided by financing activities in 2008 was higher net proceeds received from borrowings under the Company’s credit facility during 2008, as compared to 2007. As previously mentioned, a significant portion of the amounts borrowed under the revolving credit facility in 2008 were used in the redemption of the $66.7 million of Notes in October 2008. Offsetting the increase in cash provided by financing activities in 2008 was a decrease in cash received from stock option exercises in 2008 as compared to 2007.

 

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

 

The Company’s debt as of December 31, 2009 primarily consists of borrowings under its revolving credit facility and the $8.3 million remaining outstanding under its Notes, which were amended in October 2008. The Company also leases equipment under leases that are accounted for as capital leases, where the equipment and related lease obligation are recorded on the Company’s balance sheet.

 

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

 

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

 

 

 

 

As discussed in Note 14 to the Consolidated Financial Statements, the Company has long-term liabilities for deferred employee compensation, including pension, supplemental retirement plan, and deferred compensation. The payments related to the supplemental retirement plan and deferred compensation are not included above since they are dependent upon when the employee retires or leaves the Company, and whether the employee elects lump-sum or annuity payments. In addition, minimum pension funding requirements are not included above as such amounts are not available for all periods presented. The Company contributed approximately $5.0 million to its defined benefit pension plan in 2009. Based on current market conditions the Company anticipates that it will contribute approximately $3.7 million to the plan in 2010. Funding requirements for subsequent years are uncertain and will significantly depend on the actual return on plan assets, whether the plan’s actuary changes any assumptions used to calculate plan funding levels, changes in the employee groups covered by the plan, and any new legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes the Company may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law. The Company estimates it will contribute approximately $0.3 million to its unfunded supplemental retirement plan in 2010, which represents the expected benefit payments in 2010. During 2009, the Company made approximately $1.9 million in supplemental retirement plan contributions.

 

As discussed further in Note 11 to the Consolidated Financial Statements, the Company had total liabilities for unrecognized tax benefits of approximately $2.1 million as of December 31, 2009, which were excluded from the table above. The Company believes that it is reasonably possible that up to approximately $1.3 million of its currently unrecognized tax benefits may be recognized by the end of 2010.

 

The Company has issued standby letters of credit in the ordinary course of business totaling $4,372. These letters of credit primarily expire in 2010.

 

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

 

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

 

Critical Accounting Policies and Estimates

 

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States. The Company’s significant accounting polices are disclosed in Note 1 to the Consolidated Financial Statements. The selection and application of these accounting principles and methods requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as certain financial statement disclosures. On an ongoing basis, the Company evaluates its estimates, including those related to the recognition of revenue, allowance for doubtful accounts, valuation of goodwill and other intangible assets, income tax provision and deferred taxes, restructuring costs, actuarial assumptions for employee benefit plans, and contingent liabilities related to litigation and other claims and assessments. These estimates and assumptions are based on management’s best estimates and judgment, which management believes to be reasonable under the circumstances. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We adjust such estimates and assumptions when facts and circumstances dictate. The weakening economy,

illiquid credit markets, and declines in capital markets activity have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

 

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

 

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

 

In accordance with the accounting standard regarding business combinations, the Company allocates the cost of acquired companies to the identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. Certain intangible assets, such as customer relationships, are amortized to expense over time. The Company’s future operating performance will be impacted by the future amortization of identifiable intangible assets and potential impairment charges related to goodwill and other indefinite lived intangible assets. Accordingly, the allocation of the purchase price to intangible assets and goodwill has a significant impact on the Company’s future operating results. The allocation of the purchase price of the acquired companies to intangible assets and goodwill requires management to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate to value these cash flows. Should different conditions prevail, material write-downs of net intangible assets and/or goodwill could occur.

 

The Company acquired certain identifiable intangible assets in connection with its acquisitions in prior years. These identifiable intangible assets primarily consist of the value associated with customer relationships and technology. The valuation of these identifiable intangible assets is subjective and requires a great deal of expertise and judgment. The values of the customer relationships were primarily derived using estimates of future cash flows to be generated from the customer relationships. This approach was used since the inherent value of the customer relationship is its ability to generate current and future income. The value of the technology was primarily derived using the cost approach, which computes the amount to recreate the existing technology at the same level of functional utility. While different amounts would have been reported using different methods or using different assumptions, the Company believes that the methods selected and the assumptions used are the most appropriate for each asset analyzed. Depreciation of the acquired technology and amortization of all other intangible assets are charged to operating expenses as separate components of expenses in the Consolidated Statements of Operations.

