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
March 29, 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 May 2, 1997 was 2,955.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Operations for
the Thirteen Weeks Ended March 30, 1996
and March 29, 1997 ........................... 1
Consolidated Balance Sheets - Assets at
December 28, 1996 and March 29, 1997 ......... 2
Consolidated Balance Sheets - Liabilities
and Shareholders' Equity at December 28, 1996
and March 29, 1997 ........................... 3
Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended March 30, 1996
and March 29, 1997 ............................ 4
Notes to the Consolidated Financial
Statements ................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... 12
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings .............................. 17
Item 6. Exhibits and Reports on Form 8-K ............... 17
SIGNATURE PAGE ............................................ 18
<PAGE>
<TABLE>
Bell & Howell Operating Company and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
<CAPTION>
Thirteen Weeks Ended
--------------------------
March 30, March 29,
1996 1997
---------- ----------
<S> <C> <C>
Net sales $ 201,092 $ 200,018
Operating costs and expenses:
Cost of sales 130,578 129,159
Research and development 7,931 9,616
Selling and administrative 48,336 45,997
-------- --------
Total operating costs and expenses 186,845 184,772
Operating income 14,247 15,246
Net interest expense:
Interest (income) (4,242) (4,992)
Interest expense 8,983 10,847
-------- --------
Net interest expense 4,741 5,855
Earnings before income taxes and
extraordinary item 9,506 9,391
Income tax expense 1,370 1,454
-------- --------
Earnings before extraordinary item 8,136 7,937
Extraordinary loss -- (30)
-------- --------
Net earnings $ 8,136 $ 7,907
Dividends on preferred stock 6,439 5,889
-------- --------
Net earnings applicable to common stock $ 1,697 2,018
======== ========
Net earnings per common share:
Earnings before extraordinary item $ 574 $ 693
Extraordinary loss -- (10)
-------- --------
Net earnings per common share $ 574 683
======== ========
Average common shares outstanding 2,955 2,955
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
-1-
<PAGE>
<TABLE>
Bell & Howell Operating Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
Assets
<CAPTION>
December 28, March 29,
1996 1997
------------ ------------
(Audited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,480 $ 10,973
Accounts receivable, less allowance for
doubtful accounts of $5,294 and $5,386,
respectively 186,862 151,893
Inventory 139,831 139,741
Other current assets 11,814 12,529
-------- --------
Total current assets 353,987 315,136
Property, plant and equipment, at cost 363,015 370,407
Accumulated depreciation (207,287) (217,301)
-------- --------
Net property, plant and equipment 155,728 153,106
Long-term receivables 54,707 51,761
Goodwill, net of accumulated amortization 189,868 191,292
Other assets 38,677 38,291
-------- --------
Total assets $ 792,967 $ 749,586
======== ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
-2-
<PAGE>
<TABLE>
Bell & Howell Operating Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
Liabilities and Shareholders' Equity
December 28, March 29,
1996 1997
------------ -------------
(Audited) (Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable $ 8,397 $ 7,603
Current maturities of long-term debt 1,667 1,329
Accounts payable 93,135 60,984
Accrued expenses 78,486 53,370
Deferred income 171,698 161,082
Accrued income taxes 1,143 128
-------- --------
Total current liabilities 354,526 284,496
Long-term liabilities:
Long-term debt 336,606 373,965
Other liabilities 61,049 60,901
-------- --------
Total long-term liabilities 397,655 434,866
Shareholders' equity:
$121.33 Intercompany Preferred Stock,
$.01 par value, 199,636 shares outstanding at
December 28, 1996, and 196,296 shares
outstanding at March 29, 1997 2 2
Common Stock, $.01 par value, 2,955 shares
issued and outstanding at December 28, 1996
and March 29, 1997 -- --
Capital surplus 117,531 101,331
Retained earnings (deficit) (77,363) (69,456)
Cumulative foreign exchange translation adjustments 616 (1,653)
-------- --------
Total shareholders' equity 40,786 30,224
Commitments and contingencies -- --
-------- --------
Total liabilities and shareholders' equity $ 792,967 $ 749,586
======== ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
-3-
<PAGE>
<TABLE>
Bell & Howell Operating Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<CAPTION>
Thirteen Weeks
Ended
-----------------------------
March 30, March 29,
