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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of the
Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule
14a-11(c) or Rule 14a-12
BIG FLOWER HOLDINGS, INC.
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
Common Stock, par value $0.01 per share, of Big Flower
Holdings, Inc.
(2) Aggregate number of securities to which transaction applies:
22,639,875 shares of Common Stock expected to be canceled in
the transaction.
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
The underlying value of the transaction of $681,315,342 has
been calculated pursuant to Exchange Act Rule 0-11 by
multiplying $30.0936 (the average of the high and low
prices of Common Stock on November 2, 1999 on the New York
Stock Exchange) by 22,639,875 (the aggregate number of
shares expected to be canceled in the transaction).
(4) Proposed maximum aggregate value of transaction:
$681,315,342
(5) Total fee paid:
$136,263.07
/ / Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by
/X/ Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
(1) Amount Previously Paid: $152,974.73
(2) Form, Schedule or Registration Statement No.: Form S-4 and
Schedule 13E-3
(3) Filing Party: Big Flower Holdings, Inc.
(4) Date Filed: July 16, 1999
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BIG FLOWER HOLDINGS, INC.
SUPPLEMENT TO
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF STOCKHOLDERS
[LOGO]
TUESDAY, NOVEMBER 23, 1999
AT 9:00 A.M.
HOTEL INTER-CONTINENTAL NEW YORK
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇
[LOGO]
BIG FLOWER HOLDINGS, INC.
▇ ▇▇▇▇ ▇▇(▇▇) ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
November 3, 1999
Dear Fellow Stockholders:
On October 25, 1999 we sent you a proxy statement relating to the annual
meeting of stockholders of Big Flower Holdings, Inc. to be held on Tuesday,
November 23, 1999. At this meeting, Big Flower's stockholders will be asked to
consider and vote upon a proposal to approve the merger of Big Flower with BFH
Merger Corp. on the terms and conditions set forth in the Amended and Restated
Agreement and Plan of Merger, dated as of October 11, 1999, between Big Flower
and BFH Merger Corp. In the merger, Big Flower stockholders, other than some
members of Big Flower management, will receive $31.50 in cash for each share of
Big Flower common stock they own. Some members of Big Flower management will be
retaining equity interests in Big Flower or its subsidiaries in lieu of
receiving cash for their equity interests in Big Flower. The proxy statement
describes this transaction in detail. You will also be asked to vote on the
election of directors, a grant of discretionary authority to vote for
adjournment and ratification of appointment of independent accountants.
Enclosed with this letter is a supplement to the proxy statement. This
supplement includes additional information concerning the merger. We urge you to
read this supplement and the proxy statement carefully. If you would like
another copy of the proxy statement, please contact ▇▇▇▇▇▇▇▇▇ Shareholder
Communications Inc. at (▇▇▇) ▇▇▇-▇▇▇▇ (banks and other brokers call
(▇▇▇) ▇▇▇-▇▇▇▇). A copy will be mailed to you promptly.
Your vote is important, and we urge you to give the proxy statement and this
supplement your immediate attention. You have already received a proxy card on
which you can vote, and you may have already returned it to us. HOWEVER, WE HAVE
ENCLOSED A SECOND PROXY CARD (AND A RETURN ENVELOPE) FOR YOUR USE, IN CASE YOU
HAVE MISPLACED THE PROXY CARD PREVIOUSLY SENT TO YOU OR YOU WISH TO CHANGE YOUR
VOTE. IF YOU HAVE ALREADY VOTED YOUR PROXY AND YOU DO NOT WISH TO CHANGE YOUR
VOTE, YOU DO NOT NEED TO RETURN THIS SECOND PROXY CARD.
YOUR VOTE IS VERY IMPORTANT. Big Flower cannot complete the merger unless
the stockholders of Big Flower adopt the merger agreement at the stockholders
meeting. Whether or not you plan to attend the stockholders meeting, please take
the time to submit your proxy with voting instructions by mail.
/s/ R. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
R. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
CHAIRMAN OF THE BOARD CHIEF EXECUTIVE OFFICER
The date of this proxy statement supplement is November 3, 1999 and was
first mailed to Big Flower stockholders on November 3, 1999.
SUPPLEMENT
DATED NOVEMBER 3, 1999
TO
BIG FLOWER HOLDINGS, INC.
PROXY STATEMENT DATED OCTOBER 25, 1999
INTRODUCTION
This supplement is provided for the purpose of supplementing the proxy
statement, dated October 25, 1999, of Big Flower Holdings, Inc., a Delaware
corporation.
This supplement is being furnished to the holders of the common stock, par
value $0.01 per share, of Big Flower in connection with the solicitation of
proxies by the Big Flower board of directors for use at a meeting of Big Flower
stockholders scheduled to be held on Tuesday, November 23, 1999 at 9 a.m., New
York time, at the Hotel Inter-Continental New York, 111 East 48(th) Street, New
York, New York. As described in the proxy statement, stockholders are being
asked to consider and vote on the proposal to approve the merger of Big Flower
with BFH Merger Corp., an affiliate of ▇▇▇▇▇▇ ▇. ▇▇▇ Company and Evercore
Capital Partners, on the terms and conditions contained in the Amended and
Restated Agreement and Plan of Merger, dated as of October 11, 1999 between Big
Flower and BFH Merger Corp. and the transactions contemplated by the merger
agreement.
This supplement is first being mailed to Big Flower stockholders on or about
November 3, 1999. Capitalized terms used in this supplement that are not
otherwise defined have the meaning given to them in the proxy statement. This
supplement should be read in conjunction with the proxy statement.
ADDITIONAL INFORMATION REGARDING THE RABBI TRUST
As discussed in the proxy statement, some members of management of Big
Flower, including Messrs. ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇, are expected to surrender Big
Flower stock options for interests in a rabbi trust that will hold shares of Big
Flower common stock. A rabbi trust is a grantor trust utilized in connection
with deferred compensation plans. Big Flower expects that Messrs. ▇▇▇▇▇▇ and
▇▇▇▇▇▇▇ will hold a 20.1% and 11.5% interest, respectively, in the rabbi trust.
The remaining interest in the trust will be held by other members of Big Flower
management. As stated in the proxy statement, Big Flower expects the rabbi trust
to hold approximately 4.3% of Big Flower's common stock after the merger.
ADDITIONAL INFORMATION REGARDING COLUMBINE JDS SYSTEMS AND THE INTERNET
INVESTMENTS
The affiliate of BFH Merger Corp. that is purchasing all of the outstanding
shares of capital stock of Columbine JDS Systems, Inc. will pay $37 million for
these shares of stock. The value of Columbine JDS Systems was based upon the
acquisition costs of each entity comprised within Columbine JDS Systems plus a
small premium reflecting synergies. As stated in the proxy statement, this
transaction will occur after Columbine JDS Systems has borrowed approximately
$135 million and paid a dividend of approximately $128 million to its parent,
Big Flower Digital Services, who will in turn dividend these amounts to either
Big Flower Press or Big Flower to be used as necessary to effect the merger and
related recapitalization. Big Flower has been advised that the percentage
interests of ▇▇▇▇▇▇ ▇. ▇▇▇ Company, Evercore Capital Partners, ▇▇. ▇▇▇▇▇ and
other members of Columbine JDS Systems' management in Columbine JDS Systems
after this purchase are still under discussion among them, but are expected to
be approximately 59.4%, 17.1%, 12.9% and 10.6%, respectively.
The private Internet investments that an affiliate or affiliates of BFH
Merger Corp. are purchasing consist of interests in Dawntreader Fund I, LP,
Nutel Corp., Solbright, Inc., Galileo Communications Ltd., InterAdNet, Inc. and
Naviant, Inc., and any private Internet investment Big Flower acquires after the
date of the merger agreement at the price paid by Big Flower for the investment.
The merger agreement provides that the aggregate purchase price for Dawntreader,
Nutel, Solbright, Galileo, InterAdNet and Naviant is $19,126,000, although Big
Flower expects that this will be reduced to $18,626,000 because the $500,000
convertible bridge note owed to XL Ventures by Nutel, and representing part of
the investment in Nutel by XL Ventures as described in Schedule 5.15(a) of the
merger agreement, has been repaid by Nutel. Big Flower has been advised that the
percentage interest
of ▇▇▇▇▇▇ ▇. ▇▇▇ Company, Evercore Capital Partners and ▇▇. ▇▇▇▇▇ in the entity
purchasing the private Internet investments are still under discussion among
them but are expected to be approximately 66.4%, 19.2% and 14.4%, respectively.
The affiliate of BFH Merger Corp. that actually purchases Columbine JDS
Systems is expected to be different from the affiliate of BFH Merger Corp. that
actually purchases the private Internet investments, although the ultimate
controlling party of each of these affiliates may be the same. As indicated in
the proxy statement, Big Flower and BFH Merger Corp. expect that the investment
in the entities holding the public Internet investments, currently provided for
in the merger agreement, will not occur and that the merger agreement will be
amended to reflect this.
Big Flower understands that the sale of Columbine JDS Systems separate from
the merger was proposed by ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV, Evercore Capital
Partners and ▇▇. ▇▇▇▇▇ because they believe that Columbine JDS Systems does not
fit well from an operational perspective within the Big Flower corporate
structure. Big Flower understands this position is based primarily on the fact
that, although Big Flower's other principal operating units--Treasure Chest
Advertising, Webcraft and Laser Tech Color--have the same or similar customer
bases and therefore there are benefits to having these companies operate within
the same corporate structure, the customer base of Columbine JDS Systems is
entirely different to the customer bases of Treasure Chest Advertising, Webcraft
and Laser Tech Color.
Similarly, Big Flower understands that the separate sale of the private
Internet investments was proposed because the private Internet investments also
do not fit well within the Big Flower corporate structure. Big Flower's core
businesses are operational in nature, while the private Internet investments
were made purely for investment purposes. In addition, the independent ownership
of the private Internet investments by ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV, Evercore
Capital Partners and ▇▇. ▇▇▇▇▇ could potentially increase such investors'
after-tax returns with respect to any subsequent dispositions of the private
Internet investments.
Separation of Columbine JDS Systems and the private Internet investments
also provides a possibility of greater flexibility for future business
combinations or securities offerings, but Big Flower is not aware of any
definitive plans by ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV, Evercore Capital Partners and
▇▇. ▇▇▇▇▇ with respect to a business combination or sale of securities. However,
▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV is an investor, with others, in a business that
could benefit from a combination with Columbine JDS Systems and Big Flower
understands that ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV may seek to combine these
businesses in some manner after the merger. Any such combination would require
the approval of the other investors in each company.
Further, while none of ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV, Evercore Capital
Partners or ▇▇. ▇▇▇▇▇ have expressed an interest in taking public in the short
to medium term either Columbine JDS Systems or the entities holding Big Flower's
public Internet investments, namely XL Ventures and Big Flower Digital, LLC,
this is one of the many possible business decisions which these parties could
make in the future.
As noted in the proxy statement, BFH Merger Corp. may amend the terms of the
Columbine JDS Systems and Internet transactions in any manner it reasonably
requests, except that no such amendment may either impose any cost on Big Flower
if the merger is not completed or result in any delay in the completion of the
merger.
BACKGROUND OF THE MERGER
SET FORTH BELOW IS A DESCRIPTION OF THE BACKGROUND OF THE MERGER. THIS
REPEATS, WITH SOME CHANGES, THE ENTIRE BACKGROUND SECTION FROM THE PROXY
STATEMENT. THIS HAS BEEN DONE TO MAKE IT EASIER TO REVIEW THE SUPPLEMENTED
INFORMATION.
