<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to ______________
Commission File Number 0-29474
BIG FLOWER HOLDINGS, INC.
Commission File Number 1-14084
BIG FLOWER PRESS HOLDINGS, INC.
(Exact Names of Registrants as Specified in Their Charters)
DELAWARE 13-397-1556
DELAWARE 13-376-8322
(State of incorporation) (I.R.S. Employer
Identification Nos.)
3 East 54th Street
New York, New York 10022
(212) 521-1600
(Address and telephone number of Registrants' Principal Executive Offices)
Indicate by check mark whether the Registrants (1) have 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
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
As of October 31, 1998, there were approximately 19,700,000 shares of Big Flower
Holdings, Inc.'s common stock, par value $0.01 per share, outstanding. There is
no market for the common stock of Big Flower Press Holdings, Inc., all
outstanding shares of which are owned by Big Flower Holdings, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I--FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets of Big Flower Holdings, Inc. and subsidiaries at September
30, 1998 and December 31, 1997.................................................................. 3
Condensed Consolidated Statements of Operations of Big Flower Holdings, Inc. and subsidiaries for
the Three Months Ended September 30, 1998 and 1997.............................................. 4
Condensed Consolidated Statements of Operations of Big Flower Holdings, Inc. and subsidiaries for
the Nine Months Ended September 30, 1998 and 1997............................................... 5
Condensed Consolidated Statements of Cash Flows of Big Flower Holdings, Inc. and subsidiaries for
the Nine Months Ended September 30, 1998 and 1997............................................... 6
Condensed Consolidated Balance Sheets of Big Flower Press Holdings, Inc. and subsidiaries at
September 30, 1998 and December 31, 1997........................................................ 7
Condensed Consolidated Statements of Operations of Big Flower Press Holdings, Inc. and
subsidiaries for the Three Months and Nine Months Ended September 30, 1998...................... 8
Condensed Consolidated Statement of Cash Flows of Big Flower Press Holdings, Inc. and subsidiaries
for the Nine Months Ended September 30, 1998.................................................... 9
Notes to Condensed Consolidated Financial Statements of Big Flower Holdings, Inc. and
subsidiaries.................................................................................... 10
ITEM 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................... 14
PART II--OTHER INFORMATION................................................................................... 23
</TABLE>
2
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 5,800 $ 5,307
Accounts receivable, net of allowance for doubtful accounts of $10,608 and
$12,342......................................................................... 180,726 140,112
Inventories....................................................................... 56,263 46,510
Deferred income taxes and income tax receivable................................... 19,974 19,827
Prepaid expenses and other current assets......................................... 8,346 4,625
------------- ------------
Total current assets.......................................................... 271,109 216,381
Property, plant and equipment, net.................................................. 440,283 384,848
Goodwill, net....................................................................... 466,901 415,601
Intangibles and other assets, net................................................... 78,249 42,217
------------- ------------
Total Assets.................................................................. $ 1,256,542 $1,059,047
------------- ------------
------------- ------------
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 150,497 $ 133,648
Compensation and benefits payable................................................. 41,702 45,281
Accrued interest.................................................................. 9,852 13,775
Other current liabilities......................................................... 63,259 41,145
------------- ------------
Total current liabilities..................................................... 265,310 233,849
Long-term debt, net of current portion.............................................. 713,192 590,045
Deferred income taxes............................................................... 39,077 27,811
Other long-term liabilities......................................................... 19,705 20,804
------------- ------------
Total liabilities............................................................. 1,037,284 872,509
------------- ------------
Company obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust whose sole assets are the convertible subordinated debentures of
Big Flower Holdings, Inc.......................................................... 115,000 115,000
------------- ------------
Stockholders' equity:
Preferred stock
Common stock...................................................................... 198 195
Additional paid-in capital........................................................ 147,353 140,798
Accumulated deficit............................................................... (46,152) (68,548)
Accumulated other comprehensive income............................................ 3,664
Other............................................................................. (805) (907)
------------- ------------
Total stockholders' equity.................................................... 104,258 71,538
------------- ------------
Total Liabilities and Equity.................................................. $ 1,256,542 $1,059,047
------------- ------------
------------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
Net sales................................................................................. $ 440,107 $ 341,579
---------- ----------
Operating expenses:
Costs of production..................................................................... 325,991 268,827
Selling, general and administrative..................................................... 51,310 33,060
Depreciation............................................................................ 16,842 11,776
Amortization of intangibles............................................................. 5,315 4,168
---------- ----------
399,458 317,831
---------- ----------
Operating income.......................................................................... 40,649 23,748
---------- ----------
Other expenses (income):
Interest expense........................................................................ 14,588 9,805
Amortization of deferred financing costs................................................ 526 305
Interest income......................................................................... (153) (35)
Preferred dividends of a subsidiary trust............................................... 1,725
Other, net.............................................................................. (120) 1,758
---------- ----------
16,566 11,833
---------- ----------
Income before income taxes................................................................ 24,083 11,915
Income tax expense........................................................................ 11,078 5,855
---------- ----------
Income before extraordinary item.......................................................... 13,005 6,060
Extraordinary item, net................................................................... (10,504)
---------- ----------
Net income (loss)......................................................................... $ 13,005 $ (4,444)
---------- ----------
---------- ----------
Earnings per share:
Basic:
Income before extraordinary item...................................................... $ 0.66 $ 0.33
Extraordinary item, net............................................................... (0.57)
---------- ----------
Net income (loss)..................................................................... $ 0.66 $ (0.24)
---------- ----------
---------- ----------
Diluted:
Income before extraordinary item...................................................... $ 0.57 $ 0.31
Extraordinary item, net............................................................... (0.54)
---------- ----------
Net income (loss)..................................................................... $ 0.57 $ (0.23)
---------- ----------
---------- ----------
Weighted average shares outstanding:
Basic................................................................................... 19,779 18,518
---------- ----------
---------- ----------
Diluted................................................................................. 24,809 19,396
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
<S> <C> <C>
1998 1997
------------ ----------
Net sales............................................................................... $ 1,236,879 $ 955,918
------------ ----------
Operating expenses:
Costs of production................................................................... 930,992 752,981
Selling, general and administrative................................................... 149,363 96,162
Depreciation.......................................................................... 47,230 34,776
Amortization of intangibles........................................................... 17,358 12,456
------------ ----------
1,144,943 896,375
------------ ----------
Operating income........................................................................ 91,936 59,543
------------ ----------