1996 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net earnings $ 8,136 $ 7,907
Depreciation and amortization 11,577 14,370
Changes in operating assets and liabilities:
Accounts receivable 26,431 32,436
Inventory (18,675) (1,542)
Other current assets 66 (851)
Long-term receivables (4,300) 2,946
Income taxes (4,699) (809)
Accounts payable (2,165) (31,513)
Accrued expenses (13,221) (24,081)
Deferred income and other long-term liabilities (4,723) (10,240)
Other, net 923 (1,566)
------- -------
Net cash used by operating activities (650) (12,943)
Investing activities:
Expenditures for property, plant and equipment (9,801) (9,262)
Acquisitions (19,718) (2,298)
------- -------
Net cash used by investing activities (29,519) (11,560)
Financing activities:
Redemption of $121.33 Intercompany Preferred Stock -- (16,200)
Proceeds from short-term debt 1,581 1,853
Repayment of short-term debt (7,484) (2,647)
Proceeds from long-term debt 42,100 45,301
Repayment of long-term debt (4,327) (7,767)
------- -------
Net cash provided by financing activities 31,870 20,540
Effect of exchange rate changes on cash (26) (544)
------- -------
Increase (decrease) in cash and cash equivalents 1,675 (4,507)
Cash and cash equivalents, beginning of period 7,051 15,480
------- -------
Cash and cash equivalents, end of period $ 8,726 $ 10,973
======= =======
Supplemental schedule of non-cash activities:
Preferred dividends paid-in-kind $ 6,439 $ 5,889
======= =======
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
-4-
<PAGE>
Bell & Howell Operating Company and Subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands)
Note 1 - Basis of Presentation
Bell & Howell Operating Company is a wholly-owned subsidiary
of Bell & Howell Company (which is a holding company, the primary
assets of which are all of the issued and outstanding shares of
Common Stock and the Intercompany Preferred Stock of Bell &
Howell Operating Company). Bell & Howell Company conducts
business through Bell & Howell Operating Company and has no
operations of its own.
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. Certain prior year amounts have been
reclassified to conform with the 1997 presentation.
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 year
ended December 28, 1996.
-5-
<PAGE>
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 March 29, 1997.
Note 3 - Extraordinary Loss
The extraordinary loss of $30 ($47 pretax) in the first
quarter of 1997 was comprised of the debt repurchase premium and
write-off of unamortized debt issuance costs associated with the
repurchase of $600 of the 10 3/4% Senior Subordinated Notes,
which were redeemed with proceeds from the Credit Agreement.
Note 4 - 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.
-6-
<PAGE>
The condensed consolidating information which follows
presents:
1. Condensed consolidating balance sheets at March 29, 1997
and December 28, 1996 and related condensed consolidating
statements of operations and cash flows for the thirteen
weeks ended March 29, 1997 and March 30, 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 March 29, 1997
<CAPTION>
ASSETS
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 10,973 $ -- $ 1,043 $ 1,559 $ 8,371
Accounts receivable 151,893 -- 379 106,811 44,703
Inventory 139,741 (1,281) -- 113,376 27,646
Other current assets 12,529 -- 1,446 8,621 2,462
------- -------- ------- ------- -------
Total current assets 315,136 (1,281) 2,868 230,367 83,182
Investment in subsidiaries -- 57,767 (57,767) -- --
Intercompany accounts -- -- 147,119 (130,349) (16,760)
Net property, plant &
equipment 153,106 -- 1,577 141,472 10,057
Other non-current assets 281,344 (362,373) 376,612 222,034 45,071
------- -------- ------- ------- -------
Total assets $749,586 $(305,887) $470,409 $463,524 $121,550
======= ======== ======= ======= =======
</TABLE>
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Liabilities:
Current liabilities $284,496 $ -- $ 9,922 $221,091 $ 53,483
Long-term debt 373,965 (362,373) 369,980 362,390 3,968
Other liabilities 60,901 -- 58,630 1,000 1,271
------- -------- ------- ------- -------
Total liabilities 719,362 (362,373) 438,532 584,481 58,722
Shareholders' equity (deficit):
Intercompany Preferred
Stock 2 -- 2 -- --
Capital surplus 101,331 (179,323) 101,331 139,638 39,685
Retained earnings (deficit) (69,456) 235,809 (69,456) (260,595) 24,796
Cumulative foreign exchange
translation adjustments (1,653) -- -- -- (1,653)
------- -------- ------- -------- -------
Total shareholders' equity
(deficit) 30,224 56,486 31,877 (120,957) 62,828
------- -------- ------- -------- -------
