Item 1. Business - ------ --------
Bell & Howell Company and its Subsidiaries (collectively, the "Company") is a leading global information solutions and services provider. In each of its businesses, the Company transforms information through software and services, helping its customers operate more effectively and efficiently. Within its three business segments, Information Access, Mail and Messaging Technologies and Imaging, the Company focuses on well-defined market niches where it is or can become the leader, with an emphasis on adding value to information through software, and on providing world class service and support to create strong recurring revenue streams. Within its Information Access segment, Bell & Howell develops and markets information services and systems that are focused on the needs of its customers in select vertical niches, including libraries of all kinds (including college and university, and elementary and secondary schools as well as public) and transportation and vehicle dealers. Within its Mail and Messaging Technologies segment, the Company develops and markets a complete range of high volume mail processing systems and services, which increasingly utilize the Company's proprietary software to expand the capabilities and improve the efficiency and effectiveness of customers' mailing operations. Within its Imaging segment, the Company develops and markets imaging systems and components that enable its customers to effectively file and access their documents and records, with a focus on financial institutions, governmental agencies and other paper intensive industries.
Information Access - ------------------
Information Access unique databases, proprietary access tools, and value-added services are designed to meet customers' increasing information needs, which have evolved well beyond the mere availability of information. Customers' demands for more efficient and effective 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. The Company's Information and Learning business and Publishing Services business, which together comprise Bell & Howell's Information Access segment, provide solutions to these customer needs.
Information and Learning. The Company's Information and Learning business is the world's leading value-add aggregator and provider of access to information from periodicals and newspapers, dissertations, out-of-print books and other scholarly collections. This information can be accessed via the Internet, in other electronic media, such as CD-ROM and magnetic tape, or on microfilm and paper. The Company aggregates the works of publishers and authors, adds value through the creation of proprietary abstracts and indices, software, editorial process, and by creating thematic collections for easy access by its customers and their library patrons. The Company's comprehensive database consists of over 18,000 periodical titles, 7,000 newspaper titles, as well as its unique content base including 1.5 million dissertations, 140,000 out-of-print books, 300 research collections, and over 15 million proprietary abstracts for on-line/other electronic retrieval. The ability to provide its customers with the full image as originally published distinguishes the Company from other information providers which typically store and provide information in a text-only format, omitting essential charts, graphs, pictures and other images. Customers include libraries and information centers in elementary and secondary schools, colleges and universities, public, corporate and government libraries as well as a number of well known information providers that resell the Company's electronic content primarily within the corporate desktop user market.
Publishing Services. The Company's Publishing Services business is a leading provider of turnkey systems (including software, information updates, service as well as hardware) used to manage the parts area of automotive dealerships and to provide total information systems for powersports (motorcycle and marine) and recreational vehicle dealerships.
The Company's automotive customer base consists principally of franchised dealerships, including General Motors, Chrysler, Ford, Mercedes Benz, Toyota, Land Rover, Porsche, Honda, Nissan, Volvo, Isuzu, Subaru, Hyundai, Kia, Suzuki, Western Star and more recently, Lexus. For its automotive customers, the Company creates and markets turnkey systems consisting primarily of electronic parts catalogs which allow automotive dealerships to electronically access manufacturers' proprietary technical documentation (such as parts catalogs, parts and service bulletins and other reference materials) and to interface with
other important information systems (such as inventory management and billing) within the dealership. In addition, the Company provides complete dealer management systems and electronic parts catalogs to powersports and recreational vehicle dealerships. Similar to automotive, the Company provides dealerships access to proprietary technical documentation for most major motorcycle manufacturers, including Harley Davidson, Honda, Suzuki, Yamaha, Kawasaki, Triumph, BMW, KTM and Ducati as well as the major marine manufacturers, including Mercury (Brunswick), Outboard Marine, Yamaha and Volvo-Penta.
Mail and Messaging Technologies - -------------------------------
The Company's Mail and Messaging Technologies business is the leading provider of systems and services to high volume mailers. These systems, which increasingly utilize proprietary software, automatically perform a broad range of mail processing functions, from collating, cutting, bursting, folding and inserting documents (at cycle speeds ranging up to 18,000 envelopes per hour) to optical scanning, encoding and sorting of envelopes (at speeds up to 36,000 envelopes per hour). These software-driven systems allow customers to more efficiently manage mail room operations as well as convert routine mailings (such as invoices or statements) into targeted communication and marketing programs by customizing the invoice or statement and including promotional inserts based on specific customer profiles. Customers include financial institutions, insurance companies, utilities, service bureaus, credit card companies, direct mail marketers and other companies which generate high volumes of mail. After-market service and support are an important feature of the comprehensive solutions provided to the Company's customers, and are a competitive differentiator for Bell & Howell, with service revenues representing 44% of the net sales of this segment.
Imaging - -------
Bell & Howell's Imaging business is one of the leading manufacturers of technologically advanced production scanners which convert documents into electronic format. These production scanners represent approximately 25% of the sales of this business, and are primarily sold through distributors to specialized imaging value-added resellers which integrate these
scanners into customer specific solutions. In addition, the Company is a leading developer, integrator and distributor of non-paper based systems and components that enable users to efficiently file and access their documents and records. These systems and components are customized to the needs of select vertical markets, such as financial institutions and governmental agencies, in order to provide better customer service, enhance productivity, minimize storage costs and ensure the security and integrity of their records. These systems, which utilize electronic or microfilm technology, consist of the software, hardware, accessories and supplies to capture, enhance, duplicate, store, index and retrieve a customer's data and documents. Products include a full line of computer-aided electronic and microfilm retrieval systems and components, as well as other accessories and supplies. Within this segment as well, after-market service and support are an important feature of the comprehensive solutions provided to the Company's customers. In addition, the Company is increasingly servicing other manufacturers' electronic imaging systems and components through its global network of certified technicians, with service revenues representing approximately 30% of the net sales of this segment.
Financial information for each of the Company's business segments and operations by geographic area is contained in Note 2 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 or supplemented 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 of its customers cause sales, profitability and cash flow to be higher in the fourth quarter of the year. Due to this seasonal factor, the Company maintains a revolving credit facility to fund interim cash requirements.
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 equal employment opportunity, 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 laws and regulations, and that future compliance will not have a material adverse effect upon the consolidated operations or financial condition of the Company.
Financing Subsidiary
Bell & Howell Financial Services Company ("BHFS"), the Company's financing subsidiary, provides lease financing for the Company's customers. BHFS finances its leases on a stand-alone basis through separate financing arrangements. In fiscal 1998, net interest income earned at BHFS was $9.5 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.
Sources and Availability of Raw Materials
The Company purchases a significant amount of microfilm from two vendors for its Information Access and Imaging business segments. 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 material adverse effect on the Company.
Backlog
Except in its Mail and Messaging Technologies segment, which includes customized products and assembly of complex mail processing systems, the Company fills substantially all customer orders within 30 days. In the Mail and Messaging Technologies segment, backlog at the end of fiscal 1998 totaled $78.6 million as compared to $56.8 million at the end of fiscal 1997.
