UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission file number
September 28, 1996 33-59994
BELL & HOWELL COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3875177
(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) 470-7660
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of the Registrant's Common Stock, $.001
par value, outstanding as of November 11, 1996 was 18,300,685.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Operations for
the Thirteen and Thirty-Nine Weeks Ended
September 30, 1995 and September 28, 1996 .... 1
Consolidated Balance Sheets - Assets at
December 30, 1995 and September 28, 1996 ..... 2
Consolidated Balance Sheets - Liabilities
and Shareholders' Equity at December 30, 1995
and September 28, 1996 ....................... 3
Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended September 30, 1995
and September 28, 1996 ........................ 4
Notes to the Consolidated Financial
Statements ................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................. 13
Item 6. Exhibits and Reports on Form 8-K ............... 13
SIGNATURE PAGE ............................................ 14
Bell & Howell Company and Subsidiaries
Consolidated Statements of Operations
(Dollars and shares in thousands, except per share data)
(Unaudited)
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
---------------------- ----------------------
Sept. 30, Sept. 28, Sept. 30, Sept. 28,
1995 1996 1995 1996
-------- -------- -------- --------
Net sales $ 203,009 $ 218,840 $ 580,193 $ 633,905
Operating costs and expenses:
Cost of sales 127,958 140,995 369,437 410,407
Research and development 7,704 9,492 22,363 25,946
Selling and administrative 48,475 47,971 141,732 145,500
-------- -------- -------- -------
Total operating costs and expenses 184,137 198,458 533,532 581,853
Operating income 18,872 20,382 46,661 52,052
Net interest expense:
Interest (income) (3,193) (5,410) (10,646) (13,676)
Interest expense 15,402 15,832 49,488 46,840
-------- -------- -------- --------
Net interest expense 12,209 10,422 38,842 33,164
Earnings before income taxes
and extraordinary items 6,663 9,960 7,819 18,888
Income tax expense 2,828 5,137 3,469 8,868
-------- -------- -------- --------
Earnings before extraordinary items 3,835 4,823 4,350 10,020
Extraordinary losses -- -- (3,219) (2,585)
-------- -------- -------- --------
Net earnings $ 3,835 $ 4,823 $ 1,131 $ 7,435
======== ======== ======== ========
Net earnings per common share:
Primary:
Earnings before extraordinary items $ 0.21 $ 0.26 $ 0.27 $ 0.54
Extraordinary losses -- -- (0.20) (0.14)
-------- -------- -------- --------
Net earnings per common share $ 0.21 $ 0.26 $ 0.07 $ 0.40
======== ======== ======== ========
Fully Diluted:
Earnings before extraordinary items $ 0.21 $ 0.26 $ 0.27 $ 0.54
Extraordinary losses -- -- (0.20) (0.14)
-------- -------- -------- --------
Net earnings per common share $ 0.21 $ 0.26 $ 0.07 $ 0.40
======== ======== ======== ========
Average number of common shares and
equivalents outstanding:
Primary 18,329 18,545 16,003 18,584
Fully Diluted 18,329 18,571 16,003 18,591
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
-1-
Bell & Howell Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
Assets
December 30, September 28,
1995 1996
------------ ------------
(Audited) (Unaudited)
Current assets:
Cash and cash equivalents $ 7,262 $ 6,372
Accounts receivable, less allowance for
doubtful accounts of $4,406 and $6,002,
respectively 181,247 177,825
Inventory 105,918 148,426
Other current assets 11,768 10,764
-------- --------
Total current assets 306,195 343,387
Property, plant and equipment, at cost 316,036 353,388
Accumulated depreciation (171,057) (200,444)
-------- --------
Net property, plant and equipment 144,979 152,944
Long-term receivables 57,062 51,056
Goodwill, net of accumulated amortization 133,422 187,868
Other assets 40,483 41,219
-------- --------
Total assets $ 682,141 $ 776,474
======== ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
-2-
Bell & Howell Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
Liabilities and Shareholders' Equity
December 30, September 28,
1995 1996
------------ -------------
(Audited) (Unaudited)
Current liabilities:
Notes payable $ 14,939 $ 9,897
Current maturities of long-term debt 14,707 1,441
Accounts payable 65,444 65,138
Accrued expenses 81,717 80,958
Deferred income 176,351 166,136
Accrued income taxes 6,539 5,321
-------- --------
Total current liabilities 359,697 328,891
Long-term liabilities:
Long-term debt 465,230 580,739
Other liabilities 46,686 49,842
-------- --------
Total long-term liabilities 511,916 630,581
Shareholders' equity (deficit):
