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
June 28, 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 August 5, 1997 was 2,955.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Operations for
the Thirteen and Twenty-Six Weeks Ended
June 29, 1996 and June 28,1997................ 1
Consolidated Balance Sheets - Assets at
December 28, 1996 and June 28, 1997 .......... 2
Consolidated Balance Sheets - Liabilities
and Shareholders' Equity at December 28, 1996
and June 28, 1997 ............................ 3
Consolidated Statements of Cash Flows
for the Twenty-Six Weeks Ended
June 29, 1996 and June 28,1997................ 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 Twenty-Six Weeks
Ended Ended
------------------------ ------------------------
June 29, June 28, June 29, June 28,
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 213,973 $ 218,150 $ 415,065 $ 418,168
Operating costs and expenses:
Cost of sales 139,519 135,561 269,412 264,720
Research and development 8,523 10,206 16,454 19,822
Selling and administrative 48,378 52,378 97,399 98,375
-------- -------- -------- --------
Total operating costs and expenses 196,420 198,145 383,265 382,917
Operating income 17,553 20,005 31,800 35,251
Net interest expense:
Interest (income) (3,972) (5,325) (8,214) (10,317)
Interest expense 9,511 11,591 18,494 22,438
-------- -------- -------- --------
Net interest expense 5,539 6,266 10,280 12,121
Earnings before income taxes and
extraordinary items 12,014 13,739 21,520 23,130
Income tax expense 2,361 3,271 3,731 4,725
-------- -------- -------- --------
Earnings before extraordinary items 9,653 10,468 17,789 18,405
Extraordinary losses (1,088) (67) (1,088) (97)
-------- -------- -------- --------
Net earnings 8,565 10,401 16,701 18,308
Dividends on preferred stock 6,452 5,954 12,891 11,843
-------- -------- -------- --------
Net earnings applicable to common stock $ 2,113 $ 4,447 $ 3,810 $ 6,465
======== ======== ======== ========
Net earnings per common share:
Earnings before extraordinary items $ 1,083 $ 1,528 $ 1,657 $ 2,221
Extraordinary losses (368) (23) (368) (33)
-------- -------- -------- --------
Net earnings per common share $ 715 $ 1,505 $ 1,289 $ 2,188
======== ======== ======== ========
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, June 28,
1996 1997
------------ ------------
(Audited) (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,480 $ 14,077
Accounts receivable, less allowance for
doubtful accounts of $5,294 and $5,391,
respectively 186,862 164,158
Inventory 139,831 155,256
Other current assets 11,814 13,356
-------- --------
Total current assets 353,987 346,847
Property, plant and equipment, at cost 363,015 379,755
Accumulated depreciation (207,287) (229,193)
-------- --------
Net property, plant and equipment 155,728 150,562
Long-term receivables 54,707 52,083
Goodwill, net of accumulated amortization 189,868 190,835
Other assets 38,677 38,386
-------- --------
Total assets $ 792,967 $ 778,713
======== ========
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, June 28,
1996 1997
------------ -------------
(Audited) (Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable $ 8,397 $ 5,821
Current maturities of long-term debt 1,667 1,089
Accounts payable 93,135 61,593
Accrued expenses 78,486 63,161
Deferred income 171,698 146,148
Accrued income taxes 1,143 --
-------- --------
Total current liabilities 354,526 277,812
Long-term liabilities:
Long-term debt 336,606 397,674
Other liabilities 61,049 62,296
-------- --------
Total long-term liabilities 397,655 459,970
Shareholders' equity:
$121.33 Intercompany Preferred Stock,
$.01 par value, 199,636 shares outstanding at
December 28, 1996, and 196,296 shares
outstanding at June 28, 1997 2 2
Common Stock, $.01 par value, 2,955 shares
issued and outstanding at December 28, 1996
and June 28, 1997 -- --
Capital surplus 117,531 101,331
Retained earnings (deficit) (77,363) (59,055)
Cumulative foreign exchange translation adjustments 616 (1,347)
-------- --------
Total shareholders' equity 40,786 40,931
Commitments and contingencies -- --
-------- --------
