<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
<TABLE>
<C> <S>
/X/ Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
or
<TABLE>
<C> <S>
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
</TABLE>
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)
<TABLE>
<S> <C>
DELAWARE 13-3971556
DELAWARE 13-3768322
(State of incorporation) (I.R.S. Employer Identification
Nos.)
</TABLE>
3 EAST 54(TH) 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 29, 1999, 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, 1999 and
December 31, 1998. ......................................... 3
Condensed Consolidated Statements of Operations of Big
Flower Holdings, Inc. and Subsidiaries for the Three Months
Ended September 30, 1999 and 1998. ......................... 4
Condensed Consolidated Statements of Operations of Big
Flower Holdings, Inc. and Subsidiaries for the Nine Months
Ended September 30, 1999 and 1998. ......................... 5
Condensed Consolidated Statements of Cash Flows of Big
Flower Holdings, Inc. and Subsidiaries for the Nine Months
Ended September 30, 1999 and 1998. ......................... 6
Notes to Condensed Consolidated Financial Statements of Big
Flower Holdings, Inc. and Subsidiaries. .................... 7
Condensed Consolidated Balance Sheets of Big Flower Press
Holdings, Inc. and Subsidiaries at September 30, 1999 and
December 31, 1998. ......................................... 15
Condensed Consolidated Statements of Operations of Big
Flower Press Holdings, Inc. and Subsidiaries for the Three
Months Ended September 30, 1999 and 1998. .................. 16
Condensed Consolidated Statements of Operations of Big
Flower Press Holdings, Inc. and Subsidiaries for the Nine
Months Ended September 30, 1999 and 1998. .................. 17
Condensed Consolidated Statements of Cash Flows of Big
Flower Press Holdings, Inc. and Subsidiaries for the Nine
Months Ended September 30, 1999 and 1998. .................. 18
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
ITEM 3A.
Quantitative and Qualitative Disclosures about Market
Risk........................................................ 31
PART II -- OTHER INFORMATION......................................... 32
</TABLE>
2
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 2,928 $ 8,504
Accounts receivable, net.................................. 226,778 186,863
Inventories............................................... 61,425 47,954
Prepaid expenses and other current assets................. 13,188 15,648
Deferred income taxes and income tax receivable........... 15,830 10,880
---------- ----------
Total current assets.................................... 320,149 269,849
Property, plant and equipment, net.......................... 513,493 457,988
Goodwill, net of accumulated amortization of $54,152 and
$40,379................................................... 571,294 483,373
Long-term investments....................................... 172,657 74,391
Other assets, net........................................... 56,106 42,581
---------- ----------
Total Assets.............................................. $1,633,699 $1,328,182
========== ==========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable.......................................... $ 168,863 $ 151,054
Compensation and benefits payable......................... 36,461 48,983
Accrued interest.......................................... 13,693 16,991
Accrued income taxes...................................... 9,578
Other current liabilities................................. 45,860 49,024
---------- ----------
Total current liabilities............................... 264,877 275,630
Long-term debt, net of current portion...................... 933,063 731,080
Deferred income taxes....................................... 104,324 52,507
Other long-term liabilities................................. 40,729 26,755
---------- ----------
Total liabilities....................................... 1,342,993 1,085,972
---------- ----------
Company obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust whose sole
assets are the convertible subordinated debentures of Big
Flower Holdings, Inc...................................... 114,065 115,000
---------- ----------
Stockholders' equity:
Preferred stock...........................................
Common stock.............................................. 197 197
Additional paid-in capital................................ 144,833 146,135
Accumulated deficit....................................... (10,107) (30,872)
Accumulated other comprehensive income.................... 42,379 12,522
Other..................................................... (661) (772)
---------- ----------
Total stockholders' equity.............................. 176,641 127,210
---------- ----------
Total Liabilities and Equity............................ $1,633,699 $1,328,182
========== ==========
</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,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales................................................... $482,961 $440,107
-------- --------
Operating expenses:
Costs of production....................................... 350,454 326,437
Selling, general and administrative....................... 63,065 50,864
Depreciation.............................................. 20,118 16,842
Amortization of intangibles............................... 5,345 5,315
In-process acquired technology write off.................. 2,800
-------- --------
441,782 399,458
-------- --------
Operating income............................................ 41,179 40,649
-------- --------
Other expenses (income):
Interest expense.......................................... 18,472 14,588
Amortization of deferred financing costs.................. 737 526
Interest income........................................... (109) (153)
Preferred dividends of a subsidiary trust................. 1,697 1,725
Other, net................................................ (1,184) (120)
-------- --------
19,613 16,566
-------- --------
Income before income taxes.................................. 21,566 24,083
Income tax expense.......................................... 12,116 11,078
-------- --------
Net income.................................................. $ 9,450 $ 13,005
======== ========
Earnings per share:
Basic..................................................... $ 0.48 $ 0.66
======== ========
Diluted................................................... $ 0.42 $ 0.57
======== ========
Weighted average shares outstanding:
Basic..................................................... 19,743 19,779
======== ========
Diluted................................................... 24,701 24,809
======== ========
</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,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales................................................... $1,334,850 $1,236,879
---------- ----------
Operating expenses:
Costs of production....................................... 978,847 931,438
Selling, general and administrative....................... 182,331 148,917
Depreciation.............................................. 58,097 47,230
Amortization of intangibles............................... 15,801 17,358
In-process acquired technology write off.................. 2,800
---------- ----------
1,237,876 1,144,943
---------- ----------
Operating income............................................ 96,974 91,936
---------- ----------
Other expenses (income):
Interest expense.......................................... 52,746 41,135
Amortization of deferred financing costs.................. 2,199 1,381
Interest income........................................... (469) (353)
Preferred dividends of a subsidiary trust................. 5,097 5,175
Other, net................................................ (5,118) 3,125
---------- ----------
54,455 50,463
---------- ----------
Income before income taxes.................................. 42,519 41,473
Income tax expense.......................................... 21,754 19,077
---------- ----------
Net income.................................................. $ 20,765 $ 22,396
========== ==========
Earnings per share:
Basic..................................................... $ 1.05 $ 1.14
========== ==========
Diluted................................................... $ 0.97 $ 1.03
========== ==========
Weighted average shares outstanding:
Basic..................................................... 19,724 19,625
========== ==========
Diluted................................................... 24,673 24,735
========== ==========
</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,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 20,765 $ 22,396
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 73,898 64,588
In-process acquired technology write off................ 2,800
Deferred income taxes................................... 4,751 (552)
Other non-cash income and expense, net.................. (5,574) 4,358
Changes in operating assets and liabilities (excluding
effect of acquisitions):
Increase in accounts receivable....................... (29,894) (25,713)
Increase in inventories............................... (5,676) (6,252)
Increase in prepaid expenses and other assets......... (11,154) (4,288)
Increase in accounts payable and other liabilities.... 209 8,785
--------- ---------
Net cash provided by operating activities................... 50,125 63,322
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired.......... (89,398) (47,555)
Capital expenditures...................................... (77,236) (71,368)
Investments in equity securities and leveraged lease
transaction............................................. (33,402) (28,159)
Software development costs capitalized.................... (8,651) (5,455)
Other investing activities................................ 3,212 1,869
--------- ---------
Net cash used in investing activities....................... (205,475) (150,668)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities.......... 201,930 101,809
Repayments of long-term debt.............................. (35,475) (25,967)
Issuance of long-term debt................................ 17,500
(Decrease) increase in outstanding checks drawn on
controlled disbursement accounts........................ (14,792) 673
Repurchase of common stock................................ (3,088) (5,623)
Deferred financing costs.................................. (1,400) (2,023)
Issuance of common stock.................................. 1,786 1,452
--------- ---------
Net cash provided by financing activities................... 148,961 87,821
--------- ---------
Effect of exchange rate changes on cash..................... 813 18
--------- ---------
Net (decrease) increase in cash and cash equivalents........ (5,576) 493
Cash and cash equivalents at beginning of year.............. 8,504 5,307
--------- ---------
Cash and cash equivalents at end of period.................. $ 2,928 $ 5,800
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
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 management of the Company considers necessary for the
fair presentation of its financial position and operating results. The Company
prepared the condensed consolidated 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 for annual
financial statements. 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.
