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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM__________ TO__________
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COMMISSION FILE NUMBER 1-5842
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BOWNE & CO., INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of 13-2618477
incorporation or organization) (IRS Employer Identification Number)
345 HUDSON STREET
NEW YORK, NEW YORK 10014
(Address of principal executive offices) (Zip code)
(212) 924-5500
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's classes of common
stock was 18,414,283 shares of common stock, par value $.01, outstanding as at
August 12, 1998.
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FINANCIAL STATEMENTS
BOWNE & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS
ENDED
JUNE 30,
(UNAUDITED)
--------------------
(000'S OMITTED
EXCEPT SHARE
AMOUNTS)
1998 1997
---- ----
Net sales................................................... $219,328 $193,828
Expenses:
Cost of sales........................................... 115,293 108,829
Selling and administrative.............................. 66,307 50,055
Depreciation and amortization........................... 8,728 7,431
Interest................................................ 726 476
Purchased in-process research and development and other
charges................................................ 1,200 1,200
-------- --------
192,254 167,991
-------- --------
Operating income............................................ 27,074 25,837
Other income (expense)...................................... (237) 386
-------- --------
Income before income taxes.................................. 26,837 26,223
-------- --------
Income taxes................................................ 11,385 10,809
-------- --------
Net income.................................................. $ 15,452 $ 15,414
======== ========
Earnings per share
Basic................................................... $ .84 $ .85
======== ========
Diluted................................................. $ .82 $ .83
======== ========
Dividends per share......................................... $ .09 $ .09
======== ========
SIX MONTHS
ENDED
JUNE 30,
(UNAUDITED)
--------------------
(000'S OMITTED
EXCEPT SHARE
AMOUNTS)
1998 1997
---- ----
Net sales................................................... $413,613 $347,524
Expenses:
Cost of sales........................................... 216,773 192,064
Selling and administrative.............................. 128,965 96,052
Depreciation and amortization........................... 16,726 13,932
Interest................................................ 980 659
Purchased in-process research and development and other
charges................................................ 1,200 1,200
-------- --------
364,644 303,907
-------- --------
Operating income............................................ 48,969 43,617
Gain on sale of subsidiary.................................. -- 35,273
Other income (expense)...................................... (141) 1,288
-------- --------
Income before income taxes.................................. 48,828 80,178
-------- --------
Income taxes................................................ 20,423 34,241
-------- --------
Net income.................................................. $ 28,405 $ 45,937
======== ========
Earnings per share
Basic................................................... $ 1.55 $ 2.55
======== ========
Diluted..................................................... $ 1.50 $ 2.48
======== ========
Dividends per share......................................... $ .18 $ .18
======== ========
See accompanying notes.
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BOWNE & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS
ENDED
JUNE 30,
(UNAUDITED)
------------
1998 1997
------- -------
(000'S OMITTED)
Net income.................................................. $15,452 $15,414
Foreign currency translation adjustment................... (350) 87
Net unrealized gains (losses) arising from marketable
securities during the period, after deducting taxes of
$54 and $237 for June 30, 1998 and 1997, respectively... (161) 257
------- -------
Comprehensive income........................................ $14,941 $15,758
======= =======
SIX MONTHS
ENDED
JUNE 30,
(UNAUDITED)
-----------
1998 1997
------------- -------------
(000'S OMITTED)
Net income.................................................. $ 28,405 $ 45,937
Foreign currency translation adjustment................... (195) (405)
Net unrealized gains (losses) arising from marketable
securities during the period, after deducting taxes of
$137 and $246 for June 30, 1998 and 1997,
respectively............................................ (50) 267
------------- -------------
Comprehensive income........................................ $ 28,160 $ 45,799
============= =============
See accompanying notes.