Other expenses (income):
Interest expense...................................................................... 41,135 29,309
Amortization of deferred financing costs.............................................. 1,381 1,277
Interest income....................................................................... (353) (257)
Preferred dividends of a subsidiary trust............................................. 5,175
Other, net............................................................................ 3,125 5,619
------------ ----------
50,463 35,948
------------ ----------
Income before income taxes.............................................................. 41,473 23,595
Income tax expense...................................................................... 19,077 11,461
------------ ----------
Income before extraordinary item........................................................ 22,396 12,134
Extraordinary item, net................................................................. (13,463)
------------ ----------
Net income (loss)....................................................................... $ 22,396 $ (1,329)
------------ ----------
------------ ----------
Earnings per share:
Basic:
Income before extraordinary item.................................................... $ 1.14 $ 0.65
Extraordinary item, net............................................................. (0.72)
------------ ----------
Net income (loss)................................................................... $ 1.14 $ (0.07)
------------ ----------
------------ ----------
Diluted:
Income before extraordinary item.................................................... $ 1.03 $ 0.63
Extraordinary item, net............................................................. (0.70)
------------ ----------
Net income (loss)................................................................... $ 1.03 $ (0.07)
------------ ----------
------------ ----------
Weighted average shares outstanding:
Basic................................................................................. 19,625 18,544
------------ ----------
------------ ----------
Diluted............................................................................... 24,735 19,329
------------ ----------
------------ ----------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
<S> <C> <C>
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................................................................... $ 22,396 $ (1,329)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization....................................................... 64,588 47,232
Extraordinary item, net............................................................. 13,463
Deferred income taxes............................................................... (552) (26)
Other............................................................................... 50 4,140
Changes in operating assets and liabilities (excluding effect of acquisitions):
(Increase) decrease in accounts receivable........................................ (20,987) 3,420
Increase in inventories........................................................... (6,252) (9,409)
Increase in prepaid expenses and other assets..................................... (4,705) (4,079)
Increase in accounts payable and other liabilities................................ 8,784 12,873
----------- -----------
Net cash provided by operating activities............................................... 63,322 66,285
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................................................. (71,368) (60,071)
Acquisition of businesses, net of cash acquired....................................... (47,555) (32,743)
Investment in equity instruments and leveraged lease transaction...................... (28,159)
Other investing activities............................................................ (3,586) 317
----------- -----------
Net cash used in investing activities................................................... (150,668) (92,497)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under lines of credit.................................................. 101,809 14,259
Repayments of long-term debt.......................................................... (25,967) (215,396)
Issuance of long-term debt............................................................ 17,500 250,000
Increase (decrease) in outstanding checks drawn on controlled disbursement accounts... 673 (10,622)
Repurchase of common stock............................................................ (5,623) (3,521)
Deferred financing costs.............................................................. (2,023) (9,267)
Other................................................................................. 1,470 363
----------- -----------
Net cash provided by financing activities............................................... 87,839 25,816
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.................................... 493 (396)
Cash and Cash Equivalents at Beginning of Year.......................................... 5,307 4,200
----------- -----------
Cash and Cash Equivalents at End of Period.............................................. $ 5,800 $ 3,804
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
THE FOLLOWING FINANCIAL STATEMENTS PRESENT THE CONSOLIDATED FINANCIAL
POSITION AND RESULTS OF OPERATIONS OF BIG FLOWER PRESS HOLDINGS, INC., AS ISSUER
OF 8 7/8% SENIOR SUBORDINATED NOTES DUE 2007, AND ITS SUBSIDIARIES.
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 5,790 $ 5,307
Accounts receivable, net of allowance for doubtful
accounts of $10,608 and $12,342................................................. 180,704 140,112
Inventories....................................................................... 56,263 46,510
Deferred income taxes and income tax receivable................................... 19,974 19,827
Prepaid expenses and other current assets......................................... 8,104 4,625
------------- ------------
Total current assets.......................................................... 270,835 216,381
Property, plant and equipment, net.................................................. 436,288 384,848
Goodwill, net....................................................................... 466,901 415,601
Intangibles and other assets, net................................................... 72,266 37,438
------------- ------------
Total Assets.................................................................. $ 1,246,290 $1,054,268
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 150,113 $ 133,648
Compensation and benefits payable................................................. 40,816 45,281
Accrued interest.................................................................. 9,852 13,775
Other current liabilities......................................................... 64,909 40,196
------------- ------------
Total current liabilities..................................................... 265,690 232,900
Due to parent....................................................................... 3,185 3,466
Long-term debt, net of current portion.............................................. 713,192 590,045
Deferred income taxes............................................................... 39,077 27,811
Other long-term liabilities......................................................... 19,565 20,804
------------- ------------
Total liabilities............................................................. 1,040,709 875,026
------------- ------------
Stockholder's equity:
Accumulated deficit............................................................... (46,960) (67,643)
Accumulated other comprehensive income............................................ 3,664
Other............................................................................. 248,877 246,885
------------- ------------
Total stockholder's equity.................................................... 205,581 179,242
------------- ------------
Total Liabilities and Stockholder's Equity.................................... $ 1,246,290 $1,054,268
------------- ------------
------------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Net sales................................................................. $ 440,107 $ 1,236,879
-------- ------------------
Operating expenses:
Costs of production..................................................... 325,991 930,992
Selling, general and administrative..................................... 52,397 151,390
Depreciation............................................................ 16,759 47,005
Amortization of intangibles............................................. 5,160 16,893
-------- ------------------
400,307 1,146,280
-------- ------------------
Operating income.......................................................... 39,800 90,599
-------- ------------------
Other expenses (income):
Interest expense........................................................ 14,711 41,502
Amortization of deferred financing costs................................ 481 1,252
Interest income......................................................... (153) (353)
Other, net.............................................................. (120) 3,125
-------- ------------------
14,919 45,526
-------- ------------------
Income before income taxes................................................ 24,881 45,073
Income tax expense........................................................ 11,445 20,734
-------- ------------------
Net income................................................................ $ 13,436 $ 24,339
-------- ------------------
-------- ------------------
</TABLE>
See notes to condensed consolidated financial statements.
