<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Bell & Howell Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$226,672.24
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Form S-4 333-36401
------------------------------------------------------------------------
(3) Filing Party:
Bell & Howell Operating Company
------------------------------------------------------------------------
(4) Date Filed:
September 25, 1997
------------------------------------------------------------------------
<PAGE>
BELL & HOWELL COMPANY
5215 OLD ORCHARD ROAD
SKOKIE, ILLINOIS 60077-1076
October 15, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Bell & Howell Company, a Delaware corporation (the "Holding Company"), to be
held on Wednesday, November 5, 1997, at 10:00 a.m. local time at the offices of
Bell & Howell Operating Company ("BHOC") located at 5215 Old Orchard Road,
Skokie, Illinois.
At the Meeting, you will be asked to approve a plan (the "Plan") to simplify
the corporate structure of the Holding Company and its subsidiaries
(collectively, the "Company"). Although technically this Plan will include a
liquidation and dissolution of the Holding Company, the Plan will not affect the
business operations of the Company or the relative interests of the Holding
Company stockholders.
Today, essentially all of the Company's assets and operations are owned by
BHOC, which is the wholly-owned subsidiary of the Holding Company. 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, 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." You should not notice any changes in the stock exchange
listing or the management or operations of the Company as a result of the
elimination of the Holding Company.
As described later in the attached materials, the Plan will have no adverse
tax consequences to the Company or any stockholder of the Holding Company.
The Board of Directors has unanimously approved the Plan. In approving the
Plan, the Board of Directors considered that the Holding Company has no
meaningful business or assets other than its equity interest in BHOC, that the
Plan will preserve intact the present interest of all stockholders of the
Holding Company, and that the elimination of the Holding Company will reduce the
Company's administrative costs by eliminating the duplicative costs in
maintaining both the Holding Company and BHOC. We urge you to support the
proposed Plan.
Please consider the attached materials carefully. Whether or not you plan to
attend the stockholders' meeting, we urge you to complete and return your proxy
card as soon as possible. Your votes are important.
Cordially,
William J. White
CHAIRMAN OF THE BOARD
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 1997
PROXY STATEMENT/PROSPECTUS DATED , 1997
PROXY STATEMENT OF BELL & HOWELL COMPANY
5215 OLD ORCHARD ROAD
SKOKIE, ILLINOIS 60077-1076
FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 5, 1997
---------------------
PROSPECTUS OF BELL & HOWELL OPERATING COMPANY
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the Board of Directors of Bell & Howell Company (the
"Holding Company"), a Delaware corporation, for use at a Special Meeting of
Stockholders of the Holding Company to be held at the offices of Bell & Howell
Operating Company at 5215 Old Orchard Road, Skokie, Illinois, at 10:00 a.m. on
November 5, 1997 and at any adjournments or postponements of such meeting (the
"Meeting"). This Proxy Statement/Prospectus and accompanying form of proxy are
being mailed to stockholders on or about October 15, 1997. Unless the context
otherwise indicates, all references in this Proxy Statement/Prospectus to "Bell
& Howell" or the "Company" are to Bell & Howell Company, Bell & Howell Operating
Company ("BHOC") and their direct and indirect wholly-owned subsidiaries.
At such Meeting the stockholders of the Holding Company will be asked to
consider and vote upon a proposed Plan of Liquidation and Dissolution of the
Holding Company (the "Plan") as contemplated in the proposed Plan attached
hereto as Exhibit A and incorporated herein by this reference, subject to such
changes as are hereafter approved by the Board of Directors. The Plan authorizes
the directors of the Holding Company (a) to transfer all of its assets to BHOC,
which is the wholly-owned subsidiary of the Holding Company, in exchange for
newly-issued shares of Common Stock of BHOC ("BHOC Common Stock"), and (b) to
cause the Holding Company to distribute to the stockholders all the assets and
discharge or make a provision for all of the liabilities of the Holding Company,
and thereupon to wind up its operations and liquidate. 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.
Upon completion of the Plan, the name of BHOC will be changed to "Bell &
Howell Company," BHOC Common Stock will replace Holding Company Common Stock on
the New York Stock Exchange, and all current officers and directors of the
Holding Company will be elected to identical positions of BHOC. In addition,
approval and adoption of the Plan will constitute approval of the assumption by
BHOC of the rights and obligations of the Holding Company under the Holding
Company's benefit plans.
The Board of Directors has unanimously approved the Plan. In approving the
Plan, the Board of Directors considered that the Holding Company has no
meaningful business or assets other than its equity interest in BHOC, that the
Plan will preserve intact the present interest of all stockholders of the
Holding Company, and that the elimination of the Holding Company will reduce the
Company's administrative costs by eliminating the duplicative costs in
maintaining both the Holding Company and BHOC.
This Proxy Statement/Prospectus also constitutes a Prospectus of BHOC
relating to approximately 25,518,316 shares of Common Stock of BHOC to be issued
to the stockholders of the Holding Company upon the implementation of the Plan
(assuming the exercise of all outstanding options).
The Holding Company Common Stock is reported on The New York Stock Exchange
("NYSE") under the symbol "BHW." The last reported sale price of the Holding
Company Common Stock on NYSE on October , 1997 was $ per share.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT AS SOON AS
POSSIBLE
<PAGE>
BELL & HOWELL COMPANY
5215 OLD ORCHARD ROAD
SKOKIE, ILLINOIS 60077-1076
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 5, 1997
---------------------
Notice is hereby given that a Special Meeting of Stockholders (the
"Meeting") of Bell & Howell Company, a Delaware corporation (the "Holding
Company"), will be held at the offices of Bell & Howell Operating Company
("BHOC") at 5215 Old Orchard Road, Skokie, Illinois, at 10:00 a.m., local time,
on November 5, 1997, for the following purposes:
1. To consider and vote upon a proposed Plan of Liquidation and Dissolution
of the Holding Company (the "Plan") as contemplated in the proposed Plan
attached hereto as Exhibit A and incorporated herein by this reference, subject
to such changes as are hereafter approved by the Board of Directors. The Plan
authorizes the directors of the Holding Company (a) to transfer all of its
assets to BHOC, which is the wholly-owned subsidiary of the Holding Company, in
exchange for newly-issued shares of Common Stock of BHOC ("BHOC Common Stock"),
and (b) to cause the Holding Company to distribute to the stockholders all of
the assets and discharge or make provision for all of the liabilities of the
Holding Company, and thereupon to wind up its operations and liquidate. Upon
completion of the Plan, each stockholder of the Holding Company will receive
newly-issued shares of BHOC Common Stock in respect of his shares of Holding
Company Common Stock on a share-for-share basis. In connection with the
implementation of the Plan, the name of BHOC will be changed to "Bell & Howell
Company," BHOC Common Stock will replace the Holding Company Common Stock on the
New York Stock Exchange, and all current officers and directors of the Holding
Company will be elected to identical positions of BHOC.
2. To transact such other and further business as may be properly brought
before the Meeting or any adjournment thereof. As of the date hereof, the
Holding Company knows of no other business to be brought before the Meeting.
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of the Holding Company for the Meeting.
Information concerning these matters is set forth in the attached Proxy
Statement which is a part of this notice. The Board of Directors of the Holding
Company has fixed the close of business on October , 1997 as the record date
(the "Record Date") for the determination of stockholders entitled to notice of
and to vote at the Meeting and any adjournments or postponements thereof. Only
stockholders of record of Holding Company Common Stock at the close of business
on October , 1997 are entitled to notice of, and to vote at, the Meeting, or
any adjournments or postponements thereof. A list of such stockholders will be
available for inspection at the offices of Bell & Howell Operating Company
located at 5215 Old Orchard Road, Skokie, Illinois, at least ten days prior to
the Meeting.
You can ensure that your shares are voted at the Meeting by promptly
completing, signing, dating and returning the enclosed proxy card in the
envelope provided, whether or not you expect to attend the meeting. A return
envelope is enclosed for your convenience and requires no postage for mailing in
the United States. Sending in a signed proxy will not affect your right to
attend the Meeting and vote. A stockholder who gives a proxy may revoke it at
any time before it is exercised by voting in person at the Meeting, by
submitting another proxy bearing a later date or by notifying the Inspector of
Election of such revocation.
By Order of the Board of Directors
Gary S. Salit
CORPORATE COUNSEL AND SECRETARY
Skokie, Illinois
October 15, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Meeting................................................................................................ 3
The Plan................................................................................................... 4
Cautionary Statement.......................................................................................
Capitalization............................................................................................. 9
Selected Consolidated Financial Information and Operating Data............................................. 10
Market for Holding Company Common Stock.................................................................... 12
Dividend Policy............................................................................................ 12
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13
Business................................................................................................... 21
Management................................................................................................. 33
Security Ownership of Certain Beneficial Owners and Management............................................. 42
Description of Capital Stock............................................................................... 43
Interest of Certain Persons in Matters to be Acted Upon at the Meeting..................................... 44
Available Information...................................................................................... 44
Legal Matters.............................................................................................. 45
Experts.................................................................................................... 45
Stockholder Proposals...................................................................................... 45
Other Matters that May Come Before the Meeting............................................................. 45
Form 10-K.................................................................................................. 46
Consolidated Financial Information......................................................................... F-1
</TABLE>
2
<PAGE>
THE MEETING
DATE, TIME AND PLACE OF STOCKHOLDER MEETING
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Bell & Howell Company (the "Holding
Company"), a Delaware corporation, for use at a Special Meeting of Stockholders
of the Holding Company to be held at the offices of Bell & Howell Operating
Company ("BHOC") at 5215 Old Orchard Road, Skokie, Illinois, at 10:00 a.m. on
November 5, 1997 and at any adjournments or postponements of such meeting (the
"Meeting"). This Proxy Statement and accompanying form of proxy are being mailed
to stockholders on or about October 15, 1997.
REVOCABILITY OF PROXIES
Any stockholder giving a proxy has the power to revoke it at any time before
it is voted. Proxies may be revoked by filing with the Secretary of the Holding
Company written notice of revocation bearing a later date than the proxy, by
duly executing a subsequently dated proxy relating to the same shares of common
stock and delivering it to the Secretary of the Holding Company or by attending
the Meeting and voting in person. Attendance at the Meeting will not in and of
itself constitute revocation of a proxy. Any subsequently dated proxy or written
notice revoking a proxy should be sent to the Secretary of Bell & Howell Company
at 5215 Old Orchard Road, Skokie, Illinois 60077-1076.
SHARES OUTSTANDING AND VOTING RIGHTS
Only stockholders of record at the close of business on October , 1997
(the "Record Date") are entitled to vote at the Meeting. On that date, the
Holding Company had outstanding shares of common stock, par value $0.001
per share (the "Holding Company Common Stock"), each of which entitles the
holder thereof to one vote. The Holding Company has no other class of voting
securities outstanding.
The matters to be considered and acted upon at the Meeting are referred to
in the preceding notice and are more fully discussed below. All shares
represented by proxies which are properly signed, received by the Secretary of
the Holding Company prior to the Meeting and not revoked will be voted as
specified on the proxy. If choices are not specified on the proxy, the shares
will be voted FOR approval of a Plan of liquidation and dissolution as attached
hereto as Exhibit A and incorporated herein by this reference, subject to such
changes as are hereafter approved by the Board of Directors (the "Plan"), which
authorizes the directors of the Holding Company (a) to transfer all assets of
the Holding Company to BHOC in exchange for newly-issued shares of BHOC Common
Stock, and (b) to cause the Holding Company to distribute to the stockholders
all of the assets and discharge or make provisions for all of the liabilities of
the Holding Company, and thereupon to wind up its operations and liquidate.
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, the
name of Bell & Howell Operating Company will be changed to "Bell & Howell
Company," the BHOC Common Stock will replace the Holding Company Common Stock on
the New York Stock Exchange, and all current officers and directors of the
Holding Company will be elected to identical positions of BHOC.
The presence at the Meeting, in person or by proxy, of the holders of a
majority of the outstanding shares of Holding Company Common Stock is necessary
to constitute a quorum. Votes cast by proxy or in person at the Meeting will be
tabulated by the election inspectors appointed for the Meeting and will
determine whether or not a quorum is present. The election inspectors will treat
abstentions as shares that are present and entitled to vote for purposes of
determining the presence of a quorum but as unvoted for purposes of determining
the approval of any matter submitted to the stockholders for a vote. If a broker
indicates on the proxy that it does not have discretionary authority as to
certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that
3
<PAGE>
matter. Assuming a quorum is present at the Meeting, approval of the proposed
Plan shall require the affirmative vote by the stockholders of a majority of the
shares of Holding Company Common Stock entitled to vote thereon, with
abstentions counting as a vote against the proposal.
The Holding Company is required to submit the Plan to the Holding Company's
stockholders pursuant to the General Corporation Law of the State of Delaware.
No statutory appraisal or similar dissenter's rights are available to
stockholders of the Holding Company under applicable law with respect to the
implementation of the Plan or any other matters to be considered at the Meeting.
SOLICITATION
The Board of Directors has authorized the solicitation of proxies. The
Holding Company will bear the entire cost of the solicitation, including
preparation, assembly, and mailing of this Proxy Statement/ Prospectus, the
proxy, and any additional material furnished to stockholders. Proxies may be
solicited by directors, officers and a small number of regular employees of the
Holding Company personally or by mail, telephone or telegraph, but such persons
will not be specially compensated for such service. Copies of solicitation
material will be furnished to brokerage houses, fiduciaries, and custodians
holding in their names shares of Holding Company Common Stock beneficially owned
by others to forward to such beneficial owners. The Holding Company may
reimburse persons representing beneficial owners of shares for their costs of
forwarding the solicitation material to such beneficial owners.
THE PLAN
BACKGROUND
FORMATION OF HOLDING COMPANY
Bell & Howell Company was formed in 1993 to serve primarily as a holding
company, the primary assets of which are the beneficial interest in all of the
issued and outstanding shares of Common Stock and Intercompany Preferred Stock
of BHOC described below. The Holding Company conducts its business through BHOC
and has no material operations of its own. The Holding Company is dependent on
the cash flow of BHOC in order to meet its future debt service obligations.
Currently, financial information with respect to the Holding Company is reported
on a consolidated basis with BHOC and its subsidiaries and therefore includes
the financial information of BHOC and its subsidiaries.
At the time of its formation, the Holding Company sold $353.5 million
aggregate principal amount of the 11 1/2% Senior Discount Debentures due 2005
(the "11 1/2% Senior Discount Debentures"). Since such date, $245.2 million
aggregate principal amount of the 11 1/2% Senior Discount Debentures have been
acquired by the Holding Company. The remaining aggregate principal amount of the
11 1/2% Senior Discount Debentures outstanding after the completion of the
Recent Transactions will be $108.3 million. The accreted value of these
debentures at October 8, 1997 was $82.9 million. Subsequent to March 1, 2000,
the 11 1/2% Senior Discount Debentures will pay cash at the rate of 11 1/2% per
annum. The 11 1/2% Senior Discount Debentures mature on March 1, 2005.
In connection with the issuance of the 11 1/2% Senior Discount Debentures by
the Holding Company, BHOC issued to the Holding Company Intercompany Preferred
Stock ("Intercompany Preferred Stock"), the current value of which approximates
the Accreted Value of the 11 1/2% Senior Discount Debentures. The dividends from
the Intercompany Preferred Stock are intended to provide a source of funds to
the Holding Company to enable it to pay interest on the Holding Company's
obligations with respect to the 11 1/2% Senior Discount Debentures. In
connection with stockholder approval of the Plan, BHOC will redeem all of the
outstanding Intercompany Preferred Stock.
4
<PAGE>
RECENT TRANSACTIONS
The Company has recently completed a series of transactions during the
second half of 1997 which increased the number of outstanding shares of Holding
Company Common Stock, reduced Bell & Howell's outstanding indebtedness, and
decreased Bell & Howell's interest expense. The transactions included the
following (collectively, the "Recent Transactions") (i) a public offering of
5,025,500 shares of Holding Company Common Stock at a price to the public of
$28.625 per share on September 22, 1997 (the "Equity Offering"), (ii) a $600
million New Revolving Credit Agreement (the "New Revolving Credit Agreement")
and repayment of all amounts due under BHOC's former credit agreement (the
"Former Credit Agreement") on September 22, 1997, (iii) a purchase of $108.2
million aggregate principal amount of the 11 1/2% Senior Discount Debentures
pursuant to a tender offer (the "11 1/2% Tender Offer") on September 22, 1997,
(iv) a redemption of all outstanding 10 3/4% Senior Subordinated Notes due 2002
of BHOC on October 1, 1997 (the "10 3/4% Redemption"), (v) a redemption of $63.0
million aggregate principal amount of the 11 1/2% Senior Discount Debentures on
October 7, 1997 (the "11 1/2% Equity Proceeds Redemption"), and (vi) a
redemption of all outstanding 9 1/4% Senior Notes due July 15, 2000 of BHOC on
October 7, 1997 (the "9 1/4% Redemption").
REDEMPTION OF REMAINING 11 1/2% SENIOR DISCOUNT DEBENTURES IN CONNECTION WITH
THE PLAN
After taking into account all prior purchases and redemptions of the 11 1/2%
Senior Discount Debentures, approximately $108.3 million aggregate principal
amount of the 11 1/2% Senior Discount Debentures remain outstanding. The Holding
Company intends to redeem the remaining 11 1/2% Senior Discount Debentures
following stockholder approval of the Plan (the "Final 11 1/2% Redemption").
Under the Indenture relating to the 11 1/2% Senior Discount Debentures (the
"11 1/2% Indenture"), the Holding Company has the right to redeem all
outstanding 11 1/2% Senior Discount Debentures for a price of 110% of Accreted
Value (as defined therein) upon a Change of Control, as defined in the 11 1/2%
Indenture. The 11 1/2% Indenture defines a Change of Control to include the
approval by the stockholders of the Holding Company of a plan of liquidation or
dissolution. Consequently, if the Plan is not approved by the stockholders of
the Holding Company, then the remaining 11 1/2% Senior Discount Debentures will
not be presently redeemed pursuant to the Change of Control provisions contained
in the 11 1/2% Indenture. The Holding Company shall receive the funds necessary
to redeem the 11 1/2% Senior Discount Debentures as a result of BHOC's
redemption of the Intercompany Preferred Stock which will be funded by
borrowings under the New Revolving Credit Agreement.
REASONS FOR APPROVING THE PLAN
The Board of Directors of the Holding Company ( the "Board") considers it to
be in the best interest of the Company to approve the Plan and thereby liquidate
and dissolve the Holding Company. The Holding Company has no meaningful business
or assets other than its equity interest in BHOC. Prior to implementation of the
Plan, the Holding Company's assets will consist solely of BHOC Common Stock. The
function of the Holding Company has been to raise capital for the operations of
the Company. The Board believes that the two-tiered holding company structure
will no longer be required for this purpose in the future. The elimination of
the Holding Company will reduce administrative costs of the Company by
eliminating the duplicative costs in maintaining both the Holding Company and
BHOC. Moreover, the Plan will not affect the relative interests of the
stockholders of Holding Company Common Stock. Upon the liquidation and
dissolution of the Holding Company, the newly-issued shares of BHOC Common Stock
will be distributed to each stockholder of the Holding Company on a
share-for-share basis. The terms of the BHOC Common Stock shall be identical in
all material respects to the terms of the Holding Company Common Stock.
5
<PAGE>
PRINCIPAL PROVISIONS OF THE PLAN OF LIQUIDATION AND DISSOLUTION
The Board has approved the Plan and, as required by Delaware law, is
submitting the Plan to its stockholders for their approval. The Plan will be
adopted if approved by stockholders who hold at least a
majority of the outstanding Holding Company Common Stock.
The Plan provides for the liquidation and dissolution of the Holding Company
as soon as practicable after stockholder approval of the Plan and the redemption
of the remaining 11 1/2% Senior Discount Debentures in connection therewith.
Assuming that the Holding Company stockholders approve the Plan, the Holding
Company and BHOC will carry out the following actions:
(1) The Holding Company will implement the Plan and will transfer all of its
assets to BHOC in exchange for newly-issued shares of Common Stock of BHOC.
(2) The Holding Company, as sole stockholder of BHOC, will approve an
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws of BHOC which are identical in all material respects to the current
Amended and Restated Certificate of Incorporation and Bylaws of the Holding
Company.
(3) All of the current officers and directors of BHOC shall resign and the
existing officers and directors of the Holding Company shall be elected to serve
as officers and directors of BHOC in the same positions that such officers and
directors hold with the Holding Company.
(4) The Holding Company will register the BHOC Common Stock under the
Securities Exchange Act of 1934 with the Securities and Exchange Commission.
(5) The officers of the Holding Company shall file the Certificate of
Liquidation and Dissolution of the Holding Company with the Secretary of State
of the State of Delaware. Upon the effectiveness of the Certificate of
Liquidation and Dissolution, the name of BHOC shall be changed to "Bell & Howell
Company" pursuant to BHOC's Amended and Restated Certificate of Incorporation.
(6) As soon as practicable after the effectiveness of the Certificate of
Liquidation and Dissolution with the Secretary of State of the State of
Delaware, the stockholders of the Holding Company will receive newly-issued BHOC
Common Stock on a share-for-share basis. At that time, the BHOC Common Stock
will be the only asset of the Holding Company because the Intercompany Preferred
Stock will have been redeemed by BHOC after stockholder approval of the Plan but
prior to the liquidation and dissolution of the Holding Company.
(7) Simultaneously with the effectiveness of the liquidation and dissolution
of the Holding Company, officers of the Holding Company and BHOC will delist the
Holding Company Common Stock with the NYSE and list the BHOC Common Stock with
the NYSE under the symbol "BHW."
(8) Simultaneously with the effectiveness of the liquidation and dissolution
of the Holding Company, BHOC will assume all of the obligations of the Holding
Company with respect to any outstanding options of Holding Company Common Stock
granted by the Holding Company.
Upon the liquidation and dissolution of the Holding Company, the holders of
Holding Company Common Stock will not be obligated to surrender their
certificates representing Holding Company Common Stock and book-entry interests
in BHOC Common Stock will be made to all book-entry holders of Holding Company
Common Stock. On the distribution date, the Holding Company's transfer records
will close and all of the Holding Company Common Stock then outstanding will be
canceled and no longer transferable. Each share of Holding Company Common Stock
will, upon such cancellation, represent one share of BHOC Common Stock.
6
<PAGE>
CONDITIONS TO IMPLEMENTING THE PLAN
The Board reserves the right, at any time prior to the liquidation and
dissolution of the Holding Company and notwithstanding stockholder approval, to
abandon the Plan without further stockholder action in the event that the Board
determines that the consummation of the Plan is no longer in the best interest
of the Holding Company and its stockholders.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Plan will be treated as a
reorganization within the meaning of Section 368(a)(1)(D) of the Internal
Revenue Code and, accordingly, (i) no gain or loss will be recognized by the
Holding Company or BHOC as a result of the Plan, (ii) no gain or loss will be
recognized by stockholders of the Holding Company upon receipt of BHOC Common
Stock in exchange for Holding Company Common Stock in connection with the Plan,
and (iii) the tax basis of BHOC Common Stock to be received by the Holding
Company's stockholders in connection with the Plan will be the same as the tax
basis in the Holding Company Common Stock surrendered in exchange therefor.
COMMON STOCK
The BHOC Common Stock, which will be distributed to the stockholders of the
Holding Company on a share-for-share basis in exchange for Holding Company
Common Stock, will have the same attributes as Holding Company Common Stock in
all material respects. Immediately prior to the liquidation and dissolution of
the Holding Company, BHOC shall adopt an Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws that are the same in all material
respects as the existing Certificate of Incorporation and Bylaws of the Holding
Company. Consequently, the terms of BHOC Common Stock to be distributed to the
stockholders of the Holding Company shall be the same in all material respects
as the terms of the BHOC Common Stock.
The authorized capital stock of the Holding Company consists of 50,000,000
shares of Common Stock, $.001 par value, of which 23,372,116 shares are
outstanding. In addition, options to acquire 1,660,600 shares are outstanding
and 2,146,200 shares are reserved for issuance under the Holding Company's 1995
Stock Option Plan (the "Option Plan"). All of the issued and outstanding shares
of Holding Company Common Stock are fully paid and non-assessable. Holders of
Holding Company Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders of the Holding Company and have no preemptive
or other rights to subscribe for additional shares of the Holding Company.