From time to time in recent years the board of directors and management of
Big Flower have considered transactions that could increase the value of the
common equity of Big Flower. These have included potential acquisitions of or
mergers with other companies, spin-offs of parts of Big Flower and
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the sale of all or part of Big Flower. Ultimately, the board of directors
determined that these strategic alternatives were inferior to the merger for a
variety of reasons, including concerns related to future trading values,
illiquidity and taxes. In addition, the board of directors considered an initial
public offering or spin-off of each of Treasure Chest Advertising, Webcraft and
Columbine JDS Systems, along with an analysis of combinations with other
companies and the strategic rationale for each. Based upon presentations of
various investment banks during these years, and after taking into account taxes
and probable trading values for such offerings and combinations, the board of
directors did not believe that any of these alternatives was likely to result in
Big Flower's stock price being greater than the merger consideration in the
foreseeable future. During this time, the Big Flower board did not consider an
initial public offering of XL Ventures.
Since 1994, Big Flower has made 28 acquisitions, primarily outside its
original Treasure Chest Advertising printing business. These acquisitions have
added significantly higher growth and higher margin businesses than the original
Treasure Chest Advertising printing business. Management of Big Flower believed
that further acquisitions both within and outside the traditional Treasure Chest
Advertising business were desirable. Increasingly, however, these acquisitions,
especially in businesses that involve higher technology or direct marketing, or
both, could not be effected on a basis that was non-dilutive to the reported
earnings of Big Flower because companies involved in those businesses tend to
trade, if publicly held, or are sold to third parties, if privately held, at
higher multiples to earnings than Big Flower. The Big Flower board believed that
its earnings would be diluted, even when the trading price of Big Flower shares
was higher than its average trading price range, if it consistently purchased
companies with higher trading multiples than its own because Big Flower would
need to issue a greater number of Big Flower shares to pay for these companies
because the Big Flower stock traded at a lower multiple. The Big Flower board
believed that its trading history demonstrated that Big Flower was not generally
awarded a higher trading multiple even as it diversified itself through
acquisitions into higher growth, higher multiple businesses. Consequently, the
board believed that any material dilution to Big Flower's earnings per share
would adversely affect Big Flower's stock price.
In response to this determination that future acquisitions are likely to be
dilutive, and in an effort to create value for its stockholders, in 1998 and
early 1999 Big Flower began exploring various strategic alternatives, including
equity issuances, public offerings of the stock of each of its main operating
units, the mergers of each of its main operating units with other companies and
the spin-offs of one or more business units to Big Flower's stockholders. In
exploring the various strategic alternatives, the management of Big Flower met
with a number of entities to determine the best strategic alternatives to
pursue, including ▇▇. ▇▇▇▇▇'▇ initial meeting with ▇▇. ▇▇▇▇▇▇ ▇. ▇▇▇ of ▇▇▇▇▇▇
▇. ▇▇▇ Company in October 1998. At this meeting, ▇▇. ▇▇▇▇▇ gave ▇▇. ▇▇▇ an
overview of the business of Big Flower. No further discussions ensued at that
time. Subsequently, management of Big Flower met with three financial sponsors,
including representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company, and explored with them on a
preliminary basis various strategic alternatives with respect to Big Flower. On
March 17, 1999 Big Flower formally retained ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ to assist Big
Flower in exploring strategic alternatives.
On April 20, 1999, Big Flower publicly announced that its board of directors
had authorized management to explore Big Flower's strategic alternatives. In
addition to relying on ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, which had been advising Big Flower
since early 1999, Big Flower retained ▇▇▇▇▇▇▇ ▇▇▇▇▇ as a financial advisor to
assist in the exploration of strategic alternatives. Big Flower retained ▇▇▇▇▇▇▇
Sachs to act as its financial advisor based upon ▇▇▇▇▇▇▇ ▇▇▇▇▇' qualifications,
experience and expertise, as well as its knowledge of Big Flower's business.
Following the April 20 announcement, approximately ten parties contacted
both Big Flower and its financial advisors directly without solicitation. In
addition, Big Flower instructed its financial advisors to contact the likely
potential strategic and financial parties that might be interested in a
transaction involving Big Flower and who had either financial strength or access
to capital markets to complete such a transaction. The contacted parties were
chosen based upon publicly available information regarding their financial
resources, record for completing transactions and interest in Big Flower's lines
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of business. In all, Big Flower's financial advisors had extensive conversations
with 13 potential strategic parties and 15 potential financial parties about
their possible interests in Big Flower. One strategic party and six financial
parties entered into confidentiality agreements and received non-public
information concerning the business of Big Flower and its subsidiaries designed
to permit those parties to determine what interests they might have in Big
Flower. Nine other parties requested a package of non-confidential public
information only and did not need to sign a confidentiality agreement.
Three parties, ▇▇▇▇▇▇ ▇. ▇▇▇ Company, Evercore Capital Partners and one
potential strategic party, performed more detailed due diligence during the
month of May and received detailed presentations from management of Big Flower,
including ▇▇. ▇▇▇▇▇▇, ▇▇. ▇▇▇▇▇▇▇, and the chief executive officers of each of
Big Flower's four main operating units, concerning its business. During the
month of May, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ held telephonic conversations daily and, along
with representatives of Big Flower's senior management, including
Messrs. ▇▇▇▇▇, ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇, met with those parties to discuss Big Flower
and to determine whether the parties could make a proposal that would be
attractive to Big Flower's stockholders. The nature of these discussions
revolved around resolving issues necessary to permit the parties to submit a
proposal. The principal topics of discussion included resolving outstanding due
diligence questions and requests for information, possible transaction
structures, including the involvement of management, the amount and form of
consideration and financing plans.
At the conclusion of this process in mid-June, ▇▇▇▇▇▇ ▇. ▇▇▇ Company
submitted a written proposal, and Evercore Capital Partners indicated an
interest in submitting a proposal, but only if Big Flower's senior management,
including ▇▇. ▇▇▇▇▇, indicated a willingness to invest a significant portion of
their Big Flower equity interest in the merger transaction. Evercore Capital
Partners had also communicated this desire to ▇▇. ▇▇▇▇▇ prior to submitting its
indication of interest. At this time, the potential strategic party indicated
that it would not submit a proposal involving the entire company, although it
indicated that it might be interested in some parts of the business of Big
Flower. The potential strategic party advised Big Flower that it was not
interested in acquiring Treasure Chest Advertising, as it did not fit within its
business plan. Thereafter, there were no further negotiations with the potential
strategic party, although ▇▇▇▇▇▇▇ ▇▇▇▇▇, on behalf of Big Flower, sought to
obtain a proposal from the strategic party. The strategic party never indicated
an amount it would pay for any or all of Big Flower's subsidiaries. The other
parties who had received information but did not submit a proposal either gave
no reason for their decision not to submit a proposal or indicated any one or
more of the following reasons:
- the total amount of money it would take to pay the merger consideration to
all of the unaffiliated stockholders and to arrange financing for the
additional working capital needs of Big Flower was too large and would
either cause excessive leverage or the issuance of an excessive number of
shares,
- valuation, and/or
- a lack of interest in one or more of Big Flower's subsidiaries.
Big Flower continued to consider its strategic alternatives, including the
possibility of a spin-off or a sale of less than the entire company. After
discussing these matters with its financial advisors, who orally advised the Big
Flower board that it would not be tax efficient for Big Flower to sell less than
all of Big Flower and that a spin-off of part of Big Flower would not likely
enhance stockholder value, and after taking into account financial, tax and
operational factors, the Big Flower board of directors concluded that it would
not be tax-efficient for Big Flower to sell less than all of Big Flower and that
a spin-off of parts of Big Flower would not likely enhance stockholder value.
The principal financial factors that the board took into account included the
expected sale proceeds and expected trading values from these transaction(s).
The principal tax factors that the board took into account included the
corporate tax implications to Big Flower from pursuing these transaction(s). The
principal operating factors that the board took into account included the
existing business and cross-selling relationships that existed among Big
Flower's subsidiaries.
4
Big Flower also continued to evaluate a stand-alone strategy, focusing on
its historic stock price and business prospects and taking note of the fact that
the trading price of Big Flower common stock had risen approximately 30% in the
three weeks leading up to a March 22, 1999 report by a Credit Suisse First
Boston analyst. This report had focused on Big Flower's venture capital
investments in a variety of Internet-related companies, estimating the then
current value of these investments to be approximately $4.50 per share before
taxes and other expenses. In the six months prior to that report, the trading
price of Big Flower common stock had ranged between $15.375 and $28.438. On
March 22, the Credit Suisse First Boston initial report was released and the
trading price of Big Flower common stock closed at $30.13, an increase from the
$27 trading price on March 19, the preceding trading day. The Credit Suisse
First Boston report was published in its entirety on March 24, on which day the
trading price of Big Flower common stock closed at $29.50. On March 25, the
trading price of Big Flower common stock closed at $32.38. In evaluating the
effect on Big Flower and its stockholders of continuing as a stand-alone
company, Big Flower also considered, as reported in its public filings and
stated to financial analysts, that it would likely pursue acquisitions in
businesses involving higher technology or direct marketing, or both, which
acquisitions could be significantly dilutive to Big Flower's reported earnings.
On June 8, 1999, the Big Flower board of directors met to review the status
of discussions with third parties and the indications of interest received. At
the outset of the meeting ▇▇. ▇▇▇▇▇, chairman of the board of Big Flower,
advised the board that because the possibility existed that he would, under some
circumstances, consider retaining a significant interest in Big Flower in
connection with a proposal from a financial sponsor, he would recuse himself
from board deliberations on the proposals. ▇▇. ▇▇▇▇▇ left the meeting and did
not return. Following ▇▇. ▇▇▇▇▇'▇ departure, ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇.
▇▇▇▇▇, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ and ▇▇▇▇ ▇. ▇▇▇▇▇▇ discussed the potential conflicts of
interest involved in the fact that certain members of the management, including
▇▇. ▇▇▇▇▇, might be treated differently than other Big Flower stockholders in a
proposed transaction because they might continue to retain their ownership in
Big Flower. The board of directors concluded that the independent directors,
constituting a majority of the board of directors, were in a position to fairly
represent the interest of Big Flower's stockholders. Messrs. Minow and Kimmitt
and ▇▇. ▇▇▇▇▇▇ selected ▇▇. ▇▇▇▇▇▇▇▇▇ as the lead independent director to
control the work of Big Flower's outside financial and legal advisors.
▇▇. ▇▇▇▇▇▇, while present for these deliberations, did not participate in them.
The independent directors did not ask ▇▇. ▇▇▇▇▇▇ to leave the meeting because at
that time, neither ▇▇. ▇▇▇▇▇▇ nor the other members of the board had any
information regarding his participation in any transaction.
During the June 8 meeting of Big Flower's board of directors, ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ reported that ▇▇▇▇▇▇ ▇. ▇▇▇ Company had submitted a proposal for a
recapitalization of Big Flower under which public holders of Big Flower common
stock would receive a per share consideration of $27.00 in cash and $7.00 in
liquidation preference of PIK preferred stock with a warrant to purchase a
fraction of a share of Big Flower common stock representing in the aggregate
approximately five percent of the Big Flower common stock after the
recapitalization. It was also reported that Evercore Capital Partners had
indicated an interest in submitting a proposal for a recapitalization of Big
Flower at a per share price of $35.00 in cash plus a contingent value right that
would offer holders a to be agreed-upon percentage of after-tax proceeds of Big
Flower's publicly traded venture capital investments in 24/7 Media, Inc.,
▇▇▇▇▇.▇▇▇, Inc. (formerly known as ▇▇▇▇▇▇▇▇.▇▇▇) and WorldGate
Communications, Inc. Both the ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal and Evercore
Capital Partners' indication of interest were subject to financing
contingencies. In addition, the Evercore Capital Partners indication of interest
was conditioned on ▇▇. ▇▇▇▇▇'▇ retaining a substantial portion of his equity in
Big Flower. The ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal was made with the expectation
that ▇▇. ▇▇▇▇▇ would retain a substantial portion of his equity in Big Flower,
but was not expressly conditioned on his doing so.
