<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 MARCH 31, 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
(I.R.S. Employer
Identification
Nos.)
(State of
incorporation)
</TABLE>
3 East 54(th) Street
New York, New York 10022
(212) 521-1600
(Address and telephone number of Registrants' Principal Executive Offices)
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes (X) No ( )
As of April 30, 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 March 31,
1999 and December 31, 1998.......................................................................... 3
Condensed Consolidated Statements of Operations of Big Flower Holdings, Inc. and Subsidiaries for
the Three Months Ended March 31, 1999 and 1998...................................................... 4
Condensed Consolidated Statements of Cash Flows of Big Flower Holdings, Inc. and Subsidiaries for
the Three Months Ended March 31, 1999 and 1998...................................................... 5
Notes to Condensed Consolidated Financial Statements of Big Flower Holdings, Inc. and
Subsidiaries........................................................................................ 6
Condensed Consolidated Balance Sheets of Big Flower Press Holdings, Inc. and Subsidiaries at March
31, 1999 and December 31, 1998...................................................................... 10
Condensed Consolidated Statements of Operations of Big Flower Press Holdings, Inc. and Subsidiaries
for the Three Months Ended March 31, 1999 and 1998.................................................. 11
Condensed Consolidated Statements of Cash Flows of Big Flower Press Holdings, Inc. and Subsidiaries
for the Three Months Ended March 31, 1999 and 1998.................................................. 12
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 13
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk......................................... 22
PART II--OTHER INFORMATION................................................................................. 24
</TABLE>
2
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $ 9,864 $ 8,504
Accounts receivable, net........................................................... 188,565 186,863
Inventories........................................................................ 50,030 47,954
Prepaid expenses and other current assets.......................................... 11,802 15,648
Deferred income taxes and income tax receivable.................................... 9,653 10,880
------------ ------------
Total current assets........................................................... 269,914 269,849
Property, plant and equipment, net................................................... 482,975 457,988
Goodwill, net of accumulated amortization of $44,860 and $40,379..................... 540,780 483,373
Long-term investments................................................................ 173,056 74,391
Other assets, net.................................................................... 39,958 42,581
------------ ------------
Total Assets................................................................... $ 1,506,683 $1,328,182
------------ ------------
------------ ------------
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable................................................................... $ 139,671 $ 151,054
Compensation and benefits payable.................................................. 39,924 48,983
Accrued interest................................................................... 14,998 16,991
Accrued income taxes............................................................... 1,032 9,578
Other current liabilities.......................................................... 41,038 49,024
------------ ------------
Total current liabilities...................................................... 236,663 275,630
Long-term debt, net of current portion............................................... 857,324 731,080
Deferred income taxes................................................................ 94,952 52,507
Other long-term liabilities.......................................................... 28,774 26,755
------------ ------------
Total liabilities.............................................................. 1,217,713 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........................................................... 114,075 115,000
------------ ------------
Stockholders' equity:
Preferred stock....................................................................
Common stock....................................................................... 197 197
Additional paid-in capital......................................................... 143,517 146,135
Accumulated deficit................................................................ (28,046) (30,872)
Accumulated other comprehensive income............................................. 59,968 12,522
Other.............................................................................. (741) (772)
------------ ------------
Total stockholders' equity..................................................... 174,895 127,210
------------ ------------
Total Liabilities and Equity................................................... $ 1,506,683 $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 MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net sales................................................................................. $ 420,323 $ 383,902
---------- ----------
Operating expenses:
Costs of production..................................................................... 313,286 296,212
Selling, general and administrative..................................................... 60,166 47,413
Depreciation............................................................................ 18,907 14,889
Amortization of intangibles............................................................. 5,389 5,868
---------- ----------
397,748 364,382
---------- ----------
Operating income.......................................................................... 22,575 19,520
---------- ----------
Other expenses (income):
Interest expense........................................................................ 17,215 13,029
Amortization of deferred financing costs................................................ 716 429
Interest income......................................................................... (220) (120)
Preferred dividends of a subsidiary trust............................................... 1,702 1,725
Other, net.............................................................................. (2,071) 2,447
---------- ----------
17,342 17,510
---------- ----------
Income before income taxes................................................................ 5,233 2,010
Income tax expense........................................................................ 2,407 925
---------- ----------
Net income................................................................................ $ 2,826 $ 1,085
---------- ----------
---------- ----------
Earnings per share:
