UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission file number
September 27, 1997 1-3246
BELL & HOWELL OPERATING COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3580106
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5215 Old Orchard Road, Skokie, Illinois 60077-1076
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (847) 470-7100
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 X No
The number of shares of the Registrant's Common Stock, $.01
par value, outstanding as of November 7, 1997 was 2,956.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Operations for
the Thirteen and Thirty-Nine Weeks Ended
September 28, 1996 and September 27,1997 ..... 1
Consolidated Balance Sheets - Assets at
December 28, 1996 and September 27, 1997 ..... 2
Consolidated Balance Sheets - Liabilities
and Shareholders' Equity at December 28, 1996
and September 27, 1997 ....................... 3
Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended
September 28, 1996 and September 27, 1997 .... 4
Notes to the Consolidated Financial
Statements ................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... 16
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings .............................. 22
Item 6. Exhibits and Reports on Form 8-K ............... 22
SIGNATURE PAGE ............................................ 23
<PAGE>
<TABLE>
Bell & Howell Operating Company and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
------------------------- ------------------------
Sept. 28, Sept. 27, Sept. 28, Sept. 27,
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 218,840 $ 211,722 $ 633,905 $ 629,890
Operating costs and expenses:
Cost of sales 140,995 127,817 410,407 392,537
Research and development 9,492 9,344 25,946 29,166
Selling and administrative 47,910 51,368 145,310 149,742
-------- -------- -------- --------
Total operating costs and expenses 198,397 188,529 581,663 571,445
Operating income 20,443 23,193 52,242 58,445
Net interest expense:
Interest (income) (5,389) (5,505) (13,603) (15,822)
Interest expense 10,041 11,760 28,534 34,198
-------- -------- -------- --------
Net interest expense 4,652 6,255 14,931 18,376
Earnings before income taxes and
extraordinary items 15,791 16,938 37,311 40,069
Income tax expense 5,137 4,594 8,868 9,319
-------- -------- -------- --------
Earnings before extraordinary items 10,654 12,344 28,443 30,750
Extraordinary losses -- (2,931) (1,088) (3,028)
-------- -------- -------- --------
Net earnings $ 10,654 $ 9,413 $ 27,355 27,722
Dividends on preferred stock 5,712 5,735 18,603 17,578
-------- -------- -------- --------
Net earnings applicable to common stock $ 4,942 $ 3,678 $ 8,752 $ 10,144
======== ======== ======== ========
Net earnings per common share:
Earnings before extraordinary items $ 1,672 $ 2,237 $ 3,330 $ 4,458
Extraordinary losses -- (992) (368) (1,025)
-------- -------- -------- --------
Net earnings per common share $ 1,672 $ 1,245 $ 2,962 $ 3,433
======== ======== ======== ========
Average common shares outstanding 2,955 2,955 2,955 2,955
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
-1-
<PAGE>
<TABLE>
Bell & Howell Operating Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
Assets
<CAPTION>
December 28, September 27,
1996 1997
------------ ------------
(Audited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,480 $ 9,415
Accounts receivable, less allowance for
doubtful accounts of $5,294 and $5,716,
respectively 186,862 194,590
Inventory 139,831 166,540
Other current assets 11,814 10,653
-------- --------
Total current assets 353,987 381,198
Property, plant and equipment, at cost 363,015 386,514
Accumulated depreciation (207,287) (236,597)
-------- --------
Net property, plant and equipment 155,728 149,917
Long-term receivables 54,707 58,296
Goodwill, net of accumulated amortization 189,868 196,491
Other assets 38,677 36,348
-------- --------
Total assets $ 792,967 $ 822,250
======== ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
-2-
<PAGE>
<TABLE>
Bell & Howell Operating Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
Liabilities and Shareholders' Equity
<CAPTION>
December 28, September 27,
1996 1997
------------ -------------
(Audited) (Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable $ 8,397 $ 91,103
Current maturities of long-term debt 1,667 970
Accounts payable 93,135 60,025
Accrued expenses 78,486 62,053
Deferred income 171,698 173,151
Accrued income taxes 1,143 148
-------- --------
Total current liabilities 354,526 387,450
Long-term liabilities:
Long-term debt 336,606 361,506
Other liabilities 61,049 61,318
-------- --------
Total long-term liabilities 397,655 422,824
Shareholders' equity:
