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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission filenumber
December 28, 1996 1-3246
Bell & Howell Operating Company
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3580106
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5215 Old Orchard Road, Skokie, Illinois 60077-1076
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (847) 470-7100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
State the aggregate market value of the Registrant's voting
stock held by nonaffiliates. (The aggregate market value shall be
computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a
specified date within 60 days prior to the date of filing).
No Market for Common Shares
The number of shares of the Registrant's Common Stock, $.01
par value, outstanding as of March 26, 1997 was 2,955.
TABLE OF CONTENTS
PART I Page
Item 1. Business ..................................... 1
Item 2. Properties ................................... 7
Item 3. Legal Proceedings ............................ 8
Item 4. Submission of Matters to a Vote of
Security Holders ............................. 8
Executive Officers and Directors ............. 9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters .............. 12
Item 6. Selected Consolidated Financial and
Operating Data ............................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................... 15
Item 8. Financial Statements and Supplementary Data .. 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ....... 56
PART III
- --------
Item 10. Directors and Executive Officers of
the Registrant ............................... 56
Item 11. Executive Compensation ....................... 56
Item 12. Security Ownership of Certain Beneficial
Owners and Management ........................ 63
Item 13. Certain Relationships and Related
Transactions ................................. 63
SIGNATURE PAGE ........................................... 64
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ..................... 65
EXHIBITS
BELL & HOWELL OPERATING COMPANY
Item 1. Business
- ----------------
Bell & Howell Operating Company is a Delaware corporation
and a wholly-owned subsidiary of Bell & Howell Company (which is
a holding company), the primary assets of which are all of the
issued and outstanding shares of Common Stock and the
Intercompany Preferred Stock of Bell & Howell Operating Company.
Bell & Howell Company conducts business through Bell & Howell
Operating Company and has no operations of its own.
Financial Information and Principal Products and Services by
Industry Segments
Bell & Howell Operating Company and its Subsidiaries
(collectively the "Company") 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.
Information Access
- ------------------
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. Each of the
businesses which comprise Bell & Howell's Information Access
segment, consisting of UMI, PSC and Information Management (each
-1-
defined herein), offers solutions to these customer needs. UMI
focuses on the education and library market as well as the
desktop user market. PSC focuses on the transportation/vehicle
market. Information Management's primary focus is on the
financial services market, while additionally supplying
technologically advanced digital paper scanners to other markets.
UMI. UMI Company ("UMI") is the world's leading aggregator
and provider of access to information from periodicals and
newspapers, dissertations, out-of-print books and other scholarly
collections in electronic and microfilm formats. UMI aggregates
the works of publishers and authors, organizes them by subject
matter and converts them to various formats for easy access by
the customer. UMI's comprehensive database consists of over
17,000 periodicals, 7,000 newspapers, 1,400,000 dissertations,
140,000 out-of-print books and 300 research collections. UMI
also owns the rights to approximately 13,400,000 abstracts for
on-line and CD-ROM retrieval and creates over 1,200,000 new
abstracts annually. UMI's customers include libraries and
information centers in the academic, corporate, public and
government markets. In 1996, UMI complemented its electronic
product offerings through the acquisition of DataTimes
Corporation. DataTimes receives electronic content from more
than 5,200 information sources, and its database includes more
than 50 million full-text documents.
Publication Systems. Bell & Howell Publication Systems
Company ("PSC") is a leading provider of information access
systems and solutions for processing, organizing, storing and
retrieving image-intensive technical reference information
primarily for the automotive and powersports dealer markets.
PSC's customer base consists principally of automotive
dealerships (including General Motors, Chrysler, Ford, Toyota,
Mercedes Benz, Honda, Nissan, Volvo, Porsche, Land Rover, Isuzu,
Subaru, Saturn and Hyundai) and powersports dealerships,
(including Harley Davidson, Honda, BMW, Kawasaki, Yamaha, Suzuki,
Mercury Marine, Volvo-Penta, Sea Ray and Outboard Marine). PSC
creates and markets turnkey systems which convert these
manufacturers' proprietary technical documentation (such as parts
catalogs, service manuals and reference materials) typically
maintained in paper form into an extensively indexed electronic
image database. In addition, PSC's systems integrate technical
-2-
reference information with the customers' existing business
information systems, such as inventory management and billing.
Manufacturers' catalog data and application software developed by
PSC are distributed to customers primarily on CD-ROM.
Information Management. Bell & Howell's Information
Management business ("Information Management") is a leading
designer, integrator and distributor of comprehensive, non-paper
based systems and components that enable customers to file and
access their documents and records. These systems, which utilize
both electronic and microfilm technology, consist of software and
hardware to capture, enhance, duplicate, store, index and
retrieve customers' documents and management information.
Information Management's products include a full line of
computer-aided electronic and microfilm retrieval systems and
microfilm hardware components, as well as other accessories and
supplies. In addition, Information Management is one of the
leading manufacturers of technologically advanced production
scanners which convert documents into electronic format.
Information Management's products and services enable customers
to enhance productivity in handling documents and minimize
storage costs and requirements. Customers such as financial
institutions, insurance companies, governmental agencies and
other paper-intensive organizations utilize these systems to
provide the optimal level of accessibility, security and data
integrity of their records. In 1996, the Company acquired
Protocorp International, and can now offer its financial services
customers a full range of electronic information storage and
retrieval solutions.
Mail Processing
- ---------------
Bell & Howell's Mail Processing business ("Mail Processing")
is the leading manufacturer and supplier of commercial high
volume mail processing systems. These systems, which
increasingly incorporate software, automatically perform a broad
range of mail processing functions, from collating and inserting
documents to optical scanning, encoding and sorting of envelopes.
These software-driven systems allow users to more efficiently
manage mail room operations as well as to convert routine
mailings (such as billing statements) into targeted communication
-3-
and marketing programs by customizing statements and including
promotional insertions based on specific customer profiles. Mail
Processing customers include financial institutions, insurance
companies, utilities, service bureaus, credit card companies,
direct mail marketers and other companies which generate high
volumes of mail. In addition to its commercial mail processing
operations ("Mail Processing Systems"), the Company (through Bell
& Howell Postal Systems Inc.) designs, develops and manufactures
automation equipment for national postal services worldwide,
including the U.S. Postal Service.
Sales and operating earnings for each of the Company's
business segments and financial information concerning foreign
and domestic operations for fiscal 1994, 1995 and 1996 are
contained in Note 3 to the Consolidated Financial Statements.
Methods of Distribution
Because of the diverse nature of its products, the Company
utilizes several different methods of distribution. Products are
sold primarily through direct sales forces which are supported by
telemarketing, with agents and distributors utilized in selected
geographic markets.
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 business segments. Royalty
income received from licensees is not material.
Seasonality
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 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.
-4-
Competition
The markets in which the products of the Company are sold
are highly competitive and, in certain instances, include
competitors with substantially greater financial and other
resources.
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 are also 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 believes that future compliance with such laws or
regulations will not have a material adverse effect upon the
consolidated operations or financial condition of the Company.
Financing Subsidiary
Bell & Howell Acceptance Corporation ("BHAC"), 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. BHAC
finances its leases on a stand-alone basis through separate
financing arrangements. In fiscal 1996, net interest income
earned at BHAC was $6.8 million.
Promotional Activities
The Company conducts a comprehensive marketing program,
including advertising, promotional materials, direct mail and
telemarketing. The Company also participates frequently in
industry trade shows which increase customer awareness of
Bell & Howell products and services. The Company regards its
customer service and support organization as an integral part of
its marketing strategy. Technical support and product
development employees frequently participate in sales calls and
product demonstrations.
-5-
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 fiscal 1996
totaled $88.6 million as compared to $138.7 million at the end of
fiscal 1995. The significant decrease in 1996 is primarily
related to the shipment of customized mail automation equipment
for governmental postal services in the U.S. and Europe.
Major Customers
The Company is not dependent upon any one customer or a few
customers, the loss of which would 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 and 1996 were $21.6
million, $30.2 million and $38.1 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
-6-
of its businesses. The Company's research and development
expenditures include expenses primarily for database and software
development, information delivery systems, digital paper scanners
and other electronic devices for the Information Access segment,
as well as for new mail processing systems that are more
electronic and software oriented.
Employees
At the end of fiscal 1996, the Company had 6,110 employees.
Approximately 230 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.