Holders of Holding Company Common Stock do not have the right to cumulatively
vote their shares in the election of directors. Each share of Holding Company
Common Stock has an equal and ratable right to receive dividends when, as and if
declared by the Board out of assets legally available therefor. In the event of
a liquidation, dissolution or winding up of the Holding Company, the holders of
Holding Company Common Stock are entitled to share equally and ratably in the
distribution of all of the Holding Company's assets remaining available for
distribution after satisfaction of all of its liabilities and the payment of the
liquidation preference of any outstanding preferred stock. See "Description of
Capital Stock."
BHOC INTERCOMPANY PREFERRED STOCK
The Holding Company owns all of the outstanding shares of Intercompany
Preferred Stock. As owner of all of the BHOC Intercompany Preferred Stock, the
Holding Company is entitled to receive, when, as and if declared by the Board of
Directors of BHOC, out of funds legally available therefor, dividends in an
annual amount equal to (i) $121.33 per share prior to March 1, 2000, and (ii)
$115.00 per share from and after March 1, 2000. Dividends, whether or not
declared, cumulate until declared and paid. Prior to March 1, 2000, BHOC may at
its option, pay semi-annual dividends by using additional shares of Intercompany
Preferred Stock. On and after March 1, 2000, semi-annual dividends that are not
paid or declared and set apart for payment will cumulate and, for purposes of
calculating future dividends, be
7
<PAGE>
deemed to have been paid in additional shares of Intercompany Preferred Stock.
The dividends from the Intercompany Preferred Stock are intended to provide a
source of funds to the Holding Company to enable it to pay interest on the
Holding Company's debt. In connection with the Holding Company's redemption of
the remaining 11 1/2% Senior Discount Debentures, the remaining Intercompany
Preferred Stock will be redeemed by BHOC after stockholder approval of the Plan
but prior to the liquidation and dissolution of the Holding Company.
ACCOUNTING TREATMENT
The implementation of the Plan will not have any impact on the Consolidated
Financial Statements of Bell & Howell Company.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT THE PLAN IS IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL
OF THE PLAN.
The Holding Company's and BHOC's principal place of business is located at
5215 Old Orchard Road, Skokie, Illinois 60077-1076; the Holding Company's
telephone number is (847) 470-7660 and BHOC's telephone number is (847)
470-7100; the Company's e-mail address is [email protected].
CAUTIONARY STATEMENT
Certain statements contained in this Proxy Statement/Prospectus, including
without limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both domestic and foreign;
periodic fluctuations in the Company's operating results; industry capacity;
existing governmental regulations and proposals; liability and other claims
asserted against the Company; competition; changes in operating strategy or
development plans; the significant indebtedness of the Company after the
refinancing; the availability and terms of capital to fund the expansion of the
Company's business; and other factors referenced in this Proxy
Statement/Prospectus. Certain of these factors are discussed in more detail
elsewhere in this Proxy Statement/Prospectus, including, without limitation,
under the captions "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business." Given these uncertainties,
stockholders are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments. In
evaluating the Company's business, stockholders should consider carefully the
following factors in addition to the other information presented or incorporated
by reference in this Proxy Statement/Prospectus.
8
<PAGE>
CAPITALIZATION
The following table sets forth at June 28, 1997 (i) the actual current debt
and consolidated capitalization of the Holding Company and (ii) such current
debt and consolidated capitalization, as adjusted to reflect the Recent
Transactions, the implementation of the Plan and the Final 11 1/2% Redemption as
a result of stockholder approval of the Plan. This table should be read in
conjunction with the Consolidated Financial Statements, the "Selected
Consolidated Financial and Operating Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AT JUNE 28, 1997
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current debt:
Notes payable......................................................................... $ 5,821 $ 5,821
Current maturities of long-term debt.................................................. 1,089 1,089
----------- -----------
Total current debt.................................................................. $ 6,910 $ 6,910
----------- -----------
----------- -----------
Long-term debt:
Existing Credit Agreement............................................................. $ 259,000 $ --
New Revolving Credit Agreement........................................................ -- 495,438
9 1/4% Senior Notes due 2000.......................................................... 80,000 --
10 3/4% Senior Subordinated Notes due 2002............................................ 54,980 --
Other long-term debt.................................................................. 3,694 3,694
11 1/2% Senior Discount Debentures due 2005........................................... 207,511 --
----------- -----------
Total long-term debt................................................................ 605,185 499,132
Shareholders' equity:
Common Stock, par value $.001 per share, 50,000,000 shares authorized, 18,385,909
shares issued and 18,346,616 shares outstanding and 23,372,116 shares outstanding,
as adjusted......................................................................... 18 23
Capital surplus....................................................................... 1,713 138,230
Retained earnings (deficit)........................................................... (160,163) (183,903)
Other................................................................................. (3,953) (3,953)
----------- -----------
Total shareholders' equity (deficit)................................................ (162,385) (49,603)
----------- -----------
Total capitalization.............................................................. $ 442,800 $ 449,529
----------- -----------
----------- -----------
</TABLE>
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
The following historical selected consolidated financial and operating data
for fiscal 1992, fiscal 1993, fiscal 1994, fiscal 1995 and fiscal 1996, first
half 1996 and first half 1997 have been derived from the Consolidated Financial
Statements of the Holding Company. The unaudited consolidated pro forma
financial data set forth below illustrate the estimated effects of the Recent
Transactions, the implementation the Plan and the completion of the Final
11 1/2% Redemption upon stockholder approval of the Plan as if they had occurred
(i) at the beginning of each of the respective fiscal periods for purposes of
presenting the pro forma results of operations data and (ii) at June 28, 1997,
for purposes of presenting the pro forma balance sheet data. The unaudited
consolidated pro forma financial data do not necessarily reflect the results of
operations or the financial position of the Company that actually would have
occurred had the Recent Transactions, the Plan and the 11 1/2% Redemption been
consummated as of the date or for the periods indicated. The following financial
data should be read in conjunction with the Consolidated Financial Statements of
the Holding Company included elsewhere in this Proxy Statement/Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL FIRST HALF
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS DATA(1):
Net sales....................................... $ 670,039 $ 675,553 $ 720,340 $ 819,889 $ 902,797 $ 415,065 $ 418,168
Operating costs and expenses:
Cost of sales................................. 434,135 431,420 455,424 511,399 576,417 269,412 264,720
Research and development...................... 18,632 18,600 21,556 30,202 38,101 16,454 19,822
Selling and administrative.................... 166,644 168,529 173,019 194,839 198,898 97,529 98,509
Restructuring................................. -- -- 32,893 -- -- -- --
Goodwill write-off............................ -- 174,277 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total operating costs and expenses.......... 619,411 792,826 682,892 736,440 813,416 383,395 383,051
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)......................... 50,628 (117,273) 37,448 83,449 89,381 31,670 35,117
Net interest expense............................ 37,266 49,579 48,954 50,800 45,326 22,742 23,732
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes, cumulative
effect of accounting change and extraordinary
items.......................................... 13,362 (166,852) (11,506) 32,649 44,055 8,928 11,385
Income tax expense (benefit).................... 8,299 3,991 (2,490) 13,439 18,400 3,731 4,725
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before cumulative effect of
accounting change and extraordinary items...... 5,063 (170,843) (9,016) 19,210 25,655 5,197 6,660
Cumulative effect of accounting change(2)....... -- (4,759) -- -- -- -- --
Extraordinary losses(3)......................... (5,004) (6,625) (978) (3,219) (2,585) (2,585) (972)
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss)............................. 59 (182,227) (9,994) 15,991 23,070 2,612 5,688
Dividends on preferred stock.................... 22,394 5,820 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) applicable to common
stock.......................................... $ (22,335) $(188,047) $ (9,994) $ 15,991 $ 23,070 $ 2,612 $ 5,688
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per common share(4):
Earnings (loss) before cumulative effect of
accounting change and extraordinary items... $ (1.37) $ (13.89) $ (0.68) $ 1.15 $ 1.38 $ 0.28 $ 0.36
Cumulative effect of accounting change........ -- (0.37) -- -- -- -- --
Extraordinary losses.......................... (0.39) (0.52) (0.07) (0.19) (0.14) (0.14) (0.05)
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per common share........ $ (1.76) $ (14.78) $ (0.75) $ 0.96 $ 1.24 $ 0.14 $ 0.31
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA DATA (UNAUDITED)(5):
Net interest expense............................ $ 22,858 $ 11,761 $ 13,399
Earnings before extraordinary items............. 39,136 11,786 12,860
Extraordinary losses............................ (25,048) (25,048) (24,423)
Net earnings (loss)............................. 14,088 (13,262) (11,563)
Net earnings (loss) per common share(4):
Earnings before extraordinary items........... $ 1.66 $ 0.50 $ 0.55
Extraordinary losses.......................... (1.06) (1.06) (1.04)
--------- --------- ---------
Net earnings (loss) per common share.......... $ 0.60 $ (0.56) $ (0.49)
--------- --------- ---------
--------- --------- ---------
OTHER DATA:
EBITDA(6)....................................... $ 85,504 $ 93,493 $ 103,206 $ 120,788 $ 133,596 $ 53,312 $ 62,635
EBITDA as a percent of net sales................ 12.8% 13.8% 14.3% 14.7% 14.8% 12.8% 15.0%
Gross profit as a percent of net sales(7)....... 35.2% 36.1% 36.8% 37.6% 36.2% 35.1% 36.7%
Depreciation and amortization(8)................ $ 34,876 $ 36,489 $ 32,865 $ 37,339 $ 44,215 $ 21,642 $ 27,518
Capital expenditures............................ 30,950 33,191 38,345 44,047 42,744 20,384 17,184
</TABLE>
<TABLE>
<CAPTION>
AT THE END OF
FIRST HALF 1997
AT THE END OF FISCAL ----------------------
----------------------------------------------------- AS
1992 1993 1994 1995 1996 ACTUAL ADJUSTED(9)
--------- --------- --------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ (34,417) $ (40,081) $ (62,398) $ (53,502) $ (329) $ 69,935 $ 69,935
Total assets...................................... 756,855 625,481 603,745 682,141 796,786 782,120 775,496
Long-term debt.................................... 368,991 549,464 518,687 465,230 548,281 605,185 449,132
Preferred Stock(10)............................... 148,750 -- -- -- -- -- --
Total shareholders' equity (deficit).............. 68,000 (270,553) (278,728) (189,472) (166,892) (162,385) (49,603)
</TABLE>
FOOTNOTES ON FOLLOWING PAGE.
10
<PAGE>
FOOTNOTES TO THE SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA:
(1) In February 1993, the Company was formed as a holding company, the primary
assets of which are all of the issued and outstanding shares of capital
stock of BHOC. See Note 1 of the Consolidated Financial Statements included
elsewhere in this Proxy Statement/Prospectus. Data for fiscal 1992 is for
BHOC.
(2) Cumulative effect of accounting change represents the effect of adoption of
Statement of Financial Accounting Standards No. 106 "Employers' Accounting
For Postretirement Benefits Other Than Pensions" ("SFAS No. 106") as of the
beginning of fiscal 1993.
(3) Extraordinary losses represent the write-off of unamortized debt issuance
costs and applicable call/debt repurchase premiums related to debt
refinancings. See Note 6 of the Consolidated Financial Statements and Note 3
of the Consolidated Interim Financial Statements, both included elsewhere in
this Proxy Statement/Prospectus.
(4) Net earnings (loss) per common share reflects both primary and fully diluted
earnings per common share.
(5) The pro forma results of operations data give effect to the Recent
Transactions, the implementation of the Plan and the Final 11 1/2%
Redemption as if they occurred at the beginning of the respective fiscal
periods including the issuance of 5,025,500 shares of Holding Company Common
Stock at an offering price of $28.625 per share, the net proceeds of which
together with borrowings under the New Revolving Credit Agreement (at
assumed interest rates of 6.5% in 1996 and 7.2% in 1997 which represent
LIBOR plus 0.75% plus hedging costs) which were used to fund the 11 1/2%
Tender Offer, the 11 1/2% Equity Proceeds Redemption, the Final 11 1/2%
Redemption, the 10 3/4% Redemption, the 9 1/4% Redemption, and the repayment
of the Former Credit Agreement.
The debt redemption cost included in the pro forma results of operations data
for the 11 1/2% Equity Proceeds Redemption, the Final 11 1/2% Redemption, the
10 3/4% Redemption and the 9 1/4% Redemption represents the applicable call
premium. The redemption cost for the 11 1/2% Tender Offer represents the
tender price plus applicable fees and expenses. The pro forma results of
operations data do not purport to represent what the Company's results of
operations would have been if the Recent Transactions, the implementation of
the Plan and the Final 11 1/2% Redemption had occurred for the periods
indicated, or to project the Company's results of operations for any future
period. The pro forma adjustments are as follows:
(a) The decrease in net interest expense reflects the use of the net
proceeds from the Equity Offering and borrowings under the New Revolving
Credit Agreement to retire all of the outstanding 11 1/2% Senior Discount
Debentures, the 10 3/4% Senior Subordinated Notes, the 9 1/4% Senior
Notes, and repay the balance outstanding under the Former Credit
Agreement.
(b) Earnings before extraordinary items reflects the decreased interest
expense described in (a) above, net of income tax benefit.
(c) The extraordinary losses reflect the debt repurchase premiums and
write-off of unamortized debt issuance costs related to the retirement of
the 11 1/4% Senior Discount Debentures, redemption of the 10 3/4% Senior
Subordinated Notes, redemption of the 9 1/4% Senior Notes and the
repayment of indebtedness under the Former Credit Agreement described in
(a) above, net of income tax benefit.
(d) The pro forma weighted average number of shares outstanding of
23,585,825 for fiscal 1996, 23,626,519 for first half 1996 and 23,455,024
for first half 1997 consists of the total number of shares of Holding
Company Common Stock outstanding, plus 5,025,500 shares issued by the
Company in the Equity Offering.
(6) EBITDA is defined as operating income before restructuring expense and
goodwill write-off plus depreciation and amortization, and is generally
accepted as providing useful information regarding a company's financial
performance. Certain covenants in the New Revolving Credit Agreement are
based on EBITDA. EBITDA should not be considered an alternative to net
income or an alternative to the Company's cash flow from operating
activities as a measure of liquidity.
(7) Gross profit is defined as net sales less cost of sales.
(8) Excludes goodwill write-off in fiscal 1993 and amortization of deferred
financing costs which were as follows for the specified fiscal years and
interim periods: 1992--$3.6 million; 1993--$5.4 million; 1994--$3.8 million;
1995-- $4.0 million; 1996--$3.2 million; first half 1996--$2.1 million; and
first half 1997--$1.4 million.
(9) The pro forma balance sheet data at the end of first half 1997 gives effect
to the Recent Transactions as if they had occurred at June 28, 1997. See
footnote 5 above.
(10) Reflects the accreted value of the BHOC $4.25 Cumulative Exchangeable
Preferred Stock, which was redeemed in March 1993 with the proceeds from the
issuance of the 11 1/2% Senior Discount Debentures.
11
<PAGE>
MARKET FOR HOLDING COMPANY COMMON STOCK
Since May 2, 1995, the Holding Company Common Stock has traded on the NYSE
under the trading symbol "BHW." Prior to May 2, 1995, the Holding Company Common
Stock was not listed on or traded in any organized market system. On October ,
1997, the last reported sale price of the Holding Company Common Stock was
$ per share. As of October , 1997, there were approximately
holders of record of the outstanding shares of Holding Company Common Stock. The
following table sets forth for the periods indicated the high and low closing
sales price of the Holding Company Common Stock as reported on the New York
Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1995
Second Quarter (from May 2, 1995)............................................ $ 20 1/2 $ 15 1/2
Third Quarter................................................................ 22 3/4 19 5/8
Fourth Quarter............................................................... 29 1/4 24 7/8
1996
First Quarter................................................................ 32 3/4 27 1/8
Second Quarter............................................................... 35 1/4 30 1/4
Third Quarter................................................................ 32 3/4 26 7/8
Fourth Quarter............................................................... 31 3/4 22 3/4
1997
First Quarter................................................................ 24 3/8 19 7/8
Second Quarter............................................................... 29 3/8 19 3/8
Third Quarter................................................................
Fourth Quarter (through , 1997)...................................
</TABLE>
DIVIDEND POLICY
The Holding Company has not declared or paid any cash dividends on the
Holding Company Common Stock. The Holding Company currently intends to retain
future earnings to fund the development and growth of its businesses and to
repay indebtedness, and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. The Holding Company's principal source for
cash from which to make dividend payments will be dividends distributed by its
operating subsidiaries. The New Revolving Credit Agreement contains provisions
that limit the ability to pay dividends and make distributions to the Holding
Company and limit the ability of the Holding Company to pay cash dividends and
make other distributions to its stockholders. Any future determination to
declare and pay dividends will be made by the Board of Directors in light of the
Holding Company's earnings, financial position, capital requirements, credit
agreements and such other factors as the Board of Directors deems relevant.
Under Delaware law, the Holding Company is permitted to pay cash dividends to
its stockholders only (i) out of its surplus (the excess of the net assets of
the Holding Company over its capital) or (ii) out of the net profits of the
Holding Company for the fiscal year in which the dividend is declared and/or the
preceding fiscal year.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section should be read in conjunction with the "Selected Consolidated
Financial and Operating Data" and the Consolidated Financial Statements and the
Notes thereto set forth elsewhere in this Proxy Statement/Prospectus.
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 and vehicle and
education and library markets), as well as the commercial portion of Mail
Processing. This was partially offset by lower revenues in the postal
contracting portion of the Mail Processing business 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 and vehicle and education and library markets, and also provides
imaging solutions and components to financial institutions, governmental
agencies and other paper intensive industries. Net sales to the transportation
and 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 and library market increased $8.6 million, or 11%, to $89.6 million
due to a growing electronic subscription base, 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 and 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 systems
(which represents 94% of the sales in this segment) increased 18% in first half
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.
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
13
<PAGE>
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
$98.5 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 23.6% in first half 1997 increased by 0.1
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 increased $9.3 million, or 18%, to $62.6 million in first half 1997
resulting from the slightly higher sales level and leveraged operating costs and
expenses. Operating income increased $3.4 million, or 11%, to $35.1 million in
first half 1997.
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 $6.5 million in first half 1997 as productivity improvements offset
inflationary cost increases.
Net interest expense increased $1.0 million, or 4%, to $23.7 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 11 1/2% Senior Discount
Debentures and the 10 3/4% Senior Subordinated Notes, which were redeemed with
proceeds from the Existing Credit Agreement. Net interest income of Bell &
Howell Financial Services Company ("BHFS"), 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.
Income tax expense increased in first half 1997 as a result of a higher
level of pretax profit in the current year.
The extraordinary losses of $1.0 million ($1.5 million pretax) in first half
1997 were comprised of the debt repurchase premium and write-off of unamortized
debt issuance costs associated with the repurchase of $15.6 million (accreted
value) of the 11 1/2% Senior Discount Debentures and $2.1 million of the 10 3/4%
14
<PAGE>
Senior Subordinated Notes with proceeds from the Existing Credit Agreement. The
extraordinary losses of $2.6 million ($4.0 million pretax) in first half 1996
were comprised of the debt repurchase premium and write-off of unamortized debt
issuance costs associated with the repurchase of $34.2 million (accreted value)
of the 11 1/2% Senior Discount Debentures and $17.9 million of the 10 3/4%
Senior Subordinated Notes with proceeds from the Existing Credit Agreement.
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's net sales increased $82.9 million, or 10%, to $902.8 million
in 1996.
Information Access net sales increased $20.6 million, or 5%, to $470.5
million in 1996. Net sales to the transportation and vehicle market increased
$10.2 million, or 10%, to $110.0 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 and library market increased
$8.4 million, or 5%, to $172.6 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 the Company's electronic product offerings. Sales of
electronic content increased 24% 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 in 1996 decreased slightly versus the prior year as
increased pricing was offset by lower unit volumes. Sales of low margin
electronic equipment continued to decline in 1996 (and represent only 3% of
sales in this market) as on-line delivery and the availability (from other
sources) of standardized computer hardware have allowed the Company to focus on
providing the more valuable information content. Imaging Solutions and
Components net sales increased $2.0 million, or 1%, to $187.9 million as
increased sales of production scanners worldwide and imaging software systems
were partially offset by lower microfilm product sales as a result of a sales
force reduction (reflecting a shift to directly serving only the financial
services market in the U.S.--which increased the profitability of this
business). The acquisition of Protocorp International (in March 1996) allows the
Company to now offer its financial services customers a full range of electronic
information storage and retrieval solutions.
Mail Processing net sales increased $62.3 million, or 17%, to $432.3 million
in 1996. Sales of commercial mail processing systems increased $34.1 million or
11% to $352.5 million reflecting strong market demand for inserting and sorting
systems both domestically and abroad, and increased service revenue (due to both
an expanding customer service base and improved pricing). Sales of commercial
sorting equipment (which represent 12% of commercial equipment sales) increased
$6.5 million, or 35%, to $25.1 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 July 1, 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 increased $28.2 million, or 55%, to
$79.8 million, as a result of production contracts for both the German and U.S.
Postal Services.
The Company's cost of sales increased $65.0 million, or 13%, to $576.4
million in 1996, with the gross profit percentage decreasing by 1.4 percentage
points to 36.2% in the current year. The lower gross profit percentage in 1996
resulted from a shift in sales mix (as the growth rate in lower gross profit
percentage Mail Processing revenues exceeded the growth rate in higher gross
profit percentage Information Access revenues), which more than offsets the
impact of improved manufacturing productivity and increased pricing.
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Research and development expense increased $7.9 million, or 26%, to $38.1
million in 1996 as the Company continued to increase its investment in new
product offerings. Such increase primarily related to increased investment to
develop higher technology mail processing systems/software 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 $4.1 million, or 2%, to
$198.9 million in 1996 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 S&A expense to net sales of 22.0% in 1996
improved by 1.8 percentage points versus the prior year as a result of various
expense leveraging initiatives and a favorable shift in sales mix (as the growth
rate in lower S&A expense percentage Mail Processing revenues exceeded the
growth rate in higher S&A expense percentage Information Access revenues).
EBITDA increased $12.8 million, or 11%, to $133.6 million in 1996 resulting
from the higher sales level and leveraged operating costs and expenses.
Operating income increased $5.9 million, or 7%, to $89.4 million in 1996.
Information Access EBITDA, increased $4.3 million, or 5%, to $98.4 million
in 1996. 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), and the profitability improvement resulting from the domestic
refocusing of the Imaging Solutions and Components sales force on the financial
services market, which more than offset the dilutive impact in 1996 of the
acquisitions of DataTimes Corporation and Protocorp International and increased
research and development costs associated with new product offerings.
Information Access operating income of $62.9 million in 1996 increased slightly
over the prior year as the EBITDA increase was offset by both higher
depreciation cost on the Company's product capital investment and goodwill
amortization related to the aforementioned acquisitions in 1996.
Mail Processing EBITDA increased $9.1 million, or 23%, to $48.1 million in
1996. The increase resulted from the higher sales volumes and leveraged
operating costs and expenses, which included the increased investment in
research and development for higher technology mail processing systems/software.
Mail Processing operating income increased $6.5 million, or 19%, to $40.0
million in 1996.
Corporate expenses (excluding depreciation and amortization) increased $0.6
million, or 5%, to $12.9 million in 1996, reflecting inflationary cost increases
and costs associated with being a publicly traded company.
Net interest expense decreased $5.5 million, or 11%, to $45.3 million in
1996 primarily reflecting the reduction in interest expense resulting from the
initial public equity offering in May of 1995 (the net proceeds of which were
used to retire $50.0 million of the 10 3/4% Senior Subordinated Notes and to
prepay $17.6 million of term loans under the Existing Credit Agreement). Net
interest expense was further reduced by the repurchase in 1996 of $17.9 million
of the 10 3/4% Senior Subordinated Notes and $34.2 million (accreted value) of
the 11 1/2% Senior Discount Debentures, which were redeemed with proceeds from
the Existing Credit Agreement. Net interest income of Bell & Howell Financial
Services Company increased $1.7 million to $6.8 million in 1996 primarily due to
continued growth in the lease receivables portfolio.
Income tax expense increased in 1996 as a result of both a higher level of
pretax profit in the current year and a slightly higher income tax rate related
to the impact of a mix shift of taxable income to/within certain foreign
jurisdictions.