Basic................................................................................... $ 0.14 $ 0.06
---------- ----------
---------- ----------
Diluted................................................................................. $ 0.14 $ 0.05
---------- ----------
---------- ----------
Weighted average shares outstanding:
Basic................................................................................... 19,723 19,455
---------- ----------
---------- ----------
Diluted................................................................................. 20,624 20,563
---------- ----------
---------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 2,826 $ 1,085
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 24,296 20,757
Deferred income taxes................................................................. 1,822 567
Other non-cash income and expense, net................................................ (3,244) 3,217
Changes in operating assets and liabilities (excluding effect of acquisitions):
Increase in accounts receivable..................................................... 8,694 8,509
Decrease (increase) in inventories.................................................. 101 (2,843)
Increase in prepaid expenses and other assets....................................... (65) (3,060)
Decrease in accounts payable and other liabilities.................................. (34,425) (13,154)
---------- ----------
Net cash provided by operating activities................................................. 5 15,078
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired........................................ (48,076) (24,399)
Capital expenditures.................................................................... (22,473) (19,560)
Investments in equity securities........................................................ (7,965) (3,333)
Software development costs capitalized.................................................. (2,697) (733)
Other investing activities.............................................................. 1,991 51
---------- ----------
Net cash used in investing activities..................................................... (79,220) (47,974)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities........................................ 129,365 40,160
Repayments of long-term debt............................................................ (33,428) (3,672)
Decrease in outstanding checks drawn on controlled disbursement accounts................ (12,153) (1,726)
Repurchase of common stock.............................................................. (2,840) (3,342)
Deferred financing costs................................................................ (413) (240)
Issuance of common stock................................................................ 204 205
---------- ----------
Net cash provided by financing activities................................................. 80,735 31,385
---------- ----------
Effect of exchange rate changes on cash................................................... (160) (21)
---------- ----------
Net increase (decrease) in cash and cash equivalents...................................... 1,360 (1,532)
Cash and cash equivalents at beginning of year............................................ 8,504 5,307
---------- ----------
Cash and cash equivalents at end of period................................................ $ 9,864 $ 3,775
---------- ----------
---------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. 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 10 through 12 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. The
timing of these acquisitions affects the comparability of the Company's
financial statements.
In 1998, the Company acquired
- Troypeak Limited and Pismo Limited in March,
- Reach America, Inc. in April,
- Enteron Group, Inc. and ColorStream Technologies L.L.C. in May,
- Adtraq Data Systems and CJDS Adserve, Inc. in June,
- Imaging Consortium, Inc. in July, and
- DSI Datatrak Systems, Inc. and Admagic Group, Limited in November.
On January 4, 1999, the Company acquired Colorgraphic Direct Response
Limited ("Colorgraphic") for approximately $81 million in cash, including debt
repaid. 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.
The following unaudited pro forma information reflects the Company's results
adjusted to include the acquired businesses as though all the acquisitions and
related financing transactions had occurred at the
6
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
beginning of 1998. As Colorgraphic was acquired at the beginning of the first
quarter of 1999 and its results are reflected in the Company's actual results,
no pro forma adjustment for that period is necessary.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
-------------------
<S> <C>
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
Net sales................................................................ $ 423,500(1)
Net income............................................................... 1,500(1)
Earnings per share:
Basic.................................................................. $ 0.08(1)
Diluted................................................................ 0.07(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 March 31, 1999
and December 31, 1998, interests of $74.5 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>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Paper............................................................. $ 34,926 $ 32,556
Work in process................................................... 5,851 6,189
Ink and chemicals................................................. 4,833 4,354
Other............................................................. 4,420 4,855
----------- ------------
$ 50,030 $ 47,954
----------- ------------
----------- ------------
</TABLE>
7
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
Investments consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Investments in leveraged leases................................... $ 53,689 $ 51,755
Investments in equity securities.................................. 119,367 28,765
----------- ------------
173,056 80,520
Less: portion included in other current assets.................... (6,129)
----------- ------------
Long-term investments............................................. $ 173,056 $ 74,391
----------- ------------
----------- ------------
</TABLE>
In 1998 and 1999, the Company invested in several internet businesses at a
total cost of $15.6 million. The investments in two of these businesses, 24/7
Media, Inc. ("TFSM") and MiningCo.com, Inc., the stock of each of which is
publicly traded, are recorded at the closing market price of the shares as of
the balance sheet date. The investments in the other businesses (including
WorldGate Communications, Inc., Nu-Tel Corporation and Andromedia, Inc., none of
which were publicly traded as of March 31, 1999) are recorded at cost. The
cumulative unrealized pre-tax gain of $103.8 million on the publicly-traded
equity investments is included in accumulated other comprehensive income, net of
tax.
