| BOWNE & CO INC Item 1A Risk Factors 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 the other matters set forth in this annual report on Form 10-K You should carefully consider all of these risks |
| Our strategy to increase revenue through enhancement and streamlining our operations and acquiring businesses that complement our existing businesses may not be successful, which could adversely affect results and may negatively affect earnings |
| 36prca of our revenue is derived from transactional financial printing services, which are dependent upon the transactional capital markets |
| We are pursuing strategies designed to improve our transactional financial print product and service offerings, streamline our operations and reduce our costs and grow our non-transactional businesses, including compliance reporting, mutual fund reporting and our digital and personalization business |
| At the same time we are pursuing a strategy of acquisitions of complementary products and service offerings |
| We also believe that pursing complementary acquisition opportunities will lead to more stable and diverse recurring revenue |
| This strategy has many risks, including the following: • the pace of technological changes affecting our business segments and our clients’ needs could accelerate, and our products and services could become obsolete before we have recovered the cost of developing them or obtained the desired return on our investment and; • product innovations and effectively serving our clients requires a large investment in personnel and training |
| The market for sales and technical staff is competitive, and we may not be able to attract and retain a sufficient number of qualified personnel |
| If we are unsuccessful in continuing to enhance our products and services and acquire products and services, we will continue to be subject to the sometimes volatile swings in the capital markets that directly impact the demand for transactional financial printing services |
| Furthermore, if we are unable to provide value-added services in areas of document management other than traditional composition and printing, our results may be adversely affected if an increasing number of clients handle this process in-house, to the extent that new technologies allow 9 _________________________________________________________________ [63]Table of Contents this process to be conducted internally |
| We believe that if we are not successful in achieving our strategic objectives within transactional financial printing, growth of our other businesses and acquiring complementary product and service offerings, we may experience decreases in profitability and volume |
| If this decline in profitability were to continue, without offsetting increases in revenues from other products and services, our business and results of operations would be materially and adversely affected |
| Revenue from printed financial documents is subject to regulatory changes and volatility in demand, which could adversely affect our operating results |
| We anticipate that our financial print business segment will continue to contribute a material amount to our operating results |
| The financial print business contributed 90prca and 89prca of total revenue during 2005 and 2004, respectively |
| The market for these services depends in part on the demand for printed financial documents, which is driven largely by capital markets activity and the requirements of the SEC and other regulatory bodies |
| Any rulemaking substantially affecting the content of documents to be filed and the method of their delivery could have an adverse effect on our business |
| In addition, evolving market practices in light of regulatory developments, such as postings of documents on Internet web pages and electronic delivery of offering documents, may adversely affect the demand for printed financial documents and reports |
| Recent regulatory developments in the United States and abroad have sought to change the method of dissemination of financial documents to investors and shareholders through electronic delivery rather than through delivery of paper documents |
| On December 1, 2005, the SEC adopted “access equals delivery” rules which eliminate the requirement to deliver a printed final prospectus, unless requested by the investor |
| The SEC has also recently proposed rules for the dissemination of proxy materials to shareholders electronically |
| Regulatory developments which decrease the delivery of printed transactional or compliance documents could harm our business and adversely affect our operating results |
| Regulatory developments in the United States have also accelerated the timing for filing periodic compliance reports, such as public company annual reports and interim quarterly reports, and also have changed some of the content requirements requiring greater disclosure in those reports |
| The combination of shorter deadlines for public company reports and more content may adversely affect our ability to meet our client’s needs in times of peak demand, or may cause our clients to try to exercise more control over their filings by performing those functions in-house |
| Our financial print revenues may be adversely affected as clients implement technologies enabling them to produce and disseminate documents on their own |
| For example, our clients and their financial advisors have increasingly relied on web-based distributions for prospectuses and other printed materials |
| Also, the migration from an ASCII-based EDGAR system to an HTML format for SEC public filings eventually may enable more of our clients to handle all or a portion of their periodic filings without the need for our services |
| The environment in which we compete is highly competitive, which creates adverse pricing pressures and may harm our business and operating results if we cannot compete effectively |
| Competition in our businesses is intense |
| The speed and accuracy with which we can meet client needs, the price of our services and the quality of our products and supporting services are factors in this competition |
| In financial print, we compete directly with a number of other financial printers having similar degrees of specialization |
| Some of those financial printers are subsidiaries or divisions of companies having greater financial resources than those of the Company |
| Our digital printing unit faces diverse competition from a variety of industries including, other printers, transfer agents, banks, Internet systems integration consultants, direct marketing agencies, software providers and other consultants |
| In commercial printing, we compete with general commercial printers, which are far more numerous than those in the financial printing market |
| These competitive pressures could reduce our revenue and earnings |
| 10 _________________________________________________________________ [64]Table of Contents The market for our marketing and business communications services is relatively new and we may not realize the anticipated benefits of our investment |