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The extraordinary losses of $2.6 million ($4.0 million pretax) in 1996 were
comprised of the debt repurchase premium and write-off of unamortized debt
issuance costs associated with the aforementioned repurchase of the 10 3/4%
Senior Subordinated Notes and the 11 1/2% Senior Discount Debentures. The
extraordinary losses of $3.2 million ($5.0 million pretax) in 1995 were
comprised of the debt repurchase premium and write-off of unamortized debt
issuance costs associated with the aforementioned repurchase of the 10 3/4%
Senior Subordinated Notes and the write-off of unamortized debt issuance costs
associated with the aforementioned prepayment of term loans under the Former
Credit Agreement, both of which reflected the application of the net proceeds
from the initial public equity offering.
FISCAL 1995 COMPARED TO FISCAL 1994
The Company's net sales increased $99.6 million, or 14%, to $819.9 million
in 1995.
Information Access net sales increased $45.5 million, or 11%, to $449.9
million in 1995. Net sales to the transportation and vehicle market increased
$25.8 million, or 35%, to $99.8 million due to increased sales of electronic
parts catalogs and ancillary products to automotive dealerships, and increased
sales of dealer management systems and electronic parts catalogs to powersports
dealerships. In addition to new system placements, the Company also experienced
strong sales of additional product applications and high contract renewal rates
related to previously placed systems in automotive dealerships. Net sales to the
education and library market increased $12.0 million, or 8%, to $164.1 million
due to a growing electronic subscription base, which continued to reflect high
renewal rates on existing products and new product offerings. Sales of
electronic content increased 27% over the prior year as customers increasingly
demand electronic information solutions. Net sales of microfilm and paper
products in 1995 increased slightly over the prior year as increased pricing
more than offset lower unit volumes. Imaging Solutions and Components net sales
increased $7.7 million, or 4%, to $186.0 million as increased sales of
production scanners worldwide were partially offset by lower service revenue as
certain of the Company's products have become less service intensive.
Mail Processing net sales increased $54.1 million, or 17%, to $370.0 million
in 1995. The revenue growth reflected significantly increased revenues related
to customized equipment and contractual engineering services provided to the
U.S. Postal Service. Additionally contributing to the revenue growth was higher
sales of commercial inserting equipment and increased service revenue (due to
both an expanding customer base serviced and improved pricing). Sales of
commercial sorting equipment was approximately equal with the prior year which
reflected the uncertainty caused by the then existing U.S. Postal Service
proposal to alter the guidelines governing the operating requirements to qualify
for incentives to bar code and presort mail.
The Company's cost of sales increased $56.0 million, or 12%, to $511.4
million in 1995. The gross profit percentage of 37.6% in 1995 increased 0.8
percentage points over the prior year resulting from a sales mix emphasizing the
Company's more profitable products, improved manufacturing productivity and
increased pricing.
Research and development expense increased $8.6 million, or 40%, to $30.2
million in 1995 as the Company continued to increase its investment in new
product offerings. Such increase primarily related to the Company's introduction
in the third quarter of 1995 of the first full format system (ProQuest Direct)
through which customers are able to gain direct on-line access to its extensive
collection of databases. Research and development expenses in 1995 also related
to increased investment to develop higher technology mail processing
systems/software and increased investment to develop enhanced features for
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 expense increased $21.8 million, or 13%, to
$194.8 million in 1995 reflecting the Company's increased investment in sales
and marketing resources, increased distribution
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costs associated with higher sales volumes, and $5.2 million for the
continuation of the relocation of Mail Processing Systems headquarters to a new
site in North Carolina.
The Company's restructuring expense of $32.9 million in 1994 resulted from
management's decision to relocate Mail Processing Systems headquarters'
operations and consolidate certain of its domestic Mail Processing Systems
facilities at a new site that will be the base for developing innovative
technology and products (both software and hardware), and to consolidate certain
North American Imaging Solutions and Components administrative and warehouse
facilities in order to more effectively serve its customer base with a reduced
operating expense infrastructure.
EBITDA increased $17.6 million, or 17%, to $120.8 million in 1995 resulting
from the higher sales level and leveraged operating costs and expenses, which
included the significantly increased investment in research and development to
fund new product offerings. Operating income (excluding the 1994 restructuring
expense) increased $13.1 million, or 19%, to $83.4 million in 1995.
Information Access EBITDA increased $16.0 million, or 21%, to $94.1 million
in 1995. This increase resulted from the higher sales volumes and 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). Information Access operating income (excluding the 1994 restructuring
expense) increased $11.6 million, or 23%, to $62.8 million in 1995.
Mail Processing EBITDA increased $2.6 million, or 7%, to $39.0 million in
1995. The increase in 1995 resulted from the increased sales associated with the
customized equipment and contractual engineering services for the U.S. Postal
Service and the higher sales volumes of mail processing systems/service,
partially offset by the increased investment in research and development (for
higher technology mail processing systems/software). Mail Processing operating
income (excluding the 1994 restructuring expense) increased $2.5 million, or 8%,
to $33.5 million in 1995.
Corporate expenses (excluding depreciation and amortization) increased $1.0
million, or 9%, to $12.3 million in 1995, reflecting inflationary cost increases
and costs incurred related to the initial public equity offering.
Net interest expense increased $1.8 million, or 4%, to $50.8 million in 1995
reflecting a higher interest rate environment and increased interest accretion
on the 11 1/2% Senior Discount Debentures, which were partially offset by the
reduction in interest costs resulting from the initial public equity offering
(the net proceeds of which were used to repurchase $50.0 million of the 10 3/4%
Senior Subordinated Notes and to prepay $17.6 million of term loans under the
Former Credit Agreement). Net interest income of BHFS, the Company's financing
subsidiary, decreased $0.5 million to $5.1 million in 1995, as increased
interest income on lease receivables was more than offset by higher financing
costs, reflecting the higher interest rate environment.
Income tax expense increased in 1995 as a result of a higher level of pretax
profit in the current year, and additionally reflects the favorable impact of a
shift in mix of taxable income to certain foreign jurisdictions for which no tax
expense is recorded (as a result of prior foreign net operating losses being
incurred with no corresponding tax benefit previously recorded).
The extraordinary losses of $3.2 million ($5.0 million pretax) in 1995 were
comprised of the debt repurchase premium and write-off of unamortized debt
issuance costs associated with the repurchase of $50.0 million of the 10 3/4%
Senior Subordinated Notes and the write-off of unamortized debt issuance costs
associated with the prepayment of $17.6 million of term loans under the Former
Credit Agreement, both of which reflect the application of the net proceeds from
the initial public equity offering. The extraordinary loss of $1.0 million ($1.5
million pretax) in 1994 represented the write-off of unamortized debt issuance
costs associated with the prepayment of a term loan included in the Former
Credit Agreement.
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INTERNATIONAL OPERATIONS
In fiscal 1994, 1995 and 1996, the Company had domestic net sales of $548.4
million, $625.2 million, and $706.0 million respectively, and domestic operating
income (excluding corporate expenses, and the 1994 restructuring expense) of
$71.9 million, $81.4 million, and $86.5 million, respectively. Foreign net sales
in fiscal 1994, 1995 and 1996 were $171.9 million, $194.7 million, and $196.8
million respectively, with foreign operating income (excluding corporate
expenses and the 1994 restructuring expense) of $10.3 million, $14.9 million,
and $16.4 million, respectively. The Company's foreign currency hedging
activities have not and are not anticipated to have a material impact on
operations, and the Company has no significant investments denominated in
foreign currencies.
LIQUIDITY AND CAPITAL RESOURCES
The completion of the Recent Transactions (based upon the assumptions set
forth in footnote 5 to "Selected Consolidated Financial Information and
Operating Data") resulted in a decrease of $22.5 million and $10.3 million in
pro forma interest expense for fiscal 1996 and first half 1997, respectively.
Following the completion of the Recent Transactions, the Company's principal
sources of liquidity will be from cash flow generated from operations and
borrowings under the New Revolving Credit Agreement. The New Revolving Credit
Agreement provides $600 million of revolving credit availability. Management
believes that, following the Recent Transactions, cash flow from operations
combined with cash available under the New Revolving Credit Agreement will be
sufficient to fund working capital, capital expenditures, acquisitions and cash
interest and principal requirements through fiscal 1998.
At the end of first half 1997, the Company had $91 million of available
credit under the Former Credit Agreement and $14.2 million of cash and cash
equivalents. The New Revolving Credit Agreement requires the maintenance of a
minimum fixed charge coverage ratio, a minimum net worth level, and a maximum
leverage ratio. The Company is currently, and expects to continue to be through
the term of the New Revolving Credit Agreement, in compliance with all such
covenants.
Cash used by operations was $21.5 million in first half 1997 versus cash
provided by operations of $0.6 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. Debt (net of cash
and cash equivalents) increased by $55.1 million to $597.9 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), capital
expenditures/acquisitions and continued interest accretion on the 11 1/2% Senior
Discount Debentures.
Cash provided by operations of $78.0 million in fiscal 1996 represented a
$34.0 million improvement over the prior year, resulting from the increase in
EBITDA and proceeds from the sale of Bell & Howell Financial Services Company
receivables, which were partially offset by the increased investment in
inventory in 1996 related to the European postal service contracts. Debt (net of
cash and cash equivalents) increased by $55.2 million to $542.8 million in 1996
as a result of acquisitions (primarily DataTimes Corporation and Protocorp
International), continued capital expenditures, the aforementioned inventory
investment, and continued interest accretion on the 11 1/2% Senior Discount
Debentures.
For the five years subsequent to fiscal 1996, annual maturities of long-term
debt are: 1997-- $1.7 million; 1998--$0.8 million; 1999--$0.4 million;
2000--$83.3 million; and 2001--$195.1 million. On a pro forma basis, assuming
the consummation of the Recent Transactions as of October 1, 1997, annual
maturities of long-term debt are: 1997--$1.7 million; 1998--$0.8 million;
1999--$0.4 million; 2000-- $83.3 million; and 2001 zero.
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CAPITAL EXPENDITURES
In fiscal 1994, 1995, 1996, first half 1996 and first half 1997, the Company
had capital expenditures of $38.3 million, $44.0 million, $42.7 million, $20.4
million and $17.2 million, respectively, a significant portion of which
consisted of expenditures for product masters and the creation of electronic
databases for the education and library market. The Company's capital
expenditures in fiscal 1997 are projected to approximate the prior fiscal year
level as the Company continues to invest in each of its businesses.
WORKING CAPITAL
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. Further, the Company has extended its total quality
program and cycle time reduction efforts to the management of working capital.
PERIODIC FLUCTUATIONS; SEASONALITY
The Company's operating results may fluctuate from period to period and
within periods. These fluctuations could result from a number of factors,
including the timing of customers' capital expenditures, annual budgetary
considerations of customers, new product introductions and general economic
conditions. Such fluctuations are generally more pronounced in the Company's
businesses that sell equipment such as commercial mail processing and Imaging
Solutions and Components. The anticipated sales growth in the second half of
1997 is expected to be generated more by these businesses than in prior periods
which leads to less predictability in the Company's operating results for the
remainder of the year.
Although the Company in general is not affected by seasonal fluctuations,
the buying patterns and funding availability for certain Information Access and
Mail Processing customers typically cause sales, profitability and cash flow to
be higher in the fourth quarter of the year. Due to this seasonal factor, the
Company requires and expects to have a seasonal working capital credit line to
fund cash requirements primarily during the second and third quarters.
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. The new methods under this standard do not have
a material impact on the Company's current earnings per share amounts.
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.
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BUSINESS
FORMATION OF HOLDING COMPANY
Bell & Howell Company was formed in 1993 to serve primarily as a holding
company, the primary assets of which are the beneficial interest in all of the
issued and outstanding shares of Common Stock and Intercompany Preferred Stock
of BHOC described below. The Holding Company conducts its business through BHOC
and has no material operations of its own. The Holding Company is dependent on
the cash flow of BHOC in order to meet its future debt service obligations.
Currently, financial information with respect to the Holding Company is reported
on a consolidated basis with BHOC and its subsidiaries which includes the
financial information of BHOC and its subsidiaries.
At the time of its formation, the Holding Company sold $353.5 million
aggregate principal amount of the 11 1/2% Senior Discount Debentures. Since such
date, $245.2 million aggregate principal amount of the 11 1/2% Senior Discount
Debentures have been acquired by the Holding Company. The remaining aggregate
principal amount of the 11 1/2% Senior Discount Debentures outstanding after the
completion of the Recent Transactions will be $108.3 million on March 1, 2000.
The accreted value of these debentures at October 8, 1997 was $82.9 million.
Subsequent to March 1, 2000, the 11 1/2% Senior Discount Debentures will pay
cash at the rate of 11 1/2% per annum. The 11 1/2% Senior Discount Debentures
mature on March 1, 2005.
In connection with the issuance of the 11 1/2% Senior Discount Debentures by
the Holding Company, BHOC issued to the Holding Company Intercompany Preferred
Stock, the current value of which approximates the Accreted Value of the 11 1/2%
Senior Discount Debentures. Dividends from the Intercompany Preferred Stock are
intended to provide a source of funds to the Holding Company to enable it to pay
interest on the Holding Company's obligations with respect to the 11 1/2% Senior
Discount Debentures. In connection with stockholder approval of the Plan, BHOC
will redeem all of the outstanding Intercompany Preferred Stock.
GENERAL
Bell & Howell is a global provider of systems and services for information
access and high volume mail processing. Within its two business segments,
Information Access and Mail Processing, the Company focuses on well-defined
vertical markets where it is or can become the market leader. Within its
Information Access segment, Bell & Howell develops and markets imaging and
information systems that are focused on the needs of its customers in select
vertical markets, which include transportation and vehicle dealers, libraries of
all kinds (including college and university, elementary and high school as well
as public and corporate), financial institutions, governmental agencies and
other paper intensive industries. Within its Mail Processing segment, the
Company develops and markets a complete range of high volume mail processing
systems, which increasingly utilize the Company's proprietary software to expand
the capabilities and improve the efficiency and effectiveness of customers'
mailing operations. The Company's net sales, EBITDA and earnings before
extraordinary items in 1996 were $902.8 million, $133.6 million and $25.7
million, respectively. The Company's net sales, EBITDA and earnings before
extraordinary items were $418.2 million, $62.6 million and $6.7 million in first
half 1997, respectively, compared to $415.1 million, $53.3 million and $5.2
million in first half 1996, respectively.
The Company's strategy is to attain leadership positions in well-defined,
defensible market niches within select industries or vertical markets where it
believes there are significant opportunities for growth. By focusing on specific
vertical markets, the Company gains an in-depth understanding of its customers
and their industries. The Company believes this additional focus and customer
intimacy gives the Company a competitive advantage in anticipating customer
needs and being first to market with products that will achieve or maintain
market leadership. The Company believes that its industry expertise will provide
for more defensible market positions and additional opportunities for growth.
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In 1996, the Information Access segment represented 52% of net sales and 67%
of EBITDA (excluding corporate expenses). The Mail Processing segment
represented 48% of net sales and 33% of EBITDA (excluding corporate expenses).
The Company has historically achieved higher margins in its Information Access
segment due to its significant operating leverage as well as its large base of
recurring revenue with high renewal rates. The Company's two business segments
share a number of important strategic similarities, including strong market
positions, a reputation for high quality products and service excellence, broad
recognition of the Bell & Howell brand name and a significant international
presence. In addition, the Company derives a substantial portion of its net
sales from prepaid subscriptions and service agreements that historically have
had renewal rates in excess of 90%. Bell & Howell markets its products worldwide
with approximately 30% of its net sales in fiscal 1996 to customers outside the
United States. Furthermore, Bell & Howell is able to leverage certain important
technologies and expertise across its businesses, such as imaging and software
technology, information indexing and organizing capabilities as well as
expertise in paper handling.
INFORMATION ACCESS SEGMENT
Information Access's unique databases, proprietary access tools, value-added
services and image capture/enhancement systems are designed to meet customers'
increasing information needs, which have evolved well beyond the mere
availability of information. Customers' demands for more efficient access to
relevant data for specific information requirements are being driven by their
needs to reduce search time and cost while performing more focused yet
comprehensive searches. Within its Information Access segment, the Company
provides quick and easy access to information in select vertical markets, such
as transportation and vehicle dealers, libraries of all kinds (including college
and university, elementary and high school as well as public and corporate),
financial institutions, governmental agencies and other paper intensive
industries.
TRANSPORTATION AND VEHICLE MARKET
BUSINESS OVERVIEW. The transportation and vehicle market is an excellent
example of the Company's strategy of market leadership in well-defined,
defensible market niches. The Company serves its customers in this market
through its subsidiary, Bell & Howell Publications Systems Company ("PSC"),
which is a leading provider of turnkey systems (including software, information
updates, service as well as hardware) used to manage the parts area of
automotive dealerships and to provide total information systems for powersports
(motorcycle and marine) dealerships.
The Company's automotive customer base consists principally of franchised
dealerships, including General Motors ("GM"), Chrysler, Mercedes Benz, Land
Rover, Porsche, Honda, Nissan, Volvo, Isuzu, Subaru, Hyundai, and most recently,
Ford and Toyota. For the Company's automotive customers, the Company creates and
markets turnkey systems consisting primarily of electronic parts catalogs which
allow automotive dealerships to electronically access manufacturers' proprietary
technical documentation (such as parts catalogs, parts and service bulletins and
other reference materials) and to interface with other important information
systems (such as inventory management and billing) within the dealership.
The Company's products provide significant benefits to dealerships' parts
and service departments (critical profit centers for dealerships), such as
increased automotive parts sales, higher inventory turnover as well as improved
labor productivity. The Company's electronic parts catalogs appeal to dealers
because they link text with graphics, illustrations and charts in one
easy-to-use system designed to locate the desired information. In addition, use
of the Company's systems has significantly reduced the training time needed for
its customers' parts department personnel.
A typical dealer installation consists of one or more workstations and
software to search and display information from the database. In addition to the
revenue from the sale of the workstation and software, the Company's systems
generate ongoing revenues over the term of the contract from publishing database
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updates as well as additional revenues from software maintenance and hardware
service contracts. The sale of these systems also generates significant interest
income because the majority of the systems in the United States are financed
through the Company's financing subsidiary Bell & Howell Financial Services
Company.
The Company's systems are marketed to automotive dealerships pursuant to
long-term contracts with monthly payments, generally for five year terms, and
are currently used by almost 9,000 of the approximately 22,000 automotive
dealerships in the U.S. Management believes its share of installed automotive
dealership customers is significantly larger than any of its competitors.
Outside the U.S., the Company is currently the sole provider of electronic parts
catalogs to over 10,000 GM, Mercedes Benz and Chrysler dealers and distributes
its parts catalogs primarily through exclusive OEM agreements with General
Motors Europe, Mercedes Benz and Chrysler.
In addition, the Company is the preeminent supplier of complete dealer
management systems and electronic parts catalogs to powersports dealerships.
Similar to its automotive strategy, the Company provides dealerships access to
proprietary technical documentation for most major motorcycle manufacturers,
including Harley Davidson, Honda, Suzuki, Yamaha, Kawasaki, Triumph, BMW and
Ducati as well as most major marine manufacturers, including Mercury, Outboard
Marine and Volvo-Penta. Management believes its installed customer base of over
1,500 powersports dealerships is significantly larger than any of its
competitors. In June 1997, the Company launched a new generation dealer
management system initially targeted to marine dealers.
The Company sells its automotive systems primarily through a direct sales
force in the U.S. and Canada. Approximately 10% of the Company's sales within
its transportation and vehicle market are pursuant to a long-term distribution
arrangement with the Reynolds & Reynolds Company, a leading supplier of computer
systems and forms to the automotive industry, to market the systems to United
States and Canadian auto dealers. In Europe, the Company distributes its
software and information directly to GM and Mercedes Benz, and in Japan the
Company markets through Yanase, the controlling importer in Japan for virtually
all the Mercedes Benz and GM/Opel dealerships. The manufacturers then distribute
the software and information to their dealers. In the powersports business,
systems are marketed to dealerships by a dedicated, direct sales force and
through telemarketing.
The Company historically has provided microfilm publication services for
technical reference materials to major manufacturing companies, including GM and
Chrysler. Although microfilm publishing accounted for only 10% of the Company's
net sales to the transportation and vehicle market in fiscal 1996, the Company
considers this segment of strategic importance because it provides an
opportunity for the Company to transition these customers to electronic systems
and requires a relatively small continuing investment.
GROWTH STRATEGIES. The Company intends to pursue growth opportunities in
its established automotive and powersports dealership markets as well as in new
markets through new product development and acquisitions. The Company intends to
pursue the following strategies:
INCREASE SALES TO EXISTING AUTOMOTIVE CUSTOMERS. The Company has enjoyed
strong sales of additional product applications and high contract renewal rates
and intends to continue to market upgrade and replacement hardware and software
products to its large installed base. In addition, the Company continues to add
new features and services such as a vehicle identification number application,
technical service bulletins, and labor time guides which enable it to enhance
its revenue stream from its existing customer base. The Company curently has 14
product applications available up from 4 in 1994, providing additional
opportunities to cross sell applications to its existing customer base.
ATTRACT NEW AUTOMOTIVE DEALERSHIPS. The Company's unique ability to offer
electronic parts catalogs of multiple manufacturers positions it to benefit from
the industry consolidation and the increase in the number of multi-franchise
dealerships. The Company has the rights to more manufacturers' parts
23
<PAGE>
databases than any of its competitors. The Company also intends to increase its
installed base by aggressively seeking database publishing rights from
additional automotive manufacturers. For example, recent agreements with Ford
and Toyota provide the Company with access to a large number of additional
dealerships. In addition, the Company intends to penetrate the approximately 25%
of the estimated 22,000 automotive dealerships in the U.S. which do not
currently use electronic parts catalogs.
INCREASE SALES IN POWERSPORTS AND OTHER MARKETS. The Company has addressed
the growing demand for its products in the powersports market by the June 1997
introduction of an enhanced dealer management software system initially designed
for the needs of the marine dealer. Other markets for the Company's image
intensive database access products include the heavy truck markets as well as
the recreational vehicle and general aviation markets.
COMPETITION. In the automotive market, the Company's principal competitors
are ADP, which sells and services a full range of dealership management systems
and currently publishes electronic parts catalogs for GM and Chrysler
dealerships (and also distributes the parts catalogs for BMW and Nissan), and
EDS, which publishes electronic parts catalogs for GM dealerships. In addition,
certain manufacturers such as Toyota, Honda and Nissan have developed their own
proprietary electronic parts catalogs. Although additional automotive
manufacturers could also elect to develop their own electronic parts catalogs,
the Company believes that it is uniquely positioned to compete with such
manufacturers because it will not be efficient for dealerships to have separate
proprietary systems for each of their automotive lines. Due to the Company's
large installed base, its strong long-term relationships with manufacturers and
the ability of its systems to handle multiple manufacturers' data, the Company
believes it is well positioned to compete with any of its competitors. Certain
of the Company's competitors have greater financial resources than the Company.
EDUCATION AND LIBRARY MARKET
BUSINESS OVERVIEW. In the education and library market, the Company
competes through its subsidiary, UMI Company ("UMI"), which the Company believes
is the world's leading aggregator and provider of access to articles and
information from periodicals and newspapers, dissertations, out-of-print books
and other scholarly collections. This information can be accessed via the
Internet, in other electronic media, such as CD-ROM, as well as on magnetic
tape, on microfilm or on paper. The Company aggregates the works of publishers
and authors, creates proprietary abstracts and indices, and customizes this
information in various formats for easy access by its customers. For example,
elementary and high school customers may want on-line information organized by
selected topics, whereas users of academic research libraries require extensive
databases in order to perform thorough research. Furthermore, libraries have
traditionally purchased information in the microfilm format for the breadth and
depth of the Company's database as well as for archival and preservation
purposes. Bell & Howell believes its leadership position within the education
and library market is attributable to the breadth and depth of its collection of
published materials, strong publisher and customer relations, high quality
abstracts and indices, superior technology and an effective sales and
distribution network.