Total liabilities and shareholders' equity $ 792,967 $ 778,713
======== =======
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>
Twenty-Six Weeks
Ended
-----------------------------
June 29, June 28,
1996 1997
-------- --------
<S> <C> <C>
Operating Activities:
Net earnings $ 16,701 $ 18,308
Depreciation and amortization 23,529 28,671
Changes in operating assets and liabilities:
Accounts receivable 29,994 23,954
Inventory (33,293) (7,878)
Other current assets (1,036) (1,124)
Long-term receivables 8,457 2,624
Income taxes (5,239) 847
Accounts payable (4,625) (33,027)
Accrued expenses (5,024) (16,121)
Deferred income and other long-term liabilities (26,361) (30,864)
Other, net (612) (5,530)
------- -------
Net cash provided (used) by operating activities 2,491 (20,140)
Investing activities:
Expenditures for property, plant and equipment (20,384) (17,184)
Acquisitions (19,718) (5,753)
------- -------
Net cash used by investing activities (40,102) (22,937)
Financing activities:
Redemption of $121.33 Intercompany Preferred Stock (35,795) (16,200)
Proceeds from short-term debt 9,224 3,831
Repayment of short-term debt (12,235) (6,407)
Proceeds from long-term debt 192,050 70,903
Repayment of long-term debt (112,444) (10,081)
------- -------
Net cash provided by financing activities 40,800 42,046
Effect of exchange rate changes on cash (125) (372)
------- -------
Increase (decrease) in cash and cash equivalents 3,064 (1,403)
Cash and cash equivalents, beginning of period 7,051 15,480
------- -------
Cash and cash equivalents, end of period $ 10,115 $ 14,077
======= =======
Supplemental schedule of non-cash activities:
Preferred dividends paid-in-kind $ 12,891 $ 11,843
======= =======
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
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
capital 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.
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 June 28, 1997.
Note 3 - Extraordinary Losses
The extraordinary loss of $97 ($152 pretax) in first half
1997 was comprised of the debt repurchase premium and write-off
of unamortized debt issuance costs associated with the repurchase
of $2,100 of the 10 3/4% Senior Subordinated Notes, which were
redeemed with proceeds from the Bank Credit Agreement.
The extraordinary loss of $1,088 ($1,700 pretax) in first
half 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,
which were redeemed with proceeds from the Bank 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 June 28, 1997
and December 28, 1996 and related condensed consolidating
statements of operations and cash flows for the twenty-six
weeks ended June 28, 1997 and June 29, 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 June 28, 1997
<CAPTION>
ASSETS
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 14,077 $ -- $ 3,535 $ 2,832 $ 7,710
Accounts receivable 164,158 -- 55 127,509 36,594
Inventory 155,256 (1,281) -- 127,945 28,592
Other current assets 13,356 -- 1,445 9,553 2,358
------- -------- ------- -------- -------
Total current assets 346,847 (1,281) 5,035 267,839 75,254
Investment in subsidiaries -- 50,079 (50,079) -- --
Intercompany accounts -- -- 172,505 (159,257) (13,248)
Net property, plant &
equipment 150,562 -- 1,541 139,214 9,807
Other non-current assets 281,304 (362,373) 375,302 222,165 46,210
------- -------- ------- -------- -------
Total assets $778,713 $(313,575) $504,304 $ 469,961 $118,023
======= ======== ======= ======== =======
</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 $277,812 $ -- $ 7,915 $ 221,260 $ 48,637
Long-term debt 397,674 (362,373) 393,980 362,378 3,689
Other liabilities 62,296 -- 60,130 1,012 1,154
------- -------- ------- -------- -------
Total liabilities 737,782 (362,373) 462,025 584,650 53,480
Shareholders' equity:
Intercompany Preferred
Stock 2 -- 2 -- --
Capital surplus 101,331 (179,323) 101,332 139,636 39,686
Retained earnings (deficit) (59,055) 228,121 (59,055) (254,325) 26,204
Cumulative foreign exchange
translation adjustments (1,347) -- -- -- (1,347)
------- -------- ------- -------- -------
Total shareholders' equity