| The personalized communications market is loosely defined with a wide variety of different types of services and product offerings |
| Moreover, customer acceptance of the diverse solutions for these services and products remains to be proven in the long-term, and demand for discrete services and products remains difficult to predict |
| We have made significant investments in developing our capabilities and in the purchase of the marketing and business communications division of Vestcom, which was completed in January 2006 |
| If we are unable to adequately implement our solutions, generate sufficient customer interest in our solutions or capitalize on sales opportunities, we may not be able to realize the return on our investments that we anticipated |
| Failure to recover our investment or to not realize sufficient return on our investment may adversely affect our results of operations as well as our efforts to diversify our businesses |
| Our business could be harmed if we do not successfully manage the integration of businesses that we acquire |
| As part of our business strategy, we have and may continue to acquire other businesses that complement our core capabilities |
| Our acquisition in January 2006 of the marketing and business communications division of Vestcom and its integration with our existing print on demand and personalization business to form Bowne Marketing and Business Communications (MBC) is reflective of that strategy |
| The benefits of an acquisition may often take considerable time to develop and may not be realized |
| Acquisitions involve a number of risks, including: • the difficulty of integrating the operations and personnel of the acquired businesses into our ongoing operations; • the potential disruption of our ongoing business and distraction of management; • the difficulty in incorporating acquired technology and rights into our products and technology; • unanticipated expenses and delays relating to completing acquired development projects and technology integration; • a potential increase in our indebtedness and contingent liabilities, which could restrict our ability to access additional capital when needed or to pursue other important elements of our business strategy; • the management of geographically remote units; • the establishment and maintenance of uniform standards, controls, procedures and policies; • the impairment of relationships with employees and clients as a result of any integration of new management personnel; • risks of entering markets or types of businesses in which we have either limited or no direct experience; • the potential loss of key employees or clients of the acquired businesses; and • potential unknown liabilities, such as liability for hazardous substances, or other difficulties associated with acquired businesses |
| The acquisition of the business and marketing communications division of Vestcom will require substantial integration and management efforts |
| As a result of the aforementioned and other risks, we may not realize anticipated benefits from this or other acquisitions, which could adversely affect our business |
| We are exposed to risks associated with operations outside of the United States |
| We derive approximately 19prca of our revenues from various foreign sources, and a significant part of our current operations are outside of the United States |
| We conduct operations in Canada, Europe, Central America, South America and Asia |
| In addition, we have affiliations with certain firms providing similar services abroad |
| As a result, our business is subject to political and economic instability and currency fluctuations in various countries |
| 11 _________________________________________________________________ [65]Table of Contents The maintenance of our international operations and entry into additional international markets require significant management attention and financial resources |
| In addition, there are many barriers to competing successfully in the international arena, including: • costs of customizing products and services for foreign countries; • difficulties in managing and staffing international operations; • increased infrastructure costs including legal, tax, accounting and information technology; • reduced protection for intellectual property rights in some countries; • exposure to currency exchange rate fluctuations; • potentially longer sales and payment cycles; • potentially greater difficulties in collecting accounts receivable, including currency conversion and cash repatriation from foreign jurisdictions; • increased licenses, tariffs and other trade barriers; • potentially adverse tax consequences; • increased burdens of complying with a wide variety of foreign laws, including employment-related laws, which may be more stringent than US laws; • unexpected changes in regulatory requirements; and • political and economic instability |
| We cannot assure that our investments in other countries will produce desired levels of revenue or that one or more of the factors listed above will not harm our business |
| We do not have long-term service agreements in the transactional portion of our financial print business, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and lead to adverse movements in the price of our common stock |
| A majority of our revenue in our transactional financial print business is derived from individual projects rather than long-term service agreements |
| Therefore, we cannot assure you that a client will engage us for further services once a project is completed or that a client will not unilaterally reduce the scope of, or terminate, existing projects |
| The absence of long-term service agreements makes it difficult to predict our future revenue |
| As a result, our financial results may fluctuate from quarter to quarter is based on the timing and scope of the engagement with our clients which could, in turn, lead to adverse movements in the price of our common stock or increased volatility in our stock price generally |
| We have no backlog, within the common meaning of that term; however, within our financial print segment, we maintain a backlog of clients preparing for initial public offerings, or IPOs |
| This IPO backlog is highly dependent on the capital markets for new issues, which can be volatile |
| If we are unable to retain our key employees and attract and retain other qualified personnel, our business could suffer |
| Our ability to grow and our future success will depend to a significant extent on the continued contributions of our senior management |
| In addition, many of our individual technical and sales personnel have extensive experience in our business operations and/or have valuable client relationships and would be difficult to replace |
| Their departure from the company, if unexpected and unplanned for, could cause a disruption to our business |