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 1998, no single customer accounted for 5% 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 1998, 1997 and 1996 were $37.9 million, $38.3 million and $34.8 million, respectively. New product offerings resulting from the Company's research and development efforts served to offset declines in certain other
product lines, as the Company continually seeks to take advantage of new product/technology opportunities (with an increased emphasis on internet capabilities and software solutions) in each of its businesses. The Company's research and development expenditures include expenses primarily for database and software development, information delivery systems, production scanners and other electronic devices for the Information Access and Imaging segments, as well as for new mail processing systems that are more electronic and software driven and stand-alone software solutions for the Mail and Messaging Technologies segment.
Employees
At the end of fiscal 1998, the Company had 5,926 employees. Approximately 270 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.
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 and development facilities that the Company owns or leases in connection with its businesses:
Bell & Howell also leases facilities in the United States, Canada, France, United Kingdom, Germany, The Netherlands, Japan, Singapore, Switzerland and Austria for sales, service and warehouse space. The termination of any one of the leases, some of which are long-term, would not significantly affect the 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.
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.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - ------ ---------------------------------------------------
None.
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 - -------------------- --- ------------------------
James P. Roemer 51 Chairman of the Board of Directors, President and Chief Executive Officer
Nils A. Johansson 50 Director, Executive Vice President and Chief Financial Officer
David Bonderman 56 Director
David G. Brown 42 Director
J. Taylor Crandall 45 Director
Daniel L. Doctoroff 40 Director
William E. Oberndorf 45 Director
Gary L. Roubos 62 Director
John H. Scully 54 Director
William J. White 60 Director
Todd W. Buchardt 39 Secretary and General Counsel
Michael A. Dering 47 President and Chief Executive Officer of Bell & Howell Mail and Messaging Technologies
Stuart T. Lieberman 47 Vice President, Finance and Chief Accounting Officer
Dwight A. Mater 41 Vice President, Investor Relations and Business Development
Wayne E. Mickiewicz 47 President and Chief Executive Officer of Bell & Howell Publishing Services
Joseph P. Reynolds 49 President and Chief Executive Officer of Bell & Howell Information and Learning
Maria T. Rubly 44 Vice President, Human Resources
The business experience and certain other information relating to each director and executive officer of the Company is set forth below:
James P. Roemer has been Chairman of the Board since January 1998 and has been a Director of the Company since February 1995. In February 1997 he was elected President and Chief Executive Officer of the Company. From February 1995 to February 1997 he served as President and Chief Operating Officer of the Company. 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 Bell & Howell Publication Systems Company ("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 information service. From April 1981 to December 1982 he served as acting President of Mead Data Central.
Nils A. Johansson has been a Director of the Company since April 1990. Since January 1994, he has held the office of Executive Vice President and Chief Financial Officer of the Company. Mr. Johansson served as Senior Vice President, Finance and Chief Financial Officer of the Company from December 1991 to January 1994. From May 1989 to December 1991, he was Vice President, Finance, Treasurer and Chief Financial Officer of the Company. From February 1981 to May 1989 he held various executive positions with Bell & Howell, including Corporate Treasurer, and positions in financial planning, analysis and control, as well as business development.
David Bonderman has been a Director of the Company since December 1987. He has been the Managing General Partner of TPG Partners L.P. (a private investment company) since December 1993. From August 1992 to December 1993, he was a private investor. From July 1983 through August 1992, he was Vice President and Chief Operating Officer of Keystone, Inc. (a private investment company). He is also a Director of Beringer Wine Estates, Inc., Continental Airlines, Inc., Denbury Resources, Inc., Oxford Health Plans, Inc., Ryanair Ltd., Realty Information Group and Washington Mutual Inc.
David G. Brown has been a Director of the Company since January 1994. He has been a principal in Arbor Investors LLC (a private investment company) since August 1995, Chief Financial Officer of Keystone Inc. since September 1998 and a Vice President of Keystone, Inc. since August 1993. Prior to joining Keystone, Mr. Brown was a Vice President in the Corporate Finance Department of Salomon Brothers Inc. from August 1985 to July 1993. He is a Director of AER Energy Resources, Inc.
J. Taylor Crandall has been a Director of the Company since November 1990. He has been President and Chief Operating Officer of Keystone Inc. since September 1998 and was Vice President and Chief Financial Officer of Keystone, Inc. from October 1986 to August 1998. He was President, Director and sole stockholder of Acadia MGP, Inc. (managing general partner of Acadia Investment Partners, L.P., the sole general partner of Acadia Partners, L.P. (an investment partnership)) from January 1992 to September 1995. He is a Director of Integrated Orthopedics, Inc., Physicians Reliance Network, Quaker State Corporation, Signature Resorts, Inc., Specialty Foods, Inc. and Washington Mutual Inc.
Daniel L. Doctoroff has been a Director of the Company since June 1990. He has served as Managing Director of Oak Hill Partners, Inc. (successor to Rosecliff, Inc., the investment advisor to Acadia Partners, L.P.) since August 1987 and has been a managing Partner of Oakhill Capital Management since November 1998. Since October 1992, he also has been a Vice President of Keystone, Inc. and since February 1994 he has been Managing Partner of Insurance Partners Advisory, L.P. He is also a Director of Williams Scotsman, Inc., MeriStar Hospitality, Inc. and MeriStar Hotels and Resorts, Inc.
William E. Oberndorf has been a Director of the Company since July 1988. He has served as Managing Director of SPO Partners & Co. (a private investment company) since March 1991. He is also a Director of Plum Creek Timber Co., L.P.
Gary L. Roubos has been a Director of the Company since February 1994. He has been Chairman of the Board of Dover Corporation (a diversified equipment manufacturer) since August 1989 and was President from May 1977 to May 1993. He is also a Director of Omnicom Group, Inc.
John H. Scully has been a Director of the Company since July 1988. He has served as Managing Director of SPO Partners & Co. since March 1991. He is also a Director of Plum Creek Timber Co., L.P.
William J. White has been a Director of the Company since February 1990 and was Chairman of the Board from February 1990 to January 1998. He served as Chief Executive Officer of the Company from February 1990 to February 1997 and was President of the Company from February 1990 to February 1995. He is also a Director of Ivex Packaging Corporation, Readers Digest Association, Inc. and TJ International, Inc.
Todd W. Buchardt was appointed General Counsel in April 1998, and in September 1998 was elected to the additional office of Secretary. Prior to joining Bell & Howell, he held various legal positions with First Data Corporation from 1986 to 1998.
Michael A. Dering has been President and Chief Executive Officer of Bell & Howell Mail and Messaging Technologies since February 1998. From July 1996 to February 1998, he served as President and Chief Executive Officer of Bell & Howell Publishing Services. Prior to joining Bell & Howell he was President and Chief Executive Officer of TAB Products Company (an office filing systems company) from February 1991 to July 1996.
Stuart T. Lieberman has been Vice President, Finance and Chief Accounting Officer of the Company since March 1998. From February 1990 to February 1998, he served as Vice President, Controller and Chief Accounting Officer. Prior to joining Bell & Howell, he spent 11 years with Baxter International Inc. ("Baxter") where he held various financial positions, the most recent of which was as Vice President of Finance for Baxter's Global Renal Business.