Item 2. 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 years. The following table provides certain
summary information in square feet with respect to the production
facilities that the Company owns or leases in connection with its
businesses:
Owned Leased Total
------- ------- ---------
Information Access ........ 395,000 255,000 650,000
Mail Processing ........... 555,000 71,000 626,000
------- ------- ---------
950,000 326,000 1,276,000
======= ======= =========
-7-
Bell & Howell also leases facilities in the United States,
Canada, France, United Kingdom, Germany, The Netherlands, Japan,
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.
Item 3. 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.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
None.
-8-
Executive Officers and Directors
The following table sets forth the names, ages and positions
held by the directors and executive officers of the Company:
Name Age Positions at the Company
- ---- --- ------------------------
William J. White 58 Chairman of the Board of
Directors
James P. Roemer 49 Director, President and Chief
Executive Officer
Nils A. Johansson 48 Director, Executive Vice
President and Chief Financial
Officer
Stuart T. Lieberman 45 Director, Vice President,
Controller and Chief Accounting
Officer
Henry A. D'Ambrosio 51 Vice President
Kevin B. O'Shea 37 Vice President and Treasurer
Maria T. Rubly 42 Vice President
Gary S. Salit 53 Secretary and Corporate Counsel
-9-
The business experience and certain other information
relating to each director and executive officer is set forth
below:
William J. White has served as Chairman of the Board and
Director since February 1990. From February 1990 to February
1997, he served as Chief Executive Officer. He was President
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 since
February 1995. In February 1997, he was elected Chief Executive
Officer and from February 1995 to February 1997 served as Chief
Operating Officer. 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 since April 1990.
Since January 1994, he has held the office of Executive Vice
President and Chief Financial Officer. Mr. Johansson served as
Senior Vice President, Finance and Chief Financial Officer from
December 1991 to January 1994. From May 1989 to December 1991,
he was Vice President, Finance, Treasurer and Chief Financial
Officer. From February 1981 to May 1989 he held various
executive positions with Bell & Howell, including positions in
corporate treasury and group control, planning, financial
analysis and business development.
-10-
Stuart T. Lieberman has been a Director since March 1996 and
has been Vice President, Controller and Chief Accounting Officer
since January 1990. Prior to joining Bell & Howell, Mr.
Lieberman spent 11 years with Baxter International Inc.
("Baxter") where he held various financial positions, the most
recent of which was Vice President of Finance and Controller of
Baxter's Global Renal Division.
Henry A. D'Ambrosio has been a Vice President since
September 1992. Mr. D'Ambrosio has also served as Chairman of
the Bell & Howell Investment Committee, and from January 1991 to
September 1992 was Director, Human Resources and Administrative
Services. He was Director, Benefits and Corporate Services from
March 1989 to January 1991. Prior to that time, he was Vice
President of Administration, Bell & Howell Document Management
Products Company from November 1986 to March 1989.
Kevin B. O'Shea has served as Vice President and Treasurer
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. From October 1986 to July 1989, he was Vice President and
Treasurer/Group Controller for Pritzker & Pritzker.
Maria T. Rubly has been Vice President 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. From June 1985 to January 1991, she held
various vice presidential positions in human resources with
Baxter Healthcare Corp. and American Hospital Supply.
Gary S. Salit has served as Secretary since January 1993.
He has served as Corporate Counsel since 1985. From 1988 to
1992, he was Assistant Secretary.
-11-
Item 5. Market for Registrant's Common Equity and Related
- ------ -------------------------------------------------
Stockholder Matters
-------------------
There is no public market for the common stock of the
Company, all of which is held by Bell & Howell Company. There
have been no cash dividends paid on shares of its common stock.
The ability to pay dividends is restricted by provisions of
certain debt agreements to which the Company is a party (see
Note 7 to the Consolidated Financial Statements).
Item 6. Selected Consolidated Financial and Operating Data
- ------ --------------------------------------------------
The following historical selected consolidated financial and
operating data have been derived from the audited Consolidated
Financial Statements as of the end of and for each of the fiscal
years in the five-year period ended December 28, 1996. The
following financial data should be read in conjunction with the
Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
-12-
Fiscal
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(Dollars in thousands, except per share data)
Results of Operations Data:
Net sales .................................... $ 670,039 $ 675,553 $ 720,340 $ 819,889 $ 902,797
Operating costs and expenses:
Cost of sales ................................ 434,135 431,420 455,424 511,399 576,417
Research and development ..................... 18,632 18,600 21,556 30,202 38,101
Selling and administrative ................... 166,644 168,448 172,769 194,667 198,648
Restructuring ................................ -- -- 32,893 -- --
Goodwill write-off (1) ....................... -- 174,277 -- -- --
-------- -------- -------- -------- -------
Total operating costs and expenses ........... 619,411 792,745 682,642 736,268 813,166
-------- -------- -------- -------- -------
Operating income (loss) ...................... 50,628 (117,192) 37,698 83,621 89,631
Net interest expense ......................... 37,266 32,871 27,567 26,961 21,022
-------- -------- -------- -------- -------
Earnings (loss) before income taxes,
cumulative effect of accounting
change and extraordinary items .............. 13,362 (150,063) 10,131 56,660 68,609
Income tax expense (benefit) ................. 8,299 3,991 (2,490) 13,439 18,400
-------- -------- -------- -------- -------
Earnings (loss) before cumulative effect
of accounting change and extraordinary
items ....................................... 5,063 (154,054) 12,621 43,221 50,209
Cumulative effect of accounting change (2) ... -- (4,759) -- -- --
Extraordinary losses (3) ..................... (5,004) (6,625) (978) (3,219) (1,088)
-------- -------- -------- -------- -------
Net earnings (loss) .......................... 59 (165,438) 11,643 40,002 49,121
Dividends on preferred stock ................. 22,394 22,287 21,381 24,054 24,659
-------- -------- -------- -------- -------
Net earnings (loss) applicable to
common stock ................................ $ (22,335) $(187,725) $ (9,738) $ 15,948 $ 24,462
======== ======== ======== ======== =======
Net earnings (loss) per common share:
Earnings (loss) before cumulative effect of
accounting change and extraordinary items .. $ (5,827) $ (59,695) $ (2,966) $ 6,487 $ 8,646
Cumulative effect of accounting change ...... -- (1,611) -- -- --
Extraordinary losses ......................... (1,683) (2,243) (331) (1,089) (368)
-------- -------- -------- -------- -------
Net earnings (loss) per common share ......... $ (7,510) $ (63,549) $ (3,297) $ 5,398 $ 8,278
======== ======== ======== ======== =======
Other Data:
EBITDA (4) ................................... $ 85,504 $ 93,574 $ 103,456 $ 120,960 $ 133,846
EBITDA as a percent of net sales ............. 12.8% 13.9% 14.4% 14.8% 14.8%
Gross profit as a percent of net sales (5) ... 35.2% 36.1% 36.8% 37.6% 36.2%
Depreciation and amortization (6) ............ 34,876 36,489 32,865 37,339 44,215
Capital expenditures ......................... 30,950 33,191 38,345 44,047 42,744
-13-
At the end of Fiscal
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
Balance Sheet Data:
Working capital .............................. $ (34,417) $ (40,356) $ (62,903) $ (53,783) $ (539)
Total assets (1).............................. 756,855 619,051 598,158 676,944 792,967
Long-term debt ............................... 368,991 372,003 320,233 243,300 336,606
Total shareholders' equity (deficit).......... 68,000 (99,445) (86,311) 27,191 40,786
Footnotes to the Selected Consolidated Financial and Operating
Data:
(1) In the third quarter of fiscal 1993, the Company wrote off a
portion of its goodwill in the amount of $174.3 million.
(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.
(4) 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 Credit Agreement (as defined
herein) 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.
-14-
(5) Gross profit is defined as net sales less cost of sales.
(6) Excludes goodwill write-off in fiscal 1993 and amortization
of deferred financing costs which were as follows for the
specified fiscal years: 1992 - $3.6 million;
1993 - $5.0 million; 1994 - $3.3 million;
1995 - $3.5 million; 1996 - $2.0 million.
-15-
Item 7. 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 of Bell & Howell Operating Company and
Subsidiaries (collectively the "Company") and the notes thereto set
forth elsewhere herein.
