UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission file number
March 31, 2001 1-3246
BELL & HOWELL COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3580106
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
300 North Zeeb Road, Ann Arbor, Michigan 48103-1553
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (734) 761-4700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding as of May 5, 2001 was 23,707,421.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
------ --------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations for
the Thirteen Weeks Ended March 31, 2001 and
April 1, 2000............................................... 1
Consolidated Balance Sheets at
March 31, 2001 and December 30, 2000........................ 2
Consolidated Statements of Cash Flows for
the Thirteen Weeks Ended March 31, 2001 and
April 1, 2000............................................... 3
Notes to the Consolidated Financial
Statements.................................................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................... 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................ 15
PART II. OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURE PAGE........................................................... 16
Bell & Howell Company and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended
--------------------
Mar. 31, Apr. 1,
2001 2000
--------- ---------
Net sales......................................................................... $ 95,853 $ 88,627
Cost of sales..................................................................... 47,140 47,326
Research and development expense.................................................. 5,082 4,369
Selling and administrative expense................................................ 29,390 29,406
Gain on sales of assets........................................................... - 1,356
--------- ---------
Earnings from continuing operations before interest, income taxes,
equity in loss of affiliate, and cumulative effect of a change
in accounting principle.......................................................... 14,241 8,882
Net interest expense:
Interest income................................................................... 500 322
Interest expense.................................................................. (6,578) (8,235)
--------- ---------
Net interest expense.............................................................. (6,078) (7,913)
Earnings from continuing operations before income taxes, equity
in loss of affiliate, and cumulative effect of a change in
accounting principle............................................................. 8,163 969
Income tax expense................................................................ 3,265 388
--------- ---------
Earnings from continuing operations before equity in loss of
affiliate and cumulative effect of a change in accounting principle.............. 4,898 581
Equity in loss of affiliate....................................................... (5,471) (3,721)
--------- ---------
Loss from continuing operations before cumulative effect of
a change in accounting principle................................................. (573) (3,140)
Discontinued operations:
Earnings from discontinued operations, net........................................ 2,217 1,117
Gain on sale of discontinued operation, net....................................... 43,583 -
Cumulative effect of a change in accounting principle, net........................ - (65,302)
--------- ---------
Net earnings (loss)............................................................... $ 45,227 $ (67,325)
========= =========
Net earnings (loss) per common share:
Basic:
Loss from continuing operations before
cumulative effect of a change in accounting principle............................ $ (0.02) $ (0.13)
Earnings from discontinued operations............................................. 0.09 0.05
Gain from sale of discontinued operation.......................................... 1.85 -
Cumulative effect of a change in accounting principle............................. - (2.76)
--------- ---------
Net earnings (loss)............................................................... $ 1.92 $ (2.84)
========= =========
Diluted:
Loss from continuing operations before cumulative effect
of a change in accounting principle.............................................. $ (0.02) $ (0.13)
Earnings from discontinued operations............................................. 0.09 0.05
Gain from sale of discontinued operation.......................................... 1.84 -
Cumulative effect of a change in accounting principle............................. - (2.76)
--------- ---------
Net earnings (loss)............................................................... $ 1.91 $ (2.84)
========= =========
Average number of common shares and equivalents outstanding:
Basic............................................................................. 23,622 23,678
Diluted........................................................................... 23,670 23,678
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
1
Bell & Howell Company and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
Assets
Mar. 31, Dec. 30,
2001 2000
--------- ---------
Current assets:
Cash and cash equivalents.................................................... $ 14,318 $ 10,610
Accounts receivable.......................................................... 50,501 76,302
Inventory.................................................................... 4,110 4,604
Other current assets......................................................... 14,871 13,072
--------- ---------
Total current assets......................................................... 83,800 104,588
Property, plant and equipment, at cost....................................... 411,299 400,170
Accumulated depreciation..................................................... (275,616) (267,054)
--------- ---------
Net property, plant and equipment............................................ 135,683 133,116
Long-term receivables........................................................ 1,131 1,450
Goodwill, net of accumulated amortization.................................... 217,911 222,271
Net assets of discontinued operations........................................ 223,520 261,155