Dwight A. Mater has been Vice President, Investor Relations and Business Development since March 1998. From July 1996 to February 1998 he served as Vice President, Business Development and from February 1994 to June 1996, he served as Director of Business Development. Prior to joining Bell & Howell, he held various marketing and business development positions with Baxter from 1988 to 1994.
Wayne E. Mickiewicz has been President and Chief Executive Officer of Bell & Howell Publishing Services since June 1998. Prior to joining Bell & Howell, he was President of Prudential Service Bureau, Inc. (a benefits administrator) from January 1997 to June 1998. From May 1990 to June 1997 he held various positions as Vice President with the Brokerage Information Services Group at Automatic Data Processing in general management, product development and servicing.
Joseph P. Reynolds has been President and Chief Executive Officer of Bell & Howell Information and Learning since April 1998. Prior to joining Bell & Howell, he was Chief Executive Officer of the School and Career Education Group of Thomson Corporation from June 1997 to April 1998 and was Chief Operating Officer of that Group from June 1995 to June 1997. From 1982 to June 1995 he held various positions in management, sales and marketing at Thomson and its Delmar Publishers subsidiary.
Maria T. Rubly has been Vice President, Human Resources of the Company since 1993. Prior to joining the Company, she spent 13 years with Baxter, including five years with American Hospital Supply Corporation until its merger with Baxter, where she held various human resource positions.
Item 5.
Item 5. Market for Registrant's Common Equity and Related - ------ ------------------------------------------------- Stockholder Matters. -------------------
The Company's Common Stock is traded on the New York Stock Exchange under the symbol "BHW".
The Company has not declared or paid any cash dividends on its Common Stock. The Company's Credit Agreement (as defined herein) contains certain restrictions on the payment of dividends on and repurchases of its Common Stock. (See Note 6 to the Consolidated Financial Statements).
The high and low closing prices of the Company's Common Stock were as follows:
Item 6.
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 January 2, 1999. 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.
Footnotes to the Selected Consolidated Financial and Operating Data:
(1) In December 1997, the Company adopted a plan to divest its postal contracting business, and accordingly the operating results of this business have been segregated from the Company's continuing operations, and are separately reported as a discontinued operation in the financial statements.
(2) EBITDA is defined as operating income from continuing operations before special charges (Mail and Messaging Technologies charge in 1997 of $6.6 million related to severance/inventory and a restructuring charge in 1994 of $32.9 million) plus depreciation and amortization, and is generally accepted as providing useful information regarding a company's financial performance. 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.
(3) Gross profit is defined as net sales less cost of sales.
(4) Excludes amortization/write-off of deferred financing costs which were as follows for the specified fiscal years: 1998 - $.5 million; 1997 - $11.2 million; 1996 - $3.2 million; 1995 - $4.0 million; 1994 - $3.8 million.
Item 7.
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 Company and Subsidiaries (collectively the "Company") and the notes thereto set forth elsewhere herein.
Except for the historical information and discussions contained herein, statements contained in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors, including without limitation, decreases in funding for Internet access as well as overall acceptance and usage of the Internet in the education and library markets, the willingness of parents to purchase educational products for home use, decreases or shifts in mail volumes, changes in the business services market, customer Year 2000 issues and concerns that could impact their purchase and investment decisions, and general economic conditions, all of which could impact future results.
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
The Company's net sales increased $43.2 million, or 5%, to $900.2 million in 1998. The increase primarily resulted from strong sales growth in both the Mail and Messaging Technologies segment as well as the Publishing Services business within the Information Access segment.
Information Access net sales increased $14.4 million, or 5%, to $320.5 million in 1998. Net sales of the Information and Learning business increased $3.3 million, or 2%, to $187.0 million due to a growing electronic subscription base, which continued to reflect strong sales of ProQuest Direct (the Company's internet-based product offering), and high renewal rates on existing products. While the sales comparison to the
prior year is adversely impacted as the Company curtailed its direct sales efforts to the corporate market (and now more profitably serves corporate libraries through resellers like Dow Jones), sales of electronic content in the core library market increased 19% over the prior year, as customers increasingly demand electronic information solutions including on-line delivery. Net sales of microfilm and paper products of the Information and Learning business increased modestly versus the prior year as increased pricing more than offset lower unit volumes. Net sales of the Publishing Services business increased $11.1 million, or 9%, to $133.5 million due to increased sales of electronic parts catalogs and ancillary products to automotive dealerships. In addition to new systems placements, the Company continued to experience strong sales of additional software applications and high contract renewal rates related to previously placed systems.
Mail and Messaging Technologies net sales increased $26.9 million, or 7%, to $404.4 million in 1998, as increased sales of high volume inserting equipment and increased service revenues were partially offset by the impact of a U.S. Postal regulatory change which spurred sorting equipment sales in 1997. Order intake increased 15%, which has resulted in the aforementioned sales growth and a substantial increase in the backlog of 38% from the beginning of the year. Service revenues (which are primarily annuity-based and represent 44% of segment sales) increased $16.2 million, or 10%, to $177.4 million due to both an expanded customer base and increased pricing.
Imaging net sales increased $1.9 million, or 1% to $175.3 million in 1998, as increased electronic service revenues were partially offset by lower sales of micrographic/optical equipment and related service revenues, and also reflected essentially constant sales of production scanners (related to a modified strategy with respect to the level of inventory maintained in the distribution channel).
The Company's cost of sales increased $14.7 million, or 3%, to $546.3 million in 1998, with the gross profit (net sales less cost of sales) percentage increasing by 1.3 percentage points to 39.3%. The higher gross profit percentage in 1998 resulted from a more profitable product mix, increased pricing, and improved manufacturing/service productivity.
Research and development expense of $37.9 million in 1998 approximated the prior year level as the Company continued to invest significantly in new product offerings. The Company continually seeks to take advantage of new product/technology opportunities (with an increased emphasis on internet capabilities and software solutions) in each of its businesses. The Company's research and development expenditures include expenses primarily for database and software development, information delivery systems, production scanners and other electronic devices for the Information Access and Imaging segments, as well as for new mail processing systems that are more electronic and software driven and stand-alone software solutions for the Mail and Messaging Technologies segment.
Selling and administrative expense increased $10.2 million, or 5%, to $225.3 million in 1998 reflecting the Company's increased investment in sales and marketing resources (which reflects an increase in the sales force in the Information and Learning business to capitalize on the sales growth opportunities of internet-based products), as well as increased distribution costs associated with the higher sales volumes.
Operating income increased $18.7 million, or 26%, to $90.7 million, while EBITDA increased $13.9 million, or 11%, to $142.7 million in 1998.
Information Access operating income increased $2.4 million, or 5%, to $55.0 million in 1998, resulting from the higher sales volumes and an improved gross profit percentage (reflecting a more profitable product mix with a greater proportion of revenues related to software and publishing and a lower proportion related to the sale of hardware). Information Access EBITDA increased $4.9 million, or 5%, to $94.4 million in 1998.
Mail and Messaging Technologies operating income increased $6.4 million, or 21%, to $36.4 million in 1998 (excluding the $6.6 million special charge in 1997), as the increased sales and improved gross profit percentage (also reflecting a more profitable product mix with an emphasis on software and service), drove the profitability improvement. Mail and Messaging Technologies EBITDA increased $5.6 million, or 15%, to $42.8 million in 1998.