The financial statements on pages 15 through 18 present the consolidated
financial position and results of operations of Big Flower Press Holdings, Inc.
("Press") and its subsidiaries as Press is the issuer of currently outstanding
8 7/8% Senior Subordinated Notes Due 2007 and 8 5/8% Senior Subordinated Notes
Due 2008. (See note 10 regarding tender offers for these notes.) 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
Big Flower Holdings, Inc.
2. ACQUISITIONS
The Company completed ten acquisitions in 1998 and three in 1999. All were
accounted for as purchases and the financial statements include the results of
their operations beginning with their respective acquisition dates. The timing
of these acquisitions, therefore, affects the comparability of the Company's
financial statements.
In 1998, the Company acquired
- Troypeak Limited and Pismo Limited in March,
- Reach America, Inc. in April,
- Enteron Group, Inc. and ColorStream Technologies L.L.C. in May,
- Adtraq Data Systems and CJDS Adserve, Inc. in June,
- Imaging Consortium, Inc. in July, and
- DSI Datatrak Systems, Inc. and Admagic Group, Limited in November.
On January 4, 1999, the Company acquired Colorgraphic Direct Response
Limited ("Colorgraphic") for approximately $81 million in cash, including debt
repaid. On July 1, 1999, the Company acquired Drake Automation Limited ("Drake")
and on August 3, 1999, the Company acquired J.J. Grace Incorporated, a
California corporation ("Grace"). Aggregate consideration for these two
businesses was approximately $42.2 million in cash, including debt retired.
Goodwill arising in connection with these three acquisitions was approximately
$101 million. Total debt retired in connection with these acquisitions was
approximately $33 million.
7
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
In connection with the Drake acquisition, the Company wrote off in-process
technology costs of $2.8 million in the third quarter of 1999. The amount
allocated to in-process technology by management was based upon valuation by an
independent third-party appraiser. The amount was determined by:
- estimating the stage of development for each in-process product,
- estimating the cash flows generated by projected revenues for those
products, and
- discounting those cash flows back to their present values using a discount
rate of 25%, which represented a premium to the discount rate applied to
existing technology.
The estimated revenues for in-process modules assumed average compound
annual revenue growth rates of 20% through 2007 and are based on management's
estimates of market size, market share growth, expected trends in technology and
timing of new product introductions.
The amounts and allocations of costs recorded may require adjustment based
upon information that is not currently available to the Company.
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 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
-------------- --------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales................................................... $1,351,000 $1,349,000(2)
Net income.................................................. 21,500(1) 24,300(2)
Earnings per share:
Basic..................................................... $ 1.09(1) $ 1.23(2)
Diluted................................................... 1.00(1) 1.10(2)
</TABLE>
- ------------------------
(1) Includes a write off of acquired in-process technology costs related to the
Drake acquisition of $2.8 million (14 cents per basic share and 12 cents
per diluted share).
(2) 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
April 1998 and terminated the production arrangement.
3. ACCOUNTS RECEIVABLE
Accounts receivable excludes balances sold in connection with a
securitization facility, the proceeds of which serve to reduce long-term
borrowings under the Company's revolving credit facility. As of September 30,
1999 and December 31, 1998, interests of $99.7 million and $117.6 million,
respectively, had been sold under this program and are reflected as reductions
of accounts receivable.
8
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Paper....................................................... $34,650 $32,556
Work in process............................................. 13,936 6,189
Ink and chemicals........................................... 5,264 4,354
Other....................................................... 7,575 4,855
------- -------
$61,425 $47,954
======= =======
</TABLE>
5. INVESTMENTS
Investments consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Investments in leveraged leases............................. $ 60,056 $51,755
Investments in equity securities............................ 112,601 28,765
-------- -------
172,657 80,520
Less: portion included in other current assets.............. (6,129)
-------- -------
Long-term investments....................................... $172,657 $74,391
======== =======
</TABLE>
In 1998 and 1999, the Company invested a total of $40.7 million in ten
internet businesses. The investments in four of these businesses, 24/7
Media, Inc. ("TFSM"), About.com, Inc., WorldGate Communications, Inc. and
Webstakes.com, Inc., the stock of each of which was publicly traded as of
September 30, 1999, are recorded at the closing market price of the shares as of
the balance sheet date. The investments in the other businesses (including
Nu-Tel Corporation, Andromedia, Inc., Solbright, Inc., Galileo
Communications, Inc., InterAdNet, Inc., and Naviant Technologies, Inc., none of
which were publicly traded as of September 30, 1999) are recorded at cost. The
cumulative unrealized pre-tax gain of $71.9 million on the publicly traded
equity investments is included in accumulated other comprehensive income, net of
tax. Of this amount, $50.7 million ($30.4 million after tax) arose in 1999 and
is included in comprehensive income for the period (see note 6).
The unrealized gain does not include warrants that the Company holds to
purchase shares of TFSM, which warrants are not publicly traded and do not have
a readily determinable market value. The Company had an unrealized pre-tax gain
on these warrants of $24.8 million as of September 30, 1999, based on the
difference between the closing market price of TFSM's common stock and the
exercise price of the warrants. R. Theodore Ammon, the chairman of the Company,
is also chairman of TFSM.
Subsequent to September 30, 1999, Andromedia, Inc. signed a definitive
agreement to merge with Macromedia, Inc., a publicly traded company. Based on
the number of shares of Macromedia stock that
9
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. INVESTMENTS (CONTINUED)
the Company expects to receive for its investment in Andromedia and the closing
price of Macromedia stock on September 30, 1999, the Company would have had an
additional unrealized pre-tax gain of $7.4 million had the merger occurred prior
to the end of September 1999.
6. COMPREHENSIVE INCOME
Following are components of the Company's comprehensive income:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1999 1998
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net income.................................................. $20,765 $22,396
Other comprehensive income (expense):
Unrealized gain on investments, net of tax provision of
$20.3 million and $8.5 million.......................... 30,435 3,646
Foreign currency translation adjustment................... (578) 18
------- -------
Total comprehensive income.................................. $50,622 $26,060
======= =======
</TABLE>
7. 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.
10
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SEGMENT INFORMATION (CONTINUED)
Following is unaudited information regarding the Company's segments:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -----------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Sales Insert Advertising & Newspaper
Services........................... $273,048 $272,937 $ 776,013 $ 790,574
Direct Marketing Services............ 87,563 68,184 236,992 197,314
Digital Services..................... 100,002 74,404 264,245 187,240
Specialty Products & Commercial
Printing........................... 26,917 26,523 69,146 68,083
Elimination of intersegment sales.... (4,569) (1,941) (11,546) (6,332)
-------- -------- ---------- ----------
Consolidated....................... $482,961 $440,107 $1,334,850 $1,236,879
======== ======== ========== ==========
Operating
Income Insert Advertising & Newspaper $ 28,661 $ 23,986 $ 69,218 $ 56,392
Services...........................