$121.33 Intercompany Preferred Stock,
$.01 par value, 199,636 shares outstanding at
December 28, 1996, and 127,611 shares
outstanding at September 27, 1997 2 1
Common Stock, $.01 par value, 2,955 shares
issued and outstanding at December 28, 1996
and 2,956 issued and outstanding at
September 27, 1997 -- --
Capital surplus 117,531 64,134
Retained earnings (deficit) (77,363) (49,641)
Cumulative foreign exchange translation adjustments 616 (2,518)
-------- --------
Total shareholders' equity 40,786 11,976
Commitments and contingencies -- --
-------- --------
Total liabilities and shareholders' equity $ 792,967 $ 822,250
======== ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
-3-
<PAGE>
<TABLE>
Bell & Howell Operating Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<CAPTION>
Thirty-Nine Weeks
Ended
-----------------------------
Sept. 28, Sept. 27,
1996 1997
--------- ---------
<S> <C> <C>
Operating Activities:
Net earnings $ 27,355 $ 27,722
Depreciation and amortization 34,480 43,971
Changes in operating assets and liabilities:
Accounts receivable 4,840 (8,277)
Inventory (43,071) (20,755)
Other current assets 1,688 1,618
Long-term receivables 6,006 (3,589)
Income taxes (756) (1,137)
Accounts payable (981) (34,307)
Accrued expenses (3,514) (16,997)
Deferred income and other long-term liabilities (8,207) (2,562)
Other, net (907) (6,764)
-------- --------
Net cash provided (used) by operating activities 16,933 (21,077)
Investing activities:
Expenditures for property, plant and equipment (30,440) (24,791)
Acquisitions (62,568) (11,421)
-------- --------
Net cash used by investing activities (93,008) (36,212)
Financing activities:
Proceeds from short-term debt 11,409 92,164
Repayment of short-term debt (16,058) (8,561)
Proceeds from long-term debt 235,384 86,396
Repayment of long-term debt (119,564) (64,981)
Proceeds from issuance of Common Stock -- 50,000
Redemption of $121.33 Intercompany Preferred Stock (35,795) (103,414)
-------- --------
Net cash provided by financing activities 75,376 51,604
Effect of exchange rate changes on cash 13 (380)
-------- --------
Increase (decrease) in cash and cash equivalents (686) (6,065)
Cash and cash equivalents, beginning of period 7,051 15,480
-------- --------
Cash and cash equivalents, end of period $ 6,365 $ 9,415
======== ========
Supplemental schedule of non-cash activities:
Preferred dividends paid-in-kind $ 18,603 $ 17,578
======== ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
-4-
<PAGE>
Bell & Howell Operating Company and Subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands)
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts
of Bell & Howell Operating Company and its subsidiaries
(collectively the "Company") and have been prepared without
independent audit, except for the balance sheet data as of
December 28, 1996.
In the opinion of the Company's management, the consolidated
financial statements include all adjustments necessary to present
fairly the information required to be set forth therein, and such
adjustments are of a normal and recurring nature. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The Company's management believes, however, that the disclosures
are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included
in Bell & Howell Operating Company's annual report for the fiscal
year ended December 28, 1996.
Note 2 - Significant Accounting Policies
Net Earnings per Common Share. Net earnings per common
share are determined by dividing net earnings, after deducting
dividends on preferred stock, by the weighted average number of
common shares outstanding during the period.
Inventory. The Company uses the last-in, first-out (LIFO)
method of valuing the majority of its domestic inventory. Use of
the LIFO method is predicated on a determination of inventory
quantities and costs at the end of each fiscal year, and
therefore interim determinations of LIFO inventory values and
results of operations are by necessity based on management's
estimates of expected year-end inventory quantities and costs.
The excess of replacement cost over the LIFO values of inventory
was $4,489 at December 28, 1996 and September 27, 1997.
-5-
<PAGE>
Note 3 - New Credit Agreement, Capital Contribution,
Preferred Stock and Debt Redemption
In September 1997, the Company entered into a New Credit
Agreement which provides a revolving credit facility of $600,000.
Borrowings under the new credit facility together with a capital
contribution of $50,000 from the Company's parent were used to
redeem $81,164 (accreted value) of the Intercompany Preferred
Stock, purchase $8,300 of the 9 1/4% Senior Notes, and repayment
of all amounts due under the Company's former credit agreement.