Common Stock, $.001 par value, 18,336,206 shares
issued and 18,329,117 shares outstanding at
December 30, 1995, and 18,350,718 shares issued
and 18,300,685 shares outstanding at
September 28, 1996 18 18
Capital surplus 328 1,219
Notes receivable from executives (2,054) (1,425)
Retained earnings (deficit) (188,921) (181,486)
Cumulative foreign exchange translation adjustments 1,187 309
Treasury stock (30) (1,633)
-------- --------
Total shareholders' equity (deficit) (189,472) (182,998)
Commitments and contingencies -- --
-------- --------
Total liabilities and shareholders' equity (deficit) $ 682,141 $ 776,474
======== ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
-3-
Bell & Howell Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Thirty-Nine Weeks
Ended
-----------------------------
Sept. 30, Sept. 28,
1995 1996
-------- --------
Operating activities:
Net earnings $ 1,131 $ 7,435
Depreciation and amortization 31,906 35,560
Debt accretion 17,609 17,928
Changes in operating assets and liabilities:
Accounts receivable (2,972) 4,840
Inventory (26,678) (43,071)
Other current assets 1,333 1,675
Long-term receivables (11,780) 6,006
Income taxes (207) (756)
Accounts payable 1,693 (981)
Accrued expenses (11,128) (3,507)
Deferred income and other long-term liabilities 25,916 (8,207)
Other, net (1,004) (3,050)
------- -------
Net cash provided by operating activities 25,819 13,872
Investing activities:
Expenditures for property, plant and equipment (30,734) (30,440)
Acquisitions (2,438) (62,568)
------- -------
Net cash used by investing activities (33,172) (93,008)
Financing activities:
Proceeds from short-term debt 13,199 11,409
Repayment of short-term debt (13,919) (16,058)
Proceeds from long-term debt 50,887 235,384
Repayment of long-term debt (120,922) (152,390)
Proceeds from Common Stock, net 71,314 (112)
------- -------
Net cash provided by financing activities 559 78,233
Effect of exchange rate changes on cash (476) 13
------- -------
Increase (decrease) in cash and cash equivalents (7,270) (890)
Cash and cash equivalents, beginning of period 16,174 7,262
------- -------
Cash and cash equivalents, end of period $ 8,904 $ 6,372
======= ========
The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.
-4-
Bell & Howell Company and Subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands)
Note 1 - Basis of Presentation
Bell & Howell Company is a holding company, the primary
assets of which are all of the issued and outstanding shares of
Common Stock and the Intercompany Preferred Stock of
Bell & Howell Operating Company. Bell & Howell Company conducts
business through Bell & Howell Operating Company and has no
operations of its own.
The consolidated financial statements include the accounts
of Bell & Howell Company and its subsidiaries (collectively the
"Company") and have been prepared without independent audit,
except for the balance sheet data as of December 30, 1995.
Certain prior year amounts have been reclassified to conform with
the 1996 presentation.
In the opinion of the Company's management, the consolidated
financial statements include all adjustments necessary to present
fairly the information required to be set forth therein, and such
adjustments are of a normal and recurring nature. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The Company's management believes, however, that the disclosures
are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto included
in Bell & Howell Company's annual report for the year ended
December 30, 1995.
-5-
Note 2 - Significant Accounting Policies
Net Earnings per Common Share. Net earnings per common
share are determined by dividing net earnings by the weighted
average number of common shares outstanding during the period.
If dilutive, stock options are included as common stock
equivalents.
Inventory. The Company uses the last-in, first-out (LIFO)
method of valuing the majority of its domestic inventory. Use of
the LIFO method is predicated on a determination of inventory
quantities and costs at the end of each fiscal year, and
therefore interim determinations of LIFO inventory values and
results of operations are by necessity based on management's
estimates of expected year-end inventory quantities and costs.
The excess of replacement cost over the LIFO values of inventory
was $4,413 at December 30, 1995, and September 28, 1996.
Note 3 - Public Equity Offering/Supplementary Earnings Per Share Data
In May 1995, the Company completed its initial public
offering of 5,000,000 shares of Common Stock (which were issued
at $15.50 per share), the net proceeds of which were used to
retire $50,000 of the 10 3/4% Senior Subordinated Notes and to
prepay $17,628 of term loans under the Credit Agreement.
