<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-29474
BIG FLOWER HOLDINGS, INC.
Commission File Number 1-14084
BIG FLOWER PRESS HOLDINGS, INC.
(Exact Names of Registrants as Specified in Their Charters)
<TABLE>
<S> <C>
DELAWARE 13-3971556
DELAWARE 13-3768322
(State of incorporation) (I.R.S. Employer
Identification Nos.)
</TABLE>
------------------------
3 EAST 54TH STREET
NEW YORK, NEW YORK 10022
(212) 521-1600
(Address and telephone number of Registrants' Principal Executive Offices)
------------------------
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
As of July 31, 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>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets of Big Flower Holdings, Inc. and Subsidiaries at June 30,
1999 and December 31, 1998........................................................................ 3
Condensed Consolidated Statements of Operations of Big Flower Holdings, Inc. and Subsidiaries for
the Three Months Ended June 30, 1999 and 1998..................................................... 4
Condensed Consolidated Statements of Operations of Big Flower Holdings, Inc. and Subsidiaries for
the Six Months Ended June 30, 1999 and 1998....................................................... 5
Condensed Consolidated Statements of Cash Flows of Big Flower Holdings, Inc. and Subsidiaries for
the Six Months Ended June 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 June
30, 1999 and December 31, 1998.................................................................... 12
Condensed Consolidated Statements of Operations of Big Flower Press Holdings, Inc. and
Subsidiaries for the Three Months Ended June 30, 1999 and 1998.................................... 13
Condensed Consolidated Statements of Operations of Big Flower Press Holdings, Inc. and
Subsidiaries for the Six Months Ended June 30, 1999 and 1998...................................... 14
Condensed Consolidated Statements of Cash Flows of Big Flower Press Holdings, Inc. and
Subsidiaries for the Six Months Ended June 30, 1999 and 1998...................................... 15
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations............. 16
ITEM 3a.
Quantitative and Qualitative Disclosures about Market Risk........................................ 26
PART II--OTHER INFORMATION................................................................................ 27
</TABLE>
2
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, 31,
1999 1998
--------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 3,001 $ 8,504
Accounts receivable, net.......................................... 187,019 186,863
Inventories....................................................... 51,602 47,954
Prepaid expenses and other current assets......................... 11,785 15,648
Deferred income taxes and income tax receivable................... 12,921 10,880
--------- -----------
Total current assets.......................................... 266,328 269,849
Property, plant and equipment, net.................................. 494,863 457,988
Goodwill, net of accumulated amortization of $48,993 and $40,379.... 533,981 483,373
Long-term investments............................................... 153,629 74,391
Other assets, net................................................... 46,154 42,581
--------- -----------
Total Assets.................................................. $1,494,955 $1,328,182
--------- -----------
--------- -----------
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable.................................................. $ 133,520 $ 151,054
Compensation and benefits payable................................. 37,861 48,983
Accrued interest.................................................. 28,391 16,991
Accrued income taxes.............................................. 9,578
Other current liabilities......................................... 37,546 49,024
--------- -----------
Total current liabilities..................................... 237,318 275,630
Long-term debt, net of current portion.............................. 856,230 731,080
Deferred income taxes............................................... 90,827 52,507
Other long-term liabilities......................................... 32,723 26,755
--------- -----------
Total liabilities............................................. 1,217,098 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............................................................... 114,070 115,000
--------- -----------
Stockholders' equity:
Preferred stock
Common stock...................................................... 197 197
Additional paid-in capital........................................ 144,671 146,135
Accumulated deficit............................................... (19,557) (30,872)
Accumulated other comprehensive income............................ 39,169 12,522
Other............................................................. (693) (772)
--------- -----------
Total stockholders' equity.................................... 163,787 127,210
--------- -----------
Total Liabilities and Equity.................................. $1,494,955 $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 JUNE 30,
----------------------
<S> <C> <C>
1999 1998
---------- ----------
Net sales................................................................................. $ 431,566 $ 412,870
---------- ----------
Operating expenses:
Costs of production..................................................................... 315,107 308,789
Selling, general and administrative..................................................... 59,100 50,640
Depreciation............................................................................ 19,072 15,499
Amortization of intangibles............................................................. 5,067 6,175
---------- ----------
398,346 381,103
---------- ----------
Operating income.......................................................................... 33,220 31,767
---------- ----------
Other expenses (income):
Interest expense........................................................................ 17,059 13,518
Amortization of deferred financing costs................................................ 746 426
Interest income......................................................................... (140) (80)
Preferred dividends of a subsidiary trust............................................... 1,698 1,725
Other, net.............................................................................. (1,863) 798
---------- ----------
17,500 16,387
---------- ----------
Income before income taxes................................................................ 15,720 15,380
Income tax expense........................................................................ 7,231 7,074
---------- ----------
Net income................................................................................ $ 8,489 $ 8,306
---------- ----------
---------- ----------
Earnings per share:
Basic................................................................................... $ 0.43 $ 0.42
---------- ----------
---------- ----------
Diluted................................................................................. $ 0.38 $ 0.38
---------- ----------
---------- ----------
Weighted average shares outstanding:
Basic................................................................................... 19,705 19,643
---------- ----------
---------- ----------
Diluted................................................................................. 24,794 24,843
---------- ----------
---------- ----------
</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>
SIX MONTHS
ENDED JUNE 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Net sales............................................................... $ 851,889 $ 796,772
--------- ---------
Operating expenses:
Costs of production................................................... 628,393 605,001
Selling, general and administrative................................... 119,266 98,053
Depreciation.......................................................... 37,979 30,388
Amortization of intangibles........................................... 10,456 12,043
--------- ---------
796,094 745,485
--------- ---------
Operating income........................................................ 55,795 51,287
--------- ---------
Other expenses (income):