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 $36.7 million as of March 31, 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>
THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Net income............................................................... $ 2,826 $ 1,085
Other comprehensive income (expense):
Unrealized gain on investments, net of tax............................. 49,579
Foreign currency translation adjustment................................ (2,133) (21)
--------- ---------
Total comprehensive income............................................... $ 50,272 $ 1,064
--------- ---------
--------- ---------
</TABLE>
8
<PAGE>
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Net Sales Insert Advertising & Newspaper Services $ 245,865 $ 251,027
Direct Marketing Services 72,720 62,794
Digital Services 80,218 47,601
Specialty Products & Commercial Printing 24,568 24,230
Elimination of intersegment sales (3,048) (1,750)
---------- ----------
Consolidated $ 420,323 $ 383,902
---------- ----------
---------- ----------
Operating Income Insert Advertising & Newspaper Services $ 15,214 $ 10,823
Direct Marketing Services 4,686 6,104
Digital Services 5,589 4,732
Specialty Products & Commercial Printing 1,397 1,788
General Corporate (4,311) (3,927)
---------- ----------
Consolidated $ 22,575 $ 19,520
---------- ----------
---------- ----------
Depreciation Insert Advertising & Newspaper Services $ 8,284 $ 8,125
Direct Marketing Services 4,420 3,074
Digital Services 5,359 2,822
Specialty Products & Commercial Printing 576 725
General Corporate 268 143
---------- ----------
Consolidated $ 18,907 $ 14,889
---------- ----------
---------- ----------
Amortization of Insert Advertising & Newspaper Services $ 2,388 $ 3,888
Intangibles Direct Marketing Services 918 501
Digital Services 1,793 1,169
Specialty Products & Commercial Printing 165 185
General Corporate 125 125
---------- ----------
Consolidated $ 5,389 $ 5,868
---------- ----------
---------- ----------
</TABLE>
9
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents.......................................................... $ 9,819 $ 8,499
Accounts receivable, net........................................................... 187,978 186,857
Inventories........................................................................ 50,030 47,954
Prepaid expenses and other current assets.......................................... 10,819 14,788
Deferred income taxes and income tax receivable.................................... 9,683 10,910
------------ ------------
Total current assets........................................................... 268,329 269,008
Due from parent...................................................................... 1,803
Property, plant and equipment, net................................................... 478,966 454,004
Goodwill, net of accumulated amortization of $44,860 and $40,379..................... 540,780 483,373
Long-term investments................................................................ 98,773 70,141
Other assets, net.................................................................... 34,175 36,634
------------ ------------
Total Assets................................................................... $ 1,422,826 $1,313,160
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable................................................................... $ 139,263 $ 150,503
Compensation and benefits payable.................................................. 39,924 44,638
Accrued interest................................................................... 14,998 16,991
Accrued income taxes............................................................... 7,912 15,936
Other current liabilities.......................................................... 40,732 47,188
------------ ------------
Total current liabilities...................................................... 242,829 275,256
Due to parent........................................................................ 2,446
Long-term debt, net of current portion............................................... 857,324 731,080
Deferred income taxes................................................................ 70,747 53,134
Other long-term liabilities.......................................................... 26,892 26,355
------------ ------------
Total liabilities.............................................................. 1,197,792 1,088,271
------------ ------------
Stockholder's equity:
Accumulated deficit................................................................ (46,567) (36,511)
Accumulated other comprehensive income............................................. 22,721 12,522
Other.............................................................................. 248,880 248,878
------------ ------------
Total stockholder's equity..................................................... 225,034 224,889
------------ ------------
Total Liabilities and Stockholder's Equity..................................... $ 1,422,826 $1,313,160
------------ ------------
------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements of
Big Flower Holdings, Inc. and Subsidiaries.