Direct Marketing Services............ 5,923 7,584 17,658 22,380
Digital Services..................... 7,118(1) 8,647 19,004(1) 19,813
Specialty Products & Commercial
Printing........................... 1,945 3,260 2,542 4,029
General Corporate.................... (2,468) (2,828) (11,448) (10,678)
-------- -------- ---------- ----------
Consolidated......................... $ 41,179 $ 40,649 $ 96,974 $ 91,936
======== ======== ========== ==========
Depreciation Insert Advertising & Newspaper
Services........................... $ 8,687 $ 8,015 $ 25,457 $ 23,731
Direct Marketing Services............ 4,217 3,467 12,883 9,722
Digital Services..................... 6,361 4,474 17,237 11,148
Specialty Products & Commercial
Printing........................... 579 729 1,742 2,182
General Corporate.................... 274 157 778 447
-------- -------- ---------- ----------
Consolidated....................... $ 20,118 $ 16,842 $ 58,097 $ 47,230
======== ======== ========== ==========
Amortization of
Intangibles Insert Advertising & Newspaper $ 2,000 $ 3,046 $ 6,453 $ 10,822
Services...........................
Direct Marketing Services............ 883 519 2,659 1,496
Digital Services..................... 2,268 1,460 5,898 4,155
Specialty Products & Commercial
Printing........................... 192 165 522 510
General Corporate.................... 2 125 269 375
-------- -------- ---------- ----------
Consolidated....................... $ 5,345 $ 5,315 $ 15,801 $ 17,358
======== ======== ========== ==========
</TABLE>
- ------------------------
(1) Includes a $2.8 million write off of acquired in-process technology costs
related to the Drake acquisition.
11
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1999 1998
-------- --------
UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Interest paid............................................... $ 56,044 $ 45,058
======== ========
Income taxes paid........................................... $ 10,017 $ 5,912
======== ========
Non-cash investing and financing activities:
Cash paid for acquisitions................................ $ 90,533 $ 54,699
Fair value of stock and options issued, based upon closing
prices of the Company's common stock on the respective
acquisition dates....................................... 10,607
Assets acquired........................................... 156,147 112,788
-------- --------
Liabilities assumed....................................... $ 65,614 $ 47,482
======== ========
</TABLE>
9. EARNINGS PER SHARE
The following table illustrates the calculation of basic and diluted
earnings per share for the three-month and nine-month periods ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
SHARES SHARES
INCOME OUTSTANDING PER SHARE INCOME OUTSTANDING PER SHARE
-------- ----------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share................ $ 9,450 19,743 $0.48 $13,005 19,779 $0.66
Effect of dilutive stock options........ 1,021 (0.02) 1,041 (0.04)
Assumed conversion of convertible
securities............................ 1,019 3,937 (0.04) 1,035 3,989 (0.05)
------- ------ ----- ------- ------ -----
Diluted earnings per share.............. $10,469 24,701 $0.42 $14,040 24,809 $0.57
======= ====== ===== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
SHARES SHARES
INCOME OUTSTANDING PER SHARE INCOME OUTSTANDING PER SHARE
-------- ----------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share................ $20,765 19,724 $1.05 $22,396 19,625 $1.14
Effect of dilutive stock options........ 1,024 (0.05) 1,121 (0.06)
Assumed conversion of convertible
securities............................ 3,058 3,925 (0.03) 3,105 3,989 (0.05)
------- ------ ----- ------- ------ -----
Diluted earnings per share.............. $23,823 24,673 $0.97 $25,501 24,735 $1.03
======= ====== ===== ======= ====== =====
</TABLE>
12
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. RECAPITALIZATION AND TENDER OFFERS
On October 11, 1999, the Company announced a revised definitive agreement
with BFH Merger Corp., an entity formed by the Thomas H. Lee Company ("Lee") and
Evercore Partners ("Evercore"), to recapitalize the Company. The
recapitalization, which is subject to stockholder approval, would involve:
- A merger of BFH Merger Corp. into the Company with the Company as the
surviving corporation;
- In the merger, each holder of a share of the Company's outstanding common
stock, except for certain members of the Company's management, would be
entitled to receive $31.50 in cash per share of the Company's common
stock. The merger consideration would be funded by investments by Lee and
Evercore as well as by new debt financing arrangements that the Company
expects to enter into; and
- The sale of Columbine and interests in the Company's non-public internet
investments (see note 5) if the merger occurs.
The Company rescheduled its annual stockholders meeting, originally
scheduled for June 29, 1999, to November 23, 1999. The transaction, if approved
by stockholders, is expected to close during the fourth quarter of 1999. As the
transaction will be accounted for as a recapitalization, the historical basis of
the Company's assets and liabilities will not be affected.
On October 25, 1999, the Company announced tender offers and consent
solicitations, as amended on October 29, 1999, for all of Press' outstanding
8 7/8% subordinated notes due 2007 and 8 5/8% senior subordinated notes due
2008. The aggregate tender offer consideration is 100% of the principal amount
of notes tendered plus accrued interest to the payment date plus a $20 consent
fee for each $1,000 face value of notes tendered prior to a specified date.
Completion of the tender offers is contingent upon consummation of the merger
and recapitalization described above, but the merger and recapitalization are
not contingent upon completion of the tender offers.
Seven lawsuits were filed individually and as class actions by stockholders
in the Delaware Court of Chancery seeking to enjoin the consummation of or
rescind the Company's merger with BFH Merger Corp. or, in the alternative, to
recover monetary damages. On July 21, 1999, the lawsuits were consolidated into
one action, and on August 13, 1999, an amended complaint was filed in the
consolidated action. The amended complaint names as defendants the Company and
all of its directors. The amended complaint alleges in general that the
Company's directors breached their fiduciary duties by approving the merger at a
price that is inadequate and unfair to the Company's stockholders. In addition,
the amended complaint alleges that certain members of management have conflicts
of interest that have prevented them from acting in the best interests of the
Company's stockholders.
On October 29, 1999, the plaintiffs in the action described above filed a
second amended class action complaint relating to the merger agreement. The
second amended class action complaint also alleges that the proxy statement
regarding the merger is deficient because, among other things, it does not
contain adequate information regarding analyses that the Company's financial
advisors performed in connection with the merger.
On November 2, 1999, the Company entered into an oral agreement in principle
with representatives of the plaintiffs in the stockholders litigation to settle
the actions by providing additional disclosure relating to the transaction,
which was included in a supplement to the proxy statement relating to the merger
agreement.
13
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. RECAPITALIZATION AND TENDER OFFERS (CONTINUED)
In connection with the merger, the Company expects to record a pre-tax,
non-cash charge of approximately $44 million related to the settlement of stock
options. In addition, the Company expects to record a pre-tax charge of up to
approximately $8 million for the write off of unamortized deferred financing
costs related to revolving credit facility debt to be refinanced and convertible
preferred securities assumed to be converted.
In connection with the tender offers, the Company expects to record a
pre-tax charge of up to approximately $29 million related to the redemption of
outstanding debt and the write off of unamortized deferred financing costs
related to notes tendered.
In the event that the merger does not occur, the Company may be required to
pay a termination fee of $10 million or $30 million, depending upon the reason
preventing consummation of the transaction.
14
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 2,922 $ 8,499
Accounts receivable, net.................................. 226,751 186,857
Inventories............................................... 61,425 47,954
Prepaid expenses and other current assets................. 11,061 14,788
Deferred income taxes and income tax receivable........... 11,773 10,910
---------- ----------
Total current assets.................................... 313,932 269,008
Due from parent............................................. 7,486
Property, plant and equipment, net.......................... 509,428 454,004
Goodwill, net of accumulated amortization of $54,152 and
$40,379................................................... 571,294 483,373
Long-term investments....................................... 98,621 70,141
Other assets, net........................................... 49,273 36,634
---------- ----------
Total Assets............................................ $1,550,034 $1,313,160
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable.......................................... $ 168,430 $ 150,503
Compensation and benefits payable......................... 36,461 44,638
Accrued interest.......................................... 13,693 16,991
Accrued income taxes...................................... 10,095 15,936
Other current liabilities................................. 45,469 47,188
---------- ----------
Total current liabilities............................... 274,148 275,256
Due to parent............................................... 2,446
Long-term debt, net of current portion...................... 933,063 731,080
Deferred income taxes....................................... 88,098 53,134
Other long-term liabilities................................. 38,853 26,355
---------- ----------
Total liabilities....................................... 1,334,162 1,088,271
---------- ----------
Stockholder's equity:
Accumulated deficit....................................... (50,002) (36,511)
Accumulated other comprehensive income.................... 17,099 12,522
Other..................................................... 248,775 248,878
---------- ----------
Total stockholder's equity.............................. 215,872 224,889
---------- ----------
Total Liabilities and Stockholder's Equity.............. $1,550,034 $1,313,160
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
of Big Flower Holdings, Inc. and Subsidiaries.