Note 4 - Extraordinary Losses
The extraordinary losses of $3,028 ($4,732 pretax) in the
first nine months of 1997 were comprised of the debt repurchase
premium and write-off of unamortized debt issuance costs
associated with the repurchase of $8,300 of the 9 1/4% Senior
Notes and $2,100 of the 10 3/4% Senior Subordinated Notes.
The extraordinary loss of $1,088 ($1,700 pretax) in the
first nine months of 1996 was comprised of the debt repurchase
premium and write-off of unamortized debt issuance costs
associated with the repurchase of $17,920 of the 10 3/4% Senior
Subordinated Notes.
Note 5 - Foreign Postal Contracts
The Company is a subcontractor to the same general
contractor on two contracts to provide mail automation systems to
foreign postal authorities. The scope and performance of these
contracts and the Company's ability to be compensated for
additional services are currently being negotiated, the
resolution of which may adversely impact contract loss reserves
recorded to date.
Note 6 - Liquidation and Dissolution of Holding Company Structure
Bell & Howell Operating Company ("BHOC") is a wholly-owned
subsidiary of Bell & Howell Company (the "Holding Company"). The
Holding Company's primary assets are all of the issued and
outstanding shares of Common Stock and Intercompany Preferred
Stock of BHOC. The Holding Company conducts business through
BHOC and has no operations of its own.
-6-
<PAGE>
In October 1997, the stockholders of the Holding Company
approved a plan (the "Plan") to simplify the corporate structure
of the Holding Company and its subsidiaries. Although the Plan
includes the liquidation and dissolution of the Holding Company,
it does not affect the business operations of BHOC or the
relative interests of the Holding Company stockholders. Upon
completion of the Plan, each stockholder of the Holding Company
will receive newly issued shares of BHOC Common Stock on a
share-for-share basis (and the Holding Company Common Stock will
be canceled), the BHOC Common Stock will replace Holding Company
Common Stock on the New York Stock Exchange, all current officers
and directors of the Holding Company will be elected to identical
positions of BHOC and the name of BHOC will be changed to "Bell &
Howell Company".
Note 7 - Subsidiary Guarantors
The 9 1/4% Senior Notes, the 10 3/4% Senior Subordinated
Notes, and the Credit Agreement are jointly and severally
guaranteed by certain domestic operating subsidiaries of the
Company, excluding, among others, Bell & Howell Financial
Services Company (the "Guarantors"). Such guarantees are
irrevocable and unconditional, and represent a substantial
portion of each Guarantor's net worth.
The condensed consolidating information which follows
presents:
1. Condensed consolidating balance sheets at September 27, 1997
and December 28, 1996 and related condensed consolidating
statements of operations and cash flows for the thirty-nine
weeks ended September 27, 1997 and September 28, 1996.
Investments in subsidiaries are accounted for by their parent
companies on the cost basis for purposes of the condensed
consolidating income statements, and therefore, earnings of
subsidiaries are not reflected in the respective parent's net
earnings.
2. Elimination entries necessary to consolidate Bell & Howell
Operating Company and its subsidiaries.
-7-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING BALANCE SHEET
At September 27, 1997
ASSETS
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 9,415 $ -- $ 2,514 $ 3,197 $ 3,704
Accounts receivable 194,590 -- 65 157,182 37,343
Inventory 166,540 (1,281) -- 138,541 29,280
Other current assets 10,653 -- 804 7,250 2,599
------- -------- ------- -------- -------
Total current assets 381,198 (1,281) 3,383 306,170 72,926
Investment in subsidiaries -- 38,104 (38,104) -- --
Intercompany accounts -- -- 182,628 (162,197) (20,431)
Net property, plant &
equipment 149,917 -- 1,535 138,943 9,439
Other non-current assets 291,135 (362,373) 373,177 226,880 53,451
------- -------- ------- -------- -------
Total assets $822,250 $(325,550) $522,619 $ 509,796 $115,385
======= ======== ======= ======== =======
</TABLE>
-8-
<PAGE>
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Liabilities:
Current liabilities $387,450 $ -- $ 91,069 $ 251,323 $ 45,058
Long-term debt 361,506 (362,373) 357,980 362,378 3,521
Other liabilities 61,318 -- 59,076 1,128 1,114
------- -------- ------- -------- -------
Total liabilities 810,274 (362,373) 508,125 614,829 49,693
Shareholders' equity:
Intercompany Preferred
Stock 1 -- 1 -- --
Capital surplus 64,134 (179,315) 64,134 139,636 39,679
Retained earnings (deficit) (49,641) 216,138 (49,641) (244,669) 28,531
Cumulative foreign exchange
translation adjustments (2,518) -- -- -- (2,518)