8
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................. $ 24,339
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 64,150
Deferred income taxes..................................................................... (552)
Other..................................................................................... (1,697)
Changes in operating assets and liabilities (excluding effect of acquisitions):
Increase in accounts receivable......................................................... (25,691)
Increase in inventories................................................................. (6,252)
Increase in prepaid expenses and other assets........................................... (3,758)
Increase in accounts payable and other liabilities...................................... 10,353
--------
Net cash provided by operating activities..................................................... 60,892
--------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................................................ (69,967)
Acquisition of businesses, net of cash acquired............................................. (47,555)
Investments in equity instruments and leveraged lease transaction........................... (28,159)
Other investing activities.................................................................. (3,586)
--------
Net cash used in investing activities......................................................... (149,267)
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under lines of credit........................................................ 101,809
Repayments of long-term debt................................................................ (25,967)
Issuance of long-term debt.................................................................. 17,500
Increase in outstanding checks drawn on controlled disbursement accounts.................... 674
Dividends paid to parent.................................................................... (3,656)
Other....................................................................................... (1,502)
--------
Net cash provided by financing activities..................................................... 88,858
--------
Net Decrease in Cash and Cash Equivalents..................................................... 483
Cash and Cash Equivalents at Beginning of Year................................................ 5,307
--------
Cash and Cash Equivalents at End of Period.................................................... $ 5,790
--------
--------
</TABLE>
See notes to condensed consolidated financial statements.
9
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Big Flower Holdings, Inc. ("Holdings" and, together with its subsidiaries,
the "Company") is the parent of Big Flower Press Holdings, Inc. ("Press"). The
Company's operations are conducted through Press, which, in turn, conducts its
operations through its operating subsidiaries. On October 17, 1997, the Company
reorganized its legal structure and the common shares of Press, the previous
parent company, were automatically exchanged for common shares of Holdings. As a
result of this reorganization, Press became a wholly-owned subsidiary of
Holdings. Prior to the formation of Holdings, the consolidated financial
statements of the Company represented the accounts of Press and its
subsidiaries. Separate footnote information is not presented for the financial
statements of Press and its subsidiaries as that information is substantially
equivalent to that presented below. Earnings per share data is not provided for
the operating results of Press and its subsidiaries as Press is a wholly-owned
subsidiary of Holdings.
The Company is responsible for the unaudited financial statements included
in this document. The financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and include all normal and
recurring adjustments that the Company considers necessary for the fair
presentation of its financial position and operating results. The Company
prepared the condensed financial statements following the requirements of the
Securities and Exchange Commission for interim reporting. As permitted under
those rules, the Company condensed or omitted certain footnotes or other
financial information that are normally required by GAAP. As these are condensed
financial statements, one should also read the financial statements and notes in
the Company's latest Form 10-K.
Revenues, expenses, assets and liabilities can vary during each quarter of
the year. Therefore, the results and trends in these interim financial
statements may not be the same as those for the full year.
Certain amounts for prior periods have been reclassified to conform to the
current period presentation.
2. ACQUISITIONS
The Company completed six acquisitions in the fall of 1997 and seven in the
first nine months of 1998. The timing of these acquisitions affects the
comparability of the Company's financial statements.
Between September and November 1997, the Company acquired Olwen Direct Mail,
Ltd. ("Olwen"), the assets of companies operating as Riverside County Publishing
Company ("RCPC"), Columbine JDS Systems, Inc. ("Columbine"), the assets of Gamma
One, Inc. ("Gamma One"), the assets of IMPCO Enterprises, Inc. ("IMPCO") and
Broadcast Systems Software Limited ("BSS").
In the first quarter of 1998, the Company acquired Troypeak Limited and
Pismo Limited (together, the "Fusion Group"). During the second quarter of 1998,
the Company acquired Reach America, Inc. ("Reach America"), Enteron Group, Inc.
("Enteron"), ColorStream Technologies L.L.C. ("ColorStream"), Adtraq Data
Systems ("Adtraq") and CJDS Adserve, Inc. ("Adserve"). In July 1998, the Company
acquired Imaging Consortium, Inc. ("ICON"). Aggregate consideration for the 1998
acquisitions was approximately $90 million, including debt repaid and the
issuance of approximately 295,000 shares of common stock. Goodwill arising in
connection with these acquisitions was approximately $60 million. The amounts
and allocations of costs recorded may require adjustment based upon information
that is not currently available to the Company.
10
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
The following unaudited pro forma information reflects the Company's results
adjusted to include the acquired businesses as though all the acquisitions and
related financing transactions had occurred at the beginning of 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Net sales.................................................. $ 1,266,000(1) $ 1,210,000(1)
Net income................................................. 22,400(1) 15,000(1)(2)
Earnings per share:
Basic.................................................... $ 1.13(1) $ 0.75(1)(2)
Diluted.................................................. 1.02(1) 0.73(1)(2)
</TABLE>
- ------------------------
(1) Excludes sales under a production arrangement with an unconsolidated
printing venture in which the Company had a minority interest and the
profits related to those sales. The Company sold its minority interest in
the first quarter of 1998 and terminated the production arrangement.
(2) Excludes non-recurring costs related to the Company's secondary stock
offering and the acquisition of Olwen as well as extraordinary losses
related to the early termination of a credit facility and early
extinguishment of debt.
3. INVENTORIES
Inventories as of September 30, 1998, and December 31, 1997, are summarized
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Paper........................................................... $ 46,637 $ 34,324
Ink and chemicals............................................... 4,476 5,447
Other........................................................... 5,150 6,739
------------- ------------
$ 56,263 $ 46,510
------------- ------------
------------- ------------
</TABLE>
4. SEGMENT INFORMATION
The Company operates in four business segments. Each segment offers
different products or services requiring different production and marketing
strategies. The four segments are:
- Insert Advertising & Newspaper Services, including advertising inserts and
circulation-building newspaper products such as Sunday comics, TV listing
guides, Sunday magazine sections and special supplements.
- Direct Marketing Services, including highly customized direct mail
products and direct marketing services such as database management and
response fulfillment services.
- Digital Services, including outsourced digital premedia, image content
management and broadcast management services.
- Specialty Products & Commercial Printing, including fragrance samplers,
coatings and chemical production, and commercial printing.
11
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION (CONTINUED)
Following is unaudited information regarding the Company's segments:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1998 1997
---------- ------------ ------------ ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Sales.............. Insert Advertising & Newspaper $ 272,937 $ 236,019 $ 790,574 $ 666,226
Services..........................
Direct Marketing Services........... 68,184 51,116 197,314 141,070
Digital Services.................... 74,404 25,822 187,240 67,907
Specialty Products & Commercial 26,523 30,071 68,083 84,575
Printing..........................