The following supplementary 1995 pro forma earnings per
share data assumes that the initial public offering of the
5,000,000 shares of Common Stock occurred at the beginning of the
year.
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
September 30, 1995 September 30, 1995
------------------ ------------------
Net earnings before
extraordinary items $ .21 $ .34
Extraordinary losses -- (.18)
---- ----
Net earnings (loss) per
common share $ .21 $ .16
==== ====
-6-
Note 4 - Credit/Lease Receivable Sales Agreements
In April 1996, the Company amended its Credit Agreement.
Under the terms of the amendment, the Company increased its
revolving credit facility to $275,000, reduced its interest rate
and extended the maturity on all outstanding Credit Agreement
borrowings (to April 2001). In September 1996, the Company
further amended its Credit Agreement to increase the revolving
credit facility to $350,000.
In May 1996, Bell & Howell Acceptance Corporation ("BHAC"),
the Company's financing subsidiary, entered into a new receivable
sales agreement under which the buyer commits to purchase new
lease receivables. There is no recourse to BHAC or to the
Company after the sale of lease receivables pursuant to the
agreement.
Note 5 - Extraordinary Losses
The extraordinary losses of $2,585 ($4,039 pretax) in 1996
were comprised of the debt repurchase premium and write-off of
unamortized debt issuance costs associated with the retirement of
$17,920 of the 10 3/4% Senior Subordinated Notes and $34,158
(accreted value) of the 11 1/2% Senior Discount Debentures, which
were redeemed with proceeds from the amended Credit Agreement.
The extraordinary losses of $3,219 ($5,030 pretax) in 1995
were comprised of the debt repurchase premium and write-off of
unamortized debt issuance costs associated with the retirement
of $50,000 of the 10 3/4% Senior Subordinated Notes and the
write-off of unamortized debt issuance costs associated with the
prepayment of $17,628 of term loans under the Credit Agreement,
both of which reflect the application of the net proceeds from
the initial public equity offering.
-7-
Item 2.
- ------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
This section should be read in conjunction with the
Consolidated Financial Statements of Bell & Howell Company and
Subsidiaries (collectively the "Company") and the notes thereto
included in the annual report for the year ended December 30, 1995.
Results of Operations
- ---------------------
Nine Months Year-to-Date 1996 Compared to Nine Months
Year-to-Date 1995
- -----------------------------------------------------
The Company's net sales increased $53.7 million, or 9%, to
$633.9 million in the first nine months of 1996.
Information Access net sales increased $11.9 million, or 4%,
to $332.0 million in the first nine months of 1996. Within the
Information Access businesses, the Company focuses on providing
its customers solutions to their information access needs.
UMI focuses on the education and library market as well
as the business 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's net sales increased $5.6 million, or 5% to
$122.9 million due to a growing electronic subscription base,
which continued to reflect high renewal rates on existing
products and new product placements. Sales of electronic content
increased 20% 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 were
virtually constant with the prior year as increased pricing
offset lower unit volumes, as certain customers migrated to these
-8-
electronic product offerings. PSC's net sales increased $8.0
million, or 12%, to $74.9 million due to strong replacement and
add-on/upgrade sales related to previously placed electronic
parts catalogs to automotive dealerships, and increased sales of
dealer management systems and electronic parts catalogs to
powersports dealerships. Information Management net sales
decreased $1.7 million, or 1% to $134.2 million as increased
worldwide sales of digital paper scanners and imaging software
systems were more than 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.).
Mail-Processing net sales increased $41.8 million, or 16%,
to $301.9 million in the first nine months of 1996. Sales of
commercial mail processing systems increased $24.2 million or
11%, to $245.5 million reflecting strong market demand for
inserting and sorting systems both domestically and abroad, and
increased service revenue (due to both an expanding customer
service base and improved pricing). Sales of commercial sorting
equipment (which represent 13% of new equipment sales) increased
$8.8 million, or 93%, to $18.3 million in the first nine months
of 1996 as the recently approved 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/services to governmental postal
authorities increased $17.6 million, or 45%, to $56.4 million
primarily as a result of a production contract for the German
Postal service.
The Company's cost of sales increased $41.0 million, or 11%,
to $410.4 million in the first nine months of 1996, with the
gross profit (net sales less cost of sales) percentage decreasing
by 1.0 percentage point to 35.3% 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
Systems 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.
-9-
Research and development expense increased $3.6 million, or
16%, to $25.9 million in the first nine months of 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 expense increased $3.8 million,
or 3%, to $145.5 million in the first nine months of 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 23.0% in the first
nine months of 1996 improved by 1.5 percentage points versus the
prior year as a result of various expense leveraging initiatives.
