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1. SUMMARY OF ACCOUNTING POLICIES
A summary of the Company's significant accounting policies followed in the preparation of the accompanying financial statements is set forth below: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All of the significant intercompany accounts and transactions are eliminated in consolidation. Reclassification Certain amounts have been reclassified to conform to the current year's presentation. Inventories Inventories are valued at the lower of cost or market. Cost is determined by using purchase cost (first-in, first-out method) for materials and standard costs, which approximate actual costs, for work in process. Real Estate, Equipment and Leasehold Improvements Real estate, equipment and leasehold improvements are carried at cost. Maintenance and repairs are expensed as incurred. Depreciation for financial statement purposes, which is provided on the straight-line method, was $20,621,000 (1996), $16,604,000 (1995) and $13,786,000 (1994). Depreciation is calculated for tax purposes using accelerated methods. Estimated lives used in the calculation of depreciation for financial statement purposes are: Buildings 20-40 years
Machinery and plant equipment 3-12 1/2 years
Furniture and fixtures 5-12 1/2 years
Vehicles 3-5 years
Leasehold improvements Shorter of useful life
or term of lease
Excess of Cost of Subsidiaries Over Net Assets at Date of Acquisition Cost in excess of net assets ("goodwill") of acquired businesses is being amortized using the straight-line method over forty years. Accumulated amortization was $5,210,000 (1996) and $4,704,000 (1995). The realizability of goodwill is evaluated periodically to determine the recoverability of carrying amounts. The evaluation, based on various analyses including cash flow and profitability projections, addresses the impact on existing company businesses. The evaluation necessarily involves significant management judgement. Historically, the Company has generated sufficient returns from acquired businesses to recover the cost of related goodwill. Intangible Assets Trademarks, tradenames and other intangible assets of acquired businesses, included in other assets, are amortized on the straight-line method over five years. Accumulated amortization was $5,238,000 for 1996 and 1995. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation," which becomes effective in the first quarter of fiscal 1997. The Company has elected to continue accounting for stock-based compensation under the provisions of APB Opinion 25, "Accounting for Stock Issued to Employees", and will disclose the cost that would have been recognized if the modified grant date method had been adopted, as well as pro forma net income and earnings per share, as allowed under Statement No. 123. Income Taxes Effective November 1, 1993, the Company prospectively adopted Statement of Financial Accounting Standards (FAS) No. 109 "Accounting for Income Taxes." There was no material cumulative effect of this accounting change at the time of adoption. United States income tax has not been provided on the unremitted earnings of the Canadian subsidiary since it is the intention of the Company to reinvest these earnings in the growth of the Canadian business. Applicable Canadian income taxes have been provided. The cumulative amount of unremitted earnings on which the Company has not recognized United States income tax was $25,200,000 at October 31, 1996. Although it is not practicable to determine the deferred tax liability on the unremitted earnings, credits for Canadian income taxes paid will be available to significantly reduce any U.S. tax liability if Canadian earnings are remitted. Net Income Per Share Net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Shares which are issuable upon the exercise of stock options under the Company's Stock Option Plans have not entered into the computation because their inclusion would not be significant. The weighted average number of shares outstanding was 17,593,976 (1996), 17,388,748 (1995) and 17,353,645 (1994). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results can differ from those estimates. 