During the ensuing discussion, the Big Flower board of directors discussed
the financial terms and certainty of the ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal and
Evercore Capital Partners' indication of
5
interest in making a proposal under certain circumstances. The board also
discussed whether an appropriate number of potential bidders had been contacted
to obtain the best available offer in the marketplace. The financial advisors
reported to the board the number of entities who had been contacted or who had
contacted the financial advisors and the status of discussions with each of
them. The financial advisors also reported that they believed they and Big
Flower had run a thorough auction process because of the public announcement of
the process, the number of people contacted, the amount of time and effort
devoted to the auction process and the amount of time the auction process had
remained open. After these discussions with its financial advisors, the board of
directors determined that in light of Big Flower's public announcement of its
interest in pursuing its strategic alternatives, the extensive amount of time
which had passed since such announcement was made and the fact that 28 parties
had contacted, or been contacted by, Big Flower, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ or ▇▇▇▇▇▇▇
▇▇▇▇▇, an appropriate number of potential bidders had been contacted to ensure
that the financially responsible parties likely to be interested in Big Flower
had been contacted or put on notice. The Big Flower board of directors also
agreed that determining to pursue none of the available transactions was an
alternative to be considered by the board of directors. ▇▇. ▇▇▇▇▇▇▇▇▇ requested
that the board of directors take some additional time to consider the proposals
but that in the meantime, ▇▇▇▇▇▇▇ ▇▇▇▇▇ and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ should continue
discussions with both ▇▇▇▇▇▇ ▇. ▇▇▇ Company and Evercore Capital Partners with a
view to improving the ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal, to attempt to transform
Evercore Capital Partners' indication of interest into a proposal and to report
further at a meeting of the board of directors scheduled for June 14.
From shortly before the June 8, 1999 meeting of the Big Flower board,
▇▇. ▇▇▇▇▇ began to consider it likely that if a transaction were to occur he
would retain an equity interest in Big Flower and ▇▇. ▇▇▇▇▇ ceased having any
role in the board's deliberations concerning the ▇▇▇▇▇▇ ▇. ▇▇▇ Company and
Evercore Capital Partners proposals. Between June 8 and June 14, ▇▇. ▇▇▇▇▇
discussed with Evercore Capital Partners their proposed capitalization structure
and in particular his belief that there was too much debt in their proposed
capitalization structure. ▇▇. ▇▇▇▇▇ also discussed regularly with ▇▇▇▇▇▇ ▇. ▇▇▇
Company the terms of their proposals to Big Flower, their proposed
capitalization structures and, in the days just prior to signing the original
merger agreement, the amount and terms of his retained equity interest in Big
Flower. Messrs. ▇▇▇▇▇▇'▇ and ▇▇▇▇▇▇▇'▇ contact during this time period with
▇▇▇▇▇▇ ▇. ▇▇▇ Company and Evercore Capital Partners was limited to due diligence
conversations, although each had conversations with ▇▇. ▇▇▇▇▇ in which
▇▇. ▇▇▇▇▇ indicated that he, ▇▇▇▇▇▇ ▇. ▇▇▇ Company and Evercore Capital Partners
hoped they would continue with Big Flower and that if they chose to do so they
would be expected to retain an equity investment in the post-recapitalization
Big Flower.
After the June 8 board of directors meeting, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ and
representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company continued discussions on improving the
▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal. During these discussions, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
sought to increase the cash component and the total consideration offered by
▇▇▇▇▇▇ ▇. ▇▇▇ Company. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ also discussed with Evercore Capital
Partners whether it could be in a position to make a firm proposal to Big
Flower.
The Big Flower board of directors, other than Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇, who
recused themselves, met again on June 14, 1999 and received a report from its
financial advisors on the status of negotiations with ▇▇▇▇▇▇ ▇. ▇▇▇ Company and
Evercore Capital Partners. ▇▇. ▇▇▇▇▇▇ recused himself from the meeting because
he believed, based on conversations with ▇▇. ▇▇▇▇▇, that the possibility existed
that he would continue with Big Flower after the merger. The Evercore Capital
Partners indication of interest to make a proposal was unchanged at a per share
consideration of $35.00 in cash plus a contingent value right, and it remained
contingent on ▇▇. ▇▇▇▇▇'▇ retention of a significant interest in Big Flower.
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ representatives indicated that the Evercore Capital Partners'
indication of interest would result in a substantial increase in the leverage of
Big Flower, such that Big Flower's ratio of total debt at the time of the merger
to Big Flower's projected EBITDA for the last twelve months ending at the time
of the merger would be 6.2 to 1. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
6
representatives reported that they had been advised by ▇▇. ▇▇▇▇▇ that he had
concerns regarding such a high degree of leverage, and would not be willing to
retain a significant interest in Big Flower in connection with any Evercore
Capital Partners proposal that might be made on that basis. ▇▇. ▇▇▇▇▇ had also
expressed these concerns directly to Evercore Capital Partners. The ▇▇▇▇▇▇ ▇.
▇▇▇ proposal, on the other hand, involved a ratio of total debt at the time of
the merger to Big Flower's last twelve months' EBITDA projected as of the time
of the merger of 5.5 to 1. In addition, the ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal
offered greater promise of making available to Big Flower additional capital to
grow Big Flower's business on a going-forward basis. The board of directors
directed ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ to determine whether Evercore Capital Partners would
be willing to proceed with equity from non-management stockholders rather than
▇▇. ▇▇▇▇▇.
During the June 14, 1999 meeting, the board of directors, other than
▇▇. ▇▇▇▇▇ and ▇▇. ▇▇▇▇▇▇, who recused themselves, heard from outside counsel
regarding their fiduciary duties and from outside financial advisors concerning
the status of discussions with ▇▇▇▇▇▇ ▇. ▇▇▇ Company. The board of directors
determined to retain additional counsel to act for the independent directors and
thereafter retained the firm of ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ LLP. The financial advisors
reported that ▇▇▇▇▇▇ ▇. ▇▇▇ Company had agreed to improve its proposal and was
now prepared to offer a per share price of $29.00 in cash plus $6.00 in
liquidation preference of PIK preferred stock with warrants attached.
Representatives of ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ expressed their opinion that ▇▇▇▇▇▇ ▇. ▇▇▇
Company was sensitive to increasing the cash portion of the proposed
consideration, but advised that Big Flower should nonetheless try to improve
both the cash and the PIK preferred stock portions. In light of this, the board
of directors determined to request that management of Big Flower make a
presentation to the Big Flower board of directors concerning Big Flower's
business prospects and strategic plans. The board of directors directed the Big
Flower financial advisors to continue to seek to improve the ▇▇▇▇▇▇ ▇. ▇▇▇
Company proposal and to determine whether an Evercore Capital Partners proposal
capable of completion could be developed and scheduled a meeting for June 17 to
receive a further update from its advisors.
On June 14, 1999 ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ spoke with representatives of ▇▇▇▇▇▇ ▇.
▇▇▇ Company and explained that the Big Flower board of directors was seeking a
higher value level for its stockholders than offered by the current ▇▇▇▇▇▇ ▇.
▇▇▇ Company proposal. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ continued discussions with
representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company during June 15 and June 16 in an
attempt to improve the ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal. Discussions between them
continued to focus on increasing the cash component and the total consideration.
On June 16, 1999, ▇▇▇▇▇▇ ▇. ▇▇▇ Company submitted its first written proposal
to Big Flower. The proposal was for a recapitalization of Big Flower, whereby
public shareholders of Big Flower would receive $30.00 per share in cash plus
$5.00 in liquidation preference of PIK preferred stock with warrants attached.
On June 17, 1999, the Big Flower board of directors, other than
Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇, who recused themselves, met to review the status of
discussions with ▇▇▇▇▇▇ ▇. ▇▇▇ Company and Evercore Capital Partners.
Representatives of ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ reported that Evercore Capital Partners had
improved its financing somewhat, but that its indication of interest was still
conditioned upon ▇▇. ▇▇▇▇▇'▇ retention of a significant interest in Big Flower.
A representative from ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ reported that he had been advised by
▇▇. ▇▇▇▇▇ that ▇▇. ▇▇▇▇▇ was still unsatisfied with the amount of leverage
included in the capital structure in the Evercore Capital Partners' indication
of interest as well as the prospects for additional capital that Evercore
Capital Partners could offer on a going-forward basis and had stated that he
would not be willing to retain a significant interest in Big Flower in
connection with such a transaction. Having been informed of ▇▇. ▇▇▇▇▇'▇ concerns
regarding the high degree of leverage in Evercore Capital Partners' own
indication of interest and the fact that ▇▇. ▇▇▇▇▇ would not be willing to
retain a significant interest in Big Flower under the terms of such indication
of interest, Evercore Capital Partners decided not to submit its own proposal to
acquire Big Flower.
7
The ▇▇▇▇▇▇▇ Sachs and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ representatives then summarized the
current proposal from ▇▇▇▇▇▇ ▇. ▇▇▇ Company, including the terms of the PIK
preferred stock and warrants being offered by ▇▇▇▇▇▇ ▇. ▇▇▇ Company. ▇▇▇▇▇▇ ▇.
▇▇▇ Company had increased the cash portion of its proposal to $30.00 and reduced
the PIK preferred stock portion of the purchase price to a $5.00 liquidation
preference PIK preferred stock, but representatives of ▇▇▇▇▇▇▇ ▇▇▇▇▇ and
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ indicated that the proposed PIK preferred stock/warrant package
contained terms that they believed to be unfavorable compared to market practice
and that those terms could be enhanced. These unfavorable terms included a high
warrant exercise price, extensive restrictions on the ability to exercise the
warrants, and the ability of Big Flower to redeem the PIK preferred stock in a
relatively short time frame, each of which the financial advisors advised was
contrary to prevailing market practice, and a low level of PIK preferred stock
offered in exchange for Big Flower common stock. After discussion with its
financial advisors, the board of directors instructed its financial advisors to
attempt to improve the terms of the PIK preferred stock and warrants in the
following ways:
- lowering the exercise price on the warrants to a nominal amount,
- eliminating or reducing restrictions on when the warrants could be
exercised,
- protecting against Big Flower's ability to redeem the PIK preferred stock
in a relatively short time frame, and
- increasing the amount of the PIK preferred stock being offered per share
of Big Flower common stock.
The directors wished to reach a prompt determination as to the best proposal
available from ▇▇▇▇▇▇ ▇. ▇▇▇ Company and directed representatives of ▇▇▇▇▇▇▇
▇▇▇▇▇ and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ to contact ▇▇▇▇▇▇ ▇. ▇▇▇ Company and seek to improve
the amount and terms of the PIK preferred stock/warrant package. The financial
advisors left the meeting to have discussions with ▇▇▇▇▇▇ ▇. ▇▇▇ Company. At
this time, Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇ joined the meeting, along with ▇▇. ▇▇▇▇▇▇▇,
solely to give a presentation to the board of directors concerning the current
financial and operating status and business plans and prospects of Big Flower.
Although Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇ had recused themselves from all board
deliberations regarding the transaction, they, along with ▇▇. ▇▇▇▇▇▇▇, were the
most appropriate and knowledgeable persons to address the board on Big Flower's
current status and business plans and prospects. In addition, Messrs. ▇▇▇▇▇,
▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ had addressed the board on these very same matters in the
past. In the presentation, these members of management reported to the board
that Big Flower's operating units were performing consistent with past reports
and consistent with management's expectations for the financial results of the
business as reflected in the then current management projections. This inquiry
was relevant both to determine whether a potential improvement in expected
results might be used to negotiate a better price and whether there was risk of
a deterioration in results that could jeopardize completion of any agreed
transaction. The Big Flower Board of Directors recognized that in presenting
this financial information Messrs. ▇▇▇▇▇, ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ had a conflict of
interest arising out of their possible retention of equity interests and
continued employment in any transaction with ▇▇▇▇▇▇ ▇. ▇▇▇ Company.