Interest expense...................................................... 34,274 26,547
Amortization of deferred financing costs.............................. 1,462 855
Interest income....................................................... (360) (200)
Preferred dividends of a subsidiary trust............................. 3,400 3,450
Other, net............................................................ (3,934) 3,245
--------- ---------
34,842 33,897
--------- ---------
Income before income taxes.............................................. 20,953 17,390
Income tax expense...................................................... 9,638 7,999
--------- ---------
Net income.............................................................. $ 11,315 $ 9,391
--------- ---------
--------- ---------
Earnings per share:
Basic................................................................. $ 0.57 $ 0.48
--------- ---------
--------- ---------
Diluted............................................................... $ 0.54 $ 0.46
--------- ---------
--------- ---------
Weighted average shares outstanding:
Basic................................................................. 19,714 19,549
--------- ---------
--------- ---------
Diluted............................................................... 24,659 24,698
--------- ---------
--------- ---------
</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>
SIX MONTHS
ENDED JUNE 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 11,315 $ 9,391
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 48,435 42,431
Deferred income taxes................................................................. 3,414 (386)
Other non-cash income and expense, net................................................ (3,682) 4,411
Changes in operating assets and liabilities (excluding effect of acquisitions):
Decrease (increase) in accounts receivable.......................................... 8,324 (2,242)
Increase in inventories............................................................. (1,471) (3,768)
Increase in prepaid expenses and other assets....................................... (6,491) (2,539)
Decrease in accounts payable and other liabilities.................................. (17,147) (21,626)
---------- ----------
Net cash provided by operating activities................................................. 42,697 25,672
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired........................................ (48,391) (41,838)
Capital expenditures.................................................................... (52,400) (44,766)
Investments in equity securities and leveraged lease transaction........................ (17,864) (28,159)
Software development costs capitalized.................................................. (5,391) (2,263)
Other investing activities.............................................................. 2,567 226
---------- ----------
Net cash used in investing activities..................................................... (121,479) (116,800)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities........................................ 130,316 107,299
Repayments of long-term debt............................................................ (34,850) (25,651)
Issuance of long-term debt.............................................................. 17,500
Decrease in outstanding checks drawn on controlled disbursement accounts................ (20,206) (4,080)
Repurchase of common stock.............................................................. (3,088) (4,114)
Deferred financing costs................................................................ (1,525) (1,300)
Issuance of common stock................................................................ 1,624 980
---------- ----------
Net cash provided by financing activities................................................. 72,271 90,634
---------- ----------
Effect of exchange rate changes on cash................................................... 1,008 (52)
---------- ----------
Net decrease in cash and cash equivalents................................................. (5,503) (546)
Cash and cash equivalents at beginning of year............................................ 8,504 5,307
---------- ----------
Cash and cash equivalents at end of period................................................ $ 3,001 $ 4,761
---------- ----------
---------- ----------
</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 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 12 through 15 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. 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 one in January 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. Two acquisitions were completed subsequent to
the end of the second quarter of 1999, and therefore are not included in the
accompanying 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. Goodwill arising in connection with this acquisition was approximately
$66 million. The amounts and allocations of costs recorded may require
adjustment based upon information that is not currently available to the
Company.
7
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. ACQUISITIONS (CONTINUED)
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.
The following unaudited pro forma information reflects the Company's results
adjusted to include the acquired businesses (including Drake and Grace) as
though all the acquisitions and related financing transactions had occurred at
the beginning of 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
----------------------
1999 1998
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales............................................................. $ 866,000 $ 881,000(1)
Net income............................................................ 10,700 11,000(1)
Earnings per share:
Basic............................................................... $ 0.54 $ 0.55(1)
Diluted............................................................. 0.51 0.52(1)
</TABLE>
- ------------------------
(1) Excludes sales under a production arrangement with an unconsolidated
printing venture in which the Company had a minority interest and the
profits related to those sales. The Company sold its minority interest in
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 June 30, 1999
and December 31, 1998, interests of $86.6 million and $117.6 million,
respectively, had been sold under this program and are reflected as reductions
of accounts receivable.
4. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Paper................................................................ $ 34,674 $ 32,556
Work in process...................................................... 7,120 6,189
Ink and chemicals.................................................... 4,866 4,354
Other................................................................ 4,942 4,855
--------- ------------
$ 51,602 $ 47,954
--------- ------------
--------- ------------
</TABLE>
8
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. INVESTMENTS
Investments consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Investments in leveraged leases.................................... $ 57,174 $ 51,755
Investments in equity securities................................... 96,455 28,765
---------- ------------
153,629 80,520
Less: portion included in other current assets..................... (6,129)
---------- ------------
Long-term investments.............................................. $ 153,629 $ 74,391
---------- ------------
---------- ------------
</TABLE>
In 1998 and 1999, the Company invested a total of $25.5 million in several
internet businesses. The investments in three of these businesses, 24/7 Media,
Inc. ("TFSM"), About.com, Inc. and WorldGate Communications, Inc., the stock of
each of which was publicly traded as of June 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.,
Webstakes, Inc. and Solbright, Inc., none of which were publicly traded as of
June 30, 1999) are recorded at cost. The cumulative unrealized pre-tax gain of
$71.0 million on the publicly-traded equity investments is included in
accumulated other comprehensive income, net of tax. Of this amount, $49.8
million ($29.9 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 $25.4 million as of June 30, 1999, based on the difference
between the closing market price of TFSM's common stock and the exercise price
of the warrants.