------- -------- ------- -------- -------
Total shareholders' equity
(deficit) 11,976 36,823 14,494 (105,033) 65,692
------- -------- ------- -------- -------
Total liabilities &
shareholders' equity $822,250 $(325,550) $522,619 $ 509,796 $115,385
======= ======== ======= ======== =======
</TABLE>
-9-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING BALANCE SHEET
At December 28, 1996
ASSETS
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ...... $ 15,480 $ -- $ 4,318 $ 4,809 $ 6,353
Accounts receivable ............ 186,862 -- 413 137,655 48,794
Inventory ...................... 139,831 (1,282) -- 112,958 28,155
Other current assets ........... 11,814 -- 1,298 8,432 2,084
-------- -------- -------- -------- --------
Total current assets ........... 353,987 (1,282) 6,029 263,854 85,386
Investment in subsidiaries ..... -- 60,954 (60,954) -- --
Intercompany accounts .......... -- -- 118,842 (99,046) (19,796)
Net property, plant & equipment 155,728 -- 1,591 143,406 10,731
Other non-current assets ....... 283,252 (362,373) 376,875 220,228 48,522
-------- -------- -------- -------- --------
Total assets ................... $ 792,967 $(302,701) $ 442,383 $ 528,442 $ 124,843
======== ======== ======== ======== ========
</TABLE>
-10-
<PAGE>
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Liabilities:
Current liabilities ............ $ 354,526 $ -- $ 11,905 $ 285,590 $ 57,031
Long-term debt ................. 336,606 (362,373) 332,180 362,401 4,398
Other liabilities .............. 61,049 -- 58,128 1,556 1,365
-------- -------- -------- -------- --------
Total liabilities .............. 752,181 (362,373) 402,213 649,547 62,794
Shareholders' equity:
Intercompany Preferred Stock ... 2 -- 2 -- --
Capital surplus ................ 117,531 (179,314) 117,531 139,637 39,677
Retained earnings (deficit) .... (77,363) 238,986 (77,363) (260,742) 21,756
Cumulative foreign exchange
translation adjustments ....... 616 -- -- -- 616
-------- -------- -------- -------- --------
Total shareholders' equity
(deficit) ..................... 40,786 59,672 40,170 (121,105) 62,049
-------- -------- -------- -------- --------
Total liabilities &
shareholders' equity $ 792,967 $(302,701) $ 442,383 $ 528,442 $ 124,843
======== ======== ======== ======== ========
</TABLE>
-11-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirty-Nine Weeks Ended September 27, 1997
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $629,890 $(27,682) $ -- $548,951 $108,621
Cost of sales 392,537 (27,682) -- 343,888 76,331
Operating expenses 178,908 -- (8,366) 159,717 27,557
Net interest expense
(income) 18,376 -- (4,339) 29,273 (6,558)
------- ------- ------- ------- -------
Earnings before income taxes
and extraordinary items 40,069 -- 12,705 16,073 11,291
Income tax expense 9,319 -- 4,803 -- 4,516
------- ------- ------- ------- -------
Earnings before
extraordinary items 30,750 -- 7,902 16,073 6,775
Extraordinary losses (3,028) -- (3,028) -- --
------- ------- ------- ------- -------
Net earnings $ 27,722 $ -- $ 4,874 $ 16,073 $ 6,775
======= ======= ======= ======= =======
</TABLE>
-12-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirty-Nine Weeks Ended September 28, 1996
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $633,905 $(33,199) $ -- $542,889 $124,215
Cost of sales 410,407 (33,199) -- 356,412 87,194
Operating expenses 171,256 -- (7,340) 146,572 32,024
Net interest expense
(income) 14,931 -- (9,720) 26,112 (1,461)
------- ------- ------ ------- -------
Earnings before income taxes
and extraordinary items 37,311 -- 17,060 13,793 6,458
Income tax expense 8,868 -- 6,003 -- 2,865
------- ------- ------ ------- -------
Earnings before
extraordinary items 28,443 -- 11,057 13,793 3,593
Extraordinary losses (1,088) -- (1,088) -- --
------- ------- ------ ------- -------
Net earnings $ 27,355 $ -- $ 9,969 $ 13,793 $ 3,593
======= ======= ====== ======= =======
</TABLE>
-13-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Thirty-Nine Weeks Ended September 27, 1997
<CAPTION>
Parent Combined Non-
Consolidated Company Guarantors Guarantors
------------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Net cash provided (used)
by operating activities $(21,077) $(56,962) $ 33,342 $ 2,543
------- ------- ------- -------
Investing activities:
Expenditures for property,
plant and equipment (24,791) (243) (23,533) (1,015)
Acquisitions (11,421) -- (11,421) --
------- ------- ------- -------
Net cash used by
investing activities (36,212) (243) (34,954) (1,015)
------- ------- ------- -------
Financing activities:
Net short-term borrowings 83,603 87,020 -- (3,417)
Net long-term borrowings 21,415 21,795 -- (380)
Proceeds from issuance of
Common Stock 50,000 50,000 -- --
Redemption of Intercompany