After the management presentation, Messrs. ▇▇▇▇▇, ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ left
the meeting and the representatives of ▇▇▇▇▇▇▇ Sachs and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
rejoined the meeting and advised the directors that the only change ▇▇▇▇▇▇ ▇.
▇▇▇ Company was willing to make was to reduce the exercise price of the warrant
from $35.00 per share to a nominal amount. Because this was the sole improvement
offered to the terms of the PIK preferred stock and the warrants, the Big Flower
board of directors unanimously decided to reject the proposal from the ▇▇▇▇▇▇ ▇.
▇▇▇ Company and to adjourn the meeting and resolved that in the absence of an
improved offer there would be no transaction.
After the June 17 board of directors meeting, representatives of Big
Flower's financial advisors and of ▇▇▇▇▇▇ ▇. ▇▇▇ Company continued to discuss
ways to improve the ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal. ▇▇▇▇▇▇ ▇. ▇▇▇ Company agreed
to increase, from $5.00 to $5.25, the liquidation value of the PIK preferred
stock offered per share of Big Flower common stock and to make a number of
changes
8
to the terms of the PIK preferred stock and warrants that the financial advisors
believed would improve the value of the security. During this time, ▇▇. ▇▇▇▇▇
also had conversations with ▇▇▇▇▇▇ ▇. ▇▇▇ Company regarding the terms of his
possible participation in Big Flower following the merger. These conversations
continued throughout the bidding process. The transaction contemplated by the
original merger agreement involved a ratio of total debt at the projected time
of the merger to Big Flower's projected EBITDA for the last twelve months ending
at the time of the merger of approximately 5.9x.
The Big Flower board of directors, other than Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇, who
recused themselves, convened again on June 18, 1999 to receive an update on the
status of negotiations with ▇▇▇▇▇▇ ▇. ▇▇▇ Company. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇
▇▇▇▇▇ reported on the improvements in the ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal,
including an increase in the PIK preferred stock liquidation value per share
from $5.00 to $5.25, protection against Big Flower's unrestricted ability to
redeem the PIK preferred stock within the first five years, a lowered exercise
price of the attached warrants to a nominal amount, an increase in the number of
events that would permit a holder to exercise the warrants, and a longer term
for exercising the warrants. With the advice of ▇▇▇▇▇▇▇ ▇▇▇▇▇, the board of
directors discussed the market practice with respect to making a market in
securities such as the PIK preferred stock and concluded that market practice
was such that there could be no guarantees that any investment bank would
actively make a market in the PIK preferred stock or warrants, although in
conversations with Big Flower and its financial advisors, the financial
institutions providing financing for the merger and related recapitalization
indicated their intent to make a market in such securities in accordance with
customary market practice, which does not provide an assurance of a continuous
bid. The board of directors discussed the advisability of proceeding with a
transaction on the basis of the ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposal as compared to
continuing with Big Flower's current business plan. At this time, the board of
directors considered the advice of its financial advisors that the then current
trading price of Big Flower's stock, $34.25 on June 18, 1999, reflected an
expectation of a transaction that was created with the April 20, 1999
announcement that Big Flower was studying its strategic alternatives. The board
of directors also discussed the fact that the consideration offered by ▇▇▇▇▇▇ ▇.
▇▇▇ Company was near the all-time trading high of Big Flower common stock and
that if no transaction were consummated, the trading range of Big Flower common
stock likely would fall to a level below its recent elevated trading price
resulting from the April 20th announcement. The trading price of Big Flower
common stock ranged from $27.88 to $33.75 a full month prior to the April 20,
1999 announcement and in the six months prior to March 22, 1999 had traded in a
range between $15.375 and $28.438. The board of directors also considered the
dilutive effect on Big Flower's reported earnings of potential acquisitions if
Big Flower continued its current business plan. After discussion on all of these
factors, including the improvements on ▇▇▇▇▇▇ ▇. ▇▇▇ Company's proposal outlined
above, the board of directors authorized Big Flower's legal and financial
advisors to commence detailed negotiations of the terms of a possible
transaction. The board of directors was unanimous in the view that a merger
agreement should contain terms and conditions that would permit Big Flower to
negotiate and enter into an agreement with another party in the event of a
proposal from that party which was superior to the ▇▇▇▇▇▇ ▇. ▇▇▇ Company
proposal. This was communicated to ▇▇▇▇▇▇ ▇. ▇▇▇ Company.
After Big Flower communicated to ▇▇▇▇▇▇ ▇. ▇▇▇ Company that its board of
directors had determined to pursue ▇▇▇▇▇▇ ▇. ▇▇▇ Company's proposed transaction
with Big Flower, ▇▇▇▇▇▇ ▇. ▇▇▇ Company contacted Evercore Capital Partners, at
the suggestion of ▇▇. ▇▇▇▇▇, to offer Evercore Capital Partners an interest in
the proposed transaction. ▇▇. ▇▇▇▇▇ made this suggestion because while he had
been concerned with the high degree of leverage that would result from Evercore
Capital Partners' indication of interest, he believed that Evercore Capital
Partners could provide Big Flower with useful strategic advice and assist Big
Flower in identifying business opportunities in the future.
Negotiations followed between ▇▇▇▇▇▇ ▇. ▇▇▇ Company and Evercore Capital
Partners in which Evercore Capital Partners requested a larger percentage of the
equity investment than was ultimately
9
agreed upon and ▇▇▇▇▇▇ ▇. ▇▇▇ Company offered Evercore Capital Partners a
smaller percentage of the equity investment than was ultimately agreed upon. The
parties ultimately negotiated an agreement whereby Evercore Capital Partners
would have the right to invest up to $65 million in Big Flower.
Big Flower's financial advisors and representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company
continued detailed discussions concerning the terms of the PIK preferred stock
and warrants. A draft merger agreement was delivered to representatives of Big
Flower on June 19. Respective counsel for Big Flower and ▇▇▇▇▇▇ ▇. ▇▇▇ Company
discussed issues arising out of the draft on June 20 and daily thereafter until
the agreement was finalized. The contract negotiations focused primarily on the
following issues:
- the circumstances in which Big Flower could provide information to and
negotiate with third parties,
- whether Big Flower would be permitted to terminate the merger agreement to
accept a superior proposal from a third party,
- the circumstances under which the ▇▇▇▇▇▇ ▇. ▇▇▇ Company acquisition entity
would be permitted not to close the merger,
- the scope of the representations and warranties of Big Flower and the
▇▇▇▇▇▇ ▇. ▇▇▇ Company entity,
- the circumstances in which the ▇▇▇▇▇▇ ▇. ▇▇▇ Company entity would be
entitled to reimbursement of expenses and the cap on such reimbursement,
and
- the date when the parties could terminate the merger agreement if no
merger has occurred prior to such date.
During the course of these negotiations, ▇▇▇▇▇▇ ▇. ▇▇▇ Company advised Big
Flower that Evercore Capital Partners would participate with the ▇▇▇▇▇▇ ▇. ▇▇▇
Company entity in the recapitalization transaction. The inclusion, however, of
Evercore Capital Partners did not affect the structure or terms of the ▇▇▇▇▇▇ ▇.
▇▇▇ Company proposal, and therefore did not affect Big Flower's analysis of the
proposal. Big Flower's financial advisors continued to have daily discussions
with ▇▇▇▇▇▇ ▇. ▇▇▇ Company regarding the financial terms of the merger,
including the terms of the PIK preferred stock and attached warrants and the
financing commitments with respect to the proposal. These discussions included
whether the warrants would be exercisable for 5% of the equity before or after
giving effect to the exercise of the warrants and Big Flower's efforts to reduce
the number of financing contingencies in the financing commitment with respect
to the proposal.
The Big Flower board of directors, other than Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇, who
recused themselves, met on June 24 at which time it received an update on the
status of negotiations. Big Flower's legal advisors summarized the following key
terms of the merger agreement:
- scope of the representations and warranties of Big Flower and BFH Merger
Corp.,
- the ability of Big Flower to enter into transactions with other parties,
including transactions for the sale of 15% or more of Big Flower's assets
or securities or a merger with a party other than BFH Merger Corp.,
- conditions to consummation of the transaction with BFH Merger Corp.,
- the ability of Big Flower or BFH Merger Corp. to terminate the agreement,
including the ability of either of them to terminate the agreement if the
merger is not completed by the later of October 31, 1999 and the date
determined by adding to October 31, 1999 the number of days after
September 1, 1999 that this proxy statement is mailed to Big Flower
stockholders, but in no event later than December 31, 1999, and
- fees and expenses payable by Big Flower to BFH Merger Corp. upon
termination of the agreement in some circumstances.
10
Representatives of ▇▇▇▇▇▇▇ Sachs and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ also described in
detail the board presentation materials prepared by them and distributed to the
board prior to the meeting, focusing on the financial terms of the ▇▇▇▇▇▇ ▇. ▇▇▇
Company proposal, including the PIK preferred stock and warrant, and Big
Flower's alternative as a stand-alone entity. Following their presentation,
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇▇▇▇▇ informed the board of directors that their
respective firms were prepared to deliver oral opinions, which were subsequently
confirmed on June 29 in writing, to the effect that, assuming the negotiation
and execution of a definitive merger agreement, that the merger consideration to
be received by stockholders, other than the members of management retaining
shares of Big Flower common stock in the merger, as to whom they did not deliver
an opinion, was fair to those stockholders from a financial point of view.
After the June 24 board of directors meeting, Big Flower's legal advisors
continued to negotiate the merger agreement with counsel to ▇▇▇▇▇▇ ▇. ▇▇▇
Company. At the same time, Big Flower's financial advisors continued discussions
with ▇▇▇▇▇▇ ▇. ▇▇▇ Company regarding the financial terms of the merger,
including discussions to clarify the terms of the PIK preferred stock and
attached warrants, and the terms of the financing commitments with respect to
the proposed merger.
The Big Flower board of directors, other than Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇, who
recused themselves, met on June 27 at which time it received an update on the
status of negotiations. Big Flower's legal advisors reported that most of the
issues had been resolved, but that there were still some issues with respect to
closing conditions, conditions under which expenses would be payable and a small
number of relatively minor issues. The board of directors directed its legal
advisors to continue negotiations with ▇▇▇▇▇▇ ▇. ▇▇▇ Company.
The Big Flower board of directors, other than Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇, who
recused themselves, met on June 29 at which time it unanimously approved the
original merger agreement and the transactions contemplated in the original
merger agreement. On June 29, 1999 the original merger agreement was signed and
publicly announced.
Following announcement of the original merger, several stockholders,
including Big Flower's largest stockholder, expressed disappointment with the
terms of the original merger agreement, on the grounds that the overall merger
consideration should have been greater and that the preferred stock with
warrants was unattractive to them. In addition, the trading price of Big
Flower's stock remained well below the nominal $35.25 price per share which was
being offered to stockholders in the original merger agreement. In early August,
at the request of ▇▇. ▇▇▇▇▇▇▇▇▇, representatives of Big Flower contacted ▇▇▇▇▇▇
▇. ▇▇▇ Company and asked that ▇▇▇▇▇▇ ▇. ▇▇▇ Company consider revising the terms
of the merger to provide $35.25 in cash. Representatives of ▇▇▇▇▇▇ ▇. ▇▇▇
Company indicated that they were not willing to do so at that time but might be
open to considering an all cash proposal at a later time.
After signing the original merger agreement, ▇▇. ▇▇▇▇▇ continued to work
regularly with ▇▇▇▇▇▇ ▇. ▇▇▇ Company and Evercore Capital Partners on planning
arrangements for participation of management of Big Flower and its operating
subsidiaries in the post recapitalization company, including the use of a rabbi
trust, the possibility of modifying the transaction terms to all cash and the
amount of cash and the financing arrangements for the recapitalization,
including the possibility of tendering for the high yield bonds of Big Flower's
subsidiary, Big Flower Press Holdings, Inc. and separately purchasing Columbine
JDS Systems and the Internet investments. Messrs. ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ were not
involved in these matters.