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BOWNE & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S OMITTED EXCEPT SHARE AMOUNTS)
JUNE 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 37,235 $ 40,646
Marketable securities................................... 6,090 5,829
Trade accounts receivable, less allowance for doubtful
accounts of $13,359 (1998) and $12,441 (1997).......... 216,506 187,573
Inventories............................................. 57,194 35,617
Prepaid expenses and other current assets............... 15,468 15,839
-------- --------
Total current assets........................ 332,493 285,504
Property, plant and equipment, less depreciation and
amortization of $151,875 (1998) and $139,055 (1997)....... 145,157 138,933
Goodwill, net of accumulated amortization of $11,020 (1998)
and $7,174 (1997)......................................... 85,782 64,452
Other assets................................................ 23,530 11,764
-------- --------
Totals.................................. $586,962 $500,653
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt..... $ 6,992 $ 5,755
Accounts payable........................................ 36,380 28,097
Accrued liabilities..................................... 94,242 86,787
-------- --------
Total current liabilities................... 137,614 120,639
Long-term debt -- net of current portion.................... 41,594 2,537
Deferred employee compensation and benefits and other
liabilities............................................... 22,427 18,877
-------- --------
Total liabilities........................... 201,635 142,053
-------- --------
Stockholders' equity:
Preferred stock, par value $.01, none issued
Common stock, par value $.01, issued 19,767,680 shares
in 1998 and 19,605,555 shares in 1997.................. 198 196
Additional paid-in capital.............................. 39,107 36,685
Retained earnings....................................... 364,515 339,407
Treasury stock, at cost, 1,361,084 shares in 1998 and
1,366,793 shares in 1997............................... (16,514) (15,954)
Other, net.............................................. (1,979) (1,734)
-------- --------
Total stockholders' equity.................. 385,327 358,600
-------- --------
Totals.................................. $586,962 $500,653
======== ========
See accompanying notes.
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BOWNE & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED)
----------------------
(000'S OMITTED)
1998 1997
Cash flows from operating activities:
Net income.............................................. $ 28,405 $ 45,937
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 16,726 13,932
Provision for deferred employee compensation........ 840 190
Gain on sale of subsidiary.......................... -- (35,273)
Changes in other assets and liabilities, net of
non-cash transactions............................... (31,898) (25,997)
-------- --------
Net cash provided by (used in) operating activities..... 14,073 (1,211)
-------- --------
Cash flows from investing activities:
Proceeds from sale of subsidiary........................ -- 36,679
Acquisitions of businesses, including convenants not to
compete, net of cash acquired.......................... (26,233) (33,486)
Purchase of marketable securities or other
investments............................................ (2,347) (3,937)
Proceeds from the sale of marketable securities and
other investments...................................... 453 1,874
Purchase of property, plant and equipment............... (20,380) (21,389)
-------- --------
Net cash used in investing activities................... (48,507) (20,259)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings................................ 39,327 25,029
Payment of debt......................................... (6,871) (631)
Proceeds from stock options exercised................... 2,424 2,777
Purchase of treasury stock.............................. (560) (494)
Payment of dividends.................................... (3,297) (4,877)
-------- --------
Net cash provided by financing activities................... 31,023 21,804
-------- --------
Increase (decrease) in cash and cash equivalents............ $ (3,411) $ 334
======== ========
See accompanying notes.
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BOWNE & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. The financial information included herein as at June 30, 1998 and
for the three and six months ended June 30, 1998 and 1997 is unaudited and, in
the opinion of the Company, reflects all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the financial position as
of those dates and the results of operations for those periods. The information
in the Condensed Consolidated Balance Sheet as at December 31, 1997 was derived
from the Company's 1997 audited financial statement.
NOTE 2. Inventories of $57,194,000 at June 30, 1998 include raw materials
of $6,380,000 and work in process of $50,814,000. At December 31, 1997,
inventories of $35,617,000 included raw materials of $5,750,000 and work in
process of $29,867,000.
NOTE 3. Net income per share is calculated for basic earnings per share
based on the weighted-average number of shares outstanding and for diluted
earnings per share after adjustment for the assumed conversion of all
potentially dilutive securities.
THREE MONTHS ENDED
JUNE 30,
------------------------
1998 1997
---------- ----------
Weighted-average Basic shares............................... 18,289,118 18,085,111
Weighted-average Diluted shares............................. 18,945,022 18,532,306
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
---------- ----------
Weighted-average Basic shares............................... 18,338,416 18,085,669
Weighted-average Diluted shares............................. 18,982,252 18,514,430
NOTE 4. The Company classifies its investment in marketable securities as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. At June 30, 1998, the fair value of
marketable securities exceeded cost by $2,005,000. At December 31, 1997, the
fair value of marketable securities exceeded cost by $1,918,000. The net
unrealized gains, after deferred taxes, were $1,043,000 and $1,093,000 at June
30, 1998 and December 31, 1997, respectively.
