-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mt/wdyqdqxyygkprFiK2Fy/V7MWgjWkp26zpoDyAIZayoyHaE22h1nsj7hREztsV uurYJH2Ncd4H7xjhPCj1kA== 0000912057-97-029608.txt : 19970912 0000912057-97-029608.hdr.sgml : 19970912 ACCESSION NUMBER: 0000912057-97-029608 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970829 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELL & HOWELL CO CENTRAL INDEX KEY: 0000899596 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE MACHINES, NEC [3579] IRS NUMBER: 363875177 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33123 FILM NUMBER: 97673766 BUSINESS ADDRESS: STREET 1: 5215 OLD ORCHARD RD CITY: SKOKIE STATE: IL ZIP: 60077 BUSINESS PHONE: 7084707660 FORMER COMPANY: FORMER CONFORMED NAME: BELL & HOWELL HOLDINGS CO DATE OF NAME CHANGE: 19930326 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1997 REGISTRATION NO. 333-33123 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- BELL & HOWELL COMPANY (Exact name of registrant as specified in its charter) DELAWARE 7375 36-3875177 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification incorporation or organization) Number)
5215 OLD ORCHARD ROAD, SKOKIE, ILLINOIS 60077-1076 (847) 470-7660 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) JAMES P. ROEMER BELL & HOWELL COMPANY 5215 OLD ORCHARD ROAD, SKOKIE, ILLINOIS 60077-1076 (847) 470-7660 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: WILLIAM J. MCGRATH, P.C. KIRK A. DAVENPORT, ESQ. McDermott, Will & Emery Latham & Watkins 227 West Monroe Street 885 Third Avenue Chicago, Illinois 60606 New York, New York 10022 (312) 372-2000 (212) 906-1200 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE REGISTRANT AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED AUGUST 29, 1997 PROSPECTUS [LOGO] , 1997 4,177,259 SHARES BELL & HOWELL COMPANY COMMON STOCK ------------------- Of the 4,177,259 shares of common stock, par value $.001 per share (the "Common Stock"), of Bell & Howell Company, a Delaware corporation ("Bell & Howell" or the "Company"), offered hereby (the "Offering"), 3,861,004 shares are being sold by the Company and 316,255 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). The Company will not receive any of the net proceeds from the sale of Common Stock by the Selling Stockholders. All of the net proceeds to the Company from the Offering will be used by the Company to repay certain outstanding indebtedness. See "Use of Proceeds." The Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "BHW." The last reported sale price of the Common Stock on the New York Stock Exchange Composite Tape on August 27, 1997 was $32 3/8 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ----------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO THE DISCOUNTS AND TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS - ----------------------------------------------------------------------------------------------- Per share.................. $ $ $ $ Total(3)................... $ $ $ $ - -----------------------------------------------------------------------------------------------
(1) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE UNDERWRITERS (AS DEFINED) AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). (2) THE COMPANY HAS AGREED TO PAY CERTAIN EXPENSES OF THE OFFERING, ESTIMATED AT $ . (3) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30 DAYS HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 626,589 ADDITIONAL SHARES OF COMMON STOCK AT THE PRICE TO THE PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS, PROCEEDS TO COMPANY AND PROCEEDS TO SELLING STOCKHOLDERS WILL BE $ , $ , $ , AND $ , RESPECTIVELY. SEE "UNDERWRITING." The shares of the Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain prior conditions including the right of the Underwriters to reject orders in whole or in part. It is expected that delivery of the shares will be made in New York, New York on or about , 1997. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BEAR, STEARNS & CO. INC. SALOMON BROTHERS INC SMITH BARNEY INC.
TRANSPORTATION AND VEHICLE For automotive, motorcycle and marine dealerships in the transportation and vehicle market, Bell & Howell replaces hard copy technical and parts manuals with a single electronic system that integrates text, graphics and illustrations. Dealers benefit from increased parts sales, lower inventory and higher productivity. Bell & Howell's ability to provide access to information from multiple manufacturers positions it to benefit from the recent trends toward consolidation in [PICTURES] the automotive dealer industry. EDUCATION AND LIBRARY For its education and library customers, Bell & Howell's ProQuest Direct-Registered Trademark- system provides on-line access to an intelligent content base of scientific, technical reference, business, general interest and other information. The Company's information database includes 14 million proprietary abstracts and rights to full text and full image to over 18,000 periodical titles, 7,000 newspaper titles and 1.5 million dissertations. Bell & Howell also makes this information available on CD-ROM, magnetic tape, microfilm and paper-- whichever [PICTURES] media the customer desires.
------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE INDICATES, ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "BELL & HOWELL" ARE TO BELL & HOWELL COMPANY AND ITS DIRECT AND INDIRECT WHOLLY-OWNED SUBSIDIARIES, AND ALL REFERENCES TO "BHOC" ARE TO BELL & HOWELL OPERATING COMPANY, A WHOLLY-OWNED SUBSIDIARY OF THE COMPANY. BELL & HOWELL COMPANY, INCORPORATED IN DELAWARE IN FEBRUARY 1993, BENEFICIALLY OWNS ALL OF THE OUTSTANDING CAPITAL STOCK OF BHOC AND DOES NOT OWN ANY OTHER MATERIAL ASSETS OR CONDUCT ANY BUSINESS OPERATIONS. THE COMPANY'S FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO DECEMBER 31ST IN EACH CALENDAR YEAR. ALL REFERENCES TO "FIRST HALF 1996" AND "FIRST HALF 1997" ARE TO THE COMPANY'S TWENTY-SIX WEEK PERIODS ENDED JUNE 29, 1996 AND JUNE 28, 1997, RESPECTIVELY. ALL REFERENCES TO "CONSOLIDATED ANNUAL FINANCIAL STATEMENTS" AND "CONSOLIDATED INTERIM FINANCIAL STATEMENTS" ARE TO THE COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR FISCAL YEARS 1994, 1995 AND 1996 AND THE COMPANY'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 29, 1996 AND JUNE 28, 1997, RESPECTIVELY. ALL REFERENCES TO "CONSOLIDATED FINANCIAL STATEMENTS" ARE TO BOTH THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS AND THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS. ALL INFORMATION ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." THE COMPANY Bell & Howell is a global provider of systems and services for information access and high volume mail processing. Within its two business segments, Information Access and Mail Processing, the Company focuses on well-defined vertical markets where it is or can become the market leader. Within its Information Access segment, Bell & Howell develops and markets imaging and information systems that are focused on the needs of its customers in select vertical markets, which include transportation and vehicle dealers, libraries of all kinds (including college and university, elementary and high school as well as public and corporate), financial institutions, governmental agencies and other paper intensive industries. Within its Mail Processing segment, the Company develops and markets a complete range of high volume mail processing systems, which increasingly utilize the Company's proprietary software to expand the capabilities and improve the efficiency and effectiveness of customers' mailing operations. The Company's net sales, EBITDA and earnings before extraordinary items in 1996 were $902.8 million, $133.6 million and $25.7 million, respectively. The Company's net sales, EBITDA and earnings before extraordinary items were $418.2 million, $62.6 million and $6.7 million in first half 1997, respectively, compared to $415.1 million, $53.3 million and $5.2 million in first half 1996, respectively. The Company's strategy is to attain leadership positions in well-defined, defensible market niches within select industries or vertical markets where it believes there are significant opportunities for growth. By focusing on specific vertical markets, the Company gains an in-depth understanding of its customers and their industries. The Company believes this additional focus and customer intimacy gives the Company a competitive advantage in anticipating customer needs and being first to market with products that will achieve or maintain market leadership. The Company believes that its industry expertise will provide for more defensible market positions and additional opportunities for growth. In 1996, the Information Access segment represented 52% of net sales and 67% of EBITDA (excluding corporate expenses). The Mail Processing segment represented 48% of net sales and 33% of EBITDA (excluding corporate expenses). The Company has historically achieved higher margins in its Information Access segment due to its significant operating leverage as well as its large base of recurring revenue with high renewal rates. The Company's two business segments share a number of important strategic similarities, including strong market positions, a reputation for high quality products and service excellence, broad recognition of the Bell & Howell brand name and a significant international presence. In addition, the Company derives a substantial portion of its net sales from prepaid subscriptions and service agreements that historically have had renewal rates in excess of 90%. Bell & Howell markets its products worldwide with approximately 30% of its net sales in fiscal 1996 to customers outside the United States. 3 Furthermore, Bell & Howell is able to leverage certain important technologies and expertise across its businesses, such as imaging and software technology, information indexing and organizing capabilities as well as expertise in paper handling. INFORMATION ACCESS Information Access's unique databases, proprietary access tools, value-added services and image capture/enhancement systems are designed to meet customers' increasing information needs, which have evolved well beyond the mere availability of information. Customers' demands for more efficient access to relevant data for specific information requirements are being driven by their needs to reduce search time and cost while performing more focused yet comprehensive searches. Within its Information Access segment, the Company provides quick and easy access to information in select vertical markets, such as transportation and vehicle dealers, libraries of all kinds (including college and university, elementary and high school as well as public and corporate), financial institutions, governmental agencies and other paper intensive industries. TRANSPORTATION AND VEHICLE MARKET. The transportation and vehicle market is an excellent example of the Company's strategy of market leadership in well-defined, defensible market niches. The Company serves its customers in this market through its subsidiary, Bell & Howell Publications Systems Company ("PSC"), which is a leading provider of turnkey systems (including software, information updates, service as well as hardware) used to manage the parts area of automotive dealerships and to provide total information systems for powersports (motorcycle and marine) dealerships. The Company's automotive customer base consists principally of franchised dealerships, including General Motors ("GM"), Chrysler, Mercedes Benz, Land Rover, Porsche, Honda, Nissan, Volvo, Isuzu, Subaru, Hyundai, and most recently, Ford and Toyota. For the Company's automotive customers, the Company creates and markets turnkey systems consisting primarily of electronic parts catalogs which allow automotive dealerships to electronically access manufacturers' proprietary technical documentation (such as parts catalogs, parts and service bulletins and other reference materials) and to interface with other important information systems (such as inventory management and billing) within the dealership. The Company's products provide significant benefits to dealerships' parts and service departments (critical profit centers for dealerships), such as increased automotive parts sales, higher inventory turnover as well as improved labor productivity. The Company's systems are marketed to automotive dealerships pursuant to long-term contracts with monthly payments, generally for five year terms, and are currently used by almost 9,000 of the approximately 22,000 automotive dealerships in the U.S. Management believes its share of installed automotive dealership customers is significantly larger than any of its competitors. Outside the U.S., the Company is currently the sole provider of electronic parts catalogs to over 10,000 GM, Mercedes Benz and Chrysler dealers. In addition, the Company is the preeminent supplier of complete dealer management systems and electronic parts catalogs to powersports dealerships. Similar to its automotive strategy, the Company provides dealerships access to proprietary technical documentation for most major motorcycle manufacturers, including Harley Davidson, Honda, Suzuki, Yamaha, Kawasaki, Triumph, BMW and Ducati as well as most major marine manufacturers, including Mercury, Outboard Marine and Volvo-Penta. Management believes its installed customer base of over 1,500 powersports dealerships is significantly larger than any of its competitors. In June 1997, the Company launched a new generation dealer management system initially targeted to marine dealers. The Company's strategy for growth includes continuing to penetrate the global automotive and powersports markets by selling its systems to additional dealers, expanding its automotive and powersports product offerings, publishing information from additional automotive and powersports manufacturers as well as expanding into other markets. Additionally, the Company's unique ability to offer electronic parts 4 catalogs of multiple manufacturers, positions it to benefit from the recent trend toward consolidation in the automotive dealer industry. The Company estimates that approximately 25% of the estimated 22,000 automotive dealerships in the U.S. do not currently use electronic parts catalogs. The Company believes that its strong sales force and marketing abilities, and its ability to provide industry leading solutions for multi-franchise dealers, will increase its installed base of automotive and powersports dealerships. EDUCATION AND LIBRARY MARKET. In the education and library market, the Company competes through its subsidiary, UMI Company ("UMI"), which the Company believes is the world's leading aggregator and provider of access to articles and information from periodicals and newspapers, dissertations, out-of-print books and other scholarly collections. This information can be accessed via the Internet, in other electronic media, such as CD-ROM, as well as on magnetic tape, on microfilm or on paper. The Company aggregates the works of publishers and authors, creates proprietary abstracts and indices, and customizes this information in various formats for easy access by its customers. For example, elementary and high school customers may want on-line information organized by selected topics, whereas users of academic research libraries require extensive databases in order to perform thorough research. Bell & Howell believes its leadership position within the education and library market is attributable to the depth and breadth of its collection of published materials, strong publisher and customer relations, high quality abstracts and indices, superior technology and an effective sales and distribution network. The Company's comprehensive database consists of over 18,000 periodical titles, 7,000 newspaper titles, as well as its unique content base including 1.5 million dissertations, 140,000 out-of-print books, 300 research collections, over 14 million proprietary abstracts for on-line and CD-ROM retrieval. The ability to provide its customers with the full image as originally published distinguishes the Company from other information providers which typically store and provide information in a text-only format, omitting essential charts, graphs, pictures and other images. A significant amount of the Company's sales to the education and library market comes from content under exclusive licenses, making the Company the sole source of such information aside from the original publisher. In many cases, the Company's database includes the entire publication history of a periodical or newspaper. For example, the Company's database includes every edition of THE NEW YORK TIMES published since 1851. In fiscal 1996, approximately 70% of the Company's net sales to the education and library market were derived from prepaid annual subscriptions with historical renewal rates in excess of 90%. The Company is continually offering new ways to enhance each customer's ability to efficiently access the relevant information in the format or media of its choice. The Company pioneered electronic access to the full image format of periodicals and newspapers on CD-ROM in the late 1980s. In 1995, the Company introduced ProQuest Direct-Registered Trademark-, a proprietary access and delivery system offering on-line delivery of articles in formats ranging from text only to the full image as originally published. In 1996, ProQuest Direct became accessible on the Internet via any Web browser. In fiscal 1996, approximately 45% of the Company's net sales to the education and library market were derived from information in electronic format, which has grown at a compound annual rate of approximately 30% since 1994. The remaining 55% of the Company's net sales to the education and library market were derived from the more traditional microfilm and paper formats. Libraries have traditionally purchased information in the microfilm format for the breadth and depth of its database as well as for archival and preservation purposes. IMAGING SOLUTIONS AND COMPONENTS. Bell & Howell's Imaging Solutions and Components business is a leading designer, integrator and distributor of non-paper based systems and components that enable users to efficiently file and access their documents and records. These systems and components are customized to the needs of select vertical markets, such as financial institutions and governmental agencies, in order to provide better customer service, enhance productivity, minimize storage costs and ensure the security and integrity of their records. These systems, which utilize both electronic and microfilm technology, consist of the software and hardware, accessories, supplies and service required to 5 capture, enhance, duplicate, store, index and retrieve a customer's data and documents. For example, the Company recently introduced a product targeted to financial institutions which allows them to instantaneously access and view complete customer records (including check copies, signature cards and bank statements) which reside on different customer databases and which may utilize differing imaging software, in order to provide more timely and efficient customer service and increased productivity. The Company's imaging components include production scanners and software that convert paper documents into electronic files. In 1996, approximately 25% of net sales for this business were derived from scanner sales which have grown at an annual rate of approximately 30% since 1994. The Company believes its market position and strong growth rate in its scanner business result from its reputation for quality and reliability. The Company's Imaging Solutions and Components business benefits from a substantial customer base, as well as a broad product line marketed and serviced through its extensive sales and service organization. In fiscal 1996, approximately 25% of net sales within the Imaging Solutions and Components business were derived from servicing its installed customer base, generally pursuant to prepaid annual contracts. The Company's strategy for growth includes capitalizing on the strong growth in the scanner market by offering an expanded line of scanners, leveraging its national service organization to provide service for other manufacturers' products, as well as by providing imaging solutions to financial institutions and additional vertical markets. MAIL PROCESSING Management believes that Bell & Howell is the leading manufacturer and supplier of high volume mail processing systems to the commercial market. The commercial market primarily consists of business to consumer mailers and represented more than 90% of the Mail Processing segment's sales during first half 1997. These systems, which increasingly utilize proprietary software, automatically perform a broad range of mail processing functions, from collating, cutting, bursting, folding and inserting documents (at cycle speeds ranging up to 18,000 envelopes per hour) to optical scanning, encoding and sorting of envelopes (at speeds up to 36,000 envelopes per hour). These software-driven systems allow customers to more efficiently manage mail room operations as well as convert routine mailings (such as invoices or statements) into targeted communication and marketing programs by customizing the invoice or statement and including promotional inserts based on a specific customer profile. Bell & Howell believes that its leadership position in the commercial mail processing business is attributable to its substantial installed global customer base and worldwide service organization of approximately 1,500 service engineers and support personnel. In fiscal 1996, approximately 40% of commercial mail processing's net sales were derived from servicing its installed customer base, generally pursuant to prepaid annual contracts. In addition to the commercial market, the remaining sales in the Mail Processing segment stem from governmental contracts for automation equipment and software for the U.S. Postal Service and foreign postal authorities. The Company has expertise in high speed feeding of oversized envelopes, high speed labeling applications and imaging, as well as other software based solutions. Management believes continued growth in this business will be driven by its customers' increasing desire to target and personalize mailings to enhance the marketing capabilities and effectiveness of these communications to their customers. The Company's strategy for growth includes the continued introduction of new products, software upgrades for its existing base of installed products, new software applications which will allow high volume mailers to communicate more effectively with their customers and new software solutions in response to the changing regulations and incentives set forth by the U.S. Postal Service as well as other postal authorities around the world. 6 THE TRANSACTIONS In connection with the Offering, the Company intends to engage in a series of related transactions by the end of the fourth quarter of 1997 (collectively with the Offering, the "Transactions"), whereby the Company intends to use the net proceeds from the Offering and borrowings of approximately $427 million under a new $600 million revolving credit agreement (the "New Revolving Credit Agreement") to: (i) retire all of its outstanding 11 1/2% Series B Senior Discount Debentures due March 1, 2005 (the "11 1/2% Senior Discount Debentures") pursuant to (a) a tender for all of the outstanding 11 1/2% Senior Discount Debentures and a related consent solicitation (the "11 1/2% Tender Offer") and (b) in the event any 11 1/2% Senior Discount Debentures remain outstanding after completion of the 11 1/2% Tender Offer, a redemption of the remaining 11 1/2% Senior Discount Debentures outstanding (the "11 1/2% Redemption"); (ii) repay the entire balance outstanding under its existing credit agreement (the "Existing Credit Agreement") which is estimated to be $250 million at October 1, 1997; and (iii) redeem all of the outstanding 10 3/4% Series B Senior Subordinated Notes due October 1, 2002 (the "10 3/4% Senior Subordinated Notes") (the "10 3/4% Redemption"). The Transactions are designed to increase the number of shares of Common Stock in the public float, reduce the Company's outstanding indebtedness, decrease the Company's interest expense, and increase the Company's operating flexibility. As soon as practicable after completion of the Offering, the Company intends to simplify its corporate structure by combining the Company with BHOC (the "Combination"). See "The Transactions" and "Use of Proceeds." ------------------------ Bell & Howell's principal place of business is located at 5215 Old Orchard Road, Skokie, Illinois 60077-1076; its telephone number is (847) 470-7660; its e-mail address is invest@corp.bellhowell.com. 7 THE OFFERING Total shares of Common Stock Offered............... 4,177,259 By the Company................................... 3,861,004 By the Selling Stockholders...................... 316,255 Common Stock outstanding after the Offering(1)..... 22,207,620 shares Use of Proceeds.................................... To fund (i) the 11 1/2% Tender Offer (together with proceeds from the New Revolving Credit Agreement), and (ii) the 11 1/2% Redemption (in the event any 11 1/2% Senior Discount Debentures remain outstanding after the 11 1/2% Tender Offer). NYSE symbol........................................ BHW
- ------------------------ (1) Represents 18,346,616 shares outstanding as of June 28, 1997 plus the shares issued by the Company in the Offering. Excludes 2,146,200 shares of Common Stock reserved for issuance under the Company's 1995 Stock Option Plan (the "Option Plan"). As of June 28, 1997, options with respect to 1,660,600 shares of Common Stock were outstanding under the Option Plan. See "Management-- Option Plan." 8 SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
FISCAL FIRST HALF ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS DATA(1): Net sales.................................... $ 670,039 $ 675,553 $ 720,340 $ 819,889 $ 902,797 $ 415,065 $ 418,168 Operating costs and expenses: Cost of sales.............................. 434,135 431,420 455,424 511,399 576,417 269,412 264,720 Research and development................... 18,632 18,600 21,556 30,202 38,101 16,454 19,822 Selling and administrative................. 166,644 168,529 173,019 194,839 198,898 97,529 98,509 Restructuring.............................. -- -- 32,893 -- -- -- -- Goodwill write-off......................... -- 174,277 -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Total operating costs and expenses....... 619,411 792,826 682,892 736,440 813,416 383,395 383,051 --------- --------- --------- --------- --------- --------- --------- Operating income (loss)...................... 50,628 (117,273) 37,448 83,449 89,381 31,670 35,117 Net interest expense......................... 37,266 49,579 48,954 50,800 45,326 22,742 23,732 --------- --------- --------- --------- --------- --------- --------- Earnings (loss) before income taxes, cumulative effect of accounting change and extraordinary items........................ 13,362 (166,852) (11,506) 32,649 44,055 8,928 11,385 Income tax expense (benefit)................. 8,299 3,991 (2,490) 13,439 18,400 3,731 4,725 --------- --------- --------- --------- --------- --------- --------- Earnings (loss) before cumulative effect of accounting change and extraordinary items...................................... 5,063 (170,843) (9,016) 19,210 25,655 5,197 6,660 Cumulative effect of accounting change(2).... -- (4,759) -- -- -- -- -- Extraordinary losses(3)...................... (5,004) (6,625) (978) (3,219) (2,585) (2,585) (972) --------- --------- --------- --------- --------- --------- --------- Net earnings (loss).......................... 59 (182,227) (9,994) 15,991 23,070 2,612 5,688 Dividends on preferred stock................. 22,394 5,820 -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Net earnings (loss) applicable to common stock...................................... $ (22,335) $(188,047) $ (9,994) $ 15,991 $ 23,070 $ 2,612 $ 5,688 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net earnings (loss) per common share(4): Earnings (loss) before cumulative effect of accounting change and extraordinary items.................................... $ (1.37) $ (13.89) $ (0.68) $ 1.15 $ 1.38 $ 0.28 $ 0.36 Cumulative effect of accounting change..... -- (0.37) -- -- -- -- -- Extraordinary losses....................... (0.39) (0.52) (0.07) (0.19) (0.14) (0.14) (0.05) --------- --------- --------- --------- --------- --------- --------- Net earnings (loss) per common share..... $ (1.76) $ (14.78) $ (0.75) $ 0.96 $ 1.24 $ 0.14 $ 0.31 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- PRO FORMA DATA(5): Net interest expense......................... $ 26,352 $ 13,509 $ 14,912 Earnings before extraordinary items.......... 37,039 10,737 11,952 Extraordinary losses......................... (21,725) (21,725) (21,364) Net earnings (loss).......................... 15,314 (10,988) (9,412) Net earnings (loss) per common share(4): Earnings before extraordinary items........ $ 1.65 $ 0.48 $ 0.54 Extraordinary losses....................... (0.97) (0.97) (0.96) --------- --------- --------- Net earnings (loss) per common share....... $ 0.68 $ (0.49) $ (0.42) --------- --------- --------- --------- --------- --------- OTHER DATA: EBITDA(6).................................... $ 85,504 $ 93,493 $ 103,206 $ 120,788 $ 133,596 $ 53,312 $ 62,635 EBITDA as a percent of net sales............. 12.8% 13.8% 14.3% 14.7% 14.8% 12.8% 15.0% Gross profit as a percent of net sales(7).... 35.2% 36.1% 36.8% 37.6% 36.2% 35.1% 36.7% Depreciation and amortization(8)............. $ 34,876 $ 36,489 $ 32,865 $ 37,339 $ 44,215 $ 21,642 $ 27,518 Capital expenditures......................... 30,950 33,191 38,345 44,047 42,744 20,384 17,184
AT THE END OF FIRST HALF 1997 AT THE END OF FISCAL ---------------------- ----------------------------------------------------- AS 1992 1993 1994 1995 1996 ACTUAL ADJUSTED(9) --------- --------- --------- --------- --------- --------- ----------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital............................... $ (34,417) $ (40,081) $ (62,398) $ (53,502) $ (329) $ 69,935 $ 69,935 Total assets.................................. 756,855 625,481 603,745 682,141 796,786 782,120 776,603 Long-term debt................................ 368,991 549,464 518,687 465,230 548,281 605,185 513,440 Preferred Stock(10)........................... 148,750 -- -- -- -- -- -- Total shareholders' equity (deficit).......... 68,000 (270,553) (278,728) (189,472) (166,892) (162,385) (64,449)
FOOTNOTES ON FOLLOWING PAGE. 9 FOOTNOTES TO SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA: (1) In February 1993, the Company was formed as a holding company, the primary assets of which are all of the issued and outstanding shares of capital stock of BHOC. See Note 1 of the Consolidated Annual Financial Statements included elsewhere in this Prospectus. Data for fiscal 1992 is for BHOC. (2) Cumulative effect of accounting change represents the effect of adoption of Statement of Financial Accounting Standards No. 106 "Employers' Accounting For Postretirement Benefits Other Than Pensions" ("SFAS No. 106") as of the beginning of fiscal 1993. (3) Extraordinary losses represent the write-off of unamortized debt issuance costs and applicable call/debt repurchase premiums related to debt refinancings. See Note 6 of the Consolidated Annual Financial Statements and Note 3 of the Consolidated Interim Financial Statements, both included elsewhere in this Prospectus. (4) Net earnings (loss) per common share reflects both primary and fully diluted earnings per common share. (5) The pro forma results of operations data gives effect to the Transactions as if they occurred at the beginning of the respective fiscal periods including that: (i) 3,861,004 shares of Common Stock were issued by the Company at an assumed offering price of $32.375 per share (the closing price on the NYSE on August 27, 1997), the net proceeds of which were used to fund a portion of the 11 1/2% Tender Offer, and (ii) borrowings under the New Revolving Credit Agreement (at assumed interest rates of 6.5% in 1996 and 7.2% in 1997 which represent LIBOR plus 0.75% plus hedging costs) were used to fund the remaining portion of the 11 1/2% Tender Offer, the 10 3/4% Redemption and the repayment of the Existing Credit Agreement. The debt redemption cost included in the pro forma results of operations data for the 10 3/4% Redemption represents the applicable call premium. The debt redemption cost related to the 11 1/2% Tender Offer together with fees and expenses associated with the Offering are estimated, and actual costs may differ from these assumptions. The pro forma results of operations data do not purport to represent what the Company's results of operations would have been if the Transactions had occurred for the periods indicated, or to project the Company's results of operations for any future period. The pro forma adjustments are as follows: (a) The decrease in net interest expense reflects the use of the net proceeds from the Offering and borrowings under the New Revolving Credit Agreement to retire all of the outstanding 11 1/2% Senior Discount Debentures, repay the balance outstanding under the Existing Credit Agreement, and redeem all outstanding amounts of the 10 3/4% Senior Subordinated Notes. (b) Earnings before extraordinary items reflects the decreased interest expense described in (a) above, net of income tax benefit. (c) The extraordinary losses reflect the debt repurchase premiums and write-off of unamortized debt issuance costs related to the retirement of the 11 1/2% Senior Discount Debentures, redemption of the 10 3/4% Senior Subordinated Notes and the repayment of indebtedness under the Existing Credit Agreement described in (a) above, net of income tax benefit. (d) The pro forma weighted average number of shares outstanding of 22,421,329 for fiscal 1996, 22,462,023 for first half 1996 and 22,290,528 for first half 1997 consists of the total number of shares of Common Stock outstanding, plus 3,861,004 shares to be issued by the Company in the Offering. (6) EBITDA is defined as operating income before restructuring expense and goodwill write-off plus depreciation and amortization, and is generally accepted as providing useful information regarding a company's financial performance. Certain covenants in the New Revolving Credit Agreement are expected to be based on EBITDA. EBITDA should not be considered an alternative to net income or an alternative to the Company's cash flow from operating activities as a measure of liquidity. (7) Gross profit is defined as net sales less cost of sales. (8) Excludes goodwill write-off in fiscal 1993 and amortization of deferred financing costs which were as follows for the specified fiscal years and interim periods: 1992--$3.6 million; 1993--$5.4 million; 1994--$3.8 million; 1995-- $4.0 million; 1996--$3.2 million; first half 1996--$2.1 million; and first half 1997--$1.4 million. (9) The pro forma balance sheet data at the end of first half 1997 gives effect to the Transactions as if they had occurred at June 28, 1997. See footnote 5 above and "Use of Proceeds." (10) Reflects the accreted value of the BHOC $4.25 Cumulative Exchangeable Preferred Stock, which was redeemed in March 1993 with the proceeds from the issuance of the 11 1/2% Senior Discount Debentures. 10 RISK FACTORS CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "INTENDS," "EXPECTS" AND WORDS OF SIMILAR IMPORT, CONSTITUTE "FORWARD-LOOKING STATEMENTS." SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC AND BUSINESS CONDITIONS, BOTH DOMESTIC AND FOREIGN; PERIODIC FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS; INDUSTRY CAPACITY; EXISTING GOVERNMENTAL REGULATIONS AND PROPOSALS; LIABILITY AND OTHER CLAIMS ASSERTED AGAINST THE COMPANY; COMPETITION; CHANGES IN OPERATING STRATEGY OR DEVELOPMENT PLANS; THE SIGNIFICANT INDEBTEDNESS OF THE COMPANY AFTER THE REFINANCING; THE AVAILABILITY AND TERMS OF CAPITAL TO FUND THE EXPANSION OF THE COMPANY'S BUSINESS; AND OTHER FACTORS REFERENCED IN THIS PROSPECTUS. CERTAIN OF THESE FACTORS ARE DISCUSSED IN MORE DETAIL ELSEWHERE IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS." GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY OBLIGATION TO UPDATE ANY SUCH FACTORS OR TO PUBLICLY ANNOUNCE THE RESULT OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS IN THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION PRESENTED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. SUBSTANTIAL LEVERAGE As of June 28, 1997, after giving pro forma effect to the Transactions, the Company would have had $513.4 million of long-term debt outstanding. See "Capitalization." Based on current operations, the Company expects that it will be able to service its working capital needs and to fund its capital expenditures and other operating expenses out of cash flow from operations and available borrowings under its New Revolving Credit Agreement. The Company's future operating performance and ability to service or refinance its indebtedness will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control, and consequently the Company may be unable to service all of its debt in the future. There can be no assurance that the Company's future operating performance and available borrowings under the New Revolving Credit Agreement will be sufficient to service its indebtedness or that the Company will be able to refinance its indebtedness in whole or in part. The degree to which Bell & Howell is leveraged could have important consequences to holders of the Common Stock, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of the principal of and interest on its existing indebtedness; (iii) the agreements governing Bell & Howell's long-term indebtedness and bank loans contain, and are expected to continue to contain, certain restrictive covenants, including certain covenants that limit the payment of dividends and other distributions, and limit the ability of the Company to pay dividends and make other distributions to its stockholders; (iv) the Company's borrowings under the New Revolving Credit Agreement are at floating rates of interest, which could cause Bell & Howell to be vulnerable to increases in interest rates; and (v) the Company's substantial degree of leverage could make it more vulnerable to a downturn in general economic conditions. See "Description of Certain Financing Agreements and Certain Indebtedness--New Revolving Credit Agreement." 11 COMPETITION AND INDUSTRY CONDITIONS Other companies are engaged in each of the businesses in which the Company is engaged. Competition in these businesses depends on a number of factors, including the reputation of the manufacturer, the reliability, quality and price of its products and the levels of technical service and support. Some of the market niches served by Bell & Howell are mature and demand for these products and services has stabilized and perhaps even begun to migrate to other products (such as the shift from microfilm-based products to electronic-based products in the Company's Information Access segment). In addition, although the Company intends to continue to invest in new product research and development, there can be no assurance as to the future success of these products. In addition, new technologies could emerge or existing technologies could be adapted in ways which, although not anticipated, could make the Company's products and services less competitive. Certain of Bell & Howell's competitors have substantially greater financial and other resources than the Company. See "Business--Competition." PERIODIC FLUCTUATIONS; SEASONALITY The Company's operating results may fluctuate from period to period and within periods. These fluctuations could result from a number of factors, including the timing of customers' capital expenditures, annual budgetary considerations of customers, new product introductions and general economic conditions. Such fluctuations are generally more pronounced in the Company's businesses that sell equipment such as commercial mail processing and Imaging Solutions and Components. The anticipated sales growth in the second half of 1997 is expected to be generated more by these businesses than in prior periods which leads to less predictability in the Company's operating results for the remainder of the year. Although the Company in general is not affected by seasonal fluctuations, the buying patterns and funding availability for certain Information Access and Mail Processing customers cause sales, profitability and cash flow to be higher in the fourth quarter of the year. Due to this seasonal factor, the Company requires and expects to have a seasonal working capital credit line to fund cash requirements primarily during the second and third quarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Periodic Fluctuations; Seasonality." FOREIGN POSTAL CONTRACTS The Company is a subcontractor to the same general contractor on two contracts to provide systems to foreign postal authorities. The scope and performance of these contracts and the Company's ability to be compensated for additional services are currently being negotiated, and the Company has accordingly reserved for projected losses on these contracts. Management believes that the resolution of these negotiations will not have a material adverse impact upon the consolidated operations or financial condition of the Company. FOREIGN OPERATIONS Bell & Howell has substantial assets located outside the United States and a substantial portion of the Company's sales and earnings are attributable to operations conducted abroad. For fiscal 1995 and fiscal 1996, approximately 24% and 22%, respectively, of the Company's net sales were derived from operations conducted outside the United States. Foreign operations are subject to special risks that can materially affect sales and profits, including currency exchange rate fluctuations, the impact of inflation, exchange controls and other risks. Changes in certain exchange rates could have an adverse effect on the Company's ability to meet interest and principal obligations with respect to its United States dollar-denominated debt. For further discussion, see Note 13 of the Consolidated Annual Financial Statements included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations--International Operations." 12 COMPANY STRUCTURE; LIMITATIONS ON ACCESS TO CASH FLOW OF THE COMPANY The Company conducts business through BHOC and its subsidiaries and has no operations of its own. The primary asset of the Company is all of the capital stock of BHOC. The Company has no cash flow other than from dividends and other distributions from BHOC and BHOC's subsidiaries. The right of the Company to participate in any distribution of earnings or assets of BHOC and its subsidiaries is subject to the prior claims of the creditors of BHOC and such subsidiaries. In addition, the agreements governing BHOC's bank loans contain certain restrictive covenants, including certain covenants that limit BHOC's ability to pay dividends or make other distributions to the Company. In connection with the Transactions, as soon as practicable after the Offering, the Company intends to combine with BHOC. See "The Transactions" and "Description of Certain Financing Agreements and Certain Indebtedness--New Revolving Credit Agreement." PRINCIPAL STOCKHOLDERS Immediately following the Offering, Keystone, Inc., formerly Robert M. Bass Group, Inc. ("Keystone") and executive officers and directors of the Company will beneficially own 4,363,000 (19.7%) and 1,863,674 (8.4%) of the outstanding shares of Common Stock, respectively. As a result of such equity ownership, if Keystone and the executive officers and directors of the Company were to vote all of their shares in the same manner, they could significantly influence the management and policies of the Company. See "Principal and Selling Stockholders." DIVIDEND POLICY The Company has not declared or paid any cash dividends on the Common Stock. The Company currently intends to retain future earnings to fund the development and growth of its businesses and to repay indebtedness, and, therefore, does not anticipate paying any cash dividends in the foreseeable future. The Company's principal source for cash from which to make dividend payments will be dividends distributed by its operating subsidiaries. The New Revolving Credit Agreement is expected to contain provisions that limit the ability to pay dividends and make distributions to the Company and limit the ability of the Company to pay cash dividends and make other distributions to its stockholders. Any future determination to declare and pay dividends will be made by the Board of Directors in light of the Company's earnings, financial position, capital requirements, credit agreements and such other factors as the Board of Directors deems relevant. Under Delaware law, the Company is permitted to pay cash dividends to its stockholders only (i) out of its surplus (the excess of the net assets of the Company over its capital) or (ii) out of the net profits of the Company for the fiscal year in which the dividend is declared and/or the preceding fiscal year. See "Description of Certain Financing Agreements and Certain Indebtedness--New Revolving Credit Agreement." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Upon consummation of the Offering, the Company will have outstanding an aggregate of 22,207,620 shares of Common Stock (22,786,771 shares if the Underwriters' over-allotment option is exercised in full). Future sales of substantial amounts of Common Stock by Keystone and executive officers and directors of the Company after the Offering, or the perception that such sales could occur, could adversely effect the market price of the Common Stock. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock. In addition, the Company has the authority to issue additional shares of Common Stock and shares of one or more series of Preferred Stock. Keystone, the Selling Stockholders and all directors and executive officers of the Company who, immediately following the Offering, will collectively beneficially own 6,226,674 shares of Common Stock, have each agreed for a period of 90 days after the date of this Prospectus not to register for sale, offer, sell 13 (or contract to sell) or otherwise dispose of any Common Stock (or any securities convertible into or exercisable or exchangeable for Common Stock) or grant any options or warrants to purchase Common Stock (other than Common Stock sold in the Offering) without the prior written consent of DLJ. In addition, holders of an aggregate of 880,639 shares of Common Stock (which excludes shares held by Keystone, the Selling Stockholders and all directors and executive officers) are prohibited by a Registration Rights Agreement dated May 10, 1988 by and among the Company and the stockholders named therein (the "Registration Rights Agreement") from effecting any public sale or distribution of Common Stock prior to 90 days from the date of this Prospectus. Sales of substantial amounts of Common Stock in the public market following the Offering, or the possibility that such sales may occur, may adversely affect the prevailing market price of the Common Stock. Certain stockholders of the Company have certain demand and piggyback registration rights with respect to an aggregate of 7,107,313 shares of Common Stock pursuant to the Registration Rights Agreement. Subject to certain conditions and limitations, such stockholders owning at least 1,955,023 shares of Common Stock subject to the Registration Rights Agreement may require the Company to file registration statements with the Securities and Exchange Commission (the "Commission") under the Securities Act and all stockholders who are a party to the Registration Rights Agreement have the right to require the Company to include their shares in any registered offering of the Common Stock by the Company, including any such registration statement filed pursuant to the Registration Rights Agreement. In the event that the stockholders of the Company exercise their registration rights under the Registration Rights Agreement, the Company is required to bear all expenses, other than underwriting discounts and selling commissions applicable to such shares, in connection with such registration and the stockholders and the Company have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. See "Underwriting" and "Shares Eligible For Future Sale." 14 THE TRANSACTIONS In connection with the Offering, the Company intends to engage in the series of related Transactions described below. The Transactions are designed to increase the number of shares of Common Stock in the public float, reduce the Company's outstanding indebtedness, decrease the Company's interest expense and increase its operating and financial flexibility. 11 1/2% TENDER OFFER The Company commenced a tender offer to purchase for cash any or all of the outstanding 11 1/2% Senior Discount Debentures. The 11 1/2% Tender Offer includes the solicitation of consents for a proposed amendment to the indenture relating to the 11 1/2% Senior Discount Debentures (the "11 1/2% Indenture") to remove substantially all of the restrictive covenants and to amend certain other provisions contained therein. The Company anticipates that it will pay in the aggregate approximately 110.5% of Accreted Value for the tender consideration and the consent fee. There is no assurance that the 11 1/2% Tender Offer will be completed, or if completed, that all of the 11 1/2% Senior Discount Debentures will be acquired in the 11 1/2% Tender Offer. 11 1/2% REDEMPTION In the event that the 11 1/2% Tender Offer is not completed, or if completed, that any 11 1/2% Senior Discount Debentures remain outstanding after completion of the 11 1/2% Tender Offer, the Company intends to use a portion of the net proceeds from the Offering and, if necessary, borrowings under the New Revolving Credit Agreement to redeem the remaining outstanding 11 1/2% Senior Discount Debentures at a redemption price equal to 110% of Accreted Value thereof. See "Description of Certain Financing Agreements and Certain Indebtedness--11 1/2% Senior Discount Debentures." 10 3/4% REDEMPTION On October 1, 1997, the Company intends to borrow amounts under the New Revolving Credit Agreement to redeem all of the outstanding 10 3/4% Senior Subordinated Notes at a call price equal to 104.031% of the outstanding principal amount of the 10 3/4% Senior Subordinated Notes. See "Description of Certain Financing Agreements and Certain Indebtedness--New Revolving Credit Agreement." NEW REVOLVING CREDIT AGREEMENT Simultaneous with the completion of the Offering, the Company intends to enter into the $600 million New Revolving Credit Agreement and to borrow approximately $427 million under the New Revolving Credit Agreement to (i) repay the balance outstanding under the Existing Credit Agreement (which is estimated to be $250 million as of October 1, 1997), (ii) fund a portion of the 11 1/2% Tender Offer and, if necessary, the 11 1/2% Redemption and (iii) fund the 10 3/4% Redemption. Borrowings under the New Revolving Credit Agreement shall initially bear interest at LIBOR plus 0.75%. See "Description of Certain Financing Agreements and Certain Indebtedness--New Revolving Credit Agreement." COMBINATION As soon as practicable after completion of the Offering, the Company intends to simplify its corporate structure by combining the Company with BHOC. 15 SOURCES AND USES The sources and uses of the funds received from the Offering and borrowed under the New Revolving Credit Agreement to complete the Transactions are as follows (assuming an October 1, 1997 closing date and that all of the 11 1/2% Senior Discount Debentures are purchased by the Company pursuant to the 11 1/2% Tender Offer at a tender price equal to 110.5% of Accreted Value):
SOURCES (IN MILLIONS) - -------------------------------------------------------------- New Revolving Credit Agreement................................ $ 427.4 Offering...................................................... 125.0 ------ Total sources............................................... $ 552.4 ------ ------ USES - -------------------------------------------------------------- Repayment of Existing Credit Agreement (estimated)............ $ 250.0 11 1/2% Tender Offer (Accreted Value)......................... 213.5 Estimated premium for 11 1/2% Tender Offer.................... 22.4 10 3/4% Redemption (principal amount)......................... 55.0 Call premium for 10 3/4% Redemption........................... 2.2 Estimated fees and expenses................................... 9.3 ------ Total uses.................................................. $ 552.4 ------ ------
16 USE OF PROCEEDS The net proceeds to the Company from the sale of the Common Stock offered hereby, after deducting Underwriters' discounts and commissions and estimated expenses of the Offering, are estimated to be approximately $118.8 million (based on a closing market price of $32.375 per share on August 27, 1997). The Company intends to use the net proceeds from the Offering together with borrowings under the New Revolving Credit Agreement to fund the 11 1/2% Tender Offer. In the event that the 11 1/2% Tender Offer is not completed, or if completed, that any 11 1/2% Senior Discount Debentures remain outstanding after the completion of the 11 1/2% Tender Offer, the Company intends to use the net proceeds from the Offering and, if necessary, borrowings under the New Revolving Credit Agreement to fund the 11 1/2% Redemption. The 11 1/2% Senior Discount Debentures accrete in value such that the aggregate principal amount of such outstanding debentures will be $279.5 million on March 1, 2000. Subsequent to March 1, 2000, the 11 1/2% Senior Discount Debentures will bear interest at the rate of 11 1/2% per annum. The 11 1/2% Senior Discount Debentures mature on March 1, 2005. See "The Transactions" and "Description of Certain Financing Agreements and Certain Indebtedness--11 1/2% Senior Discount Debentures." DIVIDEND POLICY The Company has not declared or paid any cash dividends on the Common Stock. The Company currently intends to retain future earnings to fund the development and growth of its businesses and to repay indebtedness, and, therefore, does not anticipate paying any cash dividends in the foreseeable future. The Company's principal source for cash from which to make dividend payments will be dividends distributed by its operating subsidiaries. The New Revolving Credit Agreement is expected to contain provisions that limit the ability to pay dividends and make distributions to the Company and limit the ability of the Company to pay cash dividends and make other distributions to its stockholders. Any future determination to declare and pay dividends will be made by the Board of Directors in light of the Company's earnings, financial position, capital requirements, credit agreements and such other factors as the Board of Directors deems relevant. Under Delaware law, the Company is permitted to pay cash dividends to its stockholders only (i) out of its surplus (the excess of the net assets of the Company over its capital) or (ii) out of the net profits of the Company for the fiscal year in which the dividend is declared and/or the preceding fiscal year. MARKET FOR COMMON STOCK Since May 2, 1995, the Common Stock has traded on the NYSE under the trading symbol "BHW." Prior to May 2, 1995, the Common Stock was not listed on or traded in any organized market system. On August 27, 1997, the last reported sale price of the Common Stock was $32.375 per share. As of August 27, 1997, there were approximately 5,500 holders of record of the outstanding shares of Common Stock. The following table sets forth for the periods indicated the high and low closing sales price of the Common Stock as reported on the New York Stock Exchange Composite Tape.