Results of Operations
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. UMI's net sales 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 UMI'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 now
represent only 3% of UMI sales) as on-line delivery and the
availability (from other sources) of standardized computer
hardware have allowed UMI to focus on providing the more valuable
information content. PSC's net sales 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
-16-
electronic parts catalogs to powersports dealerships. In
addition to the increased new systems placements, PSC continued
to experience both strong sales of add-ons/upgrades and high
contract renewal rates related to previously placed systems in
automotive dealerships. Information Management net sales
increased $2.0 million, or 1%, to $187.9 million as increased
sales of digital paper 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 now represent 12% of
new 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 (net sales less
cost of sales) percentage decreasing by 1.4 percentage points to
36.2% in the current year. The lower gross profit rate in 1996
resulted from a shift in sales mix (as the growth rate in lower
gross margin percentage Mail Processing revenues exceeded the
growth rate in higher gross margin percentage Information Access
revenues), which more than offsets the impact of improved
manufacturing productivity and increased pricing.
-17-
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 digital paper 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 $4.0
million, or 2%, to $198.6 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 selling and administrative
expense to net sales of 22.0% in 1996 improved by 1.7 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 (as defined herein) increased $12.9 million, or 11%,
to $133.8 million in 1996 resulting from the higher sales level
and leveraged operating costs and expenses. Operating income
increased $6.0 million, or 7%, to $89.6 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 Information Management 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 UMI's product capital
investment and goodwill amortization related to the
aforementioned acquisitions in 1996.
-18-
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 $.5 million, or 4%, to $12.7 million in 1996,
reflecting inflationary cost increases.
Net interest expense decreased $5.9 million, or 22%, to
$21.0 million in 1996 primarily reflecting the reduction in
interest expense resulting from the capital contribution by the
Company's parent in May of 1995 (which was 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 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
which were redeemed with proceeds from the amended Credit
Agreement. Net interest income of Bell & Howell Acceptance
Corporation ("BHAC"), the Company's financing subsidiary,
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. Pursuant
to a tax sharing agreement with Bell & Howell Company, the
interest expense from the Senior Discount Debentures of Bell &
Howell Company is included in the Company's domestic consolidated
income tax return.
The extraordinary loss of $1.1 million ($1.7 million pretax)
in 1996 was 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. 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
-19-
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 Credit Agreement, both of which reflected the application of
the net proceeds from the capital contribution by the Company's
parent.
Dividends on preferred stock are associated with the
Company's $121.33 Intercompany Preferred Stock (which is owned by
Bell & Howell Company). In 1996, the Company repurchased $33.4
million (accreted value) of the Intercompany Preferred Stock for
$35.8 million, with proceeds from the amended Credit Agreement.
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. UMI's net sales 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. PSC's net sales 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, PSC also experienced strong sales of add-ons/upgrades
and high renewal rates of contracts on previously placed systems
in automotive dealerships. Information Management net sales
increased $7.7 million, or 4%, to $186.0 million as increased
sales of digital paper scanners worldwide were partially offset
by lower service revenue as certain of the Company's products
have become less service intensive.
-20-
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 .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 UMI'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 UMI's
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 digital paper
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 $21.9 million,
or 13%, to $194.7 million in 1995 reflecting the Company's
increased investment in sales and marketing resources, increased
distribution 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.
-21-
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 Information Management administrative and
warehouse facilities in order to more effectively serve its
customer base with a reduced operating expense infrastructure.
EBITDA increased $17.5 million, or 17%, to $121.0 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 $13.0 million, or 18%, to $83.6
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.
-22-
Corporate expenses (excluding depreciation and amortization)
increased $1.1 million, or 10%, to $12.1 million in 1995,
reflecting inflationary cost increases and higher corporate
insurance costs.
Net interest expense decreased $.6 million, or 2%, to $27.0
million in 1995 reflecting the reduction in interest costs
resulting from the capital contribution by the Company's parent
(which was 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 Credit Agreement), partially offset by a higher
interest rate environment. Net interest income of BHAC, the
Company's financing subsidiary, decreased $.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).
Pursuant to a tax sharing agreement with Bell & Howell Company,
the interest expense from the Senior Discount Debentures of Bell
& Howell Company is included in the Company's domestic
consolidated income tax return.
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 Credit Agreement, both of which reflect the application
of the net proceeds from the capital contribution by the
Company's parent. 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 Credit Agreement.
-23-
Dividends on preferred stock are associated with the
Company's $121.33 Intercompany Preferred Stock (which is owned by
Bell & Howell Company).
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
In fiscal 1996, the Company amended its Credit Agreement
which increased its revolving credit facility to $350.0 million,
reduced its interest rate and extended the maturity on all
outstanding Credit Agreement borrowings (to April 2001). At the
end of fiscal 1996, the Company had $154.9 million of available
credit under the Credit Agreement and $15.5 million of cash and
cash equivalents. The Credit Agreement requires 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 Credit
Agreement, in compliance with all such covenants.
In May 1995, the Company's parent made a capital
contribution in the amount of $71.7 million, the net proceeds of
which were used to reduce indebtedness and better position the
Company to capitalize on future growth opportunities.
Cash provided by operations of $79.0 million in fiscal 1996
represented a $35.6 million improvement over the prior year,
resulting from the increase in EBITDA and proceeds from the sale
-24-
of BHAC receivables, which were partially offset by the increased
investment in inventory in 1996 related to the European postal
service contracts. As a result of acquisitions (primarily
DataTimes Corporation and Protocorp International), continued
capital expenditures and the aforementioned inventory investment,
total debt (net of cash and cash equivalents) increased by $65.3
million to $331.2 million in 1996.
Cash provided by operations was $43.4 million in fiscal 1995
versus cash provided by operations of $132.8 million in fiscal
1994. Although EBITDA increased by $17.5 million in fiscal 1995,
the Company achieved a greater reduction in working capital in
the prior year. In fiscal 1995, BHAC sold $32.6 million of lease
receivables versus lease receivable sales of $66.0 million in the
prior year. As a result of the cash flow from operations and the
application of the net proceeds from the capital contribution by
the Company's parent which were partially offset by capital
expenditures and acquisitions/contingent payments in each of the
business segments, total debt (net of cash and cash equivalents)
decreased by $66.6 million to $265.9 million in fiscal 1995.
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.
Capital Expenditures
In fiscal 1994, 1995 and 1996, the Company had capital
expenditures of $38.3 million, $44.0 million, and $42.7 million
respectively, a significant portion of which consisted of
expenditures for product masters and creation of databases for
UMI.
Working Capital
The Company operates with a negative/minimal net working
capital level principally as a result of substantial customer
prepayments for annual service contracts in all businesses 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
-25-
capital. As a result of these substantial customer prepayments
and quality and cycle time reduction efforts, the Company expects
to maintain negative/minimal investments in working capital in
the foreseeable future.
Seasonality
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 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.