2. SUBSEQUENT EVENTS On November 12, 1996, the Company acquired 80% of IDOC, Inc. for $6,000,000. The purchase price consisted of 261,438 shares of Bowne Common Stock. IDOC, a leading provider of translation and localization services for the computer industry, will enable the company to significantly increase its presence in this fast growing segment. On November 19, 1996, the Company formed a joint venture (Bowne Williams Lea International) and entered into other arrangements with Williams Lea Group, Ltd. of the United Kingdom to provide outsourcing and facilities management services to multinational corporations, international law firms, banks and financial institutions. The Company and Williams Lea Group, Ltd. will each own 50% of the new joint venture. On January 6, 1997, the company sold its 90% interest in Baseline Financial Services, Inc. to Primark, Inc. for $36,000,000. The sale will be recorded in the first quarter of 1997 and is anticipated to result in a gain for the Company of approximately $20,000,000 or approximately $1.14 a share or higher. The sale will not have a significant effect on reported sales or earnings from normal operations in the future. 3. CASH AND CASH EQUIVALENTS The Company's policy is to invest cash in excess of operating requirements in income producing investments. Cash equivalents of $23,082,000 (1996) and $23,906,000 (1995) are carried at cost, which approximates market, and include certificates of deposit and money market accounts, substantially all of which have maturities of three months or less. 4. INVENTORIES Inventories consist of the following: OCTOBER 31, 1996 1995
Raw materials $ 5,583,000 $ 6,288,000
Work in process 27,926,000 20,740,000
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$33,509,000 $27,028,000
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5. MARKETABLE SECURITIES
Effective November 1, 1994, the Company adopted FAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The Company classifies its investment in marketable equity 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. The fair value of marketable securities exceeded cost by $1,311,000 (1996) and $2,333,000 (1995). The net unrealized gains, after deferred taxes, were $747,000 (1996) and $1,307,000 (1995). 6. EMPLOYEE BENEFIT PLANS Pension Plans The Company sponsors a defined benefit pension plan which covers substantially all of its United States employees not covered by union agreements. Benefits are based upon salary and years of service under the projected unit benefit method. The Company's policy is to fund each year's pension expense to the maximum allowable level. The Company has an unfunded supplemental retirement program for certain management employees. Employees covered by union agreements are included in separate multi-employer pension plans to which the Company makes contributions. Plan benefit and net asset data for these multi-employer pension plans are not available. Also, certain non-union Canadian employees are covered by defined contribution retirement plans. Pension costs are summarized as follows: 1996 1995 1994
Service cost $ 3,077,000 $ 4,946,000 $ 3,008,000
Interest cost 2,549,000 2,402,000 2,132,000
Actual loss (return)
on plan assets (7,124,000) (7,113,000) 472,000
Net amortization
and deferrals 3,211,000 3,765,000 (4,068,000)
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Net periodic pension cost
of defined benefit plans 1,713,000 4,000,000 1,544,000
Union plans 534,000 607,000 570,000
Defined contribution plans 679,000 407,000 378,000
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Total pension cost $ 2,926,000 $ 5,014,000 $ 2,492,000
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The status of the Company's funded defined benefit pension plan is as follows:
OCTOBER 31, 1996 1995
Fair value of plan assets $ 41,205,000 $36,410,000
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Actuarial value of benefit obligations:
Vested 21,979,000 21,239,000
Non-vested 1,616,000 1,418,000
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Accumulated benefit obligation 23,595,000 22,657,000
Effect of projected future
salary increases 7,562,000 4,478,000
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Projected benefit obligation 31,157,000 27,135,000
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Plan assets in excess of projected
benefit obligation 10,048,000 9,275,000
Unrecognized net gain (11,884,000) (9,832,000)
Unrecognized net transition asset
amortized over twenty-two years (4,059,000) (4,366,000)
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Accrued pension cost $ 5,895,000 $ 4,923,000
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At October 31, 1996, the projected benefit obligation under the unfunded supplemental retirement program amounted to $3,542,000 for retired employees and $1,126,000 for active employees, which amounts have been fully accrued. The plan contains covenants which prohibit retired participants from engaging in competition with the Company.