HIGH LOW ------- ------- FISCAL 1995 Second Quarter (from May 2, 1995)........................................... $20 1/2 $15 1/2 Third Quarter............................................................... 22 3/4 19 5/8 Fourth Quarter.............................................................. 29 1/4 24 7/8 FISCAL 1996 First Quarter............................................................... $32 3/4 $27 1/8 Second Quarter.............................................................. 35 1/4 30 1/4 Third Quarter............................................................... 32 3/4 26 7/8 Fourth Quarter.............................................................. 31 3/4 22 3/4 FISCAL 1997 First Quarter............................................................... $24 3/8 $19 7/8 Second Quarter.............................................................. 29 3/8 19 3/8 Third Quarter (through August 27, 1997)..................................... 32 3/8 26 7/8
17 CAPITALIZATION The following table sets forth at June 28, 1997 (i) the actual current debt and consolidated capitalization of the Company, and (ii) the current debt and consolidated capitalization of the Company as adjusted to reflect the Transactions (including the completion of Offering and the application of the net proceeds therefrom (as described in Footnotes 5 and 9 to "Selected Consolidated Financial and Operation Data")). This table should be read in conjunction with the Consolidated Financial Statements included elsewhere in this Prospectus, the "Selected Consolidated Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
AT JUNE 28, 1997 ----------------------------- AS ACTUAL ADJUSTED(1)(2) ----------- ---------------- (DOLLARS IN THOUSANDS) Current debt: Notes payable.................................................................... $ 5,821 $ 5,821 Current maturities of long-term debt............................................. 1,089 1,089 ----------- ---------------- Total current debt............................................................. $ 6,910 $ 6,910 ----------- ---------------- ----------- ---------------- Long-term debt: Existing Credit Agreement(2)..................................................... $ 259,000 $ -- New Revolving Credit Agreement................................................... -- 429,746 9 1/4% Senior Notes due 2000..................................................... 80,000 80,000 10 3/4% Senior Subordinated Notes due 2002....................................... 54,980 -- Other long-term debt............................................................. 3,694 3,694 11 1/2% Senior Discount Debentures due 2005(1)(2)................................ 207,511 -- ----------- ---------------- Total long-term debt........................................................... 605,185 513,440 Shareholders' equity: Common Stock, par value $.001 per share, 50,000,000 shares authorized, 18,385,909 shares issued and 18,346,616 shares outstanding and 22,207,620 shares outstanding, as adjusted....................................................... 18 22 Capital surplus.................................................................. 1,713 120,459 Retained earnings (deficit)...................................................... (160,163) (180,977) Other............................................................................ (3,953) (3,953) ----------- ---------------- Total shareholders' equity (deficit)........................................... (162,385) (64,449) ----------- ---------------- Total capitalization......................................................... $ 442,800 $ 448,991 ----------- ---------------- ----------- ----------------
- ------------------------ (1) Assumes 100% of the aggregate principal amount of the 11 1/2% Senior Discount Debentures are purchased pursuant to the 11 1/2% Tender Offer. (2) Assumes that the Transactions were completed on June 28, 1997. On a pro forma basis, assuming that the Transactions are completed on October 1, 1997, amounts outstanding under the Existing Credit Agreement are estimated to be $250 million and the Accreted Value of 11 1/2% Senior Discount Debentures will be $213.5 million. 18 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The following historical selected consolidated financial and operating data for fiscal 1992, fiscal 1993, fiscal 1994, fiscal 1995, fiscal 1996, first half 1996 and first half 1997 have been derived from the Consolidated Financial Statements. The unaudited consolidated pro forma financial data set forth below illustrate the estimated effects of the Transactions (including the completion of the Offering and the application of the net proceeds therefrom) as if they had occurred (i) at the beginning of each of the respective fiscal periods for purposes of presenting the pro forma results of operations data and (ii) at June 28, 1997 for purposes of presenting the pro forma balance sheet data. The unaudited consolidated pro forma financial data do not necessarily reflect the results of operations or the financial position of the Company that actually would have occurred had the Transactions been consummated as of the date or for the periods indicated. The following financial data should be read in conjunction with the Consolidated Financial Statements included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
FISCAL FIRST HALF ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS DATA(1): Net sales....................................... $ 670,039 $ 675,553 $ 720,340 $ 819,889 $ 902,797 $ 415,065 $ 418,168 Operating costs and expenses: Cost of sales................................. 434,135 431,420 455,424 511,399 576,417 269,412 264,720 Research and development...................... 18,632 18,600 21,556 30,202 38,101 16,454 19,822 Selling and administrative.................... 166,644 168,529 173,019 194,839 198,898 97,529 98,509 Restructuring................................. -- -- 32,893 -- -- -- -- Goodwill write-off............................ -- 174,277 -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Total operating costs and expenses.......... 619,411 792,826 682,892 736,440 813,416 383,395 383,051 --------- --------- --------- --------- --------- --------- --------- Operating income (loss)......................... 50,628 (117,273) 37,448 83,449 89,381 31,670 35,117 Net interest expense............................ 37,266 49,579 48,954 50,800 45,326 22,742 23,732 --------- --------- --------- --------- --------- --------- --------- Earnings (loss) before income taxes, cumulative effect of accounting change and extraordinary items.......................................... 13,362 (166,852) (11,506) 32,649 44,055 8,928 11,385 Income tax expense (benefit).................... 8,299 3,991 (2,490) 13,439 18,400 3,731 4,725 --------- --------- --------- --------- --------- --------- --------- Earnings (loss) before cumulative effect of accounting change and extraordinary items...... 5,063 (170,843) (9,016) 19,210 25,655 5,197 6,660 Cumulative effect of accounting change(2)....... -- (4,759) -- -- -- -- -- Extraordinary losses(3)......................... (5,004) (6,625) (978) (3,219) (2,585) (2,585) (972) --------- --------- --------- --------- --------- --------- --------- Net earnings (loss)............................. 59 (182,227) (9,994) 15,991 23,070 2,612 5,688 Dividends on preferred stock.................... 22,394 5,820 -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Net earnings (loss) applicable to common stock.......................................... $ (22,335) $(188,047) $ (9,994) $ 15,991 $ 23,070 $ 2,612 $ 5,688 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net earnings (loss) per common share(4): Earnings (loss) before cumulative effect of accounting change and extraordinary items... $ (1.37) $ (13.89) $ (0.68) $ 1.15 $ 1.38 $ 0.28 $ 0.36 Cumulative effect of accounting change........ -- (0.37) -- -- -- -- -- Extraordinary losses.......................... (0.39) (0.52) (0.07) (0.19) (0.14) (0.14) (0.05) --------- --------- --------- --------- --------- --------- --------- Net earnings (loss) per common share........ $ (1.76) $ (14.78) $ (0.75) $ 0.96 $ 1.24 $ 0.14 $ 0.31 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- PRO FORMA DATA(5): Net interest expense............................ $ 26,352 $ 13,509 $ 14,912 Earnings before extraordinary items............. 37,039 10,737 11,952 Extraordinary losses............................ (21,725) (21,725) (21,364) Net earnings (loss)............................. 15,314 (10,988) (9,412) Net earnings (loss) per common share(4): Earnings before extraordinary items........... $ 1.65 $ 0.48 $ 0.54 Extraordinary losses.......................... (0.97) (0.97) (0.96) --------- --------- --------- Net earnings (loss) per common share.......... $ 0.68 $ (0.49) $ (0.42) --------- --------- --------- --------- --------- --------- OTHER DATA: EBITDA(6)....................................... $ 85,504 $ 93,493 $ 103,206 $ 120,788 $ 133,596 $ 53,312 $ 62,635 EBITDA as a percent of net sales................ 12.8% 13.8% 14.3% 14.7% 14.8% 12.8% 15.0% Gross profit as a percent of net sales(7)....... 35.2% 36.1% 36.8% 37.6% 36.2% 35.1% 36.7% Depreciation and amortization(8)................ $ 34,876 $ 36,489 $ 32,865 $ 37,339 $ 44,215 $ 21,642 $ 27,518 Capital expenditures............................ 30,950 33,191 38,345 44,047 42,744 20,384 17,184
AT THE END OF FIRST HALF 1997 AT THE END OF FISCAL ---------------------- ----------------------------------------------------- AS 1992 1993 1994 1995 1996 ACTUAL ADJUSTED(9) --------- --------- --------- --------- --------- --------- ----------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital................................... $ (34,417) $ (40,081) $ (62,398) $ (53,502) $ (329) $ 69,935 $ 69,935 Total assets...................................... 756,855 625,481 603,745 682,141 796,786 782,120 776,603 Long-term debt.................................... 368,991 549,464 518,687 465,230 548,281 605,185 513,440 Preferred Stock(10)............................... 148,750 -- -- -- -- -- -- Total shareholders' equity (deficit).............. 68,000 (270,553) (278,728) (189,472) (166,892) (162,385) (64,449)
FOOTNOTES ON FOLLOWING PAGE. 19 FOOTNOTES TO THE SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA: (1) In February 1993, the Company was formed as a holding company, the primary assets of which are all of the issued and outstanding capital stock of BHOC. See Note 1 of the Consolidated Annual Financial Statements included elsewhere in this Prospectus. Data for fiscal 1992 is for BHOC. (2) Cumulative effect of accounting change represents the effect of adoption of Statement of Financial Accounting Standards No. 106 "Employers' Accounting For Postretirement Benefits Other Than Pensions" ("SFAS No. 106") as of the beginning of fiscal 1993. (3) Extraordinary losses represent the write-off of unamortized debt issuance costs and applicable call/debt repurchase premiums related to debt refinancings. See Note 6 of the Consolidated Annual Financial Statements and Note 3 of the Consolidated Interim Financial Statements, both included elsewhere in this Prospectus. (4) Net earnings (loss) per common share reflects both primary and fully diluted earnings per common share. (5) The pro forma results of operations data gives effect to the Transactions as if they occurred at the beginning of the respective fiscal periods including that (i) 3,861,004 shares of Common Stock were issued by the Company at an assumed offering price of $32.375 per share (the closing price on the NYSE on August 27, 1997), the net proceeds of which were used to fund a portion of the 11 1/2% Tender Offer, and (ii) borrowings under the New Revolving Credit Agreement (at assumed interest rates of 6.5% in 1996 and 7.2% in 1997 which represent LIBOR plus 0.75% plus hedging costs) were used to fund the remaining portion of the 11 1/2% Tender Offer, the 10 3/4% Redemption and the repayment of the Existing Credit Agreement. The debt redemption cost included in the pro forma results of operations data for the 10 3/4% Redemption represents the applicable call premiums. The debt redemption cost related to the 11 1/2% Tender Offer together with fees and expenses associated with the Offering are estimated, and actual costs may differ from these assumptions. The pro forma results of operations data do not purport to represent what the Company's results of operations would have been if the Transactions had occurred for the periods indicated, or to project the Company's results of operations for any future period. The pro forma adjustments are as follows: (a) The decrease in net interest expense reflects the use of the net proceeds from the Offering and borrowings under the New Revolving Credit Agreement to retire all of the outstanding 11 1/2% Senior Discount Debentures, repay the balance outstanding under the Existing Credit Agreement, and redeem all outstanding amounts of the 10 3/4% Senior Subordinated Notes. (b) Earnings before extraordinary items reflects the decreased interest expense described in (a) above, net of income tax benefit. (c) The extraordinary losses reflect the debt repurchase premiums and write-off of unamortized debt issuance costs related to the retirement of the 11 1/2% Senior Discount Debentures, redemption of the 10 3/4% Senior Subordinated Notes and the repayment of indebtedness under the Existing Credit Agreement described in (a) above, net of income tax benefit. (d) The pro forma weighted average number of shares outstanding of 22,421,329 for fiscal 1996, 22,462,023 for first half 1996 and 22,290,528 for first half 1997 consists of the total number of shares of Common Stock outstanding, plus 3,861,004 shares to be issued by the Company in the Offering. (6) EBITDA is defined as operating income before restructuring expense and goodwill write-off plus depreciation and amortization, and is generally accepted as providing useful information regarding a company's financial performance. Certain covenants in the New Revolving Credit Agreement are expected to be based on EBITDA. EBITDA should not be considered an alternative to net income or an alternative to the Company's cash flow from operating activities as a measure of liquidity. (7) Gross profit is defined as net sales less cost of sales. (8) Excludes goodwill write-off in fiscal 1993 and amortization of deferred financing costs which were as follows for the specified fiscal years and interim periods: 1992--$3.6 million; 1993--$5.4 million; 1994--$3.8 million; 1995-- $4.0 million; 1996--$3.2 million; first half 1996--$2.1 million; and first half 1997--$1.4 million. (9) The pro forma balance sheet data at the end of first half 1997 gives effect to the Transactions as if they had occurred at June 28, 1997. See footnote 5 above and "Use of Proceeds." (10) Reflects the accreted value of the BHOC $4.25 Cumulative Exchangeable Preferred Stock, which was redeemed in March 1993 with the proceeds from the issuance of the 11 1/2% Senior Discount Debentures. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section should be read in conjunction with the "Selected Consolidated Financial and Operating Data" and the Consolidated Financial Statements and the Notes thereto set forth elsewhere in this Prospectus. RESULTS OF OPERATIONS FIRST HALF 1997 COMPARED TO FIRST HALF 1996 The Company's net sales increased $3.1 million, or 1%, to $418.2 million in first half 1997. The increase resulted from continued strong sales growth within Information Access (particularly for the transportation and vehicle and education and library markets), as well as the commercial portion of Mail Processing. This was partially offset by lower revenues in the postal contracting portion of the Mail Processing business due to shipments of significant one-time contracts to postal authorities in 1996. Information Access net sales increased $8.3 million, or 4%, to $226.8 million in first half 1997. Within the Information Access businesses, the Company provides access to information in select vertical markets including the transportation and vehicle and education and library markets, and also provides imaging solutions and components to financial institutions, governmental agencies and other paper intensive industries. Net sales to the transportation and vehicle market increased $5.7 million, or 12%, to $53.5 million due to increased sales of electronic parts catalogs and ancillary products to automotive dealerships, and continued strong sales of dealer management systems and electronic parts catalogs to powersports dealerships. In addition to increased new systems placements, the Company continued to experience strong sales of additional product applications and high contract renewal rates related to previously placed systems in automotive dealerships. Net sales to the education and library market increased $8.6 million, or 11%, to $89.6 million due to a growing electronic subscription base, which continued to reflect high renewal rates on existing products, new product placements, and the acquisition of DataTimes Corporation (in September 1996) which added complementary information content, technology and distribution to the Company's electronic product offerings. Sales of electronic content increased 36% over the prior year as customers increasingly demand electronic information solutions and its newer form of on-line delivery. Net sales of microfilm and paper products to the education and library market declined slightly versus the prior year as increased pricing was offset by lower unit volumes. Net sales in the Imaging Solutions and Components business decreased $6.0 million, or 7%, to $83.7 million as increased sales of production scanners and imaging software systems were more than offset by the impact of divesting certain low margin product lines sold in Canada and France. Excluding the impact of the divested product lines, Imaging Solutions and Components' net sales in first half 1997 would have increased by 3% over the prior year. Mail Processing net sales decreased $5.2 million, or 3%, to $191.4 million in first half 1997. Although order intake for commercial mail processing systems (which represents 94% of the sales in this segment) increased 18% in first half 1997 reflecting strong market demand, sales increased 8% over the prior year resulting in a higher level of backlog. Sales of commercial sorting equipment (which represents 15% of commercial equipment sales) increased $5.8 million, or 62%, to $15.1 million as the U.S. Postal Service guidelines governing the operating requirements to qualify for certain financial incentives to properly address, bar code and presort mail have created a more favorable environment for customers to invest in advanced sorting technology. Service revenues (which are primarily annuity based and represent 43% of commercial Mail Processing sales) continue to increase, due to both an expanded customer base and increased pricing. Sales of customized mail automation equipment and contractual engineering services to governmental postal authorities decreased $19.0 million to $12.2 million in first half 1997, primarily as a result of shipments of significant one-time contracts to the U.S. Postal Service in first half 1996. The Company's cost of sales decreased $4.7 million, or 2%, to $264.7 million in first half 1997, with the gross profit (net sales less cost of sales) percentage increasing by 1.6 percentage points to 36.7% in first 21 half 1997 as compared to first half 1996. The higher gross profit percentage in 1997 resulted from a shift in sales mix (as the growth rate in higher gross profit percentage Information Access revenues exceeded the growth rate in lower gross profit percentage Mail Processing revenues), and additionally reflects both improved manufacturing productivity and increased pricing. Research and development expense increased $3.4 million, or 21%, to $19.8 million in first half 1997 as compared to first half 1996 as the Company continued to increase its investment in new product offerings. Such increase primarily related to increased development costs for DataTimes, to develop a new technology platform for the powersports market and to develop enhanced versions of production scanners. The Company has continually positioned itself to take advantage of new product/technology opportunities (with an increased emphasis on software solutions and electronic products) in each of its businesses. Selling and administrative ("S&A") expense increased $1.0 million, or 1%, to $98.5 million in first half 1997 reflecting the Company's increased investment in sales and marketing resources as well as increased distribution costs associated with the higher sales volumes. The ratio of selling and administrative expense to net sales of 23.6% in first half 1997 increased by 0.1 percentage points versus the prior year as various expense leveraging initiatives were offset by the result of the aforementioned shift in sales mix (as the growth rate in higher S&A expense percentage Information Access revenues exceeded the growth rate in lower S&A expense percentage Mail Processing revenues). EBITDA increased $9.3 million, or 18%, to $62.6 million in first half 1997 resulting from the slightly higher sales level and leveraged operating costs and expenses. Operating income increased $3.4 million, or 11%, to $35.1 million in first half 1997. Information Access EBITDA increased $4.9 million, or 12%, to $47.5 million in first half 1997. This increase resulted from the higher sales volumes, an improved gross profit percentage reflecting a sales mix emphasizing the Company's more profitable products (i.e., a greater proportion of revenues related to software and publishing and a lower proportion of revenues related to the sale of hardware) which more than offset the dilutive impact of the acquisition of DataTimes, and increased research and development costs associated with new product offerings. Information Access operating income decreased $0.5 million, or 2%, to $24.6 million in first half 1997 as the EBITDA increase was offset by both higher depreciation cost on the Company's product capital investment and goodwill amortization related to the DataTimes acquisition. Mail Processing EBITDA increased $4.4 million, or 26%, to $21.6 million in first half 1997 as a result of the higher sales of commercial mail processing systems and leveraged operating costs and expenses. Mail Processing operating income increased $3.9 million, or 29%, to $17.3 million in first half 1997. Corporate expenses (excluding depreciation and amortization) were constant at $6.5 million in first half 1997 as productivity improvements offset inflationary cost increases. Net interest expense increased $1.0 million, or 4%, to $23.7 million in first half 1997, primarily reflecting the increased debt resulting from the DataTimes acquisition, which was partially offset by the impact of the repurchase in 1996 and 1997 of portions of the 11 1/2% Senior Discount Debentures and the 10 3/4% Senior Subordinated Notes, which were redeemed with proceeds from the Existing Credit Agreement. Net interest income of Bell & Howell Financial Services Company ("BHFS"), the Company's financing subsidiary, increased $0.5 million to $3.9 million in first half 1997, primarily due to continued growth in the lease receivables portfolio. Income tax expense increased in first half 1997 as a result of a higher level of pretax profit in the current year. The extraordinary losses of $1.0 million ($1.5 million pretax) in first half 1997 were comprised of the debt repurchase premium and write-off of unamortized debt issuance costs associated with the repurchase of $15.6 million (accreted value) of the 11 1/2% Senior Discount Debentures and $2.1 million of the 10 3/4% 22 Senior Subordinated Notes with proceeds from the Existing Credit Agreement. The extraordinary losses of $2.6 million ($4.0 million pretax) in first half 1996 were comprised of the debt repurchase premium and write-off of unamortized debt issuance costs associated with the repurchase of $34.2 million (accreted value) of the 11 1/2% Senior Discount Debentures and $17.9 million of the 10 3/4% Senior Subordinated Notes with proceeds from the Existing Credit Agreement. FISCAL 1996 COMPARED TO FISCAL 1995 The Company's net sales increased $82.9 million, or 10%, to $902.8 million in 1996. Information Access net sales increased $20.6 million, or 5%, to $470.5 million in 1996. Net sales to the transportation and vehicle market increased $10.2 million, or 10%, to $110.0 million due to increased sales of electronic parts catalogs and ancillary products to automotive dealerships, and continued strong sales of dealer management systems and electronic parts catalogs to powersports dealerships. In addition to increased new systems placements, the Company continued to experience strong sales of additional product applications and high contract renewal rates related to previously placed systems in automotive dealerships. Net sales to the education and library market increased $8.4 million, or 5%, to $172.6 million due to a growing electronic subscription base, which continued to reflect high renewal rates on existing products, new product placements and the impact of the acquisition of DataTimes Corporation (in September 1996) which added complementary information content, technology and distribution to the Company's electronic product offerings. Sales of electronic content increased 24% over the prior year as customers increasingly demand electronic information solutions, while they are evaluating the rapid changes in technology and the evolution of on-line delivery. Net sales of microfilm and paper products in 1996 decreased slightly versus the prior year as increased pricing was offset by lower unit volumes. Sales of low margin electronic equipment continued to decline in 1996 (and represent only 3% of sales in this market) as on-line delivery and the availability (from other sources) of standardized computer hardware have allowed the Company to focus on providing the more valuable information content. Imaging Solutions and Components net sales increased $2.0 million, or 1%, to $187.9 million as increased sales of production scanners worldwide and imaging software systems were partially offset by lower microfilm product sales as a result of a sales force reduction (reflecting a shift to directly serving only the financial services market in the U.S.--which increased the profitability of this business). The acquisition of Protocorp International (in March 1996) allows the Company to now offer its financial services customers a full range of electronic information storage and retrieval solutions. Mail Processing net sales increased $62.3 million, or 17%, to $432.3 million in 1996. Sales of commercial mail processing systems increased $34.1 million or 11% to $352.5 million reflecting strong market demand for inserting and sorting systems both domestically and abroad, and increased service revenue (due to both an expanding customer service base and improved pricing). Sales of commercial sorting equipment (which represent 12% of commercial equipment sales) increased $6.5 million, or 35%, to $25.1 million as the U.S. Postal Service guidelines governing the operating requirements to qualify for incentives to bar code and presort mail (which became effective July 1, 1996) have created a more favorable environment for customers to invest in advanced sorting automation technology. Sales of customized mail automation equipment and contractual engineering services to governmental postal authorities increased $28.2 million, or 55%, to $79.8 million, as a result of production contracts for both the German and U.S. Postal Services. The Company's cost of sales increased $65.0 million, or 13%, to $576.4 million in 1996, with the gross profit percentage decreasing by 1.4 percentage points to 36.2% in the current year. The lower gross profit percentage in 1996 resulted from a shift in sales mix (as the growth rate in lower gross profit percentage Mail Processing revenues exceeded the growth rate in higher gross profit percentage Information Access revenues), which more than offsets the impact of improved manufacturing productivity and increased pricing. 23 Research and development expense increased $7.9 million, or 26%, to $38.1 million in 1996 as the Company continued to increase its investment in new product offerings. Such increase primarily related to increased investment to develop higher technology mail processing systems/software and to develop enhanced versions of production scanners. The Company has continually positioned itself to take advantage of new product/technology opportunities (with an increased emphasis on software solutions and electronic products) in each of its businesses. Selling and administrative ("S&A") expense increased $4.1 million, or 2%, to $198.9 million in 1996 reflecting the Company's increased investment in sales and marketing resources as well as increased distribution costs associated with the higher sales volumes. The ratio of S&A expense to net sales of 22.0% in 1996 improved by 1.8 percentage points versus the prior year as a result of various expense leveraging initiatives and a favorable shift in sales mix (as the growth rate in lower S&A expense percentage Mail Processing revenues exceeded the growth rate in higher S&A expense percentage Information Access revenues). EBITDA increased $12.8 million, or 11%, to $133.6 million in 1996 resulting from the higher sales level and leveraged operating costs and expenses. Operating income increased $5.9 million, or 7%, to $89.4 million in 1996. Information Access EBITDA, increased $4.3 million, or 5%, to $98.4 million in 1996. This increase resulted from the higher sales volumes, an improved gross profit percentage reflecting a sales mix emphasizing the Company's more profitable products (i.e., a greater proportion of revenues related to software and publishing and a lower proportion of revenues related to the sale of hardware), and the profitability improvement resulting from the domestic refocusing of the Imaging Solutions and Components sales force on the financial services market, which more than offset the dilutive impact in 1996 of the acquisitions of DataTimes Corporation and Protocorp International and increased research and development costs associated with new product offerings. Information Access operating income of $62.9 million in 1996 increased slightly over the prior year as the EBITDA increase was offset by both higher depreciation cost on the Company's product capital investment and goodwill amortization related to the aforementioned acquisitions in 1996. Mail Processing EBITDA increased $9.1 million, or 23%, to $48.1 million in 1996. The increase resulted from the higher sales volumes and leveraged operating costs and expenses, which included the increased investment in research and development for higher technology mail processing systems/software. Mail Processing operating income increased $6.5 million, or 19%, to $40.0 million in 1996. Corporate expenses (excluding depreciation and amortization) increased $0.6 million, or 5%, to $12.9 million in 1996, reflecting inflationary cost increases and costs associated with being a publicly traded company. Net interest expense decreased $5.5 million, or 11%, to $45.3 million in 1996 primarily reflecting the reduction in interest expense resulting from the initial public equity offering in May of 1995 (the net proceeds of which were used to retire $50.0 million of the 10 3/4% Senior Subordinated Notes and to prepay $17.6 million of term loans under the Existing Credit Agreement). Net interest expense was further reduced by the repurchase in 1996 of $17.9 million of the 10 3/4% Senior Subordinated Notes and $34.2 million (accreted value) of the 11 1/2% Senior Discount Debentures, which were redeemed with proceeds from the Existing Credit Agreement. Net interest income of Bell & Howell Financial Services Company increased $1.7 million to $6.8 million in 1996 primarily due to continued growth in the lease receivables portfolio. Income tax expense increased in 1996 as a result of both a higher level of pretax profit in the current year and a slightly higher income tax rate related to the impact of a mix shift of taxable income to/within certain foreign jurisdictions. 24 The extraordinary losses of $2.6 million ($4.0 million pretax) in 1996 were comprised of the debt repurchase premium and write-off of unamortized debt issuance costs associated with the aforementioned repurchase of the 10 3/4% Senior Subordinated Notes and the 11 1/2% Senior Discount Debentures. The extraordinary losses of $3.2 million ($5.0 million pretax) in 1995 were comprised of the debt repurchase premium and write-off of unamortized debt issuance costs associated with the aforementioned repurchase of the 10 3/4% Senior Subordinated Notes and the write-off of unamortized debt issuance costs associated with the aforementioned prepayment of term loans under the Existing Credit Agreement, both of which reflected the application of the net proceeds from the initial public equity offering. FISCAL 1995 COMPARED TO FISCAL 1994 The Company's net sales increased $99.6 million, or 14%, to $819.9 million in 1995. Information Access net sales increased $45.5 million, or 11%, to $449.9 million in 1995. Net sales to the transportation and vehicle market increased $25.8 million, or 35%, to $99.8 million due to increased sales of electronic parts catalogs and ancillary products to automotive dealerships, and increased sales of dealer management systems and electronic parts catalogs to powersports dealerships. In addition to new system placements, the Company also experienced strong sales of additional product applications and high contract renewal rates related to previously placed systems in automotive dealerships. Net sales to the education and library market increased $12.0 million, or 8%, to $164.1 million due to a growing electronic subscription base, which continued to reflect high renewal rates on existing products and new product offerings. Sales of electronic content increased 27% over the prior year as customers increasingly demand electronic information solutions. Net sales of microfilm and paper products in 1995 increased slightly over the prior year as increased pricing more than offset lower unit volumes. Imaging Solutions and Components net sales increased $7.7 million, or 4%, to $186.0 million as increased sales of production scanners worldwide were partially offset by lower service revenue as certain of the Company's products have become less service intensive. Mail Processing net sales increased $54.1 million, or 17%, to $370.0 million in 1995. The revenue growth reflected significantly increased revenues related to customized equipment and contractual engineering services provided to the U.S. Postal Service. Additionally contributing to the revenue growth was higher sales of commercial inserting equipment and increased service revenue (due to both an expanding customer base serviced and improved pricing). Sales of commercial sorting equipment was approximately equal with the prior year which reflected the uncertainty caused by the then existing U.S. Postal Service proposal to alter the guidelines governing the operating requirements to qualify for incentives to bar code and presort mail. The Company's cost of sales increased $56.0 million, or 12%, to $511.4 million in 1995. The gross profit percentage of 37.6% in 1995 increased 0.8 percentage points over the prior year resulting from a sales mix emphasizing the Company's more profitable products, improved manufacturing productivity and increased pricing. Research and development expense increased $8.6 million, or 40%, to $30.2 million in 1995 as the Company continued to increase its investment in new product offerings. Such increase primarily related to the Company's introduction in the third quarter of 1995 of the first full format system (ProQuest Direct) through which customers are able to gain direct on-line access to its extensive collection of databases. Research and development expenses in 1995 also related to increased investment to develop higher technology mail processing systems/software and increased investment to develop enhanced features for production scanners. The Company has continually positioned itself to take advantage of new product/ technology opportunities (with an increased emphasis on software solutions and electronic products) in each of its businesses. Selling and administrative expense increased $21.8 million, or 13%, to $194.8 million in 1995 reflecting the Company's increased investment in sales and marketing resources, increased distribution 25 costs associated with higher sales volumes, and $5.2 million for the continuation of the relocation of Mail Processing Systems headquarters to a new site in North Carolina. The Company's restructuring expense of $32.9 million in 1994 resulted from management's decision to relocate Mail Processing Systems headquarters' operations and consolidate certain of its domestic Mail Processing Systems facilities at a new site that will be the base for developing innovative technology and products (both software and hardware), and to consolidate certain North American Imaging Solutions and Components administrative and warehouse facilities in order to more effectively serve its customer base with a reduced operating expense infrastructure. EBITDA increased $17.6 million, or 17%, to $120.8 million in 1995 resulting from the higher sales level and leveraged operating costs and expenses, which included the significantly increased investment in research and development to fund new product offerings. Operating income (excluding the 1994 restructuring expense) increased $13.1 million, or 19%, to $83.4 million in 1995. Information Access EBITDA increased $16.0 million, or 21%, to $94.1 million in 1995. This increase resulted from the higher sales volumes and an improved gross profit percentage reflecting a sales mix emphasizing the Company's more profitable products (i.e., a greater proportion of revenues related to software and publishing and a lower proportion of revenues related to the sale of hardware). Information Access operating income (excluding the 1994 restructuring expense) increased $11.6 million, or 23%, to $62.8 million in 1995. Mail Processing EBITDA increased $2.6 million, or 7%, to $39.0 million in 1995. The increase in 1995 resulted from the increased sales associated with the customized equipment and contractual engineering services for the U.S. Postal Service and the higher sales volumes of mail processing systems/service, partially offset by the increased investment in research and development (for higher technology mail processing systems/software). Mail Processing operating income (excluding the 1994 restructuring expense) increased $2.5 million, or 8%, to $33.5 million in 1995. Corporate expenses (excluding depreciation and amortization) increased $1.0 million, or 9%, to $12.3 million in 1995, reflecting inflationary cost increases and costs incurred related to the initial public equity offering. Net interest expense increased $1.8 million, or 4%, to $50.8 million in 1995 reflecting a higher interest rate environment and increased interest accretion on the 11 1/2% Senior Discount Debentures, which were partially offset by the reduction in interest costs resulting from the initial public equity offering (the net proceeds of which were used to repurchase $50.0 million of the 10 3/4% Senior Subordinated Notes and to prepay $17.6 million of term loans under the Existing Credit Agreement). Net interest income of BHFS, the Company's financing subsidiary, decreased $0.5 million to $5.1 million in 1995, as increased interest income on lease receivables was more than offset by higher financing costs, reflecting the higher interest rate environment. Income tax expense increased in 1995 as a result of a higher level of pretax profit in the current year, and additionally reflects the favorable impact of a shift in mix of taxable income to certain foreign jurisdictions for which no tax expense is recorded (as a result of prior foreign net operating losses being incurred with no corresponding tax benefit previously recorded). The extraordinary losses of $3.2 million ($5.0 million pretax) in 1995 were comprised of the debt repurchase premium and write-off of unamortized debt issuance costs associated with the repurchase of $50.0 million of the 10 3/4% Senior Subordinated Notes and the write-off of unamortized debt issuance costs associated with the prepayment of $17.6 million of term loans under the Existing Credit Agreement, both of which reflect the application of the net proceeds from the initial public equity offering. The extraordinary loss of $1.0 million ($1.5 million pretax) in 1994 represented the write-off of unamortized debt issuance costs associated with the prepayment of a term loan included in the Existing Credit Agreement. 26 INTERNATIONAL OPERATIONS In fiscal 1994, 1995 and 1996, the Company had domestic net sales of $548.4 million, $625.2 million, and $706.0 million respectively, and domestic operating income (excluding corporate expenses, and the 1994 restructuring expense) of $71.9 million, $81.4 million, and $86.5 million, respectively. Foreign net sales in fiscal 1994, 1995 and 1996 were $171.9 million, $194.7 million, and $196.8 million respectively, with foreign operating income (excluding corporate expenses and the 1994 restructuring expense) of $10.3 million, $14.9 million, and $16.4 million, respectively. The Company's foreign currency hedging activities have not and are not anticipated to have a material impact on operations, and the Company has no significant investments denominated in foreign currencies. LIQUIDITY AND CAPITAL RESOURCES The completion of the Transactions (based upon the assumptions set forth in footnote 5 to "Selected Consolidated and Operating Data") resulted in a decrease of $19.0 million and $8.8 million in pro forma interest expense for fiscal 1996 and first half 1997, respectively. Following the completion of the Transactions, the Company's principal sources of liquidity will be from cash flow generated from operations and borrowings under the New Revolving Credit Agreement. The New Revolving Credit Agreement will provide $600 million of revolving credit availability of which approximately $427 million is expected to be drawn as of the closing of the Transactions, which is anticipated to occur on October 1, 1997. Management believes that, following the Transactions, cash flow from operations combined with cash available under the New Revolving Credit Agreement will be sufficient to fund working capital, capital expenditures, acquisitions and cash interest and principal requirements through fiscal 1998. At the end of first half 1997, the Company had $91 million of available credit under the Existing Credit Agreement and $14.2 million of cash and cash equivalents. The Existing Credit Agreement requires, and the New Revolving Credit Agreement will require, maintenance of a minimum fixed charge coverage ratio, a minimum net worth level, and a maximum leverage ratio. The Company is currently, and expects to continue to be through the term of the New Revolving Credit Agreement, in compliance with all such covenants. Cash used by operations was $21.5 million in first half 1997 versus cash provided by operations of $0.6 million in first half 1996. Although EBITDA increased by $9.3 million in first half 1997, the Company's working capital investment increased in the current year related to higher inventory levels to support sales growth and the timing of vendor disbursements. Debt (net of cash and cash equivalents) increased by $55.1 million to $597.9 million in first half 1997, as a result of the cash used by operations (which reflects the seasonal nature of the Company's cash collections and disbursements), capital expenditures/acquisitions and continued interest accretion on the 11 1/2% Senior Discount Debentures. Cash provided by operations of $78.0 million in fiscal 1996 represented a $34.0 million improvement over the prior year, resulting from the increase in EBITDA and proceeds from the sale of Bell & Howell Financial Services Company receivables, which were partially offset by the increased investment in inventory in 1996 related to the European postal service contracts. Debt (net of cash and cash equivalents) increased by $55.2 million to $542.8 million in 1996 as a result of acquisitions (primarily DataTimes Corporation and Protocorp International), continued capital expenditures, the aforementioned inventory investment, and continued interest accretion on the 11 1/2% Senior Discount Debentures. For the five years subsequent to fiscal 1996, annual maturities of long-term debt are: 1997-- $1.7 million; 1998--$0.8 million; 1999--$0.4 million; 2000--$83.3 million; and 2001--$195.1 million. On a pro forma basis, assuming the consummation of the Transactions as of October 1, 1997, annual maturities of long-term debt are: 1997--$1.7 million; 1998--$0.8 million; 1999--$0.4 million; 2000--$83.3 million; and 2001--zero. 27 CAPITAL EXPENDITURES In fiscal 1994, 1995, 1996, first half 1996 and first half 1997, the Company had capital expenditures of $38.3 million, $44.0 million, $42.7 million, $20.4 million and $17.2 million, respectively, a significant portion of which consisted of expenditures for product masters and the creation of electronic databases for the education and library market. The Company's capital expenditures in fiscal 1997 are projected to approximate the prior fiscal year level as the Company continues to invest in each of its businesses. WORKING CAPITAL The Company operates with a reduced net working capital level principally as a result of substantial customer prepayments for annual service contracts in each of its business segments and prepaid subscriptions in the Information Access business segment. Further, the Company has extended its total quality program and cycle time reduction efforts to the management of working capital. PERIODIC FLUCTUATIONS; SEASONALITY The Company's operating results may fluctuate from period to period and within periods. These fluctuations could result from a number of factors, including the timing of customers' capital expenditures, annual budgetary considerations of customers, new product introductions and general economic conditions. Such fluctuations are generally more pronounced in the Company's businesses that sell equipment such as commercial mail processing and Imaging Solutions and Components. The anticipated sales growth in the second half of 1997 is expected to be generated more by these businesses than in prior periods which leads to less predictability in the Company's operating results for the remainder of the year. Although the Company in general is not affected by seasonal fluctuations, the buying patterns and funding availability for certain Information Access and Mail Processing customers cause sales, profitability and cash flow to be higher in the fourth quarter of the year. Due to this seasonal factor, the Company requires and expects to have a seasonal working capital credit line to fund cash requirements primarily during the second and third quarters. See "Risk Factors--Periodic Fluctuations; Seasonality." RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share." The standard establishes new methods for computing and presenting earnings per share ("EPS") and replaces the presentation of primary and fully-diluted EPS with basic and diluted EPS. The Company is required to adopt the new standard for periods ending after December 15, 1997. The new methods under this standard do not have a material impact on the Company's current earnings per share amounts. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The Company is required to adopt the new standard for periods ending after fiscal 1997. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The standard requires all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed in equal prominence with the other financial statements. The standard is not expected to have a material impact on the Company's current presentation of income. In June 1997, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company is required to adopt this new standard for periods ending after fiscal 1997. This statement establishes standards for the way companies are to report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company is currently evaluating the impact of this standard on its financial statements. 28 BUSINESS GENERAL Bell & Howell is a global provider of systems and services for information access and high volume mail processing. Within its two business segments, Information Access and Mail Processing, the Company focuses on well-defined vertical markets where it is or can become the market leader. Within its Information Access segment, Bell & Howell develops and markets imaging and information systems that are focused on the needs of its customers in select vertical markets, which include transportation and vehicle dealers, libraries of all kinds (including college and university, elementary and high school as well as public and corporate), financial institutions, governmental agencies and other paper intensive industries. Within its Mail Processing segment, the Company develops and markets a complete range of high volume mail processing systems, which increasingly utilize the Company's proprietary software to expand the capabilities and improve the efficiency and effectiveness of customers' mailing operations. The Company's net sales, EBITDA and earnings before extraordinary items in 1996 were $902.8 million, $133.6 million and $25.7 million, respectively. The Company's net sales, EBITDA and earnings before extraordinary items were $418.2 million, $62.6 million and $6.7 million in first half 1997, respectively, compared to $415.1 million, $53.3 million and $5.2 million in first half 1996, respectively. The Company's strategy is to attain leadership positions in well-defined, defensible market niches within select industries or vertical markets where it believes there are significant opportunities for growth. By focusing on specific vertical markets, the Company gains an in-depth understanding of its customers and their industries. The Company believes this additional focus and customer intimacy gives the Company a competitive advantage in anticipating customer needs and being first to market with products that will achieve or maintain market leadership. The Company believes that its industry expertise will provide for more defensible market positions and additional opportunities for growth. In 1996, the Information Access segment represented 52% of net sales and 67% of EBITDA (excluding corporate expenses). The Mail Processing segment represented 48% of net sales and 33% of EBITDA (excluding corporate expenses). The Company has historically achieved higher margins in its Information Access segment due to its significant operating leverage as well as its large base of recurring revenue with high renewal rates. The Company's two business segments share a number of important strategic similarities, including strong market positions, a reputation for high quality products and service excellence, broad recognition of the Bell & Howell brand name and a significant international presence. In addition, the Company derives a substantial portion of its net sales from prepaid subscriptions and service agreements that historically have had renewal rates in excess of 90%. Bell & Howell markets its products worldwide with approximately 30% of its net sales in fiscal 1996 to customers outside the United States. Furthermore, Bell & Howell is able to leverage certain important technologies and expertise across its businesses, such as imaging and software technology, information indexing and organizing capabilities as well as expertise in paper handling. INFORMATION ACCESS SEGMENT Information Access's unique databases, proprietary access tools, value-added services and image capture/enhancement systems are designed to meet customers' increasing information needs, which have evolved well beyond the mere availability of information. Customers' demands for more efficient access to relevant data for specific information requirements are being driven by their needs to reduce search time and cost while performing more focused yet comprehensive searches. Within its Information Access segment, the Company provides quick and easy access to information in select vertical markets, such as transportation and vehicle dealers, libraries of all kinds (including college and university, elementary and high school as well as public and corporate), financial institutions, governmental agencies and other paper intensive industries. 29 TRANSPORTATION AND VEHICLE MARKET BUSINESS OVERVIEW. The transportation and vehicle market is an excellent example of the Company's strategy of market leadership in well-defined, defensible market niches. The Company serves its customers in this market through its subsidiary, Bell & Howell Publications Systems Company ("PSC"), which is a leading provider of turnkey systems (including software, information updates, service as well as hardware) used to manage the parts area of automotive dealerships and to provide total information systems for powersports (motorcycle and marine) dealerships. The Company's automotive customer base consists principally of franchised dealerships, including General Motors ("GM"), Chrysler, Mercedes Benz, Land Rover, Porsche, Honda, Nissan, Volvo, Isuzu, Subaru, Hyundai, and most recently, Ford and Toyota. For the Company's automotive customers, the Company creates and markets turnkey systems consisting primarily of electronic parts catalogs which allow automotive dealerships to electronically access manufacturers' proprietary technical documentation (such as parts catalogs, parts and service bulletins and other reference materials) and to interface with other important information systems (such as inventory management and billing) within the dealership. The Company's products provide significant benefits to dealerships' parts and service departments (critical profit centers for dealerships), such as increased automotive parts sales, higher inventory turnover as well as improved labor productivity. The Company's electronic parts catalogs appeal to dealers because they link text with graphics, illustrations and charts in one easy-to-use system designed to locate the desired information. In addition, use of the Company's systems has significantly reduced the training time needed for its customers' parts department personnel. A typical dealer installation consists of one or more workstations and software to search and display information from the database. In addition to the revenue from the sale of the workstation and software, the Company's systems generate ongoing revenues over the term of the contract from publishing database updates as well as additional revenues from software maintenance and hardware service contracts. The sale of these systems also generates significant interest income because the majority of the systems in the United States are financed through the Company's financing subsidiary Bell & Howell Financial Services Company. The Company's systems are marketed to automotive dealerships pursuant to long-term contracts with monthly payments, generally for five year terms, and are currently used by almost 9,000 of the approximately 22,000 automotive dealerships in the U.S. Management believes its share of installed automotive dealership customers is significantly larger than any of its competitors. Outside the U.S., the Company is currently the sole provider of electronic parts catalogs to over 10,000 GM, Mercedes Benz and Chrysler dealers and distributes its parts catalogs primarily through exclusive OEM agreements with General Motors Europe, Mercedes Benz and Chrysler. In addition, the Company is the preeminent supplier of complete dealer management systems and electronic parts catalogs to powersports dealerships. Similar to its automotive strategy, the Company provides dealerships access to proprietary technical documentation for most major motorcycle manufacturers, including Harley Davidson, Honda, Suzuki, Yamaha, Kawasaki, Triumph, BMW and Ducati as well as most major marine manufacturers, including Mercury, Outboard Marine and Volvo-Penta. Management believes its installed customer base of over 1,500 powersports dealerships is significantly larger than any of its competitors. In June 1997, the Company launched a new generation dealer management system initially targeted to marine dealers. The Company sells its automotive systems primarily through a direct sales force in the U.S. and Canada. Approximately 10% of the Company's sales within its transportation and vehicle market are pursuant to a long-term distribution arrangement with the Reynolds & Reynolds Company, a leading supplier of computer systems and forms to the automotive industry, to market the systems to United States and Canadian auto dealers. In Europe, the Company distributes its software and information directly to 30 GM and Mercedes Benz, and in Japan the Company markets through Yanase, the controlling importer in Japan for virtually all the Mercedes Benz and GM/Opel dealerships. The manufacturers then distribute the software and information to their dealers. In the powersports business, systems are marketed to dealerships by a dedicated, direct sales force and through telemarketing. The Company historically has provided microfilm publication services for technical reference materials to major manufacturing companies, including GM and Chrysler. Although microfilm publishing accounted for only 10% of the Company's net sales to the transportation and vehicle market in fiscal 1996, the Company considers this segment of strategic importance because it provides an opportunity for the Company to transition these customers to electronic systems and requires a relatively small continuing investment. GROWTH STRATEGIES. The Company intends to pursue growth opportunities in its established automotive and powersports dealership markets as well as in new markets through new product development and acquisitions. The Company intends to pursue the following strategies: INCREASE SALES TO EXISTING AUTOMOTIVE CUSTOMERS. The Company has enjoyed strong sales of additional product applications and high contract renewal rates and intends to continue to market upgrade and replacement hardware and software products to its large installed base. In addition, the Company continues to add new features and services such as a vehicle identification number application, technical service bulletins, and labor time guides which enable it to enhance its revenue stream from its existing customer base. The Company curently has 14 product applications available up from 4 in 1994, providing additional opportunities to cross sell applications to its existing customer base. ATTRACT NEW AUTOMOTIVE DEALERSHIPS. The Company's unique ability to offer electronic parts catalogs of multiple manufacturers positions it to benefit from the industry consolidation and the increase in the number of multi-franchise dealerships. The Company has the rights to more manufacturers' parts databases than any of its competitors. The Company also intends to increase its installed base by aggressively seeking database publishing rights from additional automotive manufacturers. For example, recent agreements with Ford and Toyota provide the Company with access to a large number of additional dealerships. In addition, the Company intends to penetrate the approximately 25% of the estimated 22,000 automotive dealerships in the U.S. which do not currently use electronic parts catalogs. INCREASE SALES IN POWERSPORTS AND OTHER MARKETS. The Company has addressed the growing demand for its products in the powersports market by the June 1997 introduction of an enhanced dealer management software system initially designed for the needs of the marine dealer. Other markets for the Company's image intensive database access products include the heavy truck markets as well as the recreational vehicle and general aviation markets. COMPETITION. In the automotive market, the Company's principal competitors are ADP, which sells and services a full range of dealership management systems and currently publishes electronic parts catalogs for GM and Chrysler dealerships (and also distributes the parts catalogs for BMW and Nissan), and EDS, which publishes electronic parts catalogs for GM dealerships. In addition, certain manufacturers such as Toyota, Honda and Nissan have developed their own proprietary electronic parts catalogs. Although additional automotive manufacturers could also elect to develop their own electronic parts catalogs, the Company believes that it is uniquely positioned to compete with such manufacturers because it will not be efficient for dealerships to have separate proprietary systems for each of their automotive lines. Due to the Company's large installed base, its strong long-term relationships with manufacturers and the ability of its systems to handle multiple manufacturers' data, the Company believes it is well positioned to compete with any of its competitors. Certain of the Company's competitors have greater financial resources than the Company. See "Risk Factors--Competition." 31 EDUCATION AND LIBRARY MARKET BUSINESS OVERVIEW. In the education and library market, the Company competes through its subsidiary, UMI Company ("UMI"), which the Company believes is the world's leading aggregator and provider of access to articles and information from periodicals and newspapers, dissertations, out-of-print books and other scholarly collections. This information can be accessed via the Internet, in other electronic media, such as CD-ROM, as well as on magnetic tape, on microfilm or on paper. The Company aggregates the works of publishers and authors, creates proprietary abstracts and indices, and customizes this information in various formats for easy access by its customers. For example, elementary and high school customers may want on-line information organized by selected topics, whereas users of academic research libraries require extensive databases in order to perform thorough research. Furthermore, libraries have traditionally purchased information in the microfilm format for the breadth and depth of the Company's database as well as for archival and preservation purposes. Bell & Howell believes its leadership position within the education and library market is attributable to the breadth and depth of its collection of published materials, strong publisher and customer relations, high quality abstracts and indices, superior technology and an effective sales and distribution network. The Company's comprehensive database consists of over 18,000 periodical titles, 7,000 newspaper titles, as well as its unique content base including 1.5 million dissertations, 140,000 out-of-print books, 300 research collections, over 14 million proprietary abstracts for on-line and CD-ROM retrieval. The ability to provide its customers with the full image as originally published distinguishes the Company from other information providers which typically store and provide information in a text-only format, omitting essential charts, graphs, pictures and other images. A significant amount of the Company's sales to the education and library market comes from content under exclusive licenses, making the Company the sole source of such information aside from the original publisher. In many cases, the Company's database includes the entire publication history of a periodical or newspaper. For example, the Company's database includes every edition of THE NEW YORK TIMES published since 1851. The Company has developed strong long-term relationships with the publishers of such periodicals and newspapers and with most major universities in North America. The Company is continually offering new ways to enhance each customer's ability to efficiently access the relevant information in the format or media of its choice. The Company pioneered electronic access to the full image format of periodicals and newspapers on CD-ROM in the late 1980s. In 1995, the Company introduced ProQuest Direct, a proprietary access and delivery system offering on-line delivery of articles in formats ranging from text only to the full image as originally published. In 1996, ProQuest Direct became accessible on the Internet via any Web browser. In fiscal 1996, approximately 45% of the Company's net sales to the education and library market were derived from information in electronic format, which has grown at a compound annual rate of approximately 30% since 1994. Initially this growth was fueled by CD-ROM subscriptions. Electronic growth is currently being driven by a combination of on-line subscriptions, agreements with information resellers such as Knight-Ridder and Dow Jones, as well as new CD-ROM databases. Customers today are increasingly computer-oriented and demand user-friendly access to information at the desktop. The Company has responded by developing a full line of proprietary electronic products marketed under the ProQuest brand name. These products include on-line via the Internet, CD-ROM, magnetic tape and other digitally-based collections of abstracts and indices, full text and full images, which generally focus on business, general interest, science and the humanities. Although overall sales growth has been driven by electronic content, customers still demand information stored in the more traditional microfilm and paper formats. In fiscal 1996, approximately 55% of the Company's net sales to the educational and library market were derived from information republished in microfilm and paper. Newspapers, magazines and journals are marketed as complete microfilm sets of both current and back issues. The Company also compiles books, magazines and journals into thematic 32 microfilm collections. Management believes that demand for microfilm products will continue despite the growing trend towards electronic products, because microfilm products may be the only source of certain out-of-print information, microfilm is a less expensive alternative or backup source of content to electronic media and microfilm is considered to be a more permanent medium than electronic media for archival and preservation purposes. In addition, paper copy is provided either as the original medium or by specific requests from customers. Management believes customers of these traditional media formats are of strategic importance because they provide a targeted market to which the Company can offer its electronic products and because continued delivery of traditional services to such customers requires only nominal continuing investment to maintain sales and cash flow. The Company's customers include libraries and information centers in elementary and high schools, colleges and universities, public, corporate and government libraries as well as a number of well known information providers that resell the Company' electronic content primarily within the corporate desktop user market. In fiscal 1996, approximately 70% of the Company's net sales to the education and library market were derived from prepaid annual subscriptions with historical renewal rates in excess of 90%. The Company has focused its direct sales and marketing efforts on academic research libraries, large public libraries, elementary and high schools and corporate libraries. In 1997, the Company curtailed its efforts to sell directly to the corporate desktop user, opting instead to distribute its content to that market through corporate resellers such as Knight-Ridder and Dow Jones. The Company's products are sold outside North America through a network of independent agents and distributors primarily working exclusively for the Company. Also, over the last several years, the Company has increased its development expenditures and product capital investment to expand and enhance its product offering of abstracts and indices, full images and full text, as well as to invest in technology to expand user access. Development expenditures were $4.7 million, $7.8 million and $9.8 million in fiscal 1994, 1995 and 1996, respectively. Investments in creation of databases were $18.8 million, $18.9 million and $19.4 million in fiscal 1994, 1995 and 1996, respectively. GROWTH STRATEGIES. The Company believes that the role of the information aggregator is becoming more important to customers and more central to the global dissemination of information, and that the Company is well positioned to capitalize on the combination of its extensive information database and its powerful data delivery tools to provide customers with accurate, comprehensive, timely and cost effective information solutions. To capitalize on the existing growth opportunities in the Information Access market, the Company intends to address the following market needs: DEMAND FOR RELEVANT AND COMPREHENSIVE ANSWERS. Over the last several years the Company has focused significant resources towards creating comprehensive abstracts and indices to be used as search tools by customers to more efficiently access the full text image of the desired article. Further, the Company has provided its information in thematic collections so that users may search across a very broad, deep cross section of its database. This search capability has been enhanced by the introduction of the Company's ProQuest Direct on-line system in 1995 whereby users now have access via the Internet to the Company's intelligent content base of information. CUSTOMER REQUIREMENTS FOR EASIER ACCESS. The Company distributes information in formats according to customers' requirements including on-line, CD-ROM, magnetic tape, microfilm and paper. Each of these formats allows customers to access the Company's comprehensive collection of business, general interest, science and humanities articles and, in the case of on-line users, utilize easily understood, menu-driven search instructions in a Windows-TM- based environment. GROWING DEMAND FOR ELECTRONIC CONTENT IN SCHOOLS & LIBRARIES. There are a number of well publicized initiatives at both the state and federal levels to connect schools and libraries to the Internet. In fact, over 80% of high schools in the U.S. have access to the Internet today. The Company believes that those 33 initiatives will enhance its opportunity to serve these customers because of the ease of use of the Company's search tools and its ability to provide its content on a customized basis according to the individual requirements of each school or district. GLOBAL DEMAND FOR UNITED STATES CONTENT. The Company's products have gained wide acceptance in Western Europe, Asia and Australia as the demand for information generated in the United States has grown. In 1996, approximately $33.1 million, or 19% of the Company's net sales to the education and library market were to customers outside the United States. The Company believes that significant international growth opportunities exist and continues to introduce new products specifically designed for international customers to capitalize on such opportunities. The Company has begun to market its ProQuest Direct-TM- on-line content-base to customers located outside the U.S. COMPETITION. In providing electronic publishing rights, the Company has found that publishers prefer republishers/aggregators with whom they have a long-standing relationship. Many of the Company's publisher relationships were established over 25 years ago and therefore constitute a key competitive advantage. The Company's competition in the microfilm republishing sector comes from organizations with less expansive publication lists. Microfilm publishers who compete with the Company include Primary Source Media, NewsBank and Thomson. In the electronic business, competitors include Dow Jones, EBSCO, Knight-Ridder, Newsbank, On-Line Computer Library Consortium (OCLC), Reed/Elsevier, SIRS and Thomson. In addition, original publishers, aggregators, technology companies and universities are beginning to position themselves as providers of electronic information directly to the desktop of the customer. All of these entities are potential competitors of the Company. Several competitors and potential competitors have greater financial resources than the Company. IMAGING SOLUTIONS AND COMPONENTS BUSINESS OVERVIEW. Bell & Howell's Imaging Solutions and Components business is a leading designer, integrator and distributor of non-paper based systems and components that enable users to efficiently file and access their documents and records. These systems and components are customized to the needs of select vertical markets, such as financial institutions and governmental agencies, in order to provide better customer service, enhance productivity, minimize storage costs and ensure the security and integrity of their records. These systems, which utilize both electronic and microfilm technology, consist of the software and hardware, accessories, supplies and service required to capture, enhance, duplicate, store, index and retrieve a customer's data and documents. Active business records and management reports are increasingly captured and stored electronically on optical disks or other electronic media which offer faster and easier access than microfilm. The Company's products include a line of electronic storage and retrieval systems which utilize a personal computer in conjunction with optical or magnetic disk, scanner, laser printer and proprietary application specific software. The Company's software products are customized to the needs of targeted vertical markets where Management believes there is potential to achieve market leadership within that niche. For example, the Company recently introduced a product targeted to financial institutions which allows them to instantaneously access and view complete customer records (including check copies, signature cards and bank statements) which reside on different customer databases and which may utilize differing imaging software, in order to provide more timely and efficient customer service and increase productivity. These market niches include financial institutions with assets of less than $10 billion, the Department of Defense and the trucking industry. These systems range in price from $10,000 for a stand-alone system to over $250,000 for a fully networked system. 34 The Company's imaging components include production scanners and software that convert paper documents into electronic files. In 1996, approximately 25% of net sales for this business were derived from scanner sales which have grown at an annual rate of approximately 30% since 1994. The Company's document scanners produce digital records from single- and dual-sided documents in a single pass. The production scanner market (where customers use a dedicated operator, in a production environment) ranges in speeds from 20 to 200 pages per minute ("ppm"). The Company has traditionally competed primarily in the mid-range (which today ranges from 50 to 100 ppm) of the production scanning market. In second quarter 1997, the Company announced two new lines of scanners, one aimed at the mid-range and up, while the other is aimed at the lower end of the production scanning market. The Company believes its market position and strong growth rate in its scanner business result from its reputation for quality and reliability. The Company's microfilm products include a full line of microfilm retrieval systems, readers, reader/ printers and a family of automated cameras, as well as other accessories and supplies. Bell & Howell systems are typically sold in the mid- to low-end of the Imaging Solutions and Components market characterized by PC-based and stand-alone systems rather than high-end integrated systems. Microfilm products are used primarily for archival and exception processing purposes, as well as for certain active business records, such as mortgage and loan applications or those applications which deal primarily with client files. Microfilm continues to be an ideal archival medium and provides numerous advantages over other storage formats. For example, microfilm offers the capability of storing a document for over 100 years. Microfilm equipment ranges in price from approximately $100 for a basic reader to over $30,000 for a sophisticated camera and in excess of $100,000 for a fully networked system. The Company's Imaging Solutions and Component business benefits from a substantial customer base, as well as a broad product line marketed and serviced through its extensive sales and service organization. Customers for the Company's products are primarily financial institutions (e.g. commercial banks, credit unions and savings and loans institutions), but also governmental agencies and trucking companies. Customers for the scanner products are distributors and OEMs who in turn place the scanners within complete systems via value added resellers ("VARs") or directly to end users for use with a variety of imaging solutions. In fiscal 1996, approximately 25% of net sales within the Imaging Solutions and Components business were derived from servicing its installed customer base, generally pursuant to prepaid annual contracts. Customers are served through direct and indirect channels, on a worldwide basis. In the United States, the direct sales force consists of more than 40 salespeople and agents who are supported by telemarketers. The scanner products are sold to distributors or to OEMs such as IBM, Filenet and Unisys. GROWTH STRATEGIES. Bell & Howell intends to pursue growth opportunities for non-paper based solutions for documents and reports by offering an expanded line of applications targeted at specific vertical markets including financial institutions, the Department of Defense and the trucking industry. The Company expects to leverage upon the strengths of its rapidly growing scanner product offerings with a range of new and related products and services including image capture software and enhanced features and functionality targeted to the needs of customers in additional vertical markets. While the microfilm market is mature, the Company believes there are opportunities for continued cash flows derived from sales of products, service and supplies to its significant customer base and to capitalize on opportunities to grow market share. The Company will also seek to expand its service revenues by targeting third party service contracts thereby leveraging its service capabilities. COMPETITION. In the traditional microfilm market, the Company primarily competes with dealers or resellers of Canon, Minolta or Kodak equipment. In the community banking, credit union and S&L market, the Company's offering of electronic solutions primarily competes with MacroSoft and Hyland software, two small privately owned companies, but also with several VARs or integrators reselling 35 software from, for example, Filenet or Optika. In the production scanner market, the Company primarily competes with Fujitsu and Ricoh in the lower end of the mid-range and with Kodak in the higher end of the mid-range. Several of the Company's competitors have greater financial resources than the Company. See "Risk Factors--Competition." Bell & Howell believes its Imaging Solution and Components business enjoys several competitive advantages. It has an excellent reputation in the industry as a leading provider of a broad line of high quality and reliable products. The Company's large installed customer base provides an opportunity to sell additional product applications, as well as new products, to existing customers and provides a predictable revenue stream from maintenance, repair services and supplies. MAIL PROCESSING SEGMENT BUSINESS OVERVIEW. Management believes that Bell & Howell is the leading manufacturer and supplier of high volume mail processing systems to the commercial market. The commercial market primarily consists of business to consumer mailers and represented more than 90% of the Mail Processing segment's sales during first half 1997. These systems, which increasingly utilize proprietary software, automatically perform a broad range of mail processing functions, from collating, cutting, bursting, folding and inserting documents (at cycle speeds ranging up to 18,000 envelopes per hour) to optical scanning, encoding and sorting of envelopes (at speeds up to 36,000 envelopes per hour). These software-driven systems allow customers to more efficiently manage mail room operations as well as convert routine mailings (such as invoices or statements) into targeted communication and marketing programs by customizing the invoice or statement and including promotional inserts based on a specific customer profile. In addition to the commercial market, the remaining sales in the Mail Processing segment stem from governmental contracts for automation equipment and software for the U.S. Postal Service and foreign postal authorities. The Company's major product line, mail inserting systems, performs virtually all mail inserting functions, including cutting and folding continuous documents, collating and inserting materials into envelopes and postage metering at speeds ranging up to 18,000 envelopes per hour. Inserting systems generally range in price from approximately $25,000 to $400,000 (with more complex systems selling for over $1 million). Customers include financial institutions, insurance companies, utilities, service bureaus, credit card companies, direct mail marketers and other companies which generate high volumes of mail. The Company also designs and manufactures mail sorting equipment which optically scans characters and prints bar coded zip codes on outgoing mail and sorts the mail according to destination at speeds up to 36,000 envelopes per hour. These sorters allow customers with varying volume needs to capitalize on presorted and bar coded mail discounts which are offered by the U.S. Postal Service and increasingly by postal services in other countries. Mail sorting systems range in price from approximately $100,000 to $600,000. Customers include users of high volume inserters and presort bureaus which aggregate mail from smaller postal patrons seeking to take advantage of presorted mail discounts. Bell & Howell believes that its leadership position in the commercial mail processing business is attributable to its substantial installed global customer base and worldwide service organization of approximately 1,500 service engineers and support personnel. In many locations, the service engineers provide services seven days a week, 24 hours per day. The majority of commercial mail processing's equipment is maintained and serviced by the Company pursuant to annual prepaid service contracts. In fiscal 1996, approximately 40% of commercial mail processing's net sales were derived from service. In addition to its commercial inserting and sorting products, Bell & Howell Postal Systems Company designs, develops and manufactures automation equipment and software for use by national postal services worldwide including the U.S. Postal Service. The Company has expertise in high speed feeding of oversized envelopes, high speed labeling applications and imaging, as well as other software based solutions. Bell & Howell Mailmobile Company distributes an automated guided vehicle used to deliver mail within the office. 36 Bell & Howell's commercial mail processing systems are sold in the United States through a direct sales force of approximately 70 salespeople. Outside the United States, commercial mail processing systems are marketed directly through wholly-owned subsidiaries located in Canada, France, Germany, the United Kingdom, Japan, the Netherlands, Singapore, Switzerland and Austria as well as through distributors in other geographic areas. GROWTH STRATEGIES. The Company intends to expand its leadership position by continuing to introduce new software and hardware solutions to existing and prospective customers through new product development and acquisitions. In addition, the Company intends to capitalize upon its customers' need to personalize their communications and to develop targeted merchandising initiatives by offering enhanced integrated software solutions. The Company believes customers will continue to seek integrated systems solutions that enhance flexibility in customer communications and connect mail room and document printing operations, while reducing labor requirements and improving total system accuracy. The Company has invested $9.4 million, $12.9 million and $17.6 million in new product development in fiscal 1994, 1995 and 1996, respectively, for new product lines, system software and systems for large mail room operations. In 1996, the Company introduced the BH6000, an 18,000 envelope per hour system targeted at simple high volume applications. The Company has also recently introduced the BH4000, an enhanced version of its most popular mailing system which will increase throughput by utilizing the software and certain hardware modules used in its fastest system. New inserting product introductions utilize flexible, modular system designs that are software driven and offer common interfaces and comprehensive information links to customer operations. Management believes the modular design will have a number of benefits including a more cost effective upgrade path for its customers, and lower production costs. Mail Processing's inserting product line will be enhanced in the future primarily through the addition of application software and new hardware that will increase throughput and reduce operating labor requirements. The Company believes these new systems will be responsive to the growing demand for integrated mail processing systems and more effective customer communications. COMPETITION. Bell & Howell believes that its commercial mail processing business enjoys several competitive advantages, including its ability to customize products to meet customer needs and provide high quality maintenance service. The Company's large installed base provides a significant opportunity to increase net sales. A substantial portion of the Company's new mail processing equipment sales are derived from sales of upgrades, add-ons or replacements. The Company also believes that its extensive service organization has led to close customer relationships which give the Company the ability to anticipate customers' future needs. The Company's nearest competitor in the high volume mail processing business in North America is Pitney Bowes. Outside of North America, Bell & Howell also competes with Kern AG and Bowe Systec AG, which are based in Switzerland and Germany, respectively. In the mail sorting product line, the Company's primary competitors are Siemens, Postal Technologies and Pitney Bowes. Of these competitors, Pitney Bowes and Siemens have greater financial resources than the Company. See "Risk Factors--Competition." FINANCING SUBSIDIARY Bell & Howell Financial Services Company, the Company's finance subsidiary, assists the Company in marketing its products by providing lease financing for the Company's customers, with both full payout and residual payment end-of-lease options. Bell & Howell Financial Services Company finances its leases on a stand-alone basis through separate financing arrangements. In fiscal 1996, net interest income earned at Bell & Howell Financial Services Company was $6.8 million. See "Description of Certain Financing Agreements and Certain Indebtedness--Bell & Howell Financial Services Company." 37 SOURCES AND AVAILABILITY OF RAW MATERIALS The Company purchases a significant amount of microfilm from two vendors for its Information Access business. Other materials, including electronic components, are purchased from a number of suppliers. Management believes that alternate sources of supply are available for substantially all raw materials and components. The Company believes that it currently has an adequate supply of raw materials and component parts to meet its manufacturing requirements and that the loss of any one of its suppliers would not have a long-term material adverse effect on the Company. BACKLOG Except in its Mail Processing segment, which includes customized products and assembly of complex systems, the Company fills substantially all customer orders within 30 days. In the Mail Processing segment, backlog at the end of first half 1997 totalled $107.5 million as compared to $129.0 million at the end of first half 1996. Although the backlog in the commercial Mail Processing business increased by $15.6 million in first half 1997 versus first half 1996, the backlog relating to the sales to postal authorities decreased by $37.1 million in the same period. MAJOR CUSTOMERS The Company is not dependent upon any one customer or a few customers. The loss of any one customer would not have a material adverse effect on the Company's businesses. In fiscal 1996, no single customer accounted for 10% or more of the consolidated net sales of the Company. RESEARCH AND DEVELOPMENT EXPENSES The amounts charged to the Company's earnings for research and development expense in fiscal 1994, 1995, 1996, first half 1996 and first half 1997 were $21.6 million, $30.2 million, $38.1 million, $16.5 million and $19.8 million, respectively. New product offerings resulting from the Company's research and development efforts served to offset declines in certain other product lines, as the Company positioned itself to take advantage of new product/technology opportunities (with an increased emphasis on software solutions and electronic products) in each of its businesses. The Company's research and development expenditures include expenses primarily for database and software development, information delivery systems, production scanners and other electronic devices for the Information Access segment, as well as for increasingly software driven mail processing systems. EMPLOYEES At the end of fiscal 1996, Bell & Howell had 6,110 employees. Approximately 239 employees located at the Company's Allentown, Pennsylvania facility are represented by a labor union pursuant to an agreement effective January 1, 1997 between Bell & Howell Mail Processing Systems Company and IMMCO Employees Association, which expires on May 31, 2001. Management believes that its relations with its employees are good. 38 PROPERTIES Bell & Howell's principal administrative office is located in Skokie, Illinois. The office space has been leased through 2009. At the Company's option, the lease may be renewed for an additional five-year period. The following table provides certain summary information in square feet with respect to certain facilities that the Company owns or leases in connection with its businesses:
SQUARE EXPIRATION LOCATION SEGMENT TITLE FEET DATE - ------------------------------ ------------------------------------------------ --------- --------- ---------- Lincolnwood, Illinois Information Access/Mail Processing Owned 338,000 N/A Allentown, Pennsylvania Mail Processing Owned 196,000 N/A Ann Arbor, Michigan Information Access Owned 171,000 N/A Friedberg, Germany Mail Processing Owned 130,000 N/A Wooster, Ohio Information Access Owned 91,000 N/A Durham, North Carolina Mail Processing Leased 80,000 5/05 Durham, North Carolina Mail Processing Leased 71,000 9/04 Tucson, Arizona Mail Processing Leased 65,000 5/02 Louisville, Kentucky Information Access Leased 45,000 6/01 Ann Arbor, Michigan Information Access Leased 42,000 3/98 Zion, Illinois Information Access Leased 36,000 6/99 Seven Hills, Ohio Information Access Leased 32,000 7/98 Oklahoma City, Oklahoma Information Access Leased 31,000 8/01 Ann Arbor, Michigan Information Access Leased 27,000 8/98 Salt Lake City, Utah Information Access Owned 22,000 N/A Monroe, North Carolina Information Access Leased 15,000 9/01 Salt Lake City, Utah Information Access Leased 11,000 3/99