Elimination of intersegment sales... (1,941) (1,449) (6,332) (3,860)
---------- ------------ ------------ ----------
Consolidated........................ $ 440,107 $ 341,579 $ 1,236,879 $ 955,918
---------- ------------ ------------ ----------
---------- ------------ ------------ ----------
Operating Insert Advertising & Newspaper $ 23,986 $ 18,696 $ 56,392 $ 44,447
Income............... Services..........................
Direct Marketing Services........... 7,584 2,704 22,380 13,346
Digital Services.................... 8,647 3,469 19,813 7,046
Specialty Products & Commercial 3,260 1,350 4,029 4,475
Printing..........................
General Corporate................... (2,828) (2,471) (10,678) (9,771)
---------- ------------ ------------ ----------
Consolidated........................ $ 40,649 $ 23,748 $ 91,936 $ 59,543
---------- ------------ ------------ ----------
---------- ------------ ------------ ----------
Depreciation........... Insert Advertising & Newspaper $ 8,015 $ 6,268 $ 23,731 $ 19,051
Services..........................
Direct Marketing Services........... 3,467 2,775 9,722 7,975
Digital Services.................... 4,474 1,573 11,148 4,423
Specialty Products & Commercial 729 959 2,182 2,840
Printing..........................
General Corporate................... 157 201 447 487
---------- ------------ ------------ ----------
Consolidated........................ $ 16,842 $ 11,776 $ 47,230 $ 34,776
---------- ------------ ------------ ----------
---------- ------------ ------------ ----------
Amortization of Insert Advertising & Newspaper $ 3,046 $ 3,470 $ 10,822 $ 10,376
Intangibles.......... Services..........................
Direct Marketing Services 519 214 1,496 632
Digital Services.................... 1,460 319 4,155 956
Specialty Products & Commercial 165 165 510 492
Printing..........................
General Corporate................... 125 375
---------- ------------ ------------ ----------
Consolidated........................ $ 5,315 $ 4,168 $ 17,358 $ 12,456
---------- ------------ ------------ ----------
---------- ------------ ------------ ----------
</TABLE>
12
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMPREHENSIVE INCOME
Following are components of the Company's comprehensive income for the first
nine months of 1998 and 1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Net income (loss)........................................................ $ 22,396 $ (1,329)
Other comprehensive income (expense):
Unrealized gain on investments, net of tax............................. 3,646
Foreign currency translation adjustment................................ 18 (76)
--------- ---------
Total comprehensive income (loss)........................................ $ 26,060 $ (1,405)
--------- ---------
--------- ---------
</TABLE>
The unrealized gain on investments relates to available-for-sale securities
that are recorded at fair value based on available market information.
13
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. IN ADDITION, WHEN USED IN THIS
REPORT, THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS," "ESTIMATES," "INTENDS,"
"PLANS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, THE
COMPANY'S EXPECTATION AS TO WHEN IT WILL COMPLETE THE REMEDIATION AND TESTING
PHASES OF ITS YEAR 2000 PROGRAM AS WELL AS ITS YEAR 2000 CONTINGENCY PLANS, ITS
ESTIMATED COST OF ACHIEVING YEAR 2000 READINESS AND THE COMPANY'S BELIEF THAT
ITS INTERNAL SYSTEMS AND EQUIPMENT WILL BE YEAR 2000 COMPLIANT IN A TIMELY
MANNER. ALL FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
PROJECTED RESULTS. FACTORS THAT MAY CAUSE THESE DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO,
- FLUCTUATIONS IN THE COST OF RAW MATERIALS USED BY THE COMPANY,
- CHANGES IN THE ADVERTISING, MARKETING AND INFORMATION SERVICES MARKETS,
- THE FINANCIAL CONDITION OF THE COMPANY'S CUSTOMERS,
- THE GENERAL CONDITION OF THE UNITED STATES AND OTHER ECONOMIES,
- THE AVAILABILITY OF QUALIFIED PERSONNEL AND OTHER INFORMATION TECHNOLOGY
RESOURCES,
- THE ABILITY TO IDENTIFY AND REMEDIATE ALL DATE SENSITIVE LINES OF COMPUTER
CODE,
- THE ABILITY TO REPLACE EMBEDDED COMPUTER CHIPS IN SYSTEMS OR EQUIPMENT
AFFECTED BY YEAR 2000 ISSUES,
- THE ACTIONS OF GOVERNMENT AGENCIES OR OTHER THIRD PARTIES WITH RESPECT TO
YEAR 2000 ISSUES AND
- MATTERS SET FORTH IN THIS DOCUMENT GENERALLY.
CONSEQUENTLY, SUCH FORWARD-LOOKING STATEMENTS SHOULD BE REGARDED SOLELY AS
THE COMPANY'S CURRENT PLANS, ESTIMATES AND BELIEFS. THE COMPANY DOES NOT
UNDERTAKE AND SPECIFICALLY DECLINES ANY OBLIGATION TO PUBLICLY RELEASE THE
RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO
REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS OR
TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS.
RESULTS OF OPERATIONS
The Company is a leading advertising, marketing and information services
company with four business segments: Insert Advertising & Newspaper Services,
Direct Marketing Services, Digital Services and Specialty Products & Commercial
Printing. The following table presents the major components from the
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<PAGE>
Condensed Consolidated Statements of Operations and Cash Flows for the
three-month and nine-month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ----------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
--------- --------- ---------- ----------
(PERCENTAGES OF NET SALES)
Net sales.......................................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- ---------- ----------
Operating expenses:
Costs of production.............................................. 74.1 78.7 75.3 78.8
Selling, general and administrative.............................. 11.7 9.7 12.1 10.1
Depreciation..................................................... 3.8 3.4 3.8 3.6
Amortization of intangibles...................................... 1.2 1.2 1.4 1.3
--------- --------- ---------- ----------
90.8 93.0 92.6 93.8
--------- --------- ---------- ----------
Operating income................................................... 9.2% 7.0% 7.4% 6.2%
--------- --------- ---------- ----------
--------- --------- ---------- ----------
EBITDA............................................................. 14.3% 11.6% 12.6% 11.2%
--------- --------- ---------- ----------
--------- --------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA............................................................. $ 62,806 $ 39,692 $ 156,524 $ 106,775
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Net cash provided by operating activities.......................... $ 37,702 $ 24,191 $ 63,322 $ 66,285
Net cash used in investing activities.............................. 33,868 56,319 150,668 92,497
Net cash (used in) provided by financing activities................ (2,795) 31,234 87,839 25,816
</TABLE>
"EBITDA" represents the sum of operating income, depreciation and
amortization of intangibles. EBITDA is presented here to provide additional
information regarding the Company's ability to meet its future debt service,
capital expenditures and working capital requirements. EBITDA is not a measure
of financial performance in accordance with GAAP and should not be considered an
alternative to net income as a measure of operating performance or to cash flows
from operating activities as a measure of liquidity. The Company's definition of
EBITDA might not be the same as that of other companies.