 

Identifiable intangible assets are reviewed for impairment whenever events or circumstances indicate that the asset’s undiscounted expected future cash flows are not sufficient to recover the carrying value amount. The Company measures potential impairment loss by utilizing an undiscounted cash flow valuation technique. To the extent that the Company’s undiscounted future cash flows were to decline substantially, an impairment charge could result. No impairment charge related to the carrying value of its intangible assets was identified in 2009 based on an analysis prepared in accordance with the applicable accounting standard. There are certain assumptions inherent in projecting the recoverability of the Company’s identifiable intangible assets. If actual experience differs from the assumptions made, the Company’s consolidated results of operations or financial position could be materially impacted. The Company also periodically evaluates the appropriateness of the remaining useful lives of long-lived assets and the method of depreciation or amortization.

 

Goodwill and other intangible assets are required to be tested annually based upon the estimated fair value of the Company’s reporting unit. At December 31, 2009, the Company’s goodwill balance was $51,076. The Company currently has one reporting unit.

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

 

Accordingly, the process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. The Company estimated its current fair market value based on its market capitalization as of December 31, 2009. The Company’s market capitalization was approximately $267.8 million as of December 31, 2009, which exceeded the Company’s carrying value of $251.5 million. Therefore, the Company has concluded that its goodwill is not considered impaired as of December 31, 2009.

 

The Company continues to monitor its stock price and market capitalization. If the price of the Company’s common stock declines, or if current economic conditions deteriorate, the Company will be required to perform impairment testing of its goodwill in advance of its next annual testing date, which could result in future impairment of its goodwill during an interim period.

 

Revenue Recognition — The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” which requires that: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectibility is reasonably assured. The Company recognizes revenue when services are completed or when the printed documents are shipped to customers. Revenue from virtual dataroom services is recognized when the documents are loaded into the dataroom. Revenue for completed but unbilled work is recognized based on the Company’s historical standard pricing for type of service and is adjusted to actual when billed. The Company accounts for sales and other use taxes on a net basis in accordance with the accounting guidance regarding how taxes collected from customers and remitted to governmental authorities should be presented in the income statement. Therefore, these taxes are excluded from revenue and cost of revenue in the Consolidated Statements of Operations.

 

Allowance for Doubtful Accounts and Sales Credits — The Company realizes that it will be unable to collect all amounts that it bills to its customers. Therefore, it estimates the amount of billed receivables that it will be unable to collect and provides an allowance for doubtful accounts and sales credits during each accounting period. A considerable amount of judgment is required in assessing the realization of these receivables. The Company’s estimates are based on, among other things, the aging of its account receivables, its past experience collecting receivables, information about the ability of individual customers to pay, and current economic conditions. While such estimates have been within the Company’s expectations and the provisions established, a change in financial condition of specific customers or in overall trends experienced may result in future adjustments of the Company’s estimates of recoverability of its receivables. In addition, the current global economic crisis may adversely affect customers’ ability to obtain credit to fund operations, which in turn would affect their ability to timely make payment on invoices. As of December 31, 2009, the Company had an allowance for doubtful accounts and sales credits of $4,554.

 

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

rate. The Company’s overall statutory tax rate was 41.5% for the years ended December 31, 2009 and 2008, respectively, as compared to 38.5% for the year ended December 31, 2007.

 

The Company accounts for income taxes in accordance with the accounting standard for income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. This accounting standard also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

 

At December 31, 2009 and 2008, the Company had deferred tax assets in excess of deferred tax liabilities of $52,363 and $60,393, respectively. At December 31, 2009 and 2008, management determined that it is more likely than not that $48,237 and $56,365, respectively, of such assets will be realized, resulting in a valuation allowance of $4,126 and $4,028, respectively, which are related to certain net operating losses which may not be utilized in future years.