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
-26-
Independent Auditors' Report
The Board of Directors
Bell & Howell Operating Company:
We have audited the accompanying consolidated balance sheets of
Bell & Howell Operating 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 audits 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 Operating 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
-27-
Bell & Howell Operating Company and Subsidiaries
Consolidated Statements of Operations
Fiscal Years 1994, 1995 and 1996
(Dollars in thousands, except per share data)
1994 1995 1996
-------- -------- --------
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 ........................... 172,769 194,667 198,648
Restructuring ........................................ 32,893 -- --
-------- -------- --------
Total operating costs and expenses ................... 682,642 736,268 813,166
Operating income ..................................... 37,698 83,621 89,631
Net interest expense:
Interest (income) .................................... (13,554) (14,209) (18,666)
Interest expense ..................................... 41,121 41,170 39,688
-------- -------- --------
Net interest expense ................................. 27,567 26,961 21,022
Earnings before income taxes
and extraordinary items ............................. 10,131 56,660 68,609
Income tax expense (benefit) ......................... (2,490) 13,439 18,400
-------- -------- --------
Earnings before extraordinary items .................. 12,621 43,221 50,209
Extraordinary losses ................................. (978) (3,219) (1,088)
-------- -------- --------
Net earnings ......................................... 11,643 40,002 49,121
Dividends on preferred stock ......................... 21,381 24,054 24,659
-------- -------- --------
Net earnings (loss) applicable to common stock ....... $ (9,738) $ 15,948 $ 24,462
======== ======== ========
Net earnings (loss) per common share:
Earnings (loss) before extraordinary items ........... $ (2,966) $ 6,487 $ 8,646
Extraordinary losses ................................. (331) (1,089) (368)
-------- -------- --------
Net earnings (loss) per common share ................. $ (3,297) $ 5,398 $ 8,278
======== ======== ========
Average number of common shares outstanding .......... 2,954 2,955 2,955
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
-28-
Bell & Howell Operating Company and Subsidiaries
Consolidated Balance Sheets
At the End of Fiscal Years 1995 and 1996
(Dollars in thousands)
Assets
------
1995 1996
-------- --------
Current assets:
Cash and cash equivalents .................................... $ 7,051 $ 15,480
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 11,814
-------- --------
Total current assets ......................................... 305,984 353,987
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 ................................................. 35,497 38,677
-------- --------
Total assets ................................................. $ 676,944 $ 792,967
======== ========
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
-29-
Bell & Howell Operating Company and Subsidiaries
Consolidated Balance Sheets
At the End of Fiscal Years 1995 and 1996
(Dollars in thousands)
Liabilities and Shareholders' Equity
------------------------------------
1995 1996
-------- --------
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 ...................................................... 81,787 78,486
Deferred income ....................................................... 176,351 171,698
Accrued income taxes .................................................. 6,539 1,143
-------- --------
Total current liabilities ............................................. 359,767 354,526
Long-term liabilities:
Long-term debt ........................................................ 243,300 336,606
Other liabilities ..................................................... 46,686 61,049
-------- --------
Total long-term liabilities ........................................... 289,986 397,655
Shareholders' equity:
$121.33 Intercompany Preferred Stock, $.01 par value,
208,059 shares outstanding at the end of fiscal 1995,
and 199,636 shares outstanding at the end of fiscal 1996 ............. 2 2
Common Stock, $.01 par value, 2,955 shares issued
and outstanding at the end of fiscal 1995 and fiscal 1996 ............ -- --
Capital surplus ....................................................... 152,485 117,531
Retained earnings (deficit)............................................ (126,484) (77,363)
Cumulative foreign exchange translation adjustments ................... 1,188 616
-------- --------
Total shareholders' equity ............................................ 27,191 40,786
Commitments and contingencies ......................................... -- --
-------- --------
Total liabilities and shareholders' equity ............................ $ 676,944 $ 792,967
======== ========
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
-30-
Bell & Howell Operating Company and Subsidiaries
Consolidated Statements of Cash Flows
Fiscal Years 1994, 1995 and 1996
(Dollars in thousands)
1994 1995 1996
-------- -------- --------
Operating activities:
Net earnings ......................................... $ 11,643 $ 40,002 $ 49,121
Depreciation and amortization ........................ 36,146 40,843 46,195
Changes in operating assets and liabilities:
Accounts receivable .................................. 741 (28,891) (5,537)
Inventory ............................................ 17,301 (27,235) (37,137)
Other current assets ................................. (1,129) (1,229) 448
Long-term receivables ................................ 30,552 (14,804) 2,355
Income taxes ......................................... (3,340) 10,041 6,003
Accounts payable ..................................... 10,004 9,475 26,166
Accrued expenses ..................................... 7,942 (2,749) (6,194)
Deferred income and other long-term liabilities ...... 11,478 22,568 (1,137)
Other, net ........................................... 11,487 (4,641) (1,273)
-------- -------- --------
Net cash provided by operating activities ............ 132,825 43,380 79,010
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:
Redemption of $121.33 Intercompany
Preferred Stock ..................................... -- -- (34,954)
Proceeds from issuance of Common Stock ............... -- 71,660 --
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) (158,546)
-------- -------- --------
Net cash provided (used) by financing activities ..... (66,453) (5,196) 37,870
Effect of exchange rate changes on cash .............. 9 (365) (393)
-------- -------- --------
Increase (decrease) in cash and cash equivalents ..... 9,289 (9,077) 8,429
Cash and cash equivalents, beginning of period ....... 6,839 16,128 7,051
-------- -------- --------
Cash and cash equivalents, end of period ............. $ 16,128 $ 7,051 $ 15,480
======== ======== ========
Supplemental schedule of non-cash activities:
Preferred dividends paid-in-kind ..................... $ 21,381 $ 24,054 $ 24,659
======== ======== ========
The accompanying Notes to the Consolidated Financial Statements are
an integral part of these statements.
-31-
Bell & Howell Operating Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
Fiscal Years 1994, 1995 and 1996
(Dollars in thousands)
Cumulative
$121.33 Foreign Unrealized
Intercompany Common Stock Retained Exchange Loss on
Preferred --------------- Capital Earnings Translation Marketable
Stock Issued Treasury Surplus Deficit) Adjustments Securities
------------ --------------- ------- -------- ----------- ---------
Balance at the end of fiscal 1993
($121.33 Intercompany Preferred
Stock 164,389 shares; Common
Stock, 2,979 shares; Treasury
stock, 25 shares) ............... $ 2 $ -- $(194) $81,019 $(178,129) $(1,898) $ (245)
Net earnings ..................... 11,643
Treasury stock, net, 25 shares ... 194 (194)
$121.33 Intercompany Preferred
Stock dividend, 20,550 shares ... -- --
Unrealized loss on marketable
securities ...................... (768)
Translation adjustments .......... 2,259
--- --- ---- ------- -------- -------- ------
Balance at the end of fiscal 1994
($121.33 Intercompany Preferred
Stock, 184,939 shares; Common
Stock, 2,954 shares) ............ 2 -- -- 80,825 (166,486) 361 (1,013)
Net earnings .................... 40,002
Common stock issued, 1 share ..... 71,660
$121.33 Intercompany Preferred
Stock dividend, 23,120 shares ... -- --
Unrealized loss on marketable
securities ...................... 1,013
Translation adjustments .......... 827
--- --- ---- ------- -------- -------- ------
Balance at the end of fiscal 1995
($121.33 Intercompany Preferred
Stock, 208,059 shares; Common
Stock, 2,955 shares) ............ 2 -- -- 152,485 (126,484) 1,188 --
Net earnings .................... 49,121
$121.33 Intercompany Preferred
Stock dividend, 24,999 shares ... -- --
Redemption of $121.33 Intercompany
Preferred Stock, 33,422 shares .. (34,954)
Translation adjustments .......... (572)
--- --- ---- ------- -------- -------- ------
Balance at the end of fiscal 1996
($121.33 Intercompany Preferred
Stock, 199,636 shares; Common
Stock, 2,955 shares) ............ $ 2 $ -- $ -- $117,531 $ (77,363) $ 616 $ --
=== === ==== ======= ======== ======== ======
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
-32-
Bell & Howell Operating Company and Subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands)
Note 1 - Basis of Presentation
Bell & Howell Operating Company, is a Delaware corporation
and a wholly-owned subsidiary of Bell & Howell Company (which is
a holding company), the primary assets of which are all of the
issued and outstanding shares of Common Stock and the
Intercompany Preferred Stock of Bell & Howell Operating Company.
Bell & Howell Company conducts business through Bell & Howell
Operating Company and has no operations of its own.
Note 2 - Significant Accounting Policies
Nature of Operations. Bell & Howell Operating Company and
its Subsidiaries (collectively the "Company"), 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.
-33-
Principles of Consolidation. The consolidated financial
statements include the accounts of the Company and its
subsidiaries. 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.
Net Earnings (Loss) per Common Share. Net earnings (loss)
per common share are determined by dividing net earnings, after
deducting dividends on preferred stock, by the weighted average
number of common shares outstanding during the period.
-34-
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:
Year end LIFO FIFO Total
-------- ------- ------- -------
1995 ....................... $ 53,601 $ 52,317 $105,918
1996 ....................... 67,051 72,780 139,831
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.
-35-
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.
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.
-36-
Information concerning the Company's business segments and
operations by geographic area for fiscal 1994, 1995 and 1996 was
as follows (dollars in millions):
Earnings (Loss) Before Income Taxes
Sales and Extraordinary Items
---------------------------- --------------------------------------
Business Segments 1994 1995 1996 1994(1) 1995 1996
----------------- ------ ------ ------ -------- -------- --------
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 .............. (27.6) (27.0) (21.0)
Corporate and other income
and expenses ...................... (11.6) (12.6) (13.3)
----- ----- ----- ----- ----- -----
Consolidated ....................... $720.3 $819.9 $902.8 $ 10.1 $ 56.7 $ 68.6
===== ===== ===== ===== ===== =====
Identifiable Assets Capital Expenditures
---------------------------- -------------------------------
1994 1995 1996 1994 1995 1996
------ ------ ------ ------ ------ ------
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 .......................... 67.8 76.6 81.7 1.3 0.2 0.3
----- ----- ----- ----- ----- -----
Consolidated ....................... $598.2 $676.9 $793.0 $ 38.3 $ 44.0 $ 42.7
===== ===== ===== ===== ===== =====
Depreciation and Amortization (2)
--------------------------------
1994 1995 1996
------ ------ ------
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
===== ===== =====
(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.