The Company's comprehensive database consists of over 18,000 periodical
titles, 7,000 newspaper titles, as well as its unique content base including 1.5
million dissertations, 140,000 out-of-print books, 300 research collections,
over 14 million proprietary abstracts for on-line and CD-ROM retrieval. The
ability to provide its customers with the full image as originally published
distinguishes the Company from other information providers which typically store
and provide information in a text-only format, omitting essential charts,
graphs, pictures and other images. A significant amount of the Company's sales
to the education and library market comes from content under exclusive licenses,
making the Company the sole source of such information aside from the original
publisher. In many cases, the Company's database includes the entire publication
history of a periodical or newspaper. For example, the Company's database
includes every edition of The New York Times published since 1851. The Company
has developed strong
24
<PAGE>
long-term relationships with the publishers of such periodicals and newspapers
and with most major universities in North America.
The Company is continually offering new ways to enhance each customer's
ability to efficiently access the relevant information in the format or media of
its choice. The Company pioneered electronic access to the full image format of
periodicals and newspapers on CD-ROM in the late 1980s. In 1995, the Company
introduced ProQuest Direct, a proprietary access and delivery system offering
on-line delivery of articles in formats ranging from text only to the full image
as originally published. In 1996, ProQuest Direct became accessible on the
Internet via any Web browser.
In fiscal 1996, approximately 45% of the Company's net sales to the
education and library market were derived from information in electronic format,
which has grown at a compound annual rate of approximately 30% since 1994.
Initially this growth was fueled by CD-ROM subscriptions. Electronic growth is
currently being driven by a combination of on-line subscriptions, agreements
with information resellers such as Knight-Ridder and Dow Jones, as well as new
CD-ROM databases. Customers today are increasingly computer-oriented and demand
user-friendly access to information at the desktop. The Company has responded by
developing a full line of proprietary electronic products marketed under the
ProQuest brand name. These products include on-line via the Internet, CD-ROM,
magnetic tape and other digitally-based collections of abstracts and indices,
full text and full images, which generally focus on business, general interest,
science and the humanities.
Although overall sales growth has been driven by electronic content,
customers still demand information stored in the more traditional microfilm and
paper formats. In fiscal 1996, approximately 55% of the Company's net sales to
the educational and library market were derived from information republished in
microfilm and paper. Newspapers, magazines and journals are marketed as complete
microfilm sets of both current and back issues. The Company also compiles books,
magazines and journals into thematic microfilm collections. Management believes
that demand for microfilm products will continue despite the growing trend
towards electronic products, because microfilm products may be the only source
of certain out-of-print information, microfilm is a less expensive alternative
or backup source of content to electronic media and microfilm is considered to
be a more permanent medium than electronic media for archival and preservation
purposes. In addition, paper copy is provided either as the original medium or
by specific requests from customers. Management believes customers of these
traditional media formats are of strategic importance because they provide a
targeted market to which the Company can offer its electronic products and
because continued delivery of traditional services to such customers requires
only nominal continuing investment to maintain sales and cash flow.
The Company's customers include libraries and information centers in
elementary and high schools, colleges and universities, public, corporate and
government libraries as well as a number of well known information providers
that resell the Company' electronic content primarily within the corporate
desktop user market. In fiscal 1996, approximately 70% of the Company's net
sales to the education and library market were derived from prepaid annual
subscriptions with historical renewal rates in excess of 90%.
The Company has focused its direct sales and marketing efforts on academic
research libraries, large public libraries, elementary and high schools and
corporate libraries. In 1997, the Company curtailed its efforts to sell directly
to the corporate desktop user, opting instead to distribute its content to that
market through corporate resellers such as Knight-Ridder and Dow Jones. The
Company's products are sold outside North America through a network of
independent agents and distributors primarily working exclusively for the
Company.
Also, over the last several years, the Company has increased its development
expenditures and product capital investment to expand and enhance its product
offering of abstracts and indices, full images and full text, as well as to
invest in technology to expand user access. Development expenditures were $4.7
million, $7.8 million and $9.8 million in fiscal 1994, 1995 and 1996,
respectively. Investments in
25
<PAGE>
creation of databases were $18.8 million, $18.9 million and $19.4 million in
fiscal 1994, 1995 and 1996, respectively.
GROWTH STRATEGIES. The Company believes that the role of the information
aggregator is becoming more important to customers and more central to the
global dissemination of information, and that the Company is well positioned to
capitalize on the combination of its extensive information database and its
powerful data delivery tools to provide customers with accurate, comprehensive,
timely and cost effective information solutions. To capitalize on the existing
growth opportunities in the Information Access market, the Company intends to
address the following market needs:
DEMAND FOR RELEVANT AND COMPREHENSIVE ANSWERS. Over the last several years
the Company has focused significant resources towards creating comprehensive
abstracts and indices to be used as search tools by customers to more
efficiently access the full text image of the desired article. Further, the
Company has provided its information in thematic collections so that users may
search across a very broad, deep cross section of its database. This search
capability has been enhanced by the introduction of the Company's ProQuest
Direct on-line system in 1995 whereby users now have access via the Internet to
the Company's intelligent content base of information.
CUSTOMER REQUIREMENTS FOR EASIER ACCESS. The Company distributes
information in formats according to customers' requirements including on-line,
CD-ROM, magnetic tape, microfilm and paper. Each of these formats allows
customers to access the Company's comprehensive collection of business, general
interest, science and humanities articles and, in the case of on-line users,
utilize easily understood, menu-driven search instructions in a Windows-TM-
based environment.
GROWING DEMAND FOR ELECTRONIC CONTENT IN SCHOOLS & LIBRARIES. There are a
number of well publicized initiatives at both the state and federal levels to
connect schools and libraries to the Internet. In fact, over 80% of high schools
in the U.S. have access to the Internet today. The Company believes that those
initiatives will enhance its opportunity to serve these customers because of the
ease of use of the Company's search tools and its ability to provide its content
on a customized basis according to the individual requirements of each school or
district.
GLOBAL DEMAND FOR UNITED STATES CONTENT. The Company's products have gained
wide acceptance in Western Europe, Asia and Australia as the demand for
information generated in the United States has grown. In 1996, approximately
$33.1 million, or 19% of the Company's net sales to the education and library
market were to customers outside the United States. The Company believes that
significant international growth opportunities exist and continues to introduce
new products specifically designed for international customers to capitalize on
such opportunities. The Company has begun to market its ProQuest Direct-TM-
on-line content-base to customers located outside the U.S.
COMPETITION. In providing electronic publishing rights, the Company has
found that publishers prefer republishers/aggregators with whom they have a
long-standing relationship. Many of the Company's publisher relationships were
established over 25 years ago and therefore constitute a key competitive
advantage.
The Company's competition in the microfilm republishing sector comes from
organizations with less expansive publication lists. Microfilm publishers who
compete with the Company include Primary Source Media, NewsBank and Thomson. In
the electronic business, competitors include Dow Jones, EBSCO, Knight-Ridder,
Newsbank, On-Line Computer Library Consortium (OCLC), Reed/Elsevier, SIRS and
Thomson. In addition, original publishers, aggregators, technology companies and
universities are beginning to position themselves as providers of electronic
information directly to the desktop of the customer. All of these entities are
potential competitors of the Company. Several competitors and potential
competitors have greater financial resources than the Company.
26
<PAGE>
IMAGING SOLUTIONS AND COMPONENTS
BUSINESS OVERVIEW. Bell & Howell's Imaging Solutions and Components
business is a leading designer, integrator and distributor of non-paper based
systems and components that enable users to efficiently file and access their
documents and records. These systems and components are customized to the needs
of select vertical markets, such as financial institutions and governmental
agencies, in order to provide better customer service, enhance productivity,
minimize storage costs and ensure the security and integrity of their records.
These systems, which utilize both electronic and microfilm technology, consist
of the software and hardware, accessories, supplies and service required to
capture, enhance, duplicate, store, index and retrieve a customer's data and
documents.
Active business records and management reports are increasingly captured and
stored electronically on optical disks or other electronic media which offer
faster and easier access than microfilm. The Company's products include a line
of electronic storage and retrieval systems which utilize a personal computer in
conjunction with optical or magnetic disk, scanner, laser printer and
proprietary application specific software. The Company's software products are
customized to the needs of targeted vertical markets where Management believes
there is potential to achieve market leadership within that niche. For example,
the Company recently introduced a product targeted to financial institutions
which allows them to instantaneously access and view complete customer records
(including check copies, signature cards and bank statements) which reside on
different customer databases and which may utilize differing imaging software,
in order to provide more timely and efficient customer service and increase
productivity. These market niches include financial institutions with assets of
less than $10 billion, the Department of Defense and the trucking industry.
These systems range in price from $10,000 for a stand-alone system to over
$250,000 for a fully networked system.
The Company's imaging components include production scanners and software
that convert paper documents into electronic files. In 1996, approximately 25%
of net sales for this business were derived from scanner sales which have grown
at an annual rate of approximately 30% since 1994. The Company's document
scanners produce digital records from single- and dual-sided documents in a
single pass. The production scanner market (where customers use a dedicated
operator, in a production environment) ranges in speeds from 20 to 200 pages per
minute ("ppm"). The Company has traditionally competed primarily in the
mid-range (which today ranges from 50 to 100 ppm) of the production scanning
market. In second quarter 1997, the Company announced two new lines of scanners,
one aimed at the mid-range and up, while the other is aimed at the lower end of
the production scanning market. The Company believes its market position and
strong growth rate in its scanner business result from its reputation for
quality and reliability.
The Company's microfilm products include a full line of microfilm retrieval
systems, readers, reader/ printers and a family of automated cameras, as well as
other accessories and supplies. Bell & Howell systems are typically sold in the
mid- to low-end of the Imaging Solutions and Components market characterized by
PC-based and stand-alone systems rather than high-end integrated systems.
Microfilm products are used primarily for archival and exception processing
purposes, as well as for certain active business records, such as mortgage and
loan applications or those applications which deal primarily with client files.
Microfilm continues to be an ideal archival medium and provides numerous
advantages over other storage formats. For example, microfilm offers the
capability of storing a document for over 100 years. Microfilm equipment ranges
in price from approximately $100 for a basic reader to over $30,000 for a
sophisticated camera and in excess of $100,000 for a fully networked system.
The Company's Imaging Solutions and Component business benefits from a
substantial customer base, as well as a broad product line marketed and serviced
through its extensive sales and service organization. Customers for the
Company's products are primarily financial institutions (e.g. commercial banks,
credit unions and savings and loans institutions), but also governmental
agencies and trucking companies. Customers for the scanner products are
distributors and OEMs who in turn place the scanners
27
<PAGE>
within complete systems via value added resellers ("VARs") or directly to end
users for use with a variety of imaging solutions. In fiscal 1996, approximately
25% of net sales within the Imaging Solutions and Components business were
derived from servicing its installed customer base, generally pursuant to
prepaid annual contracts.
Customers are served through direct and indirect channels, on a worldwide
basis. In the United States, the direct sales force consists of more than 40
salespeople and agents who are supported by telemarketers. The scanner products
are sold to distributors or to OEMs such as IBM, Filenet and Unisys.
GROWTH STRATEGIES. Bell & Howell intends to pursue growth opportunities for
non-paper based solutions for documents and reports by offering an expanded line
of applications targeted at specific vertical markets including financial
institutions, the Department of Defense and the trucking industry.
The Company expects to leverage upon the strengths of its rapidly growing
scanner product offerings with a range of new and related products and services
including image capture software and enhanced features and functionality
targeted to the needs of customers in additional vertical markets.
While the microfilm market is mature, the Company believes there are
opportunities for continued cash flows derived from sales of products, service
and supplies to its significant customer base and to capitalize on opportunities
to grow market share. The Company will also seek to expand its service revenues
by targeting third party service contracts thereby leveraging its service
capabilities.
COMPETITION. In the traditional microfilm market, the Company primarily
competes with dealers or resellers of Canon, Minolta or Kodak equipment. In the
community banking, credit union and S&L market, the Company's offering of
electronic solutions primarily competes with MacroSoft and Hyland software, two
small privately owned companies, but also with several VARs or integrators
reselling software from, for example, Filenet or Optika. In the production
scanner market, the Company primarily competes with Fujitsu and Ricoh in the
lower end of the mid-range and with Kodak in the higher end of the mid-range.
Several of the Company's competitors have greater financial resources than the
Company.
Bell & Howell believes its Imaging Solution and Components business enjoys
several competitive advantages. It has an excellent reputation in the industry
as a leading provider of a broad line of high quality and reliable products. The
Company's large installed customer base provides an opportunity to sell
additional product applications, as well as new products, to existing customers
and provides a predictable revenue stream from maintenance, repair services and
supplies.
MAIL PROCESSING SEGMENT
BUSINESS OVERVIEW. Management believes that Bell & Howell is the leading
manufacturer and supplier of high volume mail processing systems to the
commercial market. The commercial market primarily consists of business to
consumer mailers and represented more than 90% of the Mail Processing segment's
sales during first half 1997. These systems, which increasingly utilize
proprietary software, automatically perform a broad range of mail processing
functions, from collating, cutting, bursting, folding and inserting documents
(at cycle speeds ranging up to 18,000 envelopes per hour) to optical scanning,
encoding and sorting of envelopes (at speeds up to 36,000 envelopes per hour).
These software-driven systems allow customers to more efficiently manage mail
room operations as well as convert routine mailings (such as invoices or
statements) into targeted communication and marketing programs by customizing
the invoice or statement and including promotional inserts based on a specific
customer profile. In addition to the commercial market, the remaining sales in
the Mail Processing segment stem from governmental contracts for automation
equipment and software for the U.S. Postal Service and foreign postal
authorities.
The Company's major product line, mail inserting systems, performs virtually
all mail inserting functions, including cutting and folding continuous
documents, collating and inserting materials into envelopes and postage metering
at speeds ranging up to 18,000 envelopes per hour. Inserting systems generally
range in price from approximately $25,000 to $400,000 (with more complex systems
selling for
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over $1 million). Customers include financial institutions, insurance companies,
utilities, service bureaus, credit card companies, direct mail marketers and
other companies which generate high volumes of mail.
The Company also designs and manufactures mail sorting equipment which
optically scans characters and prints bar coded zip codes on outgoing mail and
sorts the mail according to destination at speeds up to 36,000 envelopes per
hour. These sorters allow customers with varying volume needs to capitalize on
presorted and bar coded mail discounts which are offered by the U.S. Postal
Service and increasingly by postal services in other countries. Mail sorting
systems range in price from approximately $100,000 to $600,000. Customers
include users of high volume inserters and presort bureaus which aggregate mail
from smaller postal patrons seeking to take advantage of presorted mail
discounts.
Bell & Howell believes that its leadership position in the commercial mail
processing business is attributable to its substantial installed global customer
base and worldwide service organization of approximately 1,500 service engineers
and support personnel. In many locations, the service engineers provide services
seven days a week, 24 hours per day. The majority of commercial mail
processing's equipment is maintained and serviced by the Company pursuant to
annual prepaid service contracts. In fiscal 1996, approximately 40% of
commercial mail processing's net sales were derived from service.
In addition to its commercial inserting and sorting products, Bell & Howell
Postal Systems Company designs, develops and manufactures automation equipment
and software for use by national postal services worldwide including the U.S.
Postal Service. The Company has expertise in high speed feeding of oversized
envelopes, high speed labeling applications and imaging, as well as other
software based solutions. Bell & Howell Mailmobile Company distributes an
automated guided vehicle used to deliver mail within the office.
Bell & Howell's commercial mail processing systems are sold in the United
States through a direct sales force of approximately 70 salespeople. Outside the
United States, commercial mail processing systems are marketed directly through
wholly-owned subsidiaries located in Canada, France, Germany, the United
Kingdom, Japan, the Netherlands, Singapore, Switzerland and Austria as well as
through distributors in other geographic areas.
GROWTH STRATEGIES. The Company intends to expand its leadership position by
continuing to introduce new software and hardware solutions to existing and
prospective customers through new product development and acquisitions. In
addition, the Company intends to capitalize upon its customers' need to
personalize their communications and to develop targeted merchandising
initiatives by offering enhanced integrated software solutions.
The Company believes customers will continue to seek integrated systems
solutions that enhance flexibility in customer communications and connect mail
room and document printing operations, while reducing labor requirements and
improving total system accuracy. The Company has invested $9.4 million, $12.9
million and $17.6 million in new product development in fiscal 1994, 1995 and
1996, respectively, for new product lines, system software and systems for large
mail room operations.
In 1996, the Company introduced the BH6000, an 18,000 envelope per hour
system targeted at simple high volume applications. The Company has also
recently introduced the BH4000, an enhanced version of its most popular mailing
system which will increase throughput by utilizing the software and certain
hardware modules used in its fastest system. New inserting product introductions
utilize flexible, modular system designs that are software driven and offer
common interfaces and comprehensive information links to customer operations.
Management believes the modular design will have a number of benefits including
a more cost effective upgrade path for its customers, and lower production
costs.
Mail Processing's inserting product line will be enhanced in the future
primarily through the addition of application software and new hardware that
will increase throughput and reduce operating labor requirements. The Company
believes these new systems will be responsive to the growing demand for
integrated mail processing systems and more effective customer communications.
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COMPETITION. Bell & Howell believes that its commercial mail processing
business enjoys several competitive advantages, including its ability to
customize products to meet customer needs and provide high quality maintenance
service. The Company's large installed base provides a significant opportunity
to increase net sales. A substantial portion of the Company's new mail
processing equipment sales are derived from sales of upgrades, add-ons or
replacements. The Company also believes that its extensive service organization
has led to close customer relationships which give the Company the ability to
anticipate customers' future needs. The Company's nearest competitor in the high
volume mail processing business in North America is Pitney Bowes. Outside of
North America, Bell & Howell also competes with Kern AG and Bowe Systec AG,
which are based in Switzerland and Germany, respectively. In the mail sorting
product line, the Company's primary competitors are Siemens, Postal Technologies
and Pitney Bowes. Of these competitors, Pitney Bowes and Siemens have greater
financial resources than the Company.
FINANCING SUBSIDIARY
Bell & Howell Financial Services Company, the Company's finance subsidiary,
assists the Company in marketing its products by providing lease financing for
the Company's customers, with both full payout and residual payment end-of-lease
options. Bell & Howell Financial Services Company finances its leases on a
stand-alone basis through separate financing arrangements. In fiscal 1996, net
interest income earned at Bell & Howell Financial Services Company was $6.8
million.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company purchases a significant amount of microfilm from two vendors for
its Information Access business. Other materials, including electronic
components, are purchased from a number of suppliers. Management believes that
alternate sources of supply are available for substantially all raw materials
and components. The Company believes that it currently has an adequate supply of
raw materials and component parts to meet its manufacturing requirements and
that the loss of any one of its suppliers would not have a long-term material
adverse effect on the Company.
BACKLOG
Except in its Mail Processing segment, which includes customized products
and assembly of complex systems, the Company fills substantially all customer
orders within 30 days. In the Mail Processing segment, backlog at the end of
first half 1997 totalled $107.5 million as compared to $129.0 million at the end
of first half 1996. Although the backlog in the commercial Mail Processing
business increased by $15.6 million in first half 1997 versus first half 1996,
the backlog relating to the sales to postal authorities decreased by $37.1
million in the same period.
MAJOR CUSTOMERS
The Company is not dependent upon any one customer or a few customers. The
loss of any one customer would not have a material adverse effect on the
Company's businesses. In fiscal 1996, no single customer accounted for 10% or
more of the consolidated net sales of the Company.
RESEARCH AND DEVELOPMENT EXPENSES
The amounts charged to the Company's earnings for research and development
expense in fiscal 1994, 1995, 1996, first half 1996 and first half 1997 were
$21.6 million, $30.2 million, $38.1 million, $16.5 million and $19.8 million,
respectively. New product offerings resulting from the Company's research and
development efforts served to offset declines in certain other product lines, as
the Company 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. The Company's research and development
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expenditures include expenses primarily for database and software development,
information delivery systems, production scanners and other electronic devices
for the Information Access segment, as well as for increasingly software driven
mail processing systems.
EMPLOYEES
At the end of fiscal 1996, Bell & Howell had 6,110 employees. Approximately
239 employees located at the Company's Allentown, Pennsylvania facility are
represented by a labor union pursuant to an agreement effective January 1, 1997
between Bell & Howell Mail Processing Systems Company and IMMCO Employees
Association, which expires on May 31, 2001. Management believes that its
relations with its employees are good.
PROPERTIES
Bell & Howell's principal administrative office is located in Skokie,
Illinois. The office space has been leased through 2009. At the Company's
option, the lease may be renewed for an additional five-year period. The
following table provides certain summary information in square feet with respect
to certain facilities that the Company owns or leases in connection with its
businesses:
<TABLE>
<CAPTION>
SQUARE EXPIRATION
LOCATION SEGMENT TITLE FEET DATE
- ------------------------------ ------------------------------------------------ --------- --------- ----------
<S> <C> <C> <C> <C>
Lincolnwood, Illinois Information Access/Mail Processing Owned 338,000 N/A
Allentown, Pennsylvania Mail Processing Owned 196,000 N/A
Ann Arbor, Michigan Information Access Owned 171,000 N/A
Friedberg, Germany Mail Processing Owned 130,000 N/A
Wooster, Ohio Information Access Owned 91,000 N/A
Durham, North Carolina Mail Processing Leased 80,000 5/05
Durham, North Carolina Mail Processing Leased 71,000 9/04
Tucson, Arizona Mail Processing Leased 65,000 5/02
Louisville, Kentucky Information Access Leased 45,000 6/01
Ann Arbor, Michigan Information Access Leased 42,000 3/98
Zion, Illinois Information Access Leased 36,000 6/99
Seven Hills, Ohio Information Access Leased 32,000 7/98
Oklahoma City, Oklahoma Information Access Leased 31,000 8/01
Ann Arbor, Michigan Information Access Leased 27,000 8/98
Salt Lake City, Utah Information Access Owned 22,000 N/A
Monroe, North Carolina Information Access Leased 15,000 9/01
Salt Lake City, Utah Information Access Leased 11,000 3/99
</TABLE>
Bell & Howell also owns or leases facilities in the United States, Canada,
France, United Kingdom, Germany, The Netherlands, Japan, Singapore, Switzerland
and Austria for sales, service and warehouse space. The termination of any one
of the leases, some of which are long-term, would not significantly affect the
results of the Company's operations.
The Company deems the buildings, machinery and equipment used in its
operations, whether owned or leased, generally to be in good condition and
adequate for the purposes for which they are used.
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PATENTS AND LICENSES
The Company owns a substantial number of patents and patent rights, but it
does not consider any one patent or group of patents owned by it, or under which
it is licensed, to be material to any of the Company's lines of business.
Royalty income received from licenses is not material.
GOVERNMENT REGULATIONS
The Company is subject to various federal, state, local and foreign
environmental laws and regulations limiting the discharge, storage, handling and
disposal of a variety of substances. The Company's operations also are governed
by laws and regulations relating to workplace safety and worker health,
including the Occupational Safety and Health Act and regulations thereunder. The
Company believes that it has complied in all material respects with applicable
environmental and health and safety laws and regulations. The Company also does
not believe that future compliance with such laws or regulations will have a
material adverse effect on its results of operations or financial condition.
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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions held by the
directors and executive officers of Holding Company which will be elected to
identical positions of BHOC in connection with the implementation of the Plan.
<TABLE>
<CAPTION>
NAME AGE POSITIONS AT THE COMPANY
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
William J. White.................... 59 Chairman of the Board of Directors of Holding Company and BHOC
James P. Roemer..................... 50 Director, President and Chief Executive Officer of Holding Company
and BHOC
Nils A. Johansson................... 49 Director, Executive Vice President and Chief Financial Officer of
Holding Company and BHOC
David Bonderman..................... 54 Director
David G. Brown...................... 40 Director
J. Taylor Crandall.................. 43 Director
Daniel L. Doctoroff................. 39 Director
William E. Oberndorf................ 44 Director
Gary L. Roubos...................... 60 Director
John H. Scully...................... 53 Director
Michael A. Dering................... 46 President and Chief Executive Officer of Bell & Howell Publication
Systems Company
Stuart T. Lieberman................. 45 Vice President, Controller and Chief Accounting Officer of Holding
Company and BHOC
Ben L. McSwiney..................... 47 President and Chief Executive Officer of Bell & Howell Mail
Processing Systems Company
Kevin B. O'Shea..................... 38 Vice President and Treasurer of Holding Company and BHOC
Maria T. Rubly...................... 42 Vice President of Holding Company and BHOC
Gary S. Salit....................... 53 Secretary and Corporate Counsel of Holding Company and BHOC
</TABLE>
The business experience and certain other information relating to each
director and executive officer of Holding Company is set forth below:
WILLIAM J. WHITE has served as Chairman of the Board and Director of Holding
Company since its organization in February 1993 and of BHOC since February 1990.