Imaging operating income increased $4.1 million, or 40%, to $14.5 million in 1998 reflecting the benefits of a lower cost infrastructure. Imaging EBITDA increased $4.2 million, or 26%, to $20.2 million in 1998.
Corporate expenses increased $0.8 million, or 6%, to $15.2 million in 1998 as productivity improvements were more than offset by inflationary/other cost increases.
Net interest expense decreased $16.2 million, or 40%, to $24.4 million in 1998, primarily reflecting the impact of the Company's public offering of 5.0 million shares of Common Stock in September 1997, the proceeds of which, together with borrowings under the Company's Credit Agreement, were used to redeem debt outstanding. Net interest income of Bell & Howell Financial Services Company ("BHFS"), the Company's financing subsidiary, increased $.8 million to $9.5 million in 1998, primarily due to continued growth in the lease receivables portfolio.
Income tax expense increased in 1998 as a result of a higher level of pretax profit, with the income tax rate remaining constant with the prior year.
As a result of changing market and competitive dynamics within global government postal markets, as well as a review of its future strategic focus, in December 1997 the Company adopted a plan to divest its postal contracting business. Accordingly, the operating results of this business have been segregated from the Company's continuing operations, and are separately reported as a discontinued operation in the consolidated financial statements. Net sales for this business increased $16.7 million to $45.0 million in 1998, with a net loss of $2.7 million in 1998 versus a net loss of $22.4 million in the prior year.
The extraordinary losses of $28.9 million ($42.7 million pretax) in 1997 were comprised of the debt repurchase premiums and write-off of unamortized debt issuance costs associated with the repurchases of the 11 1/2% Senior Discount Debentures, the 9 1/4% Senior Notes and the 10 3/4% Senior Subordinated Notes.
Fiscal 1997 Compared to Fiscal 1996
The Company's net sales increased $29.6 million, or 4%, to $857.0 million in 1997. The increase resulted from continued strong sales growth within each of the Information Access businesses, as well as the North American portion of the Mail and Messaging Technologies segment. This was partially offset by the impact of divesting certain low margin product lines within the Imaging segment, and lower high volume mail processing systems sales in Europe resulting from both softer economies in Germany and France, and a stronger U.S. dollar.
Information Access net sales increased $23.6 million, or 8%, to $306.1 million in 1997. Net sales of the Information and Learning business increased $11.1 million, or 7%, to $183.7 million due to a growing electronic subscription base, which continued to reflect strong sales of ProQuest Direct(the Company's on-line product offering), high renewal rates on existing products, and the acquisition of DataTimes Corporation (in September 1996) which added complementary information content, technology and distribution to the Company's electronic product offerings. Although the Company curtailed its direct sales efforts to the corporate market in 1997 (and now more profitably serves corporate libraries through resellers like Dow Jones), sales of electronic content increased 22% over the prior year as customers increasingly demand electronic information solutions, and its newer form of on-line delivery. Net sales of microfilm and paper products of the Information and Learning business declined slightly versus the prior year as increased pricing was offset by lower unit volumes. Information and Learning sales of lower margin electronic equipment continued to decline in 1997, as on-line delivery and the availability (from other sources) of standardized computer hardware have allowed the Company to focus on providing the more valuable information content and software. Net sales of the Publishing Services business increased $12.5 million, or 11%, to $122.4 million due to increased sales of electronic parts catalogs and ancillary products to automotive dealerships, and continued strong sales of dealer management systems and electronic parts catalogs to powersports dealerships. In addition to the increased new systems placements (which reflected significant growth in Europe as the Company is the exclusive provider of electronic parts catalogs to General Motors, Mercedes Benz, and Chrysler dealers),
the Company continued to experience strong sales of additional software applications and high contract renewal rates related to previously placed systems.
Mail and Messaging Technologies net sales increased $20.6 million, or 6%, to $377.5 million in 1997 as a 14% increase in sales to high volume mailers in North America was partially offset by the impact of softer economies in Germany and France and a stronger U.S. dollar. Excluding the impact of a stronger dollar in 1997, Mail and Messaging Technologies net sales increased 8%, reflecting strong market demand for inserting and sorting systems. Sales of commercial sorting equipment (which represents 14% of equipment sales in this segment) increased $5.5 million, or 22%, to $30.6 million as the U.S. Postal Service guidelines governing the operating requirements to qualify for certain financial incentives to properly address, bar code and presort mail created a need for customers to invest in advanced sorting technology. Service revenues (which are primarily annuity-based and represent 42% of segment sales) increased $13.8 million, or 10%, to $157.3 million, due to both an expanded customer base and increased pricing.
Imaging net sales decreased $14.6 million, or 8%, to $173.4 million in 1997, as increased sales of imaging software systems were more than offset by the impact of divestitures at the end of 1996 of certain low margin product lines in Canada and France, and lower sales of production scanners resulting from a modified strategy related to distributor inventory levels. Excluding the impact of the divested product lines, Imaging net sales in 1997 would have increased by 1%.
The Company's cost of sales increased $23.5 million, or 5%, to $531.5 million in 1997, with the gross profit (net sales less cost of sales) percentage decreasing by 0.6 percentage points to 38.0% in the current year. Although the Company benefitted from improved manufacturing productivity and increased pricing in 1997, the lower gross profit rate resulted from a special charge for mail processing inventory exposures relating to the valuation of prior generation product lines. Excluding such charge, the gross profit rate in 1997 would have been approximately equal with the prior year.
Research and development expense increased $3.5 million, or 10%, to $38.3 million in 1997 as the Company continued to increase its investment in new product offerings. Such increase primarily related to increased costs to develop new electronic products for the Information and Learning business, a new technology platform for the Publishing Services business, enhanced versions of production scanners for the Imaging business, and new mail processing systems that are more electronic and software oriented. The Company continually seeks to take advantage of new product/technology opportunities (with an increased emphasis on internet capabilities and software solutions) in each of its businesses.
Selling and administrative expense increased $16.3 million, or 8%, to $215.1 million in 1997 reflecting the Company's increased investment in sales and marketing resources as well as increased distribution costs associated with the higher sales volumes.
Operating income (excluding a $6.6 million special charge related to severance/inventory exposures in the Mail and Messaging Technologies segment) decreased $7.1 million, or 8%, to $78.6 million in 1997. EBITDA of $128.8 million in 1997 was virtually equal to the prior year.
Information Access operating income increased $6.3 million, or 14%, to $52.6 million in 1997, resulting from the higher sales volumes, an improved gross profit percentage (reflecting a more profitable product mix with a greater proportion of revenues related to software and publishing and a lower proportion related to the sale of hardware), which more than offset increased research and development costs associated with new product offerings. Information Access EBITDA increased $12.2 million, or 16%, to $89.5 million in 1997.
Mail and Messaging Technologies operating income (excluding the aforementioned special charge) decreased $6.3 million, or 17%, to $30.0 million in 1997 as a lower gross profit rate (related to a less profitable product mix), increased operating cost infrastructure, and increased investment in research and development costs for higher technology mail processing systems/software was only partially offset by the impact of the higher sales volumes. Mail and Messaging Technologies EBITDA decreased $5.8 million, or 13%, to $37.2 million in 1997.