Thereafter, ▇▇▇▇▇ ▇. ▇▇▇ Company and Evercore Capital Partners, in
consultation with ▇▇. ▇▇▇▇▇, decided to reconsider and make an all cash bid.
During the week of September 6, 1999, representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company
indicated to representatives of Big Flower that ▇▇▇▇▇▇ ▇. ▇▇▇ Company and
Evercore Capital Partners were working on developing an all cash proposal but
that it would be at a level below $35.25 per share. The ▇▇▇▇▇▇ ▇. ▇▇▇ Company
representatives indicated that they would attempt to have a proposal for
consideration by the Big Flower board of directors at
11
the time of its regularly scheduled meeting on September 14, 1999. The ▇▇▇▇▇▇ ▇.
▇▇▇ Company representatives also indicated that they were attempting to obtain
financing commitments for a $34.00 cash offer.
On September 13, 1999, representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company indicated to
representatives of Big Flower that negotiations for obtaining financing
commitments for a $34.00 cash deal were continuing, but that they were having
difficulty obtaining the necessary commitments on terms acceptable to ▇▇▇▇▇▇ ▇.
▇▇▇ Company and Evercore Capital Partners. In particular, the ▇▇▇▇▇▇ ▇. ▇▇▇
Company representatives indicated that their financing sources were seeking to
re-benchmark the lending terms agreed upon in June 1999 to reflect the market
conditions existing in September 1999, which were less favorable to borrowers in
the high yield and bank markets.
On September 14, 1999, the Big Flower board of directors held a regularly
scheduled meeting at which management, including Messrs. ▇▇▇▇▇, ▇▇▇▇▇▇ and
▇▇▇▇▇▇▇, reported on financial results through the end of July 1999 and
expectations for the third quarter and the year. The expected results were
somewhat weaker, both in terms of earnings and EBITDA, than had been expected at
the time the original merger agreement was entered into because of slower than
expected integration of recent marketing acquisitions, accompanied by weakness
in the direct mail sector arising from business with consumer products and
publishing companies. On September 14, 1999, management estimated that third
quarter earnings per share would be $0.58 per share, compared with $0.69 per
share reflected in consensus securities analyst estimates, and that full year
earnings per share would be approximately $2.07 per share compared with the
approximately $2.14 estimated at the time of the original merger agreement.
Management also estimated that full year 1999 EBITDA would be approximately
$264 million as compared to the approximately $267 million estimated at the time
of the original merger agreement.
Following the completion of regular board business, Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇
left the meeting, and the board of directors received a report on the status of
communications from ▇▇▇▇▇▇ ▇. ▇▇▇ Company. The board of directors also received
a presentation from ▇▇▇▇▇▇▇ ▇▇▇▇▇ analyzing a potential $34.00 cash offer and
discussed it with ▇▇▇▇▇▇▇ Sachs and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇. ▇▇▇▇▇▇▇ ▇▇▇▇▇ summarized
the recent trading price of Big Flower and comparable companies and re-presented
its comparable transaction analysis from June 24. The board of directors
discussed the advisability of amending the original merger agreement to provide
for an all cash consideration but did not make any decision with respect to such
a transaction because ▇▇▇▇▇▇ ▇. ▇▇▇ Company had not yet submitted any proposal.
In the discussion, the board of directors noted that:
- holders of Big Flower common stock had expressed a desire for an all cash
transaction,
- Big Flower common stock had been trading below $30.00 a share, and the
theoretical value, based on the return required by investors for a
security issued by a company having Big Flower's anticipated post
recapitalization credit rating, and without regard to the impact of supply
and demand in the market for this particular security), of the preferred
stock and warrants had declined as a result of an overall decline in the
market for high yield securities which was causing investors in that
market to require higher yields that would, because the dividend rate on
the preferred stock was fixed, be expected to result in lower trading
prices for the preferred stock and warrants, and
- Big Flower's financial results had deteriorated.
The Board of Directors did not discuss at this time the effect of the
deterioration in financial results on the value of the warrants attached to the
preferred stock. After the meeting on September 14, 1999, Big Flower informed
▇▇▇▇▇▇ ▇. ▇▇▇ Company about the revised projections, and ▇▇▇▇▇▇ ▇. ▇▇▇ Company
indicated that it was continuing to seek financing for an all cash proposal.
On September 17, 1999, the board of directors, other than Messrs. ▇▇▇▇▇ and
▇▇▇▇▇▇ who recused themselves, held a telephonic meeting and were advised that
▇▇▇▇▇▇ ▇. ▇▇▇ Company had thus far
12
been unable to obtain financing for a $34.00 cash proposal. The board of
directors was also advised that Big Flower management had determined that
results of the direct mail business were going to be even weaker than expected
on September 14, 1999. The change from the results reported on September 14 had
occurred because, in accordance with its usual practice, Webcraft's August
results and forecast for the following three months were prepared after
September 14. Webcraft's management informed Messrs. ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ of the
August results and three month forecast and they in turn had the change reported
to the board of directors on September 17 and advised that work was being done
to revise the earnings and EBITDA projections. Thereafter, Webcraft's and Big
Flower's management, including Messrs. ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇, lowered Webcraft's
estimated full year 1999 EBITDA by approximately $8.5 million, resulting in a
decline in Big Flower's estimated full year 1999 EBITDA to approximately
$256.5 million.
▇▇▇▇▇▇ ▇. ▇▇▇ Company was advised of this additional shortfall on
September 20, 1999. At that time, representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company
indicated that while they would continue working on a proposal for an all cash
transaction, given Big Flower's recent performance, the proposal likely would be
at a level below $34.00 per share.
During the weeks of September 20 and 27, 1999, representatives of ▇▇▇▇▇▇ ▇.
▇▇▇ Company communicated that they were working to be in a position to present a
proposal for a revised transaction. They also indicated their view that the high
yield debt markets and Big Flower's financial performance and prospects could
give the financial institutions that provided commitments in connection with the
original merger agreement a basis for seeking not to provide funding. The board
of directors, other than Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇ who recused themselves, held a
telephonic meeting on September 29, 1999 and received reports from Big Flower's
financial and legal advisors on the status of discussions with ▇▇▇▇▇▇ ▇. ▇▇▇
Company.
On September 30, 1999, representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company advised Big
Flower's financial and legal advisors that ▇▇▇▇▇▇ ▇. ▇▇▇ Company's proposal for
a revised transaction was $28.00 in cash plus $4.00 in PIK preferred stock
WITHOUT warrants attached. The representatives of Big Flower advised the ▇▇▇▇▇▇
▇. ▇▇▇ Company representatives against taking that proposal to the board of
directors to consider. Later that day, the ▇▇▇▇▇▇ ▇. ▇▇▇ Company representatives
indicated that they were considering making a proposal of $29.00 in cash plus
$3.00 in PIK preferred stock without warrants attached. The Big Flower
representatives agreed to take this proposal to the board of directors for
consideration. The Big Flower representatives approached ▇▇. ▇▇▇▇▇▇▇▇▇, who
declined to convene a board meeting to consider such a proposal, rejecting it
outright.
On October 1, 1999, representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company indicated that
they were prepared to propose a $30.00 all cash transaction and this was the
best proposal they were able to make under the circumstances. The board of
directors, other than Messrs. ▇▇▇▇▇ and ▇▇▇▇▇▇ who recused themselves, held
telephonic meetings on October 1, 1999 and October 2, 1999. At the October 1,
1999 meeting, the board of directors rejected this proposal. On October 2, 1999,
after receipt of a financial presentation from ▇▇▇▇▇▇▇ Sachs presenting
information of the type presented on September 14, the board discussed amongst
itself and with ▇▇▇▇▇▇▇ ▇▇▇▇▇ and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ possible proposals from
▇▇▇▇▇▇ ▇. ▇▇▇ Company and based on a number of factors--including the enhanced
certainty of completing a revised transaction, particularly if re-benchmarking
of closing conditions could be obtained, the possible decrease in the trading
price of Big Flower common stock if a merger was not completed, and uncertainty
of any alternative transaction--believed it could support a transaction in the
$31.00 to $32.00 range. On October 2, 1999, representatives of Big Flower
notified ▇▇▇▇▇▇ ▇. ▇▇▇ Company of the board's rejection of the $30.00 proposal
and the board's determination that a higher offer may be acceptable if coupled
with an increased certainty of the merger occurring and enhanced speed of
closing. Representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company indicated that they wished to
have their financing sources update their due diligence on Big Flower and to
seek to submit an improved proposal.
13
On October 4, 1999, representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company, Evercore
Capital Partners, their financing sources, ▇▇▇▇▇▇▇ Sachs and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
met with representatives of Big Flower and received detailed updates on the
financial results and operations of Big Flower and its subsidiaries. These
updates focused on management's full year 1999 EBITDA estimate based upon each
of Big Flower's main operating units.
On October 5, 1999, representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company indicated they
were seeking financing for a $31.00 cash transaction. On October 6, 1999,
representatives of Big Flower, in consultation with the independent directors,
stated that the board of directors would not support a $31.00 cash transaction
that conditioned completion of the merger on the absence of adverse market
conditions. On October 7, 1999, representatives of ▇▇▇▇▇▇ ▇. ▇▇▇ Company
indicated that they could agree to a $31.50 cash transaction and believed they
could obtain financing for a transaction at that level. The transaction
contemplated by the amended and restated merger agreement involves a ratio of
total debt at the projected time of the merger to Big Flower's projected EBITDA
for the last twelve months ending at the time of the merger of approximately
5.7x.
On October 7, 1999, the board of directors, other than Messrs. ▇▇▇▇▇ and
▇▇▇▇▇▇, who recused themselves, met by telephone and received a description of
the proposed terms of a $31.50 all cash transaction. In response to Big Flower's
statement that it would not agree to condition completion of the merger on the
absence of adverse market conditions, ▇▇▇▇▇▇ ▇. ▇▇▇ Company proposed to
benchmark this condition and the condition relating to the financial position of
Big Flower to the date of the signing of the revised merger agreement. ▇▇▇▇▇▇ ▇.
▇▇▇ Company also proposed to purchase Columbine JDS Systems and the Internet
investments separately but at or around the effective time of the merger. After
receipt of a financial presentation from ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ and after referring to
the financial presentation previously received from ▇▇▇▇▇▇▇ ▇▇▇▇▇ on October 4,
the board of directors authorized the negotiation and execution of a revised
merger agreement on the terms described to them. In doing so, the board directed
that the proposed purchase of Columbine JDS Systems and the Internet investments
should be subject to the board's receipt, prior to the purchase, of fairness
opinions from a reputable investment bank. The Big Flower board did not require
these fairness opinions as a condition to execute the revised merger agreement
because the possibility existed that the terms could change and it believed that
conditioning its obligation to sell Columbine JDS Systems and the Internet
investments upon the receipt of fairness opinions was adequate. The board also
reiterated the importance of the proposed re-benchmarking of the conditions
relating to market conditions and the financial condition of the Company to a
current time period.
On October 11, 1999 the amended and restated merger agreement was signed and
publicly announced.
ADDITIONAL INFORMATION REGARDING BIG FLOWER'S REASONS FOR THE MERGER;
RECOMMENDATION OF THE BIG FLOWER BOARD OF DIRECTORS
In reaching its decision to declare advisable and fair to unaffiliated
stockholders and approve the amended and restated merger agreement and the
transactions contemplated by the amended and restated merger agreement and to
recommend that Big Flower stockholders vote for the adoption of the amended and
restated merger agreement, the board of directors of Big Flower took into
account the amount of consideration to be paid to Big Flower stockholders. The
Big Flower board considered that Big Flower stock had, during the period shortly
before its April 20, 1999 announcement to explore strategic alternatives, traded
at prices in excess of $31.50, that the stock had historically traded over a
fairly wide range of prices, including prices substantially lower than $31.50,
and that trading prices of comparable public companies had declined
substantially since April 20, 1999. The management projections of future
performance that the Big Flower board of directors used in analyzing whether or
14
not to remain independent were prepared in the ordinary course of Big Flower's
business for internal purposes and were reviewed and approved by Messrs. ▇▇▇▇▇▇
and ▇▇▇▇▇▇▇.