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ------------------------
1998 1997 CHANGE 1998 1997 CHANGE
---------- ---------- ----------- ------------ ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net sales................................... $ 440,107 $ 341,579 28.8% $ 1,236,879 $ 955,918 29.4%
Operating income............................ 40,649 23,748 71.2% 91,936 59,543 54.4%
Net income (loss)........................... 13,005 (4,444) -- 22,396 (1,329) --
Diluted earnings (loss) per share........... 0.57 (0.23) -- 1.03 (0.07) --
</TABLE>
NET SALES
Revenue increases in 1998 were due primarily to acquisitions completed
between September 1997 and July 1998. Slightly offsetting the acquisition
impact, however, was the reduction in Specialty Products & Commercial Printing
sales caused by the divestiture of an investment in a printing venture and the
discontinuation of a related production agreement that generated approximately
$20 million of sales annually at break-even profitability. In addition, a
substantial portion of sales in the Insert Advertising & Newspaper Services
business includes the pass-through cost of paper provided to customers, and
revenue amounts can vary based on changing paper prices and the proportion of
paper provided by customers themselves.
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<PAGE>
Adjusting to include the operations of all businesses currently owned for
the entire comparable periods (and excluding the sales related to the divested
investment described above), net sales increased slightly for the third quarter
of 1998 and rose approximately 5% for the first nine months of 1998. Adjusting
further for the effect of ink and paper variations (i.e., to exclude the cost of
ink and paper), "value added" revenue increased approximately 10% for both the
quarter and nine-month periods when including comparable businesses in all
periods.
These comparable-business results reflect positive growth trends in the all
of the Company's business segments, particularly Direct Marketing Services and
Digital Services.
OPERATING EXPENSES
As a percentage of net sales, operating expenses in total declined due to
increased sales and productivity that more than offset the increased
infrastructure costs inherent in expanding the individual businesses. Variances
in expense category ratios also reflect:
- the Company's changing business mix as it acquires more companies to
expand the Digital Services and Direct Marketing Services segments, where
paper is a smaller component of costs and a higher proportion of the cost
structure is related to selling than to production.
- more rapid organic growth of business in the Digital Services and Direct
Marketing Services segments in proportion to the Company's total, and
- increased demand for higher margin products in the Insert Advertising &
Newspaper Services segment.
As a result of these factors, costs of production as a percentage of net
sales decreased to 74.1% for the current quarter from 78.7% last year, with
paper costs accounting for 31.2% of net sales in the 1998 period as compared to
37.4% in the 1997 period. Selling, general and administrative expenses increased
to 11.7% of net sales in 1998 from 9.7% in 1997.
For the first nine months of 1998, costs of production as a percentage of
net sales decreased to 75.3% from 78.8% for the same period last year with paper
costs representing 32.7% of net sales in 1998 and 36.5% in 1997. Selling,
general and administrative expenses for the first nine months of 1998 increased
to 12.1% of net sales from 10.1% in the comparable 1997 period.
Selling, general and administrative expenses in the three-month and
nine-month periods in 1997 include $3.2 million of non-recurring costs related
to the acquisition of Olwen. The nine-month period in 1997 also includes $0.6
million of non-recurring costs related to the Company's secondary stock
offering. Excluding these costs, the ratio of selling, general and
administrative expenses to net sales was 8.7% for the third quarter of 1997 and
9.7% for the nine-month period.
OPERATING INCOME AND EARNINGS PER SHARE
Operating income for the third quarter of 1998 increased 71.2% over the
prior year period to 9.2% of net sales versus 7.0% last year (7.9% in 1997
excluding the non-recurring costs discussed in the previous section). For the
nine-month periods, 1998 operating income increased 54.4% over the prior year to
7.4% of net sales versus 6.2% last year (6.6% in 1997 excluding the
non-recurring costs). Adjusted to exclude the non-recurring costs in 1997 and to
include comparable businesses for the entire comparable periods, operating
income increased approximately 20% for the three-month period and approximately
10% for the nine-month period when compared with the prior year.
In addition to the factors noted above, the increases in net income and
diluted earnings per share also reflect comparison to net losses that include
extraordinary losses of (a) $3.0 million (net of tax benefit), or 16 cents per
share, recorded in the second quarter of 1997 related to the early termination
of a revolving credit facility and (b) $10.5 million (net of tax benefit), or 54
cents per share, recorded in the third quarter
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<PAGE>
of 1997 related to the early extinguishment of debt. The year-over-year
increases in weighted average diluted shares are due to the assumed conversion
of redeemable convertible preferred securities issued in October 1997.
RESULTS BY SEGMENT
INSERT ADVERTISING & NEWSPAPER SERVICES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1998 1997 CHANGE 1998 1997 CHANGE
---------- ---------- ----------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................................... $ 272,937 $ 236,019 15.6% $ 790,574 $ 666,226 18.7%
Operating income.............................. 23,986 18,696 28.3% 56,392 44,447 26.9%
</TABLE>
The increases in net sales and operating income are mostly the result of the
acquisition of RCPC in October 1997. Adjusted to include RCPC for the comparable
periods in 1997, net sales were flat for the third quarter of 1998 and increased
approximately 5% for the nine-month period. Adjusting for the cost of paper and
the effect of customer supplied paper, "value added" revenue including RCPC in
all periods increased approximately 5% for both the three-month and nine-month
periods. Operating income, including RCPC in all periods, increased
approximately 15% for both the quarterly and the nine-month periods.
The comparable "value added" revenue results reflect the steady growth of TC
Advertising's primary insert customer categories of general merchandise,
specialty, grocery, drug, furniture and home improvement stores, as well as
newspaper television listings magazines. In addition, this segment benefited
from higher demand for targeted inserts and versioning services to customize
inserts for different regions of a customer's business.
The higher rate of operating income growth in both the three-month and
nine-month periods also stemmed from operating synergies with RCPC that yielded
more efficient production for the combined business, as well as a continued
focus on productivity and expense control.