From February 1990 to February 1997, he served as Chief Executive Officer of
both companies. He was President of the Holding Company from February 1993 to
February 1995 and President of BHOC from February 1990 to February 1995. Prior
to joining Bell & Howell, Mr. White was President and Chief Executive Officer of
Whitestar Graphics, Inc. (a printing and graphics company) from January 1989
through January 1990, when it was acquired by the William Blair Leveraged
Capital Fund and Mr. White. Prior to that, he was Executive Vice President of
USG Corporation where he served as president of three different subsidiaries
during his tenure. He is also a Director of TJ International, Inc. and Readers
Digest Association, Inc.
JAMES P. ROEMER has served as Director and President of Holding Company and
BHOC since February 1995. In February 1997, he was elected Chief Executive
Officer of Holding Company and BHOC and from
33
<PAGE>
February 1995 to February 1997 served as Chief Operating Officer of both
companies. Prior to that, he served as President and Chief Executive Officer of
UMI Company from January 1994 to June 1995. Mr. Roemer joined Bell & Howell as
Vice President and PSC as President and Chief Operating Officer in October 1991,
and was promoted to President and Chief Executive Officer of PSC in September
1993. Prior to joining Bell & Howell, Mr. Roemer was President of the Michie
Group, Mead Data Central from December 1989 to October 1991. From January 1982
to December 1989 he was Vice President and General Manager of Lexis, an on-line
legal information service. From April 1981 to December 1982 he served as acting
president for Mead Data Central.
NILS A. JOHANSSON has been a Director of Holding Company since its
organization in February 1993 and of BHOC since April 1990. Since January 1994,
he has held the office of Executive Vice President and Chief Financial Officer
of Holding Company and BHOC. Mr. Johansson served as Senior Vice President,
Finance and Chief Financial Officer of Holding Company from February 1993 to
January 1994 and of BHOC from December 1991 to January 1994. From May 1989 to
December 1991, he was Vice President, Finance, Treasurer and Chief Financial
Officer of BHOC. From February 1981 to May 1989 he held various executive
positions with Bell & Howell, including corporate treasurer and positions in
group control, planning and business development.
DAVID BONDERMAN has been a Director of Holding Company since its
organization in February 1993 and served as a Director of BHOC from December
1987 until February 1993. He has been a Managing General Partner of Texas
Pacific Group (a private investment company) since December 1993. From August
1992 to December 1993, Mr. Bonderman was an investor with TPG Partners, L.P. (a
private investment company). From July 1983 through August 1992, he was Vice
President and Chief Operating Officer of Keystone, Inc. (a private investment
company). He is also a Director of Beringer Wine Estates, Inc., Continental
Airlines, Credicom Asia, Denbury Resources, Inc., Ducati Motor Holdings, S.P.A.,
Realty Information Group L.P., Ryanair, Ltd., Virgin Cinemas, Ltd., Urogenesys,
Inc. and Washington Mutual Inc.
DAVID G. BROWN has been a Director of Holding Company since April 1995 and
served as a Director of BHOC from January 1994 to April 1995. He has been a
Principal of Arbor Investors, LLC since September 1995 and a Vice President of
Keystone, Inc. since August of 1993. Prior to joining Arbor Investors, LLC, Mr.
Brown was a Vice President in the Corporate Finance Department of Salomon
Brothers Inc from August 1985 to July 1993. He is a Director of AER Energy
Resources, Inc.
J. TAYLOR CRANDALL has been a Director of Holding Company since its
organization in February 1993 and was a Director of BHOC from November 1990
until February 1993. He has been Vice President and Chief Financial Officer of
Keystone, Inc. (a private investment company) since October 1986. He also has
been President, Director and sole stockholder of Acadia MGP, Inc. (managing
general partner of Acadia Investment Partners, L.P., the sole general partner of
Acadia Partners, L.P. (an investment partnership)) since 1992. He is also a
Director of Washington Mutual Inc.
DANIEL L. DOCTOROFF has been a Director of Holding Company since its
organization in February 1993 and served as a Director of BHOC from June 1990
until February 1993. He has served as Managing Director of Oak Hill Partners,
Inc. (successor to Rosecliff, Inc., the management company for Acadia Partners,
L.P. (an investment partnership)) since March 1992. Since October 1992, he has
been a Vice President of Keystone, Inc. (a private investment company) and since
February 1994, he has been a Managing Partner of Insurance Partners Advisors
L.P. He was Director of Rosecliff, Inc. from August 1987 through March 1992. He
is also a Director of Kemper Corporation and Specialty Foods Corporation.
WILLIAM E. OBERNDORF has been a Director of Holding Company since its
organization in February 1993 and was a Director of BHOC from July 1988 through
February 1993. He has served as Managing Director of SPO Partners & Co. (a
private investment company) since March 1991. He is also a Director of Plum
Creek Timber Co., L.P.
34
<PAGE>
GARY L. ROUBOS has been a Director of Holding Company since February 1994.
He has been Chairman of the Board of Dover Corporation (a diversified equipment
manufacturer) since August 1989 and was President from May 1977 to May 1993. He
is also a Director of Dover Corporation and Omnicom Group, Inc.
JOHN H. SCULLY has been a Director of Holding Company since its organization
in February 1993 and was a Director of BHOC from July 1988 until February 1993.
He has served as Managing Director of SPO Partners & Co. (a private investment
company) since March 1991. He is also a Director of Plum Creek Timber Co., L.P.
MICHAEL A. DERING has served as President and Chief Executive Officer of PSC
since July 1996. Prior to joining PSC he was President of TAB Products Company
(an office filing systems company) from February 1991 to July 1996. From 1990 to
1991 he was Executive Vice President and Chief Operating Officer of TAB Products
and from 1975 to 1990 he held various offices and positions with TAB Products in
sales and marketing.
STUART T. LIEBERMAN has been Vice President, Controller and Chief Accounting
Officer of Holding Company since its organization in February 1993 and of BHOC
since January 1990.
BEN L. MCSWINEY has been President and Chief Executive Officer of Bell &
Howell Mail Processing Systems Company since July 1995. Prior to joining Bell &
Howell, he was President and Chief Executive Officer of Duplex Products, Inc. (a
forms manufacturing and distributing company) from September 1993 to June 1995
and President and Chief Executive Officer of Whitestar Graphics, Inc. from April
1991 to September 1993.
KEVIN B. O'SHEA has served as Vice President and Treasurer of Holding
Company and of BHOC since February 1996. Prior to joining Bell & Howell he
served as Vice President and Treasurer of Spencer Stuart & Associates (an
executive search and consulting firm) from July 1989 to February 1996.
MARIA T. RUBLY has been Vice President of Holding Company since 1994 and of
BHOC since April 1993. Prior to joining the Company, she spent 13 years with
Baxter, which included five years with American Hospital Supply Corporation
until its merger with Baxter. Her position from January 1991 to April 1993 was
Vice President of the Baxter Management Institute.
GARY S. SALIT is Secretary and Corporate Counsel of Holding Company, a
position he has held since its organization in February 1993. He has served as a
Secretary of BHOC since January 1993. He has also served as Corporate Counsel of
BHOC since 1985.
35
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------
AWARDS(1)
----------- PAYOUTS(2)
ANNUAL COMPENSATION SECURITIES ----------
FISCAL ---------------------- UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(3) OPTIONS(#) PAYOUTS COMPENSATION
- --------------------------------------- --------- ---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. White ...................... 1996 $ 643,853 $ 294,241 -- -- $ 30,092(4)
Chairman of the Board 1995 614,427 307,501 460,000 -- 34,574(4)
1994 597,696 582,754 -- -- 36,711(4)
James P. Roemer ....................... 1996 510,572 233,331 -- $ 54,384 94,984(5)
President and Chief Executive Officer 1995 405,655 252,689 385,000 -- 21,992(5)
1994 206,000 132,679 -- 431,679 176,758(5)
Nils A. Johansson ..................... 1996 396,162 181,046 -- 79,380 27,069(6)
Executive Vice President and Chief 1995 363,827 216,063 270,000 -- 31,768(6)
Financial Officer 1994 264,092 184,865 -- 184,500 21,200(6)
Ben L. McSwiney ....................... 1996 254,539 107,413 12,000 -- 113,422(8)
President of MPS 1995(7) 140,219 9,363 10,500 -- 2,963(8)
Michael A. Dering ..................... 1996(9) 105,770 75,000 10,000 -- 87,728(10)
President of PSC
</TABLE>
- ------------------------
(1) Amounts reflected in this column are for grants of stock options under the
Option Plan.
(2) For fiscal 1994, consists of amounts earned under Bell & Howell Operating
Company's Long-Term Incentive Plan: 1991-1994 (the "1991-1994 LTIP"). The
1991-1994 LTIP provided long-term incentives to key management employees by
rewarding them for achieving financial targets for the period commencing
fiscal 1991 through fiscal 1994. Messrs. White, McSwiney and Dering did not
participate in the 1991-1994 LTIP. Mr. Roemer earned $287,674 under an
additional long-term incentive plan in 1994. Payments under the 1991-1994
LTIP were made in March 1995.
For fiscal 1996, consists of amounts earned under Bell & Howell Operating
Company's Long-Term Incentive Plan: 1993-1996 (the "1993-1996 LTIP"). The
1993-1996 LTIP initially provided long-term incentives to key management
employees by rewarding them for achieving financial targets for the period
commencing fiscal 1993 through fiscal 1996. The 1993-1996 LTIP was
terminated as of the end of fiscal 1994 and replaced with the 1995 Stock
Option Plan. Amounts earned under the 1993-1996 LTIP were determined based
on performance through the end of fiscal 1994, and prorated payments were
made in February 1997.
(3) Consists of amounts awarded under an employment agreement in respect of Mr.
White and under the Bell & Howell Operating Company's Management Incentive
Bonus Plan (the "MIB") in respect of Messrs. Roemer, Johansson, McSwiney and
Dering. The MIB provides a financial incentive for key management employees
to focus their efforts on, and achieve, annual financial targets. Payments
under the MIB for fiscal 1996 were made in February 1997.
(4) For fiscal 1996, 1995 and 1994, consists of $3,000 in contributions to the
Bell & Howell Profit Sharing Retirement Plan ("PSRP"); $16,027, $20,944 and
$19,953, respectively, in contributions to the Bell & Howell Replacement
Benefit Plan ("RBP") and $11,065, $10,630 and $13,758, respectively, in
imputed life insurance.
36
<PAGE>
(5) For fiscal 1996, 1995 and 1994 consists of $3,000 in contributions to the
PSRP; $3,384, $2,084, and $1,905, respectively, in imputed life insurance;
$12,381, $16,908 and $7,183, respectively, in contributions to the RBP; and
for fiscal 1996 and 1994 consists of $76,219 and $164,670, respectively, for
relocation and related expenses.
(6) For fiscal 1996, 1995 and 1994, consists of $6,000 in contributions to the
PSRP; $18,489, $23,328 and $13,172, respectively, in contributions to the
RBP; and $2,580, $2,440 and $2,028, respectively, in imputed life insurance.
(7) 1995 reflects compensation for the six month period from July 1995, when Mr.
McSwiney's employment by the Company began, through December 1995.
(8) For fiscal 1996 and 1995, consists of $3,000 and $2,308 respectively in
contributions to the PSRP; $3,011 and $655 respectively, in imputed life
insurance; and for fiscal 1996 includes $2,278 in contributions to the RBP;
$59,571 for relocation and related expenses; and $45,562 of income resulting
from the exercise of non-qualified stock options.
(9) Reflects compensation for the six month period from July 1996, when Mr.
Dering's employment by the Company began, through December 1996.
(10) For fiscal 1996, consists of $694 in imputed life insurance and $87,034 for
relocation and related expenses.
COMPENSATION OF DIRECTORS
All non-employee Directors are participants in the Bell & Howell
Non-Employee Directors' Stock Option Compensation Plan (the "Director Plan").
The Director Plan provides for annual stock option grants to each non-employee
director. Each annual grant (the value of which is equivalent to the level of
compensation determined by the Directors to be reasonable and appropriate)
permits each non-employee Director to purchase from the Holding Company Common
Stock, with the exercise price equal to the fair market value of such shares on
the date the option is granted. The stock options have a term of ten years and
are exercisable one year from the date of grant. In fiscal 1996, each
non-employee Director received the option to purchase 1,225 shares of Holding
Company Common Stock at the existing fair market value of $32.63 per share.
Management directors do not receive any additional compensation for serving as
Directors.
37
<PAGE>
OPTION PLAN
The following tables set forth the number of options to purchase Holding
Company Common Stock granted to each of the named executive officers during
fiscal 1995 and fiscal 1996 (pursuant to the Option Plan) and the potential
realizable values of such options, upon their latest possible expiration date,
at assumed annualized rates of stock price appreciation of 5%, 10% and 20% over
the term of the options. Because actual gains will depend upon, among other
things, the actual dates of exercise of the options and the future performance
of the Holding Company Common Stock in the market, the amounts reflected in
these tables may not reflect the ultimate values actually realized.
STOCK OPTION GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL LATEST PRICE APPRECIATION FOR OPTION
UNDERLYING ANNUAL EXERCISE OR POSSIBLE TERM
YEAR OF OPTIONS OPTIONS BASE PRICE EXPIRATION -------------------------------
NAME GRANT GRANTED(#) GRANTED ($/SH) DATE 5% 10% 20%
- -------------------------------- --------- ----------- ----------- ----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William J. White................ 1995 46,000 $ 15.50 May 2001 $ 242,488 $ 550,123 $1,416,007
1995 46,000 18.50 May 2001 104,488 412,123 1,278,007
1995 92,000 22.25 May 2001 -- 479,246 2,211,013
1995 92,000 26.75 May 2001 -- 65,246 1,797,013
1995 92,000 32.00 May 2001 -- -- 1,314,013
1995 92,000 38.50 May 2001 -- -- 716,013
-----------
460,000 35.4%
James P. Roemer................. 1995 38,500 $ 15.50 May 2001 $ 202,952 $ 460,429 $1,185,136
1995 38,500 18.50 May 2001 87,452 344,929 1,069,636
1995 77,000 22.25 May 2001 -- 401,108 1,850,522
1995 77,000 26.75 May 2001 -- 54,608 1,504,022
1995 77,000 32.00 May 2001 -- -- 1,099,772
1995 77,000 38.50 May 2001 -- -- 599,272
-----------
385,000 29.7%
Nils A. Johansson............... 1995 27,000 $ 15.50 May 2001 $ 142,330 $ 322,898 $ 831,134
1995 27,000 18.50 May 2001 61,330 241,898 750,134
1995 54,000 22.25 May 2001 -- 281,297 1,297,769
1995 54,000 26.75 May 2001 -- 38,297 1,054,769
1995 54,000 32.00 May 2001 -- -- 771,269
1995 54,000 38.50 May 2001 -- -- 420,269
-----------
270,000 20.8%
Ben L. McSwiney(1).............. 1996 12,000 5.3% $ 31.75 May 2006 $ 239,609 $ 607,216 $1,978,052
1995 10,500 0.8% 20.50 July 2005 135,370 343,053 1,117,521
Michael A. Dering(1)............ 1996 10,000 4.4% $ 29.38 July 2006 $ 184,238 $ 468,162 $1,525,073
</TABLE>
- ------------------------
(1) During first half 1997, Messrs. McSwiney and Dering were each granted 12,000
stock options at an exercise price of $21.125, the fair market value on the
date of the grant. The options expire in March 2007.
38
<PAGE>
STOCK OPTION EXERCISES IN 1996 AND
YEAR END STOCK OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
YEAR-END (#) AT YEAR-END ($)(1)
------------------ ----------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------- --------------- ------------- ------------------ ----------------------
<S> <C> <C> <C> <C>
William J. White......................... None N/A None/460,000(2) None/$575,000(2)
James P. Roemer.......................... None N/A None/385,000(2) None/481,250(2)
Nils A. Johansson........................ None N/A None/270,000(2) None/337,500(2)
Ben L. McSwiney.......................... None N/A 2,100/8,400(3) $ 4,725/18,900(3)
None/12,000(4) None/None(4)
Michael A. Dering........................ None N/A None/10,000(5) None/None(4)
</TABLE>
- ------------------------
(1) These amounts have been determined by multiplying the aggregate number of
options by the difference between $22.75, the closing price of the Holding
Company Common Stock on the NYSE on December 27, 1996 (the last trading day
of fiscal 1996), and the exercise price of the options.
(2) These options are exercisable as follows: up to 25% after May 1998, up to
50% after May 1999 and up to 100% after May 2000.
(3) These options are exercisable in annual 20% increments commencing in July of
each year from July 1996 through July 2000.
(4) These options are exercisable in annual 20% increments commencing in May of
each year from May 1997 through May 2001.
(5) These options are exercisable in annual 20% increments commencing in July of
each year from July 1997 through July 2001.
The Option Plan replaced the 1993-1996 LTIP which covered officers and
certain employees, and was to provide payments based on the participants'
participation level (which was either 30% or 60% of the employees' base rate of
pay on January 1, 1993 or the date such participant was designated as eligible
for the 1993-1996 LTIP by the Board of Directors) and the achievement of
established financial targets. Amounts earned under the 1993-1996 LTIP were
determined based on performance through the end of fiscal 1994, and prorated
payments were made in February 1997.
SUPPLEMENTAL RETIREMENT PLAN
The Bell & Howell Supplemental Retirement Plan ("SRP") provides officers and
certain employees with additional pension benefits upon retirement, in order to
supplement social security and other benefits provided under the Bell & Howell
Profit Sharing Retirement Plan ("PSRP") and the Bell & Howell Replacement
Benefit Plan ("RBP"). Generally, the SRP provides for lifetime monthly pension
payments which equal the excess, if any, of (i) up to 50% (the actual percentage
being proportional to length of service) of the participant's average monthly
compensation (which is defined to include salary and annual bonuses up to 150%
of target) during the highest paid four years of the participant's last six
years of employment over (ii) the sum of the aggregate monthly amounts which are
payable under the PSRP, RBP (in each case exclusive of voluntary and mandatory
employee contributions and investment additions thereon) and primary social
security benefits. If a participant is involuntarily terminated for a reason
other than for cause and such terminated employee shall have been a plan
participant for at least five years, he shall be entitled to deferred SRP
payments calculated as if his termination date were his retirement date. If a
participant voluntarily terminates his employment and such terminated employee
shall have been an employee for at least ten years and a plan participant for at
least five years, he shall be entitled to deferred
39
<PAGE>
SRP payments calculated as if his termination date were his retirement date. The
credited years of service at the end of fiscal 1996 for each of the individuals
listed in the Summary Compensation Table are 6 years for Mr. White, 5 years for
Mr. Roemer, 15 years for Mr. Johansson and 1 year for Mr. McSwiney. The Holding
Company estimates that the annual benefits which have accrued through the end of
fiscal 1996 and would be payable upon retirement at age 60 pursuant to the SRP
would be $142,950 for Mr. White, $43,600 for Mr. Roemer and $152,475 for Mr.
Johansson. No SRP benefits have yet accrued at the end of fiscal 1996 for Mr.
McSwiney or Mr. Dering.
The following annual benefits would be payable upon retirement at or after
age 60 to persons in the following specified participation levels, compensation
and year-of-service classifications, less amounts received as social security
benefits and benefits under BHOC's other retirement plans:
SUPPLEMENTAL RETIREMENT PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------
PARTICIPATION LEVEL I REMUNERATION 15 20 OR MORE
- ---------------------------------------------- ---------- ----------
<S> <C> <C> <C> <C>
$250,000...................................... $ 93,750 $ 125,000
425,000...................................... 159,375 212,500
600,000...................................... 225,000 300,000
775,000...................................... 290,625 387,500
950,000...................................... 356,250 475,000
<CAPTION>
YEARS OF SERVICE
---------------------------------------------
PARTICIPATION LEVEL II REMUNERATION 15 20 25 30 OR MORE
- ---------------------------------------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
$125,000...................................... $ 34,375 $ 43,750 $ 53,125 $ 62,500
150,000...................................... 41,250 52,500 63,750 75,000
175,000...................................... 48,125 61,250 74,375 87,500
200,000...................................... 55,000 70,000 85,000 100,000
225,000...................................... 61,875 78,750 95,625 112,500
</TABLE>
Participants' may retire between ages 55 and 60 with reduced benefits.
EMPLOYMENT CONTRACTS
BHOC entered into an employment agreement with William J. White dated as of
March 23, 1990. Mr. White's salary and bonus are set by the Compensation
Committee of the Board of Directors. Pursuant to the terms of the employment
agreement, Mr. White is an employee at will. The agreement provides that Mr.
White shall be entitled to severance pay equal to one-half of his annual base
salary at the time of his termination and a prorated bonus if terminated without
cause or if Mr. White resigns for good reason. The agreement contains
noncompetition and confidentiality commitments.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of Holding Company's Board of Directors in fiscal
1996 consisted of Messrs. Oberndorf (Chairman), Bonderman, Crandall, Doctoroff
and Roubos. None of Messrs. Oberndorf, Bonderman, Crandall, Doctoroff and Roubos
were executive officers of Holding Company during 1996.
40
<PAGE>
CERTAIN TRANSACTIONS
The Holding Company has made loans (the balance of which totaled $1,443,896
at the end of fiscal 1996) to certain key executives in connection with their
purchases of Holding Company Common Stock. Pursuant to the terms of such loans,
the shares acquired are pledged as security. The following individuals have
loans in excess of $60,000 outstanding at the end of fiscal 1996: Nils A.
Johansson ($236,128); Stuart T. Lieberman ($90,818); Ben L. McSwiney ($356,977);
and Maria T. Rubly ($359,987). Each loan is evidenced by an installment note
that bears interest at BHOC's marginal rate of borrowing (approximately 6% at
this time), and are primarily due on December 31, 1998. Interest and principal
may be deferred until that date.
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of October , 1997, with
respect to the beneficial ownership of Holding Company Common Stock held by
persons known to be the beneficial owners of 5% or more of any class of voting
securities of the Holding Company, by each director and certain executive
officers of the Holding Company, and by all directors and executive officers as
a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-----------------------
NUMBER OF
SHARES PERCENT
---------- -----------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS:
Keystone, Inc.(1)(2)........................................................................ 4,363,000 18.7%
Robert M. Bass(1)(2)........................................................................ 4,363,000 18.7%
David Bonderman(3)(4)....................................................................... 729,760 3.1%
William J. White(5)......................................................................... 549,540 2.4%
Nils A. Johansson........................................................................... 247,812 1.1%
James P. Roemer............................................................................. 171,555 *
John H. Scully(4)(6)........................................................................ 145,187 *
J. Taylor Crandall(4)....................................................................... 132,603 *
William E. Oberndorf(4)..................................................................... 56,565 *
Ben L. McSwiney(7).......................................................................... 20,100 *
Daniel L. Doctoroff(4)...................................................................... 13,133 *
Gary L. Roubos(4)........................................................................... 4,079 *
David G. Brown(4)........................................................................... 2,375 *
Michael A. Dering(8)........................................................................ 2,000 *
All directors and executive officers as a group (16 persons)(9)............................. 2,179,929 9.3%
</TABLE>
- ------------------------
* Less than one percent.
(1) Robert M. Bass holds all of the voting stock and serves as president and
sole director of Keystone. Accordingly, Mr. Bass may be deemed to
beneficially own the shares of Holding Company Common Stock held by
Keystone.
(2) The address for this stockholder is 201 Main Street, Suite 3100, Forth
Worth, Texas 76102.
(3) Includes 64,483 shares owned by Bonderman Family Limited Partnership and
72,488 shares owned by Group Management, Inc.
(4) Includes options to purchase 2,375 shares that are exercisable within 60
days of September 15, 1997.
(5) Includes 447,300 shares held in a trust of which Mr. White is neither
trustee nor beneficiary but for which he has the power to vote and dispose
of shares.
(6) Includes 417,812 shares owned by Cranberry Lake Partners Limited over which
Mr. Scully exercises investment discretion.
(7) Includes options to purchase 6,600 shares that are exercisable within 60
days of September 15, 1997.