As disclosed in the proxy statement, one of the factors considered by the
Big Flower board of directors in connection with its determination to approve
and recommend the amended and restated merger agreement was the opinions of Big
Flower's financial advisors, ▇▇▇▇▇▇▇ Sachs and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, to the effect
that the merger consideration is fair, from a financial point of view, to
holders of Big Flower common stock, other than members of management who are
retaining shares of Big Flower common stock in the merger, together with the
financial and comparative analyses and presentations of ▇▇▇▇▇▇▇ Sachs and
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ with respect to the merger and the consideration offered to
stockholders. These opinions, presentations and analyses are summarized in the
proxy statement at pages 31 to 46. In considering the analyses and presentations
of ▇▇▇▇▇▇▇ Sachs and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, the Big Flower board of directors took
into account, among other thing, that many of the analyses resulted in large
valuation ranges, that the $31.50 proposed to be paid in the merger is at the
low end of, and in one case below, the valuation ranges resulting from the
analyses, and that many of the analyses are based upon Big Flower management
projections, which are highly uncertain in years after 1999 because, in addition
to the uncertainties inherent in predicting future financial results, those
projections are significantly affected by the results of Big Flower's
acquisition strategy.
As noted in the proxy statement, one of the factors considered by the Big
Flower Board of Directors in connection with the merger was the prior
consideration of possible spin-off transactions. In this regard, ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ previously had calculated, based on operating assumptions provided by
Big Flower, that if Treasure Chest Advertising was spun off, its estimated
trading price would be between $0.48 and $3.55 and the trading price of Big
Flower's remaining operating businesses would be between $20.89 and $24.74 and
the trading price, assuming a 20% discount to their current after tax value, of
XL Ventures would be between $2.12 and $2.65 for a total value ranging from
$23.48 to $30.93.
ADDITIONAL INFORMATION REGARDING THE FEES AND EXPENSES OF THE MERGER
As is discussed on pages 61 and 71 of the proxy statement, in connection
with the merger, ▇▇▇▇▇▇ ▇. ▇▇▇ Company and its affiliates are expected to
receive from Big Flower a one-time transaction fee of $20 million in the
aggregate and Evercore Capital Partners and its affiliates are expected to
receive from Big Flower a one-time transaction fee of $4.3 million in the
aggregate. These fees are not payable to either ▇▇▇▇▇▇ ▇. ▇▇▇ Company and its
affiliates or Evercore Capital Partners and its affiliates if the merger does
not occur. However, as is discussed on pages 88 and 89 of the proxy statement,
the merger agreement provides that Big Flower must pay up to $10 million of the
out-of-pocket expenses of ▇▇▇▇▇▇ ▇. ▇▇▇ Company, Evercore Capital Partners and
BFH Merger Corp., or a termination fee of $30 million, less out-of-pocket
expenses already paid up to $10 million, following termination of the merger
agreement in certain circumstances.
ADDITIONAL INFORMATION REGARDING THE OPINIONS OF BIG FLOWER'S FINANCIAL ADVISORS
▇▇▇▇▇▇▇, SACHS & CO.
As disclosed in the proxy statement, ▇▇▇▇▇▇▇ ▇▇▇▇▇ analyzed the effect of
the decrease in projected 1999 EBITDA on Big Flower's equity value per share by
multiplying the amount of the decrease times a multiple equal to the equity
value of Big Flower at $35.25 per share divided by the 1999 EBITDA projected as
of June 29, 1999. Although ▇▇▇▇▇▇▇ Sachs did not present to the Big Flower board
of directors a discounted cash flow analysis, ▇▇▇▇▇▇▇ ▇▇▇▇▇ advised the board
that a discounted cash flow analysis produced a similar result as the EBITDA
multiple valuation analysis. The discounted cash flow analysis indicated that
Big Flower's equity value had declined $3 to $4 per share. In reaching its
fairness determination, ▇▇▇▇▇▇▇ Sachs, among other things, took into account the
value
15
of Big Flower's Internet investments. The value of the public Internet
investments was based upon their respective trading prices as of October 2,
1999. The value of the private Internet investments was based upon their
historical cost.
As disclosed in the proxy statement, in connection with its October 11, 1999
fairness opinion, ▇▇▇▇▇▇▇ ▇▇▇▇▇ did not update all of the analyses contained in
its June 29, 1999 presentation. For example, the Selected Companies Analysis
included in the June 29, 1999 presentation should be understood to be "as of"
such date so that updating data such as LTM EBITDA would not be meaningful.
Similarly, ▇▇▇▇▇▇▇ Sachs considered stock price expressed as a multiple of price
to earnings to be the most appropriate measure to indicate the effect of changes
in market conditions upon the valuation of the selected companies. As noted
above, ▇▇▇▇▇▇▇ ▇▇▇▇▇ did not consider it necessary to update all of the analyses
contained in the June 29, 1999 presentation.
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ & COMPANY
In addition to the report to the Big Flower board that is summarized on
pages 39 to 46 of the proxy statement, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ also delivered a report
to the Big Flower board on June 29, 1999 with respect to the original merger
agreement. On June 24, 1999, at the board of directors meeting held to evaluate
the merger, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ presented to the board of directors the financial
analyses performed by ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ in connection with the preparation of its
opinion. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ informed the Big Flower board of directors that
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ was prepared to deliver an oral opinion with respect to the
fairness, from a financial point of view, of the merger consideration to be
received by the holders of Big Flower common stock other than the members of
management retaining shares of Big Flower common stock in the merger, as to whom
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ did not deliver an opinion, assuming the negotiation and
execution of a definitive merger agreement. On June 29, 1999, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
delivered a written opinion to the Big Flower board of directors that, as of
that date, the merger consideration to be received by the holders of Big Flower
common stock, other than the members of management retaining shares of Big
Flower common stock in the merger, as to whom ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ did not deliver
an opinion, was fair, from a financial point of view.
In arriving at its June 29, 1999 opinion, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, among other
things:
-- reviewed the latest draft of the original merger agreement dated
June 27, 1999,
-- reviewed, and discussed with members of management of Big Flower, certain
business and financial information relating to Big Flower that ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ deemed relevant, including Big Flower's recent public filings and
financial statements,
-- reviewed, and discussed with members of management of Big Flower, certain
information, including budgets and financial forecasts relating to the
businesses, earnings, cash flows, assets, liabilities and prospects of
Big Flower,
-- reviewed the historical stock prices and trading volumes of Big Flower's
common stock,
-- reviewed certain information and documentation regarding the terms of the
PIK preferred stock and reviewed certain valuation methodologies relating
to the PIK preferred stock,
-- reviewed certain publicly available information regarding publicly traded
companies that ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ deemed reasonably comparable to Big
Flower,
-- reviewed certain publicly available information regarding comparable
merger and acquisition transactions that ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ deemed
relevant, including, without limitation, premiums paid in such
transactions,
16
-- performed discounted cash flow analyses based on the financial forecasts
for Big Flower, as applicable,
-- participated in certain discussions among management of Big Flower,
▇▇▇▇▇▇ ▇. ▇▇▇ Company and their financial advisors regarding Big Flower
and the merger,
-- reviewed the potential pro forma impact of the merger, and
-- reviewed such other information, performed such other analyses and took
into account such other factors as ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ deemed relevant.
In its review and analysis and in formulating its opinion, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
assumed and relied upon the accuracy and completeness of all information
supplied or otherwise made available to it by Big Flower or obtained by ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ from other sources, and upon the assurance of Big Flower's management
that they were not aware of any information or facts that would make the
information provided to ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ by Big Flower incomplete or misleading.
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ did not attempt to verify independently any of the information
supplied or otherwise made available to ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ by Big Flower or
obtained by ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ from other sources. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ did not
undertake an independent valuation or appraisal of assets or liabilities,
contingent or otherwise, of Big Flower, nor was ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ furnished with
any such valuations or appraisals of assets or liabilities, contingent or
otherwise, of Big Flower. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ did not assume any obligation to, and
accordingly did not, conduct any physical inspection of the properties or
facilities of Big Flower. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ assumed, without independent
verification, the accuracy of all representations and statements made by
officers and management of Big Flower. With respect to the financial forecasts
for Big Flower, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ was advised by Big Flower and assumed, without
independent investigation, that they had been reasonably prepared and reflected
management's most currently available estimates and judgments as to the expected
future financial performance of Big Flower. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ noted that its
opinion was necessarily based upon financial, economic, market and other
conditions as they existed and could be evaluated by ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ on the
date of its written opinion. Additionally, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ noted that Big
Flower announced publicly, by a press release dated April 20, 1999, that it was
exploring certain strategic alternatives and a substantial number of financial
and strategic buyers were either contacted by, or contacted, Big Flower and its
financial advisors and studied a potential acquisition of Big Flower. Although
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ evaluated the merger consideration from a financial point of
view, it was not asked to and did not recommend the specific type of
consideration payable in the merger, which was determined through negotiations
between Big Flower and ▇▇▇▇▇▇ ▇. ▇▇▇ Company.
In preparing its opinion, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ performed a variety of financial
and comparative analyses, including those described below. The summary of these
analyses does not purport to be a complete description of the analyses
underlying Berenson ▇▇▇▇▇▇▇'▇ opinion. The preparation of a fairness opinion is
a complete analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Furthermore, in arriving at its
opinion, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly,
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ believes that its analyses must be considered as a whole and
that selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying such analyses and opinion. In its analyses, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
made numerous assumptions with respect to Big Flower, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond Big Flower's control. The estimates contained in these
analyses and the valuation ranges resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or
17
less favorable than those suggested by these analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, these analyses and estimates are inherently subject to
substantial uncertainty. Berenson ▇▇▇▇▇▇▇'▇ opinion and analyses were only one
of various factors considered by the Big Flower board of directors in its
evaluation of the merger and should not be viewed as determinative of the view
of the board of directors of Big Flower with respect to the merger consideration
to be received by the holders of common stock of Big Flower, other than the
members of management retaining shares of Big Flower common stock in the merger,
as to whom ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ did not deliver an opinion, or the merger.
The following is a summary of the material analyses performed by ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ in connection with its June 29 opinion. Some of the summaries of the
financial analyses include information presented in tabular format. The tables
must be read together with the text accompanying each summary, in order to fully
understand the financial analyses. The tables do not constitute a complete
description of the financial analyses.
STOCK TRADING HISTORY. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ reviewed Big Flower's market
statistics, including Big Flower's price to earnings (PE) multiple as of
June 22, 1999, and Big Flower's earnings per share (EPS) for the last twelve
months (LTM). ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ also reviewed Big Flower's total enterprise
value, and calculated multiples of LTM 1999 and 2000 revenues, operating income:
earnings before interest and taxes (EBIT) and EBITDA based on the enterprise
value.
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ reviewed the stock trading history of Big Flower,
including:
-- the price per share of Big Flower common stock at Big Flower's initial
public offering in 1995,
-- the 52-week high and low prices per share of Big Flower common stock as
of June 29, 1999,
-- the trading volumes of Big Flower common stock over the six-month period
preceding June 29, 1999,
-- the daily prices per share of Big Flower common stock for the period
December 29, 1998 through June 29, 1999,
-- the weekly prices per share of Big Flower common stock for the period
July 1, 1998 through June 29, 1999, and
-- the price per share of Big Flower common stock immediately preceding the
announcement, on April 20, 1999, that Big Flower was authorized by its
board of directors to explore strategic alternatives.