10
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------------
<S> <C> <C>
1999 1998
------------- -------------
Net sales........................................................................... $ 420,323 $ 383,902
------------- -------------
Operating expenses:
Costs of production............................................................... 313,286 296,212
Selling, general and administrative............................................... 60,953 44,152
Depreciation...................................................................... 18,794 14,820
Amortization of intangibles....................................................... 5,264 5,713
------------- -------------
398,297 360,897
------------- -------------
Operating income.................................................................... 22,026 23,005
------------- -------------
Other expenses (income):
Interest expense.................................................................. 17,334 13,152
Amortization of deferred financing costs.......................................... 671 387
Interest income................................................................... (322) (120)
Other, net........................................................................ (2,024) 2,447
------------- -------------
15,659 15,866
------------- -------------
Income before income taxes.......................................................... 6,367 7,139
Income tax expense.................................................................. 2,929 3,284
------------- -------------
Net income.......................................................................... $ 3,438 $ 3,855
------------- -------------
------------- -------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements of Big Flower Holdings,
Inc. and Subsidiaries.
11
<PAGE>
BIG FLOWER PRESS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 3,438 $ 3,855
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 24,058 20,533
Deferred income taxes................................................................. 1,822 565
Other non-cash income and expense, net................................................ (3,215) 3,181
Changes in operating assets and liabilities (excluding effect of acquisitions):
Decrease in accounts receivable..................................................... 9,257 8,509
Decrease (increase) in inventories.................................................. 101 (2,843)
Decrease (increase) in prepaid expenses and other assets............................ 86 (2,773)
Decrease in accounts payable and other liabilities.................................. (33,660) (17,584)
---------- ----------
Net cash provided by operating activities................................................. 1,887 13,443
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired........................................ (48,076) (24,399)
Capital expenditures.................................................................... (22,335) (19,560)
Investments in equity securities........................................................ (3,333)
Software development costs capitalized.................................................. (2,697) (733)
Other investing activities.............................................................. 2,823 51
---------- ----------
Net cash used in investing activities..................................................... (70,285) (47,974)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities........................................ 129,365 40,160
Repayments of long-term debt............................................................ (33,428) (3,672)
Decrease in outstanding checks drawn on controlled disbursement accounts................ (12,153) (1,726)
Dividends paid to parent................................................................ (13,493) (1,674)
Deferred financing costs................................................................ (413) (85)
---------- ----------
Net cash provided by financing activities................................................. 69,878 33,003
---------- ----------
Effect of exchange rate changes on cash................................................... (160) (21)
---------- ----------
Net increase (decrease) in cash and cash equivalents...................................... 1,320 (1,549)
Cash and cash equivalents at beginning of year............................................ 8,499 5,307
---------- ----------
Cash and cash equivalents at end of period................................................ $ 9,819 $ 3,758
---------- ----------
---------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements of
Big Flower Holdings, Inc. and Subsidiaries.
12
<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 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 TO IDENTIFY AND REMEDIATE ALL DATE SENSITIVE LINES OF COMPUTER
CODE,
- THE ABILITY TO REPLACE EMBEDDED COMPUTER CHIPS IN SYSTEMS OR EQUIPMENT
AFFECTED BY YEAR 2000 ISSUES, AND
- THE ACTIONS OF GOVERNMENT AGENCIES OR OTHER THIRD PARTIES WITH RESPECT TO
YEAR 2000 ISSUES.
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 both 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.
13
<PAGE>
RESULTS OF OPERATIONS
The following table presents the major components from the Condensed
Consolidated Statements of Operations and Cash Flows for the three-month periods
ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
(PERCENTAGES OF
NET SALES)
Net sales................................................................................ 100.0% 100.0%
--------- ---------
Operating expenses:
Costs of production.................................................................... 74.5 77.2
Selling, general and administrative.................................................... 14.3 12.4
Depreciation........................................................................... 4.5 3.9
Amortization of intangibles............................................................ 1.3 1.4
--------- ---------
94.6 94.9
--------- ---------
Operating income......................................................................... 5.4% 5.1%
--------- ---------
--------- ---------
EBITDA................................................................................... 11.2% 10.5%
--------- ---------
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
EBITDA................................................................................... $ 46,871 $ 40,277
--------- ---------
--------- ---------
Net cash provided by operating activities................................................ $ 5 $ 15,078
Net cash used in investing activities.................................................... 79,220 47,974
Net cash provided by financing activities................................................ 80,735 31,385
</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
ENDED MARCH 31,
----------------------
1999 1998 CHANGE
---------- ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net sales...................................................................... $ 420,323 $ 383,902 9.5%
Operating income............................................................... 22,575 19,520 15.7%
Net income..................................................................... 2,826 1,085 160.5%
Diluted earnings per share..................................................... $ 0.14 $ 0.05 180.0%
</TABLE>
NET SALES
The revenue increase was due primarily 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 first quarter of 1998
14
<PAGE>
to include all businesses owned, and excluding the sales related to the
divestiture described above, net sales in the first quarter of 1999 were
approximately the same as the 1998 period.