Bell & Howell also owns or leases facilities in the United States, Canada, France, United Kingdom, Germany, The Netherlands, Japan, Singapore, Switzerland and Austria for sales, service and warehouse space. The termination of any one of the leases, some of which are long-term, would not significantly affect the results of the Company's operations. The Company deems the buildings, machinery and equipment used in its operations, whether owned or leased, generally to be in good condition and adequate for the purposes for which they are used. PATENTS AND LICENSES The Company owns a substantial number of patents and patent rights, but it does not consider any one patent or group of patents owned by it, or under which it is licensed, to be material to any of the Company's lines of business. Royalty income received from licenses is not material. GOVERNMENT REGULATIONS The Company is subject to various federal, state, local and foreign environmental laws and regulations limiting the discharge, storage, handling and disposal of a variety of substances. The Company's operations also are governed by laws and regulations relating to workplace safety and worker health, including the Occupational Safety and Health Act and regulations thereunder. The Company believes that it has complied in all material respects with applicable environmental and health and safety laws and regulations. 39 The Company also does not believe that future compliance with such laws or regulations will have a material adverse effect on its results of operations or financial condition. LEGAL PROCEEDINGS The Company is involved in various legal proceedings incidental to its business. Management believes that the outcome of such proceedings will not have a material adverse effect upon the consolidated operations or financial condition of the Company. 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the names, ages and positions held by the directors and executive officers of Company:
NAME AGE POSITIONS AT THE COMPANY - ------------------------------------ --- --------------------------------------------------------------------- William J. White.................... 59 Chairman of the Board of Directors of the Company and BHOC James P. Roemer..................... 50 Director, President and Chief Executive Officer of the Company and BHOC Nils A. Johansson................... 49 Director, Executive Vice President and Chief Financial Officer of the Company and BHOC David Bonderman..................... 54 Director David G. Brown...................... 40 Director J. Taylor Crandall.................. 43 Director Daniel L. Doctoroff................. 39 Director William E. Oberndorf................ 44 Director Gary L. Roubos...................... 60 Director John H. Scully...................... 53 Director Michael A. Dering................... 46 President and Chief Executive Officer of Bell & Howell Publication Systems Company Stuart T. Lieberman................. 45 Vice President, Controller and Chief Accounting Officer of the Company and BHOC Ben L. McSwiney..................... 47 President and Chief Executive Officer of Bell & Howell Mail Processing Systems Company Kevin B. O'Shea..................... 38 Vice President and Treasurer of the Company and BHOC Maria T. Rubly...................... 42 Vice President of the Company and BHOC Gary S. Salit....................... 53 Secretary and Corporate Counsel of the Company and BHOC
The business experience and certain other information relating to each director and executive officer of Company is set forth below: WILLIAM J. WHITE has served as Chairman of the Board and Director of the Company since its organization in February 1993 and of BHOC since February 1990. From February 1990 to February 1997, he served as Chief Executive Officer of both companies. He was President of the Company from February 1993 to February 1995 and President of BHOC from February 1990 to February 1995. Prior to joining Bell & Howell, Mr. White was President and Chief Executive Officer of Whitestar Graphics, Inc. (a printing and graphics company) from January 1989 through January 1990, when it was acquired by the William Blair Leveraged Capital Fund and Mr. White. Prior to that, he was Executive Vice President of USG Corporation where he served as president of three different subsidiaries during his tenure. He is also a Director of TJ International, Inc. and Readers Digest Association, Inc. JAMES P. ROEMER has served as Director and President of the Company and BHOC since February 1995. In February 1997, he was elected Chief Executive Officer of the Company and BHOC and from February 1995 to February 1997 served as Chief Operating Officer of both companies. Prior to that, he served as President and Chief Executive Officer of UMI Company from January 1994 to June 1995. 41 Mr. Roemer joined Bell & Howell as Vice President and PSC as President and Chief Operating Officer in October 1991, and was promoted to President and Chief Executive Officer of PSC in September 1993. Prior to joining Bell & Howell, Mr. Roemer was President of the Michie Group, Mead Data Central from December 1989 to October 1991. From January 1982 to December 1989 he was Vice President and General Manager of Lexis, an on-line legal information service. From April 1981 to December 1982 he served as acting president for Mead Data Central. NILS A. JOHANSSON has been a Director of the Company since its organization in February 1993 and of BHOC since April 1990. Since January 1994, he has held the office of Executive Vice President and Chief Financial Officer of the Company and BHOC. Mr. Johansson served as Senior Vice President, Finance and Chief Financial Officer of the Company from February 1993 to January 1994 and of BHOC from December 1991 to January 1994. From May 1989 to December 1991, he was Vice President, Finance, Treasurer and Chief Financial Officer of BHOC. From February 1981 to May 1989 he held various executive positions with Bell & Howell, including corporate treasurer and positions in group control, planning and business development. DAVID BONDERMAN has been a Director of the Company since its organization in February 1993 and served as a Director of BHOC from December 1987 until February 1993. He has been a Managing General Partner of Texas Pacific Group (a private investment company) since December 1993. From August 1992 to December 1993, Mr. Bonderman was an investor with TPG Partners, L.P. (a private investment company). From July 1983 through August 1992, he was Vice President and Chief Operating Officer of Keystone, Inc. (a private investment company). He is also a Director of Beringer Wine Estates, Inc., Continental Airlines, Credicom Asia, Denbury Resources, Inc., Ducati Motor Holdings, S.P.A., Realty Information Group L.P., Ryanair, Ltd., Virgin Cinemas, Ltd., Urogenesys, Inc. and Washington Mutual Inc. DAVID G. BROWN has been a Director of the Company since April 1995 and served as a Director of BHOC from January 1994 to April 1995. He has been a Principal of Arbor Investors, LLC since September 1995 and a Vice President of Keystone, Inc. since August of 1993. Prior to joining Arbor Investors, LLC, Mr. Brown was a Vice President in the Corporate Finance Department of Salomon Brothers Inc from August 1985 to July 1993. He is a Director of AER Energy Resources, Inc. J. TAYLOR CRANDALL has been a Director of the Company since its organization in February 1993 and was a Director of BHOC from November 1990 until February 1993. He has been Vice President and Chief Financial Officer of Keystone, Inc. (a private investment company) since October 1986. He also has been President, Director and sole stockholder of Acadia MGP, Inc. (managing general partner of Acadia Investment Partners, L.P., the sole general partner of Acadia Partners, L.P. (an investment partnership)) since 1992. He is also a Director of Washington Mutual Inc. DANIEL L. DOCTOROFF has been a Director of the Company since its organization in February 1993 and served as a Director of BHOC from June 1990 until February 1993. He has served as Managing Director of Oak Hill Partners, Inc. (successor to Rosecliff, Inc., the management company for Acadia Partners, L.P. (an investment partnership)) since March 1992. Since October 1992, he has been a Vice President of Keystone, Inc. (a private investment company) and since February 1994, he has been a Managing Partner of Insurance Partners Advisors L.P. He was Director of Rosecliff, Inc. from August 1987 through March 1992. He is also a Director of Kemper Corporation and Specialty Foods Corporation. WILLIAM E. OBERNDORF has been a Director of the Company since its organization in February 1993 and was a Director of BHOC from July 1988 through February 1993. He has served as Managing Director of SPO Partners & Co. (a private investment company) since March 1991. He is also a Director of Plum Creek Timber Co., L.P. 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 42 President from May 1977 to May 1993. He is also a Director of Dover Corporation and Omnicom Group, Inc. JOHN H. SCULLY has been a Director of the Company since its organization in February 1993 and was a Director of BHOC from July 1988 until February 1993. He has served as Managing Director of SPO Partners & Co. (a private investment company) since March 1991. He is also a Director of Plum Creek Timber Co., L.P. MICHAEL A. DERING has served as President and Chief Executive Officer of PSC since July 1996. Prior to joining PSC he was President of TAB Products Company (an office filing systems company) from February 1991 to July 1996. From 1990 to 1991 he was Executive Vice President and Chief Operating Officer of TAB Products and from 1975 to 1990 he held various offices and positions with TAB Products in sales and marketing. STUART T. LIEBERMAN has been Vice President, Controller and Chief Accounting Officer of the Company since its organization in February 1993 and of BHOC since January 1990. BEN L. MCSWINEY has been President and Chief Executive Officer of Bell & Howell Mail Processing Systems Company since July 1995. Prior to joining Bell & Howell, he was President and Chief Executive Officer of Duplex Products, Inc. (a forms manufacturing and distributing company) from September 1993 to June 1995 and President and Chief Executive Officer of Whitestar Graphics, Inc. from April 1991 to September 1993. KEVIN B. O'SHEA has served as Vice President and Treasurer of the Company and of BHOC since February 1996. Prior to joining Bell & Howell he served as Vice President and Treasurer of Spencer Stuart & Associates (an executive search and consulting firm) from July 1989 to February 1996. MARIA T. RUBLY has been Vice President of the Company since 1994 and of BHOC since April 1993. Prior to joining the Company, she spent 13 years with Baxter, which included five years with American Hospital Supply Corporation until its merger with Baxter. Her position from January 1991 to April 1993 was Vice President of the Baxter Management Institute. GARY S. SALIT is Secretary and Corporate Counsel of the Company, a position he has held since its organization in February 1993. He has served as a Secretary of BHOC since January 1993. He has also served as Corporate Counsel of BHOC since 1985. 43 SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ----------------------- AWARDS(1) ----------- PAYOUTS(2) ANNUAL COMPENSATION SECURITIES ---------- FISCAL ---------------------- UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(3) OPTIONS(#) PAYOUTS COMPENSATION - --------------------------------------- --------- ---------- ---------- ----------- ---------- ------------- William J. White ...................... 1996 $ 643,853 $ 294,241 -- -- $ 30,092(4) Chairman of the Board 1995 614,427 307,501 460,000 -- 34,574(4) 1994 597,696 582,754 -- -- 36,711(4) James P. Roemer ....................... 1996 510,572 233,331 -- $ 54,384 94,984(5) President and Chief Executive Officer 1995 405,655 252,689 385,000 -- 21,992(5) 1994 206,000 132,679 -- 431,679 176,758(5) Nils A. Johansson ..................... 1996 396,162 181,046 -- 79,380 27,069(6) Executive Vice President and Chief 1995 363,827 216,063 270,000 -- 31,768(6) Financial Officer 1994 264,092 184,865 -- 184,500 21,200(6) Ben L. McSwiney ....................... 1996 254,539 107,413 12,000 -- 113,422(8) President of MPS 1995(7) 140,219 9,363 10,500 -- 2,963(8) Michael A. Dering ..................... 1996(9) 105,770 75,000 10,000 -- 87,728(10) President of PSC
- ------------------------ (1) Amounts reflected in this column are for grants of stock options under the Option Plan. (2) For fiscal 1994, consists of amounts earned under Bell & Howell Operating Company's Long-Term Incentive Plan: 1991-1994 (the "1991-1994 LTIP"). The 1991-1994 LTIP provided long-term incentives to key management employees by rewarding them for achieving financial targets for the period commencing fiscal 1991 through fiscal 1994. Messrs. White, McSwiney and Dering did not participate in the 1991-1994 LTIP. Mr. Roemer earned $287,674 under an additional long-term incentive plan in 1994. Payments under the 1991-1994 LTIP were made in March 1995. For fiscal 1996, consists of amounts earned under Bell & Howell Operating Company's Long-Term Incentive Plan: 1993-1996 (the "1993-1996 LTIP"). The 1993-1996 LTIP initially provided long-term incentives to key management employees by rewarding them for achieving financial targets for the period commencing fiscal 1993 through fiscal 1996. The 1993-1996 LTIP was terminated as of the end of fiscal 1994 and replaced with the 1995 Stock Option Plan. Amounts earned under the 1993-1996 LTIP were determined based on performance through the end of fiscal 1994, and prorated payments were made in February 1997. (3) Consists of amounts awarded under an employment agreement in respect of Mr. White and under the Bell & Howell Operating Company's Management Incentive Bonus Plan (the "MIB") in respect of Messrs. Roemer, Johansson, McSwiney and Dering. The MIB provides a financial incentive for key management employees to focus their efforts on, and achieve, annual financial targets. Payments under the MIB for fiscal 1996 were made in February 1997. (4) For fiscal 1996, 1995 and 1994, consists of $3,000 in contributions to the Bell & Howell Profit Sharing Retirement Plan ("PSRP"); $16,027, $20,944 and $19,953, respectively, in contributions to the Bell & Howell Replacement Benefit Plan ("RBP") and $11,065, $10,630 and $13,758, respectively, in imputed life insurance. 44 (5) For fiscal 1996, 1995 and 1994 consists of $3,000 in contributions to the PSRP; $3,384, $2,084, and $1,905, respectively, in imputed life insurance; $12,381, $16,908 and $7,183, respectively, in contributions to the RBP; and for fiscal 1996 and 1994 consists of $76,219 and $164,670, respectively, for relocation and related expenses. (6) For fiscal 1996, 1995 and 1994, consists of $6,000 in contributions to the PSRP; $18,489, $23,328 and $13,172, respectively, in contributions to the RBP; and $2,580, $2,440 and $2,028, respectively, in imputed life insurance. (7) 1995 reflects compensation for the six month period from July 1995, when Mr. McSwiney's employment by the Company began, through December 1995. (8) For fiscal 1996 and 1995, consists of $3,000 and $2,308 respectively in contributions to the PSRP; $3,011 and $655 respectively, in imputed life insurance; and for fiscal 1996 includes $2,278 in contributions to the RBP; $59,571 for relocation and related expenses; and $45,562 of income resulting from the exercise of non-qualified stock options. (9) Reflects compensation for the six month period from July 1996, when Mr. Dering's employment by the Company began, through December 1996. (10) For fiscal 1996, consists of $694 in imputed life insurance and $87,034 for relocation and related expenses. COMPENSATION OF DIRECTORS All non-employee Directors are participants in the Bell & Howell Non-Employee Directors' Stock Option Compensation Plan (the "Director Plan"). The Director Plan provides for annual stock option grants to each non-employee director. Each annual grant (the value of which is equivalent to the level of compensation determined by the Directors to be reasonable and appropriate) permits each non-employee Director to purchase from the Company Common Stock, with the exercise price equal to the fair market value of such shares on the date the option is granted. The stock options have a term of ten years and are exercisable one year from the date of grant. In fiscal 1996, each non-employee Director received the option to purchase 1,225 shares of Common Stock at the existing fair market value of $32.63 per share. Management directors do not receive any additional compensation for serving as Directors. 45 OPTION PLAN The following tables set forth the number of options to purchase Common Stock granted to each of the named executive officers during fiscal 1995 and fiscal 1996 (pursuant to the Option Plan) and the potential realizable values of such options, upon their latest possible expiration date, at assumed annualized rates of stock price appreciation of 5%, 10% and 20% over the term of the options. Because actual gains will depend upon, among other things, the actual dates of exercise of the options and the future performance of the Common Stock in the market, the amounts reflected in these tables may not reflect the ultimate values actually realized. STOCK OPTION GRANTS
POTENTIAL REALIZABLE VALUE AT NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK SECURITIES TOTAL LATEST PRICE APPRECIATION FOR OPTION UNDERLYING ANNUAL EXERCISE OR POSSIBLE TERM YEAR OF OPTIONS OPTIONS BASE PRICE EXPIRATION ------------------------------- NAME GRANT GRANTED(#) GRANTED ($/SH) DATE 5% 10% 20% - -------------------------------- --------- ----------- ----------- ----------- ---------- --------- --------- --------- William J. White................ 1995 46,000 $ 15.50 May 2001 $ 242,488 $ 550,123 $1,416,007 1995 46,000 18.50 May 2001 104,488 412,123 1,278,007 1995 92,000 22.25 May 2001 -- 479,246 2,211,013 1995 92,000 26.75 May 2001 -- 65,246 1,797,013 1995 92,000 32.00 May 2001 -- -- 1,314,013 1995 92,000 38.50 May 2001 -- -- 716,013 ----------- 460,000 35.4% James P. Roemer................. 1995 38,500 $ 15.50 May 2001 $ 202,952 $ 460,429 $1,185,136 1995 38,500 18.50 May 2001 87,452 344,929 1,069,636 1995 77,000 22.25 May 2001 -- 401,108 1,850,522 1995 77,000 26.75 May 2001 -- 54,608 1,504,022 1995 77,000 32.00 May 2001 -- -- 1,099,772 1995 77,000 38.50 May 2001 -- -- 599,272 ----------- 385,000 29.7% Nils A. Johansson............... 1995 27,000 $ 15.50 May 2001 $ 142,330 $ 322,898 $ 831,134 1995 27,000 18.50 May 2001 61,330 241,898 750,134 1995 54,000 22.25 May 2001 -- 281,297 1,297,769 1995 54,000 26.75 May 2001 -- 38,297 1,054,769 1995 54,000 32.00 May 2001 -- -- 771,269 1995 54,000 38.50 May 2001 -- -- 420,269 ----------- 270,000 20.8% Ben L. McSwiney(1).............. 1996 12,000 5.3% $ 31.75 May 2006 $ 239,609 $ 607,216 $1,978,052 1995 10,500 0.8% 20.50 July 2005 135,370 343,053 1,117,521 Michael A. Dering(1)............ 1996 10,000 4.4% $ 29.38 July 2006 $ 184,238 $ 468,162 $1,525,073
- ------------------------ (1) During first half 1997, Messrs. McSwiney and Dering were each granted 12,000 stock options at an exercise price of $21.125, the fair market value on the date of the grant. The options expire in March 2007. 46 STOCK OPTION EXERCISES IN 1996 AND YEAR END STOCK OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS YEAR-END (#) AT YEAR-END ($)(1) ------------------ --------------------- SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE - ------------------------------------------- --------------- ------------- ------------------ --------------------- William J. White........................... None N/A None/460,000(2) None/$575,000(2) James P. Roemer............................ None N/A None/385,000(2) None/481,250(2) Nils A. Johansson.......................... None N/A None/270,000(2) None/337,500(2) Ben L. McSwiney............................ None N/A 2,100/8,400(3) $ 4,725/18,900(3) None/12,000(4) None/None(4) Michael A. Dering.......................... None N/A None/10,000(5) None/None(4)
- ------------------------ (1) These amounts have been determined by multiplying the aggregate number of options by the difference between $22.75, the closing price of the Common Stock on the NYSE on December 27, 1996 (the last trading day of fiscal 1996), and the exercise price of the options. (2) These options are exercisable as follows: up to 25% after May 1998, up to 50% after May 1999 and up to 100% after May 2000. (3) These options are exercisable in annual 20% increments commencing in July of each year from July 1996 through July 2000. (4) These options are exercisable in annual 20% increments commencing in May of each year from May 1997 through May 2001. (5) These options are exercisable in annual 20% increments commencing in July of each year from July 1997 through July 2001. The Option Plan replaced the 1993-1996 LTIP which covered officers and certain employees, and was to provide payments based on the participants' participation level (which was either 30% or 60% of the employees' base rate of pay on January 1, 1993 or the date such participant was designated as eligible for the 1993-1996 LTIP by the Board of Directors) and the achievement of established financial targets. Amounts earned under the 1993-1996 LTIP were determined based on performance through the end of fiscal 1994, and prorated payments were made in February 1997. SUPPLEMENTAL RETIREMENT PLAN The Bell & Howell Supplemental Retirement Plan ("SRP") provides officers and certain employees with additional pension benefits upon retirement, in order to supplement social security and other benefits provided under the Bell & Howell Profit Sharing Retirement Plan ("PSRP") and the Bell & Howell Replacement Benefit Plan ("RBP"). Generally, the SRP provides for lifetime monthly pension payments which equal the excess, if any, of (i) up to 50% (the actual percentage being proportional to length of service) of the participant's average monthly compensation (which is defined to include salary and annual bonuses up to 150% of target) during the highest paid four years of the participant's last six years of employment over (ii) the sum of the aggregate monthly amounts which are payable under the PSRP, RBP (in each case exclusive of voluntary and mandatory employee contributions and investment additions thereon) and primary social security benefits. If a participant is involuntarily terminated for a reason other than for cause and such terminated employee shall have been a plan participant for at least five years, he shall be entitled to deferred SRP payments calculated as if his termination date were his retirement date. If a participant voluntarily terminates his employment and such terminated employee shall have been an employee for at least ten years and a plan participant for at least five years, he shall be entitled to deferred 47 SRP payments calculated as if his termination date were his retirement date. The credited years of service at the end of fiscal 1996 for each of the individuals listed in the Summary Compensation Table are 6 years for Mr. White, 5 years for Mr. Roemer, 15 years for Mr. Johansson and 1 year for Mr. McSwiney. The Company estimates that the annual benefits which have accrued through the end of fiscal 1996 and would be payable upon retirement at age 60 pursuant to the SRP would be $142,950 for Mr. White, $43,600 for Mr. Roemer and $152,475 for Mr. Johansson. No SRP benefits have yet accrued at the end of fiscal 1996 for Mr. McSwiney or Mr. Dering. The following annual benefits would be payable upon retirement at or after age 60 to persons in the following specified participation levels, compensation and year-of-service classifications, less amounts received as social security benefits and benefits under BHOC's other retirement plans: SUPPLEMENTAL RETIREMENT PLAN TABLE
YEARS OF SERVICE ---------------------- PARTICIPATION LEVEL I REMUNERATION 15 20 OR MORE - ---------------------------------------------- ---------- ---------- $250,000...................................... $ 93,750 $ 125,000 425,000...................................... 159,375 212,500 600,000...................................... 225,000 300,000 775,000...................................... 290,625 387,500 950,000...................................... 356,250 475,000 YEARS OF SERVICE --------------------------------------------- PARTICIPATION LEVEL II REMUNERATION 15 20 25 30 OR MORE - ---------------------------------------------- ---------- ---------- --------- ---------- $125,000...................................... $ 34,375 $ 43,750 $ 53,125 $ 62,500 150,000...................................... 41,250 52,500 63,750 75,000 175,000...................................... 48,125 61,250 74,375 87,500 200,000...................................... 55,000 70,000 85,000 100,000 225,000...................................... 61,875 78,750 95,625 112,500
Participants' may retire between ages 55 and 60 with reduced benefits. EMPLOYMENT CONTRACTS BHOC entered into an employment agreement with William J. White dated as of March 23, 1990. Mr. White's salary and bonus are set by the Compensation Committee of the Board of Directors. Pursuant to the terms of the employment agreement, Mr. White is an employee at will. The agreement provides that Mr. White shall be entitled to severance pay equal to one-half of his annual base salary at the time of his termination and a prorated bonus if terminated without cause or if Mr. White resigns for good reason. The agreement contains noncompetition and confidentiality commitments. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Company's Board of Directors in fiscal 1996 consisted of Messrs. Oberndorf (Chairman), Bonderman, Crandall, Doctoroff and Roubos. None of Messrs. Oberndorf, Bonderman, Crandall, Doctoroff and Roubos were executive officers of the Company during 1996. 48 CERTAIN TRANSACTIONS The Company has made loans (the balance of which totaled $1,443,896 at the end of fiscal 1996) to certain key executives in connection with their purchases of Common Stock. Pursuant to the terms of such loans, the shares acquired are pledged as security. The following individuals have loans in excess of $60,000 outstanding at the end of fiscal 1996: Nils A. Johansson ($236,128); Stuart T. Lieberman ($90,818); Ben L. McSwiney ($356,977); and Maria T. Rubly ($359,987). Each loan is evidenced by an installment note that bears interest at BHOC's marginal rate of borrowing (approximately 6% at this time), and are primarily due on December 31, 1998. Interest and principal may be deferred until that date. 49 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information, as of August 27, 1997, with respect to the beneficial ownership before and after the Offering of the Common Stock of the Company held by persons known to be the beneficial owners of 5% or more of any class of voting securities of the Company, by each director and certain executive officers of the Company, and by all directors and executive officers as a group, and by each Selling Stockholder.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING NUMBER OF AFTER OFFERING ----------------------- SHARES ----------------------- NUMBER OF BEING NUMBER OF SHARES PERCENT OFFERED SHARES PERCENT ---------- ----------- ---------- ---------- ----------- PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS: Keystone, Inc.(1)(2)................................. 4,363,000 23.8% -- 4,363,000 19.7% Robert M. Bass(1)(2)................................. 4,363,000 23.8% -- 4,363,000 19.7% David Bonderman(3)(4)................................ 729,760 4.0% 316,255(5) 413,505 1.9% William J. White(6).................................. 549,540 3.0% -- 549,540 2.5% Nils A. Johansson.................................... 247,812 1.4% -- 247,812 1.1% James P. Roemer...................................... 171,555 * -- 171,555 * John H. Scully(4)(7)................................. 145,187 * -- 145,187 * J. Taylor Crandall(4)................................ 132,603 * -- 132,603 * William E. Oberndorf(4).............................. 56,565 * -- 56,565 * Ben L. McSwiney(8)................................... 20,100 * -- 20,100 * Daniel L. Doctoroff(4)............................... 13,133 * -- 13,133 * Gary L. Roubos(4).................................... 4,079 * -- 4,079 * David G. Brown(4).................................... 2,375 * -- 2,375 * Michael A. Dering(9)................................. 2,000 * -- 2,000 * All directors and executive officers as a group (16 persons)(10)....................................... 2,179,929 11.9% 316,255 1,863,674 8.4%
- ------------------------ * Less than one percent. (1) Robert M. Bass holds all of the voting stock and serves as president and sole director of Keystone. Accordingly, Mr. Bass may be deemed to beneficially own the shares of Common Stock held by Keystone. (2) The address for this stockholder is 201 Main Street, Suite 3100, Forth Worth, Texas 76102. (3) Includes 72,488 shares owned by Group Management, Inc. and 64,483 shares owned by Bonderman Family Limited Partnership. (4) Includes options to purchase 2,375 shares that are exercisable within 60 days of August 27, 1997. (5) Includes 72,488 shares being sold by Group Management, Inc. and 26,884 shares being sold by Bonderman Family Limited Partnership. (6) Includes 447,300 shares held in a trust of which Mr. White is neither trustee nor beneficiary but for which he has the power to vote and dispose of shares. (7) Includes 142,812 shares owned by Cranberry Lake Partners Limited over which Mr. Scully exercises investment discretion. (8) Includes options to purchase 6,600 shares that are exercisable within 60 days of August 27, 1997. (9) Includes options to purchase 2,000 shares that are exercisable within 60 days of August 27, 1997. (10) Includes options to purchase 36,225 shares that are exercisable within 60 days of August 27, 1997. 50 REGISTRATION RIGHTS Pursuant to the Registration Rights Agreement dated as of May 10, 1988, by and among the Company and the stockholders listed therein, certain stockholders have certain demand and piggyback registration rights with respect to 7,107,313 shares of Common Stock. Under the Registration Rights Agreement, such stockholders have the right to make up to two written requests for registration under the Securities Act (each, a "Demand Registration") of all or part of such stockholder's Common Stock subject to the Registration Rights Agreement ("Registrable Common Stock"); PROVIDED, HOWEVER, that such requests must be made by stockholders holding (i) in the case of the first registration, at least 1,955,023 shares of Registrable Common Stock at the time of such request and (ii) in the case of the second registration, at least 1,303,348 shares of Registrable Common Stock at the time of such request and PROVIDED, FURTHER that the Board of Directors of the Company must approve such registration. The Company may delay a Demand Registration otherwise required to be prepared and filed under the Registration Rights Agreement for up to 60 days under certain circumstances, including if (a) such Demand Registration would adversely affect an offering by the Company of its securities or (b) such Demand Registration would interfere with a pending or contemplated financing, merger, sales of assets or similar activity of the Company. See "Shares Eligible for Future Sale" and "Underwriting." In addition, in connection with any Demand Registration or a registration by the Company of its Common Stock, the Company is required to notify the stockholders subject to the Registration Rights Agreement of such registration and include in such registration all Registrable Common Stock with respect to which the Company has received written requests for inclusion therein; PROVIDED, HOWEVER, that the Registrable Common Stock to be included in such registration may be limited or eliminated under certain circumstances. Under the Registration Rights Agreement, the Company is required to bear all costs and expenses of each such registration (other than the Underwriters' commissions or discounts which are to be borne by the sellers), and the stockholders and the Company have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. SHAREHOLDERS AGREEMENT The terms of the Shareholders Agreement dated as of May 10, 1988, as amended (the "Shareholders Agreement"), among Bell & Howell Operating Company, Management Shareholders (as defined therein) and Investor Shareholders (as defined therein), provide certain restrictions on those shares acquired pursuant to the Fourth Amendment dated December 23, 1993, which governed the purchase of 255,600 shares in December 1993. Such restrictions provide that (i) no Management Shareholder may, while employed by the Company, transfer, dispose of or sell more than 50% of such Management Shareholder's shares restricted thereby (the "Employee Shares") and (ii) upon a Management Shareholder's termination or resignation of employment with the Company, such Management Shareholder has the right to require the Company to repurchase and the Company has the right to repurchase such Management Shareholder's Employee Shares at the Appraised Value (as defined therein) or the Investment Value (as defined therein), depending upon the circumstances surrounding such Management Shareholder's termination or resignation. The current Management Shareholders include William J. White, James P. Roemer, Nils A. Johansson, Stuart T. Lieberman and Maria T. Rubly. DESCRIPTION OF CAPITAL STOCK The following statements are subject to the detailed provisions of the Company's Amended and Restated Certificate of Incorporation and By-laws, do not purport to be complete and are qualified in their entirety by reference thereto. The authorized capital stock of Bell & Howell Company consists of 50,000,000 shares of Common Stock, $.001 par value, of which 22,207,620 shares will be outstanding upon completion of the Offering. 51 COMMON STOCK Following the Offering, 22,207,620 shares of Common Stock will be outstanding. In addition, options to acquire 1,660,600 shares are outstanding and 2,146,200 shares are reserved for issuance under the Option Plan. All of the issued and outstanding shares of Common Stock are, and upon completion of the Offering the shares of Common Stock offered hereby will be, fully paid and non-assessable. Holders of Common Stock are entitled to one vote for each share on all matters voted upon by stockholders and have no preemptive or other rights to subscribe for additional securities of the Company. Holders of Common Stock do not have the right to cumulatively vote their shares in the election of directors. Each share of Common Stock has an equal and ratable right to receive dividends when, as and if declared by the Board of Directors out of assets legally available therefore. In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock will be entitled to share equally and ratably in the distribution of all of the Company's assets remaining available for distribution after satisfaction of all its liabilities and the payment of the liquidation preference of any outstanding preferred stock as described below. CERTAIN CHARTER AND BY-LAW PROVISIONS In the event of any vacancy on the Board of Directors, the remaining Directors may elect a successor to serve for the remainder of the unexpired term. As permitted by Delaware General Corporation Law ("Delaware GCL"), the Directors are indemnified against certain expenses and liabilities incurred in their capacities as Directors of the Company when acting in good faith and cannot be held personally liable for certain breaches of their fiduciary duty of care, as described below. PERSONAL LIABILITY OF DIRECTORS Delaware GCL authorizes a Delaware corporation to eliminate or limit the personal liability of a director to the corporation and its stockholders for monetary damages for breach of certain fiduciary duties as a director. The Company believes that such a provision is beneficial in attracting and retaining qualified directors, and accordingly, the Company's Amended and Restated Certificate of Incorporation includes a provision eliminating liability for monetary damages for any breach of fiduciary duty as a director, except: (i) for any breach of the duty of loyalty to the Company or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for any transaction from which the director derived an improper personal benefit; or (iv) for willful or negligent payment of dividends, or approval of stock repurchases or redemptions that are unlawful under Delaware law. Pursuant to Delaware GCL, directors of the Company are not insulated from liability for breach of their duty of loyalty (requiring that, in making a business decision, directors act in good faith and in the honest belief that the action taken was in the best interest of the corporation), or for claims arising under the Federal securities laws. The foregoing provision of the Amended and Restated Certificate of Incorporation may reduce the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breaches of their fiduciary duties, even though such an action, if successful, might otherwise have benefitted the Company and its stockholders. CERTAIN STATUTORY PROVISIONS Section 203 of the Delaware GCL contains certain provisions that may make more difficult the acquisition of control of the Company by means of a tender offer, open market purchase, proxy fight or otherwise. These provisions are designed to encourage persons seeking to acquire control of the Company to negotiate with the Board of Directors. However, these provisions could have the effect of discouraging a prospective acquirer from making a tender offer or otherwise attempting to obtain control of the Company. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their shares or could depress the market price of the 52 shares. Set forth below is a description of the relevant provisions of Section 203 of the Delaware GCL. The description is intended as a summary only and is qualified in its entirety by reference to Section 203 of the Delaware GCL. Section 203 of the Delaware GCL prohibits certain "business combination" transactions between a publicly held Delaware corporation, such as the Company, and any "interested stockholder" for a period of three years after the date on which such stockholder became an interested stockholder, unless (i) the Board of Directors approves, prior to such date, either the proposed business combination or the proposed acquisition of stock that resulted in the stockholder becoming an interested stockholder, (ii) upon consummation of the transaction that results in the stockholder becoming an interested stockholder, the interested stockholder acquires at least 85% of those shares of the voting stock of the corporation which are not held by the directors, officers or certain employee stock plans or (iii) on or subsequent to that date, the business combination with the interested stockholder is approved by the Board of Directors and also approved at a stockholders' meeting by the affirmative vote of the holder of at least two-thirds of the outstanding shares of the corporation's voting stock other than shares held by the interested stockholder. The Company has opted out of Section 203 of the Delaware GCL pursuant to its terms. TRANSFER AGENT AND REGISTRAR The transfer agent, dividend paying agent and registrar for the Common Stock is Boston EquiServe, L.P. 53 DESCRIPTION OF CERTAIN FINANCING AGREEMENTS AND CERTAIN INDEBTEDNESS The following summary of the agreements governing the outstanding long-term indebtedness of the Company does not purport to be complete and is qualified in its entirety by reference to the various agreements described herein. Capitalized terms used but not defined herein have the meanings ascribed to them in the various agreements. NEW REVOLVING CREDIT AGREEMENT In connection with the consummation of the Offering, it is expected that BHOC will enter into the New Revolving Credit Agreement. The New Revolving Credit Agreement is expected to provide for a $600 million revolving credit line which will be used, along with net proceeds of the Offering, to complete the Transactions. Additionally, proceeds may be used, at the Company's option, for general corporate purposes, including working capital, acquisitions, and letters of credit. The maturity date of the New Revolving Credit Agreement will be December 31, 2003. Borrowings under the New Revolving Credit Agreement will bear interest, at the Company's option, either at the London Interbank Offering Rate ("LIBOR") plus a spread ranging from 0.25% to 1.25%, or at the prime rate plus a spread ranging from 0.0% to 0.25%. The applicable spread is determined by BHOC's leverage ratio. The New Revolving Credit Agreement will provide for an annual commitment fee of 0.25% on the amount of the average unused revolving loan commitment. Repayment of principal outstanding under the New Revolving Credit Agreement will be due at maturity. In addition, the New Revolving Credit Agreement may require commitment reductions in the event of issuance of new debt securities or Asset Sales (as defined). The New Revolving Credit Agreement will be secured by a pledge of the capital stock of BHOC's domestic subsidiaries, except BHFS, and a pledge of two-thirds of the stock of BHOC's foreign subsidiaries. Certain real property assets of BHOC's domestic subsidiaries will be also pledged as collateral. Payments due under the New Revolving Credit Agreement will be guaranteed by the Company and by each domestic subsidiary of BHOC listed therein. The New Revolving Credit Agreement will require compliance with net worth, fixed charge coverage and leverage covenants. In addition, under certain circumstances, the New Revolving Credit Agreement will limit BHOC's ability to pay dividends or to repurchase outstanding equity securities. 9 1/4% SENIOR NOTES The 9 1/4% Senior Notes due July 15, 2000 (the "9 1/4% Senior Notes") are direct, unsecured obligations of BHOC in an aggregate principal amount of $80 million which mature on July 15, 2000. The 9 1/4% Senior Notes bear interest at the rate of 9 1/4% per annum, payable semiannually on each January 15 and July 15 to holders of record at the close of business on the January 1 or July 1 next preceding the interest payment date. The 9 1/4% Senior Notes are redeemable at the option of BHOC in whole or in part on or after July 15, 1997 and upon the occurrence of a Change in Control (as defined therein), at a call price ranging from 104.625% of the principal amount in 1997 and declining to par on July 15, 1999. The payment of principal, premium and interest on the 9 1/4% Senior Notes is PARI PASSU in right of payment with all amounts outstanding under the New Revolving Credit Agreement. The indenture governing the 9 1/4% Senior Notes (the "9 1/4% Indenture") limits the ability of BHOC and its subsidiaries to incur, issue, assume or guarantee indebtedness and restricts BHOC's ability to pay dividends, redeem equity securities or repay subordinated Indebtedness (each a "Restricted Payment"). BHOC is prohibited from declaring or paying any dividend or making any other Restricted Payments if at the time of such Restricted Payment the aggregate of all Restricted Payments exceeds the sum of (i) 50% of BHOC's Consolidated Net Income (as defined in the 9 1/4% Indenture), PLUS (ii) 100% of the aggregate net proceeds received by BHOC from the issuance or sale of BHOC Equity Interests (as defined in the 9 1/4% Indenture) PLUS (iii) 100% of the net 54 proceeds received by BHOC from the issuance or sale (other than to a subsidiary) of any BHOC debt security or redeemable stock that has been converted into or exchanged for BHOC Equity Interests, subject to a minimum fixed coverage ratio. Notwithstanding the above, BHOC may make certain Restricted Payments, including declaring or paying a dividend to the Company for the purpose of repurchasing for cash equity securities of the Company from management of BHOC and its subsidiaries in an aggregate amount up to $5 million, and paying dividends or making distributions to the Company in an aggregate amount not to exceed $250,000 per year for the purpose of enabling the Company to pay its accounting and legal fees and other fees and expenses. BHOC is prohibited from creating any additional restrictions on the ability of any of BHOC's subsidiaries to pay dividends, make loans or transfer assets to BHOC or any of its subsidiaries. Additionally, the 9 1/4% Indenture restricts BHOC and its subsidiaries in their ability to engage in transactions with affiliates, create liens and participate in material acquisitions or asset sales. If BHOC defaults in the payment of principal or interest on the 9 1/4% Senior Notes or any other event of default occurs under the 9 1/4% Senior Notes, excluding certain events of insolvency, the 9 1/4% Indenture specifies that the trustee, or the holders of at least 25% of the principal amount of 9 1/4% Senior Notes outstanding, may declare all 9 1/4% Senior Notes to be due and payable at a price equal to 100% of the principal amount thereof, plus accrued interest to the date of payment. In the event of certain events of insolvency with respect to BHOC or any significant subsidiary, all outstanding 9 1/4% Senior Notes are immediately due and payable without any declaration or other act on the part of the trustee or any holder. All of BHOC's direct domestic operating subsidiaries (except Bell & Howell Financial Services Company) are jointly and severally liable as guarantors of the 9 1/4% Senior Notes. 