6. COMPREHENSIVE INCOME
Following are components of the Company's comprehensive income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
----------------------
1999 1998
----------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net income............................................... $ 11,315 $ 9,391
Other comprehensive income (expense):
Unrealized gain on investments, net of tax provision of
$19.9 million........................................ 29,893
Foreign currency translation adjustment................ (3,246) (52)
----------- ---------
Total comprehensive income............................... $ 37,962 $ 9,339
----------- ---------
----------- ---------
</TABLE>
9
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
Following is unaudited information regarding the Company's segments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1999 1998
--------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Sales Insert Advertising & Newspaper Services $ 257,100 $ 266,610 $ 502,965 $ 517,637
Direct Marketing Services 76,709 66,336 149,429 129,130
Digital Services 84,025 65,235 164,243 112,836
Specialty Products & Commercial Printing 17,661 17,330 42,229 41,560
Elimination of intersegment sales (3,929) (2,641) (6,977) (4,391)
--------- --------- --------- ---------
Consolidated $ 431,566 $ 412,870 $ 851,889 $ 796,772
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating
Income Insert Advertising & Newspaper Services $ 25,343 $ 21,583 $ 40,557 $ 32,406
Direct Marketing Services 7,049 8,692 11,735 14,796
Digital Services 6,297 6,434 11,886 11,166
Specialty Products & Commercial Printing (800) (1,019) 597 769
General Corporate (4,669) (3,923) (8,980) (7,850)
--------- --------- --------- ---------
Consolidated $ 33,220 $ 31,767 $ 55,795 $ 51,287
--------- --------- --------- ---------
--------- --------- --------- ---------
Depreciation Insert Advertising & Newspaper Services $ 8,486 $ 7,591 $ 16,770 $ 15,716
Direct Marketing Services 4,246 3,181 8,666 6,255
Digital Services 5,517 3,852 10,876 6,674
Specialty Products & Commercial Printing 587 728 1,163 1,453
General Corporate 236 147 504 290
--------- --------- --------- ---------
Consolidated $ 19,072 $ 15,499 $ 37,979 $ 30,388
--------- --------- --------- ---------
--------- --------- --------- ---------
Amortization
of
Intangibles Insert Advertising & Newspaper Services $ 2,065 $ 3,888 $ 4,453 $ 7,776
Direct Marketing Services 858 476 1,776 977
Digital Services 1,837 1,526 3,630 2,695
Specialty Products & Commercial Printing 165 160 330 345
General Corporate 142 125 267 250
--------- --------- --------- ---------
Consolidated $ 5,067 $ 6,175 $ 10,456 $ 12,043
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
10
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. RECAPITALIZATION
On June 29, 1999, the Company announced a 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; and
- In the merger, except for certain members of the Company's management,
each holder of a share of the Company's outstanding common stock would be
entitled to receive cash, preferred stock and warrants to purchase Big
Flower common stock, which warrants become exercisable if certain events
occur. The cash portion of the merger consideration would be funded by
investments by Lee and Evercore as well as by the Company's issuance of
new debt.
In connection with the agreement, the Company postponed its annual
stockholders meeting which was originally scheduled for June 29, 1999. The
transaction is expected to close during the fourth quarter of 1999. As the
transaction is expected to be accounted for as a recapitalization, the
historical basis of the Company's assets and liabilities will not be affected.
11
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $ 2,981 $ 8,499
Accounts receivable, net........................................................... 186,991 186,857
Inventories........................................................................ 51,602 47,954
Prepaid expenses and other current assets.......................................... 10,254 14,788
Deferred income taxes and income tax receivable.................................... 9,709 10,910
------------ ------------
Total current assets........................................................... 261,537 269,008
Due from parent...................................................................... 1,481
Property, plant and equipment, net................................................... 490,805 454,004
Goodwill, net of accumulated amortization of $48,993 and $40,379..................... 533,981 483,373
Long-term investments................................................................ 93,751 70,141
Other assets, net.................................................................... 39,344 36,634
------------ ------------
Total Assets................................................................... $ 1,420,899 $1,313,160
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable..................................................................... $ 132,934 $ 150,503
Compensation and benefits payable.................................................. 37,079 44,638
Accrued interest................................................................... 28,391 16,991
Accrued income taxes............................................................... 4,766 15,936
Other current liabilities.......................................................... 37,225 47,188
------------ ------------
Total current liabilities...................................................... 240,395 275,256
Due to parent........................................................................ 2,446
Long-term debt, net of current portion............................................... 856,230 731,080
Deferred income taxes................................................................ 75,184 53,134
Other long-term liabilities.......................................................... 30,901 26,355
------------ ------------
Total liabilities.............................................................. 1,202,710 1,088,271
------------ ------------
Stockholder's equity:
Accumulated deficit................................................................ (45,473) (36,511)
Accumulated other comprehensive income............................................. 14,765 12,522
Other.............................................................................. 248,897 248,878
------------ ------------
Total stockholder's equity..................................................... 218,189 224,889
------------ ------------
Total Liabilities and Stockholder's Equity..................................... $ 1,420,899 $1,313,160
------------ ------------
------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
of Big Flower Holdings, Inc. and Subsidiaries.
12
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
----------------------
<S> <C> <C>
1999 1998
---------- ----------
Net sales................................................................................. $ 431,566 $ 412,870
---------- ----------
Operating expenses:
Costs of production..................................................................... 315,107 308,789
Selling, general and administrative..................................................... 58,590 54,841
Depreciation............................................................................ 18,960 15,426
Amortization of intangibles............................................................. 4,925 6,020
---------- ----------
397,582 385,076
---------- ----------
Operating income.......................................................................... 33,984 27,794
---------- ----------
Other expenses (income):
Interest expense........................................................................ 17,178 13,639
Amortization of deferred financing costs................................................ 701 384
Interest income......................................................................... (242) (80)
Other, net.............................................................................. (1,826) 798
---------- ----------
15,811 14,741
---------- ----------
Income before income taxes................................................................ 18,173 13,053
Income tax expense........................................................................ 8,359 6,005
---------- ----------
Net income................................................................................ $ 9,814 $ 7,048
---------- ----------
---------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
of Big Flower Holdings, Inc. and Subsidiaries.
13
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------
<S> <C> <C>
1999 1998
---------- ----------
Net sales................................................................................. $ 851,889 $ 796,772
---------- ----------
Operating expenses:
Costs of production..................................................................... 628,393 605,001
Selling, general and administrative..................................................... 119,543 98,993
Depreciation............................................................................ 37,754 30,246
Amortization of intangibles............................................................. 10,189 11,733
---------- ----------
795,879 745,973
---------- ----------
Operating income.......................................................................... 56,010 50,799
---------- ----------
Other expenses (income):
Interest expense........................................................................ 34,512 26,791
Amortization of deferred financing costs................................................ 1,372 771
Interest income......................................................................... (564) (200)
Other, net.............................................................................. (3,850) 3,245
---------- ----------
31,470 30,607
---------- ----------
Income before income taxes................................................................ 24,540 20,192
Income tax expense........................................................................ 11,288 9,289
---------- ----------
Net income................................................................................ $ 13,252 $ 10,903
---------- ----------
---------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
of Big Flower Holdings, Inc. and Subsidiaries.