(deficit) 40,931 48,798 42,279 (114,689) 64,543
------- -------- ------- -------- -------
Total liabilities &
shareholders' equity $778,713 $(313,575) $504,304 $ 469,961 $118,023
======= ======== ======= ======== =======
</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 Twenty-Six Weeks Ended June 28, 1997
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $418,168 $(17,744) $ -- $363,010 $ 72,902
Cost of sales 264,720 (17,744) -- 231,679 50,785
Operating expenses 118,197 -- (5,934) 105,379 18,752
Net interest expense
(income) 12,121 -- (3,366) 19,535 (4,048)
------- ------- ------- ------- -------Earnings before income taxes
and extraordinary items 23,130 -- 9,300 6,417 7,413
Income tax expense 4,725 -- 1,760 -- 2,965
------- ------- ------- ------- -------
Earnings before
extraordinary items 18,405 -- 7,540 6,417 4,448
Extraordinary losses (97) -- (97) -- --
------- ------- ------- ------- -------
Net earnings $ 18,308 $ -- $ 7,443 $ 6,417 $ 4,448
======= ======= ======= ======= =======
</TABLE>
-12-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Twenty-Six Weeks Ended June 29, 1996
<CAPTION>
Parent Combined Non-
Consolidated Eliminations Company Guarantors Guarantors
------------ ------------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $415,065 $(24,210) $ -- $354,364 $ 84,911
Cost of sales 269,412 (24,210) -- 233,573 60,049
Operating expenses 113,853 -- (5,168) 97,275 21,746
Net interest expense
(income) 10,280 -- (6,270) 17,994 (1,444)
------- ------- ------ ------- -------
Earnings before income taxes
and extraordinary items 21,520 -- 11,438 5,522 4,560
Income tax expense 3,731 -- 1,723 -- 2,008
------- ------- ------ ------- -------
Earnings before
extraordinary items 17,789 -- 9,715 5,522 2,552
Extraordinary losses (1,088) -- (1,088) -- --
------- ------- ------ ------- -------
Net earnings $ 16,701 $ -- $ 8,627 $ 5,522 $ 2,552
======= ======= ====== ======= =======
</TABLE>
-13-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twenty-Six Weeks Ended June 28, 1997
<CAPTION>
Parent Combined Non-
Consolidated Company Guarantors Guarantors
------------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Net cash provided (used)
by operating activities $(20,140) $(45,888) $ 20,164 $ 5,584
------- ------- ------- ------
Investing activities:
Expenditures for property,
plant and equipment (17,184) (149) (16,388) (647)
Acquisitions (5,753) -- (5,753) --
------- ------- ------- ------
Net cash used by
investing activities (22,937) (149) (22,141) (647)
------- ------- ------- ------
Financing activities:
Redemption of Intercompany
Preferred Stock (16,200) (16,200) -- --
Net short-term borrowings (2,576) -- -- (2,576)
Net long-term borrowings 60,822 61,454 -- (632)
------- ------- ------- ------
Net cash provided (used)
by financing activities 42,046 45,254 -- (3,208)
------- ------- ------- ------
Effect of exchange rate
changes on cash (372) -- -- (372)
------- ------- ------- ------
Increase (decrease) in cash
and cash equivalents $ (1,403) $ (783) $ (1,977) $ 1,357
======= ======= ======= ======
</TABLE>
-14-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Twenty-Six Weeks Ended June 29, 1996
<CAPTION>
Parent Combined Non-
Consolidated Company Guarantors Guarantors
------------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Net cash provided (used)
by operating activities $ 2,491 $(45,337) $ 38,766 $ 9,062
------- ------- ------- -------
Investing activities:
Expenditures for property,
plant and equipment (20,384) (180) (19,444) (760)
Acquisitions (19,718) -- (19,718) --
------- ------- ------- -------
Net cash used by
investing activities (40,102) (180) (39,162) (760)
------- ------- ------- -------
Financing activities:
Net short-term borrowings (3,011) -- -- (3,011)
Net long-term borrowings 79,606 79,909 -- (303)
Redemption of Intercompany
Preferred Stock (35,795) (35,795) -- --
------- ------- ------- -------
Net cash provided (used)
by financing activities 40,800 44,114 -- (3,314)
------- ------- ------- -------
Effect of exchange rate
changes on cash (125) -- -- (125)
------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents $ 3,064 $ (1,403) $ (396) $ 4,863