(8) Includes options to purchase 2,000 shares that are exercisable within 60
days of September 15, 1997.
(9) Includes options to purchase 36,225 shares that are exercisable within 60
days of September 15, 1997.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following statements are subject to the detailed provisions of the
Holding Company's Amended Certificate of Incorporation and Bylaws, do not
purport to be complete and are qualified in their entirety by reference thereto.
Upon the implementation of the Plan, the Holding Company, as sole stockholder of
BHOC, will approve an Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws of BHOC which are identical to the current Amended
and Restated Certificate of Incorporation and Bylaws of the Holding Company.
The authorized capital stock of the Holding Company consists of 50,000,000
shares of Common Stock, $.001 par value, of which 23,372,116 shares are
outstanding.
COMMON STOCK
All of the issued and outstanding shares of Holding Company Common Stock are
fully paid and non-assessable. Holders of Holding Company Common Stock are
entitled to one vote for each share on all matters voted upon by stockholders
and have no preemptive or other rights to subscribe for additional securities of
the Holding Company. Holders of Holding Company Common Stock do not have the
right to cumulatively vote their shares in the election of directors. Each share
of Holding Company Common Stock has an equal and ratable right to receive
dividends when, as and if declared by the Board of Directors out of assets
legally available therefore. In the event of a liquidation, dissolution or
winding up of the Holding Company, the holders of Holding Company Common Stock
will be entitled to share equally and ratably in the distribution of all of the
Holding Company's assets remaining available for distribution after satisfaction
of all its liabilities and the payment of the liquidation preference of any
outstanding preferred stock as described below.
CERTAIN CHARTER AND BY-LAW PROVISIONS
In the event of any vacancy on the Board of Directors, the remaining
Directors may elect a successor to serve for the remainder of the unexpired
term. As permitted by Delaware General Corporation Law ("Delaware GCL"), the
Directors are indemnified against certain expenses and liabilities incurred in
their capacities as Directors of the Holding Company when acting in good faith
and cannot be held personally liable for certain breaches of their fiduciary
duty of care, as described below.
PERSONAL LIABILITY OF DIRECTORS
Delaware GCL authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to the corporation and its stockholders for
monetary damages for breach of certain fiduciary duties as a director. The
Holding Company believes that such a provision is beneficial in attracting and
retaining qualified directors, and accordingly, the Holding Company's Amended
Certificate of Incorporation includes a provision eliminating liability for
monetary damages for any breach of fiduciary duty as a director, except: (i) for
any breach of the duty of loyalty to the Holding Company or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) for any transaction from which
the director derived an improper personal benefit; or (iv) for willful or
negligent payment of dividends, or approval of stock repurchases or redemptions
that are unlawful under Delaware law. Pursuant to Delaware GCL, directors of the
Holding Company are not insulated from liability for breach of their duty of
loyalty (requiring that, in making a business decision, directors act in good
faith and in the honest belief that the action taken was in the best interest of
the corporation), or for claims arising under the Federal securities laws. The
foregoing provision of the Amended Certificate of Incorporation may reduce the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breaches of their fiduciary duties, even though such an action, if successful,
might otherwise have benefitted the Holding Company and its stockholders.
43
<PAGE>
CERTAIN STATUTORY PROVISIONS
Section 203 of the Delaware GCL contains certain provisions that may make
more difficult the acquisition of control of the Holding Company by means of a
tender offer, open market purchase, proxy fight or otherwise. These provisions
are designed to encourage persons seeking to acquire control of the Holding
Company to negotiate with the Board of Directors. However, these provisions
could have the effect of discouraging a prospective acquirer from making a
tender offer or otherwise attempting to obtain control of the Holding Company.
To the extent that these provisions discourage takeover attempts, they could
deprive stockholders of opportunities to realize takeover premiums for their
shares or could depress the market price of the shares. Set forth below is a
description of the relevant provisions of Section 203 of the Delaware GCL. The
description is intended as a summary only and is qualified in its entirety by
reference to Section 203 of the Delaware GCL.
Section 203 of the Delaware GCL prohibits certain "business combination"
transactions between a publicly held Delaware corporation, such as the Holding
Company, and any "interested stockholder" for a period of three years after the
date on which such stockholder became an interested stockholder, unless (i) the
Board of Directors approves, prior to such date, either the proposed business
combination or the proposed acquisition of stock that resulted in the
stockholder becoming an interested stockholder, (ii) upon consummation of the
transaction that results in the stockholder becoming an interested stockholder,
the interested stockholder acquires at least 85% of those shares of the voting
stock of the corporation which are not held by the directors, officers or
certain employee stock plans or (iii) on or subsequent to that date, the
business combination with the interested stockholder is approved by the Board of
Directors and also approved at a stockholders' meeting by the affirmative vote
of the holder of at least two-thirds of the outstanding shares of the
corporation's voting stock other than shares held by the interested stockholder.
The Holding Company has opted out of Section 203 of the Delaware GCL pursuant to
its terms.
TRANSFER AGENT AND REGISTRAR
The transfer agent, dividend paying agent and registrar for the Holding
Company Common Stock is BankBoston N.A.
INTERESTS OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON AT THE MEETING
The Board of Directors of the Holding Company is not aware of any material
interest of any director or executive officer, or anyone who has held office as
such since the beginning of the last completed fiscal year of the Holding
Company, or of any associate or affiliate of any of the foregoing, in any matter
to be acted upon at the Meeting.
AVAILABLE INFORMATION
The Holding Company and BHOC are each subject to the periodic reporting and
other informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The Registration Statement and the exhibits
thereto as well as the periodic reports, proxy statements and other information
filed by the Holding Company and BHOC with the Securities and Exchange
Commission (the "Commissioin") may be inspected at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices located at the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained from the public reference section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, material
filed by the Holding Company can be inspected at the offices of the NYSE at 20
Broad Street, New York, New York 10005.
44
<PAGE>
BHOC has filed with the Commission the Registration Statement on Form S-4
under the Securities Act, with respect to the shares of BHOC Common Stock to be
issued pursuant to the Plan. For purposes hereof, the term "Registration
Statement" means the original Registration Statement and any and all amendments
thereto. This Proxy Statement/Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. Statements made in this Proxy Statement/Prospectus concerning the
contents of any documents referred to herein are not necessarily complete. With
respect to each such document filed with the Commission as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and
other information filed by BHOC with the Commission are also available at the
web site maintained by the Commission on the World Wide Web at
http://www.sec.gov.
To the extent this Proxy Statement/Prospectus incorporates documents by
reference which are not presented herein or delivered herewith. These documents
are available upon request from Mr. Gary Salit, Corporate Counsel and Secretary,
Bell & Howell Company, 5215 Old Orchard Road, Skokie, Illinois 60077-1076,
telephone (847) 470-7100. In order to ensure timely delivery of the documents,
any request should be made by , 1997.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by McDermott, Will
& Emery, Chicago, Illinois.
EXPERTS
The audited Consolidated Financial Statements of the Company as of the end
of fiscal years 1995 and 1996 and for each of fiscal years 1994, 1995 and 1996
included herein have been so included in reliance on the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
Representatives of KPMG Peat Marwick LLP will be available to respond to
questions at the Special Meeting of Stockholders.
STOCKHOLDER PROPOSALS
Under the rules of the Securities and Exchange Commission, stockholder
proposals to be presented at the 1998 annual meeting of the Holding Company, or
BHOC if the proposed Plan is approved, must be received by the Holding Company
no later than the close of business on December 14, 1997, to be considered.
Proposals should be addressed to Gary S. Salit, Esq., Bell & Howell Company,
5215 Old Orchard Road, Skokie, IL 60077-1076.
OTHER MATTERS THAT MAY COME BEFORE THE MEETING
Management does not intend to bring any other matters before the Meeting nor
does it know of any matters that other persons intend to bring before the
Meeting. However, if any other matters properly come before the Meeting, the
persons named in the accompanying proxy will vote thereon in accordance with
their best judgment.
45
<PAGE>
FORM 10-K
A copy of the Holding Company's Annual Report on Form 10-K, as filed with
the Securities and Exchange Commission, will be furnished without charge to any
stockholder upon written request to Mr. Gary Salit, Corporate Counsel and
Secretary, Bell & Howell Company, 5215 Old Orchard Road, Skokie, Illinois
60077-1076.
October 15, 1997
By Order of the Board of Directors
Gary S. Salit
CORPORATE COUNSEL AND SECRETARY
46
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS:
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Operations for the fiscal years 1994, 1995 and 1996............................. F-3
Consolidated Balance Sheets at the end of fiscal years 1995 and 1996....................................... F-4
Consolidated Statements of Cash Flows for the fiscal years 1994, 1995 and 1996............................. F-5
Consolidated Statements of Shareholders' Equity for the fiscal years 1994, 1995 and 1996................... F-6
Notes to the Consolidated Financial Statements............................................................. F-7
CONSOLIDATED INTERIM FINANCIAL STATEMENTS:
Consolidated Statements of Operations for the thirteen and twenty-six weeks ended June 29, 1996 and June
28, 1997................................................................................................. F-23
Consolidated Balance Sheets at December 28, 1996 and June 28, 1997......................................... F-24
Consolidated Statements of Cash Flows for the twenty-six weeks ended June 29, 1996 and June 28, 1997....... F-25
Notes to the Consolidated Interim Financial Statements..................................................... F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Bell & Howell Company:
We have audited the accompanying consolidated balance sheets of Bell &
Howell Company and subsidiaries (the "Company") as of the end of fiscal years
1995 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the fiscal years 1994, 1995 and 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bell &
Howell Company and subsidiaries as of the end of fiscal years 1995 and 1996, and
the results of their operations and their cash flows for the fiscal years 1994,
1995 and 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 19, 1997
F-2
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS 1994, 1995 AND 1996
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales:
Product.................................................................... $ 542,546 $ 630,454 $ 703,833
Service.................................................................... 177,794 189,435 198,964
---------- ---------- ----------
Total net sales........................................................ 720,340 819,889 902,797
Operating costs and expenses:
Cost of product............................................................ 336,775 385,562 443,014
Cost of service............................................................ 118,649 125,837 133,403
Research and development................................................... 21,556 30,202 38,101
Selling and administrative................................................. 173,019 194,839 198,898
Restructuring.............................................................. 32,893 -- --
---------- ---------- ----------
Total operating costs and expenses..................................... 682,892 736,440 813,416
Operating income............................................................. 37,448 83,449 89,381
Net interest expense:
Interest (income).......................................................... (13,703) (14,391) (18,759)
Interest expense........................................................... 62,657 65,191 64,085
---------- ---------- ----------
Net interest expense................................................... 48,954 50,800 45,326
Earnings (loss) before income taxes and extraordinary items.................. (11,506) 32,649 44,055
Income tax expense (benefit)................................................. (2,490) 13,439 18,400
---------- ---------- ----------
Earnings (loss) before extraordinary items................................... (9,016) 19,210 25,655
Extraordinary losses......................................................... (978) (3,219) (2,585)
---------- ---------- ----------
Net earnings (loss).......................................................... $ (9,994) $ 15,991 $ 23,070
---------- ---------- ----------
---------- ---------- ----------
Net earnings (loss) per common share:
Primary:
Earnings (loss) before extraordinary items............................... $ (.68) $ 1.15 $ 1.38
Extraordinary losses..................................................... (.07) (.19) (.14)
---------- ---------- ----------
Net earnings (loss) per common share......................................... $ (.75) $ .96 $ 1.24
---------- ---------- ----------
---------- ---------- ----------
Fully diluted:
Earnings (loss) before extraordinary items............................... $ (.68) $ 1.15 $ 1.38
Extraordinary losses..................................................... (.07) (.19) (.14)
---------- ---------- ----------
Net earnings (loss) per common share......................................... $ (.75) $ .96 $ 1.24
---------- ---------- ----------
---------- ---------- ----------
Average number of common shares and equivalents outstanding:
Primary.................................................................... 13,267 16,585 18,560
Fully diluted.............................................................. 13,267 16,585 18,560
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
F-3
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT THE END OF FISCAL YEARS 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 7,262 $ 15,500
Accounts receivable, less allowance for doubtful accounts of $4,406 and $5,294,
respectively......................................................................... 181,247 186,862
Inventory:
Finished products.................................................................... 52,760 61,393
Products in process and materials.................................................... 53,158 78,438
---------- ----------
Total inventory.................................................................... 105,918 139,831
Other current assets................................................................... 11,768 11,826
---------- ----------
Total current assets............................................................... 306,195 354,019
Property, plant and equipment:
Land................................................................................... 4,245 4,302
Buildings.............................................................................. 42,840 47,833
Machinery and equipment................................................................ 115,023 137,586
Product masters........................................................................ 153,928 173,294
---------- ----------
Total property, plant and equipment, at cost....................................... 316,036 363,015
Accumulated depreciation................................................................. (171,057) (207,287)
---------- ----------
Net property, plant and equipment.................................................. 144,979 155,728
Long-term receivables.................................................................... 57,062 54,707
Goodwill, net of accumulated amortization................................................ 133,422 189,868
Other assets............................................................................. 40,483 42,464
---------- ----------
Total assets....................................................................... $ 682,141 $ 796,786
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable.......................................................................... $ 14,939 $ 8,397
Current maturities of long-term debt................................................... 14,707 1,667
Accounts payable....................................................................... 65,444 93,135
Accrued expenses....................................................................... 81,717 78,308
Deferred income........................................................................ 176,351 171,698
Accrued income taxes................................................................... 6,539 1,143
---------- ----------
Total current liabilities.......................................................... 359,697 354,348
Long-term liabilities:
Long-term debt......................................................................... 465,230 548,281
Other liabilities...................................................................... 46,686 61,049
---------- ----------
Total long-term liabilities........................................................ 511,916 609,330
Shareholders' equity:
Common Stock, $0.001 par value, 18,336 shares issued and 18,329 shares outstanding at
the end of fiscal 1995, and 18,359 shares issued and 18,309 shares outstanding at the
end of fiscal 1996................................................................... 18 18
Capital surplus........................................................................ 328 1,402
Notes receivable from executives....................................................... (2,054) (1,444)
Retained earnings (deficit)............................................................ (188,921) (165,851)
Cumulative foreign exchange translation adjustments.................................... 1,187 616
Treasury stock......................................................................... (30) (1,633)
---------- ----------
Total shareholders' equity (deficit)............................................... (189,472) (166,892)
Commitments and contingencies............................................................ -- --
---------- ----------
Total liabilities and shareholders' equity......................................... $ 682,141 $ 796,786
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
F-4
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net earnings (loss)...................................................... $ (9,994) $ 15,991 $ 23,070
Depreciation and amortization............................................ 36,689 41,386 47,389
Debt accretion........................................................... 20,993 23,476 23,903
Changes in operating assets and liabilities:
Accounts receivable.................................................... 741 (28,891) (5,537)
Inventory.............................................................. 17,301 (27,235) (37,137)
Other current assets................................................... (1,130) (1,220) 436
Long-term receivables.................................................. 30,552 (14,804) 2,355
Income taxes........................................................... (3,340) 10,041 6,003
Accounts payable....................................................... 9,935 9,467 26,166
Accrued expenses....................................................... 7,483 (2,361) (6,302)
Deferred income and other long-term liabilities........................ 11,478 22,568 (1,137)
Other, net............................................................. 11,300 (4,468) (1,258)
----------- ----------- -----------
Net cash provided by operating activities............................ 132,008 43,950 77,951
Investing activities:
Expenditures for property, plant and equipment........................... (38,345) (44,047) (42,744)
Acquisitions............................................................. (18,747) (2,849) (65,314)
----------- ----------- -----------
Net cash used by investing activities................................ (57,092) (46,896) (108,058)
Financing activities:
Proceeds from short-term debt............................................ 20,275 17,786 15,588
Repayment of short-term debt............................................. (24,542) (15,329) (21,650)
Proceeds from long-term debt............................................. 79,985 55,887 237,432
Repayment of long-term debt.............................................. (142,171) (135,200) (192,703)
Proceeds from Common Stock, net.......................................... 519 71,255 71
----------- ----------- -----------
Net cash provided (used) by financing activities..................... (65,934) (5,601) 38,738
Effect of exchange rate changes on cash.................................... 9 (365) (393)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents........................... 8,991 (8,912) 8,238
Cash and cash equivalents, beginning of period............................. 7,183 16,174 7,262
----------- ----------- -----------
Cash and cash equivalents, end of period................................... $ 16,174 $ 7,262 $ 15,500
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
F-5
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS 1994, 1995 AND 1996
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
NOTES FOREIGN UNREALIZED
COMMON STOCK RECEIVABLE RETAINED EXCHANGE LOSS ON
---------------------- CAPITAL FROM EARNINGS TRANSLATION MARKETABLE
ISSUED TREASURY SURPLUS EXECUTIVES (DEFICIT) ADJUSTMENTS SECURITIES
----------- --------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, at the end of fiscal 1993
(Common Stock, 13,290 shares;
treasury stock, 112 shares)..... $ 13 $ (194) $ (70,984) $ (2,328) $ (194,918) $ (1,897) $ (245)
Net loss.......................... (9,994)
Common Stock, 47 shares........... 764
Notes receivable from
executives...................... (624)
Treasury stock, net 109
shares.......................... 189
Unrealized loss on marketable
securities...................... (768)
Translation adjustments........... 2,258
--- --------- ---------- ----------- ----------- ----------- -----------
Balance, at the end of fiscal 1994
(Common Stock, 13,336 shares;
treasury stock, 3 shares)....... 13 (5) (70,220) (2,952) (204,912) 361 (1,013)
Net earnings...................... 15,991
Common Stock, 5,000 shares........ 5 70,548
Notes receivable from
executives...................... 898
Treasury stock, net 4 shares...... (25)
Unrealized loss on marketable
securities...................... 1,013
Translation adjustments........... 826
--- --------- ---------- ----------- ----------- ----------- -----------
Balance, at the end of fiscal 1995
(Common Stock, 18,336 shares;
treasury stock, 7 shares)....... 18 (30) 328 (2,054) (188,921) 1,187 --
Net earnings...................... 23,070
Common Stock, 23 shares........... 1,074
Notes receivable from
executives...................... 610
Treasury stock, net 43 shares..... (1,603)
Translation adjustments........... (571)
--- --------- ---------- ----------- ----------- ----------- -----------
Balance, at the end of fiscal 1996
(Common Stock, 18,359 shares;
treasury stock, 50 shares)...... $ 18 $ (1,633) $ 1,402 $ (1,444) $ (165,851) $ 616 $ --
--- --------- ---------- ----------- ----------- ----------- -----------
--- --------- ---------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
F-6
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--BASIS OF PRESENTATION
Bell & Howell Company (the "Company") 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 ("BHOC"). The Company conducts business through
Bell & Howell Operating Company and has no operations of its own.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Bell & Howell Company and its Subsidiaries is a
leading provider of systems and services for information access and
dissemination. The Company consists of two business segments, Information Access
and Mail Processing. Information Access develops and markets imaging and
information services and systems that provide its customers with access
solutions to targeted segments of complex public and private information
databases. Mail Processing develops and markets a complete range of high volume
mail processing systems, which increasingly utilize software to expand the
capabilities and improve the efficiencies and effectiveness of customers'
mailing operations.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Subsequent actual results may differ from those
estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its subsidiaries (collectively, the "Company").
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
FISCAL YEAR. The Company's fiscal year ends on the Saturday nearest to
December 31. References to fiscal 1996 are for the 52 weeks ended December 28,
1996, references to fiscal 1995 are for the 52 weeks ended December 30, 1995,
and references to fiscal 1994 are for the 52 weeks ended December 31, 1994.
REVENUE RECOGNITION. Product sales include sales of equipment, software and
subscriptions. Equipment and software license sales are recorded at the time of
shipment, provided no significant vendor and postcontract customer support
obligations remain outstanding and collection of the resulting receivable is
deemed probable. Sales of customized mail automation equipment under long-term
contracts are recognized at the time of shipment. Revenues from subscriptions
are deferred and recognized in the periods the subscriptions are fulfilled.
Service sales represent amounts earned by providing equipment maintenance
services to customers of the Mail Processing and Information Management
businesses. Where such services are provided under annual agreements, revenues
are recognized on a pro rata basis over the periods of the agreements. Other
service revenues are recognized when the services are performed.
FOREIGN CURRENCY TRANSLATION. The financial position and results of
operations of each of the Company's foreign subsidiaries are measured using the
local currency as the functional currency. Assets and liabilities are translated
into U.S. dollars using the exchange rates at the end of the respective fiscal
periods. Revenues and expenses are translated at average exchange rates
prevailing during the respective fiscal periods. Balance sheet translation
adjustments arising from differences in exchange rates from period to period are
included as a separate component of shareholders' equity.
F-7
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET EARNINGS (LOSS) PER COMMON SHARE. Net earnings (loss) per common share
are determined by dividing net earnings by the weighted average number of common
shares outstanding during the period. If dilutive, stock options are included as
common stock equivalents.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with maturities of three months or less (when purchased) to be cash
equivalents. The carrying amount reported in the consolidated balance sheets
approximates fair value.
INVENTORY. Inventory is valued at cost determined by the last-in, first-out
("LIFO") and the first-in, first-out ("FIFO") methods, with the following
balances at the end of fiscal 1995 and 1996:
<TABLE>
<CAPTION>
YEAR END LIFO FIFO TOTAL
- ------------------------------------------------------------ --------- --------- ----------
<S> <C> <C> <C>
1995........................................................ $ 53,601 $ 52,317 $ 105,918
1996........................................................ 67,051 72,780 139,831
</TABLE>
The Company uses the LIFO method of valuing the majority of domestic
inventories. The excess of replacement cost over the LIFO values of inventory
was approximately $4,413 and $4,489 at the end of fiscal 1995 and 1996,
respectively. Inventory cost includes material, labor and overhead and is valued
at the lower of cost or net realizable value.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is recorded at
cost. The straight-line method of depreciation is primarily used, except for
Information Access product masters (which represent the cost to create
electronic and microform master document copies which are subsequently used in
the production process to fulfill customers' information requirements), which
are depreciated on the double declining balance method. Estimated lives range
from 10 to 40 years for buildings and building improvements, 3 to 15 years for
machinery and equipment and 10 years for product masters.
GOODWILL. Goodwill, which represents the excess of purchase price over the
fair value of net assets of acquired businesses, is amortized on a straight-line
basis over the expected future periods to be benefitted. The Company
periodically assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance (for each business) over its
remaining life can be recovered through forecasted future operations.
In fiscal 1996, acquisitions (primarily DataTimes Corporation and Protocorp
International) served to initially increase goodwill by $61,511. Accumulated
amortization at the end of fiscal 1995 and 1996 was $28,489 and $33,632,
respectively.
STOCK OPTION PLAN. Prior to fiscal 1996, the Company accounted for its
stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. In fiscal 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25, and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
F-8
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
future years as if the fair-value-based method (defined in SFAS No. 123) had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123
(see Note 12 of the Consolidated Financial Statements).
NOTE 3--BUSINESS SEGMENTS
The Company consists of two business segments, Information Access and Mail
Processing. Information Access develops and markets imaging and information
services and systems that provide its customers with access solutions to
targeted segments of complex public and private information databases. Mail
Processing develops and markets a complete range of high volume mail processing
systems, which increasingly utilize software to expand the capabilities and
improve the efficiencies and effectiveness of customers' mailing operations.