15
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales................................................... $482,997 $440,107
-------- --------
Operating expenses:
Costs of production....................................... 350,449 325,991
Selling, general and administrative....................... 63,269 52,397
Depreciation.............................................. 19,996 16,759
Amortization of intangibles............................... 5,345 5,160
In-process acquired technology write off.................. 2,800
-------- --------
441,859 400,307
-------- --------
Operating income............................................ 41,138 39,800
-------- --------
Other expenses (income):
Interest expense.......................................... 18,591 14,711
Amortization of deferred financing costs.................. 692 481
Interest income........................................... (211) (153)
Other, net................................................ (1,074) (120)
-------- --------
17,998 14,919
-------- --------
Income before income taxes.................................. 23,140 24,881
Income tax expense.......................................... 12,942 11,445
-------- --------
Net income.................................................. $ 10,198 $ 13,436
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
of Big Flower Holdings, Inc. and Subsidiaries.
16
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales................................................... $1,334,886 $1,236,879
---------- ----------
Operating expenses:
Costs of production....................................... 978,842 930,992
Selling, general and administrative....................... 182,812 151,390
Depreciation.............................................. 57,750 47,005
Amortization of intangibles............................... 15,534 16,893
In-process acquired technology write off.................. 2,800
---------- ----------
1,237,738 1,146,280
---------- ----------
Operating income............................................ 97,148 90,599
---------- ----------
Other expenses (income):
Interest expense.......................................... 53,103 41,502
Amortization of deferred financing costs.................. 2,064 1,252
Interest income........................................... (775) (353)
Other, net................................................ (4,924) 3,125
---------- ----------
49,468 45,526
---------- ----------
Income before income taxes.................................. 47,680 45,073
Income tax expense.......................................... 24,230 20,734
---------- ----------
Net income.................................................. $ 23,450 $ 24,339
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
of Big Flower Holdings, Inc. and Subsidiaries.
17
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 23,450 $ 24,339
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 73,284 64,150
In-process acquired technology write off................ 2,800
Deferred income taxes................................... 4,766 (552)
Other non-cash income and expense, net.................. (5,438) 4,229
Changes in operating assets and liabilities (excluding
effect of acquisitions):
Increase in accounts receivable....................... (29,873) (25,691)
Increase in inventories............................... (5,676) (6,252)
Increase in prepaid expenses and other assets......... (8,595) (3,341)
Increase in accounts payable and other liabilities.... 2,343 4,010
-------- --------
Net cash provided by operating activities................... 57,061 60,892
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired.......... (89,398) (47,555)
Capital expenditures...................................... (76,809) (69,967)
Investments in equity securities and leveraged lease
transaction............................................. (5,453) (28,159)
Software development costs capitalized.................... (8,651) (5,455)
Other investing activities................................ 3,538 1,869
-------- --------
Net cash used in investing activities....................... (176,773) (149,267)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities.......... 201,930 101,809
Repayments of long-term debt.............................. (35,475) (25,967)
Issuance of long-term debt................................ 17,500
(Decrease) increase in outstanding checks drawn on
controlled disbursement accounts........................ (14,792) 674
Dividends paid to parent.................................. (36,941) (3,656)
Deferred financing costs.................................. (1,400) (1,520)
-------- --------
Net cash provided by financing activities................... 113,322 88,840
-------- --------
Effect of exchange rate changes on cash..................... 813 18
-------- --------
Net (decrease) increase in cash and cash equivalents........ (5,577) 483
Cash and cash equivalents at beginning of year.............. 8,499 5,307
-------- --------
Cash and cash equivalents at end of period.................. $ 2,922 $ 5,790
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
of Big Flower Holdings, Inc. and Subsidiaries.
18
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
"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," "PLANS,"
"INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. 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 ECONOMIC AND BUSINESS CONDITION OF THE UNITED STATES AND OTHER
COUNTRIES,
- THE AVAILABILITY OF QUALIFIED PERSONNEL AND OTHER INFORMATION TECHNOLOGY
RESOURCES,
- CHANGES IN INTEREST AND FOREIGN CURRENCY EXCHANGE RATES, AND
- MATTERS SET FORTH IN THIS DOCUMENT GENERALLY.
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. FACTORS
THAT MAY AFFECT THE COMPANY'S YEAR 2000 READINESS INCLUDE, BUT ARE NOT LIMITED
TO:
- THE ABILITY AND COST TO IDENTIFY AND REMEDIATE ALL DATE SENSITIVE LINES OF
COMPUTER CODE,
- THE ABILITY AND COST TO REPLACE EMBEDDED COMPUTER CHIPS IN SYSTEMS OR
EQUIPMENT AFFECTED BY YEAR 2000 ISSUES, AND
- THE ACTIONS OF GOVERNMENT AGENCIES OR OTHER THIRD PARTIES WITH RESPECT TO
YEAR 2000 ISSUES, AS WELL AS THE YEAR 2000 READINESS OF THOSE OTHER
PARTIES.
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.
GENERAL
Operating results in all periods presented reflect the impact of
acquisitions and the timing of those acquisitions. The changing mix of
businesses as acquired companies are integrated into the Company may affect the
comparability of results from one period to another.
19
<PAGE>
RESULTS OF OPERATIONS
The following table presents the major components from the Condensed
Consolidated Statements of Operations and Cash Flows for the three- and
nine-month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- -------------------
1999 1998 1999 1998
--------- --------- -------- --------
(PERCENTAGES OF NET SALES)
<S> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0%
--------- --------- -------- --------
Operating expenses:
Costs of production............... 72.6 74.1 73.3 75.3
Selling, general and
administrative.................. 13.1 11.7 13.7 12.1
Depreciation...................... 4.2 3.8 4.3 3.8
Amortization of intangibles....... 1.1 1.2 1.2 1.4
In-process acquired technology
write off....................... 0.5 0.2
--------- --------- -------- --------
91.5 90.8 92.7 92.6
--------- --------- -------- --------
Operating income.................... 8.5% 9.2% 7.3% 7.4%
========= ========= ======== ========
EBITDA.............................. 13.8% 14.3% 12.8% 12.7%
========= ========= ======== ========
<CAPTION>
(IN THOUSANDS)
EBITDA. $ 66,642 $ 62,806 $170,842 $156,524
<S> <C> <C> <C> <C>
========= ========= ======== ========
Net cash provided by operating
activities........................ $ 7,428 $ 37,650 $ 50,125 $ 63,322
Net cash used in investing
activities........................ 83,996 33,868 205,475 150,668
Net cash provided by (used in)
financing activities.............. 76,690 (2,813) 148,961 87,821
</TABLE>
"EBITDA" represents the sum of operating income, depreciation and
amortization of intangibles, and approximates the definition of EBITDA provided
in the Company's current debt agreements. EBITDA does not include costs
associated with the accounts receivable securitization facility (see note 3 to
the condensed consolidated financial statements) and is presented here to
provide additional information about the Company's ability to meet its future
debt service, capital expenditure and working capital requirements. It should
not be considered a better indicator of operating performance than operating
income as determined in accordance with GAAP or a better indicator of liquidity
than cash flows from operating activities as determined in accordance with GAAP.