Other assets................................................................. 55,740 43,159
--------- ---------
Total assets................................................................. $ 717,785 $ 765,739
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable................................................................ $ 3,234 $ 15,568
Current maturities of long-term debt......................................... 379 466
Accounts payable............................................................. 38,119 43,134
Accrued expenses............................................................. 40,220 35,594
Deferred income.............................................................. 93,209 112,881
--------- ---------
Total current liabilities.................................................... 175,161 207,643
Long-term liabilities:
Long-term debt............................................................... 408,918 501,821
Other liabilities............................................................ 163,883 125,934
--------- ---------
Total long-term liabilities.................................................. 572,801 627,755
Shareholders' equity:
Common Stock, $.001 par value, 24,084 shares issued
and 23,629 shares outstanding at March 31, 2001,
and 24,078 shares issued and 23,622 shares outstanding
at December 30, 2000........................................................ 24 24
Capital surplus.............................................................. 156,708 156,708
Notes receivable from executives............................................. (1,198) (1,180)
Retained earnings (deficit).................................................. (168,388) (213,615)
Treasury stock............................................................... (11,393) (11,493)
Accumulated foreign currency translation adjustment.......................... 664 (103)
SFAS 133 unrealized gain/(loss).............................................. (6,594) -
--------- ---------
Accumulated other comprehensive loss......................................... (5,930) (103)
--------- ---------
Total shareholders' equity (deficit)......................................... (30,177) (69,659)
--------- ---------
Total liabilities and shareholders' equity................................... $ 717,785 $ 765,739
========= =========
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
2
Bell & Howell Company and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Thirteen Weeks
Ended
-------------------------
Mar. 31, Apr. 1,
2001 2000
--------- --------
Operating Activities:
Loss from continuing operations before cumulative
effect of a change in accounting principle................... $ (573) $ (3,140)
Adjustments to reconcile to cash provided by operating
activities of continuing operations:
Depreciation and amortization................................. 13,715 13,132
Equity in loss of affiliates.................................. 5,471 3,721
Gains on sales of assets...................................... - (1,356)
Changes in operating assets and liabilities:
Accounts receivable........................................... 25,217 3,496
Inventory..................................................... 429 278
Other miscellaneous assets.................................... (8,874) (405)
Long-term receivables......................................... 319 (812)
Income taxes.................................................. (192) (644)
Accounts payable.............................................. (4,900) (692)
Accrued expenses.............................................. (17,835) (8,196)
Deferred income and other long-term liabilities............... (9,527) (14,640)
Other, net.................................................... (2,778) (4,033)
--------- --------
Net cash provided by (used by) continuing operations.......... 472 (13,291)
Investing activities:
Expenditures for property, plant and equipment................ (12,503) (10,161)
Acquisitions.................................................. (10,000) -
Proceeds from sale of discontinued operation.................. 135,000 -
Proceeds from asset sales..................................... - 1,156
--------- --------
Net cash provided by (used by) investing activities........... 112,497 (9,005)
Financing activities:
Proceeds from short-term debt................................. 1,643 2,138
Repayment of short-term debt.................................. (13,345) (15,460)
Proceeds from long-term debt.................................. 10,614 15,880
Repayment of long-term debt................................... (103,604) (624)
Proceeds from Common Stock, net............................... 100 1,536
--------- --------
Net cash provided by (used by) financing activities........... (104,592) 3,470
Effect of exchange rate changes on cash....................... 1,460 289
Net cash provided by (used by) discontinued operations........ (6,129) 21,245
--------- --------
Increase in cash and cash equivalents......................... 3,708 2,708
Cash and cash equivalents, beginning of period................ 10,610 4,773
--------- --------
Cash and cash equivalents, end of period...................... $ 14,318 $ 7,481
========= ========
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these statements.
3
Bell & Howell Company and Subsidiaries
Notes to the Consolidated Financial Statements
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts of Bell & Howell
Company and its subsidiaries (collectively the "Company") and have been prepared
without independent audit.
In the first quarter of fiscal 2000, the Company adopted a plan to divest its
Mail and Messaging Technologies and Imaging businesses and its financing
subsidiary. Accordingly, the operating results and net assets of these
businesses have been segregated from the Company's continuing operations.
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 accounting principles
generally accepted in the United States have been condensed or omitted. The
Company's management believes, however, that the disclosures are adequate to
make the information presented not misleading. These consolidated financial
statements should be read in conjunction with the Consolidated Financial
Statements and the notes thereto included in the Company's annual report for the
fiscal year ended December 30, 2000. Certain amounts from 2000 have been
reclassified to conform with the 2001 classifications.