 

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

 

Accounting for Pensions — The Company sponsors a defined benefit pension plan in the United States. The Company accounts for its defined benefit pension plan in accordance with generally accepted accounting standards, which require that expenses and liabilities recognized in financial statements be actuarially calculated. Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and the future performance of plan assets. Under these accounting standards, the Company is required to recognize the funded status of the plans as an asset or liability in the financial statements, measure defined benefit postretirement plan assets and obligations as of the end of the employer’s fiscal year, and recognize the change in the funded status of defined benefit postretirement plans in other comprehensive income. The primary assumptions used in calculating pension expense and liability are related to the discount rate at which the future obligations are discounted to value the liability, expected rate of return on plan assets, and projected salary increases. These rates are estimated annually as of December 31.

 

The discount rate assumption is tied to a long-term high quality bond index and is therefore subject to annual fluctuations. A lower discount rate increases the present value of the pension obligations, which results in higher pension expense. The discount rate was 6.0% at December 31, 2009, 6.25% at December 31, 2008 and 6.0% at December 31, 2007, respectively. The Company used a discount rate of 6.25% in determining the Company’s pension expense during the first five months of 2009. However, as a result of the Company’s workforce reductions that occurred during the first half of 2009, the Company was required to remeasure its pension plan’s funded status and recalculate the benefit obligations as of May 31, 2009. The remeasurement resulted in a discount rate of 7.50%, based on the prevailing rates as of May 31, 2009, which was used in calculating pension expense for the remainder of 2009. These assumptions are discussed further in Note 13 to the Consolidated Financial Statements. Each 0.25 percentage point change in the discount rate would result in a $5.0 million change in the projected pension benefit obligation and a $0.2 million change in annual pension expense.

 

The expected rate of return on plan assets assumption is based on the long-term expected returns for the investment mix of assets currently in the portfolio. Management uses historic return trends of the asset portfolio combined with anticipated future market conditions to estimate the rate of return. For 2004 through 2009 the Company’s expected return on plan assets has remained at 8.5%. Each 0.25 percentage point change in the assumed long-term rate of return would result in a $0.2 million change in annual pension expense.

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

 

Restructuring Accrual — During the past three fiscal years, the Company recorded significant restructuring charges. The Company accounts for these charges in accordance with generally accepted accounting standards, which require that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Accounting for costs associated with exiting leased facilities is based on estimates of current facility costs and is offset by estimates of projected sublease income expected to be recovered over the remainder of the lease. These estimates are based on a variety of factors including the location and condition of the facility, as well as the overall real estate market. The actual sublease terms could vary from the estimates used to calculate the initial restructuring accrual, resulting in potential adjustments in future periods. In management’s opinion, the Company has made reasonable estimates of these restructuring accruals based upon available information. The Company’s accrued restructuring is discussed in more detail in Note 10 to the Consolidated Financial Statements.

 

Recent Accounting Pronouncements

 

In December 2008, the FASB issued guidance regarding an employer’s disclosures about postretirement benefit plan assets. This guidance amends the previously issued FASB standard to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plans. This guidance requires employers of public and nonpublic companies to disclose more information about how investment allocation decisions are made, more information about major categories of plan assets, including concentration of risk and fair-value measurements, and the fair-value techniques and inputs used to measure plan assets. The disclosure requirements are effective for years ending after December 15, 2009. The Company adopted the disclosure requirements of this guidance, which is discussed in more detail in Note 13 to the Consolidated Financial Statements. The adoption of this guidance did not have a significant impact on the Company’s financial statements.

 

In June 2009, the FASB issued a standard regarding the FASB Accounting Standards CodificationTM and the hierarchy of generally accepted accounting principles, which replaces the standard previously issued by the FASB regarding the hierarchy of generally accepted accounting principles. This standard identifies the source of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States (the “GAAP hierarchy”). In addition, this standard establishes the FASB Accounting Standard Codification^tm (the “Codification”) as the source of authoritative GAAP recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. All guidance contained in the Codification carries an equal level of authority. The initial date of the adoption of this standard was effective for financial statements issued for interim and annual periods ending after June 15, 2009. On June 3, 2009, FASB decided that this standard is effective for interim and annual periods ending after September 15, 2009. The Company adopted this standard during the third quarter of 2009. Its adoption did not have a significant impact on the Company’s results of operations or financial statements.