Information concerning the Company's business segments and operations by
geographic area for fiscal 1994, 1995 and 1996 was as follows (dollars in
millions):
<TABLE>
<CAPTION>
EARNINGS (LOSS) BEFORE INCOME
TAXES
SALES AND EXTRAORDINARY ITEMS
------------------------------- -------------------------------
BUSINESS SEGMENTS 1994 1995 1996 1994(1) 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Information Access..................................... $ 404.4 $ 449.9 $ 470.5 $ 46.5 $ 62.8 $ 62.9
Mail Processing........................................ 315.9 370.0 432.3 2.8 33.5 40.0
--------- --------- --------- --------- --------- ---------
Total................................................ 720.3 819.9 902.8 49.3 96.3 102.9
Interest expense, net.................................. (49.0) (50.8) (45.3)
Corporate and other income and expenses................ (11.8) (12.9) (13.5)
--------- --------- --------- --------- --------- ---------
Consolidated........................................... $ 720.3 $ 819.9 $ 902.8 $ (11.5) $ 32.6 $ 44.1
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
IDENTIFIABLE ASSETS CAPITAL EXPENDITURES
------------------------------- -------------------------------
1994 1995 1996 1994 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Information Access..................................... $ 371.3 $ 393.9 $ 451.9 $ 30.5 $ 34.2 $ 31.0
Mail Processing........................................ 159.1 206.4 259.4 6.5 9.6 11.4
--------- --------- --------- --------- --------- ---------
Total................................................ 530.4 600.3 711.3 37.0 43.8 42.4
Corporate.............................................. 73.3 81.8 85.5 1.3 0.2 0.3
--------- --------- --------- --------- --------- ---------
Consolidated........................................... $ 603.7 $ 682.1 $ 796.8 $ 38.3 $ 44.0 $ 42.7
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
F-9
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
DEPRECIATION AND
AMORTIZATION(2)
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Information Access..................................... $ 26.9 $ 31.3 $ 35.5
Mail Processing........................................ 5.4 5.5 8.1
--------- --------- ---------
Total................................................ 32.3 36.8 43.6
Corporate.............................................. 0.5 0.6 0.6
--------- --------- ---------
Consolidated........................................... $ 32.8 $ 37.4 44.2
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Includes restructuring expense of $32.9 million ($28.2 million for Mail
Processing and $4.7 million for Information Access).
(2) Excludes amortization of deferred financing costs.
<TABLE>
<CAPTION>
EARNINGS (LOSS) BEFORE INCOME
SALES TAXES AND EXTRAORDINARY ITEMS(1) IDENTIFIABLE ASSETS(2)
------------------------------- --------------------------------- -------------------------------
GEOGRAPHIC SEGMENTS 1994 1995 1996 1994(3) 1995 1996 1994 1995 1996
--------- --------- --------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES:
Unaffiliated customers..... $ 548.4 $ 625.2 $ 706.0
Inter-segment.............. 45.6 51.1 46.6
--------- --------- ---------
Total.................... 594.0 676.3 752.6 $ 42.7 $ 81.4 $ 86.5 $ 439.3 $ 497.0 $ 615.4
--------- --------- --------- ----- --------- --------- --------- --------- ---------
EUROPE:
Unaffiliated customers..... 130.5 145.1 158.2
Inter-segment.............. 1.6 2.0 0.8
--------- --------- ---------
Total.................... 132.1 147.1 159.0 7.8 12.6 13.3 67.8 78.2 81.2
--------- --------- --------- ----- --------- --------- --------- --------- ---------
OTHER:
Unaffiliated customers..... 41.4 49.6 38.6 (1.2) 2.3 3.1 24.3 26.3 16.0
--------- --------- --------- ----- --------- --------- --------- --------- ---------
Eliminations inter-
segment.................. (47.2) (53.1) (47.4) -- -- -- (1.0) (1.2) (1.3)
--------- --------- --------- ----- --------- --------- --------- --------- ---------
Total.................... $ 720.3 $ 819.9 902.8 $ 49.3 $ 96.3 102.9 $ 530.4 $ 600.3 $ 711.3
--------- --------- --------- ----- --------- --------- --------- --------- ---------
--------- --------- --------- ----- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Excludes net interest and corporate expenses.
(2) Excludes corporate identifiable assets.
(3) Includes restructuring expense of $32.9 million ($29.2 million in the United
States, $1.3 million in Europe and $2.4 million in Other).
F-10
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--RESTRUCTURING
The Company's restructuring expense of $32,893 in fiscal 1994 resulted from
management's decision to relocate Mail Processing Systems headquarters'
operations and consolidate certain of its domestic Mail Processing Systems
facilities at a new site that will be the base for developing innovative
technology and products (both software and hardware), and to consolidate certain
North American Information Management administrative and warehouse facilities in
order to more effectively serve its customer base with a reduced operating
expense infrastructure.
NOTE 5--INCOME TAXES
The pretax income (loss) amounts, before extraordinary items, on which
income taxes were provided in fiscal 1994, 1995 and 1996 were:
<TABLE>
<CAPTION>
1994 1995 1996
---------- --------- ---------
<S> <C> <C> <C>
Domestic.................................................... $ (13,471) $ 27,251 $ 35,850
Foreign..................................................... 1,965 5,398 8,205
---------- --------- ---------
Pretax income (loss)...................................... $ (11,506) $ 32,649 $ 44,055
---------- --------- ---------
---------- --------- ---------
</TABLE>
The provision for income taxes in fiscal 1994, 1995 and 1996 included the
following:
<TABLE>
<CAPTION>
1994 1995 1996
---------- --------- ---------
<S> <C> <C> <C>
Current income tax expense (benefit):
United States............................................. $ 1,814 $ 5,157 $ 1,996
State and local........................................... (62) 513 476
Foreign................................................... (379) 1,849 3,974
---------- --------- ---------
Current income tax expense.............................. 1,373 7,519 6,446
---------- --------- ---------
Deferred income tax expense (benefit):
United States............................................. (3,303) 3,906 9,035
State and local........................................... (147) 1,633 2,208
Foreign................................................... (413) 381 711
---------- --------- ---------
Deferred income tax expense (benefit)..................... (3,863) 5,920 11,954
---------- --------- ---------
Income tax expense (benefit).............................. $ (2,490) $ 13,439 $ 18,400
---------- --------- ---------
---------- --------- ---------
</TABLE>
The significant components of deferred income tax expense (benefit) in
fiscal 1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- --------- ---------
<S> <C> <C> <C>
Deferred income tax expense (benefit), exclusive of
components listed below................................... $ (11,230) $ (3,806) $ 12,557
Operating loss carryforwards................................ 5,654 9,974 (414)
Tax credits................................................. 1,713 (248) (189)
---------- --------- ---------
Deferred income tax expense (benefit)..................... $ (3,863) $ 5,920 $ 11,954
---------- --------- ---------
---------- --------- ---------
</TABLE>
F-11
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--INCOME TAXES (CONTINUED)
Deferred income taxes are primarily provided for temporary differences
between the financial reporting bases and the tax bases of the Company's assets
and liabilities. The tax effects of the major temporary differences that gave
rise to the deferred tax asset (liability) at the end of fiscal 1995 and 1996
were as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets are attributable to:
Accrued expenses.................................................... $ 14,889 $ 9,236
Deferred compensation............................................... 8,094 9,194
Postretirement benefits............................................. 3,669 3,476
Accounts receivable................................................. 1,722 2,332
Operating loss carryforwards........................................ 17,934 22,188
Tax credits......................................................... 765 525
Other............................................................... 9,468 82
---------- ----------
Total gross deferred tax assets................................... 56,541 47,033
Valuation allowance............................................... (4,666) (7,049)
---------- ----------
Net deferred tax assets........................................... 51,875 39,984
Deferred tax liabilities are attributable to:
Property, plant and equipment....................................... (13,832) (14,410)
Intangibles......................................................... (16,293) (16,607)
Deferred income..................................................... (21,349) (23,346)
Undistributed foreign earnings...................................... (4,449) (3,305)
---------- ----------
Total gross deferred tax liabilities.............................. (55,923) (57,668)
---------- ----------
Net deferred tax liabilities...................................... $ (4,048) $ (17,684)
---------- ----------
---------- ----------
</TABLE>
Net deferred tax liabilities are classified as other long-term liabilities
in the balance sheet.
At the end of fiscal 1996, the net deferred tax assets of $39,984 are
expected to be realized through both the reversal of taxable temporary
differences as well as the Company's ability to generate future taxable income.
This is on the basis that it is more likely than not that both the timing of
reversal of taxable amounts and the generation of future taxable income allows
for offset with future deductible amounts in the permitted
carryback/carryforward periods.
F-12
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--INCOME TAXES (CONTINUED)
The differences between the Company's effective rate for income taxes and
the statutory federal income tax rate in fiscal 1994, 1995 and 1996 were as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate................................... (35.0%) 35.0% 35.0%
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit........................ (24.2) 6.3 5.7
Foreign earnings.................................................. (1.9) 1.0 4.4
Amortization of intangibles....................................... 14.5 2.3 2.1
Repatriation of foreign earnings.................................. 19.4 (.8) (1.0)
Other............................................................. 5.6 (2.6) (4.4)
--------- --- ---
Effective income tax rate....................................... (21.6%) 41.2% 41.8%
--------- --- ---
--------- --- ---
</TABLE>
As a result of losses incurred in fiscal 1991 through 1993, domestic net
operating loss ("NOL") carryforwards of $40,007 exist for tax purposes expiring
as follows: $8,552 in 2006, $15,371 in 2007, $15,144 in 2008, $822 in 2009 and
$118 in 2010. Foreign NOL carryforwards of $13,044 exist for tax purposes
expiring as follows: $574 in 1997, $229 in 1998, $66 in 1999, $2,466 in 2000,
$4,789 in 2001, $4,834 in 2002 and $86 in 2003.
The Tax Reform Act of 1986 expanded the corporate alternative minimum tax
("AMT"). Under this Act, the Company's current tax liability is the greater of
its regular tax or AMT. The Company has AMT credits of $6,306 that may be
carried forward indefinitely and used as credits in future tax returns against
regular tax in the event the regular tax expense exceeds the alternative minimum
tax expense, or are available to offset future AMT-NOL's which can be carried
back.
Net income taxes paid for fiscal 1994, 1995 and 1996 were $250, $4,803 and
$10,943, respectively.
NOTE 6--EXTRAORDINARY LOSSES
The fiscal 1996 extraordinary losses of $2,585 ($4,039 pretax) were
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 and $34,158 (accreted value) of the 11 1/2% Senior Discount
Debentures, which were redeemed with proceeds from the amended Credit Agreement
(as defined herein).
The fiscal 1995 extraordinary losses of $3,219 ($5,030 pretax) were
comprised of the debt repurchase premium and write-off of unamortized debt
issuance costs associated with the repurchase of $50,000 of the 10 3/4% Senior
Subordinated Notes and the write-off of unamortized debt issuance costs
associated with the prepayment of $17,628 of term loans under the Credit
Agreement, both of which reflect the application of the net proceeds from the
initial public equity offering.
The fiscal 1994 extraordinary loss of $978 ($1,528 pretax) represents the
write-off of unamortized debt issuance costs associated with the prepayment of a
term loan included in the Credit Agreement.
F-13
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--DEBT AND LINES OF CREDIT
Debt at the end of fiscal 1995 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Notes payable......................................................... $ 14,939 $ 8,397
---------- ----------
---------- ----------
Long-term debt:
Credit Agreement:
Term loan......................................................... $ 91,765 $ --
Revolving Credit Line due 2001.................................... 5,000 195,100
9 1/4% Senior Notes due 2000...................................... 80,000 80,000
10 3/4% Senior Subordinated Notes due 2002........................ 75,000 57,080
11 1/2% Senior Discount Debentures due 2005....................... 221,930 211,675
Other long-term debt.............................................. 6,242 6,093
---------- ----------
Long-term debt, including current maturities.......................... 479,937 549,948
Less: current maturities.............................................. 14,707 1,667
---------- ----------
Long-term debt.................................................. $ 465,230 $ 548,281
---------- ----------
---------- ----------
</TABLE>
The weighted average interest rates on short-term borrowings at the end of
fiscal 1996 and 1995 were 7.0% and 7.4%, respectively.
The carrying amounts and fair values of certain long-term debt instruments
at the end of fiscal 1996, based on quoted market prices for the 9 1/4% Senior
Notes, the 10 3/4% Senior Subordinated Notes and the 11 1/2% Senior Discount
Debentures were as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
---------- ----------
<S> <C> <C>
9 1/4% Senior Notes due 2000.......................................... $ 80,000 $ 81,600
10 3/4% Senior Subordinated Notes due 2002............................ 57,080 60,505
11 1/2% Senior Discount Debentures due 2005........................... 211,675 221,602
---------- ----------
$ 348,755 $ 363,707
---------- ----------
---------- ----------
</TABLE>
At the end of fiscal 1996, the Company had foreign short-term lines of
credit totaling $33,764, of which $25,367 was unused. These short-term credit
lines are primarily denominated in foreign currencies and generally require no
compensating balances or commitment fees.
In fiscal 1996, BHOC amended its Bank Credit Agreement (the "Credit
Agreement") which increased its revolving credit facility to $350,000, reduced
its interest rate and extended the maturity on all outstanding Credit Agreement
borrowings (to April 2001). The interest rates on borrowings under the Credit
Agreement are determined at the time of borrowing, and are based upon the
Company's interest coverage ratio for the preceding four quarters. At December
1996, the interest rate in effect was (at the Company's option) either LIBOR +
.50% or the prime rate. The Credit Agreement requires maintenance of a minimum
fixed charge coverage ratio, a minimum net worth level and a maximum leverage
ratio. The Company and its domestic operating subsidiaries except Bell & Howell
Financial Services Co. ("BHFS"),
F-14
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--DEBT AND LINES OF CREDIT (CONTINUED)
the Company's financing subsidiary, are jointly and severally liable as
guarantors under the Credit Agreement.
The 9 1/4% Senior Notes are general unsecured obligations of BHOC. The
9 1/4% Senior Notes are redeemable at the option of BHOC in whole or in part on
or after July 15, 1997 or upon the occurrence of a Change of Control (as defined
therein), at a call price ranging from 104.625% in 1997 and declining to par on
July 15, 1999. In addition, BHOC may redeem up to $26,700 of the principal
amount of the 9 1/4% Senior Notes prior to July 15, 1997 with the proceeds from
an offering of equity securities of the Company, BHOC or their subsidiaries at a
call price of 108%. The 9 1/4% Senior Notes are guaranteed by certain of BHOC's
domestic operating subsidiaries, excluding, among others, BHFS.
The 10 3/4% Senior Subordinated Notes are general unsecured obligations of
BHOC. The 10 3/4% Senior Subordinated Notes are redeemable at the option of BHOC
in whole or in part (i) after October 1, 1997, at a call price ranging from
104.031% in 1997 and declining to par on October 1, 2000 or (ii) upon the
occurrence of a Change of Control (as defined therein) at a call price ranging
from 105.375% in 1997 and declining to par on October 1, 2000. The 10 3/4%
Senior Subordinated Notes are guaranteed by certain of BHOC's domestic operating
subsidiaries, excluding, among others, BHFS. In fiscal 1996, BHOC repurchased
$17,920 in principal value of the 10 3/4% Senior Subordinated Notes with
proceeds from the amended Credit Agreement. In fiscal 1995, BHOC repurchased
$50,000 in principal value of the 10 3/4% Senior Subordinated Notes with a
portion of the proceeds of the initial public equity offering of Bell & Howell
Company.
The 11 1/2% Senior Discount Debentures pay no cash interest until September
1, 2000. The 11 1/2% Senior Discount Debentures may be redeemed in whole or in
part, at any time at the option of the Company at a price equal to 100% of the
principal amount at maturity plus accrued interest to the date of redemption.
The principal amount at maturity of the Senior Discount Debentures is $301,500;
at the end of fiscal 1996 the Accreted Value (as defined therein) is $211,675.
In addition, the Company may redeem up to 50% of the original principal amount
of the 11 1/2% Senior Discount Debentures with the proceeds from an offering of
equity securities of the Company and its subsidiaries at any time prior to March
1, 1998, at a price equal to 110% of the Accreted Value thereof. In the event of
a Change of Control (as defined therein), the Company may redeem any or all of
the 11 1/2% Senior Discount Debentures at a price equal to 110% of the Accreted
Value thereof to March 1, 2000, and at the principal amount at maturity
thereafter. The 11 1/2% Senior Discount Debentures are senior, unsecured
obligations of the Company with no claim against the Company's subsidiaries and
are effectively subordinate to all subsidiary debt obligations. In fiscal 1996,
the Company repurchased $34,158 of Accreted Value ($52,000 of Principal Value)
of 11 1/2% Senior Discount Debentures with proceeds from the amended Credit
Agreement.
The Credit Agreement prohibits and the 9 1/4% Senior Notes, the 10 3/4%
Senior Subordinated Notes and the 11 1/2% Senior Discount Debentures restrict
the payment of cash dividends on the Company's Common Stock.
In fiscal 1996, BHFS entered into a new Receivables Purchase Agreement.
Under this agreement and the existing Lease Receivables Financing Agreement
(collectively, the "Agreements"), BHFS sells lease receivables on a non-recourse
basis. Both Agreements are renewable annually and include the buyers' commitment
to purchase new lease receivables. During fiscal 1996, BHFS sold $71.3 million
of lease receivables.
F-15
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--DEBT AND LINES OF CREDIT (CONTINUED)
For the five years subsequent to 1996, annual maturities of long-term debt
are: 1997--$1,667; 1998-- $790; 1999--$354; 2000--$83,274 and 2001--$195,107.
Interest paid for fiscal 1994, 1995 and 1996 was $38,122, $34,142 and
$30,197, respectively.
NOTE 8--LEASES
LESSOR. The Company provides sales-type leases for its products and
additionally leases products to customers under direct financing leases,
primarily through BHFS. The Company's net investment in sales-type and direct
financing leases at the end of fiscal 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Minimum lease payments receivable..................................... $ 72,510 $ 69,172
Estimated unguaranteed residual values................................ 3,868 4,347
Unearned income....................................................... (17,508) (21,905)
Allowance for doubtful accounts....................................... (2,299) (2,805)
---------- ----------
Net investment...................................................... $ 56,571 $ 48,809
---------- ----------
---------- ----------
</TABLE>
The scheduled maturities for sales-type and direct financing lease
receivables at the end of fiscal 1996 were as follows:
<TABLE>
<S> <C>
1997............................................................... $ 17,092
1998............................................................... 15,148
1999............................................................... 13,299
2000............................................................... 13,490
2001............................................................... 10,143
---------
Total minimum lease payments to be received...................... $ 69,172
---------
---------
</TABLE>
LESSEE. The Company leases certain facilities and equipment for production
and selling and administrative purposes. Future minimum rental payments required
under long-term noncancelable operating leases at the end of fiscal 1996 were as
follows:
<TABLE>
<S> <C>
1997............................................................... $ 14,921
1998............................................................... 11,903
1999............................................................... 9,209
2000............................................................... 6,213
2001............................................................... 4,100
Subsequent to 2001................................................. 16,174
---------
$ 62,520
---------
---------
</TABLE>
Total rental expenses for fiscal 1994, 1995 and 1996 were $12,356, $14,216
and $16,007, respectively.
F-16
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9--PENSION AND PROFIT-SHARING PLANS
Eligible employees of the Company's domestic and Canadian operations who
elect to do so participate in defined contribution profit-sharing retirement
plans. The amounts charged to earnings for fiscal 1994, 1995 and 1996 were
$5,413, $5,591 and $5,819, respectively.
The Company also has defined benefit pension plans covering certain domestic
and most foreign employees. The benefits are primarily based on years of service
and/or compensation during the years immediately preceding retirement. The
Company funds its foreign plans based on local statutes and funds its domestic
plans in amounts that fulfill the funding requirements of the Employee
Retirement Income Security Act of 1974.
Plan assets consist principally of common stocks, fixed income securities
and cash equivalents.
The net pension costs of defined benefit plans for fiscal 1994, 1995 and
1996 were as follows (with 1994 costs including the impact of a pension plan
curtailment resulting from the restructuring of the Mail Processing Systems
business):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost.................................................. $ 2,210 $ 2,062 $ 2,108
Interest cost................................................. 4,098 4,225 4,602
Return on assets.............................................. (4,821) (6,745) (5,513)
Net amortization and deferral................................. 193 1,497 (1,037)
Curtailment loss (included in 1994 restructuring expense)..... 5,431 -- --
--------- --------- ---------
Net pension cost............................................ $ 7,111 $ 1,039 $ 160
--------- --------- ---------
--------- --------- ---------
</TABLE>
The projected benefit obligations were determined using assumed discount
rates of 8.0% to 8.5%, and assumed compensation increase rates of 4.0% to 5.5%.
The assumed long-term rates of return on plan assets are 9.5% to 10.0%.
The status of defined benefit plans at the end of fiscal 1995 and 1996 was
as follows:
<TABLE>
<CAPTION>
1995 1996
---------------------- ----------------------
FUNDED UNFUNDED FUNDED UNFUNDED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Vested benefit obligation..................... $ 38,126 $ 13,848 $ 42,315 $ 16,505
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Accumulated benefit obligation................ $ 38,527 $ 16,000 $ 42,578 $ 16,902
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Projected benefit obligation.................. $ 40,316 $ 17,576 $ 44,792 $ 18,384
Plan assets at fair value..................... 53,359 -- 63,566 --
---------- ---------- ---------- ----------
Plan assets in excess of (less than) projected
benefit obligation.......................... 13,043 (17,576) 18,774 (18,384)
Unrecognized net (gain) loss.................. (10,043) 2,377 (12,585) 2,098
Unrecognized prior service costs.............. 2,460 187 2,131 235
---------- ---------- ---------- ----------
Prepaid (accrued) pension cost.............. $ 5,460 $ (15,012) $ 8,320 $ (16,051)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
F-17
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has contributory and non-contributory postretirement medical
benefit plans and a non-contributory postretirement life insurance benefit plan
covering certain domestic employees; all plans are unfunded.
The net postretirement benefit costs in fiscal 1994, 1995 and 1996 were as
follows (with 1994 costs including the impact of a postretirement benefit plan
curtailment resulting from the restructuring of the Mail Processing Systems
business):
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost....................................................... $ 124 $ 41 $ 92
Interest cost...................................................... 764 898 1,033
Net amortization and deferral...................................... 19 49 322
Curtailment loss (included in 1994 restructuring expense).......... 1,446 -- --
--------- --------- ---------
Net postretirement benefit cost.................................. $ 2,353 $ 988 $ 1,447
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accumulated postretirement benefit obligations at the end of fiscal 1995
and 1996 were as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Retirees................................................................... $ 6,833 $ 6,820
Active employees eligible for retirement benefits.......................... 4,418 5,219
Active employees not yet eligible for retirement benefits.................. 296 217
--------- ---------
Accumulated postretirement benefit obligation............................ 11,547 12,256
Unrecognized net loss...................................................... 3,276 3,830
--------- ---------
Accrued postretirement benefit obligation................................ $ 8,271 $ 8,426
--------- ---------
--------- ---------
</TABLE>
For measurement purposes, discount rates of 8.0% and 8.8% were used for 1995
and 1996 respectively, with an assumed constant inflationary health care cost
trend rate of 5.5%. If the health care cost trend rate increased by 1%, the
accumulated postretirement benefit obligation at the end of fiscal 1996 would
increase by $1,506 and the net postretirement benefit cost for fiscal 1996 would
increase by $127.
NOTE 11--COMMON STOCK
The Company has 50,000 authorized shares of Common Stock, ($.001 par value
per share), 18,359 of which were issued and 18,309 outstanding at the end of
fiscal 1996. The Company is restricted from paying dividends on its Common
Stock, and the amount of stock repurchases is limited by the provisions of
certain debt agreements.
NOTE 12--STOCK COMPENSATION PLANS
STOCK OPTION PLAN
In May, 1995, the Company completed its initial public equity offering of
5,000 shares of Common Stock (which were issued at $15.50 per share). Coincident
with the initial public equity offering, the Company adopted the 1995 Stock
Option Plan (the "Option Plan"), under which 2,160 shares of Common
F-18
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12--STOCK COMPENSATION PLANS (CONTINUED)
Stock have been reserved for issuance. The Option Plan is administered by the
Compensation Committee of the Board of Directors which has authority to
determine which officers and key employees of the Company will be granted
options. All options are granted at not less than the fair market value on the
date of the grant.
Additionally coincident with the initial public equity offering, the Company
granted options for 1,115 shares to Messrs. White, Roemer and Johansson (the
"Senior Executive Grantees"), with a series of six option exercise prices (the
first of which equaled the initial public equity offering price, with each
subsequent exercise price set at 120% of the preceding exercise price). The term
for these options is six years, with the options vesting in installments
commencing after year three. Options with respect to the remaining 1,045 shares
reserved under the Option Plan may be granted to other officers and key
employees of the Company (the "Key Executive Grantees"), selected by the
Compensation Committee. At the end of fiscal 1996 the Company had options
outstanding for 366 shares to the Key Executive Grantees. The term for these
options is ten years, vesting in equal annual increments over a five year
period.