Imaging operating income decreased $6.2 million, or 38%, to $10.4 million in 1997 reflecting decreased sales of production scanners and the aforementioned divestitures of certain low margin product lines. Imaging EBITDA decreased by $5.7 million, or 26%, to $16.0 million in 1997.
Corporate expenses increased $.9 million, or 6%, to $14.4 million in 1997, as productivity improvements were more than offset by inflationary/other cost increases.
In September 1997, the Company completed a public offering of 5.0 million shares of Common Stock (issued at $28.625 per share) and entered into a new Credit Agreement which provided a revolving credit facility of $600.0 million. The net proceeds of the equity offering together with borrowings under the Company's credit facility during the year were used to repurchase $229.7 million (accreted value) of the 11 1/2% Senior Discount Debentures, $80.0 million of the 9 1/4% Senior Notes, and $57.1 million of the 10 3/4% Senior Subordinated Notes, and to repay the outstanding balance of the former Credit Agreement. Net interest expense decreased $2.5 million, or 6%, to $40.6 million in 1997, primarily reflecting the impact of the aforementioned equity offering, which was partially offset by increased debt resulting from acquisitions. Net interest income of BHFS, the Company's financing subsidiary, increased $1.9 million to $8.7 million in 1997, primarily due to continued growth in the lease receivables portfolio.
Income tax expense decreased in 1997 as a result of a lower level of pretax profit in the current year, and a reduced income tax rate related to the favorable settlement of certain prior year tax exposures.
As a result of changing market and competitive dynamics within global government postal markets, in December 1997 the Company adopted a plan to divest its postal contracting business. Accordingly, the operating results of this business have been segregated from the Company's continuing operations, and are separately reported as a discontinued operation in the consolidated financial statements. Net sales for this business decreased $47.1 million to $28.3 million in 1997 due to shipments of significant one-time contracts to postal authorities in 1996. The Company incurred a net loss for this business of $22.4 million in 1997 versus net
income of $.8 million in the prior year. The Company is a subcontractor to the same general contractor on two contracts to provide mail automation systems to foreign postal authorities, with the 1997 loss primarily resulting from additional loss reserves related to these two contracts.
The extraordinary losses of $28.9 million ($42.7 million pretax) in 1997 were comprised of the debt repurchase premiums and write-off of unamortized debt issuance costs associated with the aforementioned repurchases of the 11 1/2% Senior Discount Debentures, the 9 1/4% Senior Notes, and the 10 3/4% Senior Subordinated Notes. The extraordinary losses of $2.6 million ($4.0 million pretax) in 1996 were comprised of the debt repurchase premiums and write-off of unamortized debt issuance costs associated with the repurchases of $34.2 million (accreted value) of the 11 1/2% Senior Discount Debentures and $17.9 million of the 10 3/4% Senior Subordinated Notes.
International Operations
In fiscal 1998, 1997 and 1996, the Company had domestic net sales of $670.0 million, $633.2 million, and $587.0 million, respectively. Foreign net sales in fiscal 1998, 1997 and 1996 were $230.2 million, $223.8 million, and $240.4 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
As previously mentioned, in September 1997, the Company completed a public offering of 5.0 million shares of Common Stock (issued at $28.625 per share) and entered into a new Credit Agreement which provided a revolving credit facility of $600.0 million. The net proceeds of the equity offering together with borrowings under the credit facility were used to repurchase all of the Company's outstanding public indebtedness and repay the outstanding balance of the former Credit Agreement. At the end of fiscal 1998, the Company had $156.1 million of additional credit available under the Credit Agreement and $18.1 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.
The Company's financing subsidiary, BHFS, funds its operations by selling its lease receivables on a non-recourse basis under a Receivables Purchase Agreement. The agreement is renewable annually and includes the buyers' commitment to purchase new lease receivables. During fiscal 1998 and 1997, BHFS sold lease receivables of $56.3 million and $47.0 million respectively.
Cash provided by continuing operations increased $50.6 million to $92.7 million in 1998 resulting from the aforementioned EBITDA increase, the sale of BHFS receivables, and timing issues associated with receivable collections and vendor disbursements. Cash provided by discontinued operations improved by $29.7 million to $8.6 million in 1998, resulting from increased collections from/lower costs incurred for international postal contracts. As a result of the cash provided by operations which was partially offset by investments in acquisitions and capital expenditures, total debt (net of cash and cash equivalents) decreased by $54.1 million to $434.3 million in 1998.
Cash provided by continuing operations was $42.0 million in 1997 versus $97.7 million in 1996. Although EBITDA in 1997 was virtually equal with the prior year, the Company sold a greater level of BHFS receivables in 1996, and the Company's working capital investment increased in the current year related to the timing of receivable collections and vendor disbursements. Cash used by discontinued operations of $21.1 million in 1997 approximated the prior year level. As a result of the cash provided by operations and the aforementioned equity offering, which were partially offset by investments in acquisitions and capital expenditures, total debt (net of cash and cash equivalents) decreased by $54.4 million to $488.4 million in 1997.
For the five years subsequent to fiscal 1998, annual maturities of long-term debt are: 1999 - $3.4 million; 2000 - $.4 million; 2001 - $.3 million; 2002 - $.3 million; and 2003 - $444.2 million.
Capital Expenditures
In fiscal 1998, 1997 and 1996, capital expenditures for the Company's continuing operations were $36.4 million, $36.4 million, and $41.5 million, respectively, a significant portion of which consisted of expenditures for product masters and creation of databases for the Information and Learning business.
Seasonality
Although the Company in general is not affected by seasonal fluctuations, the buying patterns and funding availability for certain of its customers cause sales, profitability and cash flow to be higher in the fourth quarter of the year. Due to this seasonal factor, the Company maintains a revolving credit facility to fund interim cash requirements.
Impact of the Year 2000
Over the past few years, the Company has been assessing the impact on its products and computer systems of Year 2000 (Y2K) related issues. The Company's Y2K compliance plans include: inventorying affected technology and assessing the impact of the Y2K issue; developing resultant solution plans; modification/replacement and testing/certification of systems and software; and developing contingency plans as appropriate.
The Company relies on third party suppliers for systems, products and services. The Company has a comprehensive supplier compliance program in place, as the Company could be adversely impacted if these suppliers do not make the necessary changes to their own systems/products in a timely manner.
The Company has identified its products and services that are not currently Y2K compliant, nor will be modified or upgraded to become Y2K compliant. These products and services are at the end of their natural product life cycle and for most of the affected customers, newer Y2K compliant replacement products and services have been offered. For those products and services that will not be Y2K compliant, the Company provided notice to customers of its intent not to provide ongoing support of such products or services after 1999.
The Company has also identified its products and services that either are currently Y2K compliant or will be modified or upgraded to become Y2K compliant. The Company has developed plans to provide its customers with such modifications and upgrades. The completion of these plans could be adversely affected if these customers do not provide the Company with sufficient timeframes in which to make such modifications and upgrades.