 

In May 2009, the FASB issued a standard regarding accounting for subsequent events. This standard incorporates into authoritative accounting literature certain guidance that already existed within generally accepted auditing standards, but the rules concerning recognition and disclosure of subsequent events will remain essentially unchanged. Subsequent events guidance addresses events which occur after the balance sheet date but before the issuance of financial statements. Under this guidance as under current practice, an entity must record the effect of subsequent events that provide evidence about conditions that existed at the balance sheet date. This standard was effective for interim and annual periods ending after June 15, 2009. The Company adopted this standard during the second quarter of 2009. Its adoption did not have a significant impact on the Company’s financial statements. The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2009, for items that should be recognized or disclosed in these financial statements.

 

In April 2009, the FASB issued guidance regarding interim disclosures about fair value of financial instruments, which amended the preexisting standards to require disclosures about fair value of financial instruments for

interim reporting periods of publicly traded companies as well as in annual financial statements, and to require those disclosures in summarized financial information at interim reporting periods. This guidance was effective for interim reporting periods ending after June 15, 2009. The guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, the guidance requires comparative disclosures only for periods ending after initial adoption. The Company adopted this guidance during the second quarter of 2009. Its adoption did not have a significant impact on the Company’s results of operations or financial statements.

 

In April 2009, the FASB issued guidance regarding accounting for recognition and presentation of other-than-temporary impairments, which amended the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, and does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, the guidance requires comparative disclosures only for periods ending after initial adoption. The Company adopted this guidance during the second quarter of 2009. Its adoption did not have a material effect on the determination or reporting of our financial results for the year ended December 31, 2009.

 

In April 2009, the FASB issued guidance regarding determining fair value when the volume and level of activity for the asset or liability have significantly decreased, and guidance for identifying transactions that are not orderly. This guidance was effective for interim and annual reporting periods ending after June 15, 2009. The guidance does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this guidance requires comparative disclosures only for periods ending after initial adoption. The Company adopted the provisions of this guidance during the second quarter of 2009. Its adoption did not have a material effect on the determination or reporting of our financial results for the year ended December 31, 2009.

 

In May 2008, the FASB issued guidance regarding accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). The guidance requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. As such, the initial debt proceeds from the sale of the Company’s convertible subordinated debentures, which are discussed in more detail in Note 12 to the Consolidated Financial Statements, are required to be allocated between a liability component and an equity component as of the debt issuance date. The resulting debt discount is amortized over the instrument’s expected life as additional non-cash interest expense.

 

This guidance was effective for fiscal years beginning after December 15, 2008 and required retrospective application. During the first quarter of 2009, the Company adopted this guidance. All prior year information has been revised to present the retrospective adoption of this guidance. The adoption of this guidance is described further below and in more detail in Note 21 to the Company’s amended annual report on Form 10-K/A for the year ended December 31, 2008.

 

Upon adoption of the accounting guidance the Company measured the fair value of its $75.0 million 5% Convertible Subordinated Debentures (“Notes”) issued in September 2003, using an interest rate that the Company could have obtained at the date of issuance for similar debt instruments without an embedded conversion option. Based on this analysis, the Company determined that the fair value of the Notes was approximately $61.7 million as of the issuance date, a reduction of approximately $13.3 million in the carrying value of the Notes, of which $8.2 million was recorded as additional paid-in capital, and $5.1 million was recorded as a deferred tax liability. Also in accordance with the accounting guidance, the Company is required to allocate a portion of the $3.3 million of debt issuance costs that were directly related to the issuance of the Notes between a liability component and an equity component as of the issuance date, using the interest rate method as discussed above. Based on this analysis, the Company reclassified approximately $0.4 million of these costs as a component of equity and approximately $0.3 million as a deferred tax asset. These costs were amortized through October 1, 2008, as this was the first date at which the redemption and repurchase of the Notes could occur.