The foreign currency translation adjustment was $3,022,000 and $2,827,000
at June 30, 1998 and December 31, 1997, respectively.
NOTE 5. During 1998, the Company acquired 80% of Quadravision
Communications Limited and 100% of Sitewerks, Inc. Quadravision and Sitewerks
are worldwide Internet development companies serving the banking, insurance,
mutual funds, brokerage, automotive and software markets. The total purchase
price of these two companies, including related acquisition costs, approximated
$13,300,000, of which goodwill was approximately $11,400,000. A portion of the
purchase price ($3,000,000) for Quadravision was in the form of non-interest
bearing promissory notes, which have been recorded net of imputed interest. In
addition, the Company and the selling shareholders entered into non-compete
agreements totaling $6,000,000 of which $4,000,000 was paid at closing and the
balance is payable over the next two years.
The Company expanded its presence in the area of software globalization and
localization solutions services by acquiring Technical Core Co., Ltd., Datalink
Co., Ltd. and 80% of NorthWord A/S. The total purchase price of these three
companies, including related acquisition costs, approximated $3,246,000, of
which goodwill was approximately $2,070,000. The Company also retained an option
for three years to purchase the minority interest in NorthWord A/S.
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In June 1998, the Company acquired Mountain Lake Software Corporation and
Open Sesame, a division of Charles River Analytics, Inc. These acquisitions
increase the Company's ability to provide clients with integrated Internet
solutions. The total purchase price for these two companies, including related
acquisition costs, approximated $7,600,000, of which goodwill was approximately
$7,300,000. In addition, the Company entered into non-compete agreements, in
consideration for which the Company agreed to pay a total of $5,300,000 in equal
annual installments over a period of two to five years.
These acquisitions are accounted for under the purchase method of
accounting. In connection with the acquisitions, the Company recorded $1,200,000
of purchased in-process research and development as an operating expense.
NOTE 6. At June 30, 1998, the Company had borrowed $35,000,000 under its
$200,000,000 unsecured five-year revolving credit agreement, with interest at
approximately 5.85%.
NOTE 7. On June 25, 1998, the Company announced a two-for-one stock split,
in the form of a 100% stock dividend to shareholders at the close of business on
August 14, 1998. The shares will be distributed on August 26, 1998. The
accompanying earnings per share data does not reflect the effects of this stock
split. Had the stock split been effective for the period ended June 30, 1998,
the basic and diluted earnings per share would have been as follows:
THREE MONTHS
ENDED
JUNE 30,
---------------
1998 1997
----- ------
Earnings per share
Basic..................................................... $ .42 $ .425
Diluted................................................... .41 .415
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
------ -------
Earnings per share
Basic..................................................... $.775 $1.275
Diluted................................................... .75 1.24
In addition, effective with the third quarter, the quarterly dividend rate
was raised from $0.09 to $0.11.
NOTE 8. Subsequent to June 30, 1998, the Company entered into certain
transactions. In July 1998, the Company acquired all of the outstanding shares
of Donnelley Enterprise Solutions Incorporated (DESI), pursuant to a tender
offer, at a price of $21 per share. The total acquisition costs, excluding fees
and expenses, for the outstanding stock of DESI amounted to approximately
$105,000,000. DESI provides a comprehensive array of business services,
including document services, desktop publishing, and imaging services. DESI's
operations include the LANSystems division, which provides services for systems
integration, software development and technical training services. Based on the
Company's determination that the LANSystems operations were not a fit with the
Company's strategy, the Company entered into an agreement in July 1998 to sell
these assets in a separate transaction for approximately $23,000,000.
In July 1998, the Company acquired all of the stock of Mapora Books, S.L.,
a company located in Spain, for approximately $1,500,000. Mapora will help
enhance the Company's global solutions services in foreign projects.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position continues to be strong with excellent
liquidity. On June 30, 1998, the Company had a working capital ratio of 2.42 to
1 and working capital of $194,879,000.