In addition, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ reviewed Big Flower's investments in both
public and private Internet-related entities. Given the movement of Big Flower's
stock price following the March 22, 1999 Credit Suisse First Boston research
report, which highlighted the value of Big Flower's Internet investments, as
well as the significant volatility in the stock price of these Internet
securities, in reviewing the 1999 stock price performance of the Big Flower
common stock, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ considered the estimated value of the Internet
investments per share of Big Flower common stock, assuming the Internet
investments could be liquidated at the prevailing market prices. In estimating
this per share value, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated the after-tax market value of
the Internet investments. The net value was based on the daily closing prices
for public investments and Big Flower's cost basis for private investments less
estimated capital gains tax due upon the sale of such securities, less any
sharing interests in profits held by some employees of Big Flower. The after-tax
market value of the Internet investments as of June 22, 1999 was approximately
$82.5 million, or approximately $3.24 per share, and has been treated like cash
and marketable securities in calculating the valuation per fully diluted share
of Big Flower common stock in each of Berenson ▇▇▇▇▇▇▇'▇ valuation analyses. As
is
18
disclosed in the proxy statement, the value of the Internet investments as of
October 7, 1999 was approximately $109.1 million, or approximately $4.32 per
share.
COMPARISON WITH SELECTED COMPARABLE PUBLICLY TRADED COMPANIES. ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ reviewed and compared certain financial data of each of nine printing
companies deemed similar to Big Flower, based upon financial information
publicly available and stock prices as of June 22, 1999. The companies compared
were ▇▇▇▇▇ Corp., Cadmus Communications Corp., Consolidated Graphics, Inc.,
▇▇▇▇▇▇▇▇▇▇ Graphics International Inc., RR ▇▇▇▇▇▇▇▇ & Sons Company,
Mail-Well Inc., Master Graphics Inc., Quebecor Printing Inc. and World Color
Press, Inc. For each comparable printing company, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated:
-- the equity value,
-- the PE multiples for the LTM, estimated for 1999 and estimated for 2000,
-- the enterprise value,
-- the ratio of the enterprise value to EBITDA for the LTM, estimated for
1999 and estimated for 2000, and
-- the ratio of the enterprise value to the LTM revenues.
The following table presents Berenson ▇▇▇▇▇▇▇'▇ observations with regard to
the calculations it performed for the printing companies that ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
deemed similar to Big Flower.
PRINTING COMPANIES
RANGE MEDIAN MEAN
---------------------- -------- --------
PE MULTIPLE
LTM......................................................... 9.0x - 19.0x 14.7x 14.7x
1999 Estimated.............................................. 8.3x - 16.9x 12.6x 12.6x
2000 Estimated.............................................. 6.2x - 15.1x 11.0x 10.7x
RANGE MEDIAN MEAN
---------------------- -------- --------
RATIO OF ENTERPRISE VALUE TO:
LTM EBITDA.................................................. 4.7x - 10.3x 7.1x 7.4x
1999 Estimated EBITDA....................................... 4.0x - 7.3x 6.2x 6.1x
2000 Estimated EBITDA....................................... 3.6x - 6.5x 5.4x 5.3x
LTM Revenues................................................ 0.58x - 1.90x 1.02x 1.07x
Of the larger printing companies that ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ deemed most similar
to Big Flower, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ reviewed the median and mean:
- PE multiples for the LTM, estimated for 1999 and estimated for 2000,
- ratio of the enterprise value to EBITDA for the LTM, estimated for 1999 and
estimated for 2000, and
- ratio of the enterprise value to the LTM revenues.
Excluded from this review were Consolidated Graphics, Inc., ▇▇▇▇▇▇▇▇▇▇
Graphics International Inc. and Master Graphics Inc., all of which were viewed
as regional consolidators of independent sheet fed printers and not directly
comparable to Big Flower.
The following table presents Berenson ▇▇▇▇▇▇▇'▇ observations with regard to
the calculations it performed for the larger printing companies.
19
LARGER PRINTING COMPANIES
RANGE MEDIAN MEAN
---------------------- -------- --------
PE MULTIPLE
LTM......................................................... 9.0x - 18.8x 14.7x 14.5x
1999 Estimated.............................................. 8.3x - 16.9x 12.6x 12.8x
2000 Estimated.............................................. 7.6x - 15.1x 11.0x 11.3x
RANGE MEDIAN MEAN
---------------------- -------- --------
RATIO OF ENTERPRISE VALUE TO:
LTM EBITDA.................................................. 4.7x - 7.4x 6.7x 6.4x
1999 Estimated EBITDA....................................... 4.0x - 7.0x 6.0x 5.7x
2000 Estimated EBITDA....................................... 3.6x - 6.5x 5.4x 5.3x
LTM Revenues................................................ 0.58x - 1.19x 0.88x 0.88x
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated the implied valuation per fully diluted share of
Big Flower common stock by applying the larger printing companies' median and
mean multiples to Big Flower's LTM EBITDA, 1999 estimated EBITDA, 2000 estimated
EBITDA, LTM EPS, 1999 estimated EPS and 2000 estimated EPS and observed that the
range of valuations per fully diluted share of Big Flower common stock was
$27.25 to $33.50, including the value of Big Flower's Internet investments.
COMPARISON WITH SELECTED COMPARABLE MERGER AND ACQUISITION
TRANSACTIONS. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ reviewed certain recent business combinations
involving North American companies engaged in businesses deemed relatively
comparable to those of Big Flower and reviewed selected financial data and
valuation parameters, to the extent publicly available, including total
enterprise value as a multiple of LTM sales, EBITDA and EBIT, and equity market
value as a multiple of LTM net income and book value.
The merger and acquisition transactions that ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ compared were:
- UP/Graphics, Inc. / World Color Press, Inc.
- Infiniti Graphics, Inc. / World Color Press, Inc.
- ▇▇▇▇ Digital Technologies, Inc. / Photobition Group plc
- Quebecor Printing Inc.'s Check & Card Division / MDC Communications
Corporation
- Port City Press, Inc. / ▇▇▇▇ Printing Company
- ▇▇▇▇▇▇▇▇ Lithograph Company / Mail-Well Inc.
- Devon Group, Inc. / Applied Graphics Technologies, Inc.
- Artistic Greetings, Inc. / MDC Communications Company
- Acme Printing Company / World Color Press, Inc.
- Century Graphics Corporation / World Color Press, Inc.
- Uarco Incorporated / The Standard Register Company
- Graphic Industries Inc. / ▇▇▇▇▇▇▇ Computer Services Inc.
- ▇▇▇▇'▇, Incorporated / Perry Graphic Communications, Inc.
▇▇
- ▇▇▇▇▇ ▇▇▇▇▇▇▇▇-▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ / ▇▇▇▇▇▇▇▇ Printing Inc.
- Riverside County Publishing Company / Big Flower Holdings, Inc.
- ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ / World Color Press, Inc.
Given the lack of precedent transactions involving companies with a
comparable mix of businesses to Big Flower and similar transaction value to the
merger, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ analyzed transaction multiples for a broad group of
mergers and acquisitions in the North American printing and related industries
completed over the last three years.
The following table presents Berenson ▇▇▇▇▇▇▇'▇ observations with regard to
recent merger and acquisition transactions involving North American companies
engaged in businesses that ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ deemed relatively comparable to
those of Big Flower.
COMPARABLE NORTH AMERICAN COMPANIES INVOLVED IN RECENT
MERGER AND ACQUISITION TRANSACTIONS
RANGE
----------------------
TOTAL ENTERPRISE VALUE AS A MULTIPLE OF:
LTM Sales................................................... 0.4x - 1.6x
EBITDA...................................................... 5.5x - 11.6x
EBIT........................................................ 6.7x - 17.6x
RANGE
----------------------
EQUITY MARKET VALUES AS A MULTIPLE OF:
LTM Net Income.............................................. 9.8x - 57.5x
Book Value.................................................. 1.7x - 12.9x
Based upon its review of companies involved in comparable merger and
acquisition transactions, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated the implied valuation per
fully diluted share of Big Flower common stock using Big Flower's LTM revenues,
LTM EBITDA and LTM EBIT and concluded that the implied valuation per fully
diluted share of Big Flower common stock was $32.00 to $39.25, including the
value of Big Flower's Internet investments, but noted that many of these
precedent transactions involved competitors being acquired by larger strategic
buyers who could recognize significant synergies or cost savings or eliminate
duplicative operations and that no strategic buyer submitted any offer to
acquire Big Flower or any indication of interest in making such an offer.
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ observed that, in the absence of interest from strategic buyers
able to recognize significant synergies or cost savings, it is typically more
difficult to achieve premium valuation multiples in a sale transaction. ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ did not make any conclusions as to whether the valuation amounts it
computed should be adjusted based on this observation.
DISCOUNTED CASH FLOW ANALYSIS. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ utilized a discounted cash
flow analysis to calculate the implied equity values per fully diluted share of
Big Flower common stock based upon the discounted net present value, utilizing
discount rates ranging from 10% to 14%, of the sum of management's projections
of after-tax unlevered free cash flows of Big Flower for the period from
March 1999 through 2004 and of the terminal value of Big Flower at 2004 by
applying multiples ranging from 6.0x to 7.0x to Big Flower's projected EBITDA in
2004. In performing its discounted cash flow analysis, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ used
discount rates based upon Big Flower's estimated weighted average cost of
capital and EBITDA multiples based on Big Flower's historical valuation range.
Based on its analysis, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated that the implied value per
fully diluted share of Big Flower
21
common stock ranged from a low of $30.92 to a high of $50.86, including the
value of Big Flower's Internet investments.
PREMIUMS PAID ANALYSIS. In performing its premium paid analysis, ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ screened 74 transactions analyzed based on the following criteria:
- the transactions were announced after January 1, 1997 and closed after
January 1, 1997,
- only completed or unconditional transactions were analyzed, and
- the value of each transaction analyzed was between $1.5 billion and
$2.5 billion.
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ compared the premiums paid relative to the acquired
companies' stock values one day prior to announcement of the transaction, five
days prior to announcement of the transaction and 30 days prior to announcement
of the transaction, and observed the following:
PREMIUMS PAID SINCE JANUARY 1997
RANGE MEDIAN
------------------------------- --------
1 Day Prior to Announcement.................... 16.11% - 100.85% 19.2%
1 Week Prior to Announcement................... 11.49% - 154.07% 23.7%
1 Month Prior to Announcement.................. -27.35% - 163.14% 39.5%
Based upon its review of comparable premiums, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated
the implied valuation per fully diluted share of Big Flower common stock using
Big Flower's closing price one day, one week and one month before the date of
the public announcement on April 20 and concluded that the implied valuation per
fully diluted Big Flower common stock was $32.50 to $41.75, including the value
of Big Flower's Internet investments.
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ was not asked, and did not undertake, to value separately
the PIK preferred stock and the warrants apart from the overall merger
consideration. As part of its analysis, however, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated a
range of implied theoretical values for the PIK preferred stock and warrants to
be received in exchange for one share of Big Flower common stock. In performing
its analysis, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated the projected future value of the PIK
preferred stock and the warrants in the year 2004 based on Big Flower
management's projections and the proposed capital structure following the
merger. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated the projected future value using EBITDA
multiples ranging from 6.0x to 8.0x and discounted the implied future values
using discount rates from 14.0% to 20.0%, resulting in a range of implied
present values for the PIK preferred stock and warrants per share of Big Flower
common stock of $4.42 to $6.55. Alternatively, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated the
value of the non-cash merger consideration based on the implied present value of
the PIK preferred stock based on the projected future value in years 2004
through maturity in year 2012 and discount rates from 14.0% to 20.0% plus the
implied value of the warrants based on the $35.25 purchase price per common
share by the new equity investors, resulting in a range of implied values for
the PIK preferred stock and warrants per share of Big Flower stock of $2.50 to
$5.23.