The Company's definition of EBITDA might not be the same as that of other
companies.
20
<PAGE>
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -----------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- --------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $482,961 $440,107 9.7 % $1,334,850 $1,236,879 7.9 %
Operating income............. 41,179 40,649 1.3 % 96,974 91,936 5.5 %
Net income................... 9,450 13,005 (27.3)% 20,765 22,396 (7.3)%
Diluted earnings per share... $ 0.42 $ 0.57 (26.3)% $ 0.97 $ 1.03 (5.8)%
</TABLE>
NET SALES
Revenue increases in 1999 were due largely to acquisitions. Slightly
offsetting the acquisition impact was the reduction in Specialty Products &
Commercial Printing sales caused by the April 1998 divestiture of a minority
investment in a printing venture and the discontinuation of a related production
agreement that generated approximately $3 million of sales in the first quarter
of 1998 at break-even profitability. Adjusting the 1998 periods to include all
businesses owned, and excluding the first quarter 1998 sales related to the
divestiture described above, net sales in the third quarter increased
approximately 5% over the third quarter of 1998, and net sales for the first
nine months of 1999 were approximately the same as the comparable 1998 periods.
In addition to the acquisition impact, revenue amounts can vary based on
changing paper prices and the proportion of paper provided by customers
themselves since a substantial portion of sales in the Insert Advertising &
Newspaper Services business includes the pass-through cost of paper (see also
the discussion of paper costs in OPERATING EXPENSES). Adjusting the
comparable-business results for the effect of paper variations as well as the
cost of ink (i.e., to reduce sales by the cost of ink and paper entirely),
"value added" revenue increased approximately 6% in both the 1999 quarter and
nine-month periods when compared to the prior year.
These comparable-business increases reflect positive growth trends in the
Insert Advertising & Newspaper Services segment and the software and US premedia
categories in the Digital Services segment. The third quarter results were
tempered by shortfalls in the US direct mail sector of the Direct Marketing
Services segment, as large sweepstakes and consumer products customers curtailed
campaigns, and continued softness in the UK operations of the Digital Services
segment due to competitive conditions. For further discussion of net sales, see
RESULTS BY SEGMENT.
OPERATING EXPENSES
Total operating expenses increased due to the growth of the Company's
businesses and the impact of acquisitions. As a percentage of net sales,
operating expenses in total increased despite increased sales throughout the
Company and productivity gains and favorable materials costs in the Insert
Advertising & Newspaper Services segment. This decrease in operating margin is
due to:
- the sales factors noted above,
- slower than expected integration of recent Direct Marketing Services
acquisitions,
- a non-recurring $2.8 million write off of in-process acquired technology
costs in the Digital Services segment related to the Drake acquisition,
and
- 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
a higher proportion of the cost structure is related to selling rather
than to production, and
21
<PAGE>
- increased demand for higher margin products in the Insert Advertising &
Newspaper Services segment.
As a result of these factors, costs of production in the current year
quarter declined as a percentage of net sales by 1.5% in 1999 compared to the
third quarter of 1998. Paper costs accounted for 28% of net sales in the third
quarter of 1999 compared to 32% in the same period in 1998, reflecting the
Company's changing business mix as well as the higher proportion of paper
supplied by customers in the Insert Advertising & Newspaper Services segment.
Further reflecting the changing business mix, selling, general and
administrative expenses in the 1999 quarter increased as a percentage of net
sales by 1.4% over the 1998 period.
Similarly, for the first nine months of 1999, costs of production declined
as a percentage of net sales by 2.0% compared to the first nine months of 1998
and paper costs accounted for 29% of net sales compared to 33% in the same
period in 1998. Selling, general and administrative expenses in the same period
increased as a percentage of net sales by 1.6% over the 1998 period.
Combined operating expenses (excluding depreciation and amortization)
decreased as a percentage of net sales for the first nine months of 1999,
leading to an increase in the margin of EBITDA to net sales. The margin of
EBITDA to net sales for the third quarter of 1999 declined from the 1998 period
only because of the acquired in-process technology write off noted above. The
improved margins reflect the increased productivity of the Company's operations
and the higher-margin lines of business in the expanding Digital Services
segment. For further discussion, see RESULTS BY SEGMENT.
IN-PROCESS ACQUIRED TECHNOLOGY
The Company recorded a $2.8 million write off of acquired technology costs
in the third quarter of 1999 related to the acquisition of Drake. At the time of
its acquisition, Drake was developing several software product lines.
The purchase price for Drake exceeded the fair value of net tangible assets
acquired, and the Company allocated the excess to identified intangible assets
and existing technology based on values calculated by an independent third-party
appraiser. In performing this allocation, values were assigned to existing
technology and the research and development for products in process at the
acquisition date. With regard to the in-process research and development product
lines, the appraisal considered, among other factors, the stage of development
of each module, the importance of each module to the overall development plan,
the projected incremental cash flows from the modules when completed and the
associated risks. Associated risks included the inherent difficulties and
uncertainties in completing each module to achieve technological feasibility and
risks related to the impact of potential changes in future target markets.
The total projected cost to develop the in-process technology into
commercially viable products was in excess of $200,000, of which the Company has
incurred approximately $100,000, related primarily to sub-contracted costs,
through September 30, 1999. The Company expects to incur the balance of these
costs over the next year. Development efforts have focused on, and continue to
focus on, the products' ability to centralize automation of multi-channel
processes in a client/server environment ("podless architecture") together with
an advanced graphical user interface and interfaces between various systems
under development. The Company expects to benefit from the purchased in-process
technology beginning in periods ranging from the 1999 through 2005 fiscal years.
If these modules are not successfully developed, the Company may not realize the
value assigned to the in-process research and development. In addition, the
value of the other acquired intangible assets may also become impaired.
OPERATING INCOME
Operating income represented 8.5% of net sales in the third quarter of 1999
compared to 9.2% in the third quarter of 1998, with the decline due primarily to
the 1999 in-process acquired technology write off
22
<PAGE>
described above. Adjusting both periods to include all businesses currently
owned, operating income in the third quarter of 1999 was approximately the same
as in the 1998 period.
For the first nine months of 1999, operating income decreased to represent
7.3% of net sales compared to 7.4% in the same period in 1998, due to the 1999
in-process acquired technology write off. Adjusting the 1998 period to include
all businesses currently owned, operating income in the first nine months of
1999 decreased approximately 5% compared to the 1998 period.
The margin of operating income to net sales reflects the increased EBITDA
margins noted in the previous section offset by the impact of direct marketing
operations where operating income margins have declined in 1999 as a result of
sales shortfalls. Additionally, higher depreciation costs, resulting from
expansion of the Company's businesses through capital investments and
acquisitions, served to lower operating income levels.
INTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest expense..................... $18,472 $14,588 26.6% $52,746 $41,135 28.2%
Average interest rate................ 8.26% 8.23% 8.27% 8.30%
Average borrowing rate, including the
effect of convertible preferred
securities......................... 8.00% 7.93% 8.00% 7.97%
</TABLE>
Interest expense in 1999 increased over the 1998 period due to higher debt
levels related primarily to acquisitions and investments.
The average borrowing rate for the third quarter of 1999 was higher than
that in the third quarter of 1998 due to:
- increased rates on US variable rate borrowings and
- higher interest costs for fixed rate debt issued in December 1998.
These factors offset the decline in interest costs for variable rate debt in the
UK.
Lower interest rates for variable-rate debt for the first nine months of
1999 as compared to the 1998 period were only partially offset by the impact of
fixed-rate debt issued in December 1998.
The Company's total borrowing rate including convertible preferred
securities increased in both periods as these securities continue to represent a
declining proportion of total borrowings.