During the first six months of 1998, the Company completed seven
acquisitions to strengthen and broaden its Internet and globalization and
localization solutions. It is expected that the cash generated from operations,
working capital, and the Company's borrowing capacity will be sufficient to fund
its development and integration needs (both foreign and domestic), finance
future acquisitions and capital expenditures, and provide for the payment of
dividends.
CASH FLOWS
The Company had net cash provided by (used in) operating activities of
$14,073,000 and $(1,211,000) for the six months ended June 30, 1998 and 1997,
respectively.
Net cash used in investing activities was $48,507,000 and $20,259,000 for
the six months ended June 30, 1998 and 1997, respectively. This included
expenditures related to the expansion of facilities and continued investments in
new technologies through acquisitions.
Net cash provided by financing activities was $31,023,000 and $21,804,000
for the six months ended June 30, 1998 and 1997, respectively.
FOREIGN EXCHANGE
The Company derives a portion of its revenues from various foreign sources.
The Company has not experienced significant gains or losses as a result of
fluctuations in the exchange rates of the related foreign currencies. To date,
the Company has not used foreign currency hedging instruments to reduce its
exposure to foreign exchange fluctuations.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued in
June 1998. SFAS 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, by
requiring recognition of those instruments as assets and liabilities and to
measure them at fair value. SFAS 133 will be effective for the Company in the
year 2000. The adoption of this pronouncement is not expected to have a material
affect on the Company's consolidated financial statements.
RESULTS OF OPERATIONS AND OUTLOOK
The Company primarily provides printing and other related services.
Revenues related to the transactional financial printing business are affected
by cyclical conditions of the capital markets. Over the past year the Company
has expanded its service offerings to include information management, global
document creation and dissemination, and Internet services.
The Company decided to focus its business on empowering information to
become the global market leader in this field by combining superior customer
service with appropriate new technologies to manage, repurpose and distribute a
client's information to any audience, through any medium, in any language,
anywhere in the world. The Company's goal is to become the empowerer of
information to global companies. The Company is investing heavily in building
its resources outside the United States to enable it to provide worldwide
information empowerment solutions to its global clients. While the Company is
growing and integrating these services outside the United States, these
operations are anticipated to operate at a loss. We expect to continue to invest
outside the United States as the Company grows in the newer information solution
fields and as it positions itself to take advantage of the impact of the
European Monetary Union in the financial services industry.
STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
Information contained in this Management Discussion and Analysis with
respect to expected financial results and future events and trends is forward
looking, based upon managements' estimates and assumptions
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and subject to risk and uncertainties. For such statements, the Company claims
the protection of the safe harbor for forward looking statements contained in
the Private Securities Litigation Reform Act of 1995.
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
Net sales increased by $25,500,000, or 13.1%, to $219,328,000. The increase
was primarily attributable to higher levels of demand for transactional printing
and growth in non-transactional printing services. Secondarily, sales increased
as a result of the acquisitions made in 1997 and in 1998. The overall increase
in sales contributed to a $19,036,000 growth in gross margin. The gross margin
percentage improved approximately 3% to 47%. This increase was primarily
attributable to higher margins of transactional business partially offset by
lower margins at acquired businesses.
Selling and administrative expenses increased by $16,252,000 to
$66,307,000. This increase was due to the selling and administrative costs
related to the new businesses, increased staff, and variable costs associated
with increased sales and profitability.
Depreciation and amortization increased $1,297,000, or 17.5%, primarily due
to the expansion of facilities, acquisition of equipment, and depreciation and
amortization related to the new businesses.
Interest expense increased by $250,000 primarily as a result of interest
related to borrowings under the revolving credit agreement.
Other income decreased $623,000 due to lower levels of gains from the sale
of marketable securities.
During the quarter the Company recorded a one-time charge of $1,200,000 for
purchased in-process research and development, which was not deductible for tax
purposes.
The effective overall tax rate for the quarter increased approximately 1%,
to 42%.
As a result of the foregoing, net income was $15,452,000 compared to
$15,414,000 for the same period last year.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales increased by $66,089,000 or 19%, to $413,613,000. The increase
was primarily attributable to higher levels of demand for transactional printing
and growth in non-transactional printing services. Secondarily, sales increased
as a result of the acquisitions made in 1997 and in 1998. The overall increase
in sales contributed to a $41,380,000 growth in gross margin. The gross margin
percentage improved approximately 3% to 47%. This increase was primarily
attributable to higher margins of transactional business partially offset by
lower margins at acquired businesses.