A substantial portion of the Company's Y2K initiatives have been completed to date, with remaining project work expected to be completed in 1999. Based on such initiatives, and assuming that remaining issues can be addressed as planned, management believes that future costs relating to Bell & Howell's Y2K issue will not have a material adverse impact upon the consolidated operations or financial condition of the Company. However, preoccupation with Y2K initiatives in the market in general could potentially impact customer purchase decisions, which could adversely affect the Company's sales in fiscal 1999.
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency - the euro. The euro trades on currency exchanges and may be used in business transactions. The conversion to the euro will eliminate currency exchange rate risk between the member countries. Beginning in January 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the euro conversion have established plans to address the issues raised by the euro currency conversion. Management believes that future costs related to the euro conversion will not have a material adverse impact upon the consolidated operations or financial condition of the Company.
Recently Issued Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement provides a comprehensive standard for the
recognition and measurement of derivatives and hedging activities. The Company is currently evaluating the impact of this standard on its financial statements and is required to adopt this new standard beginning with its fiscal 2000 financial statements.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About - ------- ---------------------------------------------- Market Risk -----------
The Company, as a result of its global operating and financing activities, is exposed to changes in foreign currency and interest rates which may adversely affect its results of operations and financial position. In seeking to minimize such risks, the Company uses derivative financial instruments. The Company periodically utilizes interest rate swaps, caps and collars in order to hedge its exposure to interest rate risk on debt outstanding. The Company also periodically utilizes foreign currency forward or option contracts in order to hedge its exposure to changes in foreign currency rates. The Company does not utilize financial derivatives for trading or other speculative purposes.
Item 8.
Item 8. Financial Statements and Supplementary Data - ------ -------------------------------------------
Independent Auditors' Report
The Board of Directors Bell & Howell Company:
We have audited the accompanying consolidated balance sheets of Bell & Howell Company and subsidiaries (the "Company") as of the end of fiscal years 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for the fiscal years 1998, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bell & Howell Company and subsidiaries as of the end of fiscal years 1998 and 1997, and the results of their operations and their cash flows for the fiscal years 1998, 1997 and 1996 in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois February 16, 1999
Bell & Howell Company and Subsidiaries
Notes to the Consolidated Financial Statements
(Dollars and shares in thousands, except per share data)
Note 1 - Significant Accounting Policies
Nature of Operations. Bell & Howell Company and its Subsidiaries (collectively the "Company") is a leading global information solutions and services provider. The Company consists of three business segments, Information Access, Mail and Messaging Technologies and Imaging. Within its Information Access segment, Bell & Howell develops and markets information services and systems that are focused on the needs of its customers in select vertical niches, including libraries of all kinds (including college and university, and elementary and secondary schools as well as public) and transportation and vehicle dealers. Within its Mail and Messaging Technologies segment, the Company develops and markets a complete range of high volume mail processing systems and services, which increasingly utilize the Company's proprietary software to expand the capabilities and improve the efficiency and effectiveness of customers' mailing operations. Within its Imaging segment, the Company develops and markets imaging systems and components that enable its customers to effectively file and access their documents and records, with a focus on financial institutions, governmental agencies and other paper intensive industries.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Subsequent actual results may differ from those estimates.
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries. In December 1997, the Company adopted a plan to divest its postal contracting business, and accordingly the
operating results and net assets of this business have been segregated from the Company's continuing operations, and are separately reported as discontinued operations in the consolidated financial statements, with the prior year financial statements correspondingly reclassified. (See Note 4 to the Consolidated Financial Statements).
Fiscal Year. The Company's fiscal year ends on the Saturday nearest to December 31. References to fiscal 1998 are for the 52 weeks ended January 2, 1999, references to fiscal 1997 are for the 53 weeks ended January 3, 1998, and references to fiscal 1996 are for the 52 weeks ended December 28, 1996.
Revenue Recognition. Product sales include sales of equipment, software and subscriptions. Equipment and software license sales are recognized upon shipment, when all significant contractual obligations are satisfied and collection of the resulting receivable is reasonably assured. 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. 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. The Company periodically reviews its accounts receivable balances and estimates required allowances for doubtful accounts. Allowances for doubtful accounts at the end of fiscal 1998 and 1997 were $15,910 and $7,068, respectively.
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. Revenues and expenses are translated at average exchange rates prevailing during the respective fiscal periods. Assets and liabilities are translated into U.S. dollars using the exchange rates at the end of 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, and are included in the determination of the Company's comprehensive income.
Net Earnings (Loss) per Common Share. Basic net earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period, and assumes the issuance of additional common shares for all dilutive stock options outstanding during the period. A reconciliation of the weighted average number of common shares and equivalents outstanding in the calculation of basic and diluted net earnings (loss) per common share is shown in the table below for the periods indicated:
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 1998 and 1997:
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 $4,900 and $4,064 at the end of fiscal 1998 and 1997, 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, which range from 15 to 40 years. The Company periodically assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through related forecasted future cash flows. Accumulated amortization at the end of fiscal 1998 and 1997 was $47,873 and $39,990, respectively.
Stock Option Plan. As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation", the Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Pro forma net income and earnings per share disclosures for employee stock option grants based on the fair-value-based method (defined in SFAS No. 123), whereby the fair value of stock-based awards at the date of grant would be subsequently expensed over the related vesting periods, are included in Note 10 to the Consolidated Financial Statements.
Derivative Financial Instruments. The Company does not invest in any derivatives for trading purposes. The Company periodically utilizes interest rate swaps, caps and collars in order to hedge its exposure to interest rate risk on debt outstanding. The Company also periodically utilizes foreign currency forward or option contracts in order to hedge its exposure to changes in foreign currency rates. Amounts related to derivative contracts are recorded using the hedge accounting approach. The Company currently does not recognize the fair values of these derivative financial investments or their changes in fair value in its consolidated financial statements.
Note 2 - Business Segments
The Company, which is organized on the basis of products and services, has three reportable business segments, Information Access, Mail and Messaging Technologies and Imaging. (Refer to Note 1 to the Consolidated Financial Statements for a detailed description of segment operations). The Company evaluates the performance of and allocates resources to each of the segments based on their operating results excluding interest and taxes. The accounting policies for each of the segments are described in the summary of significant accounting policies in Note 1 to the Consolidated Financial Statements.
Information concerning the Company's reportable business segments and operations by geographic area for fiscal 1998, 1997 and 1996 for its continuing operations was as follows (dollars in millions):
Note 3 - Income Taxes
The earnings from continuing operations, before income taxes and extraordinary items, on which income taxes were provided in fiscal 1998, 1997 and 1996 were:
The provision for income taxes in fiscal 1998, 1997 and 1996 included the following:
The significant components of deferred income tax expense in fiscal 1998, 1997 and 1996 were as follows:
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 1998 and 1997 were as follows:
Net deferred tax liabilities, including amounts related to discontinued operations, are classified as other long-term liabilities in the balance sheet. Valuation allowances are established for certain foreign jurisdictions where the future realization of deferred tax assets have not been assumed.
At the end of fiscal 1998, the net deferred tax assets of $52,428 are expected to be realized through the reversal of taxable temporary differences which generate future taxable income.