14
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 13,252 $ 10,903
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 47,943 41,979
Deferred income taxes................................................................. 3,414 (386)
Other non-cash income and expense, net................................................ (3,218) 4,321
Changes in operating assets and liabilities (excluding effect of acquisitions):
Decrease (increase) in accounts receivable.......................................... 8,346 (2,255)
Increase in inventories............................................................. (1,471) (3,768)
Increase in prepaid expenses and other assets....................................... (4,288) (1,209)
Decrease in accounts payable and other liabilities.................................. (15,870) (24,157)
---------- ----------
Net cash provided by operating activities................................................. 48,108 25,428
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................................... (52,126) (44,637)
Acquisitions of businesses, net of cash acquired........................................ (48,377) (41,838)
Investments in equity securities and leveraged lease transaction........................ (2,918) (28,159)
Software development costs capitalized.................................................. (5,391) (2,263)
Other investing activities.............................................................. 2,656 226
---------- ----------
Net cash used in investing activities..................................................... (106,156) (116,671)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities........................................ 130,316 107,299
Repayments of long-term debt............................................................ (34,850) (25,651)
Issuance of long-term debt.............................................................. 17,500
Decrease in outstanding checks drawn on controlled disbursement accounts................ (20,206) (4,079)
Dividends paid to parent................................................................ (22,214) (3,404)
Deferred financing costs................................................................ (1,525) (923)
---------- ----------
Net cash provided by financing activities................................................. 51,521 90,742
---------- ----------
Effect of exchange rate changes on cash................................................... 1,009 (52)
---------- ----------
Net decrease in cash and cash equivalents................................................. (5,518) (553)
Cash and cash equivalents at beginning of year............................................ 8,499 5,307
---------- ----------
Cash and cash equivalents at end of period................................................ $ 2,981 $ 4,754
---------- ----------
---------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements
of Big Flower Holdings, Inc. and Subsidiaries.
15
<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
ECONOMIES,
- 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.
16
<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
six-month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ---------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
--------- --------- ---------- ---------
<CAPTION>
(PERCENTAGES OF NET SALES)
<S> <C> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0% 100.0%
--------- --------- ---------- ---------
Operating expenses:
Costs of production....................................... 73.0 74.8 73.8 76.0
Selling, general and administrative....................... 13.7 12.3 14.0 12.3
Depreciation.............................................. 4.4 3.7 4.5 3.8
Amortization of intangibles............................... 1.2 1.5 1.2 1.5
--------- --------- ---------- ---------
92.3 92.3 93.5 93.6
--------- --------- ---------- ---------
Operating income............................................ 7.7% 7.7% 6.5% 6.4%
--------- --------- ---------- ---------
--------- --------- ---------- ---------
EBITDA...................................................... 13.3% 12.9% 12.2% 11.8%
--------- --------- ---------- ---------
--------- --------- ---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA...................................................... $ 57,359 $ 53,441 $ 104,230 $ 93,718
--------- --------- ---------- ---------
--------- --------- ---------- ---------
Net cash provided by operating activities................... $ 42,692 $ 10,594 $ 42,697 $ 25,672
Net cash used in investing activities....................... 42,259 68,826 121,479 116,800
Net cash (used in) provided by financing activities......... (8,464) 59,249 72,271 90,634
</TABLE>
"EBITDA" represents the sum of operating income, depreciation and
amortization of intangibles, and approximates the definition of EBITDA provided
in the Company's debt agreements. EBITDA is presented here to provide additional
information regarding the Company's ability to meet its future debt service,
capital expenditures and working capital requirements. EBITDA is not a measure
of financial performance in accordance with GAAP and should not be considered an
alternative to net income as a measure of operating performance or to cash flows
from operating activities as a measure of liquidity. The Company's definition of
EBITDA might not be the same as that of other companies.
CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---------- ---------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) PER SHARE AMOUNTS)
Net sales...................................... $ 431,566 $ 412,870 4.5% $ 851,889 $ 796,772 6.9%
Operating income............................... 33,220 31,767 4.6% 55,795 51,287 8.8%
Net income..................................... 8,489 8,306 2.2% 11,315 9,391 20.5%
Diluted earnings per share..................... $ 0.38 $ 0.38 -- $ 0.54 $ 0.46 17.4%
</TABLE>
NET SALES
Revenue increases in 1999 were due largely to acquisitions and increased
demand for higher-margin advertising insert programs. 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
17
<PAGE>
include all businesses owned, and excluding the first quarter 1998 sales related
to the divestiture described above, net sales in both the second quarter and the
first half of 1999 were approximately the same as the 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 5% in both the 1999 quarter and
half-year periods when compared to the prior year.
These comparable-business increases reflect positive growth trends in the
Insert Advertising & Newspaper Services segment and the US operations in the
Digital Services segment. These results were tempered by shortfalls in the UK
operations of the Direct Marketing Services and Digital Services segments due to
soft economic conditions as well as spending curtailment by some US Direct
Marketing Services customers. 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 declined due to increased sales and productivity as
well as favorable materials costs. These factors more than offset the increased
infrastructure costs inherent in expanding the individual businesses. Variances
in expense category ratios also reflect:
- the Company's changing business mix as it acquires more companies to
expand the Digital Services and Direct Marketing Services segments, where
a higher proportion of the cost structure is related to selling rather
than to production, and
- 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 1.8% in 1999 compared to the
second quarter of 1998. Paper costs accounted for 29% of net sales in the second
quarter of 1999 compared to 33% 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 half of 1999, costs of production declined as a
percentage of net sales by 2.2% compared to the first half of 1998 and paper
costs accounted for 29% of net sales compared to 34% in the same period in 1998.