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 exclude the cost of ink and paper entirely), "value added"
revenue increased approximately 5% in the 1999 quarter.
These comparable-business increases reflect positive growth trends in the
Insert Advertising & Newspaper Services and Digital Services segments, which was
tempered by shortfalls in the UK operations of the Direct Marketing Services and
Digital Services segments due to soft economic conditions. For further
discussion of net sales, see RESULTS BY SEGMENT.
OPERATING EXPENSES
Total operating expenses increased due to the growth of the Company's
businesses and the impact of acquisitions. As a percentage of net sales,
operating expenses in total declined due to increased sales and productivity
that more than offset the increased infrastructure costs inherent in expanding
the individual businesses. Variances in expense category ratios also reflect:
- the Company's changing business mix as it acquires more companies to
expand the Digital Services and Direct Marketing Services segments, where
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 declined as a percentage
of net sales by 2.7% in 1999 compared to the first quarter of 1998. Paper costs
accounted for 30% of net sales in the first quarter of 1999 compared to 34% 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 increased as a
percentage of net sales by 1.9% in 1999 over the 1998 quarter.
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.
OPERATING INCOME
Operating income increased to represent 5.4% of net sales in the current
year period versus 5.1% in the first three months of 1998. Adjusting the 1998
period to include all businesses currently owned, operating income in the first
quarter of 1999 was approximately the same as the 1998 period.
The increasing 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.
15
<PAGE>
INTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998 % CHANGE
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Interest expense................................................................ $ 17,215 $ 13,029 32.1%
Average interest rate........................................................... 8.46% 8.39%
Average borrowing rate, including the effect of convertible preferred
securities.................................................................... 8.16% 8.02%
</TABLE>
Interest expense in 1999 increased over the 1998 period due to higher debt
levels related primarily to acquisitions and investments. In addition, the
issuance of fixed-rate debt in December 1998 served to increase the cost of
borrowings for the 1999 quarter.
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 $3.9 million of income
earned on tax-advantaged investments accounted for as leveraged leases. 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 both periods presented and
exceeded the federal statutory rate due primarily to state and local taxes and
amortization of certain goodwill.
EARNINGS PER SHARE
The calculation of diluted earnings per share for the three month periods
ended March 31, 1999 and 1998 does not reflect the potential issuance of
approximately 4.0 million shares and the exclusion of $1.0 million (after tax)
of preferred dividends related to the potential conversion of redeemable
convertible preferred securities as the effect would be anti-dilutive. Giving
effect to the potential conversion of these securities, diluted earnings per
share would have been higher by two cents in the 1999 period and by four cents
in the 1998 period.
RESULTS BY SEGMENT
INSERT ADVERTISING & NEWSPAPER SERVICES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1999 1998 % CHANGE
---------- ---------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Net sales..................................................................... $ 245,865 $ 251,027 -2.1%
Operating income.............................................................. 15,214 10,823 40.6%
</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 exclude the cost of paper as
well as ink), "value added" revenue in the first quarter of 1999 increased
approximately 3% over the same period in 1998. The increase reflects growth of
TC Advertising's insert sales to grocery store customers as well as sales of
newspaper television listings guides. In addition, TC Advertising's offering of
Reach America's targeted advertising software products in combination with
16
<PAGE>
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 expire. 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
ENDED MARCH 31,
--------------------
1999 1998 % CHANGE
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Net sales....................................................................... $ 72,720 $ 62,794 15.8%
Operating income................................................................ 4,686 6,104 -23.2%
</TABLE>
The 1999 results reflect the impact of acquisitions of ColorStream
Technologies in May 1998 and UK-based Colorgraphic in January 1999. Adjusting to
include these businesses in the first quarter of 1998, net sales decreased
approximately 5% in the first quarter of 1999 and operating income decreased
approximately 40%.
The comparable net sales results reflect softness in the UK operations which
represent approximately 30% of segment sales and where pro forma sales
(including Colorgraphic in the first quarter of 1998) decreased nearly 10% from
the prior year period. In addition, timing issues affected the US businesses in
this segment, as two major customers postponed direct mail campaigns originally
planned for the first quarter and advised the Company that their campaigns will
be run later in 1999. In addition, other customers accelerated orders in the
fourth quarter of 1998 in anticipation of the January 1999 postage rate
increase.