10 3/4% SENIOR SUBORDINATED NOTES The 10 3/4% Senior Subordinated Notes are direct, unsecured obligations of BHOC in an aggregate principal amount of $55.0 million which mature on October 1, 2002. The 10 3/4% Senior Subordinated Notes bear interest at the rate of 10 3/4% per annum, payable semiannually on each April 1 and October 1 to holders of record at the close of business on the March 15 or September 15 next preceding the interest payment date. Subject to certain provisions of the Credit Agreement, the 10 3/4% Senior Subordinated Notes are redeemable at the option of BHOC in whole or in part (i) after October 1, 1997, at a call price ranging from 104.031% in 1997 and declining to par on October 1, 2000 and (ii) upon the occurrence of a Change of Control (as defined therein) at a call price ranging from 105.375% in 1996 declining to par on October 1, 2000. The payment of principal, premium and interest on the 10 3/4% Senior Subordinated Notes is subordinated in right of payment to the prior payment of all Senior Indebtedness (as defined in the indenture governing the 10 3/4% Senior Subordinated Notes (the "10 3/4% Indenture")) including indebtedness under the Credit Agreement. The 10 3/4% Indenture limits the ability of BHOC and its subsidiaries to incur, issue, assume or guarantee indebtedness and restricts BHOC's ability to pay dividends, redeem equity securities or repay subordinated indebtedness (each a "Restricted Payment"). BHOC is prohibited from declaring or paying any dividend or making any other Restricted Payments if at the time of such Restricted Payment the aggregate of all Restricted Payments exceeds the sum of (i) 50% of BHOC's Consolidated Net Income (as defined in the 10 3/4% Indenture), PLUS (ii) 100% of the aggregate net proceeds received by BHOC from the issue or sale of BHOC Equity Interests (as defined in the 10 3/4% Indenture) PLUS (iii) 100% of the net proceeds received by BHOC from the issuance or sale (other than to a subsidiary) of any BHOC debt security or redeemable stock that has been converted into or exchanged for BHOC Equity Interest, subject to a minimum fixed coverage ratio. Notwithstanding the above, BHOC may make certain Restricted Payments, including the repurchase for cash of any equity securities of BHOC from management of BHOC and its subsidiaries in an aggregate amount up to $5 million, cash payments with respect to BHOC's Intercompany Preferred Stock not to exceed $500,000, and payment of additional cash dividends to holders of Preferred Stock not to exceed 10% of BHOC's Consolidated Net Income. BHOC is prohibited from creating any additional restrictions on the ability of any of BHOC's subsidiaries to pay dividends, make loans or transfer assets to BHOC or any of its subsidiaries. Additionally, the 10 3/4% Indenture restricts BHOC and its subsidiaries in their ability to engage in transactions with affiliates, 55 create liens and participate in material acquisitions or asset sales. If BHOC defaults in the payment of principal or interest on the 10 3/4% Senior Subordinated Notes or any other event of default occurs under the 10 3/4% Senior Subordinated Notes, excluding certain events of insolvency, the 10 3/4% Indenture specifies that the trustee or the holders of at least 25% of the principal amount of 10 3/4% Senior Subordinated Notes outstanding may declare all 10 3/4% Senior Subordinated Notes to be due and payable at a price equal to 100% of the principal amount thereof, plus accrued interest to the date of payment. In the event of certain events of insolvency with respect to BHOC or any significant subsidiary, all outstanding 10 3/4% Senior Subordinated Notes are immediately due and payable without any declaration or other act on the part of the trustee or any holder. All of BHOC's direct domestic operating subsidiaries (except BHFS) are jointly and severally liable as guarantors of the 10 3/4% Senior Subordinated Notes. As part of the Transactions, the Company intends to purchase all of the outstanding 10 3/4% Senior Subordinated Notes pursuant to the 10 3/4% Redemption. 11 1/2% SENIOR DISCOUNT DEBENTURES The 11 1/2% Senior Discount Debentures are direct, unsecured obligations of the Company in an aggregate principal amount at maturity of $279.5 million which mature on March 1, 2005. The 11 1/2% Senior Discount Debentures bear interest at the rate of 11 1/2% per annum, payable semiannually on each March 1 and September 1 commencing September 1, 2000, to holders of record at the close of business on the February 15 or August 15 next preceding the interest payment date. Prior to March 1, 2000, the 11 1/2% Senior Discount Debentures accrete in value such that the aggregate principal amount of all such debentures initially issued will be $279.5 million on March 1, 2000. The 11 1/2% Senior Discount Debentures are redeemable at the option of the Company at 100% of the principal amount of maturity, plus accrued and unpaid interest if any, to the date of payment. In addition, the Company may redeem up to 50% of the principal amount of 11 1/2% Senior Discount Debentures with the gross proceeds from an offering of certain equity securities of the Company and its subsidiaries prior to March 1, 1998, at 110% of the Accreted Value thereof. In the event of a Change of Control (as defined therein), the Company may redeem any or all of the 11 1/2% Senior Discount Debentures at a premium of 10% to March 1, 2000, and at the principal amount at maturity thereafter. If the 11 1/2% Senior Discount Debentures become the primary obligation of BHOC, then the payment of principal, premium and interest on the 11 1/2% Senior Discount Debentures is subordinated in right of payment to the prior payment of all indebtedness of BHOC, including all indebtedness outstanding under the New Revolving Credit Agreement, the 10 3/4% Senior Subordinated Notes and the 9 1/4% Senior Notes. The indenture governing the 11 1/2% Senior Discount Debentures (the "11 1/2% Indenture") limits the ability of the Company and its subsidiaries to incur, issue, assume or guarantee indebtedness and restricts the Company's ability to pay dividends, redeem equity securities or repay subordinated Indebtedness (each, a "Restricted Payment"). the Company is prohibited from declaring or paying any dividend or making any other Restricted Payments if at the time of such Restricted Payment the aggregate of all Restricted Payments exceeds the sum of (i) 50% of the Company's Consolidated Net Income (as defined in the 11 1/2% Indenture), PLUS (ii) 100% of the aggregate net proceeds received by the Company from the issue or sale of the Company Equity Interests (as defined in the 11 1/2% Indenture) PLUS (iii) 100% of the net proceeds received by the Company from the issuance or sale (other than to a subsidiary) of any the Company debt security or redeemable stock that has been converted into or exchanged for the Company Equity Interests, subject to a minimum fixed coverage ratio. Notwithstanding the above, BHOC may make certain Restricted Payments, including the repurchase for cash of any equity securities of the Company from management of the Company and its subsidiaries in an aggregate amount up to $5 million. The Company is prohibited from creating any additional restrictions on the ability of any of the Company's subsidiaries to pay dividends, make loans or transfer assets to the Company or any of its subsidiaries. Additionally, the 11 1/2% Indenture restricts the Company in its ability to engage in transactions with affiliates, create liens and participate in material acquisitions or asset sales. If the Company defaults in the payment of principal or interest on the 11 1/2% Senior Discount Debentures or any other event of default occurs, excluding certain events of insolvency, the 11 1/2% Indenture specifies 56 that the trustee, or the holders of at least 25% of the principal amount of 11 1/2% Senior Discount Debentures outstanding, may declare all 11 1/2% Senior Discount Debentures to be due and payable at a price equal to 100% of the principal amount thereof, plus accrued interest to the date of payment, or Accreted Value, as applicable. In the event of certain events of insolvency with respect to the Company or any significant subsidiary, all outstanding 11 1/2% Senior Discount Debentures are immediately due and payable without any declaration or other act on the part of the trustee or any Holder. As part of the Transactions, the Company intends to complete the 11 1/2% Redemption and the 11 1/2% Tender Offer. Those 11 1/2% Senior Discount Debentures not tendered in the Tender Offer will remain outstanding; HOWEVER, the 11 1/2% Indenture pursuant to which the 11 1/2% Senior Discount Debentures were issued will be amended to remove substantially all restrictive covenants. BELL & HOWELL FINANCIAL SERVICES COMPANY Bell & Howell Financial Services Company, a wholly owned subsidiary of BHOC, assists BHOC in the marketing of products by providing lease financing for BHOC's customers. The leases contain either full payout or fair market value options at lease expiration. Bell & Howell Financial Services Company finances its lease receivables on a non-recourse basis through two funding sources. Its primary funding source is Falcon Asset Securitization Corporation ("Falcon"), under the Amended and Restated Receivables Purchase Agreement, dated May 20, 1997, as amended (the "Falcon Agreement"). Its secondary funding source is Sanwa Business Credit Corporation) ("Sanwa"), under the Lease Receivable Purchase and Sale Agreement dated September 25, 1992, as amended (the "Sanwa Agreement"). Pursuant to each of the Agreements, Bell & Howell Financial Services Company assigns an interest in a pool of lease contracts. Interests assigned under the Falcon Agreement may vary in amount, at the request of Bell & Howell Financial Services Company, up to a maximum of the principal balance of the lease contract pool (net of loss reserve requirements) which principal balance accrues interest at the A1/P1 commercial paper rate plus 0.185%. Interests assigned under the Sanwa Agreement are the present value of the remaining payments in the underlying lease pools (net of loss reserve requirements) discounted at LIBOR plus 1.65%. At June 28, 1997, under both agreements, Bell & Howell Financial Services Company had assigned receivables with a total value of $125.9 million. SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering, the Company will have outstanding an aggregate of 22,207,620 shares of Common Stock (22,786,771 shares if the Underwriters' over-allotment option is exercised in full). The shares of Common Stock offered hereby will be freely tradeable without restriction or further registration under the Securities Act, except for shares sold by persons deemed to be "affiliates" of the Company or acting as "underwriters," as those terms are defined in the Securities Act. Following the expiration of the lock-up period described below, all of the remaining outstanding shares of Common Stock will be freely tradeable subject to the restrictions on resale imposed upon "affiliates" by Rule 144 under the Securities Act. In general, under Rule 144 a person (or persons whose shares are required to be aggregated) who has beneficially owned, for at least one year, shares of Common Stock that have not been registered under the Securities Act or that were acquired from an "affiliate" of the Company is entitled to sell within any three-month period the number of shares of Common Stock which does not exceed the greater of one percent of the number of then outstanding shares or the average weekly reported trading volume during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain notice requirements and to the availability of current public information about the Company and must be made in unsolicited brokers' transactions or to a market maker. A person (or persons whose shares are aggregated) who was not an "affiliate" of the Company under the Securities Act during the three months preceding a sale and who has beneficially owned such shares for at least two years is entitled to sell such shares under Rule 144 without regard to the volume, notice, information and manner of sale provisions of such Rule. 57 Keystone, the Selling Stockholders and all directors and executive officers of the Company who, immediately following the Offering, will collectively beneficially own 6,226,674 shares of Common Stock, have each agreed for a period of 90 days after the date of this Prospectus not to register for sale, offer, sell (or contract to sell) or otherwise dispose of any Common Stock (or any securities convertible into or exercisable or exchangeable for Common Stock) or grant any options or warrants to purchase Common Stock (other than Common Stock sold in the Offering) without the prior written consent of DLJ. In addition, holders of an aggregate of 880,639 shares of Common Stock (which excludes shares held by Keystone, the Selling Stockholders and all directors and executive officers) are prohibited by the Registration Rights Agreement from effecting any public sale or distribution of Common Stock prior to 90 days from the date of this Prospectus. Sales of substantial amounts of Common Stock in the public market following the Offering, or the possibility that such sales may occur, may adversely affect the prevailing market price of the Common Stock. Future sales of substantial amounts of Common Stock by Keystone and executive officers and directors of the Company after the Offering, or the perception that such sales could occur, could adversely effect the market price of the Common Stock. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock. In addition, the Company has the authority to issue additional shares of Common Stock and shares of one or more series of Preferred Stock. REGISTRATION RIGHTS AGREEMENT Certain stockholders of the Company have certain demand and piggyback registration rights with respect to an aggregate of 7,107,313 shares of Common Stock pursuant to the Registration Rights Agreement dated May 10, 1988 by and among the Company and the stockholders named therein. Subject to certain conditions and limitations, stockholders owning in the aggregate 1,955,023 shares of Registrable Common Stock may require the Company to file registration statements with the Securities and Exchange Commission (the "Commission") under the Securities Act and all stockholders who are a party to the Registration Rights Agreement have the right to require the Company to include their shares of Common Stock in any registered offering of the Common Stock by the Company, including any such registration statement filed pursuant to the Registration Rights Agreement. In the event that the stockholders of the Company exercise their registration rights under the Registration Rights Agreement, the Company is required to bear all expenses, other than underwriting discounts and selling commissions applicable to such shares, in connection with such registration and the stockholders and the Company have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. 58 UNDERWRITING Subject to certain conditions contained in the Underwriting Agreement, dated , 1997 (the "Underwriting Agreement"), the underwriters named below (the "Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Bear, Stearns & Co. Inc., Salomon Brothers Inc and Smith Barney Inc. are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company and the Selling Stockholders all of the shares of Common Stock offered in the Offering. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
NUMBER OF NAME SHARES Donaldson, Lufkin & Jenrette Securities Corporation.............................. Bear, Stearns & Co. Inc.......................................................... Salomon Brothers Inc............................................................. Smith Barney Inc................................................................. ---------- Total.......................................................................... 4,177,259 ---------- ----------
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than the shares of Common Stock covered by the over-allotment option described below) if any are taken. The Company and the Selling Stockholders have been advised by the Representatives that the Underwriters propose to offer the Common Stock to the public initially at the price to the public set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price less a concession not to exceed $ per share. The Underwriters may allow, and such dealers may reallow, discounts not in excess of $ per share to certain other dealers. The Company and the Selling Stockholders have granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 579,151 and 47,438 additional shares of Common Stock, respectively, solely to cover over-allotments at the public offering price set forth on the cover page of this Prospectus less underwriting discounts and commissions. The Underwriters may exercise such option from time to time to purchase additional shares solely for the purpose of covering over-allotments, if any, incurred in connection with the sale of the shares offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth opposite such Underwriter's name in the preceding table bears to the total number of shares offered in the Offering. The Company, the Selling Stockholders and certain subsidiaries of the Company have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute payments that the Underwriters may be required to make in respect thereof. Keystone, the Selling Stockholders and all directors and executive officers of the Company who, immediately following the Offering, will collectively beneficially own 6,226,674 shares of Common Stock, have each agreed for a period of 90 days after the date of this Prospectus not to register for sale, offer, sell (or contract to sell) or otherwise dispose of any Common Stock (or any securities convertible into or exercisable or exchangeable for Common Stock) or grant any options or warrants to purchase Common Stock (other than Common Stock sold in the Offering) without the prior written consent of DLJ. In addition, holders of an aggregate of 880,639 shares of Common Stock (which excludes shares held by Keystone, the Selling Stockholders and all directors and executive officers) are prohibited by the Registration Rights Agreement from effecting any public sale or distribution of Common Stock prior to 90 days from the date of this Prospectus. Sales of substantial amounts of Common Stock in the public market 59 following the Offering, or the possibility that such sales may occur, may adversely affect the prevailing market price of the Common Stock. In addition, certain stockholders of the Company have certain demand and piggyback registration rights with respect to an aggregate of 7,107,313 shares of Common Stock pursuant to the Registration Rights Agreement. Subject to certain conditions and limitations, certain stockholders owning at least 1,955,023 shares of Registrable Common Stock may require the Company to file registration statements with the Commission under the Securities Act and all stockholders who are a party to the Registration Rights Agreement have the right to require the Company to include their shares of Common Stock in any registered offering of the Common Stock by the Company, including any such registration statement filed pursuant to the Registration Rights Agreement. In the event that the stockholders of the Company exercise their registration rights under the Registration Rights Agreement, the Company is required to bear all expenses, other than underwriting discounts and selling commissions applicable to such shares, in connection with such registration and the stockholders and the Company have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. In connection with the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot the Offering, creating a syndicate short position. Underwriters may bid for and purchase shares of Common Stock in the open market to cover syndicate short positions. In addition, the Underwriters may bid for and purchase shares of Common Stock in the open market to stabilize the price of the Common Stock. These activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end these activities at any time. DLJ has received customary compensation for broker services performed in connection with certain open market purchases on behalf of the Company of the 11 1/2% Senior Discount Debentures and the 10 3/4% Senior Subordinated Notes. DLJ is acting as dealer manager for the 11 1/2% Tender Offer and is receiving a customary fee in connection therewith. LEGAL MATTERS Certain legal matters will be passed upon for the Company by McDermott, Will & Emery, Chicago, Illinois. Certain legal matters will be passed upon for the Underwriters by Latham & Watkins, New York, New York. EXPERTS The audited Consolidated Annual Financial Statements of the Company as of the end of fiscal years 1995 and 1996 and for each of fiscal years 1994, 1995 and 1996 included herein have been so included in reliance on the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Registration Statement and the exhibits thereto as well as the periodic reports, proxy statements and other information filed by the Company with the Commission may be inspected at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices located at the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the public reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at 60 prescribed rates. In addition, material filed by the Company can be inspected at the offices of the NYSE at 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a registration statement on Form S-1 under the Securities Act, with respect to the shares of Common Stock offered hereby. For purposes hereof, the term "Registration Statement" means the original Registration Statement and any and all amendments thereto. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are contained in exhibits to the Registration Statement as permitted by the rules and regulations of the Commission. Statements made in this Prospectus concerning the contents of any documents referred to herein are not necessarily complete. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and other information filed by the Company with the Commission are also available at the web site maintained by the Commission on the World Wide Web at http://www.sec.gov. 61 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS: Independent Auditors' Report............................................................................... F-2 Consolidated Statements of Operations for the fiscal years 1994, 1995 and 1996............................. F-3 Consolidated Balance Sheets at the end of fiscal years 1995 and 1996....................................... F-4 Consolidated Statements of Cash Flows for the fiscal years 1994, 1995 and 1996............................. F-5 Consolidated Statements of Shareholders' Equity for the fiscal years 1994, 1995 and 1996................... F-6 Notes to the Consolidated Annual Financial Statements...................................................... F-7 CONSOLIDATED INTERIM FINANCIAL STATEMENTS: Consolidated Statements of Operations for the thirteen and twenty-six weeks ended June 29, 1996 and June 28, 1997................................................................................................. F-23 Consolidated Balance Sheets at December 28, 1996 and June 28, 1997......................................... F-24 Consolidated Statements of Cash Flows for the twenty-six weeks ended June 29, 1996 and June 28, 1997....... F-25 Notes to the Consolidated Interim Financial Statements..................................................... F-26
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Bell & Howell Company: We have audited the accompanying consolidated balance sheets of Bell & Howell Company and subsidiaries (the "Company") as of the end of fiscal years 1995 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for the fiscal years 1994, 1995 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bell & Howell Company and subsidiaries as of the end of fiscal years 1995 and 1996, and the results of their operations and their cash flows for the fiscal years 1994, 1995 and 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Chicago, Illinois February 19, 1997 F-2 BELL & HOWELL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FISCAL YEARS 1994, 1995 AND 1996 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1995 1996 ---------- ---------- ---------- Net sales: Product.................................................................... $ 542,546 $ 630,454 $ 703,833 Service.................................................................... 177,794 189,435 198,964 ---------- ---------- ---------- Total net sales........................................................ 720,340 819,889 902,797 Operating costs and expenses: Cost of product............................................................ 336,775 385,562 443,014 Cost of service............................................................ 118,649 125,837 133,403 Research and development................................................... 21,556 30,202 38,101 Selling and administrative................................................. 173,019 194,839 198,898 Restructuring.............................................................. 32,893 -- -- ---------- ---------- ---------- Total operating costs and expenses..................................... 682,892 736,440 813,416 Operating income............................................................. 37,448 83,449 89,381 Net interest expense: Interest (income).......................................................... (13,703) (14,391) (18,759) Interest expense........................................................... 62,657 65,191 64,085 ---------- ---------- ---------- Net interest expense................................................... 48,954 50,800 45,326 Earnings (loss) before income taxes and extraordinary items.................. (11,506) 32,649 44,055 Income tax expense (benefit)................................................. (2,490) 13,439 18,400 ---------- ---------- ---------- Earnings (loss) before extraordinary items................................... (9,016) 19,210 25,655 Extraordinary losses......................................................... (978) (3,219) (2,585) ---------- ---------- ---------- Net earnings (loss).......................................................... $ (9,994) $ 15,991 $ 23,070 ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) per common share: Primary: Earnings (loss) before extraordinary items............................... $ (.68) $ 1.15 $ 1.38 Extraordinary losses..................................................... (.07) (.19) (.14) ---------- ---------- ---------- Net earnings (loss) per common share......................................... $ (.75) $ .96 $ 1.24 ---------- ---------- ---------- ---------- ---------- ---------- Fully diluted: Earnings (loss) before extraordinary items............................... $ (.68) $ 1.15 $ 1.38 Extraordinary losses..................................................... (.07) (.19) (.14) ---------- ---------- ---------- Net earnings (loss) per common share......................................... $ (.75) $ .96 $ 1.24 ---------- ---------- ---------- ---------- ---------- ---------- Average number of common shares and equivalents outstanding: Primary.................................................................... 13,267 16,585 18,560 Fully diluted.............................................................. 13,267 16,585 18,560
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. F-3 BELL & HOWELL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AT THE END OF FISCAL YEARS 1995 AND 1996 (DOLLARS IN THOUSANDS)
1995 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents.............................................................. $ 7,262 $ 15,500 Accounts receivable, less allowance for doubtful accounts of $4,406 and $5,294, respectively......................................................................... 181,247 186,862 Inventory: Finished products.................................................................... 52,760 61,393 Products in process and materials.................................................... 53,158 78,438 ---------- ---------- Total inventory.................................................................... 105,918 139,831 Other current assets................................................................... 11,768 11,826 ---------- ---------- Total current assets............................................................... 306,195 354,019 Property, plant and equipment: Land................................................................................... 4,245 4,302 Buildings.............................................................................. 42,840 47,833 Machinery and equipment................................................................ 115,023 137,586 Product masters........................................................................ 153,928 173,294 ---------- ---------- Total property, plant and equipment, at cost....................................... 316,036 363,015 Accumulated depreciation................................................................. (171,057) (207,287) ---------- ---------- Net property, plant and equipment.................................................. 144,979 155,728 Long-term receivables.................................................................... 57,062 54,707 Goodwill, net of accumulated amortization................................................ 133,422 189,868 Other assets............................................................................. 40,483 42,464 ---------- ---------- Total assets....................................................................... $ 682,141 $ 796,786 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable.......................................................................... $ 14,939 $ 8,397 Current maturities of long-term debt................................................... 14,707 1,667 Accounts payable....................................................................... 65,444 93,135 Accrued expenses....................................................................... 81,717 78,308 Deferred income........................................................................ 176,351 171,698 Accrued income taxes................................................................... 6,539 1,143 ---------- ---------- Total current liabilities.......................................................... 359,697 354,348 Long-term liabilities: Long-term debt......................................................................... 465,230 548,281 Other liabilities...................................................................... 46,686 61,049 ---------- ---------- Total long-term liabilities........................................................ 511,916 609,330 Shareholders' equity: Common Stock, $0.001 par value, 18,336 shares issued and 18,329 shares outstanding at the end of fiscal 1995, and 18,359 shares issued and 18,309 shares outstanding at the end of fiscal 1996................................................................... 18 18 Capital surplus........................................................................ 328 1,402 Notes receivable from executives....................................................... (2,054) (1,444) Retained earnings (deficit)............................................................ (188,921) (165,851) Cumulative foreign exchange translation adjustments.................................... 1,187 616 Treasury stock......................................................................... (30) (1,633) ---------- ---------- Total shareholders' equity (deficit)............................................... (189,472) (166,892) Commitments and contingencies............................................................ -- -- ---------- ---------- Total liabilities and shareholders' equity......................................... $ 682,141 $ 796,786 ---------- ---------- ---------- ----------
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. F-4 BELL & HOWELL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS 1994, 1995 AND 1996 (DOLLARS IN THOUSANDS)
1994 1995 1996 ----------- ----------- ----------- Operating activities: Net earnings (loss)...................................................... $ (9,994) $ 15,991 $ 23,070 Depreciation and amortization............................................ 36,689 41,386 47,389 Debt accretion........................................................... 20,993 23,476 23,903 Changes in operating assets and liabilities: Accounts receivable.................................................... 741 (28,891) (5,537) Inventory.............................................................. 17,301 (27,235) (37,137) Other current assets................................................... (1,130) (1,220) 436 Long-term receivables.................................................. 30,552 (14,804) 2,355 Income taxes........................................................... (3,340) 10,041 6,003 Accounts payable....................................................... 9,935 9,467 26,166 Accrued expenses....................................................... 7,483 (2,361) (6,302) Deferred income and other long-term liabilities........................ 11,478 22,568 (1,137) Other, net............................................................. 11,300 (4,468) (1,258) ----------- ----------- ----------- Net cash provided by operating activities............................ 132,008 43,950 77,951 Investing activities: Expenditures for property, plant and equipment........................... (38,345) (44,047) (42,744) Acquisitions............................................................. (18,747) (2,849) (65,314) ----------- ----------- ----------- Net cash used by investing activities................................ (57,092) (46,896) (108,058) Financing activities: Proceeds from short-term debt............................................ 20,275 17,786 15,588 Repayment of short-term debt............................................. (24,542) (15,329) (21,650) Proceeds from long-term debt............................................. 79,985 55,887 237,432 Repayment of long-term debt.............................................. (142,171) (135,200) (192,703) Proceeds from Common Stock, net.......................................... 519 71,255 71 ----------- ----------- ----------- Net cash provided (used) by financing activities..................... (65,934) (5,601) 38,738 Effect of exchange rate changes on cash.................................... 9 (365) (393) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents........................... 8,991 (8,912) 8,238 Cash and cash equivalents, beginning of period............................. 7,183 16,174 7,262 ----------- ----------- ----------- Cash and cash equivalents, end of period................................... $ 16,174 $ 7,262 $ 15,500 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. F-5 BELL & HOWELL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FISCAL YEARS 1994, 1995 AND 1996 (DOLLARS AND SHARES IN THOUSANDS)
CUMULATIVE NOTES FOREIGN UNREALIZED COMMON STOCK RECEIVABLE RETAINED EXCHANGE LOSS ON ---------------------- CAPITAL FROM EARNINGS TRANSLATION MARKETABLE ISSUED TREASURY SURPLUS EXECUTIVES (DEFICIT) ADJUSTMENTS SECURITIES ----------- --------- ---------- ----------- ----------- ----------- ----------- Balance, at the end of fiscal 1993 (Common Stock, 13,290 shares; treasury stock, 112 shares)..... $ 13 $ (194) $ (70,984) $ (2,328) $ (194,918) $ (1,897) $ (245) Net loss.......................... (9,994) Common Stock, 47 shares........... 764 Notes receivable from executives...................... (624) Treasury stock, net 109 shares.......................... 189 Unrealized loss on marketable securities...................... (768) Translation adjustments........... 2,258 --- --------- ---------- ----------- ----------- ----------- ----------- Balance, at the end of fiscal 1994 (Common Stock, 13,336 shares; treasury stock, 3 shares)....... 13 (5) (70,220) (2,952) (204,912) 361 (1,013) Net earnings...................... 15,991 Common Stock, 5,000 shares........ 5 70,548 Notes receivable from executives...................... 898 Treasury stock, net 4 shares...... (25) Unrealized loss on marketable securities...................... 1,013 Translation adjustments........... 826 --- --------- ---------- ----------- ----------- ----------- ----------- Balance, at the end of fiscal 1995 (Common Stock, 18,336 shares; treasury stock, 7 shares)....... 18 (30) 328 (2,054) (188,921) 1,187 -- Net earnings...................... 23,070 Common Stock, 23 shares........... 1,074 Notes receivable from executives...................... 610 Treasury stock, net 43 shares..... (1,603) Translation adjustments........... (571) --- --------- ---------- ----------- ----------- ----------- ----------- Balance, at the end of fiscal 1996 (Common Stock, 18,359 shares; treasury stock, 50 shares)...... $ 18 $ (1,633) $ 1,402 $ (1,444) $ (165,851) $ 616 $ -- --- --------- ---------- ----------- ----------- ----------- ----------- --- --------- ---------- ----------- ----------- ----------- -----------
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. F-6 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1--BASIS OF PRESENTATION Bell & Howell Company (the "Company") is a holding company, the primary assets of which are all of the issued and outstanding shares of capital stock of Bell & Howell Operating Company ("BHOC"). The Company conducts business through Bell & Howell Operating Company and has no operations of its own. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS. Bell & Howell Company and its Subsidiaries is a leading provider of systems and services for information access and dissemination. The Company consists of two business segments, Information Access and Mail Processing. Information Access develops and markets imaging and information services and systems that provide its customers with access solutions to targeted segments of complex public and private information databases. Mail Processing develops and markets a complete range of high volume mail processing systems, which increasingly utilize software to expand the capabilities and improve the efficiencies and effectiveness of customers' mailing operations. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Subsequent actual results may differ from those estimates. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its subsidiaries (collectively, the "Company"). Certain prior year amounts have been reclassified to conform with the 1996 presentation. FISCAL YEAR. The Company's fiscal year ends on the Saturday nearest to December 31. References to fiscal 1996 are for the 52 weeks ended December 28, 1996, references to fiscal 1995 are for the 52 weeks ended December 30, 1995, and references to fiscal 1994 are for the 52 weeks ended December 31, 1994. REVENUE RECOGNITION. Product sales include sales of equipment, software and subscriptions. Equipment and software license sales are recorded at the time of shipment, provided no significant vendor and postcontract customer support obligations remain outstanding and collection of the resulting receivable is deemed probable. Sales of customized mail automation equipment under long-term contracts are recognized at the time of shipment. Revenues from subscriptions are deferred and recognized in the periods the subscriptions are fulfilled. Service sales represent amounts earned by providing equipment maintenance services to customers of the Mail Processing and Information Management businesses. Where such services are provided under annual agreements, revenues are recognized on a pro rata basis over the periods of the agreements. Other service revenues are recognized when the services are performed. FOREIGN CURRENCY TRANSLATION. The financial position and results of operations of each of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities are translated into U.S. dollars using the exchange rates at the end of the respective fiscal periods. Revenues and expenses are translated at average exchange rates prevailing during the respective fiscal periods. Balance sheet translation adjustments arising from differences in exchange rates from period to period are included as a separate component of shareholders' equity. F-7 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET EARNINGS (LOSS) PER COMMON SHARE. Net earnings (loss) per common share are determined by dividing net earnings by the weighted average number of common shares outstanding during the period. If dilutive, stock options are included as common stock equivalents. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments with maturities of three months or less (when purchased) to be cash equivalents. The carrying amount reported in the consolidated balance sheets approximates fair value. INVENTORY. Inventory is valued at cost determined by the last-in, first-out ("LIFO") and the first-in, first-out ("FIFO") methods, with the following balances at the end of fiscal 1995 and 1996:
YEAR END LIFO FIFO TOTAL - ------------------------------------------------------------ --------- --------- ---------- 1995........................................................ $ 53,601 $ 52,317 $ 105,918 1996........................................................ 67,051 72,780 139,831
The Company uses the LIFO method of valuing the majority of domestic inventories. The excess of replacement cost over the LIFO values of inventory was approximately $4,413 and $4,489 at the end of fiscal 1995 and 1996, respectively. Inventory cost includes material, labor and overhead and is valued at the lower of cost or net realizable value. PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is recorded at cost. The straight-line method of depreciation is primarily used, except for Information Access product masters (which represent the cost to create electronic and microform master document copies which are subsequently used in the production process to fulfill customers' information requirements), which are depreciated on the double declining balance method. Estimated lives range from 10 to 40 years for buildings and building improvements, 3 to 15 years for machinery and equipment and 10 years for product masters. GOODWILL. Goodwill, which represents the excess of purchase price over the fair value of net assets of acquired businesses, is amortized on a straight-line basis over the expected future periods to be benefitted. The Company periodically assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance (for each business) over its remaining life can be recovered through forecasted future operations. In fiscal 1996, acquisitions (primarily DataTimes Corporation and Protocorp International) served to initially increase goodwill by $61,511. Accumulated amortization at the end of fiscal 1995 and 1996 was $28,489 and $33,632, respectively. STOCK OPTION PLAN. Prior to fiscal 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In fiscal 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25, and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and F-8 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) future years as if the fair-value-based method (defined in SFAS No. 123) had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see Note 12 of the Consolidated Financial Statements). NOTE 3--BUSINESS SEGMENTS The Company consists of two business segments, Information Access and Mail Processing. Information Access develops and markets imaging and information services and systems that provide its customers with access solutions to targeted segments of complex public and private information databases. Mail Processing develops and markets a complete range of high volume mail processing systems, which increasingly utilize software to expand the capabilities and improve the efficiencies and effectiveness of customers' mailing operations. Information concerning the Company's business segments and operations by geographic area for fiscal 1994, 1995 and 1996 was as follows (dollars in millions):
EARNINGS (LOSS) BEFORE INCOME TAXES SALES AND EXTRAORDINARY ITEMS ------------------------------- ------------------------------- BUSINESS SEGMENTS 1994 1995 1996 1994(1) 1995 1996 --------- --------- --------- --------- --------- --------- Information Access..................................... $ 404.4 $ 449.9 $ 470.5 $ 46.5 $ 62.8 $ 62.9 Mail Processing........................................ 315.9 370.0 432.3 2.8 33.5 40.0 --------- --------- --------- --------- --------- --------- Total................................................ 720.3 819.9 902.8 49.3 96.3 102.9 Interest expense, net.................................. (49.0) (50.8) (45.3) Corporate and other income and expenses................ (11.8) (12.9) (13.5) --------- --------- --------- --------- --------- --------- Consolidated........................................... $ 720.3 $ 819.9 $ 902.8 $ (11.5) $ 32.6 $ 44.1 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- IDENTIFIABLE ASSETS CAPITAL EXPENDITURES ------------------------------- ------------------------------- 1994 1995 1996 1994 1995 1996 --------- --------- --------- --------- --------- --------- Information Access..................................... $ 371.3 $ 393.9 $ 451.9 $ 30.5 $ 34.2 $ 31.0 Mail Processing........................................ 159.1 206.4 259.4 6.5 9.6 11.4 --------- --------- --------- --------- --------- --------- Total................................................ 530.4 600.3 711.3 37.0 43.8 42.4 Corporate.............................................. 73.3 81.8 85.5 1.3 0.2 0.3 --------- --------- --------- --------- --------- --------- Consolidated........................................... $ 603.7 $ 682.1 $ 796.8 $ 38.3 $ 44.0 $ 42.7 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
F-9 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3--BUSINESS SEGMENTS (CONTINUED)
DEPRECIATION AND AMORTIZATION(2) ------------------------------- 1994 1995 1996 --------- --------- --------- Information Access..................................... $ 26.9 $ 31.3 $ 35.5 Mail Processing........................................ 5.4 5.5 8.1 --------- --------- --------- Total................................................ 32.3 36.8 43.6 Corporate.............................................. 0.5 0.6 0.6 --------- --------- --------- Consolidated........................................... $ 32.8 $ 37.4 44.2 --------- --------- --------- --------- --------- ---------
- ------------------------ (1) Includes restructuring expense of $32.9 million ($28.2 million for Mail Processing and $4.7 million for Information Access). (2) Excludes amortization of deferred financing costs.