Total liabilities &
shareholders' equity
(deficit) $749,586 $(305,887) $470,409 $ 463,524 $121,550
======= ======== ======= ======== =======
</TABLE>
-8-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING BALANCE SHEET
At December 28, 1996
ASSETS
<CAPTION>
Parent Combined
Consolidated Eliminations Company Guarantors Non-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>
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
Parent Combined
Consolidated Eliminations Company Guarantors Non-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 (deficit):
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 (deficit) $ 792,967 $(302,701) $ 442,383 $ 528,442 $ 124,843
======== ======== ======== ======== ========
</TABLE>
-9-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirteen Weeks Ended March 29, 1997
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $200,018 $ (9,380) $ -- $172,495 $ 36,903
Cost of sales 129,159 (9,380) -- 113,274 25,265
Operating expenses 55,613 -- (2,666) 48,645 9,634
Net interest expense
(income) 5,855 -- (1,949) 9,797 (1,993)
------- ------- ------ ------- -------
Earnings before income taxes
and extraordinary item 9,391 -- 4,615 779 3,997
Income tax expense 1,454 -- (145) -- 1,599
------- ------- ------ ------- -------
Earnings before
extraordinary item 7,937 -- 4,760 779 2,398
Extraordinary loss (30) -- (30) -- --
------- ------- ------ ------- -------
Net earnings $ 7,907 $ -- $ 4,730 $ 779 $ 2,398
======= ======= ====== ======= =======
</TABLE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Thirteen Weeks Ended March 30, 1996
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $201,092 $(12,505) $ -- $170,116 $ 43,481
Cost of sales 130,578 (12,505) -- 112,352 30,731
Operating expenses 56,267 -- (2,389) 48,199 10,457
Net interest expense
(income) 4,741 -- (3,464) 9,737 (1,532)
------- ------- ------ ------- -------
Earnings (loss) before
income taxes 9,506 -- 5,853 (172) 3,825
Income tax expense 1,370 -- 65 -- 1,305
------- ------- ------ ------- -------
Net earnings (loss) $ 8,136 $ -- $ 5,788 $ (172) $ 2,520
======= ======= ====== ======= =======
</TABLE>
-10-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Thirteen Weeks Ended March 29, 1997
<CAPTION>
Parent Combined Non-
Consolidated Company Guarantors Guarantors
------------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Net cash provided (used)
by operating activities $(12,943) $(27,657) $ 9,234 $ 5,480
------- ------- ------- ------
Investing activities:
Expenditures for property,
plant and equipment (9,262) (74) (8,872) (316)
Acquisitions (2,298) -- (2,298) --
------- ------- ------- ------
Net cash used by
investing activities (11,560) (74) (11,170) (316)
------- ------- ------- ------
Financing activities:
Redemption of Intercompany
Preferred Stock (16,200) (16,200) -- --
Net short-term borrowings (794) -- -- (794)
Net long-term borrowings 37,534 40,579 -- (3,045)
------- ------- ------- ------
Net cash provided (used)
by financing activities 20,540 24,379 -- (3,839)
------- ------- ------- ------
Effect of exchange rate
changes on cash (544) -- -- (544)
------- ------- ------- ------
Increase (decrease) in cash
and cash equivalents $ (4,507) $ (3,352) $ (1,936) $ 781
======= ======= ======= ======
</TABLE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Thirteen Weeks Ended March 30, 1996
<CAPTION>
Parent Combined Non-
Consolidated Company Guarantors Guarantors
------------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Net cash provided (used)
by operating activities $ (650) $(38,012) $ 28,671 $ 8,691
------- ------- ------- -------
Investing activities:
Expenditures for property,
plant and equipment (9,801) (40) (9,477) (284)
Acquisitions (19,718) -- (19,718) --
------- ------- ------- -------
Net cash used by
investing activities (29,519) (40) (29,195) (284)
------- ------- ------- -------
Financing activities:
Net short-term borrowings (5,903) -- -- (5,903)
Net long-term borrowings 37,773 38,101 -- (328)
------- ------- ------- -------
Net cash provided (used)
by financing activities 31,870 38,101 -- (6,231)
------- ------- ------- -------
Effect of exchange rate
changes on cash (26) -- -- (26)
------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents $ 1,675 $ 49 $ (524) $ 2,150
======= ======= ======= =======
</TABLE>
-11-
<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
- ---------------------
First Quarter 1997 Compared to First Quarter 1996
- -------------------------------------------------
The Company's net sales for the first quarter of 1997 of
$200.0 million were virtually constant with the first quarter of
1996.