Selling and administrative expenses increased $32,913,000 to $128,965,000.
This increase was due to the selling and administrative costs related to
businesses acquired during the latter part of the second quarter in 1997,
acquisitions during 1998, increases in staff, and variable costs associated with
increased sales and profitability.
Depreciation and amortization increased $2,794,000, or 20%, primarily due
to the expansion of facilities, acquisition of equipment, and depreciation and
amortization related to the new businesses.
Interest expense increased by $321,000 primarily as a result of interest
related to borrowings under the revolving credit agreement.
During the first quarter of 1997, the Company realized a pre-tax gain from
the sale of Baseline, Inc. of $35,273,000. The net of tax effect of this item
was $20,005,000.
Other income decreased $1,429,000 due to lower levels of gains from the
sale of marketable securities.
During the period the Company recorded a one-time charge of $1,200,000 for
purchased in-process research and development, which was not deductible for tax
purposes.
The effective overall tax rate decreased 1%, from 43% to 42%, as a result
of income attributable to jurisdictions having lower tax rates.
As a result of the foregoing, net income was $28,405,000 compared to
$45,937,000 for the same period.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
BOWNE & CO., INC.
Date: August 14, 1998 ROBERT M. JOHNSON
--------------------------------------------------------
ROBERT M. JOHNSON
(CHAIRMAN OF THE BOARD (AND DIRECTOR)
AND CHIEF EXECUTIVE OFFICER)
Date: August 14, 1998 DENISE K. FLETCHER
--------------------------------------------------------
DENISE K. FLETCHER
(VICE PRESIDENT, CHIEF FINANCIAL OFFICER)
Date: August 14, 1998 THOMAS P. MEOLA
--------------------------------------------------------
THOMAS P. MEOLA
(VICE PRESIDENT, FINANCE AND CORPORATE CONTROLLER)
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Part II -- Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The registrant held its Annual Meeting of Shareholders on May 28, 1998.
(b) Not required pursuant to Instruction 3 of Item 4.
(c) Briefly described below is each matter voted upon at the Annual Meeting and
the number of affirmative votes, negative votes, votes withheld, as well as
the number of abstentions and broker non-votes.
\(I) Election of five nominees to the Board of Directors:
Robert M. Conway
For 16,416,854
Against 0
Withheld 548,355
Abstain 35,704
Broker Non-votes 0
Edward H. Meyer
For 16,395,051
Against 0
Withheld 570,158
Abstain 35,704
Broker Non-votes 0
James P. O'Neil
For 16,416,029
Against 0
Withheld 549,180
Abstain 35,704
Broker Non-votes 0
Judith Shapiro
For 16,407,970
Against 0
Withheld 557,239
Abstain 35,704
Broker Non-votes 0
Lisa A. Stanley
For 16,399,584
Against 0
Withheld 565,625
Abstain 35,704
Broker Non-votes 0
(II) Ratification of the appointment of Ernst & Young LLP as independent
public accountants for the fiscal year which will end December 31,
1998:
For 16,966,104
Against 9,842
Withheld 0
Abstain 24,967
Broker Non-votes 0
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(III) Approval of amendment to the registrant's Certificate of
Incorporation to increase the minimum number of directors who may
serve on the Board of Directors from six to nine and to increase the
maximum number of directors who may serve on the Board from ten to
fifteen:
For 16,706,255
Against 239,192
Withheld 0
Abstain 55,466
Broker Non-votes 0
(IV) Approval to reincorporate the registrant from the State of New York
to the State of Delaware:
For 14,272,030
Against 886,841
Withheld 0
Abstain 161,387
Broker Non-votes 1,680,655
(d) Not required
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
Report dated June 23, 1998
Item 5. Other Events
Information regarding the reincorporation of the registrant from the State
of New York to the State of Delaware and the adoption of an analogous
shareholders' rights plan under Delaware law.
REPORT DATED JUNE 25, 1998
ITEM 4. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANTS
Information regarding a change in the registrant's independent public
accountants from Ernst & Young LLP to KPMG Peat Marwick LLP.
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
27 Financial Data Schedule