EARNINGS (LOSS) BEFORE INCOME SALES TAXES AND EXTRAORDINARY ITEMS(1) IDENTIFIABLE ASSETS(2) ------------------------------- --------------------------------- ------------------------------- GEOGRAPHIC SEGMENTS 1994 1995 1996 1994(3) 1995 1996 1994 1995 1996 --------- --------- --------- ----------- --------- --------- --------- --------- --------- UNITED STATES: Unaffiliated customers..... $ 548.4 $ 625.2 $ 706.0 Inter-segment.............. 45.6 51.1 46.6 --------- --------- --------- Total.................... 594.0 676.3 752.6 $ 42.7 $ 81.4 $ 86.5 $ 439.3 $ 497.0 $ 615.4 --------- --------- --------- ----- --------- --------- --------- --------- --------- EUROPE: Unaffiliated customers..... 130.5 145.1 158.2 Inter-segment.............. 1.6 2.0 0.8 --------- --------- --------- Total.................... 132.1 147.1 159.0 7.8 12.6 13.3 67.8 78.2 81.2 --------- --------- --------- ----- --------- --------- --------- --------- --------- OTHER: Unaffiliated customers..... 41.4 49.6 38.6 (1.2) 2.3 3.1 24.3 26.3 16.0 --------- --------- --------- ----- --------- --------- --------- --------- --------- Eliminations inter- segment.................. (47.2) (53.1) (47.4) -- -- -- (1.0) (1.2) (1.3) --------- --------- --------- ----- --------- --------- --------- --------- --------- Total.................... $ 720.3 $ 819.9 902.8 $ 49.3 $ 96.3 102.9 $ 530.4 $ 600.3 $ 711.3 --------- --------- --------- ----- --------- --------- --------- --------- --------- --------- --------- --------- ----- --------- --------- --------- --------- ---------
- ------------------------ (1) Excludes net interest and corporate expenses. (2) Excludes corporate identifiable assets. (3) Includes restructuring expense of $32.9 million ($29.2 million in the United States, $1.3 million in Europe and $2.4 million in Other). F-10 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 4--RESTRUCTURING The Company's restructuring expense of $32,893 in fiscal 1994 resulted from management's decision to relocate Mail Processing Systems headquarters' operations and consolidate certain of its domestic Mail Processing Systems facilities at a new site that will be the base for developing innovative technology and products (both software and hardware), and to consolidate certain North American Information Management administrative and warehouse facilities in order to more effectively serve its customer base with a reduced operating expense infrastructure. NOTE 5--INCOME TAXES The pretax income (loss) amounts, before extraordinary items, on which income taxes were provided in fiscal 1994, 1995 and 1996 were:
1994 1995 1996 ---------- --------- --------- Domestic.................................................... $ (13,471) $ 27,251 $ 35,850 Foreign..................................................... 1,965 5,398 8,205 ---------- --------- --------- Pretax income (loss)...................................... $ (11,506) $ 32,649 $ 44,055 ---------- --------- --------- ---------- --------- ---------
The provision for income taxes in fiscal 1994, 1995 and 1996 included the following:
1994 1995 1996 ---------- --------- --------- Current income tax expense (benefit): United States............................................. $ 1,814 $ 5,157 $ 1,996 State and local........................................... (62) 513 476 Foreign................................................... (379) 1,849 3,974 ---------- --------- --------- Current income tax expense.............................. 1,373 7,519 6,446 ---------- --------- --------- Deferred income tax expense (benefit): United States............................................. (3,303) 3,906 9,035 State and local........................................... (147) 1,633 2,208 Foreign................................................... (413) 381 711 ---------- --------- --------- Deferred income tax expense (benefit)..................... (3,863) 5,920 11,954 ---------- --------- --------- Income tax expense (benefit).............................. $ (2,490) $ 13,439 $ 18,400 ---------- --------- --------- ---------- --------- ---------
The significant components of deferred income tax expense (benefit) in fiscal 1994, 1995 and 1996 were as follows:
1994 1995 1996 ---------- --------- --------- Deferred income tax expense (benefit), exclusive of components listed below................................... $ (11,230) $ (3,806) $ 12,557 Operating loss carryforwards................................ 5,654 9,974 (414) Tax credits................................................. 1,713 (248) (189) ---------- --------- --------- Deferred income tax expense (benefit)..................... $ (3,863) $ 5,920 $ 11,954 ---------- --------- --------- ---------- --------- ---------
F-11 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5--INCOME TAXES (CONTINUED) Deferred income taxes are primarily provided for temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities. The tax effects of the major temporary differences that gave rise to the deferred tax asset (liability) at the end of fiscal 1995 and 1996 were as follows:
1995 1996 ---------- ---------- Deferred tax assets are attributable to: Accrued expenses.................................................... $ 14,889 $ 9,236 Deferred compensation............................................... 8,094 9,194 Postretirement benefits............................................. 3,669 3,476 Accounts receivable................................................. 1,722 2,332 Operating loss carryforwards........................................ 17,934 22,188 Tax credits......................................................... 765 525 Other............................................................... 9,468 82 ---------- ---------- Total gross deferred tax assets................................... 56,541 47,033 Valuation allowance............................................... (4,666) (7,049) ---------- ---------- Net deferred tax assets........................................... 51,875 39,984 Deferred tax liabilities are attributable to: Property, plant and equipment....................................... (13,832) (14,410) Intangibles......................................................... (16,293) (16,607) Deferred income..................................................... (21,349) (23,346) Undistributed foreign earnings...................................... (4,449) (3,305) ---------- ---------- Total gross deferred tax liabilities.............................. (55,923) (57,668) ---------- ---------- Net deferred tax liabilities...................................... $ (4,048) $ (17,684) ---------- ---------- ---------- ----------
Net deferred tax liabilities are classified as other long-term liabilities in the balance sheet. At the end of fiscal 1996, the net deferred tax assets of $39,984 are expected to be realized through both the reversal of taxable temporary differences as well as the Company's ability to generate future taxable income. This is on the basis that it is more likely than not that both the timing of reversal of taxable amounts and the generation of future taxable income allows for offset with future deductible amounts in the permitted carryback/carryforward periods. F-12 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5--INCOME TAXES (CONTINUED) The differences between the Company's effective rate for income taxes and the statutory federal income tax rate in fiscal 1994, 1995 and 1996 were as follows:
1994 1995 1996 --------- --------- --------- Statutory federal income tax rate................................... (35.0%) 35.0% 35.0% Increase (reduction) in taxes resulting from: State income taxes, net of federal benefit........................ (24.2) 6.3 5.7 Foreign earnings.................................................. (1.9) 1.0 4.4 Amortization of intangibles....................................... 14.5 2.3 2.1 Repatriation of foreign earnings.................................. 19.4 (.8) (1.0) Other............................................................. 5.6 (2.6) (4.4) --------- --- --- Effective income tax rate....................................... (21.6%) 41.2% 41.8% --------- --- --- --------- --- ---
As a result of losses incurred in fiscal 1991 through 1993, domestic net operating loss ("NOL") carryforwards of $40,007 exist for tax purposes expiring as follows: $8,552 in 2006, $15,371 in 2007, $15,144 in 2008, $822 in 2009 and $118 in 2010. Foreign NOL carryforwards of $13,044 exist for tax purposes expiring as follows: $574 in 1997, $229 in 1998, $66 in 1999, $2,466 in 2000, $4,789 in 2001, $4,834 in 2002 and $86 in 2003. The Tax Reform Act of 1986 expanded the corporate alternative minimum tax ("AMT"). Under this Act, the Company's current tax liability is the greater of its regular tax or AMT. The Company has AMT credits of $6,306 that may be carried forward indefinitely and used as credits in future tax returns against regular tax in the event the regular tax expense exceeds the alternative minimum tax expense, or are available to offset future AMT-NOL's which can be carried back. Net income taxes paid for fiscal 1994, 1995 and 1996 were $250, $4,803 and $10,943, respectively. NOTE 6--EXTRAORDINARY LOSSES The fiscal 1996 extraordinary losses of $2,585 ($4,039 pretax) were comprised of the debt repurchase premium and write-off of unamortized debt issuance costs associated with the repurchase of $17,920 of the 10 3/4% Senior Subordinated Notes and $34,158 (accreted value) of the 11 1/2% Senior Discount Debentures, which were redeemed with proceeds from the amended Credit Agreement (as defined herein). The fiscal 1995 extraordinary losses of $3,219 ($5,030 pretax) were comprised of the debt repurchase premium and write-off of unamortized debt issuance costs associated with the repurchase of $50,000 of the 10 3/4% Senior Subordinated Notes and the write-off of unamortized debt issuance costs associated with the prepayment of $17,628 of term loans under the Credit Agreement, both of which reflect the application of the net proceeds from the initial public equity offering. The fiscal 1994 extraordinary loss of $978 ($1,528 pretax) represents the write-off of unamortized debt issuance costs associated with the prepayment of a term loan included in the Credit Agreement. F-13 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7--DEBT AND LINES OF CREDIT Debt at the end of fiscal 1995 and 1996 consisted of the following:
1995 1996 ---------- ---------- Notes payable......................................................... $ 14,939 $ 8,397 ---------- ---------- ---------- ---------- Long-term debt: Credit Agreement: Term loan......................................................... $ 91,765 $ -- Revolving Credit Line due 2001.................................... 5,000 195,100 9 1/4% Senior Notes due 2000...................................... 80,000 80,000 10 3/4% Senior Subordinated Notes due 2002........................ 75,000 57,080 11 1/2% Senior Discount Debentures due 2005....................... 221,930 211,675 Other long-term debt.............................................. 6,242 6,093 ---------- ---------- Long-term debt, including current maturities.......................... 479,937 549,948 Less: current maturities.............................................. 14,707 1,667 ---------- ---------- Long-term debt.................................................. $ 465,230 $ 548,281 ---------- ---------- ---------- ----------
The weighted average interest rates on short-term borrowings at the end of fiscal 1996 and 1995 were 7.0% and 7.4%, respectively. The carrying amounts and fair values of certain long-term debt instruments at the end of fiscal 1996, based on quoted market prices for the 9 1/4% Senior Notes, the 10 3/4% Senior Subordinated Notes and the 11 1/2% Senior Discount Debentures were as follows:
CARRYING AMOUNT FAIR VALUE ---------- ---------- 9 1/4% Senior Notes due 2000.......................................... $ 80,000 $ 81,600 10 3/4% Senior Subordinated Notes due 2002............................ 57,080 60,505 11 1/2% Senior Discount Debentures due 2005........................... 211,675 221,602 ---------- ---------- $ 348,755 $ 363,707 ---------- ---------- ---------- ----------
At the end of fiscal 1996, the Company had foreign short-term lines of credit totaling $33,764, of which $25,367 was unused. These short-term credit lines are primarily denominated in foreign currencies and generally require no compensating balances or commitment fees. In fiscal 1996, BHOC amended its Bank Credit Agreement (the "Credit Agreement") which increased its revolving credit facility to $350,000, reduced its interest rate and extended the maturity on all outstanding Credit Agreement borrowings (to April 2001). The interest rates on borrowings under the Credit Agreement are determined at the time of borrowing, and are based upon the Company's interest coverage ratio for the preceding four quarters. At December 1996, the interest rate in effect was (at the Company's option) either LIBOR + .50% or the prime rate. The Credit Agreement requires maintenance of a minimum fixed charge coverage ratio, a minimum net worth level and a maximum leverage ratio. The Company and its domestic operating subsidiaries except Bell & Howell Financial Services Co. ("BHFS"), F-14 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7--DEBT AND LINES OF CREDIT (CONTINUED) the Company's financing subsidiary, are jointly and severally liable as guarantors under the Credit Agreement. The 9 1/4% Senior Notes are general unsecured obligations of BHOC. The 9 1/4% Senior Notes are redeemable at the option of BHOC in whole or in part on or after July 15, 1997 or upon the occurrence of a Change of Control (as defined therein), at a call price ranging from 104.625% in 1997 and declining to par on July 15, 1999. In addition, BHOC may redeem up to $26,700 of the principal amount of the 9 1/4% Senior Notes prior to July 15, 1997 with the proceeds from an offering of equity securities of the Company, BHOC or their subsidiaries at a call price of 108%. The 9 1/4% Senior Notes are guaranteed by certain of BHOC's domestic operating subsidiaries, excluding, among others, BHFS. The 10 3/4% Senior Subordinated Notes are general unsecured obligations of BHOC. The 10 3/4% Senior Subordinated Notes are redeemable at the option of BHOC in whole or in part (i) after October 1, 1997, at a call price ranging from 104.031% in 1997 and declining to par on October 1, 2000 or (ii) upon the occurrence of a Change of Control (as defined therein) at a call price ranging from 105.375% in 1997 and declining to par on October 1, 2000. The 10 3/4% Senior Subordinated Notes are guaranteed by certain of BHOC's domestic operating subsidiaries, excluding, among others, BHFS. In fiscal 1996, BHOC repurchased $17,920 in principal value of the 10 3/4% Senior Subordinated Notes with proceeds from the amended Credit Agreement. In fiscal 1995, BHOC repurchased $50,000 in principal value of the 10 3/4% Senior Subordinated Notes with a portion of the proceeds of the initial public equity offering of Bell & Howell Company. The 11 1/2% Senior Discount Debentures pay no cash interest until September 1, 2000. The 11 1/2% Senior Discount Debentures may be redeemed in whole or in part, at any time at the option of the Company at a price equal to 100% of the principal amount at maturity plus accrued interest to the date of redemption. The principal amount at maturity of the Senior Discount Debentures is $301,500; at the end of fiscal 1996 the Accreted Value (as defined therein) is $211,675. In addition, the Company may redeem up to 50% of the original principal amount of the 11 1/2% Senior Discount Debentures with the proceeds from an offering of equity securities of the Company and its subsidiaries at any time prior to March 1, 1998, at a price equal to 110% of the Accreted Value thereof. In the event of a Change of Control (as defined therein), the Company may redeem any or all of the 11 1/2% Senior Discount Debentures at a price equal to 110% of the Accreted Value thereof to March 1, 2000, and at the principal amount at maturity thereafter. The 11 1/2% Senior Discount Debentures are senior, unsecured obligations of the Company with no claim against the Company's subsidiaries and are effectively subordinate to all subsidiary debt obligations. In fiscal 1996, the Company repurchased $34,158 of Accreted Value ($52,000 of Principal Value) of 11 1/2% Senior Discount Debentures with proceeds from the amended Credit Agreement. The Credit Agreement prohibits and the 9 1/4% Senior Notes, the 10 3/4% Senior Subordinated Notes and the 11 1/2% Senior Discount Debentures restrict the payment of cash dividends on the Company's Common Stock. In fiscal 1996, BHFS entered into a new Receivables Purchase Agreement. Under this agreement and the existing Lease Receivables Financing Agreement (collectively, the "Agreements"), BHFS sells lease receivables on a non-recourse basis. Both Agreements are renewable annually and include the buyers' commitment to purchase new lease receivables. During fiscal 1996, BHFS sold $71.3 million of lease receivables. F-15 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7--DEBT AND LINES OF CREDIT (CONTINUED) For the five years subsequent to 1996, annual maturities of long-term debt are: 1997--$1,667; 1998-- $790; 1999--$354; 2000--$83,274 and 2001--$195,107. Interest paid for fiscal 1994, 1995 and 1996 was $38,122, $34,142 and $30,197, respectively. NOTE 8--LEASES LESSOR. The Company provides sales-type leases for its products and additionally leases products to customers under direct financing leases, primarily through BHFS. The Company's net investment in sales-type and direct financing leases at the end of fiscal 1995 and 1996 were as follows:
1995 1996 ---------- ---------- Minimum lease payments receivable..................................... $ 72,510 $ 69,172 Estimated unguaranteed residual values................................ 3,868 4,347 Unearned income....................................................... (17,508) (21,905) Allowance for doubtful accounts....................................... (2,299) (2,805) ---------- ---------- Net investment...................................................... $ 56,571 $ 48,809 ---------- ---------- ---------- ----------
The scheduled maturities for sales-type and direct financing lease receivables at the end of fiscal 1996 were as follows: 1997............................................................... $ 17,092 1998............................................................... 15,148 1999............................................................... 13,299 2000............................................................... 13,490 2001............................................................... 10,143 --------- Total minimum lease payments to be received...................... $ 69,172 --------- ---------
LESSEE. The Company leases certain facilities and equipment for production and selling and administrative purposes. Future minimum rental payments required under long-term noncancelable operating leases at the end of fiscal 1996 were as follows: 1997............................................................... $ 14,921 1998............................................................... 11,903 1999............................................................... 9,209 2000............................................................... 6,213 2001............................................................... 4,100 Subsequent to 2001................................................. 16,174 --------- $ 62,520 --------- ---------
Total rental expenses for fiscal 1994, 1995 and 1996 were $12,356, $14,216 and $16,007, respectively. F-16 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9--PENSION AND PROFIT-SHARING PLANS Eligible employees of the Company's domestic and Canadian operations who elect to do so participate in defined contribution profit-sharing retirement plans. The amounts charged to earnings for fiscal 1994, 1995 and 1996 were $5,413, $5,591 and $5,819, respectively. The Company also has defined benefit pension plans covering certain domestic and most foreign employees. The benefits are primarily based on years of service and/or compensation during the years immediately preceding retirement. The Company funds its foreign plans based on local statutes and funds its domestic plans in amounts that fulfill the funding requirements of the Employee Retirement Income Security Act of 1974. Plan assets consist principally of common stocks, fixed income securities and cash equivalents. The net pension costs of defined benefit plans for fiscal 1994, 1995 and 1996 were as follows (with 1994 costs including the impact of a pension plan curtailment resulting from the restructuring of the Mail Processing Systems business):
1994 1995 1996 --------- --------- --------- Service cost.................................................. $ 2,210 $ 2,062 $ 2,108 Interest cost................................................. 4,098 4,225 4,602 Return on assets.............................................. (4,821) (6,745) (5,513) Net amortization and deferral................................. 193 1,497 (1,037) Curtailment loss (included in 1994 restructuring expense)..... 5,431 -- -- --------- --------- --------- Net pension cost............................................ $ 7,111 $ 1,039 $ 160 --------- --------- --------- --------- --------- ---------
The projected benefit obligations were determined using assumed discount rates of 8.0% to 8.5%, and assumed compensation increase rates of 4.0% to 5.5%. The assumed long-term rates of return on plan assets are 9.5% to 10.0%. The status of defined benefit plans at the end of fiscal 1995 and 1996 was as follows:
1995 1996 ---------------------- ---------------------- FUNDED UNFUNDED FUNDED UNFUNDED ---------- ---------- ---------- ---------- Vested benefit obligation..................... $ 38,126 $ 13,848 $ 42,315 $ 16,505 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Accumulated benefit obligation................ $ 38,527 $ 16,000 $ 42,578 $ 16,902 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Projected benefit obligation.................. $ 40,316 $ 17,576 $ 44,792 $ 18,384 Plan assets at fair value..................... 53,359 -- 63,566 -- ---------- ---------- ---------- ---------- Plan assets in excess of (less than) projected benefit obligation.......................... 13,043 (17,576) 18,774 (18,384) Unrecognized net (gain) loss.................. (10,043) 2,377 (12,585) 2,098 Unrecognized prior service costs.............. 2,460 187 2,131 235 ---------- ---------- ---------- ---------- Prepaid (accrued) pension cost.............. $ 5,460 $ (15,012) $ 8,320 $ (16,051) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
F-17 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 10--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company has contributory and non-contributory postretirement medical benefit plans and a non-contributory postretirement life insurance benefit plan covering certain domestic employees; all plans are unfunded. The net postretirement benefit costs in fiscal 1994, 1995 and 1996 were as follows (with 1994 costs including the impact of a postretirement benefit plan curtailment resulting from the restructuring of the Mail Processing Systems business):
1994 1995 1996 --------- --------- --------- Service cost....................................................... $ 124 $ 41 $ 92 Interest cost...................................................... 764 898 1,033 Net amortization and deferral...................................... 19 49 322 Curtailment loss (included in 1994 restructuring expense).......... 1,446 -- -- --------- --------- --------- Net postretirement benefit cost.................................. $ 2,353 $ 988 $ 1,447 --------- --------- --------- --------- --------- ---------
The accumulated postretirement benefit obligations at the end of fiscal 1995 and 1996 were as follows:
1995 1996 --------- --------- Retirees................................................................... $ 6,833 $ 6,820 Active employees eligible for retirement benefits.......................... 4,418 5,219 Active employees not yet eligible for retirement benefits.................. 296 217 --------- --------- Accumulated postretirement benefit obligation............................ 11,547 12,256 Unrecognized net loss...................................................... 3,276 3,830 --------- --------- Accrued postretirement benefit obligation................................ $ 8,271 $ 8,426 --------- --------- --------- ---------
For measurement purposes, discount rates of 8.0% and 8.8% were used for 1995 and 1996 respectively, with an assumed constant inflationary health care cost trend rate of 5.5%. If the health care cost trend rate increased by 1%, the accumulated postretirement benefit obligation at the end of fiscal 1996 would increase by $1,506 and the net postretirement benefit cost for fiscal 1996 would increase by $127. NOTE 11--COMMON STOCK The Company has 50,000 authorized shares of Common Stock, ($.001 par value per share), 18,359 of which were issued and 18,309 outstanding at the end of fiscal 1996. The Company is restricted from paying dividends on its Common Stock, and the amount of stock repurchases is limited by the provisions of certain debt agreements. NOTE 12--STOCK COMPENSATION PLANS STOCK OPTION PLAN In May, 1995, the Company completed its initial public equity offering of 5,000 shares of Common Stock (which were issued at $15.50 per share). Coincident with the initial public equity offering, the Company adopted the 1995 Stock Option Plan (the "Option Plan"), under which 2,160 shares of Common F-18 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 12--STOCK COMPENSATION PLANS (CONTINUED) Stock have been reserved for issuance. The Option Plan is administered by the Compensation Committee of the Board of Directors which has authority to determine which officers and key employees of the Company will be granted options. All options are granted at not less than the fair market value on the date of the grant. Additionally coincident with the initial public equity offering, the Company granted options for 1,115 shares to Messrs. White, Roemer and Johansson (the "Senior Executive Grantees"), with a series of six option exercise prices (the first of which equaled the initial public equity offering price, with each subsequent exercise price set at 120% of the preceding exercise price). The term for these options is six years, with the options vesting in installments commencing after year three. Options with respect to the remaining 1,045 shares reserved under the Option Plan may be granted to other officers and key employees of the Company (the "Key Executive Grantees"), selected by the Compensation Committee. At the end of fiscal 1996 the Company had options outstanding for 366 shares to the Key Executive Grantees. The term for these options is ten years, vesting in equal annual increments over a five year period. Per the provisions of SFAS No. 123, the Company has elected to continue to apply APB Opinion No. 25 and related Interpretations in accounting for the Option Plan, and accordingly, no compensation cost has been recognized. Had compensation cost for the Option Plan been determined based on the fair value of options granted (consistent with SFAS No. 123), the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1995 1996 --------- --------- Net Income: As Reported........................................................... $ 15,991 $ 23,070 Pro Forma............................................................. 15,718 22,392 Primary Earnings Per Share: As Reported........................................................... $ .96 $ 1.24 Pro Forma............................................................. .95 1.22 Fully Diluted Earnings Per Share: As Reported........................................................... $ .96 $ 1.24 Pro Forma............................................................. .95 1.22
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: volatility of 20%; risk free interest rate of 6%; expected lives of 5 years; and no dividend yield. F-19 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 12--STOCK COMPENSATION PLANS (CONTINUED) A summary of the stock option transactions for fiscal 1995 and 1996 is as follows:
SENIOR EXECUTIVE KEY EXECUTIVE GRANTEES GRANTEES ---------------------- ------------------------ WEIGHTED- WEIGHTED- AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE (000) PRICE (000) PRICE --------- ----------- ----------- ----------- Balance at the end of fiscal 1994................... -- -- -- -- 1995: Granted............................................. 1,115 $ 27.30 184 $ 15.99 Exercised........................................... -- -- -- -- Forfeited........................................... -- -- (14) 15.50 --------- ----------- ----- ----------- Options outstanding at the end of fiscal 1995..... 1,115 $ 27.30 170 $ 16.03 --------- ----------- ----- ----------- --------- ----------- ----- ----------- Options exercisable at the end of fiscal 1995....... -- -- -- -- --------- ----------- ----- ----------- Weighted average fair value of options granted during fiscal 1995................................ $ 1.75 $ 4.96 --------- ----- Balance at the end of fiscal 1995................... 1,115 $ 27.30 170 $ 16.03 1996: Granted............................................. -- -- 226 31.50 Exercised........................................... -- -- (2) 15.50 Forfeited........................................... -- -- (28) 18.09 --------- ----------- ----- ----------- Options outstanding at the end of fiscal 1996..... 1,115 $ 27.30 366 $ 25.42 --------- ----------- ----- ----------- --------- ----------- ----- ----------- Options exercisable at the end of fiscal 1996....... -- -- 28 $ 16.14 --------- ----------- ----- ----------- Weighted average fair value of options granted during fiscal 1996................................ -- $ 9.78 --------- -----
The following table provides additional information with respect to stock options outstanding at the end of fiscal 1996:
OPTIONS OUTSTANDING ------------------------------------------- OPTIONS EXERCISABLE WEIGHTED ---------------------------- AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICE (000) LIFE (YEARS) PRICE (000) PRICE ------------- --------------- ----------- --------------- ----------- $15.00--$20.00...................................... 351 5.8 $ 16.45 25 $ 15.50 20.01--$25.00...................................... 239 4.6 22.14 3 20.61 25.01--$30.00...................................... 240 4.7 26.89 -- -- 30.01--$35.00...................................... 428 6.7 31.87 -- -- 35.01--$40.00...................................... 223 4.3 38.50 -- -- -- -- ----- ----------- ----------- 1,481 5.5 $ 26.84 28 $ 16.14 -- -- -- -- ----- ----------- ----------- ----- ----------- -----------
F-20 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 12--STOCK COMPENSATION PLANS (CONTINUED) EMPLOYEE STOCK PURCHASE PLAN In fiscal 1996, the Company's Board of Directors adopted the Associate Stock Purchase Plan (the "ASPP"), whereby employees are afforded the opportunity to purchase shares in the Company, by authorizing the sale of up to 500 shares of Common Stock. The purchase price of the shares is 95% of the lower of the closing market price at the beginning or end of each quarter. Under SFAS No. 123, the ASPP is a non-compensatory plan. NOTE 13--FOREIGN CURRENCY TRANSACTIONS The Company has entered into various contracts to buy or sell foreign currencies. The contracts have maturity dates extending through May 1997, and are for an aggregate amount of $12,294 (which approximates the fair value based on quoted market prices). The Company is exposed to market risk in the event of nonperformance by the other parties (major international banks) to these contracts, however, such nonperformance is not anticipated. Net transaction gains (losses) for fiscal 1994, 1995 and 1996 of ($522), ($322) and $4, respectively, have been included in the earnings of the respective periods. NOTE 14--CONTINGENT LIABILITIES The Company is involved in various legal proceedings incidental to its business. Management believes that the outcome of such proceedings will not have a material adverse effect upon the consolidated operations or financial condition of the Company. The Internal Revenue Service (the "IRS") has notified the Company of certain proposed adjustments to its income tax returns for fiscal years 1984 through 1991. The proposed adjustments primarily relate to the potential disallowance of certain deductions for depreciation and amortization. Certain of these proposed adjustments would also be applicable to the Company's fiscal years subsequent to 1991 and accordingly could result in further adjustments. The Company cannot now predict (i) when the examination process will be completed, (ii) the adjustments that the IRS may ultimately propose or (iii) the final resolution of any proposed adjustments. Accordingly, the outcome of the audits of the Company's income tax returns by the IRS is not determinable at this time. However, management believes that the resolution of these proposed adjustments will not have a material adverse effect upon the consolidated operations or financial condition of the Company. NOTE 15--RELATED PARTY TRANSACTIONS The Company has made loans (the balance of which totaled $1,444 at the end of fiscal 1996) to certain key executives in connection with their purchases of Common Stock. Pursuant to the terms of such loans, the shares acquired are pledged as security. The following individuals have loans in excess of $60 outstanding at the end of fiscal 1996: Nils A. Johansson ($236), Stuart T. Lieberman ($91), Maria T. Rubly ($360), Henry G. Riner ($258) and Ben L. McSwiney ($357). Each loan is evidenced by an installment note which bears interest at BHOC's marginal rate of borrowing (approximately 6% at this time), and are primarily due on December 31, 1998. Interest and principal may be deferred until that date. F-21 BELL & HOWELL COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 16--INTERIM FINANCIAL INFORMATION (UNAUDITED) The following table presents the Company's quarterly results of operations for fiscal 1996 and fiscal 1995:
FISCAL QUARTER ---------------------------------------------- FIRST SECOND THIRD FOURTH YEAR ---------- ---------- ---------- ---------- ---------- 1996 Net sales............................................ $ 201,092 $ 213,973 $ 218,840 $ 268,892 $ 902,797 Gross profit......................................... 71,199 74,454 77,845 102,882 326,380 Earnings before extraordinary items.................. 1,853 3,344 4,823 15,635 25,655 Extraordinary losses................................. -- (2,585) -- -- (2,585) ---------- ---------- ---------- ---------- ---------- Net earnings....................................... $ 1,853 $ 759 $ 4,823 $ 15,635 $ 23,070 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings per common share(1): Earnings before extraordinary items................ $ 0.10 $ 0.18 $ 0.26 $ 0.85 $ 1.38 Extraordinary losses............................... -- (0.14) -- -- (0.14) ---------- ---------- ---------- ---------- ---------- Net earnings per common share...................... $ 0.10 $ 0.04 $ 0.26 $ 0.85 $ 1.24 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 1995 Net sales............................................ $ 187,065 $ 190,119 $ 203,009 $ 239,696 $ 819,889 Gross profit......................................... 65,715 69,990 75,051 97,734 308,490 Earnings (loss) before extraordinary items........... (483) 998 3,835 14,860 19,210 Extraordinary losses................................. -- (3,219) -- -- (3,219) ---------- ---------- ---------- ---------- ---------- Net earnings (loss).................................. $ (483) $ (2,221) $ 3,835 $ 14,860 $ 15,991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) per common share(1): Earnings (loss) before extraordinary items......... $ (0.04) $ 0.06 $ 0.21 $ 0.80 $ 1.15 Extraordinary losses............................... -- (0.20) -- -- (0.19) ---------- ---------- ---------- ---------- ---------- Net earnings (loss) per common share............... $ (0.04) $ (0.14) $ 0.21 $ 0.80 $ 0.96 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------ (1) Net earnings (loss) per common share reflects both primary and fully diluted earnings per common share. F-22 BELL & HOWELL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ---------------------- ---------------------- JUNE 29, JUNE 28, JUNE 29, JUNE 28, 1996 1997 1996 1997 ---------- ---------- ---------- ---------- Net sales........................................................ $ 213,973 $ 218,150 $ 415,065 $ 418,168 Operating costs and expenses: Cost of sales.................................................. 139,519 135,561 269,412 264,720 Research and development....................................... 8,523 10,206 16,454 19,822 Selling and administrative..................................... 48,426 52,429 97,529 98,509 ---------- ---------- ---------- ---------- Total operating costs and expenses......................... 196,468 198,196 383,395 383,051 Operating income................................................. 17,505 19,954 31,670 35,117 Net interest expense: Interest (income).............................................. (3,994) (5,345) (8,266) (10,357) Interest expense............................................... 15,794 17,418 31,008 34,089 ---------- ---------- ---------- ---------- Net interest expense....................................... 11,800 12,073 22,742 23,732 Earnings before income taxes and extraordinary items............. 5,705 7,881 8,928 11,385 Income tax expense............................................... 2,361 3,271 3,731 4,725 ---------- ---------- ---------- ---------- Earnings before extraordinary items.............................. 3,344 4,610 5,197 6,660 Extraordinary losses............................................. (2,585) (67) (2,585) (972) ---------- ---------- ---------- ---------- Net earnings..................................................... $ 759 $ 4,543 $ 2,612 $ 5,688 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings per common share: Primary: Earnings before extraordinary items.......................... $ 0.18 $ 0.25 $ 0.28 $ 0.36 Extraordinary losses......................................... (0.14) -- (0.14) (0.05) ---------- ---------- ---------- ---------- Net earnings per common share.................................... $ 0.04 $ 0.25 $ 0.14 $ 0.31 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Fully Diluted: Earnings before extraordinary items.......................... $ 0.18 $ 0.25 $ 0.28 $ 0.36 Extraordinary losses......................................... (0.14) -- (0.14) (0.05) ---------- ---------- ---------- ---------- Net earnings per common share.................................... $ 0.04 $ 0.25 $ 0.14 $ 0.31 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Average number of common shares and equivalents outstanding: Primary........................................................ 18,636 18,473 18,601 18,430 Fully Diluted.................................................. 18,636 18,558 18,626 18,525
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. F-23 BELL & HOWELL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS AND SHARES IN THOUSANDS)
JUNE 28, 1997 DECEMBER 28, ----------- 1996 (UNAUDITED) ------------ (AUDITED) ASSETS Current assets: Cash and cash equivalents........................................................... $ 15,500 $ 14,183 Accounts receivable, less allowance for doubtful accounts of $5,294 and $5,391, respectively...................................................................... 186,862 164,158 Inventory........................................................................... 139,831 155,256 Other current assets................................................................ 11,826 13,363 ------------ ----------- Total current assets.............................................................. 354,019 346,960 Property, plant and equipment, at cost................................................ 363,015 379,755 Accumulated depreciation.............................................................. (207,287) (229,193) ------------ ----------- Net property, plant and equipment................................................. 155,728 150,562 Long-term receivables................................................................. 54,707 52,083 Goodwill, net of accumulated amortization............................................. 189,868 190,835 Other assets.......................................................................... 42,464 41,680 ------------ ----------- Total assets...................................................................... $ 796,786 $ 782,120 ------------ ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable....................................................................... $ 8,397 $ 5,821 Current maturities of long-term debt................................................ 1,667 1,089 Accounts payable.................................................................... 93,135 61,593 Accrued expenses.................................................................... 78,308 62,374 Deferred income..................................................................... 171,698 146,148 Accrued income taxes................................................................ 1,143 -- ------------ ----------- Total current liabilities......................................................... 354,348 277,025 Long-term liabilities: Long-term debt...................................................................... 548,281 605,185 Other liabilities................................................................... 61,049 62,295 ------------ ----------- Total long-term liabilities....................................................... 609,330 667,480 Shareholders' equity: Common Stock, $.001 par value, 18,359 shares issued and 18,309 shares outstanding at December 28, 1996, and 18,385 shares issued and 18,346 shares outstanding at June 28, 1997.......................................................................... 18 18 Capital surplus..................................................................... 1,402 1,713 Notes receivable from executives.................................................... (1,444) (1,359) Retained earnings (deficit)......................................................... (165,851) (160,163) Cumulative foreign exchange translation adjustments................................. 616 (1,347) Treasury stock...................................................................... (1,633) (1,247) ------------ ----------- Total shareholders' equity (deficit).............................................. (166,892) (162,385) Commitments and contingencies......................................................... -- -- ------------ ----------- Total liabilities and shareholders' equity........................................ $ 796,786 $ 782,120 ------------ ----------- ------------ -----------
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. F-24 BELL & HOWELL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
TWENTY-SIX WEEKS ENDED ----------------------- JUNE 29, JUNE 28, 1996 1997 ----------- ---------- Operating Activities: Net earnings........................................................................... $ 2,612 $ 5,688 Depreciation and amortization.......................................................... 23,791 28,889 Debt accretion......................................................................... 12,252 11,434 Changes in operating assets and liabilities: Accounts receivable.................................................................. 29,994 23,954 Inventory............................................................................ (33,293) (7,878) Other current assets................................................................. (1,052) (1,119) Long-term receivables................................................................ 8,457 2,624 Income taxes......................................................................... (5,239) 847 Accounts payable..................................................................... (4,625) (33,027) Accrued expenses..................................................................... (5,193) (16,730) Deferred income and other long-term liabilities...................................... (26,361) (30,864) Other, net........................................................................... (700) (5,280) ----------- ---------- Net cash provided (used) by operating activities................................... 643 (21,462) Investing activities: Expenditures for property, plant and equipment......................................... (20,384) (17,184) Acquisitions........................................................................... (19,718) (5,753) ----------- ---------- Net cash used by investing activities.............................................. (40,102) (22,937) Financing activities: Proceeds from short-term debt.......................................................... 9,224 3,831 Repayment of short-term debt........................................................... (12,235) (6,407) Proceeds from long-term debt........................................................... 192,050 70,903 Repayment of long-term debt............................................................ (146,602) (25,679) Proceeds from Common Stock, net........................................................ 25 806 ----------- ---------- Net cash provided by financing activities.......................................... 42,462 43,454 Effect of exchange rate changes on cash.................................................. (125) (372) ----------- ---------- Increase (decrease) in cash and cash equivalents......................................... 2,878 (1,317) Cash and cash equivalents, beginning of period........................................... 7,262 15,500 ----------- ---------- Cash and cash equivalents, end of period................................................. $ 10,140 $ 14,183 ----------- ---------- ----------- ----------
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements. F-25 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 capital stock of Bell & Howell Operating Company. Bell & Howell Company conducts business through Bell & Howell Operating Company and has no operations of its own. The consolidated financial statements include the accounts of Bell & Howell Company and its subsidiaries (collectively the "Company") and have been prepared without independent audit, except for the balance sheet data as of December 28, 1996. In the opinion of the Company's management, the consolidated financial statements include all adjustments necessary to present fairly the information required to be set forth therein, and such adjustments are of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company's management believes, however, that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in Bell & Howell Company's annual report for the year ended December 28, 1996. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES NET EARNINGS PER COMMON SHARE. Net earnings per common share are determined by dividing net earnings by the weighted average number of common shares outstanding during the period. If dilutive, stock options are included as common stock equivalents. INVENTORY. The Company uses the last-in, first-out (LIFO) method of valuing the majority of its domestic inventory. Use of the LIFO method is predicated on a determination of inventory quantities and costs at the end of each fiscal year, and therefore interim determinations of LIFO inventory values and results of operations are by necessity based on management's estimates of expected year-end inventory quantities and costs. The excess of replacement cost over the LIFO values of inventory was $4,489 at December 28, 1996, and June 28, 1997. NOTE 3--EXTRAORDINARY LOSSES The extraordinary losses of $972 ($1,519 pretax) in first half 1997 were comprised of the debt repurchase premium and write-off of unamortized debt issuance costs associated with the repurchase of $15,598 (accreted value) of the 11 1/2% Senior Discount Debentures and $2,100 of the 10 3/4% Senior Subordinated Notes, which were redeemed with proceeds from the Existing Credit Agreement. The extraordinary losses of $2,585 ($4,039 pretax) in first half 1996 were comprised of the debt repurchase premium and write-off of unamortized debt issuance costs associated with the repurchase of $34,158 (accreted value) of the 11 1/2% Senior Discount Debentures and $17,920 of the 10 3/4% Senior Subordinated Notes, which were redeemed with proceeds from the Existing Credit Agreement. F-26 IMAGING SOLUTIONS & COMPONENTS Bell & Howell's "LINKS" solution is an example of customized software specifically designed for community banks and similar financial institutions. By providing instantaneous access to different database and imaging systems, it allows banks to offer better customer service and to benefit from increased productivity. MAIL PROCESSING High volume commercial mailers rely on Bell & Howell's equipment, software, service, and support to increase the effectiveness of their mailing operations. New software applications allow customers to add more value into the envelope by converting routine mailings into targeted communication and marketing programs. - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. -------------- TABLE OF CONTENTS
PAGE Prospectus Summary............................. 3 Risk Factors................................... 11 The Transactions............................... 15 Use of Proceeds................................ 17 Dividend Policy................................ 17 Market for Common Stock........................ 17 Capitalization................................. 18 Selected Consolidated Financial and Operating Data......................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 21 Business....................................... 29 Management..................................... 41 Certain Transactions........................... 49 Principal and Selling Stockholders............. 50 Description of Capital Stock................... 51 Description of Certain Financing Agreements and Certain Indebtedness......................... 54 Shares Eligible for Future Sale................ 57 Underwriting................................... 59 Legal Matters.................................. 60 Experts........................................ 60 Available Information.......................... 60 Index to Consolidated Financial Statements..... F-1
4,177,259 SHARES BELL & HOWELL COMPANY COMMON STOCK ----------------- PROSPECTUS ----------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BEAR, STEARNS & CO. INC. SALOMON BROTHERS INC SMITH BARNEY INC. , 1997 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION REQUIRED IN THE REGISTRATION STATEMENT ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an estimate (except for the SEC Registration Fee, NASD filing fee and New York Stock Exchange fee) of all expenses, payable by the Company in connection with the issuance of the securities being registered. SEC Registration Fee.............................................. $ 43,561 NASD Filing Fee................................................... 14,875 Printing Costs.................................................... * Accounting Fees and Expenses...................................... * Printing and Engraving............................................ * New York Stock Exchange Fee....................................... * Legal Fees and Expenses (not including Blue Sky).................. * Blue Sky Fees and Expenses........................................ * Miscellaneous..................................................... * --------- Total......................................................... $ --------- ---------
- ------------------------ * To be filed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "Delaware GCL") provides that a Delaware corporation may indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, provided that, in the case of actions brought by or in the right of the corporation, no indemnification may be made with respect to any matter to which such person shall have been adjudged liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances. Article Tenth of the Certificate of Incorporation of the Company, as amended (the "Certificate of Incorporation") provides that each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter, a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Company or is or was serving at the request of the Company as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to any employee benefit plan (hereinafter, an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware GCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss II-1 (including attorneys' fees, judgments, finds, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided, however, that, except as provided with respect to proceedings to enforce rights to indemnification, the Company shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification shall include the right to be paid by the Company for the expenses incurred in defending any proceeding for which such right to indemnification is applicable in advance of its final disposition (hereinafter, an "advancement of expenses"); provided, however, that, if the Delaware GCL requires an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity) in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan shall be made only upon delivery to the Company of an undertaking (hereinafter, an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter, a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses. The rights to indemnification and to the advancement of expenses shall be contract rights. If a claim for indemnification is not paid in full by the Company, the indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim, and, if successful in whole or in part in any such suit, or in a suit brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses, or by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, shall be on the Company. Article Tenth further provides that the rights to indemnification and to the advancement of expenses conferred in the Certificate of Incorporation shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Certificate of Incorporation, any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the Delaware GCL. The Company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and to the advancement of expenses to any employee or agent of the Company or to any person serving at the request of the Company as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, to the fullest extent of the provisions of the Certificate of Incorporation with respect to the indemnification and advancement of expenses of directors and officers of the Company. The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for the indemnification of officers and directors of the Company under certain circumstances in connection with the Offering. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits.