Information Access net sales increased $3.7 million,
or 4%, to $110.2 million in the first quarter of 1997. Within
the Information Access businesses, the Company focuses on
providing its customers solutions to their information access
needs. UMI focuses on the education, public and academic as well
as the corporate library markets. PSC focuses on the
transportation/vehicle market. Information Management's primary
focus is on the financial services market, while additionally
supplying technologically advanced digital document scanners to
other markets. UMI's net sales increased $3.9 million, or 10%,
to $43.0 million due to a growing electronic subscription base,
which continued to reflect high renewal rates on existing
products, new product placements, and the impact of the
acquisition of DataTimes Corporation (in September 1996) which
added complementary information content, technology, and
distribution to UMI's electronic product offerings. Sales of
electronic content increased 28% over the prior year as customers
increasingly demand electronic information solutions while they
are evaluating the rapid changes in technology and the evolution
of on-line delivery. Net sales of microfilm and paper products
-12-
<PAGE>
were constant with the prior year as increased pricing offset
lower unit volumes. PSC's net sales increased $2.1 million, or
9%, to $25.9 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 the increased new systems placements, PSC continued
to experience both strong sales of add-ons/upgrades and high
contract renewal rates related to previously placed systems in
automotive dealerships. Information Management net sales
decreased $2.3 million, or 5%, to $41.3 million as increased
sales of digital document scanners and imaging software systems
were more than offset by the impact of divesting certain low
margin product lines in the Canadian and French markets.
Excluding the impact of the divested product lines, Information
Management's net sales in the first quarter of 1997 would have
increased by 6% over the prior year.
Mail Processing net sales decreased $4.8 million, or 5%, to
$89.8 million in the first quarter of 1997. Although order
intake for commercial mail processing systems (which now
represents 90% of the sales in this segment) increased in excess
of 30% in the first quarter of 1997 reflecting strong market
demand, sales of $80.9 million in the first quarter of 1997 were
virtually constant with the prior year as the backlog grew, while
service revenue continued to increase (due to both an expanding
customer base and increased pricing). Sales of commercial
sorting equipment (which now represents 10% of commercial
equipment sales) increased $1.3 million, or 47%, to $4.1 million
as the U.S. Postal Service guidelines governing the operating
requirements to qualify for incentives to bar code and presort
mail (which became effective mid-1996) have created a more
favorable environment for customers to invest in advanced sorting
automation technology. Sales of customized mail automation
equipment and contractual engineering services to governmental
postal authorities decreased $4.1 million to $8.9 million in the
first quarter of 1997, primarily as a result of shipments of
significant one-time contracts to the U.S. Postal Service in the
first quarter of 1996.
The Company's cost of sales decreased $1.4 million, or 1%,
to $129.2 million in the first quarter of 1997, with the gross
profit (net sales less cost of sales) percentage increasing by
-13-
<PAGE>
0.4 percentage points to 35.4% in the current year. The higher
gross profit rate in 1997 resulted from a shift in sales mix (as
the growth rate in higher gross margin percentage Information
Access revenues exceeded the growth rate in lower gross margin
percentage Mail Processing revenues), and additionally reflects
both improved manufacturing productivity and increased pricing.
Research and development expense increased $1.7 million, or
21%, to $9.6 million in the first quarter of 1997 as the Company
continued to increase its investment in new product offerings.
Such increase primarily related to increased development costs to
integrate DataTimes and to develop a new technology platform for
the powersports market. 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 expense decreased $2.3 million,
or 5%, to $46.0 million and the ratio of selling and
administrative expense to net sales decreased by 1.0 percentage
point to 23.0% in the first quarter of 1997 (versus the prior
year) as a result of various expense leveraging initiatives.
EBITDA (defined as operating income plus depreciation and
amortization) increased $3.8 million, or 15%, to $29.2 million
in the first quarter of 1997 resulting from the improved gross
margin rate and leveraged operating expenses. Operating income
increased $1.0 million, or 7%, to $15.2 million in the first
quarter of 1997.
Information Access EBITDA increased $3.4 million, or 17%,
to $23.5 million in the first quarter 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 the dilutive impact in 1997 of the acquisitions
of DataTimes and Protocorp, and increased research and
development costs associated with new product offerings.
Information Access operating income increased $1.0 million, or
9%, to $12.2 million in the first quarter of 1997 as the EBITDA
-14-
<PAGE>
increase was partially offset by both higher depreciation cost on
UMI's product capital investment and goodwill amortization
related to the aforementioned acquisitions in 1996.
Mail Processing EBITDA increased $0.4 million, or 5%, to
$8.9 million in the first quarter of 1997 as a result of
leveraged operating costs and expenses. Mail-Processing
operating income increased $0.1 million, or 1%, to $6.4 million
in the first quarter of 1997.