-37-
Earnings (Loss) Before
Income Taxes
Sales and Extraordinary Items (1) Identifiable Assets (2)
------------------------- ---------------------------- ------------------------
1994 1995 1996 1994 (3) 1995 1996 1994 1995 1996
----- ----- ----- -------- ----- ----- ----- ----- -----
Geographic segments
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
===== ===== ===== ===== ===== ===== ===== ===== =====
(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).
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.
-38-
Note 5 - Income Taxes
Pursuant to a tax sharing agreement with Bell & Howell
Company, the interest expense from the Senior Discount Debentures
of Bell & Howell Company is included in the Company's domestic
consolidated income tax returns.
The pretax income amounts, before extraordinary items, on
which income taxes were provided in fiscal 1994, 1995 and 1996
were:
1994 1995 1996
-------- -------- --------
Domestic ................................................. $ 8,166 $ 51,262 $ 60,404
Foreign .................................................. 1,965 5,398 8,205
-------- -------- --------
Pretax income ............................................ $ 10,131 $ 56,660 $ 68,609
======== ======== ========
The provision for income taxes in fiscal 1994, 1995 and 1996
included the following:
1994 1995 1996
-------- -------- --------
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
====== ====== ======
-39-
The significant components of deferred income tax expense
(benefit) in fiscal 1994, 1995 and 1996 were as follows:
1994 1995 1996
-------- -------- --------
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
======= ======= =======
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:
1995 1996
-------- --------
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)
======= =======
Net deferred tax liabilities are classified as other
long-term liabilities in the balance sheet.
-40-
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.
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:
1994 1995 1996
-------- -------- --------
Statutory federal income tax rate ........................... 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit .................. (20.2) 5.4 5.1
Holdings interest benefit ................................... (49.6) (16.5) (14.0)
Foreign earnings ............................................ (.6) .6 2.8
Amortization of intangibles ................................. 4.0 1.3 1.4
Repatriation of foreign earnings ............................ 5.3 (.5) (0.6)
Other ....................................................... 1.5 (1.6) (2.9)
------ ----- -----
Effective income tax rate ................................... (24.6%) 23.7% 26.8%
====== ===== =====
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.
-41-
Note 6 - Extraordinary Losses
The fiscal 1996 extraordinary loss of $1,088 ($1,700 pretax)
was comprised of the debt repurchase premium and write-off of
unamortized debt issuance costs associated with the repurchase of
$17,920 of the 10 3/4% Senior Subordinated Notes, which were
redeemed with proceeds from the 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 capital contribution by the Company's parent.
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.
Note 7 - Debt and Lines of Credit
Debt at the end of fiscal 1995 and 1996 consisted of the
following:
1995 1996
-------- --------
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
Other long-term debt ....................................... 6,242 6,093
------- -------
Long-term debt, including current maturities ................ 258,007 338,273
Less: current maturities .................................... 14,707 1,667
------- -------
Long-term debt .............................................. $243,300 $336,606
======= =======
-42-
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 and the
10 3/4% Senior Subordinated Notes were as follows:
Carrying Fair
Amount Value
-------- --------
9 1/4% Senior Notes due 2000 ................................ $ 80,000 $ 81,600
10 3/4% Senior Subordinated Notes due 2002 ................... 57,080 60,505
------- -------
$137,080 $142,105
======= =======
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, the Company 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
Acceptance Corporation ("BHAC"), the Company's financing
subsidiary, are jointly and severally liable as guarantors under
the Credit Agreement.
-43-
The 9 1/4% Senior Notes are general unsecured obligations of
the Company. The 9 1/4% Senior Notes are redeemable at the
option of the Company 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, the Company 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 or its subsidiaries at a call
price of 108%. The 9 1/4% Senior Notes are guaranteed by certain
of the Company's domestic operating subsidiaries, excluding,
among others, BHAC.
The 10 3/4% Senior Subordinated Notes are general unsecured
obligations of the Company. The 10 3/4% Senior Subordinated
Notes are redeemable at the option of the Company 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 the Company's domestic operating
subsidiaries, excluding, among others, BHAC. In fiscal 1996, the
Company repurchased $17,920 in principal value of the 10 3/4%
Senior Subordinated Notes with proceeds from the amended Credit
Agreement. In fiscal 1995, the Company repurchased $50,000 in
principal value of the 10 3/4% Senior Subordinated Notes with a
portion of the proceeds from the capital contribution by the
Company's parent.
The Credit Agreement prohibits and the 9 1/4% Senior Notes
and the 10 3/4% Senior Subordinated Notes restrict the payment of
cash dividends on the Company's Common Stock.
In fiscal 1996, BHAC entered into a new Receivables
Purchase Agreement. Under this agreement and the existing Lease
Receivables Financing Agreement (collectively, the "Agreements"),
BHAC 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, BHAC sold $71.3 million of lease receivables.
-44-
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 BHAC. The Company's
net investment in sales-type and direct financing leases at the
end of fiscal 1995 and 1996 were as follows:
1995 1996
-------- --------
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
======= =======
The scheduled maturities for sales-type and direct financing
lease receivables at the end of fiscal 1996 were as follows:
1997 ............................................................ $ 17,092
1998 ............................................................ 15,148
1999 ............................................................ 13,299
2000 ............................................................ 13,490
2001 ............................................................ 10,143
-------
Total minimum lease payments to be received ..................... $ 69,172
=======
-45-
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:
1997 ........................................................... $ 14,921
1998 ........................................................... 11,903
1999 ........................................................... 9,209
2000 ........................................................... 6,213
2001 ........................................................... 4,100
Subsequent to 2001 ............................................. 16,174
-------
$ 62,520
=======
Total rental expenses for fiscal 1994, 1995 and 1996 were
$12,356, $14,216 and $16,007, respectively.
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.
-46-
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):
1994 1995 1996
-------- -------- --------
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
======= ======= =======
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:
1995 1996
-------------------- --------------------
Funded Unfunded Funded Unfunded
------- -------- ------- --------
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)
======= ======= ======= =======
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.
-47-
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):
1994 1995 1996
-------- -------- --------
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
===== ===== =====
The accumulated postretirement benefit obligations at the end
of fiscal 1995 and 1996 were as follows:
1995 1996
-------- --------
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
====== ======
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 1.0%, 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.
-48-
Note 11 - Capital Contribution
In May 1995, the Company's parent made a capital contribution
in the amount of $71,660, the net proceeds of which were used to
repurchase $50,000 of the 10 3/4% Senior Subordinated Notes (and
associated debt repurchase premium) and to prepay $17,628 of term
loans under the Credit Agreement.
Note 12 - Common Stock
The Company has 3,500 authorized shares of Common Stock ($.01
par value per share), 2,955 of which were issued and 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 13 - Preferred Stock
The Company has 354,000 authorized shares of $121.33
Intercompany Preferred Stock ($.01 par value per share), of which
199,636 were issued and outstanding at the end of fiscal 1996. In
1996, the Company repurchased 33,422 shares of the Intercompany
Preferred Stock for $35,795, with proceeds from the amended Credit
Agreement. Dividends are payable when declared in an annual
amount equal to $121.33 prior to March 1, 2000, and $115.00 after
March 1, 2000. Dividends will cumulate until declared and paid,
and may be paid in additional shares of $121.33 Intercompany
Preferred Stock. The Credit Agreement prohibits and the 9 1/4%
Senior Notes and the 10 3/4% Senior Subordinated Notes restrict
the payment of cash dividends on the Company's $121.33
Intercompany Preferred Stock.
Note 14 - 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.
-49-
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 15 - 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 16 - Subsidiary Guarantors
The 9 1/4% Senior Notes, the 10 3/4% Senior Subordinated
Notes, and the Credit Agreement are jointly and severally
guaranteed by certain domestic operating subsidiaries of the
Company, excluding, among others, BHAC (the "Guarantors"). Such
guarantees are irrevocable and unconditional, and represent a
substantial portion of each Guarantor's net worth.
-50-
The condensed consolidating information which follows
presents:
1. Condensed consolidating balance sheets at the end of fiscal
1996 and 1995 and related condensed consolidating statements
of operations and cash flows for fiscal 1996, 1995 and 1994.
Investments in subsidiaries are accounted for by their parent
companies on the cost basis for purposes of the condensed
consolidating income statements, and therefore, earnings of
subsidiaries are not reflected in the respective parent's net
earnings.
2. Elimination entries necessary to consolidate Bell & Howell
Operating Company and its subsidiaries.