Preferred Stock (103,414) (103,414) -- --
------- ------- ------- -------
Net cash provided (used)
by financing activities 51,604 55,401 -- (3,797)
------- ------- ------- -------
Effect of exchange rate
changes on cash (380) -- -- (380)
------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents $ (6,065) $ (1,804) $ (1,612) $ (2,649)
======= ======= ======= =======
</TABLE>
-14-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Thirty-Nine Weeks Ended September 28, 1996
<CAPTION>
Parent Combined Non-
Consolidated Company Guarantors Guarantors
------------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Net cash provided (used)
by operating activities $ 16,933 $(81,318) $ 90,720 $ 7,531
------- ------- ------- -------
Investing activities:
Expenditures for property,
plant and equipment (30,440) (265) (28,723) (1,452)
Acquisitions (62,568) -- (62,568) --
------- ------- ------- -------
Net cash used by
investing activities (93,008) (265) (91,291) (1,452)
------- ------- ------- -------
Financing activities:
Net short-term borrowings (4,649) -- -- (4,649)
Net long-term borrowings 115,820 116,322 -- (502)
Redemption of Intercompany
Preferred Stock (35,795) (35,795) -- --
------- ------- ------- -------
Net cash provided (used)
by financing activities 75,376 80,527 -- (5,151)
------- ------- ------- -------
Effect of exchange rate
changes on cash 13 -- -- 13
------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents $ (686) $ (1,056) $ (571) $ 941
======= ======= ======= =======
</TABLE>
-15-
<PAGE>
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This section should be read in conjunction with the
Consolidated Financial Statements of Bell & Howell Operating Company
and Subsidiaries (collectively the "Company") and the notes thereto
included in the annual report for the year ended December 28, 1996.
Results of Operations
- ---------------------
Nine Months Year-to-Date 1997 Compared to Nine Months
- -----------------------------------------------------
Year-to-Date 1996
- -----------------
The Company's net sales decreased $4.0 million, or 1%, to
$629.9 million in the first nine months of 1997 as continued
strong sales growth within Information Access (particularly for
the transportation & vehicle and education & library markets), as
well as the high volume mailing portion of Mail Processing was
more than offset by lower revenues in the postal contracting
portion of Mail Processing due to shipments of significant
one-time contracts to postal authorities in 1996.
Information Access net sales increased $15.8 million, or 5%,
to $347.9 million in the first nine months of 1997. Within the
Information Access businesses, the Company provides access to
information in select vertical markets including the
transportation & vehicle and education & library markets, and
also provides imaging solutions and components to financial
institutions, governmental agencies and other paper intensive
industries. Net sales to the transportation & vehicle market
increased $10.2 million, or 14%, to $85.1 million due to
increased sales of electronic parts catalogs and ancillary
products to automotive dealerships, and continued strong sales of
dealer management systems and electronic parts catalogs to
powersports dealerships. In addition to increased new systems
placements, the Company continued to experience strong sales of
additional product applications and high contract renewal rates
related to previously placed systems. Net sales to the education
& library market increased $12.8 million, or 10%, to $135.8
million due to a growing electronic subscription base, which
continued to reflect strong sales of ProQuest Direct(the
Company's on-line electronic product offering), high renewal
rates on existing products, and the acquisition of DataTimes
Corporation (in September 1996) which added complementary
information content, technology and distribution to the Company's
electronic product offerings. Sales of electronic content
increased 32% over the prior year as customers increasingly
demand electronic information solutions and its newer form of
-16-
<PAGE>
on-line delivery. Net sales of microfilm and paper products to
the education & library market declined slightly versus the prior
year as increased pricing was offset by lower unit volumes. Net
sales in the Imaging Solutions and Components business decreased
$7.2 million, or 5%, to $127.0 million as increased sales of
production scanners and imaging software systems were more than
offset by the impact of divesting certain low margin product
lines in Canada and France. Excluding the impact of the divested
product lines, Imaging Solutions and Components' net sales in the
first nine months of 1997 would have increased by 5% over the
prior year.