======= ======= ======= =======
</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
First Half 1997 Compared to First Half 1996
The Company's net sales increased $3.1 million, or 1%, to
$418.2 million in first half 1997. The increase resulted from
continued strong sales growth within Information Access
(particularly for the transportation & vehicle and education &
library markets), as well as the commercial portion of Mail
Processing. This was partially 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 $8.3 million, or
4%, to $226.8 million in first half 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 $5.7 million, or 12%,
to $53.5 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 in automotive dealerships. Net sales
to the education & library market increased $8.6 million, or 11%,
to $89.6 million due to a growing electronic subscription base,
-16-
<PAGE>
which continued to reflect high renewal rates on existing
products, new product placements, 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 36% over the prior year as customers
increasingly demand electronic information solutions and its
newer form of 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 $6.0 million, or 7%, to $83.7 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 sold in Canada and France. Excluding
the impact of the divested product lines, Imaging Solutions and
Components' net sales in first half 1997 would have increased by
3% over the prior year.
Mail Processing net sales decreased $5.2 million, or 3%, to
$191.4 million in first half 1997. Although order intake for
commercial mail processing (which represents 94% of the sales in
this segment) increased 18% in first half of 1997 reflecting
strong market demand, sales increased 8% over the prior year
resulting in a higher level of backlog. Sales of commercial
sorting equipment (which represents 15% of commercial equipment
sales) increased $5.8 million, or 62%, to $15.1 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 43% of commercial Mail Processing 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 $19.0 million to $12.2 million in first
half 1997, primarily as a result of shipments of significant one-
time contracts to the U.S. Postal Service in first half 1996.
-17-
<PAGE>
The Company's cost of sales decreased $4.7 million, or 2%,
to $264.7 million in first half 1997, with the gross profit (net
sales less cost of sales) percentage increasing by 1.6 percentage
points to 36.7% in first half 1997 as compared to first half
1996. 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.
Research and development expense increased $3.4 million, or
21%, to $19.8 million in first half 1997 as compared to first
half 1996 as the Company continued to increase its investment in
new product offerings. Such increase primarily related to
increased development costs for DataTimes, 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 $1.0
million, or 1%, to $98.4 million in first half 1997 reflecting
the Company's increased investment in sales and marketing
resources as well as increased distribution costs associated with
the higher sales volumes. The ratio of selling and
administrative expense to net sales of 23.5% in first half 1997
remained constant 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 $9.3 million, or 18%, to $62.8 million
in first half 1997 resulting from the slightly higher sales level
and leveraged operating costs and expenses. Operating income
increased $3.5 million, or 11%, to $35.3 million in first half
1997.
-18-
<PAGE>
Information Access EBITDA increased $4.9 million, or 12%,
to $47.5 million in first half 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 of the acquisition of DataTimes, and increased
research and development costs associated with new product
offerings. Information Access operating income decreased $0.5
million, or 2%, to $24.6 million in first half 1997 as the EBITDA
increase was offset by both higher depreciation cost on the
Company's product capital investment and goodwill amortization
related to the DataTimes acquisition.