OTHER EXPENSES, NET
Other expenses, net, include costs associated with the Company's accounts
receivable securitization facility, which vary based on the levels of accounts
receivable sold each year. The 1999 results also include higher income earned on
tax-advantaged investments accounted for as leveraged leases, totaling
$2.9 million in the third quarter and $10.3 million for the first nine months.
The comparable amounts in 1998 were $1.9 for the third quarter and $3.3 million
for the nine-month period. The investment income excludes interest costs
incurred on borrowings used to finance the investments, which are recorded as
interest expense.
INCOME TAXES
The Company's effective tax rate exceeded the federal statutory rate due
primarily to state and local taxes and amortization of certain goodwill. In
addition, the 1999 periods include a non-deductible charge for the write off of
in-process acquired technology costs.
23
<PAGE>
RESULTS BY SEGMENT
INSERT ADVERTISING & NEWSPAPER SERVICES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $273,048 $272,937 0.0% $776,013 $790,574 (1.8)%
Operating income................. 28,661 23,986 19.5% 69,218 56,392 22.7 %
</TABLE>
Fluctuations in the cost of paper and in the amount of paper supplied by
customers negatively impacted net sales, as paper is generally a pass-through
cost to this segment. Adjusting for this variable (i.e., to reduce sales by the
cost of paper as well as ink), "value added" revenue in both the third quarter
and first nine months of 1999 increased approximately 4% over the same periods
in 1998. The increases for both the third quarter and nine-month periods reflect
growth of TC Advertising's insert sales to grocery, drug and specialty store
customers. The nine-month results also reflect favorable sales trends for
newspaper television listings guides, as well as favorable pricing of materials
other than paper. In addition, TC Advertising's offering of Reach America's
targeted advertising software products in combination with printing services and
the expansion of digital workflow capabilities have enhanced service offerings
to new and existing customers.
In relation to the value added revenue increases, the higher rates of
operating income growth stemmed from operational efficiencies and declining
intangibles amortization as non-compete agreements expired. Operational
efficiencies include continuous improvement of press time utilization, whereby
press capabilities are best matched to the requirements of a given print job and
the continued movement to a complete digital workflow that improved the prepress
and plating processes in many of the production facilities.
DIRECT MARKETING SERVICES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $87,563 $68,184 28.4 % $236,992 $197,314 20.1 %
Operating income................... 5,923 7,584 (21.9)% 17,658 22,380 (21.1)%
</TABLE>
The 1999 results reflect the operations of ColorStream Technologies,
acquired in May 1998, and UK-based Colorgraphic, acquired in January 1999.
Adjusting to include these businesses in the full 1998 periods, net sales
increased approximately 5% in the third quarter of 1999 and were approximately
the same as 1998 for the nine-month period. On the same basis of comparison,
operating income decreased approximately 40% in the third quarter and
approximately 35% in the nine-month period.
The comparable results reflect the slower than expected integration of
recent acquisitions and lower direct mail spending by two major US customers in
the sweepstakes and consumer products industries as well as softness in the UK
operations during the first half of 1999. Additionally, the 1999 nine-month
results reflect the impact of customers accelerating orders into the fourth
quarter of 1998 in anticipation of the January 1999 postage rate increase.
24
<PAGE>
Pro forma sales of UK operations (including Colorgraphic in the 1998
periods) represent approximately 30% of segment sales and increased
approximately 25% in the third quarter of 1999 from the prior year period, with
an increase of approximately 10% for the nine-month period. The increased sales
in the third quarter did not generate a corresponding increase in profitability
as intensified competition and the mix of business accepted had the effect of
reducing margins on work performed and new revenue streams were created which,
initially, are expected to be only marginally profitable. Pro forma operating
income of these operations in the 1999 periods declined nearly 50% from the same
periods in 1998.
The comparable operating income results reflect the impact of the factors
noted above and additional infrastructure investments in data analysis, data
mining, digital printing and response management portions of the business which
lowered the profitability of the US businesses in this segment as they coincided
with the lower sales levels.
DIGITAL SERVICES
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales......................... $100,002 $74,404 34.4% $264,245 $187,240 41.1%
Operating income.................. 7,118 8,647 (17.7)% 19,004 19,813 (4.1)%
</TABLE>
Changes in sales and operating income for this segment were significantly
impacted by acquisitions in 1998 and 1999. The premedia portion of this segment
added Enteron Group, Imaging Consortium and UK-based Troypeak, Pismo, and
Admagic in 1998. The software development product lines were expanded with the
acquisitions of Reach America, Adtraq, Adserve and Datatrak in 1998 and Drake in
1999. Adjusting to include all of these businesses in the comparable periods of
1998 and 1999, net sales increased approximately 15% in the third quarter of
1999 and approximately 10% in the nine-month period in 1999. On the same basis
of comparison, 1999 operating income decreased approximately 25% in the third
quarter and approximately 30% in the nine-month period as compared to the same
periods in 1998. These operating income results include a $2.8 million write off
of acquired in-process technology costs in connection with the July 1999
acquisition of Drake.
The increase in comparable-business net sales was due to the expansion of
service offerings to provide integrated solutions to customers, tempered by
softness in the UK-based premedia businesses (which represent approximately 10%
of segment sales). Premedia sales in the UK (including all businesses for all
periods) declined approximately 5% in both the third quarter of 1999 and the
first nine months of 1999 when compared to the corresponding periods in 1998.
Despite the UK impact, sales of commercial services increased approximately 5%
in the third quarter of 1999 and were flat for the nine-month period. Sales of
retail services increased approximately 25% in the 1999 quarterly and nine-month
periods, while strong increases were also achieved in the areas of packaging and
services for advertising agencies and corporate advertisers. Software related
sales increased approximately 30% in the third quarter from the 1998 level when
including all businesses, although sales related to the Paradigm and other new
systems grew approximately 60%. For the first nine months of 1999, total
software related sales increased approximately 10% from the 1998 level on the
same basis of comparison while sales of the newer systems grew approximately
20%.
Operating income growth on a comparable-business basis was negatively
impacted by the UK premedia businesses, which are facing margin pressure
resulting from the local advertising environment. Excluding these businesses,
third quarter segment operating income decreased approximately 20% from the
prior year compared to a sales increase of approximately 20% on the same basis.
For the first nine months of 1999, the comparable operating income exclusive of
UK premedia businesses decreased approximately 20% compared to the same period
in 1998, while sales increased approximately 10%. The
25
<PAGE>
relatively lower profitability reflects the fixed depreciation and amortization
costs inherent in building the software products portion of the segment.
SPECIALTY PRODUCTS & COMMERCIAL PRINTING
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- -------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $26,917 $26,523 1.5% $69,146 $68,083 1.6%
Operating income..................... 1,945 3,260 (40.3)% 2,542 4,029 (36.9)%
</TABLE>
Segment sales were affected by the divestiture of a minority interest in a
commercial printing venture in April 1998 as part of management's strategy to
re-deploy the assets associated with commercial printing. A production
arrangement related to the minority interest investment had yielded
approximately $3 million of break-even revenue in the first quarter of 1998.
Excluding these sales from the first quarter of 1998, the nine-month revenue
increase was approximately 5% in 1999 and the operating income variance was
approximately the same as shown above.
Despite the revenue increase, operating income for the segment declined due
to changes in the product mix as management continues to de-emphasize this
business and reallocate resources to the Direct Marketing Services segment.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Big Flower has grown through acquisitions, and expects to continue seeking
to acquire entities in similar or complementary businesses. Such acquisitions
are likely to require the incurrence and/or assumption of indebtedness and/or
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. Big Flower cannot predict if any
such transactions will be consummated, nor the terms or forms of consideration
which might be required in any such transactions.
On October 11, 1999, the Company announced that it had reached a revised
definitive agreement with BFH Merger Corp., an entity formed by the Thomas H.