Mail Processing net sales decreased $19.8 million, or 7%, to
$282.0 million in the first nine months of 1997. Excluding the
impact of a stronger dollar in 1997, sales of high volume mailing
systems increased $24.8 million, or 10%, to $263.4 million
reflecting strong market demand for inserting and sorting
systems. Sales of commercial sorting equipment (which represents
16% of high volume mailing systems sales) increased $4.1 million,
or 22%, to $23.4 million as the U.S. Postal Service guidelines
governing the operating requirements to qualify for certain
financial incentives to properly address, bar code and presort
mail have created a more favorable environment for customers to
invest in advanced sorting technology. Service revenues (which
are primarily annuity based and represent 45% of high volume
mailing systems sales) continue to increase, due to both an
expanded customer base and increased pricing. Sales of
customized mail automation equipment and contractual engineering
services to governmental postal authorities decreased $37.8
million to $18.6 million in the first nine months of 1997,
primarily as a result of shipments of significant one-time
contracts to postal authorities in the first nine months of 1996.
In its government postal contracting business, the Company is a
subcontractor to the same general contractor on two contracts to
provide mail automation systems to foreign postal authorities.
The scope and performance of these contracts and the Company's
ability to be compensated for additional services are currently
being negotiated, the resolution of which may adversely impact
contract loss reserves recorded to date.
The Company's cost of sales decreased $17.9 million, or 4%,
to $392.5 million in the first nine months of 1997, with the
gross profit (net sales less cost of sales) percentage increasing
by 2.4 percentage points to 37.7%. The higher gross profit
percentage in 1997 resulted from a shift in sales mix (as the
growth rate in higher gross profit percentage Information Access
revenues exceeded the growth rate in lower gross profit
percentage Mail Processing revenues), and additionally reflects
both improved manufacturing productivity and increased pricing.
-17-
<PAGE>
Research and development expense increased $3.2 million, or
12%, to $29.2 million in the first nine months of 1997 as the
Company continued to increase its investment in new product
offerings. Such increase primarily related to increased costs to
develop new electronic products for the education & library
market, to develop a new technology platform for the powersports
market and to develop enhanced versions of production scanners.
The Company has continually positioned itself to take advantage
of new product/technology opportunities (with an increased
emphasis on software solutions and electronic products) in each
of its businesses.
Selling and administrative ("S&A") expense increased $4.4
million, or 3%, to $149.7 million in the first nine months of
1997 reflecting the Company's increased investment in sales and
marketing resources. The ratio of selling and administrative
expense to net sales of 23.8% in the first nine months of 1997
increased by 0.9 percentage points versus the prior year as
various expense leveraging initiatives were offset by the result
of the aforementioned shift in sales mix (as the growth rate in
higher S&A expense percentage Information Access revenues
exceeded the growth rate in lower S&A expense percentage Mail
Processing revenues).
EBITDA (defined as operating income plus depreciation and
amortization) increased $11.8 million, or 14%, to $96.9 million
in the first nine months of 1997 resulting from the increased
sales to the transportation & vehicle and education & library
markets, as well as increased high volume mailing systems sales,
and leveraged operating costs and expenses. Operating income
increased $6.2 million, or 12%, to $58.4 million in the first
nine months of 1997.
Information Access EBITDA increased $10.2 million, or 16%,
to $75.9 million in the first nine months of 1997. This increase
resulted from the higher sales volumes, an improved gross profit
percentage reflecting a sales mix emphasizing the Company's more
profitable products (i.e., a greater proportion of revenues
related to software and publishing and a lower proportion of
revenues related to the sale of hardware) which more than offset
increased research and development costs associated with new
product offerings. Information Access operating income increased
$5.0 million, or 13%, to $44.3 million in the first nine months
of 1997.