-51-
CONDENSED CONSOLIDATING BALANCE SHEET
At the End of Fiscal 1996
ASSETS
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Assets:
Cash and cash equivalents ...... $ 15,480 $ -- $ 4,318 $ 4,809 $ 6,353
Accounts receivable ............ 186,862 -- 413 137,655 48,794
Inventory ...................... 139,831 (1,282) -- 112,958 28,155
Other current assets ........... 11,814 -- 1,298 8,432 2,084
-------- -------- -------- -------- --------
Total current assets ........... 353,987 (1,282) 6,029 263,854 85,386
Investment in subsidiaries ..... -- 60,954 (60,954) -- --
Intercompany accounts .......... -- -- 118,842 (99,046) (19,796)
Net property, plant & equipment 155,728 -- 1,591 143,406 10,731
Other non-current assets ....... 283,252 (362,373) 376,875 220,228 48,522
-------- -------- -------- -------- --------
Total assets ................... $ 792,967 $(302,701) $ 442,383 $ 528,442 $ 124,843
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING BALANCE SHEET
At the End of Fiscal 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Liabilities:
Current liabilities ............ $ 354,526 $ -- $ 11,905 $ 285,590 $ 57,031
Long-term debt ................. 336,606 (362,373) 332,180 362,401 4,398
Other liabilities .............. 61,049 -- 58,128 1,556 1,365
-------- -------- -------- -------- --------
Total liabilities .............. 752,181 (362,373) 402,213 649,547 62,794
Shareholders' equity (deficit):
Intercompany Preferred Stock ... 2 -- 2 -- --
Capital surplus ................ 117,531 (179,314) 117,531 139,637 39,677
Retained earnings (deficit) .... (77,363) 238,986 (77,363) (260,742) 21,756
Cumulative foreign exchange
translation adjustments ....... 616 -- -- -- 616
-------- -------- -------- -------- --------
Total shareholders' equity
(deficit) ..................... 40,786 59,672 40,170 (121,105) 62,049
-------- -------- -------- -------- --------
Total liabilities &
shareholders' equity (deficit). $ 792,967 $(302,701) $ 442,383 $ 528,442 $ 124,843
======== ======== ======== ======== ========
-52-
CONDENSED CONSOLIDATING BALANCE SHEET
At the End of Fiscal 1995
ASSETS
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Assets:
Cash and cash equivalents ...... $ 7,051 $ -- $ 2,518 $ 1,857 $ 2,676
Accounts receivable ............ 181,247 -- 220 125,062 55,965
Inventory ...................... 105,918 (1,163) -- 75,637 31,444
Other current assets ........... 11,768 -- 998 8,525 2,245
-------- -------- -------- -------- --------
Total current assets ........... 305,984 (1,163) 3,736 211,081 92,330
Investment in subsidiaries ..... -- 105,198 (105,218) 20 --
Intercompany accounts .......... -- -- 63,429 (32,910) (30,519)
Net property, plant & equipment 144,979 -- 1,805 132,350 10,824
Other non-current assets ....... 225,981 (362,373) 377,465 161,277 49,612
-------- -------- -------- -------- --------
Total assets ................... $ 676,944 $(258,338) $ 341,217 $ 471,818 $ 122,247
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING BALANCE SHEET
At the End of Fiscal 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Liabilities:
Current liabilities ............ $ 359,767 $ -- $ 31,735 $ 265,782 $ 62,250
Long-term debt ................. 243,300 (362,373) 237,937 362,465 5,271
Other liabilities .............. 46,686 -- 45,542 343 801
-------- -------- -------- -------- --------
Total liabilities .............. 649,753 (362,373) 315,214 628,590 68,322
Shareholders' equity (deficit):
Intercompany Preferred Stock ... 2 -- 2 -- --
Capital surplus ................ 152,485 (164,436) 152,485 124,738 39,698
Retained earnings (deficit) .... (126,484) 268,471 (126,484) (281,510) 13,039
Cumulative foreign exchange
translation adjustments ....... 1,188 -- -- -- 1,188
-------- -------- -------- -------- --------
Total shareholders' equity
(deficit) ..................... 27,191 104,035 26,003 (156,772) 53,925
-------- -------- -------- -------- --------
Total liabilities &
shareholders' equity (deficit). $ 676,944 $ (258,338) $ 341,217 $ 471,818 $ 122,247
======== ========= ======== ======== ========
-53-
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Fiscal 1996
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Net sales ..................... $ 902,797 $ (47,386) $ -- $ 771,323 $ 178,860
Cost of sales ................. 576,417 (47,277) -- 498,131 125,552
Operating expenses ............ 236,749 -- (20,234) 213,476 43,518
Net interest expense (income) . 21,022 -- (11,535) 38,948 (6,391)
-------- -------- ------- -------- --------
Earnings before income
taxes and extraordinary items. 68,609 (109) 31,769 20,768 16,181
Income tax expense ............ 18,400 -- 10,936 -- 7,464
-------- -------- -------- -------- --------
Earnings before
extraordinary items .......... 50,209 (109) 20,833 20,768 8,717
Extraordinary loss ............ (1,088) -- (1,088) -- --
-------- -------- -------- -------- --------
Net earnings .................. $ 49,121 $ (109) $ 19,745 $ 20,768 $ 8,717
======== ======== ======== ======== ========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Fiscal 1995
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Net sales ..................... $ 819,889 $ (53,083) $ -- $ 689,048 $ 183,924
Cost of sales ................. 511,399 (52,876) -- 436,953 127,322
Operating expenses ............ 224,869 -- (22,995) 199,141 48,723
Net interest expense (income) . 26,961 -- (7,943) 38,935 (4,031)
-------- -------- -------- -------- --------
Earnings before income
taxes and extraordinary items. 56,660 (207) 30,938 14,019 11,910
Income tax expense (benefit) .. 13,439 (83) 9,187 -- 4,335
-------- -------- -------- -------- --------
Earnings before
extraordinary items .......... 43,221 (124) 21,751 14,019 7,575
Extraordinary losses .......... (3,219) -- (3,219) -- --
-------- -------- -------- -------- --------
Net earnings .................. $ 40,002 $ (124) $ 18,532 $ 14,019 $ 7,575
======== ======== ======== ======== ========
-54-
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Fiscal 1994
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Net sales .................... $ 720,340 $ (47,159) $ -- $ 601,822 $ 165,677
Cost of sales ................ 455,424 (47,465) -- 386,551 116,338
Operating expenses ........... 194,325 -- (18,109) 168,298 44,136
Restructuring ................ 32,893 -- -- 29,182 3,711
Net interest expense (income). 27,567 -- (9,264) 41,153 (4,322)
-------- -------- -------- -------- --------
Earnings (loss) before income
taxes and extraordinary item 10,131 306 27,373 (23,362) 5,814
Income tax expense (benefit).. (2,490) 122 (4,038) -- 1,426
-------- -------- -------- -------- --------
Earnings (loss) before
extraordinary item .......... 12,621 184 31,411 (23,362) 4,388
Extraordinary loss ........... (978) -- (978) -- --
-------- -------- -------- -------- --------
Net earnings (loss) .......... $ 11,643 $ 184 $ 30,433 $ (23,362) $ 4,388
======== ======== ======== ======== ========
-55-
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Fiscal 1996
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Net cash provided (used) by
operating activities ........ $ 79,010 $ -- $ (30,793) $ 93,627 $ 12,576
-------- -------- -------- -------- --------
Investing activities:
Expenditures for property,
plant and equipment ......... (42,744) -- (306) (40,261) (2,177)
Acquisitions ................. (65,314) -- (14,900) (50,414) --
-------- -------- -------- -------- --------
Net cash used by
investing activities ........ (108,058) -- (15,206) (90,675) (2,177)
-------- -------- -------- -------- --------
Financing activities:
Net short-term borrowings .... (6,062) -- -- -- (6,062)
Net long-term borrowings ..... 78,886 -- 79,153 -- (267)
Redemption of Intercompany
Preferred Stock ............. (34,954) -- (34,954) -- --
-------- -------- ------- ------- -------
Net cash provided (used) by
financing activities ........ 37,870 -- 44,199 -- (6,329)
------- -------- ------- ------- -------
Effect of exchange rate changes
on cash ..................... (393) -- -- -- (393)
------- -------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents ........ $ 8,429 $ -- $ 1,800 $ 2,952 $ 3,677
======== ======== ======== ======== ========
-56-
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Fiscal 1995
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Net cash provided (used) by
operating activities ........ $ 43,380 $ -- $ (1,861) $ 43,428 $ 1,813
------- -------- ------- ------- --------
Investing activities:
Expenditures for property,
plant and equipment ......... (44,047) -- (208) (40,809) (3,030)
Acquisitions ................. (2,849) -- -- (2,849) --
------- -------- ------- ------- --------
Net cash used by
investing activities ........ (46,896) -- (208) (43,658) (3,030)
------- -------- ------- ------- --------
Financing activities:
Proceeds from issuance of
Common Stock ................ 71,660 -- 71,660 -- --
Net short-term borrowings .... 2,457 -- -- -- 2,457
Net long-term borrowings ..... (79,313) -- (78,760) -- (553)
------- -------- ------- ------- --------
Net cash provided (used) by
financing activities ........ (5,196) -- (7,100) -- 1,904
------- -------- ------- ------- --------
Effect of exchange rate changes
on cash ..................... (365) -- -- -- (365)
------- -------- ------- ------- --------
Increase (decrease) in cash
and cash equivalents ........ $ (9,077) $ -- $ (9,169) $ (230) $ 322
======= ======== ======= ======= ========
-57-
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Fiscal 1994
Parent Combined
Consolidated Eliminations Company Guarantors Non-Guarantors
------------ ------------- -------- ---------- --------------
Net cash provided by
operating activities ........ $ 132,825 $ -- $ 24,825 $ 52,202 $ 55,798
-------- -------- ------- ------- -------
Investing activities:
Expenditures for property,
plant and equipment ......... (38,345) -- (1,319) (33,978) (3,048)
Acquisitions ................. (18,747) -- -- (18,409) (338)
-------- -------- ------- ------- -------
Net cash used by
investing activities ........ (57,092) -- (1,319) (52,387) (3,386)
-------- -------- ------- ------- -------
Financing activities:
Net short-term borrowings .... (4,267) -- -- -- (4,267)
Net long-term borrowings ..... (62,186) -- (12,126) -- (50,060)
-------- -------- ------- ------- -------
Net cash used by
financing activities ........ (66,453) -- (12,126) -- (54,327)
-------- -------- ------- ------- -------
Effect of exchange rate changes
on cash ..................... 9 -- -- -- 9
-------- -------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents ........ $ 9,289 $ -- $ 11,380 $ (185) $ (1,906)
======== ======== ======= ======= ========
-58-
Item 9. Changes in and Disagreements with Accountants on
- ------ ------------------------------------------------
Accounting and Financial Disclosure.