Lee Company and Evercore Partners, regarding a recapitalization of the Company.
Among other things, this agreement limits the Company's ability to make
acquisitions, issue securities and incur debt without the consent of BFH Merger
Corp. In the event the transaction is not consummated, the Company will incur a
termination fee of $10 million or $30 million, depending upon the reason
preventing consummation of the transaction, which would be paid from borrowings
under the revolving credit facility.
On October 25, 1999, the Company announced tender offers and consent
solicitations, as amended on October 29, 1999, for all of Press' outstanding
8 7/8% subordinated notes due 2007 and 8 5/8% senior subordinated notes due
2008. The aggregate tender offer consideration is 100% of the principal amount
of notes tendered plus accrued interest to the payment date plus a $20 consent
fee for each $1,000 face value of notes tendered prior to a specified date.
Funding for the tender offers would be obtained through incremental financing at
the time of the merger, for which the Company has obtained commitments.
Completion of the tender offers is contingent upon consummation of the merger
and recapitalization described above, but the merger and recapitalization are
not contingent upon completion of the tender offers.
See note 10 to the condensed consolidated financial statements for
information regarding the transaction and tender offers.
26
<PAGE>
SOURCES OF FUNDS
Historically, the Company has funded its operations, acquisitions and
investments with internally generated funds, revolving credit facility
borrowings, sales of accounts receivable, and issuances of stock and debt. In
connection with the proposed merger and recapitalization described above, the
Company would replace its existing revolving credit facility and outstanding
debt with new senior credit facilities and high yield debt which are fully
committed by a group of lending institutions. Additionally, new funds would be
obtained from equity contributions from Lee and Evercore and the sales of
Columbine and the Company's non-public internet investments.
Management believes that the facilities in place, as well as the Company's
cash flows, will be sufficient to meet operational needs (including capital
expenditures) until the time of the merger and recapitalization. At
September 30, 1999, the Company had approximately $211.2 million available to
borrow under its revolving credit facility, although restrictions in the credit
facility and the indentures governing its outstanding subordinated notes would
have limited the amounts borrowed to approximately $70.6 million as of that
date.
Management also believes that the financing committed in connection with the
merger and tender offers, as well as the Company's cash flows, will be
sufficient to meet operating requirements (including capital expenditures) for
several years. There can be no assurance, however, that the Company's operations
will generate sufficient cash flows or that the Company will always be able to
refinance its current debt obligations or obtain additional financing to
refinance obligations assumed in acquisition transactions. In the event the
Company is unable to obtain sufficient financing, other sources of funding would
be pursued such as equity offerings. In the event that the merger is not
completed, management believes that the facilities currently in place, along
with the Company's cash flows, will continue to meet the Company's long-term
operating needs.
WORKING CAPITAL
The Company's current assets exceeded current liabilities by $55.3 million
at September 30, 1999 while current liabilities exceeded current assets by
$5.8 million at December 31, 1998 (an increase in working capital of
$61.1 million). The working capital amounts exclude accounts receivable sold
under a securitization facility, the proceeds of which serve to reduce long-term
borrowings under the Company's revolving credit facility. (See note 3 to the
condensed consolidated financial statements.) Excluding the effect of the
securitization (i.e., to add back receivables and reflect the offsetting
increase in long-term debt as if the securitization facility had been
terminated) working capital at September 30, 1999 and December 31, 1998 would
have been $155.0 million and $111.8 million, respectively. The ratio of current
assets to current liabilities as of September 30, 1999 was 1.21 to 1 (1.59 to 1
excluding the securitization effect) compared to 0.98 to 1 as of December 31,
1998 (1.41 to 1 excluding the securitization effect). The increase is due to
lower current liability balances, primarily as a result of decreases in the cost
of paper and the timing of payments as well as the tax benefit of leveraged
lease investments. In addition, accounts receivable balances have increased due
to the acquisition of companies which are not participating in the accounts
receivable securitization program.
SUMMARY OF CASH FLOWS
Net cash provided by operating activities decreased by $13.1 million in the
first nine months of 1999 compared to the same period in 1998, with a decrease
of $30.1 million in the third quarter period compared to the 1998 quarter.
Despite a higher level of earnings before depreciation and amortization, the
decreases resulted from a lower proportionate utilization of the accounts
receivable securitization facility compared to the 1998 periods, expenditures
for long-term assets, tax refunds receivable arising from leveraged lease
transactions and the timing of payments for current liabilities, particularly
accounts payable.
27
<PAGE>
Cash flows used in investing activities increased in 1999 from the 1998
level, with investing activities in the third quarter of 1999 higher by
$50 million than those in the same period in 1998. Fluctuations were due to:
- the relative cost of companies acquired in each period,
- increased software development costs in 1999 due to the growth of the
Digital Services segment,
- increased capital expenditures necessary to expand the Company's
businesses, and
- a higher level of investments in 1999 compared to 1998.
The amount of cash provided by financing activities in each period reflects
the relative cost of acquisitions, capital expenditures and investments in those
years, as well as the level of borrowings that corresponds with operating cash
flows. Additionally, financing cash flows in both years reflect the repayment of
debt assumed in acquisition transactions, which was generally replaced by
borrowings under the Company's revolving credit facility under more favorable
terms.
SEASONALITY AND OTHER FACTORS
While TC Advertising's advertising insert business is seasonal in nature,
the addition of other businesses has reduced the overall seasonality of the
Company's revenues. On a pro forma basis, assuming all businesses owned at
September 30, 1999 had been owned for the full year, net sales for the Company
for 1998 would have been 23% in the first quarter, 24% in the second, 25% in the
third and 28% in the fourth. Profitability, however, continues to follow a more
seasonal pattern due to the higher margins and efficiency during the fall
production season and lower margins in the first quarter that do not fully
leverage fixed depreciation, amortization, interest and preferred dividend costs
that are incurred more evenly throughout the year. Based on its historical
experience and projected operations, the Company expects its operating results
in the near future to be strongest in the fourth quarter and softest in the
first.
The cost of paper is a principal factor in TC Advertising's pricing to
certain customers. As TC Advertising is the Company's largest operating unit,
the cost of paper significantly affects the Company's net sales. TC Advertising
is generally able to pass increases in the cost of paper to its 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
GENERAL
The Company has undertaken a comprehensive program to address the issue of
computer programs and embedded microchips which are unable to distinguish
between the year 1900 and the year 2000 within its organization and with respect
to its material suppliers and customers (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.
PROJECT
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;
28
<PAGE>
(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 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
periodically with the Company's Board of Directors.
TC Advertising has completed testing of all material assets. Computer
hardware, software and networking equipment have been successfully tested.
Production equipment was tested, where possible, and certification received from
equipment manufacturers. Although some production equipment has been upgraded to
ensure dates appear correctly on monitors and reports, no embedded chip or
production equipment problems were found which TC Advertising believes would
result in a production failure. TC Advertising 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 assessment of all material assets. Webcraft
completed remediation and testing of its main unit business systems prior to
December 31, 1998. Computer remediation, upgrade and replacement of material
assets at Webcraft's subsidiaries have been completed and Webcraft is in the
final stages of testing these systems. Webcraft has completed a review and
testing, where possible, of its production equipment. One type of equipment
failure was identified and has been successfully upgraded. Webcraft has limited
electronic interaction with its customers and is upgrading the relevant software
as necessary.
Laser Tech has completed its assessment and testing of all material assets.
Since many hardware and software assets are similar across Laser Tech's numerous
sites, centralized testing was performed for common assets and each subsidiary
tested material assets unique to its operations. Many of the electronic premedia
assets are off-the-shelf, Macintosh-based hardware and software which, based
upon manufacturer information, Laser Tech believes are generally less
susceptible to Year 2000 issues. Testing uncovered the need to upgrade certain
common technologies and these upgrades were successfully completed. Existing
financial systems were successfully upgraded and tested and new financial
systems, the vendors of which have represented such systems to be Year 2000
compliant, are being implemented. Testing of other financial systems which have
been certified by the manufacturers is underway.