The differences between the Company's effective rate for income taxes and the statutory federal income tax rate in fiscal 1998, 1997 and 1996 were as follows:
At the end of fiscal 1998, the United States has a net operating loss ("NOL") carryforward of $12,347 which expires in 2012. Foreign NOL carryforwards of $10,565 expire as follows: $897 in 2000, $11 in 2001, $4,304 in 2002, $3,999 in 2003, $201 in 2004, $358 in 2005 and $795 in 2006.
In the United States, the Company's current tax liability is the greater of its regular tax or alternative minimum tax ("AMT"). To the extent that AMT exceeds regular tax, the Company is entitled to an AMT credit. The Company has AMT credits of $12,792 that may be carried forward indefinitely and used as credits in future tax returns against regular tax in the event that the regular tax exceeds the AMT, or are available to offset future AMT-NOL's which can be carried back.
Net income taxes paid for fiscal 1998, 1997 and 1996 were $2,571, $5,533 and $10,943, respectively.
Note 4 - Discontinued Operations
In December 1997, the Company adopted a plan to divest its postal contracting business, and accordingly the operating results and net assets of this business have been segregated from continuing operations. The Consolidated Statements of Operations separately reflect the earnings (loss) of the postal contracting business, which includes an allocation of the Company's interest expense based on proportionate net assets. The Consolidated Balance Sheets separately reflect the net assets of the postal contracting business as a non-current asset.
Results from discontinued operations for fiscal years 1998, 1997 and 1996 are as follows:
No provision has been made for future losses for the postal contracting business during the divestiture period or for losses to dispose of the business, as no such combined loss is currently projected.
Note 5 - Extraordinary Losses
The fiscal 1997 extraordinary losses of $28,889 ($42,734 pretax) were comprised of the debt repurchase premiums and write-off of unamortized debt issuance costs associated with the repurchases of $229,712 (accreted value) of the 11 1/2% Senior Discount Debentures, $80,000 of the 9 1/4% Senior Notes and $57,080 of the 10 3/4% Senior Subordinated Notes.
The fiscal 1996 extraordinary losses of $2,585 ($4,039 pretax) were comprised of the debt repurchase premiums and write-off of unamortized debt issuance costs associated with the repurchases of $34,158 (accreted value) of the 11 1/2% Senior Discount Debentures and $17,920 of the 10 3/4% Senior Subordinated Notes.
Note 6 - Debt and Lines of Credit
Debt at the end of fiscal 1998 and 1997 consisted of the following:
The weighted average interest rates on short-term borrowings at the end of fiscal 1998 and 1997 were 7.07% and 6.85%, respectively.
At the end of fiscal 1998, the Company had foreign short-term lines of credit totaling $31,600, of which $27,800 was unused. These short-term credit lines are denominated in foreign currencies and generally require no compensating balances or commitment fees.
In fiscal 1997, the Company entered into a $600,000 revolving credit agreement ("Credit Agreement") which replaced the 1996 Bank Credit Agreement. The final maturity date of the Credit Agreement is December 31, 2003, with no principal payments due until December 31, 2002, at which time the maximum amount of the credit facility is reduced to $500,000. The interest rate on borrowings under the Credit Agreement is determined at the time of borrowing, and is based upon the Company's leverage ratio. At the end of fiscal 1998, the interest rate in effect was (at the Company's option), either LIBOR + .75%, or the prime rate. The Credit Agreement requires compliance with leverage, fixed charge and net worth covenants. The Company and its domestic operating subsidiaries, excluding Bell & Howell Financial Services Company ("BHFS"), are jointly and severally liable as guarantors under the Credit Agreement. The Credit Agreement contains certain restrictions on the payment of dividends on and repurchases of the Company's Common Stock. At the end of fiscal 1998, the Company had $156.1 million of additional credit available under the Credit Agreement.
The Company's financing subsidiary, BHFS, funds its operations by selling lease receivables on a non-recourse basis under a Receivable Purchase Agreement. The agreement is renewable annually and includes the buyer's commitment to purchase new lease receivables. During fiscal 1998 and 1997, BHFS sold lease receivables of $56,300 and $47,000, respectively.
For the five years subsequent to 1998, annual maturities of long-term debt are: 1999 - $3,365; 2000 - $413; 2001 - $349; 2002 - $309; and 2003 - $444,169.
Interest paid for fiscal 1998, 1997 and 1996 was $48,426, $46,878 and $36,275, respectively.
Note 7 - Leases
Lessor. The Company provides sales-type leases for its products and additionally leases products to customers under direct financing leases, primarily through BHFS. The Company's net investment in sales-type and direct financing leases at the end of fiscal 1998 and 1997 were as follows:
Lessee. The Company leases certain facilities and equipment for production, selling and administrative purposes. Future minimum rental payments required under long-term noncancelable operating leases at the end of fiscal 1998 were as follows:
Total rental expenses for fiscal 1998, 1997 and 1996 were $15,978, $14,657 and $16,007, respectively.
Note 8 - Profit-Sharing, Pension, and Other Postretirement Benefit 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 1998, 1997 and 1996 were $7,307, $7,025 and $5,819, respectively.
The Company also has defined benefit pension plans covering certain domestic and most foreign employees. The benefits are primarily based on years of service and/or compensation during the years immediately preceding retirement. The Company funds its foreign plans based on local statutes and funds its domestic plans in amounts that fulfill the funding requirements of the Employee Retirement Income Security Act of 1974. Plan assets consist principally of common stocks, fixed income securities and cash equivalents.
In addition, the Company has contributory and non-contributory postretirement medical benefit plans and a non-contributory postretirement life insurance benefit plan covering certain domestic employees. Each of these other postretirement benefit plans are unfunded.
The net cost of pension and other postretirement benefit plans for fiscal 1998, 1997 and 1996 were as follows:
The status of pension and other postretirement benefit plans at the end of fiscal 1998 and 1997 was as follows:
For the Company's unfunded pension plans, the projected benefit obligation and accumulated benefit obligation at the end of fiscal 1998 and 1997 were as follows:
Assumed future health care cost trend rates have a significant effect on postretirement medical benefit costs. A one percentage point change in the assumed health care cost trend rates would have the following effects:
Note 9 - Common Stock
The Company has 50,000 authorized shares of Common Stock, ($.001 par value per share), 23,277 of which were outstanding at the end of fiscal 1998, which includes 5,026 shares issued in a public offering in September 1997. The Company's Credit Agreement contains certain restrictions on the payment of dividends on and repurchases of its Common Stock.
Note 10 - Stock Compensation Plans
Stock Option Plan
In May 1995, the Company completed its initial public equity offering of 5,000 shares of Common Stock (which were issued at $15.50 per share). Coincident with the initial public equity offering, the Company adopted the 1995 Stock Option Plan (the "Option Plan"), under which 2,160 shares of Common Stock were reserved for issuance. In May 1998, the Company increased the shares reserved for issuance under the Option Plan to 3,660. The Option Plan is administered by the Compensation Committee of the Board of Directors which has authority to determine which officers and key employees of the Company will be granted options. All options are granted at not less than the fair market value on the date of the grant.