-----------------------------------
None.
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
Information regarding Directors and Executive Officers of the
Registrant is included at the end of Part I of this report.
Item 11. Executive Compensation.
- ------- ----------------------
Compensation of Directors
In 1996, the directors of the Company did not receive annual
retainer or meeting attendance fees.
-59-
Executive Compensation
The following table sets forth the cash compensation paid by
the Company to each of the five most highly compensated executive
officers for fiscal 1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
--------------------------
Long Term
Compensation
--------------------------
Awards(2) Payouts (3)
----------- -----------
Securities
Fiscal Annual Compensation Underlying LTIP All Other
Name and Principal Position Year Salary Bonus(1) Options(#) Payouts Compensation
- --------------------------- ------ ------- -------- ---------- --------- ------------
William J. White, Chairman 1996 $643,853 $294,241 --- $ --- $ 30,092 (4)
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 1995 405,655 252,689 385,000 --- 21,992 (5)
Executive Officer 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 1995 363,827 216,063 270,000 --- 31,768 (6)
and Chief 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)
Henry G. Riner, 1996 249,999 34,050 12,000 10,560 65,746 (10)
President of UMI 1995 (9) 193,655 95,000 10,000 --- 6,411 (10)
(1) Consists of amounts awarded under an employment agreement in
respect of Mr. White and under the Company's Management
Incentive Bonus Plan (the "MIB") in respect of Messrs.
Roemer, Johansson, McSwiney and Riner. 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.
(2) Amounts reflected in this column are for grants of stock
options under the 1995 Stock Option Plan for the Common Stock
of Bell & Howell Company. No Stock Appreciation Rights
(SAR's) have been used by Bell & Howell Company.
-60-
(3) For fiscal 1994, consists of amounts earned under the
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 Riner
did not participate in the 1991-1994 LTIP. Mr. Roemer earned
$287,674 under an additional long-term incentive plan.
Payments under the 1991-1994 LTIP were made in March 1995.
For fiscal 1996, consists of amounts earned under the
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.
(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.
(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.
-61-
(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) 1995 reflects compensation for the full year 1995, during
which Mr. Riner was promoted to President of UMI.
(10) For fiscal 1996 and 1995, consists of $3,000 in contributions
to the PSRP; $3,992 and $2,558 respectively, in contributions
to the RBP and $2,289 and $853 respectively, in imputed life
insurance. Fiscal 1996 additionally includes $33,903 for
relocation and related expenses; and $22,562 of income
resulting from the exercise of non-qualified stock options.
-62-
The following tables set forth the number of options to
purchase Bell & Howell Company Common Stock granted to each of the
named executive officers during fiscal 1996 and 1995 (pursuant to
the 1995 Stock Option Plan) and the potential realizable values of
such options, upon their latest possible expiration date, at
arbitrarily assumed annualized rates of stock price appreciation
of 5%, 10% and 20% over the term of the options. Because actual
gains will depend upon, among other things, the actual dates of
exercise of the options and the future performance of the Common
Stock in the market, the amounts reflected in these tables may not
reflect the ultimate values actually realized.
STOCK OPTIONS
Individual Grants
Potential Realizable
Number of Percent Value at Assumed
Securities of Total Exercise Latest Annual Rates of Stock
Underlying Annual or Possible Price Appreciation
Year of Options Options Base Price Expiration For Option Term
Name Grant Granted (#) Granted ($/Sh) Date 5% 10% 20%
- -------------------- ------- ------------ ------------ ---------- ----------- -------- -------- ----------
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 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
Henry G. Riner 1996 12,000 5.3% $31.75 May 2006 $239,609 $607,216 $1,978,052
1995 10,000 0.8% 15.50 May 2005 97,479 247,030 804,719
-63-
AGGREGATED STOCK OPTION EXERCISES IN 1996 AND
YEAR END STOCK OPTION VALUES
Number of Unexercised
Options at Value of Unexercised
In-the-Money Options
Year-End (#)(1) at Year-End ($)(1)(2)
--------------------- ----------------------
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($)(1) Unexercisable Unexercisable
- -------------------- ----------------- -------------- --------------------- -----------------------
William J. White None N/A None / 460,000 (3) None / $575,000 (3)
James P. Roemer None N/A None / 385,000 (3) None / 481,250 (3)
Nils A. Johansson None N/A None / 270,000 (3) None / 337,500 (3)
Ben L. McSwiney None N/A 2,100/ 8,400 (4) 4,725 / 18,900 (4)
None / 12,000 (5) None / None (5)
Henry G. Riner None N/A 2,000/ 8,000 (4) 14,500 / 58,000 (4)
None / 12,000 (5) None / None (5)
(1) All information provided is with respect to stock options. No SAR's
have been issued by Bell & Howell Company.
(2) These amounts have been determined by multiplying the aggregate number
of options by the difference between $22.75, the closing price of
Bell & Howell Company's Common Stock on the New York Stock
Exchange on December 27, 1996 (the last trading day of fiscal 1996),
and the exercise price of the options.
(3) 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.
(4) These options are exercisable in annual 20% increments commencing in
May of each year from May 1996 through May 2000.
(5) These options are exercisable in annual 20% increments commencing in
May of each year from May 1997 through May 2001.
-64-
The 1995 Stock 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 of 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 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, 2 years for Mr.
Riner and 1 year for Mr. McSwiney. The 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, $152,475 for Mr. Johansson and $3,675 for
Mr. Riner. No SRP benefits have yet accrued at the end of fiscal 1996 for
Mr. McSwiney.
-65-
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 the Company's other retirement plans:
SUPPLEMENTAL RETIREMENT PLAN TABLE
PARTICIPATION YEARS OF SERVICE
LEVEL I -------------------------------
REMUNERATION 15 20 or more
- ------------ --------- ----------
$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
PARTICIPATION YEARS OF SERVICE
LEVEL II --------------------------------------------------------------------------
REMUNERATION 15 20 25 30 or More
- ------------ -------- -------- -------- -----------
$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
Participants' may retire between ages 55 and 60 with benefits
reduced based on age.
-66-
Employment Contracts
The Company 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 of
Bell & Howell Company. 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 (as defined therein). The
agreement contains noncompetition and confidentiality commitments.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors of
Bell & Howell Company oversees compensation for the Company's
executive officers. The Committee in 1996 consisted of Messrs.