EBITDA (defined as operating income plus depreciation and
amortization) increased $9.8 million, or 13%, to $84.9 million
in the first nine months of 1996 resulting from the higher sales
level and leveraged operating costs and expenses. Operating
income increased $5.4 million, or 12%, to $52.1 million in the
first nine months of 1996.
Information Access EBITDA increased $3.0 million, or 5%,
to $65.7 million in the first nine months of 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. Information Access operating income of $39.3
million in the first nine months of 1996 was constant with the
prior year as the EBITDA increase was offset by both higher
depreciation cost on UMI's product capital and goodwill
amortization related to two acquisitions in 1996.
-10-
Mail-Processing EBITDA increased $7.4 million, or 35%, to
$28.8 million in the first nine months of 1996. The increase
resulted from the increased sales volume and leveraged operating
costs and expenses, which included the increased investment in
research and development for higher technology mail processing
systems/software. Mail-Processing Systems operating income
increased $5.9 million, or 35%, to $22.7 million in the first
nine months of 1996.
Corporate expenses (excluding depreciation and amortization)
increased $.6 million, or 6%, to $9.6 million in the first nine
months of 1996, reflecting inflationary cost increases and costs
associated with being a publicly traded Company.
Net interest expense decreased $5.7 million, or 15%, to
$33.2 million in the first nine months of 1996, primarily
reflecting the reduction in interest expense resulting from the
initial public equity offering in May of 1995 (the net proceeds
of which were used to retire $50.0 million of the 10 3/4% Senior
Subordinated Notes and to prepay $17.6 million of term loans
under the Credit Agreement). Net interest expense was further
reduced by the repurchase in 1996 of $17.9 million of the 10 3/4%
Senior Subordinated Notes and $34.2 million (accreted value) of
the 11 1/2% Senior Discount Debentures, which were redeemed with
proceeds from the amended Credit Agreement. Net interest income
of Bell & Howell Acceptance Corporation, the Company's financing
subsidiary, increased $1.5 million to $5.1 million in the first
nine months of 1996 due to continued growth in the lease
receivables portfolio.
Income tax expense increased in the first nine months of
1996 as a result of a higher level of pretax profit in the
current year.
The extraordinary losses of $2.6 million ($4.0 million
pretax) in the first nine months of 1996 were comprised of the
debt repurchase premium and write-off of unamortized debt
issuance costs associated with the aforementioned repurchase and
retirement of the 10 3/4% Senior Subordinated Notes and the
11 1/2% Senior Discount Debentures. The extraordinary losses of
$3.2 million ($5.0 million pretax) in the first nine months of
1995 were comprised of the debt repurchase premium and write-off
-11-
of unamortized debt issuance costs associated with the
aforementioned retirement 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 initial public equity offering.
Cash provided by operations was $11.6 million in the first
nine months of 1996 versus cash provided by operations of $25.8
million in the first nine months of 1995. The prior year
comparison is adversely impacted by the increased investment in
inventory in 1996 related to the European postal service
contracts, for which a significant prepayment was received in
1995. The Company operates with a negative/minimal working
capital level principally as a result of substantial customer
prepayments for both annual service contracts in each of the
business segments and subscriptions in the Information Access
business segment.
As a result of acquisitions (primarily the acquisitions of
DataTimes Corporation and Protocorp International, Inc.),
continued capital expenditures, the aforementioned inventory
investments, the seasonal nature of the Company's cash
collections and disbursements and continued interest accretion on
the 11 1/2% Senior Discount Debentures, debt (net of cash and
cash equivalents) increased by $98.1 million to $585.7 million in
the first nine months of 1996.
-12-
Part II. Other Information
- ---------------------------
Item 1. Legal Proceedings.
- ------ -----------------
The Company is involved in various legal proceedings
incidental to its business. Management believes that the outcome
of such proceedings will not have a material adverse effect upon
the consolidated operations or financial condition of the
Company.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
Index Number Description
------------ ----------------------------
(10.1) 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
(11.1) Computation of Earnings
Per Common Share
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the thirteen weeks
ended September 28, 1996.
-13-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: November 11, 1996 BELL & HOWELL COMPANY
/s/ William J. White
William J. White
Chairman of the Board, Chief
Executive Officer and Director
/s/Nils A. Johansson
Nils A. Johansson
Executive Vice President,
Chief Financial Officer
and Director
-14-