Columbine has completed testing of all material assets. Year 2000 compliant
versions of Columbine's major products are currently in use by a number of
customers. Columbine has completed upgrades to all of its material products and
made those upgrades available to customers. It has completed upgrades and
successfully tested its internal systems. Columbine continues to communicate
often with its customers to encourage them to install needed upgrades and to
test Columbine products thoroughly in the customer environment. On occasion,
customer testing raises new issues, primarily concerning minor products or the
integration of products, and Columbine responds to such issues as a priority.
Contingency plans are being finalized to address concerns at each site,
including the potential impact of shortages of critical supplies or the loss of
production capability at any facility. In addition, Columbine recognizes that
customers who have not installed the provided software upgrades or who have not
thoroughly tested their own environments may request unusual levels of support
at year-end. Columbine's contingency plans address these anticipated
higher-than-normal customer service demands.
Each group has tested facilities and miscellaneous equipment. To their
knowledge, all material facilities and equipment have been successfully tested
or reported compliant by vendors. Each group has identified 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 were completed by the end of June 1999, with
follow-up reviews planned during the remainder of
29
<PAGE>
1999. Each group has taken these evaluations into account in preparing its
contingency plans. Communications with customers have begun and will continue
through the end of 1999 to ensure continued service levels. Vendors continue to
supply Year 2000 upgrades and patches which the Company is implementing as
appropriate.
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 has evaluated recent
acquisition candidates and 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. Following acquisition, new units will
participate in the ongoing company-wide Year 2000 activities.
The headquarters office Year 2000 team has been coordinating and overseeing
the Year 2000 responses of the operating units. Since mid-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 third quarter of 1998, periodic progress reports have been submitted
to and discussed with the Company's Board of Directors.
COSTS
The estimated total cost of the Year 2000 Project, including that related to
acquisitions made prior to September 30, 1999, is approximately $5.3 million, of
which approximately $3.2 million reflects allocation of internal costs and
approximately $2.1 million reflects amounts for external consultants, equipment,
hardware and software. The total amount spent on the Year 2000 Project through
September 30, 1999 was approximately $4.1 million, of which approximately
$2.8 million reflected allocation of internal costs and approximately
$1.3 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 costs of implementing such systems are
not included in these cost estimates, but are included in the Company's capital
expenditure estimates.
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 position 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.
30
<PAGE>
ITEM 3A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE INFORMATION
The Company's primary exposures to market risks relate to interest rate
fluctuations on variable rate debt and to the decline in market values of
available-for-sale investments. Its exposure to foreign currency exchange rate
fluctuations is immaterial as foreign operations are a small proportion of the
total Company and foreign currency borrowings act as a natural hedge against
fluctuations in net asset values. The fair values of all financial instruments,
other than investments, debt and redeemable convertible preferred securities,
approximate their carrying values.
The Company's objective in its risk management program is to seek a
reduction in the potential negative earnings effects from changes in interest
rates. The Company's strategy to meet this objective is to maintain a balance
between fixed-rate and variable-rate debt, varying the proportion based on the
Company's perception of interest rate trends and the marketplace for various
debt instruments. In general, the Company does not use derivative financial
instruments in its risk management program and does not use any for trading
purposes. These practices may change in the future as conditions change.
QUANTITATIVE INFORMATION
At September 30, 1999, 67% of the Company's long-term debt was fixed-rate.
Including off-balance sheet debt related to the accounts receivable
securitization facility, the fees on which are variable, fixed-rate debt
represented 60% of total debt. When also including redeemable convertible
preferred securities, which carry a fixed dividend, fixed-rate obligations
represented 64% of the total.
If interest rates increased 10% (which would increase the Company's
borrowing rate by less than one percentage point), the expected effect on annual
net income related to variable-rate debt would be immaterial. For the purposes
of sensitivity analysis, the same percentage change was assumed for both the
revolving credit facility and the accounts receivable securitization facility.
All other factors were held constant. The sensitivity analysis is limited in
that it is based on balances outstanding at September 30, 1999 and does not
provide for changes in borrowings that may occur in the future.
A 10% decline in the market value of all available-for-sale investments
owned at September 30, 1999 would have reduced the Company's total assets by
$7.2 million and reduced stockholders' equity by $4.3 million. There would have
been no impact on net income as the unrealized gain is deferred until the
investments are sold.
FORWARD-LOOKING STATEMENTS
Readers are cautioned that forward-looking statements contained in this
discussion of market risks should be read in conjunction with the Company's
disclosures under the heading: "Forward Looking Statements" on page 19.
31
<PAGE>
PART II--OTHER INFORMATION
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Item 1. LEGAL PROCEEDINGS
Seven lawsuits were filed individually and as class actions
by stockholders in the Delaware Court of Chancery seeking to
enjoin the consummation of or rescind the Company's merger
with BFH Merger Corp. or, in the alternative, to recover
monetary damages. On July 21, 1999, the lawsuits were
consolidated into one action, and on August 13, 1999, an
amended complaint was filed in the consolidated action. The
amended complaint names as defendants the Company and all of
its directors. The amended complaint alleges in general that
the Company's directors breached their fiduciary duties by
approving the merger at a price that is inadequate and
unfair to the Company's stockholders. In addition, the
amended complaint alleges that certain members of management
have conflicts of interest that have prevented them from
acting in the best interests of the Company's stockholders.
On October 29, 1999, the plaintiffs in the action described
above filed a second amended class action complaint relating
to the merger agreement. The second amended class action
complaint also alleges that the proxy statement regarding
the merger is deficient because, among other things, it does
not contain adequate information regarding analyses that the
Company's financial advisors performed in connection with
the merger.
On November 2, 1999, the Company entered into an oral
agreement in principle with representatives of the
plaintiffs in the stockholders litigation to settle the
actions by providing additional disclosure relating to the
transaction, which was included in a supplement to the proxy
statement relating to the merger agreement.
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.
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
</TABLE>
(a) Exhibits
27.1-2 Financial Data Schedules.*
(b) Reports on Form 8-K
During the three months ended September 30, 1999, the Registrant filed the
following report on Form 8-K:
(i) Current report on Form 8-K dated July 1, 1999, concerning the
Registrant's merger with BFH Merger Corp.
- ------------------------
* Being Filed Herewith
33
<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> <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 15, 1999
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 15, 1999
</TABLE>
34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- ---------------------
<C> <S> <C>
27.1-2 Financial Data Schedules.*
</TABLE>
- ------------------------
* Being Filed Herewith
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,928
<SECURITIES> 0
<RECEIVABLES> 234,033
<ALLOWANCES> 7,255
<INVENTORY> 61,425
<CURRENT-ASSETS> 320,149
<PP&E> 760,548
<DEPRECIATION> 247,055
<TOTAL-ASSETS> 1,633,699
<CURRENT-LIABILITIES> 264,877
<BONDS> 0
114,065
0
<COMMON> 197
<OTHER-SE> 176,444
<TOTAL-LIABILITY-AND-EQUITY> 1,633,699
<SALES> 1,334,850
<TOTAL-REVENUES> 1,334,850
<CGS> 978,847
<TOTAL-COSTS> 978,847
<OTHER-EXPENSES> 257,783
<LOSS-PROVISION> 756
<INTEREST-EXPENSE> 54,945
<INCOME-PRETAX> 42,519
<INCOME-TAX> 21,754
<INCOME-CONTINUING> 20,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,765
<EPS-BASIC> 1.05
<EPS-DILUTED> 0.97
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BIG FLOWER PRESS HOLDINGS, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000924146
<NAME> BIG FLOWER PRESS HOLDINGS, INC.
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