Note 2 - Significant Accounting Policies
Inventory. Inventory costs include material, labor and overhead. Inventories
---------
are stated at the lower of cost (determined using the first-in, first-out
("FIFO") method) or market. During the fourth quarter of 2000, the Company
changed its method of inventory valuation for the Publishing Services
business from the last-in, first-out ("LIFO") method to the FIFO method as the
majority of the inventory items for this business
4
have been continuing to decrease in price. Accordingly, the Company believes
that the FIFO method will result in a better measurement of operating results.
All previously reported results have been restated to reflect the retroactive
application of this accounting change as required by accounting principles
generally accepted in the United States.
The components of inventory are shown in the table below as of the dates
indicated:
March 31, December 30,
2001 2000
---------- -----------
Finished products...................... $ 1,509 $ 1,932
Products in process and materials...... 2,601 2,672
-------- --------
Total inventory........................ $ 4,110 $ 4,604
======== ========
Net Earnings per Common Share. Basic net earnings per common share is
-----------------------------
computed by dividing net earnings by the weighted average number of common
shares outstanding during the period. Diluted net earnings per common share is
computed by dividing net earnings by the weighted average number of common
shares outstanding during the period, and assumes the issuance of additional
common shares for all dilutive stock options outstanding during the period. A
reconciliation of the weighted average number of common shares and equivalents
outstanding in the calculation of basic and diluted earnings per share is shown
in the table below for the periods indicated:
Thirteen Weeks Ended
--------------------
March 31, April 1,
2001 2000
-------- --------
Basic................................. 23,622 23,678
Dilutive effect of stock options...... 48 --
------ ------
Diluted............................... 23,670 23,678
====== ======
Diluted Earnings (Loss) Per Common Share from Continuing Operations
before Equity in Loss of Affiliate and Cumulative Effect of a
Change in Accounting Principle:
------------------------------
Earnings from continuing operations before
equity in loss of affiliate and cumulative
effect of a change in accounting principle... $ 0.21 $ 0.03
Equity in loss of affiliate................... (0.23) (0.16)
------- -------
Loss from continuing operations before
cumulative effect of a change in
accounting principle......................... $ (0.02) $ (0.13)
======= =======
5
Note 3 - Discontinued Operations
In the first quarter of fiscal 2000, the Company adopted a plan to divest
its Mail and Messaging Technologies and Imaging businesses and its financing
subsidiary. Accordingly, the operating results and net assets of these
businesses have been segregated from the Company's continuing operations. The
Consolidated Statements of Operations separately reflect the earnings of these
businesses, which include an allocation of the Company's interest expense. The
Consolidated Balance Sheets separately reflect the net assets of these
businesses as a non-current asset.
Results from discontinued operations are shown in the table below for the
periods indicated:
Thirteen Weeks Ended
--------------------
March 31, April 1,
2001 2000
-------- --------
Net sales....................................... $115,520 $137,597
Earnings before restructuring charge, interest
and income taxes............................... 6,195 7,668
Restructuring charge............................ -- 3,462
Interest expense................................ 2,500 2,345
-------- --------
Earnings before income taxes.................... 3,695 1,861
Income tax expense.............................. 1,478 744
-------- --------
Earnings from discontinued operations........... $ 2,217 $ 1,117
======== ========
In October 2000, the Company announced an agreement to sell its Imaging
business to Eastman Kodak. The transaction was completed in February 2001 for
$135,000 with the scanner equipment business excluded due to regulatory issues.
Further, in April 2001 the Company announced an agreement to sell a majority of
its foreign discontinued operations to Pitney Bowes for $51,000. The
transaction, which is subject to regulatory approval in Germany and to employee
consultation obligations, is expected to close in the second quarter of 2001.
Note 4 - Sales of Assets
Gains on sales of assets in the first quarter of fiscal 2000 included:
- a portion of the Company's investment in its affiliate (bigchalk.com)
resulting from the exercise of stock options granted to employees
(proceeds of $1,156 and gain on sale of $867), and
6
- the Company's investment in an entity acquired by bigchalk.com in
exchange for additional common stock in bigchalk.com with a value of
$4,935 and a resulting gain on sale of $489.