Mail Processing EBITDA increased $4.4 million, or 26%, to
$21.6 million in first half 1997 as a result of the higher sales
of commercial mail processing systems and leveraged operating
costs and expenses. Mail Processing operating income increased
$3.9 million, or 29%, to $17.3 million in first half 1997.
Corporate expenses (excluding depreciation and amortization)
were constant at $6.4 million in first half 1997 as productivity
improvements offset inflationary cost increases.
Net interest expense increased $1.8 million, or 18%, to
$12.1 million in first half 1997, primarily reflecting the
increased debt resulting from the DataTimes acquisition, 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 Bank Credit Agreement. Net
interest income of Bell & Howell Financial Services Company, the
Company's financing subsidiary, increased $0.5 million to $3.9
million in first half 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
first half 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.
-19-
<PAGE>
The extraordinary loss of $0.1 million ($0.2 million pretax)
in first half 1997 was comprised of the debt repurchase premium
and write-off of unamortized debt issuance costs associated with
the repurchase of $2.1 million of the 10 3/4% Senior Subordinated
Notes with proceeds from the Bank Credit Agreement. The
extraordinary loss of $1.1 million ($1.7 million pretax) in first
half 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 with proceeds from the Bank 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 first half 1997, the Company
repurchased $15.3 million (accreted value) of the Intercompany
Preferred Stock for $16.7 million, with proceeds from the Bank
Credit Agreement.
Cash used by operations was $20.1 million in first half 1997
versus cash provided by operations of $2.5 million in first half
1996. Although EBITDA increased by $9.3 million in first half
1997, the Company's working capital investment increased in the
current year related to higher inventory levels to support sales
growth and the timing of 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 $59.3
million to $390.5 million in first half 1997, 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.
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.
-20-
<PAGE>
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
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 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 June 28, 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: August 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>
<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 Twenty-six Weeks
Ended Ended
------------------ -----------------
June 29, June 28, June 29, June 28,
1996 1997 1996 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
Net earnings applicable to common stock:
Earnings before extraordinary items $ 9,653 $10,468 $17,789 $18,405
Extraordinary losses (1,088) (67) (1,088) (97)
------ ------ ------ ------
Net earnings $ 8,565 10,401 $16,701 $18,308
Dividends on preferred stock 6,452 5,954 12,891 11,843
------ ------ ------ ------
Net earnings applicable to
common stock $ 2,113 $ 4,447 $ 3,810 $ 6,465
====== ====== ======= ======
Average common shares outstanding 2,955 2,955 2,955 2,955
Net earnings per common share:
Earnings before extraordinary items $ 1,083 $ 1,528 $ 1,657 $ 2,221
Extraordinary losses (368) (23) (368) (33)
------ ------ ------- ------
Net earnings per common share $ 715 $ 1,505 $ 1,289 $ 2,188
====== ====== ======= ======
</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> 6-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JUN-28-1997
<CASH> 14077
<SECURITIES> 0
<RECEIVABLES> 169549
<ALLOWANCES> (5391)
<INVENTORY> 155256
<CURRENT-ASSETS> 346847
<PP&E> 379755
<DEPRECIATION> (229193)
<TOTAL-ASSETS> 778713
<CURRENT-LIABILITIES> 277812
<BONDS> 397674
0
2
<COMMON> 0
<OTHER-SE> 40929
<TOTAL-LIABILITY-AND-EQUITY> 778713
<SALES> 418168
<TOTAL-REVENUES> 418168
<CGS> 264720
<TOTAL-COSTS> 382917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12121
<INCOME-PRETAX> 23130
<INCOME-TAX> 4725
<INCOME-CONTINUING> 18405
<DISCONTINUED> 0
<EXTRAORDINARY> (97)
<CHANGES> 0
<NET-INCOME> 18308
<EPS-PRIMARY> 2188
<EPS-DILUTED> 2188
</TABLE>