| Our future success also depends in large part on our ability to identify, attract and retain other highly qualified managerial, technical, sales and marketing and customer service personnel |
| Competition for these individuals is intense, especially in the markets in which we operate |
| Further, competitors and other entities have in the past recruited and may in the future attempt to recruit our employees, particularly our sales personnel |
| The loss of the services of our key personnel, the inability to identify, attract and retain qualified personnel in the future or delays in hiring qualified personnel, particularly 12 _________________________________________________________________ [66]Table of Contents technical and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as the timely introduction of new technology-based products and services, which could harm our business, financial condition and operating results |
| If we fail to keep our clients’ information confidential or if we handle their information improperly, our business and reputation could be significantly and adversely affected |
| We manage private and confidential information and documentation related to our clients’ finances and transactions, often prior to public dissemination |
| The use of insider information is highly regulated in the United States and abroad, and violations of securities laws and regulations may result in civil and criminal penalties |
| If we fail to keep our clients’ proprietary information and documentation confidential, we may lose existing clients and potential new clients and may expose them to significant loss of revenue based on the premature release of confidential information |
| We may also become subject to civil claims by our clients or other third parties or criminal investigations by appropriate authorities |
| Our services depend on the reliability of our computer systems and our ability to implement and maintain information technology and security measures |
| Our global platform of services depends on the ability of our computer systems to act efficiently and reliably at all times |
| Certain emergencies or contingencies could occur, such as a computer virus attack, a natural disaster, a significant power outage covering multiple cities or a terrorist attack, which could temporarily shut down our facilities and computer systems |
| Maintaining up to date and effective security measures requires extensive capital expenditures |
| In addition, the ability to implement further technological advances and to maintain effective information technology and security measures is important to each of our business segments |
| If our technological and operations platforms become outdated, we will be at a disadvantage when competing in our industry |
| Furthermore, if the security measures protecting our computer systems and operating platforms are breached, we may lose our clients’ business and become subject to civil claims by our clients or other third parties |
| Our services depend on third-parties to provide or support some of our services and our business and reputation could suffer if these third-parties fail to perform satisfactorily |
| We outsource some of our services to third parties both domestically and internationally |
| For example, our EDGAR document conversion services for SEC filings substantially rely on independent contractors to provide a portion of this work |
| If these third parties do not perform their services satisfactorily, if they decide not to continue to provide such services to us on commercially reasonable terms or if they decide to compete directly with us, our business could be adversely affected |
| We could also experience delays in providing our products and services, which could negatively affect our business until comparable third-party service providers, if available, were identified and obtained |
| Any service interruptions experienced by our clients could negatively impact our reputation, cause us to lose clients and limit our ability to attract new clients and we may become subject to civil claims by our clients or other third parties |
| We must adapt to rapid changes in technology and client requirements to remain competitive |
| The market and demand for our products and services, to a varying extent, has been characterized by: • technological change; • frequent product and service introductions; and • evolving client requirements |
| 13 _________________________________________________________________ [67]Table of Contents We believe that these trends will continue into the foreseeable future |
| Our success will depend, in part, upon our ability to: • enhance our existing products and services; • successfully develop new products and services that meet increasing client requirements; and • gain market acceptance |
| To achieve these goals, we will need to continue to make substantial investments in development and marketing |
| We may not: • have sufficient resources to make these investments; • be successful in developing product and service enhancements or new products and services on a timely basis, if at all; or • be able to market successfully these enhancements and new products once developed |
| Further, our products and services may be rendered obsolete or uncompetitive by new industry standards or changing technology |
| The inability to identify, obtain and retain important intellectual property rights to technology could harm our business |
| We rely upon the development, acquisition, licensing and enhancement of document composition, creation, production and job management systems, applications, tools and other information technology software to conduct our business |
| These systems, applications, and tools are “off the shelf” software that are generally available and may be obtained on competitive terms and conditions, or are developed by our employees, or are available from a limited number of vendors or licensors on negotiated terms and conditions |
| Our future success depends in part on our ability to identify, obtain and retain intellectual property rights to technology, either through internal development or through acquisition or licensing from others |
| The inability to identify, obtain and retain rights to certain technology on favorable terms and conditions would make it difficult for us to conduct our business or to timely introduce new technology-based products and services, which could harm our business, financial condition and operating results |
| Fluctuations in the costs of paper, ink, energy, and other raw materials may adversely impact the Company Our business is subject to risks associated with the cost and availability of paper, ink, other raw materials, and energy |
| Increases in the costs of these items may increase the Company’s costs, and the Company may not be able to pass these costs on to customers through higher prices |
| Increases in the costs of materials may adversely impact our customers’ demand for printing and related services |
| A severe paper or multi-market energy shortage could have an adverse effect upon many of the Company’s operations |