Mail Processing EBITDA increased $2.2 million, or 8%, to
$31.0 million in the first nine months of 1997 as a result of the
higher sales of high volume mailing systems and leveraged
operating costs and expenses. Mail Processing operating income
increased $1.7 million, or 7%, to $24.4 million in the first nine
months of 1997.
-18-
<PAGE>
Corporate expenses (excluding depreciation and amortization)
increased $0.6 million, or 6%, to $9.9 million in the first nine
months of 1997 as productivity improvements were more than offset
by inflationary/other cost increases.
Net interest expense increased $3.4 million, or 23%, to
$18.4 million in the first nine months of 1997, primarily
reflecting the increased debt (resulting from acquisitions in
1996 and the increased inventory investment related to postal
contracts), which was partially offset by the impact of the
repurchases in 1996 and 1997 of portions of the 10 3/4% Senior
Subordinated Notes, which were redeemed with bank borrowings.
Net interest income of Bell & Howell Financial Services Company,
the Company's financing subsidiary, increased $1.1 million to
$6.2 million in the first nine months of 1997, primarily due to
continued growth in the lease receivables portfolio.
Pursuant to a tax sharing agreement with Bell & Howell
Company, the interest expense from the Senior Discount Debentures
of Bell & Howell Company is included in the Company's domestic
consolidated income tax return. Income tax expense increased in
the first nine months of 1997 as a result of a reduction in such
interest expense transferred to the Company and a higher level of
pretax profit in the current year.
In September 1997, the Company entered into a New Credit
Agreement which provides a revolving credit facility of $600.0
million. Borrowings under the new credit facility together with
a capital contribution of $50.0 million from the Company's parent
were used to redeem $81.2 million (accreted value) of the
Intercompany Preferred Stock, purchase $8.3 million of the 9 1/4%
Senior Notes, and repayment of all amounts due under the
Company's former credit agreement. In the fourth quarter of
1997, the Company redeemed the remaining Intercompany Preferred
Stock ($128.8 million in accreted value at September 27, 1997),
the remaining $71.7 million of the 9 1/4 Senior Notes, and the
remaining $55.0 million of the 10 3/4% Senior Subordinated Notes.
The extraordinary losses of $3.0 million ($4.7 million
pretax) in the first nine months of 1997 were comprised of the
debt repurchase premium and write-off of unamortized debt
issuance costs associated with the repurchase of $8.3 million of
the 9 1/4% Senior Notes, and $2.1 million of the 10 3/4% Senior
Subordinated Notes. The extraordinary loss of $1.1 million ($1.7
million pretax) in the first nine months of 1996 was comprised of
the debt repurchase premium and write-off of unamortized debt
issuance costs associated with the repurchase of $17.9 million of
the 10 3/4% Senior Subordinated Notes.
-19-
<PAGE>
Dividends on preferred stock are associated with the
Company's $121.33 Intercompany Preferred Stock (which is owned by
Bell & Howell Company). In the first nine months of 1997, the
Company repurchased $96.5 million (accreted value) of the
Intercompany Preferred Stock for $107.7 million. In the first
nine months of 1996 the Company repurchased $33.4 million
(accreted value) of the Intercompany Preferred Stock for $35.8
million.
Cash used by operations was $21.1 million in the first nine
months of 1997 versus cash provided by operations of $16.9
million in the first nine months of 1996. Although EBITDA
increased by $11.8 million in the first nine months of 1997, the
Company's working capital investment increased in the current
year related to the timing of receivable collections and vendor
disbursements. The Company operates with a reduced net working
capital level principally as a result of substantial customer
prepayments for annual service contracts in each of its business
segments and prepaid subscriptions in the Information Access
business segment.
Debt (net of cash and cash equivalents) increased by $113.0
million to $444.2 million in the first nine months of 1997 as the
proceeds from the capital contribution by the Company's parent was
more than offset by the cash used by operations (which reflects the
seasonal nature of the Company's cash collections and
disbursements), the redemption of the Intercompany Preferred Stock
and capital expenditures/acquisitions.