Selling, general and administrative expenses in the same period increased as a
percentage of net sales by 1.7% over the 1998 period.
Combined operating expenses (excluding depreciation and amortization) have
decreased as a percentage of net sales, leading to an increase in the margin of
EBITDA to net sales. This increase reflects the increased productivity of the
Company's operations and the higher-margin lines of business in the expanding
Digital Services and Direct Marketing Services segments. For further discussion,
see RESULTS BY SEGMENT.
18
<PAGE>
OPERATING INCOME
Operating income represented 7.7% of net sales in second quarters of both
1999 and 1998. Adjusting the 1998 period to include all businesses currently
owned, operating income in the second quarter of 1999 decreased approximately 5%
compared to the 1998 period.
For the first six months of 1999, operating income increased to represent
6.5% of net sales compared to 6.4% in the same period in 1998. Adjusting the
1998 period to include all businesses currently owned, operating income in the
first half 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 which have risen at a higher rate relative
to the increased depreciation and amortization costs incurred in expanding the
Company's businesses through capital investments and acquisitions. The increase
was offset by the impact of UK operations and US direct marketing operations
where operating income margins have declined in 1999 as a result of sales
shortfalls.
INTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- ------------- --------- --------- -------------
<CAPTION>
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest expense.............................. $ 17,059 $ 13,518 26.2% $ 34,274 $ 26,547 29.1%
Average interest rate......................... 8.15% 8.31% 8.32% 8.31%
Average borrowing rate, including the effect
of convertible preferred securities......... 7.89% 7.97% 8.05% 7.96%
</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 second quarter of 1999 was lower than that in the second quarter of
1998, however, due to lower interest rates in both the US and the UK. For the
six-month periods, the effect of declining variable-rate interest was offset by
the impact of fixed-rate debt issued in December 1998.
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 $3.5
million in the second quarter and $7.4 million for the first six months. The
comparable amount in 1998 was $1.4 million for both the second quarter and
six-month periods. The investment income excludes interest costs incurred on
borrowings used to finance the investment, which are recorded as interest
expense.
INCOME TAXES
The Company's effective tax rate was the same in all periods presented and
exceeded the federal statutory rate due primarily to state and local taxes and
amortization of certain goodwill.
19
<PAGE>
RESULTS BY SEGMENT
INSERT ADVERTISING & NEWSPAPER SERVICES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
---------- ---------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (IN THOUSANDS)
Net sales................................ $ 257,100 $ 266,610 -3.6% $ 502,965 $ 517,637 -2.8%
Operating income......................... 25,343 21,583 17.4% 40,557 32,406 25.2%
</TABLE>
Fluctuations in the cost of paper and in the amount of paper supplied by
customers negatively impacted 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 second quarter and
first half of 1999 increased approximately 4% over the same periods in 1998. The
increases reflect growth of TC Advertising's insert sales to grocery store
customers and sales of newspaper television listings guides, as well as
favorable price 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ----------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (IN THOUSANDS)
Net sales................................... $ 76,709 $ 66,336 15.6% $ 149,429 $ 129,130 15.7%
Operating income............................ 7,049 8,692 -18.9% 11,735 14,796 -20.7%
</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 1998 periods, net sales decreased
approximately 5% in both the second quarter and the first half of 1999 and
operating income decreased approximately 30% in the second quarter and
approximately 35% in the six-month period.
The comparable results reflect the delay or curtailment of direct mail
spending by two major customers in the US as well as softness in the UK
operations. UK operations represent approximately 30% of 1999 segment sales.
Additionally, the 1999 six-month results reflect the impact of customers
accelerating orders into the fourth quarter of 1998 in anticipation of the
January 1999 postage rate increase.
Pro forma sales of UK operations (including Colorgraphic in the 1998
periods) increased approximately 5% in the second quarter from the prior year
period, but were approximately equal to the prior year for the six-month period.
The increased sales in the second 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.
20
<PAGE>
The comparable operating income results reflect the impact of the sales
factors noted above and the reduced margins in the UK. Also, additional
infrastructure investments in data analysis, data mining, digital printing and
response management portions of the business lowered the profitability of the US
businesses in this segment as they coincided with the lower sales levels.
DIGITAL SERVICES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ----------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- ------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (IN THOUSANDS)
Net sales................................... $ 84,025 $ 65,235 28.8% $ 164,243 $ 112,836 45.6%
Operating income............................ 6,297 6,434 -2.1% 11,886 11,166 6.4%
</TABLE>
Changes in sales and operating income for this segment were significantly
impacted by acquisitions in 1998. 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. Adjusting to include all
of these businesses in the comparable periods of 1998, net sales increased
approximately 5% in both the second quarter and six-month periods in 1999. On
the same basis of comparison, 1999 operating income decreased approximately 25%
in the second quarter and approximately 20% in the six-month period as compared
to the same periods in 1998.
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 10% in the second quarter of 1999 and
approximately 5% for the first half of 1999 when compared to the corresponding
periods in 1998. Due to the UK impact, sales of commercial services declined
approximately 5% in the second quarter of 1999 and were flat for the six-month
period. More than offsetting these results, retail and commercial printing each
increased more than 30% in the 1999 quarter and more than 20% for the six-month
period. Software related sales increased approximately 11% in the second quarter
from the 1998 level when including all businesses, although sales related to the
Paradigm and other new systems grew approximately 30%. For the first six months
of 1999, total software related sales increased approximately 7% from the 1998
level on the same basis of comparison while sales of the newer systems grew
approximately 22%.
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,
second quarter segment operating income decreased approximately 5% from the
prior year compared to a sales increase of approximately 10% on the same basis.