The comparable operating income results reflect the impact of the sales
factors noted above. Reduced margins in the UK exaggerated the impact of fixed
acquisition related goodwill associated with those businesses. Also, additional
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 sales shortfalls.
DIGITAL SERVICES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998 % CHANGE
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Net sales....................................................................... $ 80,218 $ 47,601 68.5%
Operating income................................................................ 5,589 4,732 18.1%
</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 first quarter of 1998, net sales increased
approximately 5% in the quarter and operating income decreased approximately 15%
compared to the prior year period.
17
<PAGE>
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), where sales were flat compared to the first quarter of 1998.
Despite the UK impact, sales of all service lines in the premedia group
increased, with retail and packaging growing more than 15% year-over-year on a
comparable business basis. Sales of commercial services increased slightly on
the same basis and commercial printing grew by 15%. Software related sales
increased approximately 3% from the 1998 level when including all businesses,
although sales related to the Paradigm and other new systems grew approximately
10%.
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,
segment operating income increased approximately 2% over the prior year compared
to a sales increase of approximately 5% on the same basis.
SPECIALTY PRODUCTS & COMMERCIAL PRINTING
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
1999 1998 % CHANGE
--------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Net sales....................................................................... $ 24,568 $ 24,230 1.4%
Operating income................................................................ 1,397 1,788 -21.9%
</TABLE>
Segment sales were affected by the divestiture of a minority interest in a
commercial printing venture in April 1998 as part of management's strategy to
re-deploy the assets associated with commercial printing. A production
arrangement related to the minority interest investment had yielded
approximately $3 million of break-even revenue in the first quarter of 1998.
Excluding these sales from the first quarter of 1998, the revenue increase was
approximately 15% in 1999 and the operating income variance was approximately
the same as presented.
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. Subsequent to the end of the
first quarter of 1999, the Company announced that its Board of Directors had
authorized the exploration of strategic alternatives to maximize shareholder
value. The strategic alternatives to be considered include transactions
involving all or part of the Company. There can be no assurance, however, that
any strategic alternative will be pursued or that any transaction will be
consummated.
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.
18
<PAGE>
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 March 31, 1999, the Company had approximately $283.4 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.
WORKING CAPITAL
The Company's current assets exceeded current liabilities by $33.3 million
at March 31, 1999 while current liabilities exceeded current assets by $5.8
million at December 31, 1998 (an increase in working capital of $39.1 million).
The working capital amounts exclude accounts receivable sold under a
securitization facility, the proceeds of which serve to reduce long-term
borrowings under the Company's revolving credit facility. 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 was terminated)
working capital at March 31, 1999 and December 31, 1998 would have been $107.7
million and $111.8 million, respectively. The ratio of current assets to current
liabilities as of March 31, 1999 was 1.14 to 1 (1.46 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.
SUMMARY OF CASH FLOWS
Net cash provided by operating activities declined by $15 million in the
first quarter of 1999 compared to the same period in 1998. Although net earnings
before depreciation and amortization in the first three months of 1999 increased
in comparison to the comparable 1998 period, the lower operating cash flows
resulted from the timing of payments for current liabilities, particularly
accounts payable.
Cash flows used in investing activities increased in 1999 from the 1998
level due to the relative cost of companies acquired in each year, an increase
in software development costs due to the growth of the Digital Services segment
and minority equity investments in internet businesses.
The amount of cash provided by financing activities in each year reflects
the relative cost of acquisitions, capital expenditures and investments in those
years. 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 March
31, 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.
19
<PAGE>
YEAR 2000
GENERAL
The Company has undertaken a comprehensive program to address the issue of
computer programs and embedded microchips which are unable to distinguish
between the year 1900 and the year 2000 within its organization and with respect
to its material suppliers and customers (the "Year 2000 Project"). The Company
has established Year 2000 teams at TC Advertising, Webcraft, Laser Tech and
Columbine, as well as at the Company's headquarters office.