Note 5 - Restructuring
In December 1999, the Company announced a plan to restructure and consolidate
certain of its operations, which resulted in recording a charge of $36,765
($28,277 after-tax). In fiscal 2000, further restructuring charges of $12,589
($7,553 after-tax) were recorded primarily for severance cost and future lease
obligations. The fiscal 2000 severance provided for a reduction of approximately
36 employees in continuing operations and 64 employees in discontinued
operations. The fiscal 1999 severance provided for a reduction of approximately
122 employees in continuing operations and 178 employees in discontinued
operations. The restructuring plan will be substantially completed during fiscal
2001, with the details of the restructuring charges as follows:
Balance Thirteen Weeks Ended March 31, 2001 Balance
-----------------------------------
Dec. 31, Restruct. Utilized March 31,
2000 Charge Cash Noncash 2001
--------- ---------- ------ --------- ----------
Continuing Operations
---------------------
Severance.................. $ 1,980 $ -- $ 535 $ -- $ 1,445
Obligations under various
noncancellable leases...... 4,293 -- 573 77 3,643
------- ------ ------- -------- -------
Continuing Operations...... 6,273 -- 1,108 77 5,088
Discontinued Operations
-----------------------
Severance.................. 327 -- 306 -- 21
Obligations under various
noncancellable leases...... 2,743 -- 230 -- 2,513
------- ------ ------- -------- -------
Discontinued Operations.... 3,070 -- 536 -- 2,534
------- ------ ------- -------- -------
Total Company.............. $ 9,343 $ -- $ 1,644 $ 77 $ 7,622
======= ====== ======= ======== =======
The restructuring plan has been approved by the Company's Board of Directors,
with the related severance costs based on preexisting severance agreements and
the number, job classification and location of affected employees to be
terminated. Accrued costs for obligations under various noncancellable leases
relate to contractual payments that were committed to prior to approving the
restructuring plan, for which
7
no economic benefit to the Company will be subsequently realized. The
restructuring plan identifies all significant actions to be taken and
significant changes to such plan are not likely.
Note 6 - Cumulative Effect of a Change in Accounting Principle
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). As a result of this pronouncement, the Company has modified its
accounting for revenue from new on-line subscriptions in the Information and
Learning business and from electronic parts catalog agreements in the Publishing
Services business.
Consistent with the SEC guidelines contained in SAB 101, beginning in fiscal
2000, revenue for new on-line subscriptions at Information and Learning is
recognized equally throughout the initial subscription period, with appropriate
cost deferral. Previously, such revenue was recognized during the initial
subscription period in proportion to costs incurred, in order to yield a
constant gross profit percentage throughout the subscription period.
Under the new method of revenue recognition at Publishing Services, all
electronic parts catalog content revenue is recognized over the term of the
agreement using the straight-line method. Previously, the Company recognized
revenue related to the content element of these agreements primarily upon
delivery of the product to the customer, with a portion deferred and recognized
on the straight-line basis over the initial agreement period.
The cumulative effect of adopting these changes in accounting for revenue are
reported as a cumulative effect of a change in accounting principle as of the
beginning of fiscal 2000. As a result of the changes in the methods of
accounting for revenue, approximately $114,800 in revenue recognized in fiscal
1999 and prior years was reversed and included in the cumulative effect
adjustment of $65,302 (net of tax benefit of $38,500). In connection with the
initial recognition of these changes in the method of accounting for revenue,
the Company reversed certain accounts receivable balances and recorded a
liability of approximately $88,600 representing amounts due from customers in
the future that were monetized by the Company's finance subsidiary prior to the
change in the method of revenue recognition. The effect of these changes in the
first quarter of fiscal 2000 was to increase sales by $2,700, selling and
administrative expense by $500, and net interest expense by $2,300.
8
During the first quarter of fiscal 2001 and 2000, the Company recognized
revenue of approximately $8,452 and $12,245, respectively, that was recognized
in 1999 and prior years under the Company's prior revenue recognition methods.
Note 7 - Derivative Instruments
The Company's operations expose it to risks associated with interest rates. As
part of the Company's risk management program, it uses or has used interest rate
swaps. None of the instruments used are entered into for trading purposes or
speculation, and management believes all are economically effective as hedges of
underlying transactions. As the underlying transaction is realized, interest
expense will be recognized.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement provides a comprehensive
standard for the recognition and measurement of derivatives and hedging
activities. In June 2000, the FASB issued SFAS No. 138, which amended certain
provisions of SFAS No. 133. The Company adopted SFAS No. 133, as amended, at the
beginning of the current fiscal year.
The adoption of SFAS No. 133 did not have a material impact on the Company's
results of operations or financial position, but resulted in a net decrease in
other comprehensive income of $6,594 for the quarter ended March 31, 2001. The
effect of the transition adjustment as of the first day of fiscal 2001 was a net
decrease in other comprehensive income of $2,032. The transition adjustment had
no effect on net earnings. As of March 31, 2001, accrued expenses included
$10,717 representing the fair value of derivative instruments.