Additionally, coincident with the initial public equity offering, the Company granted options for 1,115 shares to Messrs. White, Roemer and Johansson (the "Senior Executive Grantees"), with a series of six option exercise prices (the first of which equaled the initial public equity offering price, with each subsequent exercise price set at 120% of the preceding exercise price). The term for these options is six years, with the options vesting in installments commencing after year three. In fiscal 1998, options for an additional 250 shares were granted to Mr. Roemer, which have a six year term and which vest after three years. Options may be granted to other officers and key employees of the Company (the "Key Executive Grantees"), selected by the Compensation Committee. At the end of fiscal 1998, the Company had options outstanding for 729 shares to the Key Executive Grantees. The term for these options is ten years, vesting in equal annual increments over a five year period.
Per the provisions of SFAS No. 123, the Company has elected to continue to apply APB Opinion 25 and related Interpretations in accounting for the Option Plan, and accordingly, no compensation cost has been recognized. Had compensation cost for the Option Plan been determined based on the fair value of options granted (consistent with SFAS No. 123), the Company's net income (loss) and earnings (loss) per share would have been the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: volatility of 20%; risk free interest rate of 6%; expected lives of 5 years; and no dividend yield.
A summary of the stock option transactions for fiscal 1996, 1997, and 1998 are as follows:
The following table provides additional information with respect to stock options outstanding at the end of fiscal 1998:
Employee Stock Purchase Plan
In fiscal 1996, the Company's Board of Directors adopted the Associate Stock Purchase Plan (the "ASPP"), whereby employees are afforded the opportunity to purchase shares in the Company, by authorizing the sale of up to 500 shares of Common Stock. The purchase price of the shares is 95% of the lower of the closing market price at the beginning or end of each quarter. Under SFAS No. 123, the ASPP is a non-compensatory plan.
Note 11 - Foreign Currency Transactions
The Company has entered into various contracts to buy or sell foreign currencies. The contracts have maturity dates extending through June 1999, and are for an aggregate amount of $26,753 (which approximates the fair value based on quoted market prices). The Company is exposed to market risk in the event of nonperformance by the other parties (major international banks) to these contracts, however, such nonperformance is not anticipated.
Net foreign currency transaction gains(losses) for fiscal 1998, 1997 and 1996 of $(319), $113 and $4, respectively, have been included in the earnings of the respective periods.
Note 12 - 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.
Note 13 - Related Party Transactions
The Company has made loans (the balance of which totaled $2,523 at the end of fiscal 1998) to certain key executives in connection with their purchases of the Company's Common Stock. Pursuant to the terms of such loans, the shares acquired are pledged as security. The following individuals have loans in excess of $60 outstanding at the end of fiscal 1998: Nils Johansson ($267), Michael Dering ($226), Maria Rubly ($406), Brian Longe ($209), Wayne Mickiewicz ($209), Joseph Reynolds ($225), Dwight Mater ($120), and Bruce Moeller ($175). Each loan is evidenced by an installment note maturing five years from the date of the note and bearing interest at the Company's marginal rate of borrowing (approximately 6% in fiscal 1998). Interest and principal may be deferred until the maturity date.
Note 14 -Interim Financial Information (unaudited)
The following table presents the Company's quarterly results of operations for fiscal 1998 and fiscal 1997:
Item 9.
Item 9. Changes in and Disagreements with Accountants on - ------ ------------------------------------------------ Accounting and Financial Disclosure. -----------------------------------
None.
Item 10.
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.
Item 11. Executive Compensation. - ------- ----------------------
The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 1999 (under the captions "Compensation of Directors", "Executive Compensation", "Supplemental Retirement Plan", and "Compensation Committee Interlocks and Insider Participation"), and is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and - ------- --------------------------------------------------- Management. ----------
The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 1999 (under the captions "Security Ownership of Certain Beneficial Owners and Management", and "Information Relating to Directors and Executive Officers"), and is hereby incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions. - ------- ----------------------------------------------
Information regarding Related Party Transactions is included in Note 13 of this report. The remaining information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 1999 (under the caption "Shareholders Agreement"), and is hereby incorporated by reference.
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 15, 1999 Bell & Howell Company
By: /s/ James P. Roemer
----------------------- James P. Roemer Chairman of the Board of Directors, President and Chief Executive Officer
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.
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports - ------- ---------------------------------------------------- on Form 8-K. -----------
(a) 1. Financial statements: The following consolidated financial statements of Bell & Howell Company are included in Part II, Item 8, Financial Statements and Supplementary Data:
Independent Auditors' Report
Consolidated Statements of Operations - Fiscal years 1998, 1997 and 1996
Consolidated Balance Sheets - At the end of fiscal years 1998 and 1997
Consolidated Statements of Cash Flows - Fiscal years 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity - Fiscal years 1998, 1997 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.
Exhibit No. Description
*3.1 Form of Amended and Restated Certificate of Incorporation of Bell & Howell Company (f/k/a Bell & Howell Operating Company), Amended and Restated Registration No. 333-59994 *3.2 By-laws of Bell & Howell Company (f/k/a Bell & Howell Operating Company) Registration No. 333-63556
*10.1 Amended and Restated Profit Sharing Retirement Plan is incorporated herein by reference to Exhibit 10.1 to Bell & Howell Company's (f/k/a Bell & Howell Operating Company) Registration Statement on Form S-1, as amended, Registration No. 33-63556
*10.2 Amended and Restated Replacement Benefit Plan is incorporated herein by reference to Exhibit 10.4 to Bell & Howell Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556
*10.3 Supplemental Retirement Plan is incorporated herein by reference to Exhibit 10.3 to Bell & Howell Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556
*10.4 Management Incentive Bonus Plan is incorporated herein by reference to Exhibit 10.5 to Bell & Howell Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556
*10.5 Long Term Incentive Plan II, 1993-1996, is incorporated herein by reference to Exhibit to Bell & Howell Company's Registration Statement on Form S-1, as amended, Registration No. 33-89992
*10.6 Deferred Benefit Trust is incorporated herein by reference to Exhibit 10.10 to Bell & Howell Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556
*10.7 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 *10.8 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 Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556
*10.9 Amended and Restated Credit Agreement, dated as of September 4, 1996, among Bell & Howell Company (f/k/a Bell & Howell Operating Company), the Lenders listed therein and Bankers Trust Company, as Agent, Registration No. 33-59994
*10.10 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
*10.11 Receivables Purchase Agreement dated May 1, 1996, between Bell & Howell Financial Services Company and the First National Bank of Chicago, Registration No. 33-59994
*10.12 Bell & Howell Profit Sharing Retirement Plan and Bell & Howell Associate Stock Purchase Plan, Registration Statement on Form S-8, Registration No. 33-99982
*10.13 Bell & Howell Company 1995 Stock Option Plan, Registration Statement on Form S-8, Registration No. 333-42425
21.1 Subsidiaries of Bell & Howell Company
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
* As previously filed
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors Bell & Howell Company:
We consent to incorporation by reference in the registration statements (Nos. 33-99982 and 333-48425) on Form S-8 of Bell & Howell Company of our report dated February 16, 1999, relating to the consolidated balance sheets of Bell & Howell Company and subsidiaries as of the end of fiscal years 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for the fiscal years 1998, 1997 and 1996, which report appears in the fiscal 1998 annual report on Form 10-K of Bell & Howell Company.
KPMG LLP
Chicago, Illinois March 15, 1999