PROJECT
The general approach employed by each of the Company's Year 2000 teams is:
(1) inventorying assets that may be affected by Year 2000 issues;
(2) assigning priorities to identified items;
(3) assessing the Year 2000 compliance of items determined to be material;
(4) repairing or replacing material items that are determined not to be Year
2000 compliant;
(5) testing material items;
(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
quarterly 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 would result in a production
failure. Remediation of the human resources system was completed in March 1999
and tested successfully. 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. Other material computer remediation, upgrade and replacement
projects underway at Webcraft's subsidiaries are expected to be completed by
August 1999. Webcraft has completed a review and testing, where possible, of its
production equipment. Only one type of equipment failure was uncovered that
would impact production, and this equipment is expected to be upgraded or
replaced in the second quarter of 1999. Webcraft has limited electronic
interaction with its customers but intends to test these interactions by the
middle of 1999.
Laser Tech has completed its assessment of all material assets and testing
is expected to be completed during the second quarter of 1999. Since many
hardware and software assets are similar across Laser Tech's numerous sites,
centralized testing is being performed for common assets and each subsidiary is
testing material assets unique to its operations. Many of the electronic
premedia assets are off-the-shelf, Macintosh-based hardware and software which,
based upon 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
20
<PAGE>
2000 compliant. Implementation of these systems is underway and completion at
all designated sites is expected to be completed by September 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
by September 1999. It has successfully tested most of its internal systems and
is expected to upgrade or replace non-compliant systems by September 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 particular, the Company anticipates developing a
contingency plan by June 1999 for each material asset which has not been
successfully tested. 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 have been
initiated and are scheduled for completion by mid-1999, with follow-up reviews
planned during the remainder of 1999. Based on these evaluations, each group
will tailor its contingency plans as appropriate. Communications with customers
have begun and will continue through 1999 to ensure continued service levels.
As time passes, it is foreseeable that additional Year 2000 issues will
arise due to business acquisitions or other reasons, in which case the Company
will address such issues as they arise. The Company will evaluate future
acquisition candidates for Year 2000 compliance prior to acquisition, where
feasible, and will conduct appropriate assessment, remediation, testing and
contingency planning following completion of any such acquisition. During the
fourth quarter of 1998 and January 1999, the Company made three acquisitions. In
each case, a review of the acquisition candidate's Year 2000 plans and project
status was completed and evaluated. Following acquisition, these new units are
participating in the ongoing company-wide Year 2000 team 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, a quarterly progress report has been submitted
to and discussed with the Company's Board of Directors. The Company plans to
continue such periodic reporting.
COSTS
The estimated total cost of the Year 2000 Project, including that related to
acquisitions made prior to March 31, 1999, is approximately $5.1 million, of
which approximately $3.2 million reflects allocation of internal costs and
approximately $1.9 million reflects amounts for external consultants, equipment,
hardware and software. The total amount spent on the Year 2000 Project through
March 31, 1999 was approximately $3.1 million, of which approximately $2.3
million reflected allocation of internal costs and approximately $0.8 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
21
<PAGE>
of implementing such systems are not included in these cost estimates, but are
included in the Company's capital expenditure estimates.
RISKS
The failure to address a material Year 2000 issue could result in an
interruption in, or a failure of, certain normal business activities or
operations. Due to the diversity and decentralized nature of the Company's
operations, there are few systems the failure of which would have a material
adverse effect on the Company as a whole. Nonetheless, the Company relies upon
utility companies, telecommunication services providers, the United States
Postal Service, the financial services industry and other suppliers outside of
its control and there can be no assurance that such suppliers or other third
parties will not suffer a Year 2000 business disruption. The failure of the
systems or equipment of one or more third parties (which the Company believes is
the most reasonably likely worst case scenario) could result in the reduction or
suspension of one or more of the Company's operations and could have a material
adverse effect on the Company's consolidated financial position or results of
operations. Due to the general uncertainty inherent in the Year 2000 issue,
resulting in part from the uncertainty of the Year 2000 readiness of its Trading
Partners and its Trading Partners' customers, the Company is unable to determine
at this time whether the consequences of Year 2000 failures will have a material
impact on the Company's consolidated financial position or results of
operations. The Year 2000 Project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 issue and, in particular,
about the Year 2000 compliance and readiness of its material Trading Partners.
The Company believes that, with the implementation of new business systems and
completion of the Year 2000 Project as scheduled, the possibility of significant
interruptions of normal operations should be greatly reduced.
ITEM 7A. 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 March 31, 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 67% 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%, 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
22
<PAGE>
constant. The sensitivity analysis is limited in that it is based on balances
outstanding at March 31, 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 March 31, 1999 would have reduced the Company's total assets by $11.1
million and reduced stockholders' equity by $6.7 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 13.