Corporate expenses (excluding depreciation and amortization)
were constant at $3.2 million in the first quarter of 1997 as
productivity improvements offset inflationary cost increases.
Net interest expense increased $1.1 million, or 23%, to $5.9
million in the first quarter of 1997, primarily reflecting the
increased debt resulting from the aforementioned 1996
acquisitions, which was partially offset by the impact of the
repurchase in 1996 and 1997 of portions of the 10 3/4% Senior
Subordinated Notes, which were redeemed with proceeds from the
Credit Agreement. Net interest income of Bell & Howell Financial
Services Company, the Company's financing subsidiary, increased
$0.1 million to $2.0 million in the first quarter 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 quarter of 1997 as a result of a reduction in such
interest expense transferred to the Company.
The extraordinary loss in the first quarter of 1997 was
comprised of the debt repurchase premium and write-off of
unamortized debt issuance costs associated with the
aforementioned repurchase of $0.6 million of the 10 3/4% Senior
Subordinated Notes with proceeds from the Credit Agreement.
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 quarter of 1997, the
-15-
<PAGE>
Company repurchased $15.3 million (accreted value) of the
Intercompany Preferred Stock for $16.7 million, with proceeds
from the Credit Agreement.
Cash used by operations was $12.9 million in the first
quarter of 1997 versus cash used by operations of $0.7 million in
the first quarter of 1996. Although EBITDA increased by $3.8
million in the first quarter of 1997, the Company achieved a
greater reduction in working capital in the prior year. The
Company operates with a negative/minimal working capital level
principally as a result of substantial customer prepayments for
both annual service contracts in each of the business segments
and prepaid subscriptions in the Information Access business
segment.
As a result of the cash used by operations (which reflects
the seasonal nature of the Company's cash collections and
disbursements), and capital expenditures/acquisitions, debt (net
of cash and cash equivalents) increased by $40.7 million to
$371.9 million in the first quarter of 1997.
Recently Issued Financial Accounting Standards
Statement of Financial Accounting Standards No. 128,
"Earnings per Share", was issued in February 1997. 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, with earlier adoption not permitted. Under
this standard, EPS data is not required for the Company, as it is
a wholly owned subsidiary of Bell & Howell Company.
-16-
<PAGE>
Part II. Other Information
- ------- -----------------
Item 1. Legal Proceedings.
- ------ -----------------
The Company is involved in various legal proceedings
incidental to its business. Management believes that 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
------------ ----------------------------
(11.1) Computation of Earnings
Per Common Share
(27.1) Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the thirteen weeks
ended March 29, 1997.
-17-
<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: May 2, 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
-18-
<PAGE>
Exhibit 11.1
Bell & Howell Operating Company and Subsidiaries
Computation of Earnings per Common Share
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks
Ended
----------------------
March 30, March 29,
1996 1997
--------- ---------
<S> <C> <C>
Net earnings:
Earnings before extraordinary item $ 8,136 $ 7,937
Extraordinary loss -- (30)
------ ------
Net earnings 8,136 7,907
Dividends on preferred stock 6,439 5,889
------ ------
Net earnings applicable to
common stock $ 1,697 $ 2,018
====== ======
Average number of common shares outstanding 2,955 2,955
Net earnings per common share:
Earnings before extraordinary item $ 574 $ 693
Extraordinary loss -- (10)
------ ------
Net earnings per common share $ 574 $ 683
====== ======
</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> 3-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> MAR-29-1997
<CASH> 10973
<SECURITIES> 0
<RECEIVABLES> 157279
<ALLOWANCES> 5386
<INVENTORY> 139741
<CURRENT-ASSETS> 315136
<PP&E> 370407
<DEPRECIATION> (217301)
<TOTAL-ASSETS> 749586
<CURRENT-LIABILITIES> 284496
<BONDS> 0
0
2
<COMMON> 0
<OTHER-SE> 30222
<TOTAL-LIABILITY-AND-EQUITY> 749586
<SALES> 200018
<TOTAL-REVENUES> 200018
<CGS> 129159
<TOTAL-COSTS> 184772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5855
<INCOME-PRETAX> 9391
<INCOME-TAX> 1454
<INCOME-CONTINUING> 7937
<DISCONTINUED> 0
<EXTRAORDINARY> (30)
<CHANGES> 0
<NET-INCOME> 7907
<EPS-PRIMARY> 683
<EPS-DILUTED> 683
</TABLE>