For the first half of 1999, the comparable operating income exclusive of UK
premedia businesses was approximately equal to the same period in 1998, compared
to a sales increase of nearly 10%. The 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) (IN THOUSANDS)
Net sales..................................... $ 17,661 $ 17,330 1.9% $ 42,229 $ 41,560 1.6%
Operating income.............................. (800) (1,019) 21.5% 597 769 -22.4%
</TABLE>
21
<PAGE>
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 six-month revenue
increase was approximately 10% 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 June 29, 1999, the Company announced that it had reached a 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. See note 8 to
the condensed consolidated financial statements.
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.
Management believes that the facilities in place, as well as the Company's
cash flows, will be sufficient to meet operational needs for at least the next
twelve months. At June 30, 1999, the Company had approximately $286.5 million
available to borrow under its revolving credit facility, although restrictions
in the credit facility and the indentures governing its outstanding subordinated
notes may limit the amounts borrowed. Subsequent to June 30, 1999, the Company
utilized approximately $42.2 million of the available amount for acquisitions
(see note 2 to the condensed consolidated financial statements).
WORKING CAPITAL
The Company's current assets exceeded current liabilities by $29.0 million
at June 30, 1999 while current liabilities exceeded current assets by $5.8
million at December 31, 1998 (an increase in working capital of $34.8 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. 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 June 30, 1999 and December 31, 1998 would have
been $115.6 million and $111.8 million, respectively. The ratio of current
assets to current liabilities as of June 30, 1999 was 1.12 to 1 (1.49 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.
22
<PAGE>
SUMMARY OF CASH FLOWS
Net cash provided by operating activities increased by $17 million in the
first half of 1999 compared to the same period in 1998, with an increase of
$32.1 million in the second quarter period compared to the 1998 quarter. The
increases resulted from a higher proportionate utilization of the accounts
receivable securitization facility compared to the 1998 periods, as well as the
timing of payments for current liabilities, particularly accounts payable.
Cash flows used in investing activities increased in 1999 from the 1998
level, although the level of investing activities in the second quarter of 1999
was lower than that 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 and
increased capital expenditures necessary to expand the Company's businesses.
These increases were offset by a lower level of investments in the second
quarter of 1999 compared to the 1998 period, which included the Company's first
investment in leveraged lease transactions.
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 is 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 June
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.
23
<PAGE>
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;
(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 will be upgraded in
1999 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. Remaining computer remediation, upgrade and replacement
projects underway at Webcraft's subsidiaries are expected to be completed during
the Fall of 1999. Webcraft has completed a review and testing, where possible,
of its production equipment. Only one type of equipment failure was uncovered
that Webcraft believes would impact production, and this equipment is expected
to be upgraded or replaced in the Fall of 1999. Webcraft has limited electronic
interaction with its customers but has evaluated these interactions and
determined that a software upgrade will be necessary for one customer. This
upgrade is expected to be installed in the Fall of 1999.
Laser Tech completed its assessment and testing of all material assets
during the second quarter of 1999. 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. Tests have identified the need to upgrade certain common technologies
and these upgrades are expected to be completed by September 1999. As planned,
Laser Tech is replacing several financial systems with others which the vendors
have represented to be Year 2000 compliant. Implementation of these systems is
underway and completion at all designated sites is expected to be completed by
September 1999. Testing of other financial systems which have been certified by
the manufacturers to be compliant is expected to be done in the Fall of 1999.
Columbine has completed its assessment of all material assets. Year 2000
compliant versions of Columbine's major products are currently in use by a
number of customers. Columbine is expected to complete upgrades for a few
remaining products and additional third-party products embedded in its software
during the Fall of 1999. It has successfully tested most of its internal systems
and is expected to
24
<PAGE>
complete the upgrade of non-compliant systems during the Fall of 1999. 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.
Contingency plans are being developed 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 general, the Company began its
examination of various contingency plans in the fourth quarter of 1998 and
expects to substantially complete the same prior to October 1999, with updates
through the end of the year. 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.
Contingency plans are being developed to meet these anticipated
higher-than-normal customer service demands.
Each group is testing facilities and miscellaneous equipment. Any
remediation is expected to be completed by September 1999. 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
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.
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 second quarter of 1998, periodic progress reports have been submitted
to and discussed with the Company's Board of Directors. The Company plans to
continue such periodic reporting.
COSTS
The estimated total cost of the Year 2000 Project, including that related to
acquisitions made prior to June 30, 1999, is approximately $5.1 million, of
which approximately $3.1 million reflects allocation of internal costs and
approximately $2.0 million reflects amounts for external consultants, equipment,
hardware and software. The total amount spent on the Year 2000 Project through
June 30, 1999 was approximately $3.4 million, of which approximately $2.3
million reflected allocation of internal costs and approximately $1.1 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
25
<PAGE>
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.
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 June 30, 1999, 73% 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 66% of total debt. When also including redeemable convertible
preferred securities, which carry a fixed dividend, fixed rate obligations
represented 70% 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 June 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 June 30, 1999 would have reduced the Company's total assets by $7.1
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 16.
26
<PAGE>
PART II--OTHER INFORMATION
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS -
Six lawsuits have been 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. The complaints name as defendants the
Company, all of its directors and, in some cases, Thomas H. Lee Company,
Evercore Capital Partners and Mark A. Angelson, General Counsel of the Company.
The complaints allege 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 complaints allege that
certain members of management have conflicts of interest that have prevented
them from acting in the best interests of the Company's stockholders. The cases
naming Thomas H. Lee Company and Evercore Capital Partners as defendants allege
that they aided and abetted the alleged breaches of fiduciary duties. The
Company believes that the claims are entirely without merit and intends to
vigorously contest the claims.
ITEM 2. CHANGES IN SECURITIES -
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS -
None.
ITEM 5. OTHER INFORMATION -
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -
(a) Exhibits
<TABLE>
<C> <S>
10.1 Fourth Amendment to the Credit Agreement, dated as of May 14, 1999, among
Big Flower Holdings, Inc., certain subsidiaries of Big Flower Holdings,
Inc., the banks from time to time party thereto, Bank of America NT & SA and
the Industrial Bank of Japan, Limited as Co-Agents, Credit Suisse First
Boston as Documentation Agent and Bankers Trust Company as Administrative
Agent.*
27.1-2 Financial Data Schedules.*
</TABLE>
(b) Reports on Form 8-K
During the three months ended June 30, 1999, the Registrant filed the
following reports on Form 8-K:
(i) Current report on Form 8-K dated April 20, 1999, concerning the Big
Flower Holdings, Inc. board of directors approving exploration of
strategic alternatives.