William E. Oberndorf (Chairman), David Bonderman, J. Taylor
Crandall, Daniel L. Doctoroff and Gary L. Roubos. None of Messrs.
Oberndorf, Bonderman, Crandall, Doctoroff and Roubos were
executive officers of the Company during 1996.
Item 12. Security Ownership of Certain Beneficial Owners and
- ------- ---------------------------------------------------
Management.
----------
None.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
therefore duly authorized.
Date: March 26, 1997 Bell & Howell Operating Company
By: /s/ William J. White
------------------------
William J. White
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
- -------------------------------- --------------------------- ----------------
/s/ William J. White Chairman of the Board March 26, 1997
- --------------------------------
William J. White
/s/ James P. Roemer President, Chief Executive March 26, 1997
- -------------------------------- Officer and Director
James P. Roemer
/s/ Nils A. Johansson Executive Vice President, March 26, 1997
- -------------------------------- Chief Financial Officer
Nils A. Johansson and Director
/s/ Stuart T. Lieberman Vice President, Controller, March 26, 1997
- -------------------------------- Chief Accounting Officer
Stuart T. Lieberman and Director
/s/ Gary S. Salit Corporate Counsel and March 26, 1997
- -------------------------------- Secretary
Gary S. Salit
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Item 14. Exhibits, Financial Statement Schedules, and Reports
- ------- ----------------------------------------------------
on Form 8-K.
-----------
(a) 1. Financial statements:
The following consolidated financial statements of
Bell & Howell Operating Company are included in Part II,
Item 8, Financial Statements and Supplementary Data:
Independent Auditors' Report
Consolidated Statements of Operations -
Fiscal years 1994, 1995 and 1996
Consolidated Balance Sheets - At the end of fiscal years
1995 and 1996
Consolidated Statements of Cash Flows -
Fiscal years 1994, 1995 and 1996
Consolidated Statements of Shareholders'
Equity - Fiscal years 1994, 1995 and 1996
Notes to Consolidated Financial Statements
2. Financial statement schedule filed as a part of
this report:
Financial Statement Schedules are omitted as the
required information is either inapplicable or is
presented in the Company's Consolidated Financial
Statements or the Notes thereto.
3. Exhibits and Financial Statement Schedules
(a) Exhibits.
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Exhibit
No. Description
------- -----------
*3.1 Form of amendment to Certificate of
Incorporation of Bell & Howell Company, as
amended, Registration No. 33-59994
*3.2 By-laws of Bell & Howell Company is
incorporated herein by reference to Exhibit
3.2 to Bell & Howell Company's Registration
Statement on Form S-1 as amended, Registration
No. 33-63556
*4.1 Form of 9 1/4% Senior Note due 2000 of
Bell & Howell Operating Company including
the form of notation relating to the
Subsidiary Guarantee of Bell & Howell
Postal Systems Inc. Bell & Howell
Document Management Products Company, Bell &
Howell Publication Systems Company,
Bell & Howell Mail Processing Systems
UMI Company and Bell & Howell Mailmobile
Company is incorporated herein by reference to
Exhibit 4.1 to Bell & Howell Operating
Company's Registration Statement on Form S-1,
as amended, Registration No. 33-63556
*4.2 Indenture dated as of June 21, 1993 between
Bell & Howell Operating Company, Bell & Howell
Postal Systems Inc., Bell & Howell
Document Management Products Company,
Bell & Howell Publication Systems Company,
Bell & Howell Mail Processing Systems,
UMI Company, Bell & Howell Mailmobile Company
and The First National Bank of Boston, as
Trustee, relating to the 9 1/4% Senior Notes
due 2000 of Bell & Howell Operating Company is
incorporated herein by reference to Exhibit
4.6 to Bell & Howell Operating Company's
Registration Statement on Form S-1, as
amended, Registration No. 33-63556
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*4.3 Form of 10 3/4% Series B Senior Subordinated
Note of Bell & Howell Operating Company
including the form of notation relating to the
Subsidiary Guarantee of Bell & Howell Document
Management Products Company, Bell & Howell
Publication Systems Company, Bell & Howell
Mail Processing Systems, UMI Company and
Bell & Howell Mailmobile Company is
incorporated herein by reference to Exhibit
4.2 to Bell & Howell Operating Company's
Registration Statement on Form S-1, as
amended, Registration No. 33-63556
*4.4 Indenture dated as of October 5, 1992 between
Bell & Howell Operating Company, Bell & Howell
Document Management Products Company,
Bell & Howell Publication Systems Company,
Bell & Howell Mail Processing Systems,
UMI Company, Bell & Howell Mailmobile Company
and The First National Bank of Boston, as
Trustee, relating to the 10 3/4% Series A and
Series B Senior Subordinated Notes due 2002 of
Bell & Howell Operating Company is
incorporated herein by reference to Exhibit
4.7 to Bell & Howell Operating Company's
Registration Statement on Form S-1, as
amended, Registration No. 33-63556
*10.1 Certificate of Designation for the $121.33
Intercompany Preferred Stock of Bell & Howell
Operating Company is incorporated herein by
reference to Exhibit 4.5 to Bell & Howell
Operating Company's Registration Statement on
Form S-1, as amended, Registration
No. 33-63556
*10.2 Amended and Restated Profit Sharing Retirement
Plan is incorporated herein by reference to
Exhibit 10.1 to Bell & Howell Operating
Company's Registration Statement on Form S-1,
as amended, Registration No. 33-63556
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*10.3 Amended and Restated Replacement Benefit Plan
is incorporated herein by reference to Exhibit
10.4 to Bell & Howell Operating Company's
Registration Statement on Form S-1, as amended,
Registration No. 33-63556
*10.4 Supplemental Retirement Plan is incorporated
herein by reference to Exhibit 10.3 to
Bell & Howell Operating Company's Registration
Statement on Form S-1, as amended, Registration
No. 33-63556
*10.5 Management Incentive Bonus Plan is incorporated
herein by reference to Exhibit 10.5 to
Bell & Howell Operating Company's Registration
Statement on Form S-1, as amended, Registration
No. 33-63556
*10.6 Long Term Incentive Plan II, 1993-1996, is
incorporated herein by reference to Exhibit
to Bell & Howell Operating Company's
Registration Statement on Form S-1, as amended,
Registration No. 33-89992
*10.7 Deferred Benefit Trust is incorporated herein
by reference to Exhibit 10.10 to Bell & Howell
Operating Company's Registration Statement on
Form S-1, as amended, Registration No. 33-63556
*10.8 Employment Agreement with William J. White
dated as of March 23, 1990 is incorporated
herein by reference to Exhibit 10.11 to
Bell & Howell Operating Company's Registration
Statement on Form S-1, as amended, Registration
No. 33-63556
*10.9 Shareholders Agreement dated May 10, 1988, as
amended, among certain Management Stockholders
(as defined therein) and Investor Shareholders
(as defined therein) is incorporated herein by
reference to Exhibit 10.17 to Bell & Howell
Company's Registration Statement on Form S-1,
as amended, Registration No. 33-59994
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*10.10 Registration Rights Agreement dated as of
May 10, 1988 by and among Bell & Howell
Group, Inc. and each of the Purchasers referred
to therein is incorporated herein by reference
to Exhibit 10.1 to Bell & Howell Operating
Company's Registration Statement on Form S-1,
as amended, Registration No. 33-63556
*10.11 Amended and Restated Credit Agreement, dated as of
September 4, 1996, among Bell & Howell Operating
Company, the Lenders listed therein and Bankers
Trust Company, as Agent, Registration No. 1-3246
*10.12 Supplement to Fourth Amendment to the
Shareholders Agreement dated May 10, 1988, as
amended, among certain Management Stockholders
(as defined therein) and Investor Shareholders
(as defined therein) Registration Statement on
Form S-1, as amended, Registration No. 33-89992
*10.13 Receivables Purchase Agreement dated May 1, 1996,
between Bell & Howell Acceptance Corporation and
the First National Bank of Chicago, Registration
No. 1-3246
11.1 Computation of Earnings (Loss) per Common Share
21.1 Subsidiaries of Bell & Howell Company
27.1 Financial Data Schedule
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* As previously filed
(b) Reports on Form 8-K filed during the last quarter
of the year:
None.
(c) Exhibits
The response to this portion of Item 14 is
submitted as a separate section of this report.
(d) Schedules
The response to this portion of Item 14 is
submitted as a separate section of this report.
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