Recently Issued Financial Accounting Standards
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share." The standard establishes new methods for
computing and presenting earnings per share ("EPS") and replaces
the presentation of primary and fully-diluted EPS with basic and
diluted EPS. The Company is required to adopt the new standard
for periods ending after December 15, 1997. Under this standard,
EPS data will not be required for the Company, as it is a
wholly-owned subsidiary of Bell & Howell Company.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." The Company is required to
adopt the new standard for periods ending after fiscal 1997.
This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. The standard requires all items
that are required to be recognized under accounting standards as
-20-
<PAGE>
components of comprehensive income be reported in a financial
statement that is displayed in equal prominence with the other
financial statements. The standard is not expected to have a
material impact on the Company's current presentation of income.
In June 1997, the Financial Accounting Standards Board also
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." The Company is required to adopt this new standard
for periods ending after fiscal 1997. This statement establishes
standards for the way companies are to report information about
operating segments. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. The Company is currently evaluating the impact
of this standard on its financial statements.
-21-
<PAGE>
Part II. Other Information
- ------- -----------------
Item 1. Legal Proceedings.
- ------ -----------------
The Company is involved in various legal proceedings
incidental to its business. Management believes that except
for the impact of the resolution of the issues associated
with certain foreign postal contracts (referenced in Note 5 to
the Consolidated Financial Statements), the outcome of such
proceedings will not have a material adverse effect upon
the consolidated operations or financial condition of the
Company.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
Index Number Description
------------ -----------------------
(10.11) Revolving Credit Agreement
(11.1) Computation of Earnings
Per Common Share
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the thirteen
weeks ended September 27, 1997.
-22-
<PAGE>
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.
Date: November 7, 1997 BELL & HOWELL OPERATING COMPANY
/s/James P. Roemer
--------------------------
James P. Roemer
President, Chief Executive
Officer and Director
/s/Nils A. Johansson
--------------------------
Nils A. Johansson
Executive Vice President,
Chief Financial Officer
and Director
-23-
<PAGE>
Exhibit 10.11
Revolving Credit Agreement, dated as of September 22, 1997, among
Bell & Howell Operating Company, the Lenders listed therein, and
Bankers Trust Company incorporated herein by reference to Exhibit
10.11 to Bell & Howell Operating Company's Registration Statement
on Form S-4, as amended, Registration No. 333-36401.
<PAGE>
<TABLE>
Exhibit 11.1
Bell & Howell Operating Company and Subsidiaries
Computation of Earnings per Common Share
(Dollars in thousands, except per share data)
(Unaudited)
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
-------------------- ---------------------
Sept. 28, Sept. 27, Sept. 28, Sept. 27,
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings applicable to common stock:
Earnings before extraordinary items $10,654 $12,344 $28,443 $30,750
Extraordinary losses -- (2,931) (1,088) (3,028)
------ ------ ------ ------
Net earnings 10,654 9,413 27,355 27,722
Dividends on preferred stock 5,712 5,735 18,603 17,578
------ ------ ------ ------
Net earnings applicable to
common stock $ 4,942 $ 3,678 $ 8,752 $10,144
====== ====== ====== ======
Average common shares outstanding 2,955 2,955 2,955 2,955
Net earnings per common share:
Earnings before extraordinary items $ 1,672 $ 2,237 $ 3,330 $ 4,458
Extraordinary losses -- (992) (368) (1,025)
------ ------ ------ ------
Net earnings per common share $ 1,672 $ 1,245 $ 2,962 $ 3,433
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S BALANCE SHEET AND STATEMENT OF OPERATIONS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> SEP-27-1997
<CASH> 9415
<SECURITIES> 0
<RECEIVABLES> 200306
<ALLOWANCES> 5716
<INVENTORY> 166540
<CURRENT-ASSETS> 381198
<PP&E> 386514
<DEPRECIATION> (236597)
<TOTAL-ASSETS> 822250
<CURRENT-LIABILITIES> 387450
<BONDS> 361506
0
1
<COMMON> 0
<OTHER-SE> 11975
<TOTAL-LIABILITY-AND-EQUITY> 822250
<SALES> 629890
<TOTAL-REVENUES> 629890
<CGS> 392537
<TOTAL-COSTS> 571445
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18376
<INCOME-PRETAX> 40069
<INCOME-TAX> 9319
<INCOME-CONTINUING> 30750
<DISCONTINUED> 0
<EXTRAORDINARY> (3028)
<CHANGES> 0
<NET-INCOME> 10144
<EPS-PRIMARY> 3433
<EPS-DILUTED> 3433
</TABLE>