The discount rate used to calculate the projected benefit obligations was 8% in 1996 and 1995. The rate used to project future salary increases was 4.5% for 1996 and 1995. The long-term rate of return on plan assets was 9.0% (1996, 1995 and 1994). The assets of the funded plan consist primarily of equity and fixed income securities. Profit Sharing Plan Certain subsidiaries are participating companies in a qualified profit sharing plan covering substantially all employees of those subsidiaries who are not covered by union agreements. Amounts charged to income for the Profit Sharing Plan were $8,364,000 (1996), $4,937,000 (1995) and $6,211,000 (1994). Stock Purchase Plan Under the Employees' Stock Purchase Plan, participating subsidiaries match 50% of amounts contributed by employees. All contributions are invested in the common stock of the Company. The plan acquired 88,453 shares (1996), 102,049 shares (1995) and 78,899 shares (1994) of the Company's common stock on the open market. At October 31, 1996, the Stock Purchase Plan held 470,497 shares of the Company's common stock. Charges to income amounted to $603,000 (1996), $500,000 (1995) and $472,000 (1994). The shares held by the plan are considered outstanding in computing the Company's earnings per share and dividends paid to the plan are charged to retained earnings. 7. STOCK OPTION PLANS The Company has two stock option plans, a 1981 Plan and a 1992 Plan. The 1981 Plan, which provided for the granting of options to purchase 1,400,000 shares of the Company's common stock, expired December 15, 1991 except as to options then outstanding. The Company's 1992 Stock Option Plan provides for the granting of options to purchase 850,000 shares to officers and key employees at a price not less than the fair market value on the date each option is granted. Both plans permitted grants of either Incentive Stock Options or Non-Qualified Options. Options become exercisable as determined at the date of grant by a committee of the Board of Directors. Options expire ten years after the date of grant unless an earlier expiration date is set at the time of grant. Details of stock options are as follows:
NUMBER OF SHARES OPTION PRICE
1994
Granted 215,200 $19.06
Exercised 83,945 6.25-17.88
Cancelled 56,150 6.25-19.06
Outstanding, end of year 1,013,118 8.12-19.06
Exercisable, end of year 225,592 8.12-17.88
1995
Granted 104,900 $16.06
Exercised 35,042 8.13-14.50
Cancelled 40,800 8.13-19.06
Outstanding, end of year 1,042,176 9.75-19.06
Exercisable, end of year 291,225 9.75-17.88
1996
Granted 222,300 $20.19
Exercised 273,876 9.75-20.19
Cancelled 62,650 10.00-20.19
Outstanding, end of year 927,950 11.13-20.19
Exercisable, end of year 264,900 11.13-17.88
Options to purchase 144,800 shares (1996) and 312,100 shares (1995) were available for grant under the 1992 Plan.
8. INCOME TAXES The provision for income taxes is summarized as follows:
1996 1995 1994
CURRENT:
U.S. Federal $25,813,000 $12,725,000 $16,091,000
Foreign 1,504,000 1,292,000 1,025,000
State and local 6,935,000 3,841,000 4,477,000
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34,252,000 17,858,000 21,593,000
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DEFERRED:
U.S. Federal (1,220,000) 533,000 633,000
Foreign (229,000) (110,000) 712,000
State and local (291,000) 184,000 25,000
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(1,740,000) 607,000 1,370,000
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$32,512,000 $18,465,000 $22,963,000
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The provision for income taxes differed from the U.S. Federal statutory rate for the following reasons:
1996 1995 1994
Statutory tax rate 35.0% 35.0% 35.0%
Increase in tax resulting from:
State and local taxes 5.8 6.3 5.4
Foreign taxes .3 .1 .2
Non-deductible items 2.2 2.7 1.5
Other - .1 .3
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Effective income tax rate 43.3% 44.2% 42.4%
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of October 31, 1996 and 1995 calculated under FAS No. 109 are as follows:
Current deferred tax asset included in prepaid expenses and other current assets: 1996 1995 1994
Bad debt allowance $ 1,294,000 $ 699,000 $ 1,375,000
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Non-current deferred tax
assets (liability):
Deferred compensation
and benefits $ 7,172,000 $ 6,663,000 $ 6,805,000
Depreciation (4,766,000) (5,141,000) (4,527,000)
Other 788,000 191,000 172,000
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Total net non-current asset $ 3,194,000 $ 1,713,000 $ 2,450,000
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Canadian income before income taxes, excluding any allocation of general corporate expenses, was $3,075,000 (1996), $944,000 (1995) and $4,728,000 (1994).