The following table summarizes the net activities in other comprehensive
income related to derivatives classified as hedges held by the Company during
the fiscal quarter ended March 31, 2001:
Cumulative effect of adopting SFAS No. 133 as of
December 31, 2000....................................... $ (2,032)
Gains/(losses) reclassified into net earnings............ 213
Year-to-date net unrealized loss on derivatives.......... (4,775)
--------
Total.................................................... $ (6,594)
========
9
Note 8 - Comprehensive Income
Comprehensive earnings or loss includes all changes in stockholders' equity
during the period except those resulting from investments by owners and
distributions to owners. The components of comprehensive income for the Company
include net earnings, unrealized gains and losses relating to the translation
of foreign currency balance sheets, and the net unrealized gains and losses
related to derivative instruments.
Comprehensive income is shown in the table below for the periods indicated:
Thirteen Weeks Ended
-----------------------
March 31, April 1,
2001 2000
-------- ---------
Net earnings (loss)........................................... $ 45,227 $ (67,325)
Other comprehensive income (loss):
Net unrealized loss on derivative instruments................. (6,594) --
Foreign currency translation adjustments...................... 767 (1,264)
-------- ---------
Comprehensive income (loss)................................... $ 39,400 $ (68,589)
======== =========
The foreign currency translation adjustments and net loss on derivative
instruments do not impact the Company's income tax expense.
10
Item 2.
------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
This section should be read in conjunction with the Consolidated Financial
Statements of Bell & Howell Company and Subsidiaries (collectively the
"Company") and the notes thereto included in the annual report for the year
ended December 30, 2000.
Except for the historical information and discussions contained herein,
statements contained in this release may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements involve a number of risks, uncertainties and other factors,
including, without limitation, the cost and availability of intellectual
property from third parties, decreases in the ability to attract and retain
employees, obtain capital, including interest rate risks, unexpected merger-
related effects, timing and market conditions relating to the sale of the Mail &
Messaging Technologies business as well as business execution risk and risk of
new competitors, and any necessary regulatory approvals, decreases in funding
for Internet access as well as overall acceptance and usage of the Internet in
the education and library markets, the availability of free or advertising-
supported research information on the Internet, decreases or shifts in mail
volumes, rate of acceptance of electronic-based mailings, including effects of
and rate of acceptance of internet-based solutions, including the automotive
business, changes in the business services market, changes in the automotive
industry, and general economic conditions, all of which could cause actual
results to differ materially, and such other risks as discussed in the Company's
filings with the Securities and Exchange Commission.
Results of Operations
---------------------
First Quarter of Fiscal 2001 Compared to First Quarter of Fiscal 2000
---------------------------------------------------------------------
The Company's net sales from continuing operations increased $7.2 million, or
8%, to $95.9 million in the first quarter of 2001.
Net sales of the Information and Learning business increased $5.5 million, or
11%, to $55.9 million primarily due to strong sales at ProQuest On-line, which
grew 18%, partially offset by lower than expected revenues from non-subscription
digital products.
11
Net sales of the Publishing Services business increased $1.8 million, or 5%,
to $40.0 million in the first quarter of 2001. This increase is primarily due to
strong sales of the Automotive Electronic Parts Catalogs, which grew 11%,
partially offset by a decline in the sales of computer hardware and microfilm,
which are less strategic and more mature product lines.
The Company's cost of sales decreased $0.2 million to $47.1 million in
the first quarter of 2001, with the gross profit (net sales less cost of sales)
percentage increasing by 4.2 percentage points to 50.8. The higher gross profit
percentage in 2001 primarily resulted from good expense management and increased
sales of products with high margin contribution.
Research and development expense for the first quarter 2001 increased 16% to
$5.1 million as the Company continues to invest significantly in new product
offerings. The Company continually seeks to take advantage of new
product/technology opportunities in each of its businesses. The Company's
research and development expenditures include investments in a variety of e-
commerce initiatives, expenses for database and software development,
information delivery systems and other electronic devices.
Selling and administrative expense of $29.4 million in the first quarter of
2001 was essentially equal to that reported for the period last year. However,
as a percent of sales, selling and administrative expenses declined from 33% in
the first quarter of 2000 to 31% in the first quarter of 2001. This improvement
in cost efficiency reflects benefits related to sales force realignment,
partially offset by continued investment in a variety of e-commerce initiatives
and sales/marketing resources to capitalize on the sales growth opportunities
from internet-based products.