On October 1, 2008, the Company repurchased approximately $66.7 million of the Notes, and amended the terms of the remaining $8.3 million of Notes outstanding (the “Amended Notes”), effective October 1, 2008. The amendment increased the semi-annual cash interest payable on the Notes from 5.0% to 6.0% per annum, and changed the conversion price applicable to the Notes from $18.48 per share to $16.00 per share for the period from October 1, 2008 to October 1, 2010. In accordance with the accounting guidance the Company remeasured the fair value of the Amended Notes using an applicable interest rate for similar debt instruments without an embedded conversion option as of the amendment date. Based on this analysis, the Company determined that the fair value of the Amended Notes was approximately $7.6 million as of the amendment date, a reduction of approximately $0.7 million in the carrying value of the Amended Notes, of which $0.4 million was recorded as additional paid-in capital, and $0.3 million was recorded as a deferred tax liability.

 

The Company recognized interest expense for the Notes of $0.9 million in 2009, $5.4 million in 2008, and $6.6 million in 2007. The effective interest rate for the year ended December 31, 2009, 2008 and 2007 was 11.0%, 9.6% and 9.5%, respectively. Included in interest expense for these periods was additional non-cash interest expense of approximately $0.4 million (approximately $0.2 million, net of tax), $2.5 million (approximately $1.5 million, net of tax) and $2.9 million (approximately $1.8 million, net of tax) for the years ended December 31, 2009, 2008 and 2007, respectively, as a result of the adoption of this accounting guidance. The impact of adopting this accounting guidance on the Company’s earnings (loss) per share from continuing operations was ($0.01) per basic and diluted share for 2009, ($0.06) per basic and diluted share for 2008, and ($0.06) per basic share and ($0.02) per diluted share for 2007, which is reflected in the Company’s Consolidated Financial Statements.

 

As of December 31, 2009 the carrying value of the Amended Notes was approximately $7.9 million and the Notes are classified as a current liability in the accompanying Consolidated Balance Sheet, as a result of the redemption and repurchase option that can occur on October 1, 2010. As of December 31, 2008, the carrying value of the Notes amounted to approximately $7.5 million and is classified as noncurrent liabilities in the accompanying Consolidated Balance Sheet. The Notes are discussed in more detail in Note 12 to the Consolidated Financial Statements.

 

In April 2008, the FASB issued guidance regarding the determination of the useful life of intangible assets. This guidance amends the facts that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under the standard previously issued by FASB regarding accounting for goodwill and other intangible assets. This guidance requires companies to consider their historical experience in renewing or extending similar arrangements together with the asset’s intended use, regardless of whether the arrangements have explicit renewal or extension provisions. In the absence of historical experience, companies should consider the assumptions that market participants would use about renewal or extension consistent with the highest and best use of the asset, adjusted for entity-specific factors. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, which required prospective application. The Company adopted this guidance during the first quarter of 2009. Its adoption did not have a significant impact on the Company’s financial statements.

 

In February 2008, the FASB issued guidance, which deferred the effective date of the FASB statement regarding fair value measurements for all non-financial assets and non-financial liabilities for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of this guidance. The Company adopted this guidance for non-financial assets and non-financial liabilities during the first quarter of 2009. Its adoption did not have a significant impact on the Company’s financial statements.

 

In December 2007, the FASB issued a revised standard regarding accounting for business combinations. This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired and also changes the accounting treatment for certain acquisition related costs, restructuring activities, and acquired contingencies, among other changes. This standard also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This standard was effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. The Company adopted this standard during the first quarter of 2009. Its adoption did not have a material impact on the Company’s financial statements as a result of the Company not acquiring any

businesses during the year ended December 31, 2009. The adoption of this standard could potentially reduce the Company’s future operating earnings due to required recognition of acquisition and restructuring costs through operating earnings upon the acquisitions. The magnitude of this impact will be dependent on the number, size, and nature of acquisitions in periods subsequent to adoption.

 

In December 2007, the FASB issued a standard regarding accounting for noncontrolling interests in consolidated financial statements. This standard outlines the accounting and reporting for ownership interests in a subsidiary held by parties other than the parent. The Company adopted this standard during the first quarter of 2009. The adoption of this standard did not have a significant impact on its financial statements.

 

 

The Company’s market risk is principally associated with trends in the domestic and international capital markets. This includes trends in the IPO and M&A markets, both important components of the Company’s revenue. The Company also has market risk tied to interest rate fluctuations related to its debt obligations and fluctuations in foreign currency, as discussed below.

 

Interest Rate Risk