DIRECT MARKETING SERVICES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ----------------------
1998 1997 CHANGE 1998 1997 CHANGE
--------- --------- ----------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................... $ 68,184 $ 51,116 33.4% $ 197,314 $ 141,070 39.9%
Operating income............................. 7,584 2,704 180.5% 22,380 13,346 67.7%
</TABLE>
Net sales and operating income increases in this segment over the prior year
reflect, in part, the impact of acquisitions in 1997 and 1998. Adjusting to
include acquired businesses for the full comparable periods, sales increased
approximately 10% in the third quarter and the nine-month periods. Operating
income, excluding the non-recurring costs related to the acquisition of Olwen in
September 1997, increased 28.8% in the quarter and 35.4% for the nine-month
period. Adjusting further to include all acquired companies for full comparable
periods, the increases were approximately 25% for the quarter and approximately
20% for the first nine months of 1998.
The net sales results for both periods reflect increased demand for
customized direct mail, principally from customers in the publishing, financial
services, retail, non-profit, automotive and telecommunications industries.
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<PAGE>
The operating income results reflect the impact of strong growth in
higher-margin imaged direct mail product lines and the effective management of
expenses, tempered by investments in data analysis and data mining portions of
the business to allow for expansion of service offerings.
DIGITAL SERVICES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ---------------------
1998 1997 CHANGE 1998 1997 CHANGE
--------- --------- ----------- ---------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales...................................... $ 74,404 $ 25,822 188.1% $ 187,240 $ 67,907 175.7%
Operating income............................... 8,647 3,469 149.3% 19,813 7,046 181.2%
</TABLE>
Increases in sales and operating income for this segment are principally
attributable to the acquisitions of Columbine and Gamma One in October 1997 as
well as the additions of the Fusion Group, Enteron, Reach America, Adtraq,
Adserve and ICON in 1998. Adjusting to include these businesses in all periods,
net sales increased approximately 5% for the third quarter and approximately 10%
for the first nine months of 1998 as compared to the same periods in 1997.
Operating income for the nine-month period on the same basis of comparison
increased approximately 10% over the first nine months of 1997, although the
third quarter operating income, on the same basis, decreased approximately 5%
when compared with the prior year quarter, which reflected pro forma growth of
approximately 90%.
The increases in comparable-business net sales were primarily due to
increased demand for packaging and retail premedia services, digital asset
management services and Columbine's next-generation product line. These gains
more than offset shortfalls in commercial premedia services and a decline in
fees related to Columbine's legacy products as the Company focuses on the
next-generation product line. The increase for the nine-month period was also
due to first-quarter growth in fee and consulting revenues related to large
software contracts in both domestic and international markets.
Despite the profit gains from the increased sales, operating income growth,
on a comparable-business basis, was at a lower level than sales growth due to
staffing investments in the component businesses to accommodate business
expansion and a large accounts receivable write-off stemming from a customer's
bankruptcy.
SPECIALTY PRODUCTS & COMMERCIAL PRINTING
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1997 CHANGE 1998 1997 CHANGE
--------- --------- ----------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales....................................... $ 26,523 $ 30,071 -11.8% $ 68,083 $ 84,575 -19.5%
Operating income................................ 3,260 1,350 141.5% 4,029 4,475 -10.0%
</TABLE>
The decreases from the prior year in net sales were the result of the
divestiture of a minority interest in a commercial printing venture at the end
of the first quarter of 1998 as part of management's strategy to de-emphasize
and re-deploy the assets associated with commercial printing. A production
arrangement related to this investment had yielded approximately $20 million of
break-even revenue annually. Excluding these sales from all periods, revenues
increased approximately 15% in the third quarter and increased slightly for the
nine-month period. Continuing softness in commercial printing was offset by
growth in the fragrance sampler product lines in the third quarter. The decline
in operating profits in the nine-month period resulted from soft sales in both
of these categories in the first half of 1998.
18
<PAGE>
INTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1997 CHANGE 1998 1997 CHANGE
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest expense................................ $ 14,588 $ 9,805 48.8% $ 41,135 $ 29,309 40.3%
Average interest rate........................... 8.23% 8.35% 8.30% 8.55%
Average borrowing rate including the effect of
convertible preferred securities.............. 7.93% 7.97%
</TABLE>
Interest expense in 1998 increased over the 1997 periods due to higher debt
levels related primarily to acquisitions although the average rate of interest
declined as compared to the 1997 periods. The decreased rate reflects the lower
cost of the Company's variable rate debt and the redemption of higher-yield debt
in 1997. In addition, the issuance of redeemable convertible preferred
securities in October 1997 allowed repayment of revolving credit facility
indebtedness.
OTHER EXPENSES, NET
Other expenses, net, consist primarily of costs associated with the
Company's accounts receivable securitization facility. These costs amounted to
$1.6 million in the third quarter of 1998 compared to $1.5 million in the 1997
quarter. For the first nine months of the year, these costs totaled $4.7 million
in 1998 and $4.5 million in 1997. The three-month and nine-month periods ended
September 30, 1998, also include $1.9 million and $3.3 million, respectively, of
income earned on a tax-advantaged investment accounted for as a leveraged lease
in accordance with Statement of Financial Accounting Standards No. 13,
"Accounting for Leases". The amount of investment income excludes interest costs
incurred on borrowings used to finance the investment.
INCOME TAXES
The Company's effective income tax rate for the third quarter of 1998 was
46.0% as compared to 49.1% in the same period last year. For the nine-month
period, the rate was also 46.0% compared to 48.6% in the first nine months of
1997. The effective rates exceeded the federal statutory rate due primarily to
state income taxes and amortization of certain goodwill that is not deductible
for income tax purposes.
The lower effective tax rates in 1998 reflect the proportionally lower level
of non-deductible goodwill expense in relation to expected taxable income for
the year.
LIQUIDITY AND CAPITAL RESOURCES
The operations of the Company historically have been funded with internally
generated funds, term loans, borrowings under revolving credit facilities and
utilization of an accounts receivable securitization facility. At September 30,
1998, the Company had approximately $179.5 million available to borrow under its
revolving credit facility. Management believes that the facility in place will
be sufficient to meet the Company's operational needs for the near future.
At September 30, 1998, the Company's current assets exceeded current
liabilities by $5.8 million. At December 31, 1997, the Company's current
liabilities exceeded current assets by $17.5 million. Adjusting for assets
removed from the balance sheet in connection with the accounts receivable
securitization facility, net working capital was $100.5 million at September 30,
1998 (a current ratio of 1.38 to 1) compared to $83.6 million at December 31,
1997 (a current ratio of 1.36 to 1).