23
<PAGE>
PART II--OTHER INFORMATION
BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS--
No reportable developments occurred with respect to legal proceedings during
the quarter ended March 31, 1999.
ITEM 2. CHANGES IN SECURITIES--
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS--
None.
ITEM 5. OTHER INFORMATION--
None.
<TABLE>
<S> <C>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K--
(a) Exhibits
Agreement, dated December 16, 1998, among Big Flower Limited, Colorgraphic Direct
Response Limited and the holders of capital stock of Colorgraphic Direct Response
Limited.(1)
2.1
27.1-2 Financial Data Schedules.*
(b) Reports on Form 8-K
During the three months ended March 31, 1999, the Registrant filed the following
reports on Form 8-K:
(i) Current report on Form 8-K dated January 4, 1999, concerning Registrant's
acquisition of Colorgraphic Direct Response Limited.
(ii) Current Report on Form 8-K/A, filed March 19, 1999, amending the Current Report
on Form 8-K dated January 4, 1999, to include certain financial statements and pro
forma financial information not included in such Form 8-K.
</TABLE>
- ------------------------
* Being Filed Herewith
(1) Incorporated by reference to Registrant's Current Report on Form 8-K,
dated January 4, 1999, concerning the consummation of the Registrant's
acquisition of Colorgraphic Direct Response Limited (File #0-29474).
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
BIG FLOWER HOLDINGS, INC.
BY: /S/ RICHARD L. RITCHIE
-----------------------------------------
Richard L. Ritchie
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</TABLE>
DATE: May 14, 1999
<TABLE>
<S> <C> <C>
BIG FLOWER PRESS HOLDINGS, INC.
BY: /S/ RICHARD L. RITCHIE
-----------------------------------------
Richard L. Ritchie
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</TABLE>
DATE: May 14, 1999
25
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement, dated December 16, 1998, among Big Flower Limited, Colorgraphic Direct Response Limited and
the holders of capital stock of Colorgraphic Direct Response Limited.(1)
27.1-2 Financial Data Schedules.*
</TABLE>
- ------------------------
* Being Filed Herewith
(1) Incorporated by reference to Registrant's Current Report on Form 8-K,
dated January 4, 1999, concerning the consummation of the Registrant's
acquisition of Colorgraphic Direct Response Limited (File #0-29474).
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BIG FLOWER HOLDINGS, INC. AND SUBSIDIARIES.
</LEGEND>
<CIK> 0001048662
<NAME> BIG FLOWER HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,864
<SECURITIES> 0
<RECEIVABLES> 197,034
<ALLOWANCES> 8,469
<INVENTORY> 50,030
<CURRENT-ASSETS> 269,914
<PP&E> 696,139
<DEPRECIATION> 213,164
<TOTAL-ASSETS> 1,506,683
<CURRENT-LIABILITIES> 236,663
<BONDS> 0
114,075
0
<COMMON> 197
<OTHER-SE> 174,698
<TOTAL-LIABILITY-AND-EQUITY> 1,506,683
<SALES> 420,323
<TOTAL-REVENUES> 420,323
<CGS> 313,286
<TOTAL-COSTS> 313,286
<OTHER-EXPENSES> 83,652
<LOSS-PROVISION> 271
<INTEREST-EXPENSE> 17,931
<INCOME-PRETAX> 5,233
<INCOME-TAX> 2,407
<INCOME-CONTINUING> 2,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,826
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</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.
</LEGEND>
<CIK> 0000924146
<NAME> BIG FLOWER PRESS HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,819
<SECURITIES> 0
<RECEIVABLES> 196,447
<ALLOWANCES> 8,469
<INVENTORY> 50,030
<CURRENT-ASSETS> 268,329
<PP&E> 691,278
<DEPRECIATION> 212,312
<TOTAL-ASSETS> 1,422,826
<CURRENT-LIABILITIES> 242,829
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 225,034
<TOTAL-LIABILITY-AND-EQUITY> 1,422,826
<SALES> 420,323
<TOTAL-REVENUES> 420,323
<CGS> 313,286
<TOTAL-COSTS> 313,286
<OTHER-EXPENSES> 82,394
<LOSS-PROVISION> 271
<INTEREST-EXPENSE> 18,005
<INCOME-PRETAX> 6,367
<INCOME-TAX> 2,929
<INCOME-CONTINUING> 3,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,438
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