(ii) Current report on Form 8-K dated May 14, 1999, concerning Big Flower
Press Holdings, Inc.'s extension of an exchange offer for its senior
subordinated notes due 2008.
- ------------------------
* Being Filed Herewith
27
<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.
BIG FLOWER HOLDINGS, INC.
/S/ RICHARD L. RITCHIE
---------------------------------------------
Richard L. Ritchie
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
DATE: August 12, 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: August 12, 1999
28
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
<C> <S>
10.1 Fourth Amendment to the Credit Agreement, dated as of May 14, 1999, among Big Flower Holdings,
Inc., certain subsidiaries of Big Flower Holdings, Inc., the banks from time to time party thereto,
Bank of America NT & SA and the Industrial Bank of Japan, Limited as Co-Agents, Credit Suisse First
Boston as Documentation Agent and Bankers Trust Company as Administrative Agent.*
27.1-2 Financial Data Schedules.*
</TABLE>
- ------------------------
* Being Filed Herewith
29
<PAGE>
FOURTH AMENDMENT
FOURTH AMENDMENT (this "Amendment"), dated as of May 14, 1999, among BIG
FLOWER HOLDINGS, INC., a Delaware corporation ("Holdings"), BIG FLOWER PRESS
HOLDINGS, INC., a Delaware corporation ("BFPH"), TREASURE CHEST ADVERTISING
COMPANY, INC., a Delaware corporation and a Wholly-Owned Subsidiary of BFPH
("Treasure Chest"), WEBCRAFT, INC., a Delaware corporation and a Wholly-Owned
Subsidiary of BFPH ("Webcraft"), BIG FLOWER DIGITAL SERVICES, INC., a Delaware
corporation and a Wholly-Owned Subsidiary of BFPH ("BF Digital"), BIG FLOWER
LIMITED, a Wholly-Owned Subsidiary of BFPH and a limited company organized under
the laws of England ("BFL"), OLWEN DIRECT MAIL LIMITED, a Wholly-Owned
Subsidiary of BFL and a limited company organized under the laws of England
("Olwen"), BIG FLOWER DIGITAL SERVICES LIMITED, an indirect Wholly-Owned
Subsidiary of BF Digital and a limited company organized under the laws of
England ("BFDSL"), TROYPEAK LIMITED, an indirect Wholly-Owned Subsidiary of BF
Digital and a limited company organized under the laws of England ("Troypeak"),
PISMO LIMITED, an indirect Wholly-Owned Subsidiary of BF Digital and a limited
company organized under the laws of England ("Pismo"), and BROADCAST SYSTEMS
SOFTWARE LIMITED, an indirect Wholly-Owned Subsidiary of BF Digital and a
limited company organized under the laws of England ("Broadcast", and together
with Treasure Chest, Webcraft, BF Digital, BFL, Olwen, BFDSL, Troypeak and
Pismo, the "Borrowers", and each, a "Borrower"), the Banks from time to time
party to the Credit Agreement referred to below, BANK OF AMERICA NT & SA and THE
INDUSTRIAL BANK OF JAPAN, LIMITED, as Co-Agents (collectively, the "Co-Agents,"
and each, a "Co-Agent"), CREDIT SUISSE FIRST BOSTON, as Documentation Agent, and
BANKERS TRUST COMPANY, as Administrative Agent (the "Administrative Agent"). All
capitalized terms used herein and not otherwise defined shall have the
respective meanings provided such terms in the Credit Agreement.
W I T N E S S E T H :
WHEREAS, Holdings, BFPH, the Borrowers, the Banks, the Co-Agents, the
Documentation Agent and the Administrative Agent are parties to an Amended and
Restated Credit Agreement, dated as of June 22, 1998 (as in effect on the date
hereof, the "Credit Agreement"); and
WHEREAS, subject to the terms and conditions of this Amendment, the parties
hereto wish to amend the Credit Agreement as herein provided;
NOW, THEREFORE, it is agreed:
I. AMENDMENTS TO CREDIT AGREEMENT.
1. Section 9.05(vii) of the Credit Agreement is hereby amended by inserting
the text "as provided by this clause (y)" immediately following the word
"Investment" appearing in the proviso to clause (y) of said Section.
2. The definition of "Available Basket Amount" appearing in Section 11.01 of
the Credit Agreement is hereby amended by (a) deleting the amount "$25,000,000"
appearing therein and inserting in lieu thereof the amount "$50,000,000" and (b)
inserting the following text immediately following, but prior to the period
ending, clause (vii) of said definition:
"PLUS, (viii) if positive, an amount equal to 50% of the remainder of (x)
the Cumulative Capital Gains Amount on such date LESS (y) $25,000,000".
3. Section 11.01 of the Credit Agreement is hereby further amended by adding
the following new definitions in appropriate alphabetical order in said Section:
"Consolidated Subsidiary" shall mean each Subsidiary of Holdings the
financial results of which are consolidated with those of Holdings, in
accordance with GAAP, for financial reporting purposes.
<PAGE>
"Cumulative Capital Gains Amount" shall mean, at any date, an amount
equal to the remainder of (x) the aggregate amount of all capital gains
realized by Holdings (on a consolidated basis) upon the sale or other
disposition after the Fourth Amendment Effective Date of all or any part
of any Investment made pursuant to Section 9.05(vii) (other than an
Investment in a Consolidated Subsidiary) LESS (y) the aggregate amount of
all capital losses realized by Holdings (on a consolidated basis) upon
the sale or other disposition after the Fourth Amendment Effective Date
of all or any part of any Investment made pursuant to Section 9.05(vii)
(other than an Investment in a Consolidated Subsidiary).