9. NOTES PAYABLE AND LONG-TERM DEBT Notes Payable The Company's Canadian subsidiary has agreements with Canadian banks which provide the funds to meet short-term working capital requirements. Borrowings under the agreements bear interest at Canadian prime plus .25% and are due on demand. At the end of 1996 the amount outstanding on these agreements was $2,299,000. The weighted average interest rate for 1996 was 6.8%. The carrying value of amounts outstanding at the end of 1996 approximates fair values due to their short-term nature. During 1996, the Company entered into an agreement for an uncommitted bank line of credit which provides for secured borrowings for general corporate purposes of up to $50 million. At October 31, 1996 there were no amounts outstanding. Long-Term Debt The Company's other long-term debt of $2,949,000 consists primarily of a capital lease obligation, a mortgage and debt related to the Canadian subsidiary bearing interest from 7.5% to 11.4%. The debt is secured by land, buildings, machinery and equipment with a net book value of $4,195,000. The lease requires aggregate payments of $3,606,000 through 2002 with annual payments of $581,000 in 1997 and $660,000 in 1998, 1999, 2000 and 2001. Of the aggregate payments, $1,096,000 represents executory and interest costs and $2,510,000 represents the present value of the capital lease obligation. Aggregate annual installments of both the notes payable and long-term debt due for the next five years are $2,753,000, $506,000, $555,000, $617,000 and $422,000 respectively. 10. DEFERRED EMPLOYEE COMPENSATION AND BENEFITS Liabilities for deferred employee compensation and benefits consist of the following:
OCTOBER 31, 1996 1995
Pension costs $ 6,418,000 $ 5,553,000
Supplemental retirement 4,128,000 4,343,000
Deferred compensation 4,506,000 4,135,000
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$15,052,000 $14,031,000
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11. OTHER REVENUE
The components of other revenue are summarized as follows: 1996 1995 1994
Interest income $ 991,000 $1,477,000 $ 790,000
Dividends 642,000 720,000 836,000
Capital gains 2,809,000 446,000 3,119,000
Other 463,000 1,063,000 488,000
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$4,905,000 $3,706,000 $5,233,000
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12. LEASE COMMITMENTS
The Company's subsidiaries occupy premises and utilize equipment under leases which are classified as operating leases and expire at various dates to 2006. Many of the leases provide for payment of certain expenses and contain renewal and purchase options. Rent expense relating to premises and equipment amounted to $9,823,000 (1996), $8,265,000 (1995) and $7,034,000 (1994). The minimum annual rental commitments under non-cancelable leases as at October 31, 1996, are summarized as follows: 1997 $7,844,000 2000 $ 4,478,000
1998 7,071,000 2001 3,727,000
1999 5,780,000 2002-2006 10,747,000
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Total $39,647,000
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13. SEGMENT AND GEOGRAPHIC DATA
The Company is engaged in one line of business Ñ transactional, corporate reporting, mutual fund, and commercial printing. Information about the business of the Company by geographic area is presented in the table below. The Company's areas of operation outside of the United States and Canada principally include London, Paris, Hong Kong and Singapore. Sales or transfers between geographic areas and United States export sales were not material. General corporate expenses are included in the United States operations. OTHER
UNITED STATES CANADA FOREIGN TOTAL
1996
Net sales $404,683,000 $62,513,000 $34,173,000 $501,369,000
Net income 40,951,000 1,818,000 (266,000) 42,503,000
Identifiable assets 324,172,000 36,760,000 24,890,000 385,822,000
1995
Net sales $314,264,000 $56,199,000 $22,250,000 $392,713,000
Net income 23,328,000 526,000 (568,000) 23,286,000
Identifiable assets 276,107,000 33,536,000 16,027,000 325,670,000
1994
Net sales $305,848,000 $56,304,000 $18,501,000 $380,653,000
Net income 28,423,000 2,991,000 (174,000) 31,240,000
Identifiable assets 242,912,000 34,691,000 13,978,000 291,581,000
The Board of Directors and Stockholders We have audited the accompanying consolidated balance sheets of Bowne & Co., Inc. and Subsidiaries as of October 31, 1996 and 1995, and the related consolidated statements of income, stockholdersÕ equity and cash flows for each of the three years in the period ended October 31, 1996. These financial statements are the responsibility of the CompanyÕs management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bowne & Co., Inc. and Subsidiaries at October 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 5 to the consolidated financial statements, as of November 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities."
New York, New York |