EXHIBIT NO. DESCRIPTION - ------ -------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement by and among Bell & Howell Company and Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc., Salomon Brothers Inc and Smith Barney Inc. +3.1 Form of Amended and Restated Certificate of Incorporation of Bell & Howell Company is incorporated herein by reference to Exhibit 3.1 to Bell & Howell Company's Registration Statement on Form S-1, Registration No. 33-59994. +3.2 By-laws of Bell & Howell Company is incorporated herein by reference to Exhibit 3.2 to Bell & Howell Company's Registration Statement on Form S-1 as amended, Registration No. 33-63556. +4.1 Form of 9 1/4% Senior Note due 2000 of Bell & Howell Company including the form of notation relating to the Subsidiary Guarantee of Bell & Howell Documail Systems Company, Bell & Howell Document Management Products Company, Bell & Howell Publication Systems Company, Bell & Howell Phillipsburg Company, University Microfilms Inc. and Bell & Howell Mailmobile Company is incorporated herein by reference to Exhibit 4.1 to Bell & Howell Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. +4.2 Indenture dated as of June 21, 1993 between Bell & Howell Company, Bell & Howell Documail Systems Company, Bell & Howell Document Management Products Company, Bell & Howell Publication Systems Company, Bell & Howell Phillipsburg Company, University Microfilms Inc., Bell & Howell Mailmobile Company and The First National Bank of Boston, as Trustee, relating to the 9 1/4% Senior Notes due 2000 of Bell & Howell Operating Company is incorporated herein by reference to Exhibit 4.6 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. +4.3 Form of 11 1/2% Series B Senior Discount Debenture due 2005 of Bell & Howell Company is incorporated herein by reference to Exhibit 4.1 to Bell & Howell's Company's Registration Statement on Form S-1, as amended, Registration No. 33-59994. +4.4 Indenture dated February 23, 1993 between Bell & Howell Company and The First National Bank of Boston, as Trustee, relating to the 11 1/2% Series A and Series B Senior Discount Debentures due 2005 of Bell & Howell Company is incorporated herein by reference to Exhibit 4.3 to Bell & Howell Company's Registration Statement on Form S-1, as amended, Registration No. 33-59994. +4.5 Form of 10 3/4% Series B Senior Subordinated Note of Bell & Howell Operating Company, including the form of notation relating to the Subsidiary Guarantee of Bell & Howell Document Management Products Company, Bell & Howell Publication Systems Company, Bell & Howell Phillipsburg Company, University Microfilms Inc. and Bell & Howell Mailmobile Company is incorporated herein by reference to Exhibit 4.2 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556.
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EXHIBIT NO. DESCRIPTION - ------ -------------------------------------------------------------------------- +4.6 Indenture dated as of October 5, 1992 between Bell & Howell Operating Company, Bell & Howell Document Management Products Company, Bell & Howell Publications Systems Company, Bell & Howell Phillipsburg Company, University Microfilms Inc., Bell & Howell Mailmobile Company and The First National Bank of Boston, as Trustee, relating to the 10 3/4% Series A and Series B Senior Subordinated Notes due 2002 of Bell & Howell Operating Company is incorporated herein by reference to Exhibit 4.7 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. 5.1 Opinion of McDermott, Will & Emery. +10.1 Certificate of Designation for the $121.33 Intercompany Preferred Stock of Bell & Howell Operating Company is incorporated herein by reference to Exhibit 4.5 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. +10.2 Amended and Restated Profit Sharing Retirement Plan is incorporated herein by reference to Exhibit 10.1 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. +10.3 Amended and Restated Replacement Benefit Plan is incorporated herein by reference to Exhibit 10.4 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. +10.4 Supplemental Retirement Plan is incorporated herein by reference to Exhibit 10.3 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. +10.5 Management Incentive Bonus Plan is incorporated herein by reference to Exhibit 10.5 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. +10.6 Long Term Incentive Plan II, 1993-1996, is incorporated herein by reference to Exhibit to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-89992. +10.7 Deferred Benefit Trust is incorporated herein by reference to Exhibit 10.10 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. +10.8 Employment Agreement with William J. White dated as of March 23, 1990 is incorporated herein by reference to Exhibit 10.11 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556. +10.9 Shareholders Agreement dated May 10, 1988, as amended, among certain Management Stockholders (as defined therein) and Investor Shareholders (as defined therein) is incorporated herein by reference to Exhibit 10.17 to Bell & Howell Company's Registration Statement on Form S-1, as amended, Registration No. 33-59994. +10.10 Registration Rights Agreement dated as of May 10, 1988 by and among Bell & Howell Group, Inc. and each of the Purchasers referred to therein is incorporated herein by reference to Exhibit 10.1 to Bell & Howell Operating Company's Registration Statement on Form S-1, as amended, Registration No. 33-63556.
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EXHIBIT NO. DESCRIPTION - ------ -------------------------------------------------------------------------- +10.11 Amended and Restated Credit Agreement, dated as of September 4, 1996, among Bell & Howell Operating Company, the Lenders listed therein and Bankers Trust Company, as Agent, Registration No. 33-59994. +10.12 Supplement to Fourth Amendment to the Shareholders Agreement dated May 10, 1988, as amended, among certain Management Stockholders (as defined therein) and Investor Shareholders (as defined therein) Registration Statement on Form S-1, as amended, Registration No. 33-89992. +10.13 Receivables Purchase Agreement dated May 1, 1996, between Bell & Howell Acceptance Corporation and the First National Bank of Chicago, Registration No. 33-59994. +11.1 Computation of Earnings (Loss) per Common Share for the twenty-six weeks ended June 28, 1997. Computation of Earnings (Loss) per common share for fiscal 1997 is incorporated herein by reference to Exhibit 11.1 to the Company's Annual Report on Form 10-K for the year ended December 28, 1997. +21.1 Subsidiaries of Bell & Howell Company is incorporated by reference to Exhibit 21.1 of Bell & Howell Company's Annual Report on Form 10-K for the year ended December 28, 1996. 23.1 Consent of McDermott, Will & Emery (to be included in Exhibit 5.1) 23.2 Consent of KPMG Peat Marwick LLP +24.1 Powers of Attorney
- ------------------------ * To be filed by amendment. + Previously filed. (b) Financial Schedules. Schedule I--Condensed Financial Information of the Company. ITEM 17. UNDERTAKINGS A. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) as asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. B. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on this 29th day of August 1997. BELL & HOWELL COMPANY By: /s/ STUART T. LIEBERMAN ----------------------------------------- Stuart T. Lieberman VICE PRESIDENT, CONTROLLER, AND CHIEF ACCOUNTING OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment to its Registration Statement has been signed by the following persons or their attorneys-in-fact in the capacities indicated on this 29th day of August 1997.
SIGNATURE TITLE - ------------------------------ -------------------------- * - ------------------------------ Chairman of the Board William J. White * - ------------------------------ President, Chief Executive James P. Roemer Officer and Director * Executive Vice President, - ------------------------------ Chief Financial Officer Nils A. Johansson and Director * Vice President, Controller - ------------------------------ and Chief Accounting Stuart T. Lieberman Officer * - ------------------------------ Director David Bonderman * - ------------------------------ Director David G. Brown * - ------------------------------ Director J. Taylor Crandall * - ------------------------------ Director Daniel L. Doctoroff * - ------------------------------ Director William E. Oberndorf * - ------------------------------ Director Gary L. Roubos
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SIGNATURE TITLE - ------------------------------ -------------------------- * - ------------------------------ Director John H. Scully
*By: /s/ STUART T. LIEBERMAN ------------------------- Stuart T. Lieberman ATTORNEY-IN-FACT II-7 INDEX TO FINANCIAL STATEMENTS SCHEDULES
PAGE ----- Financial statement schedules: Independent Auditors' Report............................................................................... S-2 Schedule I -- Condensed Financial Information.............................................................. S-3
S-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Bell & Howell Company: Under date of February 19, 1997, we reported on the consolidated balance sheets of Bell & Howell Company and subsidiaries (the "Company") as of the end of fiscal years 1995 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal years 1994, 1995 and 1996, which are included in the prospectus. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule included in the registration statement. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Chicago, Illinois February 19, 1997 S-2 SCHEDULE I BELL & HOWELL COMPANY CONDENSED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS)
AT THE END OF FISCAL -------------------- 1995 1996 --------- --------- CONDENSED BALANCE SHEETS Assets: Investment in Bell & Howell Operating Company, at equity.................................. $ 27,191 $ 40,787 Other assets.............................................................................. 5,267 3,996 --------- --------- Total assets............................................................................ $ 32,458 $ 44,783 --------- --------- --------- --------- Liabilities: 11 1/2% Senior Discount Debentures........................................................ $ 221,930 $ 211,675 Shareholders' equity: Common Stock.............................................................................. 18 18 Capital surplus........................................................................... 328 1,402 Notes receivable from officers............................................................ (2,054) (1,444) Retained earnings (deficit)............................................................... (188,921) (165,851) Cumulative translation adjustments........................................................ 1,187 616 Treasury stock............................................................................ (30) (1,633) --------- --------- Total shareholders' equity (deficit).................................................... (189,472) (166,892) --------- --------- Total liabilities and shareholders' equity.................................................. $ 32,458 $ 44,783 --------- --------- --------- --------- FISCAL -------------------- 1994 1995 --------- --------- 1996 -- CONDENSED STATEMENTS OF OPERATIONS Equity in net earnings of Bell & Howell Operating Company......................... $ 11,643 $ 40,002 $ 49,121 Operating expenses................................................................ 250 172 250 Net interest expense.............................................................. 21,387 23,839 24,304 Extraordinary losses.............................................................. -- -- 1,497 --------- --------- --------- Net earnings (loss)............................................................. $ (9,994) $ 15,991 $ 23,070 --------- --------- --------- --------- --------- --------- CONDENSED STATEMENTS OF CASH FLOWS Operating activities: Net earnings (loss)............................................................... $ (9,994) $ 15,991 $ 23,070 Debt accretion.................................................................... 20,993 23,476 23,903 Equity in net earnings of Bell & Howell Operating Company......................... (11,643) (40,002) (49,121) Changes in operating assets and liabilities....................................... (173) 1,105 1,886 --------- --------- --------- Net cash provided (used) by operating activities.................................. (817) 570 (262) Investing activities: Investment in Bell & Howell Operating Company..................................... -- (71,660) -- --------- --------- --------- Net cash used by investing activities............................................. -- (71,660) -- Financing activities: Proceeds from Common Stock, net................................................... 519 71,255 71 Redemption of Preferred Stock..................................................... -- -- 35,795 Repayment of long-term debt....................................................... -- -- (35,795) --------- --------- --------- Net cash provided by financing activities........................................... 519 71,255 71 --------- --------- --------- Increase (decrease) in cash and cash equivalents.................................... (298) 165 (191) Cash and cash equivalents, beginning of period...................................... 344 46 211 --------- --------- --------- Cash and cash equivalents, end of period............................................ $ 46 $ 211 $ 20 --------- --------- --------- --------- --------- ---------
S-3 EX-1.1 2 EXHIBIT 1.1 L&W Draft August 29, 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BELL & HOWELL COMPANY ------------------------------- ___________________ Shares of Common Stock Underwriting Agreement ________________________, 1997 ------------------------------- Donaldson, Lufkin & Jenrette Securities Corporation Bear, Stearns & Co., Inc. Salomon Brothers Inc Smith Barney Inc. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BELL & HOWELL COMPANY _________________ Shares Common Stock UNDERWRITING AGREEMENT _______________________, 1997 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BEAR, STEARNS & CO., INC. SALOMON BROTHERS INC SMITH BARNEY INC. As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Ladies and Gentlemen: Bell & Howell Company, a Delaware corporation (the "COMPANY") proposes to issue and sell ______________________ shares of its common stock, par value $.001 per share (the "COMPANY FIRM SHARES"), and the stockholders of the Company named in Schedule II hereto (the "SELLING STOCKHOLDERS") propose to sell an aggregate of _____________________ shares of common stock, par value $.001 per share (the "SELLING STOCKHOLDER FIRM SHARES" and, together with the Company Firm Shares, the "FIRM SHARES"), to the several Underwriters named in Schedule I hereto (the "UNDERWRITERS"). The Company also proposes to issue and sell not more than ___________________ additional shares of its common stock, par value $.001 per share (the "COMPANY ADDITIONAL SHARES"), and the stockholders of the Company named in Schedule II hereto (the "OPTION SELLING STOCKHOLDERS") propose to sell not more than _______________________ additional shares of common stock, par value $.001 per share (the "SELLING STOCKHOLDER ADDITIONAL SHARES" and, together with the Company Additional Shares, the "ADDITIONAL SHARES"), to the several Underwriters if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter referred to collectively as the "SHARES." The shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK." Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Bear, Stearns & Co., Inc., Salomon Brothers Inc and Smith Barney Inc. (the "REPRESENTATIVES") shall act as representatives of the several Underwriters. 1 The Company and each of the Company's subsidiaries set forth on the signature pages hereto (each an "INDEMNITOR" and, collectively, the "INDEMNITORS"), and each of the Selling Stockholders agree with the Underwriters as follows: 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and filed with the Securities and Exchange Commission (the "COMMISSION") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "ACT"), a registration statement on Form S-1, including a prospectus, relating to the Shares. The registration statement, as amended at the time it became effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT;" and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS." If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of Common Stock (a "RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. 2. AGREEMENTS TO SELL AND PURCHASE. On the basis of the representations and warranties contained in this Agreement, and subject to the terms and conditions contained herein the Company agrees to sell the Company Firm Shares to the Underwriters and each Selling Stockholder agrees, severally and not jointly, to sell a number of Firm Shares equal to the number of Firm Shares set forth opposite such Selling Stockholder's name on Schedule II hereto to the Underwriters and each of the Underwriters agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders at a price per share of $________________ (the "PURCHASE PRICE"), the number of Firm Shares set forth in Schedule I hereto opposite the name of such Underwriter. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell the Company Additional Shares, and each Option Selling Stockholder agrees to sell the number of Selling Stockholder Additional Shares set forth opposite such Option Selling Stockholder's name on Schedule III hereto and the Underwriters shall have the right to purchase, severally and not jointly, the Additional Shares from the Company and the Option Selling Stockholders at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by (i) giving written notice thereof to the Company within 30 days after the date of this Agreement and (ii) giving written notice thereof to the Attorney-in-Fact (as hereinafter defined) within 30 days after the date of this Agreement. DLJ shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof, which date shall be a business day (i) no earlier than two business days after such notice has been given (and, in any event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no later than ten business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company and the Option Selling Stockholders the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company and the Option Selling Stockholders as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. 2 The Company hereby agrees not to register for sale, offer, sell (or contract to sell) or otherwise dispose of any Common Stock (or any securities convertible into or exercisable or exchangeable for Common Stock) or grant any options, warrants to purchase Common Stock (other than Common Stock sold in the Offering) for a period of 90 days after the date of the Prospectus without the prior written consent of DLJ. Notwithstanding the foregoing, during such period (i) the Company may grant stock options pursuant to the Company's existing stock option plan and (ii) the Company may issue shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof. The Company also agrees not to file any registration statement with respect to any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. The Company shall, prior to or concurrently with the execution of this Agreement, deliver an agreement executed by (i) each of the directors and officers of the Company and (ii) each stockholder listed on Annex I hereto to the effect that such person will not, during the period commencing on the date such person signs such agreement and ending 90 days after the date of the Prospectus, without the prior written consent of DLJ, (x) engage in any of the transactions described in the first sentence of this paragraph or (y) make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. 3. TERMS OF PUBLIC OFFERING. The Company and the Selling Stockholders are advised by the Representatives that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the execution and delivery of this Agreement as in their judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. 4. DELIVERY AND PAYMENT. Delivery to the Underwriters of and payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on ________________________, 1997 (the "CLOSING DATE"), at the offices of Latham & Watkins, 885 Third Avenue, Suite 1000, New York, New York 10022, or at such other place as you shall designate. The Closing Date and the location of delivery of and the form of payment for the Firm Shares may be varied by agreement between DLJ and the Company and/or the Attorney-in-Fact. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at such place as you shall designate at 10:00 A.M., New York City time, on the date specified in the applicable exercise notice given pursuant to Section 2 (an "OPTION CLOSING DATE"). Any such Option Closing Date and the location of delivery of and payment for such Additional Shares may be varied by agreement between DLJ and the Company and/or the Attorney-in-Fact. Certificates for the Shares shall be registered in such names and issued in such denominations as the Underwriters shall request in writing not later than two full business days prior to the Closing Date or an Option Closing Date, as the case may be. Such certificates shall be made available to the Underwriters for inspection at the offices of DLJ in New York, New York (or such other place as shall be acceptable to the Underwriters) not later than 9:30 A.M., New York City time, on the business day prior to the Closing Date or an Option Closing Date, as the case may be. Certificates in definitive form evidencing the Shares shall be delivered to the Underwriters on the Closing Date or an Option Closing Date, as the case may be, with any transfer taxes thereon duly paid by the Company or the respective Selling Stockholders, for the respective accounts of the several Underwriters against payment of the Purchase Price therefor by wire transfer of Federal or other funds immediately available in New York City. 3 5. AGREEMENTS OF THE COMPANY. The Company agrees with you: (a) If necessary, to (i) file (A) an amendment to the Registration Statement or (B) a post-effective amendment to the Registration Statement pursuant to Rule 430A or Rule 462(b) or (c) under the Act, in either case as soon as practicable after the execution and delivery of this Agreement; (ii) provide evidence satisfactory to the Underwriters of such timely filing; and (iii) use its reasonable best efforts to cause the Registration Statement or such post-effective amendment to become effective at the earliest possible time. (b) To comply fully and in a timely manner with the applicable provisions of Rule 424, Rule 430A and Rule 462 under the Act. (c) To advise the Underwriters promptly and, if requested by the Underwriters, to confirm such advice in writing, (i) when the Registration Statement has become effective, if and when the Prospectus is sent for filing pursuant to Rule 424 under the Act and when all post-effective amendments to it become effective, (ii) of the receipt of any comments from the Commission or any securities commission or regulatory authority of the several states or any foreign jurisdiction that relate to the Registration Statement or requests by the Commission or any securities commission or regulatory authority of the several states or any foreign jurisdiction for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes by the Commission or any securities commission or other regulatory authority of the several states or any foreign jurisdiction, and (iv) of the happening of any event during the period referred to in Section 5(f) below which makes any statement of a material fact made in the Registration Statement untrue or which requires the making of any additions to or changes in the Registration Statement (as amended or supplemented from time to time) in order to make the statements therein not misleading or that makes any statement of a material fact made in the Prospectus (as amended or supplemented from time to time) untrue or which requires the making of any additions to or changes in the Prospectus (as amended or supplemented from time to time) in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any securities commission or other regulatory authority shall issue an order suspending the qualification or exemption of the Shares under any securities or Blue Sky laws of the several states or any foreign jurisdiction, the Company shall use its reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (d) To promptly furnish to the Underwriters and their counsel, without charge, five signed copies of each amendment to the Registration Statement filed with the Commission after the date hereof, including all exhibits filed therewith and to furnish to the Underwriters such number of conformed copies of the Registration Statement as first filed and each amendment thereto as you may reasonably request. 4 (e) Not to file any amendment or supplement to the Registration Statement, whether before or after the time when the Registration Statement becomes effective, or to make any amendment or supplement to the Prospectus, unless the Underwriters shall previously have been advised thereof and shall not have objected thereto in writing within five business days after being furnished with a copy thereof; and to prepare and file with the Commission, promptly upon the Underwriters' request, any amendment to the Registration Statement or supplement to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by the Underwriters, and to use its reasonable best efforts to cause the same to become effective as promptly as possible. (f) Promptly after the Registration Statement becomes effective and the public offering of the Shares commences, and from time to time thereafter for such period as in the opinion of counsel to the Underwriters a prospectus is required to be delivered in connection with sales of the Shares by the Underwriters, to furnish to the Underwriters without charge as many copies of each preliminary prospectus, the Prospectus, the Registration Statement and all amendments and supplements to such documents, if any, as such Underwriters may reasonably request. The Company consents to the use of each preliminary prospectus and the Prospectus and each amendment or supplement thereto by the Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required to be delivered in connection therewith. (g) If during the period specified in Section 5(f) above any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of counsel to the Underwriters, it becomes necessary or advisable to amend the Registration Statement in order to make the statements therein not misleading or amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to any purchaser, not misleading, or if it is necessary to amend the Registration Statement, to amend or supplement the Prospectus, forthwith to prepare and file with the Commission an appropriate amendment to the Registration Statement (in form and substance satisfactory to the Underwriters) so that the statements therein as so amended will not be misleading or an appropriate amendment or supplement to the Prospectus (in form and substance satisfactory to the Underwriters) so that the statements therein as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Registration Statement and the Prospectus will comply with law; to use its reasonable best efforts to have each such amendment to the Registration Statement declared effective as promptly as possible; and to furnish to the Underwriters and dealers without charge such number of copies thereof as they may reasonably request. (h) To cooperate with the Underwriters and their counsel in connection with the registration or qualification of the Shares for offer and sale by the Underwriters under the securities or Blue Sky laws of such states and foreign jurisdictions as the Underwriters may reasonably request, to continue such qualification in effect so long as reasonably required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; PROVIDED, HOWEVER, that the Company shall not be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or taxation, other than as to matters and transactions relating to the offer and sale of the Shares, in any jurisdiction where it is not now so subject. 5 (i) To mail and make generally available to the Company's stockholders as soon as reasonably practicable, but not later than 15 months after the effective date of the Registration Statement, a consolidated earnings statement of the Company (which need not be audited) covering a period of at least twelve months beginning with the first quarter after the effective date of the Registration Statement which shall satisfy the provisions of Section 11(a) of the Act and Rule 158 promulgated thereunder, and to advise the Underwriters in writing when such statement has been so made available. (j) To timely complete all required filings and otherwise fully comply in a timely manner with all provisions of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") in connection with the registration of the Shares thereunder. (k) Upon the request of DLJ, during a period of five years following the date of this Agreement, to deliver to the Underwriters promptly upon their becoming available (i) copies of all current, regular and periodic reports filed by the Company with any securities exchange or with the Commission or any governmental authority succeeding to any of the Commission's functions and (ii) such other information as DLJ may reasonably request regarding the Company or its subsidiaries. (l) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement becomes effective or is terminated, to pay and be responsible for all costs, expenses, fees and taxes incident to and in connection with: (i) the preparation, printing, filing and distribution under the Act of the Registration Statement (including, without limitation, the financial statements and exhibits thereto), each preliminary prospectus and the Prospectus relating to the Shares and all amendments and supplements to any of them (but not, however, legal fees and expenses of counsel to the Underwriters incurred in connection therewith), (ii) the preparation, printing (including, without limitation, word processing and duplication costs) and delivery of this Agreement, the Power of Attorney (as hereinafter defined), all Blue Sky Memoranda and all other agreements, memoranda, correspondence and other documents printed and delivered in connection herewith and with the offering of the Shares (but not, however, legal fees and expenses of counsel to the Underwriters incurred in connection with any of the foregoing, other than as specified in (iv) below), (iii) the registration with the Commission and transfer and delivery by the Company and the Selling Stockholders of the Shares, (iv) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states and any foreign jurisdiction (including, without limitation, the reasonable fees and disbursements of counsel to the Underwriters relating to such registration or qualification and memoranda in an amount not to exceed $10,000, and all filing fees in connection therewith), (v) furnishing such copies of the Registration Statement, the Prospectus and all preliminary prospectuses, and all amendments and supplements thereto, as may be reasonably requested by the Underwriters or by dealers to whom Shares may be sold, (vi) filing and clearance by the National Association of Securities Dealers, Inc. ("NASD") in connection with the offering of the Shares, including all filing fees in connection therewith (excluding legal fees and expenses of counsel for the Underwriters), (vii) fees, disbursements and expenses of the Company's and the Indemnitors' counsel and accountants, (viii) fees, disbursements and expenses of one counsel for the Company and one counsel for the Selling Stockholders incurred in connection with the registration of the Shares and (ix) the performance by the Company and the Indemnitors of their other obligations under this Agreement. 6 (m) To do and perform all things required or necessary to be done and performed by it under this Agreement that are within its control prior to and after the Closing Date and to use its reasonable best efforts to satisfy all conditions precedent to the delivery of the Shares set forth in Section 10 hereof that are within its control. (n) For a period of 90 days after the date of the Prospectus, not to register for sale or offer, sell (or contract to sell) or otherwise dispose of any Common Stock (or any securities convertible into or exercisable or exchangeable for Common Stock) or grant any options or warrants to purchase Common Stock without the prior written consent of DLJ. (o) Not to take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company or its subsidiaries to facilitate the sale or resale of the Shares. Except as permitted by the Act, the Company will not distribute any Registration Statement, preliminary prospectus or Prospectus or other offering material in connection with the offering and sale of the Shares. (p) Prior to the Closing Date, to furnish to the Underwriters, as soon as they have been prepared, a copy of all consolidated financial statements of the Company and its subsidiaries for all periods subsequent to the period covered by the financial statements appearing in the Registration Statement and the Prospectus. (q) For a period of at least five years after the date of the Prospectus, for so long as any Shares are outstanding, to use its reasonable best efforts to maintain the inclusion of the Shares on the New York Stock Exchange. (r) With respect to all officers, directors and stockholders set forth on Annex I, prior to the Closing Date to deliver to the Underwriters a lock-up letter (a "LOCK-UP AGREEMENT"), substantially in the form of Annex II hereto. (s) To instruct Boston EquiServe, L.P., transfer agent for the Common Stock, (the "TRANSFER AGENT"), in writing on or prior to the Closing Date (the "INSTRUCTION") not to transfer, or to register the transfer of, any shares of Common Stock held by any person subject to (i) the 90-day lock-up provided for in Section 6(h) hereof, (ii) any Lock-up Agreement, or (ii) the 90-day lock-up provided for under the Registration Rights Agreement, dated May 10, 1988 (the "REGISTRATION RIGHTS AGREEMENT"), among Bell & Howell Group, Inc. and the Purchasers identified therein. (t) Except to the extent required to permit sales of Shares hereunder, not to waive the restrictions on transfer contained in Section 8(b)(ii)(D) of the Fourth Amendment of the Shareholder's Agreement for a period of 120 days after the date of this Agreement. 6. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each of the Selling Stockholders, severally and not jointly, agrees with each of the Underwriters and the Company as follows: (a) To pay or to cause to be paid all transfer taxes with respect to the Shares to be sold by such Selling Stockholder hereunder. 7 (b) To deliver to the Attorney-in-Fact such documentation as the Attorney-in-Fact, the Company or the Underwriters or any of their respective counsel may reasonably request to effectuate any of the provisions of this Agreement, the Custody Agreement (as hereinafter defined) or the Power of Attorney, all of the foregoing in form and substance reasonably satisfactory to the Attorney-in-Fact. (c) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect to the transactions herein contemplated, to deliver to the Underwriters prior to or on the Closing Date or each Option Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form statement specified by Treasury Department regulations in lieu thereof). (d) Each of the Selling Stockholders specifically agrees that the Shares represented by the certificates held in custody for such Selling Stockholder under the Custody Agreement are subject to the interests of the Underwriters under this Agreement, and that the arrangement made by such Selling Stockholder for such custody, and the appointment by such Selling Stockholder of each Attorney-in-Fact by the Power of Attorney, are to that extent irrevocable. Except as expressly provided to the contrary in this Agreement or the Power of Attorney, each of the Selling Stockholders specifically agrees that the obligations of the Selling Stockholders hereunder shall not be terminated by operation of law, by the merger, consolidation, reorganization, liquidation, dissolution, bankruptcy, insolvency, death, incapacity or similar event with respect to such Selling Stockholder or any proceeding in connection therewith, or by the occurrence of any other event. If any Selling Stockholder should be merged, consolidated, reorganized, liquidated, dissolved, become bankrupt or insolvent, die, become incapacitated or if any other event should occur or proceeding be instituted in connection therewith, before the delivery of such Selling Stockholder's Shares hereunder, certificates representing such Shares shall be delivered by or on behalf of such Selling Stockholder in accordance with the terms and conditions of this Agreement and the Custody Agreement, and actions taken by the Attorney-in-Fact pursuant to the Power of Attorney shall be valid as if such merger, consolidation, reorganization, liquidation, dissolution, bankruptcy, insolvency, death, incapacity or other event had not occurred, or such proceeding had not been instituted, regardless of whether the Custodian (as hereinafter defined), the Attorney-in-Fact, or any of them, shall have received notice thereof. (e) To notify the Company and the Representatives if, at any time during the period described in Section 5(f) hereof, such Selling Stockholder becomes aware of any material change in the information contained in the Registration Statement, any preliminary prospectus or the Prospectus. (f) To take all reasonable actions in cooperation with the Company and the Underwriters to cause the Registration Statement to become effective at the earliest possible time, to do and perform all things to be done and performed under this Agreement by such Selling Stockholder prior to the Closing Date and each Option Closing Date and to satisfy all conditions precedent to the delivery of the Shares pursuant to this Agreement. (g) Upon execution and delivery of this Agreement by such Selling Stockholder or on behalf of such Selling Stockholder by the Attorney-in-Fact, as applicable, to be bound by and to perform 8 each of the covenants and agreements of such Selling Stockholder provided for under this Agreement. (h) For a period of 90 days after the date of this Agreement, not to offer, sell (or contract to sell) or otherwise dispose of any Common Stock (or any securities convertible into or exercisable or exchangeable for Common Stock) or grant any options or warrants to purchase Common Stock (other than Common Stock sold in the Offerings) except to the Underwriters pursuant to this Agreement. 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Underwriter that: (a) The Company (i) has filed with the Commission prior to the effectiveness of the Registration Statement, a further amendment thereto, including therein a final prospectus, (ii) will file with the Commission after the effectiveness of such Registration Statement, a final prospectus in accordance with Rules 430A and 424(b)(1) of the Act, or (iii) will file with the Commission after the effectiveness of such Registration Statement, a post-effective amendment thereto in accordance with Rule 462 under the Act; the documents so filed conform, in content and form, to the last printer's proof thereof furnished to and approved by the Underwriters immediately prior to such filing; any required filing of the Prospectus, or any supplement thereto, pursuant to Rule 424(b) under the Act has been or will be made in the manner and within the time period required thereunder; any required filing of a post-effective amendment pursuant to Rule 462 under the Act has been or will be made in the manner and within the time period required thereunder; no stop order suspending or preventing the use of the Registration Statement or the Prospectus, or any amendment or supplement thereto, has been issued and no proceedings for such purpose are, to the knowledge of the Company, pending before or contemplated by the Commission. (b)(i) Each prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied in all material respects when so filed with the Act; (ii) when the Registration Statement became or becomes effective, including at the date of each post-effective amendment, at the date of the Prospectus (if different) and at the Closing Date and each Option Closing Date, if any, the Registration Statement and each amendment thereto complied or will comply with the provisions of the Act and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (iii) the Prospectus and each amendment and supplement thereto, as of its date, the Closing Date and each Option Closing Date, if any, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this paragraph (b) shall not apply to statements in or omissions from the Registration Statement, any preliminary prospectus or the Prospectus (or any supplement or amendment to them) made in reliance on and in conformity with information relating to (A) the Underwriters furnished to the Company in writing by the Underwriters expressly for use therein or (B) the Selling Stockholders furnished to the Company in writing by the Selling Stockholders expressly for use therein to the extent applicable to the preparation of the answers therein to Item 7 of Form S-1. 9 (c) Each of the Company and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all requisite corporate power and authority to carry on its business and to own and lease its properties, in each case, as described in the Registration Statement and the Prospectus, and is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified or in good standing would not have a material adverse effect on the business, condition (financial or other), results of operations, properties or prospects of the Company and its subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT"). (d) The Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. (e) Each Indemnitor has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. (f) Except as disclosed in the Registration Statement and the Prospectus, none of the Company or any of its subsidiaries (i) is in violation of its respective certificate of incorporation or bylaws, (ii) is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any indenture or other material agreement to which it is a party or by which it is bound or to which any of its properties is subject, including but not limited to the agreements listed in Item 16 of Part II of the Registration Statement (collectively, the "MATERIAL AGREEMENTS") or (iii) is in violation of any law, statute, rule, regulation, judgment or court decree applicable to the Company, or any of its subsidiaries except, in the case of clauses (ii) and (iii) above, for such violations or defaults that would not, individually or in the aggregate, have a Material Adverse Effect. The execution, delivery and performance of this Agreement by the Company and the Indemnitors, compliance by the Company and the Indemnitors with all provisions hereof (as applicable), and the consummation of the transactions contemplated hereby, will not conflict with, or constitute a breach or a violation of, any of the terms or provisions of, or a default under, the certificate of incorporation or bylaws of the Company or any of its subsidiaries, any Material Agreement or any law, statute, rule, regulation, judgment or court decree applicable to the Company or any of its subsidiaries. Except as required under (A) the Act and (B) applicable securities or Blue Sky laws of any state or foreign jurisdiction (each of which will be obtained or made on or prior to the Closing Date and any Option Closing Date), no consent, authorization, approval or order of, or filing or registration with, or notice to, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement and the performance of the obligations of the Company and the Indemnitors hereunder. (g) This Agreement has been duly authorized, executed and delivered by the Company and each Indemnitor and (assuming the due execution and delivery thereof by the Representatives) is the legally valid and binding agreement of the Company and each Indemnitor, enforceable against the Company and each Indemnitor in accordance with its terms, except (i) as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to or affecting creditors' rights generally; (ii) that the remedies of specific performance and injunctive and other forms of relief are subject to general equitable principles, whether enforcement is sought at law or in equity, and that such enforcement may be subject to the discretion 10 of the court before which any proceedings therefor may be brought; and (iii) as rights to indemnity and contribution may be limited by state or federal laws relating to securities or by the policies underlying such laws. (h) Except as set forth in the Registration Statement and the Prospectus, subsequent to the respective dates as of which information is given therein and up to and including the Closing Date and each Option Closing Date, if any, (i) none of the Company or any of its subsidiaries has incurred any liabilities or obligations outside of the ordinary course of business, direct or contingent, that are material to the Company and its subsidiaries, taken as a whole, (ii) none of the Company or any of its subsidiaries has entered into any material transactions outside of the ordinary course of business, (iii) there has not been any material adverse change in the business, condition (financial or other), results of operations, properties or prospects of the Company and its subsidiaries, taken as a whole (a "MATERIAL ADVERSE CHANGE"), and (iv) there has not been any change in the capital stock or material increase in long-term debt of the Company or any of its subsidiaries, or any issuance of options or warrants to purchase capital stock of the Company or any of its subsidiaries, or any payment or declaration to pay any dividends or other distribution with respect to the capital stock of the Company. (i) Except as set forth in the Registration Statement and the Prospectus, there is no legal or governmental proceeding pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries is a party or of which any of them or their respective properties is the subject that (i) is required to be disclosed in the Registration Statement or Prospectus and that is not so disclosed or (ii) if adversely determined, would have a Material Adverse Effect. No contract, agreement, instrument or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed as required. (j) Except as set forth in the Registration Statement and the Prospectus, the Company and each of its subsidiaries has (i) good title to all of the properties and assets described in the Registration Statement and the Prospectus as owned by it, free and clear of all liens (other than liens for taxes not yet due), charges, encumbrances or restrictions ("LIENS"), except for such Liens as would not, individually or in the aggregate, have a Material Adverse Effect, (ii) peaceful and undisturbed possession under all leases to which it is party as lessee, (iii) all governmental licenses, certificates, permits, authorizations, approvals, franchises or other rights necessary to engage in the business currently conducted by it ("LICENSES"), except where the failure to hold such Licenses would not, individually or in the aggregate, have a Material Adverse Effect, and (iv) no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such License. All material leases to which the Company or any of its subsidiaries is a party are valid and binding. None of the Company or any of its subsidiaries is in default under any lease to which it is a party or by which its assets are bound, except for such defaults which would not, individually or in the aggregate, result in a Material Adverse Effect. (k) No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company is threatened that, if adversely resolved, would have a Material Adverse Effect; and the Company is not aware of any existing or threatened labor disturbance by the 11 employees of any of its principal suppliers or contractors that might be expected to result in a Material Adverse Change. (l) None of the Company or any of its subsidiaries has (i) taken, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company or any of its subsidiaries to facilitate the sale or resale of the Shares or (ii) since the initial filing of the Registration Statement (A) sold, bid for, purchased or paid any person any compensation for soliciting purchases of, the Shares or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company. Except as permitted by the Act, neither the Company nor any of its subsidiaries has distributed any Registration Statement, Prospectus, preliminary prospectus or other offering material in connection with the offering and sale of the Shares. (m) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (n) To the knowledge of the Company, KPMG Peat Marwick, the accountants who have certified or will certify the financial statements included or to be included as part of the Registration Statement and the Prospectus or incorporated by reference therein are independent public accountants with respect to the Company and its subsidiaries, as required by the Act. The consolidated financial statements, together with the related notes, set forth in the Registration Statement and the Prospectus have been prepared and fairly present the financial condition and results of operations of the Company and its subsidiaries at the respective dates and for the respective periods indicated, in accordance with generally accepted accounting principles consistently applied throughout such periods. The pro forma financial data and the related notes thereto included in the Registration Statement and the Prospectus have been prepared in accordance with the applicable requirements of the Act, include all adjustments necessary to present fairly the pro forma financial condition and results of operations at the respective dates and for the respective periods indicated and are based upon good faith estimates and assumptions believed by the Company to be reasonable at the time made, on the date hereof, on the Closing Date and any Option Closing Date. The other financial and statistical information and data set forth in the Registration Statement and the Prospectus is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company and its subsidiaries. (o) Except as set forth in the Registration Statement and the Prospectus under the caption "Risk Factors--Shares Eligible for Future Sale; Registration Rights" there are no holders of securities of the Company or any of its subsidiaries (other than the Selling Stockholders) who, by reason of the execution by the Company of this Agreement, the sale of the Shares or the filing of the Registration Statement under the Act, have the right to request or demand that the Company register under the Act securities held by them. (p) Neither the Company nor any of its subsidiaries has dealt with any broker, finder, commission agent or other person in connection with the issuance and sale of the Shares and the transactions contemplated by this Agreement (other than the Underwriters), and none of the Company or any of its subsidiaries is under any obligation to pay any broker's fee or commission in 12 connection with such transactions (other than discounts and commissions to the Underwriters in connection with their purchase and sale of the Shares). (q) The Company beneficially owns, directly or indirectly, 100% of the outstanding capital stock or other securities evidencing equity ownership of each of its subsidiaries free and clear of any security interest, other than (i) pursuant to the New Revolving Credit Agreement, dated as of __________________, 1997, among Bell & Howell Operating Company, the Lenders listed therein and _________________________, as Agent, as amended (together with all amendments, alterations, modifications and waivers thereto or to the exhibits or schedules thereto to the date hereof, the "NEW REVOLVING CREDIT AGREEMENT"), and the pledge agreement entered into in connection therewith] and (ii) those shares of common stock required under local law to be owned by a national person, and all of such securities have been duly authorized, validly issued and are fully paid and non-assessable. There are no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any such shares of capital stock or other equity interest of such subsidiaries. (r) The authorized, issued and outstanding capital stock of the Company was, as of June 28, 1997, as set forth in the Registration Statement and Prospectus under the caption "Capitalization." The consolidated capitalization table on page 18 of the Registration Statement and Prospectus sets forth, as of June 28, 1997, and identifies in reasonable detail as of such date all outstanding short-term (other than trade payables) and long-term indebtedness of the Company, on a consolidated basis. (s) All the outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Stockholders) have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights. The Shares to be sold pursuant hereto, when delivered to the Underwriters against payment therefor as provided in this Agreement, will conform to the description of Common Stock in the Registration Statement and Prospectus under the caption "Description of Capital Stock." (t) The Company has complied with all provisions of Section 517.075, Florida Statutes, relating to doing business with the Government of Cuba or with any person or any affiliate located in Cuba. 8. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each Selling Stockholder severally represents and warrants to each Underwriter and to the Company that: (a) Such Selling Stockholder is the lawful owner of the Shares to be sold by such Selling Stockholder pursuant to this Agreement and has, and on the Closing Date and any Option Closing Date will have, good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests and claims whatsoever. (b) Upon delivery of and payment for such Shares pursuant to this Agreement, good and clear title to such Shares will pass to the Underwriters, free of all restrictions on transfer, liens, encumbrances, security interests and claims whatsoever. 13 (c) Each Selling Stockholder has, and on the Closing Date and on each Option Closing Date, if applicable, will have, full legal right, power and authority to enter into (i) this Agreement, (ii) a Power of Attorney (the "POWER OF ATTORNEY") in favor of each of Messrs. Johansson, Lieberman and Salit (each, an "ATTORNEY-IN-FACT") which, in the case of each Selling Stockholder, relates to the execution of this Agreement and (iii) a Custody Agreement (the "CUSTODY AGREEMENT") between the Selling Stockholders and _________________________, as Custodian (the "CUSTODIAN"), and each amendment to any of them and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder in the manner provided herein and therein; this Agreement, the Power of Attorney and the Custody Agreement have been duly authorized, executed and delivered by such Selling Stockholder and each of this Agreement, the Power of Attorney and the Custody Agreement is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except (i) as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to or affecting creditors' rights generally; (ii) that the remedies of specific performance and injunctive and other forms of relief are subject to general equitable principles, whether enforcement is sought at law or in equity, and that such enforcement may be subject to the discretion of the court before which any proceedings therefor may be brought; and (iii) as rights to indemnity and contribution may be limited by state or federal laws relating to securities or by the policies underlying such laws. (d) With respect to each Selling Stockholder, pursuant to the Power of Attorney executed by such Selling Stockholder, such Selling Stockholder has authorized Nils A. Johansson, Stuart T. Lieberman and Gary S. Salit, or any one of them, to execute and deliver on his or her behalf this Agreement, amendments to the Custody Agreement and any other document necessary or desirable in connection with transactions contemplated hereby and thereby and to deliver the Shares to be sold by such Selling Stockholder pursuant to this Agreement. (e) Such Selling Stockholder has not (i) taken, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company or any of its subsidiaries to facilitate the sale or resale of the Shares or (ii) since the initial filing of the Registration Statement (A) sold, bid for, purchased or paid any person any compensation for soliciting purchases of, the Shares or (B) paid or agreed to pay to any person (other than the Underwriters) any compensation for soliciting another to purchase any other securities of the Company. Except as permitted by the Act, no Selling Stockholder has distributed any Registration Statement, Prospectus, preliminary prospectus or other offering material in connection with the offering and sale of the Shares. (f) The execution, delivery and performance of this Agreement, the Custody Agreement and the Power of Attorney, by such Selling Stockholder, compliance by such Selling Stockholder with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not conflict with, or constitute a breach or a violation of, any of the terms or provisions of, or a default under, the organizational documents of such Selling Stockholder if such Selling Stockholder is not an individual, any material agreement to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or any law, statute, rule, regulation, judgment or court decree applicable to such Selling Stockholder or its property. Except as required under (A) the Act and (B) applicable securities or Blue Sky laws of the several states and any foreign jurisdiction (each of which will be obtained or made on or prior to the Closing Date and any Option Closing Date), no 14 consent, authorization, approval or order of, or filing or registration with, or notice to, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Custody Agreement, the Power of Attorney, or the valid sale of the Shares and the performance of the obligations of the Selling Stockholders hereunder and under the Custody Agreement. (g) To the extent that any statements or omissions made in the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement thereto are made in reliance upon and in conformity with written information furnished to the Company by such Selling Stockholder expressly for use therein, such preliminary prospectus and the Registration Statement did, and the Prospectus and any further amendments or supplements to the Registration Statement and the Prospectus will, when they become effective or are filed with the Commission, as the case may be, not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (h) Certificates in negotiable form representing all of the Shares to be sold by such Selling Stockholder hereunder have been placed in custody under the Custody Agreement, in the form heretofore furnished to or approved by the Underwriters, duly executed and delivered by such Selling Stockholder to the Custodian, and such Selling Stockholder has duly appointed Nils A. Johansson, Stuart T. Lieberman and Gary S. Salit and any of them, as Attorneys-in-Fact with authority, among other things, to execute and deliver this Agreement on behalf of such Selling Stockholder, to authorize the delivery of the Shares to be sold by such Selling Stockholder hereunder and otherwise to act on behalf of such Selling Stockholder in connection with the transactions contemplated by this Agreement and the Custody Agreement. 9. INDEMNIFICATION. (a) Each of the Company and each Indemnitor, jointly and severally agrees to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with defending or investigating any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Company by such Underwriter through you expressly for use therein. (b) Each Selling Stockholder, jointly and severally agrees to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with defending or investigating any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the 15 Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but, only insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to such Selling Stockholder and furnished in writing to the Company by or on behalf of such Selling Stockholder expressly for use therein. Notwithstanding the foregoing, the aggregate liability of each Selling Stockholder pursuant to the provisions of this paragraph shall be limited to an amount equal to the aggregate Purchase Price received by such Selling Stockholder from the sale of such Selling Stockholder's Shares hereunder. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, each Indemnitor and any person controlling the Company or such Indemnitor within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling Stockholder and each person, if any, controlling such Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company, the Indemnitors and the Selling Stockholders to such Underwriter but only with reference to information relating to such Underwriter furnished in writing to the Company by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus. (d) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to paragraph (a) or (b) of this Section 9 (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both paragraphs (a) and (b) of this Section 9, the Underwriter shall not be required to assume the defense of such action pursuant to this paragraph (c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by DLJ, in the case of parties indemnified pursuant to paragraph (a) or (b) of this Section 9, and by the Company, the Indemnitors or the Selling Stockholders, in the case of parties indemnified pursuant to paragraph (c) of this Section 9. The indemnifying party shall indemnify and hold harmless the indemnified 16 party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than 20 business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (e) To the extent the indemnification provided for in this Section 9 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Indemnitors and/or the Selling Stockholders on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the Indemnitors and/or the Selling Stockholders and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Indemnitors and/or the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company, and the total underwriting discounts and commissions received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company, the Indemnitors and/or the Selling Stockholders and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders, the Indemnitors and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9(e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any 17 damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9(e) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. Each Selling Stockholder's obligation to contribute pursuant to this Section 9(e) is several and not joint, is in proportion to the respective number of Shares sold by such Selling Stockholder and shall be limited to an amount equal to the aggregate Purchase Price received by such Selling Stockholder from the sale of such Selling Stockholder's Shares hereunder. (f) The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. 10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All of the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date and each Option Closing Date, if any, with the same force and effect as if made on and as of the Closing Date or such Option Closing Date, as the case may be. The Company shall have performed or complied with all of the agreements herein contained and required to be performed or complied with by the Company at or prior to the Closing Date and each Option Closing Date, if any. (b) All the representations and warranties of the Selling Stockholders contained in this Agreement shall be true and correct on the Closing Date and each Option Closing Date, if any, with the same force and effect as if made on and as of the Closing Date or such Option Closing Date, as the case may be, and the Underwriters shall have received a certificate to such effect, dated the Closing Date or such Option Closing Date, as the case may be, from each Selling Stockholder. The Selling Stockholders shall have performed or complied with all of the agreements herein contained and required to be performed or complied with by the Selling Stockholders at or prior to the Closing Date or each Option Closing Date, as the case may be. (c)(i) The Registration Statement shall have become effective (or if a post-effective amendment is required to be filed pursuant to Rule 430A or Rule 462 under the Act, such post-effective amendment shall become effective) not later than 10:00 A.M., New York City time, on the day following the date of this Agreement or at such later date and time as the Underwriters may approve in writing, (ii) at or prior to the Closing Date and each Option Closing Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission and every comment by or request for additional information on the part of the Commission or any securities commission or regulatory authority of the several states or any foreign jurisdiction shall have been responded to or complied with in all material respects and (iii) no stop order suspending the sale of the Shares in any jurisdiction designated by the Underwriters pursuant to Section 5(i) hereof shall have been issued and no proceeding for that purpose shall have been commenced and be pending before any securities regulators, and the Company shall not have received notice of the contemplation of any such issuance by any such securities regulator. 18 (d)(i) On the Closing Date and each Option Closing Date, if any, no action shall have been taken and no statute, rule or regulation or order shall have been enacted, adopted or issued by any governmental agency that would, as of the Closing Date and each Option Closing Date, if any, prevent the sale of the Shares; no action, suit or proceeding shall be pending against or affecting or, to the knowledge of the Company and the Selling Stockholders, threatened against the Company, any of its subsidiaries or any Selling Stockholder before any court or arbitrator or any governmental body, agency or official that, if adversely determined, would prohibit, interfere with or adversely affect the issuance or sale of the Shares or would, individually or in the aggregate, have a Material Adverse Effect, or in any manner draw into question the validity of this Agreement, the Custody Agreement, the Power of Attorney or the Shares. (e) Except as set forth in the Registration Statement and Prospectus, since the date of the latest balance sheet included therein, (i) there shall not have been a Material Adverse Change, whether or not arising in the ordinary course of business, (ii) there shall not have been any change in the capital stock or material increase in the long-term debt of the Company or its subsidiaries from that set forth in the Registration Statement and Prospectus and (iii) none of the Company or its subsidiaries shall have incurred any liability or obligation, other than in the ordinary course of business, direct or contingent, that shall have a Material Adverse Effect. (f) On the Closing Date and each Option Closing Date, if any, the Underwriters shall have received a certificate dated the Closing Date or each Option Closing Date, as the case may be, signed by the Executive Vice President and the Chief Financial Officer of the Company, confirming the matters set forth in paragraphs (a), (c), (d) and (e) of this Section 10. (g) The Underwriters shall have received on the Closing Date and each Option Closing Date, an opinion (substantially in the form of Annex III hereto), dated the Closing Date and each Option Closing Date, if any, of McDermott, Will & Emery, counsel for the Company and the Indemnitors. (h) The Underwriters shall have received on the Closing Date and each Option Closing Date, if any, (i) an opinion (substantially in the form attached hereto as Annex IV) dated the Closing Date and each Option Closing Date, if any, of ____________________________, counsel for the Selling Stockholders. (i) The Underwriters shall have received on the Closing Date and each Option Closing Date, if any, an opinion (substantially in the form of Annex V), dated the Closing Date and each Option Closing Date, if any, of Gary S. Salit, General Counsel of the Company. (j) The Underwriters shall have received on the Closing Date and each Option Closing Date, if any, an opinion, dated the Closing Date or an Option Closing Date, as the case may be, of Latham & Watkins, counsel for the Underwriters, in form and substance reasonably satisfactory to the Underwriters. (k) Concurrently with the execution hereof and on the Closing Date and each Option Closing Date, if any, the Underwriters shall have received comfort letters, substantially in the form 19 previously approved by the Underwriters, from KPMG Peat Marwick, independent certified public accountants for the Company and its subsidiaries, with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (l) Latham & Watkins shall have been furnished with such documents as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 10 and in order to evidence the accuracy, completeness and satisfaction of the representations, warranties and conditions herein contained. (m) Each of the officers, directors and stockholders of the Company set forth in Annex I shall have delivered to DLJ a Lock-up Agreement, substantially in the form attached hereto as Annex II. (n) The Underwriters shall have received from each Selling Stockholder on the Closing Date and each Option Selling Stockholder on each Option Closing Date, if any, an executed (i) statement pursuant to Section 1445 of the Internal Revenue Code of 1986, as amended and the Treasury Regulations thereunder and (ii) Form W-9 (or Form W-8 if such Selling Stockholder is not a United States citizen), as previously provided by DLJ. (o) The Company shall have delivered the Instruction to the Transfer Agent. (p) The Shares shall have been approved for listing on the New York Stock Exchange. (q) The Transfer Agent shall have delivered to the Underwriters a certificate signed by an authorized officer attesting to (i) the due authorization, execution and delivery by the Transfer Agent of the Custody Agreement and (ii) the incumbency of the officers of the Transfer Agent who signed the Custody Agreement. All opinions, certificates, letters and other documents required by this Section 10 to be delivered by the Company and the Selling Stockholders will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to the Underwriters. The Company and the Selling Stockholders will furnish the Underwriters with such conformed copies of such opinions, certificates, letters and other documents as the Underwriters or their counsel shall reasonably request. 11. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time prior to the Closing Date by you by written notice to the Company and the Attorney-in-Fact if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and would, in your judgment, make it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) the suspension or material limitation of trading in securities on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any 20 securities of the Company on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase is not more than one-tenth of the total number of Shares to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the non-defaulting Underwriters, as the case may be, have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase on such date; provided that in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 11 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased by all Underwriters and arrangements satisfactory to the Underwriters, the Company and the Attorney-in-Fact for purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company and the Selling Stockholders. In any such case which does not result in termination of this Agreement, either DLJ, the Company or the Selling Stockholders shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one- tenth of the aggregate number of Additional Shares to be purchased on such date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase such Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase on such date in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. 12. MISCELLANEOUS. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (a) if to the Company or any Indemnitor, c/o Bell & Howell Company, 5215 Old Orchard Road, Skokie, Illinois 60077-1076, Attention: Gary S. Salit, with a copy to McDermott, Will & Emery, 227 West Monroe Street, Chicago, Illinois 60606, Attention: William J. McGrath, P.C., (b) if to the Underwriters, c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New 21 York 10172, Attention: Syndicate Department, with a copy to Latham & Watkins, 885 Third Avenue, Suite 1000, New York, New York 10022, Attention: Kirk A. Davenport, Esq., (c) if to a Selling Stockholder, to the address of such Selling Stockholder listed in the Company's stock register, with a copy to ________________________________________________________________________________ ____________________________________________________________, Attention:____________________ and (d) in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, the Indemnitors, their respective officers and directors, the Selling Stockholders and of the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter or by or on behalf of the Company and/or Selling Stockholders, the officers or directors of the Company or any controlling person of the Company and/or Selling Stockholders, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Indemnitors, the Selling Stockholders, the Underwriters, any controlling persons referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement, except that counsel to the parties hereto may rely on the representations and warranties contained herein. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. Except as otherwise provided herein, as used in this Agreement, the phrase "to the knowledge" of the Company or any Indemnitor shall refer to all facts of which Mr. Gary S. Salit, the President or Chief Executive Officer of any Indemnitor or any officer whose name is set forth in the Registration Statement or Prospectus under the caption "Management" shall have notice or actual knowledge. This Agreement shall be governed and construed in accordance with the internal laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. [Signature Pages Follow] 22 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Indemnitors, the Selling Stockholders and the several Underwriters. Very truly yours, BELL & HOWELL COMPANY By: ------------------------------------------ Name: Title: BELL & HOWELL OPERATING COMPANY By: ------------------------------------------ Name: Title: BELL & HOWELL DOCUMENT MANAGEMENT PRODUCTS COMPANY By: ------------------------------------------ Name: Title: BELL & HOWELL PUBLICATION SYSTEMS COMPANY By: ------------------------------------------ Name: Title: BELL & HOWELL MAIL PROCESSING SYSTEMS COMPANY By: ------------------------------------------ Name: Title: UMI COMPANY By: ------------------------------------------ Name: Title: Selling Stockholders [ ] By: ------------------------------------------ Name: Title: [ ] By: ------------------------------------------ Name: Title: [ ] By: ------------------------------------------ Name: Title: [ ] By: ------------------------------------------ Name: Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BEAR, STEARNS & CO., INC. SALOMON BROTHERS INC SMITH BARNEY INC. Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: -------------------------- Name: Title: SCHEDULE I Underwriters Number of Shares - ------------ ---------------- Donaldson, Lufkin & Jenrette Securities Corporation. . . . . . . . . . Bear, Stearns & Co., Inc.. . . . . . . . . . . . . . . . . . . . . . . Salomon Brothers Inc . . . . . . . . . . . . . . . . . . . . . . . . . Smith Barney Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . ___________ Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SCHEDULE II Number of Firm Number of Additional Name Shares Being Sold Shares Being Sold - ---- ----------------- ----------------- Total ANNEX I REQUIRED STOCKHOLDER LOCK-UPS [TO BE UPDATED] Richard S. Austin Robert A. Nero David Bonderman William E. Oberndorf Bonderman Family L.P. Raymond D. Patterson J. Taylor Crandall James P. Roemer Daniel L. Doctoroff Gary L. Roubos Patrick J. Graver Maria T. Rubly Group Management, Inc. John H. Scully Nils A. Johansson Dieter E.A. Tannenberg Keystone, Inc. William J. White Stuart T. Lieberman ANNEX II FORM OF LOCK-UP AGREEMENT ANNEX III FORM OF OPINION OF MCDERMOTT, WILL & EMERY (i) the Company and each of its subsidiaries is a corporation validly existing and in good standing under the laws of Delaware and has all requisite corporate power to carry on its business and to own and lease its properties, in each case, as described in the Registration Statement and the Prospectus; (ii) each of the Company and the Indemnitors has all requisite corporate power to execute, deliver and perform its obligations under this Agreement; this Agreement has been duly authorized, executed and delivered by each of the Company and the Indemnitors; (iii) all of the outstanding shares of Common Stock (including the Additional Shares) have been duly authorized and validly issued and will be fully paid and non-assessable and the issuance thereof will not have been subject to any preemptive or similar rights; (iv) the Company has all requisite corporate power to authorize, issue and sell the Shares to be sold by it hereunder; the Shares to be issued and sold by the Company hereunder have been duly authorized and when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will have been validly issued and will be fully paid and non- assessable and the issuance of such Shares will not be subject to any preemptive or similar rights; (v) to such counsel's knowledge (based solely on such counsel's representation of the Company and without performing any docket searches or further inquiry), there are no legal or governmental actions, suits, proceedings or investigations pending or threatened against the Company or any of its subsidiaries which (i) are required to be disclosed in the Registration Statement or Prospectus and that are not so disclosed or (ii) if adversely determined, would prohibit, interfere with or materially and adversely affect the issuance and sale of the Shares or would, individually or in the aggregate, result in a Material Adverse Effect, or in any manner draw into question the validity of this Agreement, the Power of Attorney or the issuance and sale of the Shares; to such counsel's knowledge, no contract, agreement, instrument or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed as required; (vi) the Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (vii) the authorized capital stock of the Company, including the Common Stock, conforms in all material respects to the description thereof in the Registration Statement and Prospectus; (viii) the statements under (A) the captions "Description of Capital Stock" and "Description of Certain Financing Agreements and Certain Indebtedness" in the Prospectus and (B) Item 14 of Part II of the Registration Statement insofar as such statements constitute a summary of 1 legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (ix) the execution, delivery and performance of this Agreement by the Company and the Indemnitors, the issuance and sale of the Shares by the Company pursuant hereto, compliance by the Company and the Indemnitors with all provisions hereof, and consummation of the transactions contemplated hereby, including the issuance and sale of the Shares, will not (A) conflict with or constitute a violation of the certificate of incorporation or bylaws of the Company or any of its subsidiaries, (B) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any Material Agreement, (C) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any law or statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, any of its subsidiaries or any of their respective properties which, in such counsel's experience are normally applicable to transactions of the type contemplated in the Registration Statement and the Prospectus, except that such counsel need not express an opinion regarding the limitation on indemnity and contribution by state and federal laws relating to securities or by the policies underlying such laws or waiver of damage remedies; (x) except as required under applicable securities or Blue Sky laws of the several states and any foreign jurisdiction, no consent, approval, authorization or other order from, and no filing with or notice to, any regulatory body, administrative agency, or other governmental authority is required for the consummation of the Stock Split, the due authorization, execution, delivery and performance by the Company of this Agreement and the issuance and sale of the Shares; (xi) all of the shares of issued and outstanding capital stock of each of the Company's subsidiaries have been validly authorized and issued and, to the knowledge of such counsel, are owned directly or indirectly by the Company free and clear of any security interest, other than (A) pursuant to the Credit Agreement and the pledge agreement entered into in connection therewith and (B) those shares of common stock required by local law to be owned by a national person; and, to the knowledge of such counsel, there are no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in any such subsidiary; (xii) the Registration Statement, as of its effective date and as of the Closing Date and any Option Closing Date, and the Prospectus, as of its date and as of the Closing Date and any Option Closing Date, complied as to form in all material respects with the requirements of the Act and the applicable rules and regulations of the Commission thereunder, except that in each case such counsel expresses no opinion with respect to the financial statements or other financial data contained in the Registration Statement or the Prospectus; (xiii) the Registration Statement has become effective under the Act; (xiv) to the knowledge of such counsel, each required filing of the Prospectus and each supplement thereto, pursuant to Rule 424(b) under the Act has been made in the manner and within the time period required thereunder and, to the knowledge of such counsel (after due inquiry), no stop order suspending the effectiveness of the Registration Statement or any post-effective 2 amendment thereto has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; (xv) assuming the Power of Attorney, as amended, signed by each Option Selling Stockholder appointing Nils A. Johansson, Stuart T. Lieberman and Gary S. Salit or any of them, as Attorney-in-Fact to the extent set forth therein with regard to the transactions contemplated herein and by the Registration Statement has been duly authorized, executed and delivered by or on behalf of each Option Selling Stockholder, the Power of Attorney is a valid and binding instrument of such Option Selling Stockholder enforceable in accordance with its terms, except that no opinion is expressed as to the enforceability of Section 2 with respect to the death of any such Selling Stockholder and Section 8 of the Power of Attorney. Pursuant to such Power of Attorney, each of the Option Selling Stockholders has authorized Messrs. Johannson, Lieberman and Salit, or either of them, to execute and deliver on their behalf this Agreement and any other document necessary or desirable in connection with transactions contemplated hereby and to deliver the Shares to be sold by them pursuant to the Underwriting Agreement. (xvi) assuming that (i) the Underwriters exercise their option to purchase the Additional Shares, and (ii) each of the several Underwriters purchasing Additional Shares pursuant to this Agreement have purchased such shares in good faith and without notice of any lien, encumbrance, equity or any other adverse claim within the meaning of the Uniform Commercial Code, upon delivery of certificates for Additional Shares to be sold pursuant to this Agreement, each of the several Underwriters who have purchased such Additional Shares will acquire such Additional Shares free and clear of all liens, encumbrances equities or any other adverse claims within the meaning of the Uniform Commercial Code. In addition, such counsel shall also state that in the course of preparation by the Company of the Registration Statement and Prospectus, such counsel has participated in conferences with directors, officers and other representatives of the Company and its subsidiaries, representatives of KPMG Peat Marwick, the independent certified public accountants for the Company and its subsidiaries, representatives of the Underwriters and representatives of their counsel, at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and, although such counsel has not independently verified and is not passing upon and assumes no responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus (other than those with respect to which such counsel is opining pursuant to Section 10(g) of this Agreement), and noting that they have relied as to materiality to a large extent upon the statements of directors, officers and other representatives of the Company and its subsidiaries, nothing has come to such counsel's attention that has caused such counsel to believe that the Registration Statement, on the effective date thereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading, or that the Prospectus, on the date thereof or on the date of such opinion, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel expresses no view with respect to the financial statements and related notes, the financial statement schedules and other financial, statistical and accounting data included in the Registration Statement or Prospectus). 3 In rendering the opinions set forth in Section 10(g) of the Underwriting Agreement, McDermott, Will & Emery may rely as to factual matters upon certificates or written statements from officers or other appropriate representatives of the Company and its subsidiaries and upon certificates of public officials. In addition, in rendering the opinions set forth in Section 10(g) of the Underwriting Agreement, McDermott, Will & Emery may rely as to matters of law, other than the law of the State of New York, the law of the State of Illinois, the General Corporation Law of the State of Delaware and the federal law of the United States, on the opinions of local counsel retained by it, or by the Company or any of its subsidiaries on behalf of itself, provided that such counsel is satisfactory to the Underwriters and their counsel and that a copy of such opinion is delivered with the opinion of McDermott, Will & Emery. In rendering the opinions set forth above, such counsel may state that whenever a statement included therein is qualified by "to our knowledge" or a similar phrase, it is intended to indicate that those attorneys with McDermott, Will & Emery who have rendered legal services in connection with the offering to which the Registration Statement and Prospectus relate do not have current actual knowledge of the inaccuracy of such statement. 4 ANNEX IV FORM OF OPINION OF ANNEX IV FORM OF OPINION OF GARY S. SALIT (i) the Company and each of the Indemnitors is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power to carry on its business and to own and lease its properties, in each case, as described in the Registration Statement and the Prospectus. The Company and each of the Indemnitors is duly qualified to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified would, individually or in the aggregate, prohibit, interfere with or materially and adversely affect the issuance and sale of the Shares or individually or in the aggregate, result in material adverse effect on the business or properties of the Company (collectively, a "Material Adverse Effect"); (ii) All of the outstanding shares of Common Stock have been duly authorized, validly issued and are fully paid and non-assessable and the issuance thereof was not subject to any preemptive or similar rights; (iii) all of the shares of issued and outstanding common stock and preferred stock, if any, of each Indemnitor have been validly authorized and issued and are fully paid and non-assessable and all of the shares of issued and outstanding common stock and preferred stock, if any, of the Company's subsidiaries listed on EXHIBIT A hereto (each, a "Material Subsidiary") are owned, directly or indirectly, by the Company, free and clear of any security interest, other than (i) pursuant to the New Revolving Credit Agreement and the pledge agreement entered into in connection therewith and (ii) those shares of common stock required under law to be owned by a national person; and there are no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interests in any subsidiary of the Company; (iv) each of the Company and each Indemnitor has all requisite corporate power to execute, deliver and perform its obligations under this Agreement; this Agreement has been duly authorized, executed and delivered by the Company and the Indemnitors; (v) the execution, delivery and performance of this Agreement by the Company and the Indemnitors, compliance by the Company and the Indemnitors with all provisions hereof and thereof, and consummation of the transactions contemplated hereby and thereby, will not (a) conflict with or constitute a violation of the certificate of incorporation or bylaws of the Company or any of the Indemnitors, (b) conflict with or result in a breach or violation of any agreement filed (or incorporated by reference into) the Registration Statement (each, a "Material Agreement"), (c) contravene the General Corporation Law of the State of Delaware or any statute, rule or regulation under the laws of the United States or the State of Illinois which, in my experience, are normally applicable to transactions of the type contemplated by the Underwriting Agreement or (d) conflict with or violate any judgment, decree or order of any court or governmental agency or body known 1 to me or any executive officer of the Company applicable to the Company, the Indemnitors or their respective properties; (vi) except as disclosed in the Registration Statement and the Prospectus, there is no action, suit, investigation or proceeding, governmental or otherwise, pending or, to the knowledge of such counsel, threatened against the Company or any Indemnitor, that prevents the sale of the Shares by the Company and the Selling Stockholders; no stop order preventing the use of the Registration Statement or the Prospectus, or any amendment or supplement thereto has been issued; and no contract, agreement, instrument or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed as required; (vii) no action, suit or proceeding is pending against or affecting or, to the knowledge of such counsel threatened against, the Company or any of its subsidiaries before any court or arbitrator or any governmental body, agency or official that (A) is required to be disclosed in the Registration Statement or Prospectus and that is not so disclosed or (B) if adversely determined, would prohibit, interfere with or materially and adversely affect the sale of the Shares or would, individually or in the aggregate, have a Material Adverse Effect, or render illegal, invalid or unenforceable any of this Agreement, the Custody Agreement or the sale of the Shares; (viii) no consent, approval, authorization or other order from, and no filing with or notice to, any regulatory body, administrative agency, or other governmental authority is required for the due authorization, execution, delivery and performance by the Company and the Indemnitors of this Agreement, except (i) as required under the Act (which have been obtained) or (ii) as required by applicable securities or Blue Sky Laws of the several states or any foreign jurisdiction (as to which such counsel need express no opinion); (ix) (A) none of the Company or any Material Subsidiary (1) is in violation of its respective certificate of incorporation or bylaws or (2) is in default in the performance of any Material Agreement and (B) no notice has been issued and no investigation or review is pending or threatened by any governmental entity with respect to (1) any alleged violation by the Company or any Material Subsidiary of any statute, law, ordinance, rule, regulation, judgment, decree or order of any governmental entity, agency or body or (2) any alleged failure by the Company or any Material Subsidiary to have all Licenses required in connection with the operation of its business, that, with respect to clauses (A)(2) or (B) above, would individually or in the aggregate (x) render illegal, invalid or unenforceable any of this Agreement, the Power of Attorney or the issuance and sale of the Shares or (y) result in a Material Adverse Effect; (x) based solely upon a review of (a) the stock records of the Company, (b) the certificate or certificates representing the Shares to be sold on the Closing Date and any Option Closing Date by the Selling Stockholders, (c) the representations of such Selling Stockholder contained in Section 8(a) of the Underwriting Agreement and (d) factual certificates obtained from each Selling Stockholder, immediately prior to the Closing Date or such Option Closing Date, the Shares to be sold on such Option Closing Date under this Agreement are owned of record as set forth on Schedule A to such opinion. 2 In addition, such counsel shall also state that in the course of preparation by the Company of the Registration Statement and Prospectus, such counsel has participated in conferences with directors, officers and other representatives of the Company and its subsidiaries, representatives of KPMG Peat Marwick, the independent certified public accountants for the Company and its subsidiaries, representatives of the Underwriters and representatives of their counsel, at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed and, although such counsel has not independently verified and is not passing upon and assumes no responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, and noting that such counsel has relied as to materiality to a large extent upon the statements of directors, officers and other representatives of the Company and its subsidiaries, nothing has come to such counsel's attention that has caused such counsel to believe that the Registration Statement, on the effective date thereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading, or that the Prospectus, on the date thereof or on the date of such opinion, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel expresses no view with respect to the financial statements and related notes, the financial statement schedules and other financial, statistical and accounting data included in the Registration Statement or Prospectus. In rendering the opinions required by Section 10(i) of the Underwriting Agreement, such counsel may rely as to factual matters upon certificates or written statements from officers or other appropriate representatives of the Company or its subsidiaries or upon certificates of public officials and need not express any opinion with regard to the laws of any jurisdiction other than the law of the State of Illinois, the General Corporation Law of the State of Delaware and the federal law of the United States. 3 Exhibit A Material Subsidiaries [UPDATE] 1. Each of the Indemnitors 2. Bell & Howell Acceptance Corporation 3. Bell & Howell A-V Limited 4. Bell & Howell Foreign Sales Corporation 5. Bell & Howell GmbH 6. Bell & Howell International Services Company 7. Bell & Howell Japan Co., Ltd. 8. Bell & Howell Ltd 9. Bell & Howell Mailmobile Company 10. Bell & Howell Nederland BV 11. Bell & Howell Postal Systems Inc. 12. Bell & Howell Protocorp International, Inc. 13. Bell & Howell PW Acquisition Company 14. Bell & Howell PW Licensing Company 15. Bell & Howell France S.A. EX-5.1 3 OPINION OF MCDERMOTT WILL & EMERY Exhibit 5.1 August 29, 1997 Bell & Howell Company 5215 Old Orchard Road Skokie, Illinois 60077 Re: Registration Statement on Form S-1 File No. 333-33123 ---------------------------------- Ladies and Gentlemen: You have requested our opinion in connection with the above-referenced registration statement (the "Registration Statement"), under which (i) Bell & Howell Company (the "Company") intends to issue and sell in a public offering 3,861,004 shares of Common Stock, par value $.001 per share, of the Company ("Common Stock"), plus up to an additional 579,151 shares of Common Stock granted to the underwriters by the Company to cover over-allotments (the "Primary Shares"), and (ii) certain stockholders of the Company intend to sell in such offering 316, 255 shares of Common Stock, plus up to an additional 47,438 shares of Common Stock granted to the underwriters by certain selling stockholders to cover over-allotments (the "Secondary Shares"). In arriving at the opinion expressed below, we have examined the Registration Statement and such other documents as we have deemed necessary to enable us to express the opinion hereinafter set forth. In addition, we have examined and relied, to the extent we deem proper, on certificates of officers of the Company as to factual matters, and on the originals or copies certified or otherwise identified to our satisfaction, of all such corporate records of the Company and such other instruments and certificates of public officials and other persons as we have deemed appropriate. In our examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to the original documents of all documents submitted to us as copies, the genuineness of all signatures on documents reviewed by us and the legal capacity of natural persons. Bell & Howell Company August 29, 1997 Page 2 Based upon and subject to the foregoing, we are of the opinion that (i) the Primary Shares have been duly authorized and, when issued in accordance with the terms and conditions set forth in the Registration Statement (including the Underwriting Agreement) and upon authorization of the Pricing Committee of the Board of Directors, will be validly issued, fully paid and non-assessable (ii) the Secondary Shares have been duly authorized, validly issued and are fully paid and non-assessable. We hereby consent to the references to our firm under the caption "Legal Matters" in the Registration Statement and to the use of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Very truly yours, EX-23.2 4 EX 23.2 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.2 The Board of Directors Bell & Howell Company: We consent to the use of our reports included in this registration statement on Form S-1 of Bell & Howell Company and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Chicago, Illinois August 29, 1997 -----END PRIVACY-ENHANCED MESSAGE-----