Earnings from continuing operations before interest, income taxes, equity in
loss of affiliate, and cumulative effect of a change in accounting principle
increased $5.4 million, or 60%, to $14.2 million in the first quarter of 2001
resulting from the increased sales and leveraged operating costs/expenses
(despite significant investments in e-commerce-related initiatives). EBITDA
(which adds back depreciation and amortization) increased $5.8 million, or 26%,
to $27.8 million in the first quarter of 2001.
Net interest expense decreased $1.8 million, or 23%, to $6.1 million in the
first quarter of 2001, primarily reflecting decreased debt levels due to the
Company utilizing the proceeds from the sale of a discontinued operation to pay
down debt.
12
Income tax expense increased in the first quarter of 2001 as a result of the
higher level of pretax profit, with the income tax rate remaining constant with
the prior year.
In December 1999, the Company combined its kindergarten through twelfth grade
("K-12") internet business with the K-12 internet business from Infonautics,
Inc., to form bigchalk.com. The Company's equity in bigchalk.com's loss equaled
$5.5 million in the first quarter of 2001. Subsequent to both venture capital
financing and the sale of the Company's investment in an entity acquired by
bigchalk.com (in exchange for additional common stock) the Company owned
approximately 38% of bigchalk.com at the end of the first quarter of 2001.
bigchalk.com develops and markets products and services for research, curriculum
integration, assessment, peer collaboration, professional development, online
community, and e-commerce for teachers, students, parents, librarians and school
administrators in the K-12 educational community.
In the first quarter of 2000, the Company adopted a plan to divest its Mail
and Messaging Technologies and Imaging businesses and its financing subsidiary.
Accordingly, the operating results of these businesses have been segregated from
the Company's continuing operations, and are separately reported as discontinued
operations in the consolidated financial statements.
Debt (net of cash and cash equivalents) decreased by $109.0 million to $398.2
million in the first quarter of 2001 as a result of the cash provided by
operations and proceeds from the sale of a discontinued operation, partially
offset by capital expenditures.
The Company believes that current cash balances, cash generated from
operations, and availability under its line of credit will be adequate to fund
the growth in working capital and capital expenditures necessary to support
planned increases in sales for the foreseeable future.
Interest Rate Risk Management
The Company uses variable-rate long-term debt to finance its operations. These
debt obligations expose the Company to variability in interest payments due to
changes in interest rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense also
decreases.
Management believes it is prudent to limit the variability of most of its
interest payments. It is the Company's objective
13
to hedge between 75 and 95 percent of its variable-rate longer term interest
payments.
To meet this objective, management enters into interest rate swaps to manage
fluctuations in cash flows resulting from interest rate risk. The Company
assesses interest rate cash flow risk by continually identifying and monitoring
changes in interest rate exposures that may adversely impact expected future
cash flows.
The interest rate swaps change the variable-rate cash flow exposure on the
long-term debt obligations to fixed-rate cash flows by entering into receive-
variable, pay-fixed interest rate agreements, thereby creating fixed-rate long-
term debt.
Recently Adopted Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement provides a comprehensive
standard for the recognition and measurement of derivatives and hedging
activities. In June 2000, the FASB issued SFAS No. 138, which amended certain
provisions of SFAS No. 133. The Company adopted SFAS No. 133, as amended, at the
beginning of the current fiscal year. The Company recorded a one-time after-tax
unrealized loss of $2,032 representing the cumulative effect of a change in
accounting principle to other comprehensive income as of December 31, 2000, and
an after-tax unrealized loss of $4,775 for the quarter ended March 31, 2001 as a
result of the adoption of SFAS No. 133.
14
Item 3.
------
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no material changes in the Company's market risk during the
quarter ended March 31, 2001. For additional information on market risk, refer
to the "Quantitative and Qualitative Disclosures About Market Risk" section of
the Company's annual report for the fiscal year ended December 30, 2000.
Part II. Other Information
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Item 1. Legal Proceedings.
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The Company is involved in various legal proceedings incidental to its
business. Management believes that the outcome of such proceedings will not have
a material adverse effect upon the consolidated operations or financial
condition of the Company.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits:
Index Number Description
------------ -----------
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the thirteen weeks ended March 31,
2001.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2001 BELL & HOWELL COMPANY
/s/ James P. Roemer
--------------------------
James P. Roemer
Chairman of the Board
of Directors, President and
Chief Executive Officer
/s/ Alan Aldworth
---------------------------
Alan Aldworth
Chief Financial Officer
16