Per the provisions of SFAS No. 123, the Company has elected to continue to
apply APB Opinion No. 25 and related Interpretations in accounting for the
Option Plan, and accordingly, no compensation cost has been recognized. Had
compensation cost for the Option Plan been determined based on the fair value of
options granted (consistent with SFAS No. 123), the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Net Income:
As Reported........................................................... $ 15,991 $ 23,070
Pro Forma............................................................. 15,718 22,392
Primary Earnings Per Share:
As Reported........................................................... $ .96 $ 1.24
Pro Forma............................................................. .95 1.22
Fully Diluted Earnings Per Share:
As Reported........................................................... $ .96 $ 1.24
Pro Forma............................................................. .95 1.22
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
volatility of 20%; risk free interest rate of 6%; expected lives of 5 years; and
no dividend yield.
F-19
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12--STOCK COMPENSATION PLANS (CONTINUED)
A summary of the stock option transactions for fiscal 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
SENIOR EXECUTIVE
KEY EXECUTIVE GRANTEES
GRANTEES
---------------------- ------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at the end of fiscal 1994................... -- -- -- --
1995:
Granted............................................. 1,115 $ 27.30 184 $ 15.99
Exercised........................................... -- -- -- --
Forfeited........................................... -- -- (14) 15.50
--------- ----------- ----- -----------
Options outstanding at the end of fiscal 1995..... 1,115 $ 27.30 170 $ 16.03
--------- ----------- ----- -----------
--------- ----------- ----- -----------
Options exercisable at the end of fiscal 1995....... -- -- -- --
--------- ----------- ----- -----------
Weighted average fair value of options granted
during fiscal 1995................................ $ 1.75 $ 4.96
--------- -----
Balance at the end of fiscal 1995................... 1,115 $ 27.30 170 $ 16.03
1996:
Granted............................................. -- -- 226 31.50
Exercised........................................... -- -- (2) 15.50
Forfeited........................................... -- -- (28) 18.09
--------- ----------- ----- -----------
Options outstanding at the end of fiscal 1996..... 1,115 $ 27.30 366 $ 25.42
--------- ----------- ----- -----------
--------- ----------- ----- -----------
Options exercisable at the end of fiscal 1996....... -- -- 28 $ 16.14
--------- ----------- ----- -----------
Weighted average fair value of options granted
during fiscal 1996................................ -- $ 9.78
--------- -----
</TABLE>
The following table provides additional information with respect to stock
options outstanding at the end of fiscal 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICE (000) LIFE (YEARS) PRICE (000) PRICE
------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
$15.00--$20.00...................................... 351 5.8 $ 16.45 25 $ 15.50
20.01--$25.00...................................... 239 4.6 22.14 3 20.61
25.01--$30.00...................................... 240 4.7 26.89 -- --
30.01--$35.00...................................... 428 6.7 31.87 -- --
35.01--$40.00...................................... 223 4.3 38.50 -- --
-- --
----- ----------- -----------
1,481 5.5 $ 26.84 28 $ 16.14
-- --
-- --
----- ----------- -----------
----- ----------- -----------
</TABLE>
F-20
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12--STOCK COMPENSATION PLANS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
In fiscal 1996, the Company's Board of Directors adopted the Associate Stock
Purchase Plan (the "ASPP"), whereby employees are afforded the opportunity to
purchase shares in the Company, by authorizing the sale of up to 500 shares of
Common Stock. The purchase price of the shares is 95% of the lower of the
closing market price at the beginning or end of each quarter. Under SFAS No.
123, the ASPP is a non-compensatory plan.
NOTE 13--FOREIGN CURRENCY TRANSACTIONS
The Company has entered into various contracts to buy or sell foreign
currencies. The contracts have maturity dates extending through May 1997, and
are for an aggregate amount of $12,294 (which approximates the fair value based
on quoted market prices). The Company is exposed to market risk in the event of
nonperformance by the other parties (major international banks) to these
contracts, however, such nonperformance is not anticipated.
Net transaction gains (losses) for fiscal 1994, 1995 and 1996 of ($522),
($322) and $4, respectively, have been included in the earnings of the
respective periods.
NOTE 14--CONTINGENT LIABILITIES
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.
The Internal Revenue Service (the "IRS") has notified the Company of certain
proposed adjustments to its income tax returns for fiscal years 1984 through
1991. The proposed adjustments primarily relate to the potential disallowance of
certain deductions for depreciation and amortization. Certain of these proposed
adjustments would also be applicable to the Company's fiscal years subsequent to
1991 and accordingly could result in further adjustments. The Company cannot now
predict (i) when the examination process will be completed, (ii) the adjustments
that the IRS may ultimately propose or (iii) the final resolution of any
proposed adjustments. Accordingly, the outcome of the audits of the Company's
income tax returns by the IRS is not determinable at this time. However,
management believes that the resolution of these proposed adjustments will not
have a material adverse effect upon the consolidated operations or financial
condition of the Company.
NOTE 15--RELATED PARTY TRANSACTIONS
The Company has made loans (the balance of which totaled $1,444 at the end
of fiscal 1996) to certain key executives in connection with their purchases of
Common Stock. Pursuant to the terms of such loans, the shares acquired are
pledged as security. The following individuals have loans in excess of $60
outstanding at the end of fiscal 1996: Nils A. Johansson ($236), Stuart T.
Lieberman ($91), Maria T. Rubly ($360), Henry G. Riner ($258) and Ben L.
McSwiney ($357). Each loan is evidenced by an installment note which bears
interest at BHOC's marginal rate of borrowing (approximately 6% at this time),
and are primarily due on December 31, 1998. Interest and principal may be
deferred until that date.
F-21
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16--INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following table presents the Company's quarterly results of operations
for fiscal 1996 and fiscal 1995:
<TABLE>
<CAPTION>
FISCAL QUARTER
----------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996
Net sales............................................ $ 201,092 $ 213,973 $ 218,840 $ 268,892 $ 902,797
Gross profit......................................... 71,199 74,454 77,845 102,882 326,380
Earnings before extraordinary items.................. 1,853 3,344 4,823 15,635 25,655
Extraordinary losses................................. -- (2,585) -- -- (2,585)
---------- ---------- ---------- ---------- ----------
Net earnings....................................... $ 1,853 $ 759 $ 4,823 $ 15,635 $ 23,070
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net earnings per common share(1):
Earnings before extraordinary items................ $ 0.10 $ 0.18 $ 0.26 $ 0.85 $ 1.38
Extraordinary losses............................... -- (0.14) -- -- (0.14)
---------- ---------- ---------- ---------- ----------
Net earnings per common share...................... $ 0.10 $ 0.04 $ 0.26 $ 0.85 $ 1.24
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
1995
Net sales............................................ $ 187,065 $ 190,119 $ 203,009 $ 239,696 $ 819,889
Gross profit......................................... 65,715 69,990 75,051 97,734 308,490
Earnings (loss) before extraordinary items........... (483) 998 3,835 14,860 19,210
Extraordinary losses................................. -- (3,219) -- -- (3,219)
---------- ---------- ---------- ---------- ----------
Net earnings (loss).................................. $ (483) $ (2,221) $ 3,835 $ 14,860 $ 15,991
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net earnings (loss) per common share(1):
Earnings (loss) before extraordinary items......... $ (0.04) $ 0.06 $ 0.21 $ 0.80 $ 1.15
Extraordinary losses............................... -- (0.20) -- -- (0.19)
---------- ---------- ---------- ---------- ----------
Net earnings (loss) per common share............... $ (0.04) $ (0.14) $ 0.21 $ 0.80 $ 0.96
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Net earnings (loss) per common share reflects both primary and fully diluted
earnings per common share.
F-22
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS 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..................................... 48,426 52,429 97,529 98,509
---------- ---------- ---------- ----------
Total operating costs and expenses......................... 196,468 198,196 383,395 383,051
Operating income................................................. 17,505 19,954 31,670 35,117
Net interest expense:
Interest (income).............................................. (3,994) (5,345) (8,266) (10,357)
Interest expense............................................... 15,794 17,418 31,008 34,089
---------- ---------- ---------- ----------
Net interest expense....................................... 11,800 12,073 22,742 23,732
Earnings before income taxes and extraordinary items............. 5,705 7,881 8,928 11,385
Income tax expense............................................... 2,361 3,271 3,731 4,725
---------- ---------- ---------- ----------
Earnings before extraordinary items.............................. 3,344 4,610 5,197 6,660
Extraordinary losses............................................. (2,585) (67) (2,585) (972)
---------- ---------- ---------- ----------
Net earnings..................................................... $ 759 $ 4,543 $ 2,612 $ 5,688
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per common share:
Primary:
Earnings before extraordinary items.......................... $ 0.18 $ 0.25 $ 0.28 $ 0.36
Extraordinary losses......................................... (0.14) -- (0.14) (0.05)
---------- ---------- ---------- ----------
Net earnings per common share.................................... $ 0.04 $ 0.25 $ 0.14 $ 0.31
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Fully Diluted:
Earnings before extraordinary items.......................... $ 0.18 $ 0.25 $ 0.28 $ 0.36
Extraordinary losses......................................... (0.14) -- (0.14) (0.05)
---------- ---------- ---------- ----------
Net earnings per common share.................................... $ 0.04 $ 0.25 $ 0.14 $ 0.31
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average number of common shares and equivalents outstanding:
Primary........................................................ 18,636 18,473 18,601 18,430
Fully Diluted.................................................. 18,636 18,558 18,626 18,525
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
F-23
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 28,
1997
DECEMBER 28, -----------
1996 (UNAUDITED)
------------
(AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 15,500 $ 14,183
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................................................................ 11,826 13,363
------------ -----------
Total current assets.............................................................. 354,019 346,960
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.......................................................................... 42,464 41,680
------------ -----------
Total assets...................................................................... $ 796,786 $ 782,120
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
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.................................................................... 78,308 62,374
Deferred income..................................................................... 171,698 146,148
Accrued income taxes................................................................ 1,143 --
------------ -----------
Total current liabilities......................................................... 354,348 277,025
Long-term liabilities:
Long-term debt...................................................................... 548,281 605,185
Other liabilities................................................................... 61,049 62,295
------------ -----------
Total long-term liabilities....................................................... 609,330 667,480
Shareholders' equity:
Common Stock, $.001 par value, 18,359 shares issued and 18,309 shares outstanding at
December 28, 1996, and 18,385 shares issued and 18,346 shares outstanding at June
28, 1997.......................................................................... 18 18
Capital surplus..................................................................... 1,402 1,713
Notes receivable from executives.................................................... (1,444) (1,359)
Retained earnings (deficit)......................................................... (165,851) (160,163)
Cumulative foreign exchange translation adjustments................................. 616 (1,347)
Treasury stock...................................................................... (1,633) (1,247)
------------ -----------
Total shareholders' equity (deficit).............................................. (166,892) (162,385)
Commitments and contingencies......................................................... -- --
------------ -----------
Total liabilities and shareholders' equity........................................ $ 796,786 $ 782,120
------------ -----------
------------ -----------
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
F-24
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
-----------------------
JUNE 29, JUNE 28,
1996 1997
----------- ----------
<S> <C> <C>
Operating Activities:
Net earnings........................................................................... $ 2,612 $ 5,688
Depreciation and amortization.......................................................... 23,791 28,889
Debt accretion......................................................................... 12,252 11,434
Changes in operating assets and liabilities:
Accounts receivable.................................................................. 29,994 23,954
Inventory............................................................................ (33,293) (7,878)
Other current assets................................................................. (1,052) (1,119)
Long-term receivables................................................................ 8,457 2,624
Income taxes......................................................................... (5,239) 847
Accounts payable..................................................................... (4,625) (33,027)
Accrued expenses..................................................................... (5,193) (16,730)
Deferred income and other long-term liabilities...................................... (26,361) (30,864)
Other, net........................................................................... (700) (5,280)
----------- ----------
Net cash provided (used) by operating activities................................... 643 (21,462)
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:
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............................................................ (146,602) (25,679)
Proceeds from Common Stock, net........................................................ 25 806
----------- ----------
Net cash provided by financing activities.......................................... 42,462 43,454
Effect of exchange rate changes on cash.................................................. (125) (372)
----------- ----------
Increase (decrease) in cash and cash equivalents......................................... 2,878 (1,317)
Cash and cash equivalents, beginning of period........................................... 7,262 15,500
----------- ----------
Cash and cash equivalents, end of period................................................. $ 10,140 $ 14,183
----------- ----------
----------- ----------
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
F-25
<PAGE>
BELL & HOWELL COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
Bell & Howell Company 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
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 Company's annual report for the 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 by the weighted average number of common shares
outstanding during the period. If dilutive, stock options are included as common
stock equivalents.
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 losses of $972 ($1,519 pretax) in first half 1997 were
comprised of the debt repurchase premium and write-off of unamortized debt
issuance costs associated with the repurchase of $15,598 (accreted value) of the
11 1/2% Senior Discount Debentures and $2,100 of the 10 3/4% Senior Subordinated
Notes, which were redeemed with proceeds from the Existing Credit Agreement.
The extraordinary losses of $2,585 ($4,039 pretax) in first half 1996 were
comprised of the debt repurchase premium and write-off of unamortized debt
issuance costs associated with the repurchase of $34,158 (accreted value) of the
11 1/2% Senior Discount Debentures and $17,920 of the 10 3/4% Senior
Subordinated Notes, which were redeemed with proceeds from the Existing Credit
Agreement.
F-26
<PAGE>
EXHIBIT A
PLAN OF
LIQUIDATION AND DISSOLUTION OF
BELL & HOWELL COMPANY
This Plan of Liquidation and Dissolution (this "Plan") of Bell & Howell
Company, a Delaware corporation (the "Holding Company"), is intended to
accomplish the complete liquidation and dissolution of the Holding Company in
accordance with the provisions of the Delaware General Corporation Law (the
"DGCL") and the Internal Revenue Code of 1986, as amended (the "Code") in
substantially the following manner:
1. DEFINITION OF PLAN AND EFFECTIVE DATE. (a) The Board of Directors of
the Holding Company has adopted this Plan, pursuant to which it is proposed that
the Holding Company (i) shall transfer substantially all of its assets to Bell &
Howell Operating Company, a Delaware corporation ("BHOC"), in exchange for a
number of shares of newly-issued common stock of BHOC equal to the number of
shares of common stock of the Holding Company issued and outstanding on the date
of such exchange, and thereafter (ii) shall liquidate and distribute all of its
assets to the holders (the "Stockholders") of the outstanding shares of the
Common Stock, par value $.001 per share, of the Holding Company (the "Common
Stock"). The Board of Directors has authorized the Holding Company to notify the
Stockholders of the terms of this Plan, and solicit the votes of those
individuals who were Stockholders at the close of business on October , 1997
(the "Record Date"), in favor of this Plan, such votes to be cast at a special
meeting of Stockholders (the "Special Meeting").
(b) This Plan shall be effective immediately upon its approval and
adoption by the affirmative vote of holders of a majority of the shares of
Common Stock entitled to vote thereon if the quorum requirements of the
Special Meeting have been satisfied (the "Effective Date"). Notwithstanding
the preceding sentence, the Holding Company shall not be deemed to have been
liquidated for any purpose until a certificate of dissolution is filed on
behalf of the Holding Company with the Delaware Secretary of State.
2. CESSATION OF BUSINESS ACTIVITIES. After the Effective Date, the Holding
Company shall not engage in any business activities except for the purpose of
preserving the value of its assets, prosecuting and defending suits by or
against the Holding Company, adjusting and winding up its business and affairs
and distributing its assets in accordance with this Plan. The directors in
office and, at their pleasure, the officers of the Holding Company in office on
the Effective Date shall continue in office solely for these purposes and as
otherwise provided in this Plan.
3. LIQUIDATION OF ASSETS. Except as provided in Section 4 hereof, on such
date as is determined by the officers of the Holding Company (the "Liquidation
Date"), the Holding Company shall distribute to all of the Stockholders as of
such date, all of the Holding Company's property and assets, which at the time
shall consist of shares of common stock of BHOC (the "BHOC Stock"), together
with any dividends or other distributions theretofore paid on the BHOC Stock
(together, the "Assets"), in the manner hereafter set forth hereof as the Board
of Directors deems expedient and in the best interests of the Holding Company
and the Stockholders. As part of the liquidation of the Assets, the Holding
Company shall pay, or make provision for the payment of, all accounts payable,
debts and claims owing by it, and shall collect, or make provision for the
collection of, all accounts receivable, debts and claims owing to it.
4. RESERVE FUND. Prior to making any distributions to the Stockholders,
the Holding Company shall pay or, if and to the extent deemed necessary or
appropriate by the Board of Directors, make reasonable provision to set aside a
reserve fund (the "Reserve Fund") from the Assets to pay all known or
ascertainable claims, obligations and liabilities of the Holding Company and the
expenses of its liquidation
A-1
<PAGE>
and dissolution provided for in this Plan, including all contingent, conditional
or unmatured claims, obligations and liabilities of the Holding Company, and
shall make such provision, as determined by the Board of Directors, as will be
reasonably likely to be sufficient to provide compensation for claims that have
not been made known to the Holding Company or that have not arisen, but that,
based on facts known to the Holding Company, are likely to arise or to become
known to the Holding Company prior to the expiration of applicable statutes of
limitation. Following the payment, satisfaction or other resolution of such
claims, obligations and liabilities, any Assets remaining in the Reserve Fund
shall be distributed as hereafter provided.
5. LIQUIDATION DISTRIBUTIONS. To the extent that the Holding Company has
any remaining Assets, the Assets will be distributed to the Stockholders pro
rata among the Stockholders as of the Liquidation Date (i) on the Liquidation
Date (the "Initial Distribution") and (ii) with respect to Assets committed to
the Reserve Fund, as soon as practicable after the funds become available for
distribution to the Stockholders (the "Final Distribution"). If no Reserve Fund
is created, then the Initial Distribution shall also be the Final Distribution.
6. CANCELLATION OF CAPITAL STOCK. The distributions to the Holding
Company's Stockholders pursuant to Section 5 hereof shall be in complete
redemption and cancellation of all of the outstanding Common Stock of the
Holding Company. As a condition to the receipt of any distribution under this
Plan, the Board of Directors may require holders of Common Stock to surrender
their certificates evidencing Common Stock to the Holding Company or its agent
for recording thereon receipt of distributions and to surrender such
certificates for cancellation upon receipt of the Initial Distribution. If a
Stockholder's certificate for shares of Common Stock has been lost, stolen or
destroyed, as a condition to the receipt of any distribution, such Stockholder
may be required to furnish to the Holding Company satisfactory evidence of the
loss, theft or destruction thereof, together with a surety bond or other
security or indemnity reasonably satisfactory to the Holding Company. Adoption
of this Plan by any Stockholder shall be deemed to be such Stockholder's consent
to the proposed distribution mechanics set forth in the Plan.
7. RESTRICTIONS ON TRANSFER OF SHARES. The Holding Company will close its
stock transfer books and discontinue recording transfers of Common Stock and
options to purchase Common Stock at the close of business on the Liquidation
Date, and as a result thereof certificates representing Common Stock shall not
be assignable or transferable on the books of the Holding Company except by
will, intestate succession or operation of law or unless BHOC determines that
such certificate shall thereafter represent the BHOC Stock. The proportionate
interests of all of the Stockholders of the Holding Company shall be fixed on
the basis of their respective holdings at the close of business on the
Liquidation Date, and, after the Liquidation Date, any distributions made by the
Holding Company shall be made solely to the Stockholders of record at the close
of business on the Liquidation Date except as may be necessary to reflect
subsequent transfers recorded on the books of the Holding Company as a result of
any assignments by will, intestate succession or operation of law.
8. POWER OF BOARD OF DIRECTORS. The Board of Directors and, if authorized
by the directors, the officers of the Holding Company, shall have authority to
do or authorize any and all acts and things provided for in this Plan and any
and all further acts and things as they may consider desirable to carry out the
purposes of this Plan, including the execution and filing of all such
certificates, documents, information returns, tax returns and other documents
which may be necessary or appropriate to implement this Plan. The directors may
authorize such variations from or amendments to the provisions of this Plan as
may be necessary or appropriate to effectuate the complete liquidation,
dissolution and termination of existence of the Holding Company and the
distribution of its assets to the Stockholders in accordance with the laws of
the State of Delaware. The death, resignation or other disability of any
director or officer of the Holding Company shall not impair the authority of the
surviving or remaining directors or officers to exercise any of the powers
provided for in this Plan. Upon such death, resignation or other disability, the
surviving or remaining directors, or, if there be none, the surviving or
remaining officers, shall have authority to fill the
A-2
<PAGE>
vacancy or vacancies created, but the failure to fill such vacancy or vacancies
shall not impair the authority of the surviving or remaining directors or
officers to exercise any of the powers provided for in this Plan.
After the Effective Date, the Board of Directors shall continue to act as a
Board of Directors and shall have full power to wind up and settle the Holding
Company's affairs. The powers and duties of the directors and, if authorized by
the Board of Directors, the officers of the Holding Company shall include, but
are not limited to, the following acts in the name and on behalf of the Holding
Company: (a) to elect officers and to employ agents and attorneys to liquidate
or wind up its affairs; (b) to continue the conduct of the business of the
Holding Company to the extent permitted by the DGCL; (c) to carry out contracts
and collect, pay, compromise and settle debts and claims for or against the
Holding Company; (d) to defend suits brought against the Holding Company; (e) to
sue in the name of the Holding Company for all sums due or owing to the Holding
Company or to recover any of its property; and (f) in general, to make contracts
and to do any and all things in the name of the Holding Company which may be
proper or convenient for the purposes of winding up, settling and liquidating
the affairs of the Holding Company.
9. LIQUIDATING TRUST. If advisable for any reason to complete the
liquidation and distribution of the Holding Company's assets to the
Stockholders, the Board of Directors or officers may at any time transfer to a
trust (the "Trust") the remaining assets of the Holding Company. The Trust
thereupon shall succeed to all of the then remaining assets of the Holding
Company, including the Reserve Fund, and any remaining liabilities and
obligations of the Holding Company. The sole purposes of the Trust shall be to
prosecute and defend suits by or against the Holding Company, to settle and
close the business of the Holding Company, to dispose of and convey the assets
of the Holding Company, to satisfy the remaining liabilities and obligations of
the Holding Company and to distribute the remaining assets of the Holding
Company to the Stockholders as provided herein. The Board of Directors may
appoint one or more individuals or corporate persons to act as trustee or
trustees of the Trust and to cause the Holding Company to enter into a
liquidating trust agreement with such trustee or trustees on such terms and
conditions as the Board of Directors determines. Adoption of this Plan by the
Stockholders also will constitute the approval by the Stockholders of any
appointment of trustees and of the liquidating trust agreement.
11. TAX TREATMENT. The Holding Company intends and, by their approval of
the Plan, the Stockholders agree, that the exchange of the Holding Company's
assets for newly-issued shares of BHOC Stock, followed by the liquidation of the
Holding Company, shall be treated for federal (and any applicable state) income
tax purposes as a reorganization of the Holding Company under the provisions of
Section 368(a)(1)(D) of the Code.
12. INDEMNIFICATION. The Holding Company shall continue to indemnify its
officers, directors, employees and agents in accordance with its certificate of
incorporation, bylaws and any contractual arrangements as therein provided, and
such indemnification shall apply to acts or omissions of such persons in
connection with the implementation of this Plan and the winding up of the
affairs of the Holding Company. The Holding Company's obligation to indemnify
such persons may be satisfied out of assets transferred to the Trust, if any.
The Board of Directors and the trustees of any Trust are authorized to obtain
and maintain insurance as may be necessary to cover the Holding Company's
indemnification obligations.
13. DISSOLUTION. At the direction of the Board of Directors, and upon the
taking of all acts required to be taken under the DGCL, the appropriate officers
of the Holding Company shall execute, acknowledge and file a certificate of
dissolution of the Holding Company in accordance with Section 275 of the DGCL,
thereby terminating the corporate existence of the Holding Company.
14. AMENDMENT. Notwithstanding the adoption of this Plan by the
Stockholders, the Board of Directors may modify or amend this Plan and, prior to
the filing of a certificate of dissolution with the Secretary of State of the
State of Delaware, may abandon this Plan, in each case without further action by
the Holding Company's Stockholders, to the extent permitted by the DGCL.
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15. COSTS. The Board of Directors is authorized, empowered and directed to
pay all fees and expenses of persons rendering services to the Holding Company
in connection with the implementation of this Plan.
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