19
<PAGE>
Cash flows provided by operating activities for the first nine months of
1998 were $63.3 million, compared to $66.3 million in the first nine months of
1997. Although net earnings before depreciation and amortization in the 1998
period increased in comparison to the prior year period, the cash flows from
operations were lower due to the lower proportionate utilization of the accounts
receivable securitization facility and the timing of payments for current
liabilities.
Cash from operations and borrowings under the revolving credit facility
funded capital expenditures of $71.4 million and $60.1 million for the nine
months ended September 30, 1998 and 1997, respectively. Borrowings under the
revolving credit facility and the issuance of debt funded investments and
acquisitions of $75.7 million during the first nine months of 1998 and
acquisitions costing $32.7 million in 1997. Cash flows from financing activities
in the third quarter of 1998 reflect the lower level of acquisition activity
compared to the third quarter of 1997 while the year-to-date cash flows reflect
the financing of acquisitions in the first half of 1998.
Big Flower has grown through acquisitions and continues to seek similar or
complementary businesses. Such acquisitions are likely to require the incurrence
and/or assumption of indebtedness and other obligations, the issuance of equity
securities or some combination thereof. In addition, Big Flower may from time to
time determine to sell or otherwise dispose of certain of its existing
businesses. However, Big Flower cannot predict if any such transactions will be
consummated, or the terms or forms of consideration required in such
transactions.
SEASONALITY AND OTHER FACTORS
While the insert advertising portion of the Company's Insert Advertising &
Newspaper Services segment is somewhat seasonal in nature, the growth of other
segments has reduced the overall seasonality of the Company's revenues. On a pro
forma basis, assuming all businesses owned at September 30, 1998 had been owned
for all of 1997, the net sales percentages for the Company for the year ended
December 31, 1997 would have been 23% in the first quarter, 24% in the second,
26% in the third and 27% in the fourth. Profitability, however, continues to
follow a more seasonal pattern for all segments and lower margins in the first
quarter must absorb fixed depreciation, amortization, interest and preferred
dividend costs that are incurred evenly throughout the year. Based on its
historical experience and projected operations, the Company expects its
operating results in the near future to be highest in the fourth quarter and
lowest in the first.
The cost of paper is a principal factor in pricing to customers of the
Insert Advertising & Newspaper Services segment. As this is the Company's
largest segment, fluctuations in the cost of paper significantly affect the
Company's consolidated net sales. The Company is generally able to pass
increases in the cost of paper to that segment's customers, while decreases in
paper costs generally result in lower prices to customers. Volatility in paper
costs results in a corresponding volatility in the Company's net sales, but
generally has not affected volume or profits to any significant extent.
YEAR 2000
The Company has undertaken a comprehensive program to address the issue of
computer software and embedded microchips which are unable to distinguish
between the year 1900 and the year 2000 within the Company and in the products
and services purchased from its material suppliers. (the "Year 2000 Project").
The Company has established Year 2000 teams at TC Advertising, Webcraft, Laser
Tech and Columbine, as well as at the Company's headquarters office. The general
approach employed by each of the Company's Year 2000 teams is: (1) inventorying
assets that may be affected by Year 2000 issues; (2) assigning priorities to
identified items; (3) assessing the Year 2000 compliance of items determined to
be material; (4) repairing or replacing material items that are determined not
to be Year 2000 compliant; (5) testing material items; (6) identifying material
vendors and customers (collectively, "Trading Partners") and contacting each
Trading Partner to determine whether the products and/or services purchased from
or
20
<PAGE>
sold to such Trading Partner will be materially affected by the millenium year
change; (7) designing and implementing contingency plans where appropriate; and
(8) reviewing progress monthly with the Company's senior executives and
quarterly with the Company's Board of Directors.
TC Advertising has completed its inventory of all material assets. It has
successfully tested its main business systems, networks, personal computer
("PC") hardware and most PC software and administrative equipment. TC
Advertising is in the process of testing its production equipment and intends to
complete testing of all material Year 2000 assets by the end of the first
quarter of 1999. TC Advertising has identified customers with whom it exchanges
electronic transmissions and has tested successfully the material means of
transmission utilized in such exchanges.
Webcraft has completed its inventory of all material assets except those of
one recently acquired business, which it expects to complete by the end of 1998.
Webcraft also expects to complete remediation of its main unit business systems
by the end of 1998. Other remediation, upgrade and replacement projects underway
at Webcraft's subsidiaries are expected to be completed by the middle of 1999.
Webcraft has begun testing its production equipment and plans to complete
testing of its material Year 2000 assets by the middle of 1999. Webcraft has
limited electronic interaction with its customers but intends to test these
interactions by the middle of 1999.
Laser Tech has completed its inventory of all material assets and has begun
testing such assets. Since many hardware and software assets are similar across
Laser Tech's numerous sites, centralized tests are being performed for common
assets and each subsidiary is testing material assets unique to its operations.
Many of the electronic premedia assets are off-the-shelf, Macintosh-based
hardware and software which, based upon information provided by Apple Computer
Inc., Laser Tech believes are generally less susceptible to Year 2000 issues.
Test results will be shared among Laser Tech and its subsidiaries. As planned,
Laser Tech is replacing several financial systems with a new system from Oracle
Corporation, which the vendor has designed and has publicly represented to be
Year 2000 compliant. Laser Tech's testing of material Year 2000 assets is
expected to be completed during the first quarter of 1999.
Columbine develops and markets software products and related services.
Columbine has compiled an inventory of material assets. Year 2000 compliant
versions of Columbine's major products are currently in use by a number of
customers. Columbine is now focusing on additional testing of third-party
products embedded in its software. It has successfully tested PCs and servers
and is currently concentrating on testing remaining internal systems, which it
expects to complete by the middle of 1999. Columbine has had extensive
communications with its customers, including identifying products that require
patches or upgrades to become Year 2000 compliant or that will not be made Year
2000 compliant and providing upgrade plans and kits for customer testing of
these upgraded products.