"Fourth Amendment" shall mean the Fourth Amendment to this Agreement,
dated as of May 14, 1999.
"Fourth Amendment Effective Date" shall have the meaning provided in
the Fourth Amendment.
II. MISCELLANEOUS PROVISIONS.
1. In order to induce the Banks to enter into this Amendment, each Credit
Agreement Party hereby represents and warrants that:
(a) no Default or Event of Default exists as of the Fourth Amendment
Effective Date, both immediately before and immediately after giving effect
to this Amendment; and
(b) all of the representations and warranties contained in the Credit
Agreement or the other Credit Documents are true and correct in all material
respects on the Fourth Amendment Effective Date both immediately before and
immediately after giving effect to this Amendment, with the same effect as
though such representations and warranties had been made on and as of the
Fourth Amendment Effective Date (it being understood that any representation
or warranty made as of a specific date shall be true and correct in all
material respects as of such specific date).
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
3. This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument. A complete set of counterparts
shall be lodged with Holdings and the Administrative Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.
5. This Amendment shall become effective on the date (the "Fourth Amendment
Effective Date") when each Credit Agreement Party and the Banks constituting the
Required Banks shall have signed a counterpart hereof (whether the same or
different counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at its Notice Office.
6. From and after the Fourth Amendment Effective Date, all references in the
Credit Agreement and each of the other Credit Documents to the Credit Agreement
shall be deemed to be references to the Credit Agreement as modified hereby.
* * *
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
<TABLE>
<S> <C> <C>
BIG FLOWER HOLDINGS, INC.,
as a Guarantor
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
BIG FLOWER PRESS HOLDINGS, INC.,
as a Guarantor
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
TREASURE CHEST ADVERTISING COMPANY, INC.,
as a Borrower and a Guarantor
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
WEBCRAFT, INC.,
as a Borrower and a Guarantor
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
BIG FLOWER DIGITAL SERVICES, INC.,
as a Borrower and a Guarantor
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
BIG FLOWER LIMITED,
as a Borrower
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
OLWEN DIRECT MAIL LIMITED,
as a Borrower
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
TROYPEAK LIMITED,
as a Borrower
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
PISMO LIMITED,
as a Borrower
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
BIG FLOWER DIGITAL SERVICES LIMITED,
as a Borrower
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
BROADCAST SYSTEMS SOFTWARE LIMITED,
as a Borrower
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
BANKERS TRUST COMPANY,
Individually, and as Administrative Agent
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
CREDIT SUISSE FIRST BOSTON,
Individually
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
CREDIT SUISSE FIRST BOSTON,
as Documentation Agent
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ABN AMRO BANK N.V.,
NEW YORK BRANCH
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
BANK OF AMERICA NT & SA
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
BANKBOSTON, N.A.
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
BANK OF MONTREAL
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
THE BANK OF NEW YORK
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
BANK POLSKA KASA OPIEKI, S.A.
PEKAO S.A. Group, New York Branch
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
PARIBAS
By
-----------------------------------------
Title:
FIRST UNION NATIONAL BANK
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
CREDIT AGRICOLE INDOSUEZ
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
CITY NATIONAL BANK
By
-----------------------------------------
Title:
CREDIT LYONNAIS, NEW YORK BRANCH
By
-----------------------------------------
Title:
DAI-ICHI KANGYO BANK, LIMITED
By
-----------------------------------------
Title:
DRESDNER BANK AG, NEW YORK AND
GRAND CAYMAN BRANCHES
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By
-----------------------------------------
Title:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ERSTE BANK DER
OESTERREICHISCHEN SPARKASSEN AG
By
-----------------------------------------
Title:
IMPERIAL BANK
By
-----------------------------------------
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
NATIONSBANK, N.A.
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
CALIFORNIA BANK AND TRUST,
formerly Sumitomo Bank of California
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
THE TOKAI BANK, LIMITED
By
-----------------------------------------
Title:
THE TOYO TRUST & BANKING CO., LTD.
By
-----------------------------------------
Title:
UNION BANK OF CALIFORNIA, N.A.
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
MICHIGAN NATIONAL CORPORATION
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By /s/ AUTHORIZED SIGNATORY
-----------------------------------------
Title:
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENT 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,001
<SECURITIES> 0
<RECEIVABLES> 194,514
<ALLOWANCES> 7,495
<INVENTORY> 51,602
<CURRENT-ASSETS> 266,328
<PP&E> 724,874
<DEPRECIATION> 230,011
<TOTAL-ASSETS> 1,494,955
<CURRENT-LIABILITIES> 237,318
<BONDS> 0
114,070
0
<COMMON> 197
<OTHER-SE> 163,590
<TOTAL-LIABILITY-AND-EQUITY> 1,494,955
<SALES> 851,889
<TOTAL-REVENUES> 851,889
<CGS> 628,393
<TOTAL-COSTS> 628,393
<OTHER-EXPENSES> 165,853
<LOSS-PROVISION> 954
<INTEREST-EXPENSE> 35,736
<INCOME-PRETAX> 20,953
<INCOME-TAX> 9,638
<INCOME-CONTINUING> 11,315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,315
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.54
</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.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,981
<SECURITIES> 0
<RECEIVABLES> 194,486
<ALLOWANCES> 7,495
<INVENTORY> 51,602
<CURRENT-ASSETS> 261,537
<PP&E> 719,853
<DEPRECIATION> 229,048
<TOTAL-ASSETS> 1,420,899
<CURRENT-LIABILITIES> 240,395
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 218,189
<TOTAL-LIABILITY-AND-EQUITY> 1,420,899
<SALES> 851,889
<TOTAL-REVENUES> 851,889
<CGS> 628,393
<TOTAL-COSTS> 628,393
<OTHER-EXPENSES> 162,118
<LOSS-PROVISION> 954
<INTEREST-EXPENSE> 35,884
<INCOME-PRETAX> 24,540
<INCOME-TAX> 11,288
<INCOME-CONTINUING> 13,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,252
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