All Year 2000 teams are obtaining information from production and other
equipment manufacturers to identify and test embedded microchips and
date-related components of various equipment. Each group is in the process of
identifying material Trading Partners and has initiated communications with
material suppliers about their plans and progress in addressing the Year 2000
issue. Detailed evaluations of the most critical Trading Partners have been
initiated and are scheduled for completion by mid-1999, with follow-up reviews
planned during the remainder of 1999. These evaluations will be followed, where
appropriate, by the development of contingency plans. In general, the Company
began its examination of various contingency plans in the fourth quarter of 1998
and expects to complete the same by mid-1999. Communications with customers have
begun and will continue into 1999 to ensure continued service levels. As time
passes, it is foreseeable that additional Year 2000 issues will arise due to
business acquisitions or other reasons, in which case the Company will address
such issues as they arise. The Company will evaluate future acquisition
candidates for Year 2000 compliance prior to acquisition, where feasible, and
will conduct appropriate assessment, remediation, testing and contingency
planning following completion of any such acquisition.
21
<PAGE>
The headquarters office Year 2000 team has been coordinating and overseeing
the Year 2000 response of the operating units. Since August 1998, a detailed
monthly report has been submitted to and discussed with senior executives of the
Company, including the Chief Executive Officer and Chief Financial Officer.
Since the second quarter of 1998, a quarterly progress report has been submitted
to and discussed with the Company's Board of Directors. The Company plans to
continue such periodic reporting to its senior officers and its Board of
Directors.
COSTS
The estimated total cost of the Year 2000 Project is approximately $4.5
million, of which approximately $3.0 million reflects allocation of internal
costs and approximately $1.5 million reflects amounts for external consultants,
equipment, hardware and software. The total amount spent on the Year 2000
Project through September 30, 1998 was approximately $2.2 million, of which
approximately $1.8 million reflected allocation of internal costs and
approximately $0.4 million related to external costs, principally consultants.
Because the Company had planned to replace certain financial systems before
formal consideration of the Year 2000 issue, the cost of implementing the Oracle
financial system at Laser Tech is not included in these cost estimates.
Therefore, the total cost associated with Year 2000 efforts is not expected to
be material to the Company's consolidated financial position or results of
operations. However, because of the early stage of this matter at certain of the
Company's Trading Partners, there can be no assurance that it will not
ultimately have such an effect.
RISKS
The failure to address a material Year 2000 issue could result in an
interruption in, or a failure of, certain normal business activities or
operations. Due to the diversity and decentralized nature of the Company's
operations, there are few systems the failure of which would have a material
adverse effect on the Company as a whole. Nonetheless, the Company relies upon
utility companies, telecommunication services providers, the United States
postal service, the financial services industry and other suppliers outside of
its control and there can be no assurance that such suppliers or other third
parties will not suffer a Year 2000 business disruption. The failure of the
systems or equipment of one or more third parties (which the Company believes is
the most reasonably likely worst case scenario) could result in the reduction or
suspension of one or more of the Company's operations and could have a material
adverse effect on the Company's consolidated financial position or results of
operations. Due to the general uncertainty inherent in the Year 2000 issue,
resulting in part from the uncertainty of the Year 2000 readiness of its Trading
Partners and its Trading Partners' customers, the Company is unable to determine
at this time whether the consequences of Year 2000 failures will have a material
impact on the Company's consolidated financial condition or results of
operations. The Year 2000 Project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 issue and, in particular,
about the Year 2000 compliance and readiness of its material Trading Partners.
The Company believes that, with the implementation of new business systems and
completion of the Year 2000 Project as scheduled, the possibility of significant
interruptions of normal operations should be greatly reduced.
FORWARD-LOOKING STATEMENTS
Readers are cautioned that forward-looking statements contained herein
concerning the Year 2000 should be read in conjunction with the Company's
disclosures under the heading: "SAFE HARBOR STATEMENT" beginning on page 14.
22
<PAGE>
PART II--OTHER INFORMATION
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
ITEM 1. LEGAL PROCEEDINGS--
No reportable developments occurred with respect to legal proceedings during the
quarter ended September 30, 1998.
ITEM 2. CHANGES IN SECURITIES--
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS--
None
ITEM 5. OTHER INFORMATION--
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K--
</TABLE>
(a) Exhibits
27.1-2 Financial Data Schedules.
(b) Reports on Form 8-K
None.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
BIG FLOWER HOLDINGS, INC.
/S/ RICHARD L. RITCHIE
------------------------------------------
Richard L. Ritchie
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
DATE: November 13, 1998
BIG FLOWER PRESS HOLDINGS, INC.
/S/ RICHARD L. RITCHIE
------------------------------------------
Richard L. Ritchie
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
DATE: November 13, 1998
</TABLE>
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
27.1-2 Financial Data Schedules.
</TABLE>
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF BIG FLOWER HOLDINGS, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001048662
<NAME> BIG FLOWER HOLDINGS INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,800
<SECURITIES> 0
<RECEIVABLES> 191,334
<ALLOWANCES> 10,608
<INVENTORY> 56,263
<CURRENT-ASSETS> 271,109
<PP&E> 621,312
<DEPRECIATION> 181,029
<TOTAL-ASSETS> 1,256,542
<CURRENT-LIABILITIES> 265,310
<BONDS> 0
115,000
0
<COMMON> 198
<OTHER-SE> 104,060
<TOTAL-LIABILITY-AND-EQUITY> 1,256,542
<SALES> 1,236,879
<TOTAL-REVENUES> 1,236,879
<CGS> 930,992
<TOTAL-COSTS> 930,992
<OTHER-EXPENSES> 220,537
<LOSS-PROVISION> 2,742
<INTEREST-EXPENSE> 41,135
<INCOME-PRETAX> 41,473
<INCOME-TAX> 19,077
<INCOME-CONTINUING> 22,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,396
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.03
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF BIG FLOWER PRESS HOLDINGS AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000924146
<NAME> BIG FLOWER PRESS HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,790
<SECURITIES> 0
<RECEIVABLES> 191,312
<ALLOWANCES> 10,608
<INVENTORY> 56,263
<CURRENT-ASSETS> 270,835
<PP&E> 616,684
<DEPRECIATION> 180,396
<TOTAL-ASSETS> 1,246,290
<CURRENT-LIABILITIES> 265,690
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 205,571
<TOTAL-LIABILITY-AND-EQUITY> 1,246,290
<SALES> 1,236,879
<TOTAL-REVENUES> 1,236,879
<CGS> 930,992
<TOTAL-COSTS> 930,992
<OTHER-EXPENSES> 216,570
<LOSS-PROVISION> 2,742
<INTEREST-EXPENSE> 41,502
<INCOME-PRETAX> 45,073
<INCOME-TAX> 20,734
<INCOME-CONTINUING> 24,339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,339
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