In connection with its October 7, 1999 report, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ did not
perform a premiums paid analysis as it had in June 1999. It was Berenson
Minella's view that the price of Big Flower common stock had reflected the
market expectation of a transaction since the April 20, 1999 announcement that
Big Flower was considering strategic alternatives and, as such, the premiums
paid analysis based on stock prices leading up to the date of the report was not
applicable to the determination of fairness from a financial point of view. In
addition, given fluctuations in general market conditions and the company's
financial performance during the approximately five and one-half months since
the April 20 announcement, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ believed that the financial analysis
of stock prices prior to the April
22
20 period did not necessarily reflect the company's status quo value per share
as of the date of the report.
In connection with its analysis of how Big Flower might trade as a public
company if no transaction were effected, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ calculated an implied
value per share of Big Flower common stock based upon a range of possible LTM
EBITDA multiples ended September 30, 1999. The LTM EBITDA amount was
$248.6 million and the multiples ranged from 5.5x to 7.0x and yielded an implied
value per share of $16.27 to $32.27. In connection with this analysis, ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ noted that R.R. ▇▇▇▇▇▇▇▇ was currently trading at approximately 5.87x
its LTM EBITDA. As the largest company in the industry for many years, it was
Berenson Minella's view that R.R. ▇▇▇▇▇▇▇▇ is viewed as an industry bellweather
and therefore an important valuation benchmark. The implied price per share of
Big Flower common stock at a 5.87x EBITDA multiple was $20.58.
ADDITIONAL INFORMATION REGARDING THE FAIRNESS OF THE MERGER
The proxy statement describes the belief of ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV and
Messrs. ▇▇▇▇▇, ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ that the merger agreement was the product of
arms length bargaining between Big Flower, on the one hand, and ▇▇▇▇▇▇ ▇. ▇▇▇
Company and Evercore Capital Partners, on the other. Although each of those
parties, and Big Flower, believes that this is a correct characterization of the
negotiations, it is also true that the participation of members of Big Flower
management with ▇▇▇▇▇▇ ▇. ▇▇▇ Company and Evercore Capital Partners resulted in
a circumstance not customarily found in arms length negotiations and it would be
more appropriate to say, as Evercore Capital Partners said, that the merger
agreement was the result of active bargaining rather than characterize the
negotiations as arms length.
▇▇▇▇▇▇ ▇. ▇▇▇ COMPANY AND ITS AFFILIATES
In the discussion on pages 46 to 48 of the proxy statement as to the reasons
why ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV believes that the merger is fair to Big
Flower's unaffiliated stockholders, factor (15) refers to the fact that ▇▇▇▇▇▇
▇. ▇▇▇ Equity Fund IV performed a number of quantitative financial analyses
based upon projections developed by ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV.
The financial analyses which were performed were:
-- a leveraged buyout financial model, which considered possible capital
structures in light of projected financial results,
-- a comparable company analysis, which reviewed the financial and trading
ratios of public companies in the same or similar industries to the
principal Big Flower operating units,
-- a premium-paid analysis, which reviewed business combinations,
acquisitions and other similar transactions in the industries in which
Big Flower operates, and
-- a sum-of-the-parts financial analysis which considered the financial
performance and worth of each principal Big Flower operating unit
separately.
Prior to the signing of the original merger agreement on June 29, 1999,
these financial analyses produced the following valuation ranges of Big Flower:
-- the leveraged buyout financial model, which incorporated comparable
company and premium-paid analyses, produced a valuation range of $32-$36
per share, and
-- the sum-of-the-parts analysis, which also incorporated comparable company
and premium-paid analyses, produced a valuation range of $30-$45 per
share.
23
Subsequent to the signing of the original merger agreement, and as a result
of the deterioration in the financial performance of Big Flower and a reduction
in the aggregate trading valuation of Big Flower's public Internet investments,
▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV perfomed a revised analysis of Big Flower. This
revised analysis was based solely on its leveraged buyout financial model and
produced a valuation range for Big Flower of $28-$32 per share.
The projections developed by ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV were based on
projections provided by management, ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV's careful
review of management's projections as a financial buyer, and ▇▇▇▇▇▇ ▇. ▇▇▇
Equity Fund IV's due diligence of Big Flower and own assessment of future
events. ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV's projections, which were primarily of
sales and EBITDA, were lower than management's projections disclosed in the
section "Certain Estimates of Future Operations and Other Information" on page
57 of the proxy statement by, on average, approximately 5%.
On page 48 of the proxy statement, factor (18) states that ▇▇▇▇▇▇ ▇. ▇▇▇
Equity Fund IV reviewed reports prepared by its financing sources in the merger
which did not address the fairness of the merger consideration to unaffiliated
stockholders of Big Flower and were not material to its decision to proceed with
the merger.
These reports, of which there were three, were prepared by Chase Securities,
Inc. Chase Securities is a nationally recognized investment banking division of
The Chase Manhattan Bank. Chase Securities was selected as BFH Merger Corp.'s
financial advisor based on Chase Securities' experience in transactions of this
type and its knowledge of Big Flower and the industry in which Big Flower
operates. As provided on page 67 of the proxy statement in the section "Special
Factors--Source and Amount of Funds--Debt Financings--High Yield Financing,"
Chase Securities has also been engaged by BFH Merger Corp. in connection with
the high yield notes which may be issued in connection with the transaction. An
affiliate of Chase Securities, The Chase Manhattan Bank, is involved in
providing the senior bank and the bridge loan financings with respect to the
merger.
During the past two years, Chase Securities has provided from time to time,
and currently provides, numerous investment banking services to Big Flower,
▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV and Evercore Capital Partners and their respective
affiliates. The compensation to be received by Chase Securities in connection
with any of these relationships varies depending on the nature of the services
to be provided. In connection with the merger, Chase Securities is expected to
receive for its investment banking services to BFH Merger Corp. compensation in
the amount of $4,000,000 if the merger is consummated. This compensation forms
part of the fees and expenses of the merger disclosed on page 71 of the proxy
statement under the heading "Fees and Expenses of the Merger".
The first report is dated April 29, 1999 and was provided to ▇▇▇▇▇▇ ▇. ▇▇▇
Equity Fund IV by Chase Securities in anticipation of BFH Merger Corp.'s
engagement of Chase Securities in this transaction. This report was of a
preliminary nature and did not result in a valuation of Big Flower, but did
provide the following background information:
-- a general overview and description of Big Flower and its principal
operating units, including its current trading statistics and capital
structure;
-- earnings and EBITDA multiples of Big Flower based on illustrative share
prices and current debt levels; and
-- trading and transaction comparisons with entities in similar industries
to Big Flower's principal operating units.
The second report is dated May 12, 1999 and was provided after Chase
Securities was engaged as BFH Merger Corp.'s financial advisor in this
transaction. This report provided summaries of
24
quantitative financial analyses with respect to Big Flower's primary operating
units, including preliminary discounted cash flow analysis and, with respect to
both Big Flower and its competitors, historical enterprise value/EBITDA multiple
analysis and historical Price/Earnings multiple analysis. Based on these
analyses, Chase Securities completed a segment-by-segment valuation analysis,
resulting in an aggregate valuation of Big Flower of $33.64-$40.02 per share.
The third report is dated September 28, 1999 and updated the previous
reports in light of certain material developments that could impact the
consummation of the merger, including deterioration in Big Flower's overall
results of operation, lack of liquidity in the high yield market, changes in Big
Flower's Internet/new media investment portfolio and changes in public
comparative valuations. As a result of these developments, Chase Securities
revised its earlier segment-by-segment valuation analysis, resulting in an
aggregate valuation of Big Flower of $28.97-$34.86 per share. In addition, Chase
Securities valued Big Flower based on Big Flower's historical trading multiples
of EBITDA and earnings per share to assess the unaffected trading level of Big
Flower's common stock--that is, the trading level excluding any change as a
result of Big Flower's announcement that it was exploring strategic
alternatives--and this analysis produced a valuation range of Big Flower of
$23.36-$27.17 per share.
Except with respect to the first report, Chase Securities produced the
reports in response to ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV's request. With respect to
the requested reports, ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV requested that Chase
Securities provide it with analyses, based on publicly available information,
and any other information known by Chase Securities and available to ▇▇▇▇▇▇ ▇.
▇▇▇ Equity Fund IV, that would be helpful in analyzing an investment in Big
Flower.
None of these reports involved any specific findings and recommendations by
Chase Securities with respect to the transaction which were relied upon by BFH
Merger Corp. or ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV in deciding to proceed with the
merger. They were designed as background or overview materials.
These reports will be filed with the Securities and Exchange Commission as
an exhibit to Amendment No. 3 to Schedule 13E-3, which is expected to be filed
with the Commission on November 3, 1999. A copy of this filing will be publicly
available on the Securities and Exchange Commission's Internet site, located at
▇▇▇▇://▇▇▇.▇▇▇.▇▇▇. In addition, these reports will be made available for
inspection and copying at the principal executive offices of Big Flower during
regular business hours by any interested equity securityholder of Big Flower or
its representative who has been so designated in writing.
In the final paragraph commencing on page 48 of the proxy statement, it is
noted that ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV filed a "Schedule 13E-3". A
Schedule 13E-3 is a filing made with the Securities and Exchange Commission
which is only required to be signed by an issuer of securities, here Big Flower,
or affiliates of the issuer. While ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV does not believe
that it was an affiliate of Big Flower at the time the Schedule 13E-3 was filed,
and therefore would not strictly be required to make this filing with the
Securities and Exchange Commission, ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV made the filing
because:
-- it was aware that the issue of whether or not an entity is an affiliate
of another entity can be difficult to determine,
-- in some instances in similar transactions persons similarly situated to
▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV have filed a Schedule 13E-3 with the
Securities and Exchange Commission, and
-- when complying with federal securities laws, it is prudent to take a
cautious approach.
25
EVERCORE CAPITAL PARTNERS AND ITS AFFILIATES
Evercore Capital Partners, in forming its belief that the merger is fair to
Big Flower's unaffiliated stockholders, conducted an analysis to value Big
Flower on a going concern basis. In conducting its analysis, Evercore Capital
Partners used methodologies based on discounted cash flow and comparable
companies analyses to create a leveraged recapitalization model. Although this
leveraged recapitalization model was not constructed to determine a per share
value for Big Flower, but rather to determine whether, under a leveraged
operating structure, the proposed deal price would yield a return which was
acceptable to Evercore Capital Partners, per share values for Big Flower can be
implied from this analysis.
Prior to the signing of the original merger agreement on June 29, 1999, the
leveraged recapitalization model produced an implied valuation range of $31-$36
per share for Big Flower.
Subsequent to the signing of the original merger agreement, and as a result
of the deterioration in the financial performance of Big Flower, Evercore
Capital Partners performed a revised analysis of Big Flower. This revised
leveraged recapitalization model produced an implied valuation range for Big
Flower of $27-$34 per share.
The projections developed by Evercore Capital Partners were based on
projections provided by management, as disclosed in the section "Certain
Estimates of Future Operations and Other Information" on page 57 of the proxy
statement but discounted, on average, by approximately 5%. Evercore Capital
Partners discounted management's projections because of its cautious review of
management's projections as a financial buyer, including consideration of the
high degree of operating leverage that would be placed on the business, and its
own assessment of future events.
While the purposes of these analyses was not to determine what would be a
fair amount of consideration, from a financial point of view, to be paid by
Evercore Capital Partners to the unaffiliated stockholders of Big Flower, in the
view of Evercore Capital Partners, the results of these analyses support the
conclusion that the merger consideration is fair to unaffiliated stockholders of
Big Flower.
In the first paragraph on page 51 of the proxy statement, it is noted that
Evercore Capital Partners filed a "Schedule 13E-3". A Schedule 13E-3 is a filing
made with the Securities and Exchange Commission which is only required to be
signed by an issuer of securities, here Big Flower, or affiliates of the issuer.
While Evercore Capital Partners does not believe that it was an affiliate of Big
Flower at the time the Schedule 13E-3 was filed with the Securities and Exchange
Commission, Evercore Capital Partners made the filing because:
- it was aware that the issue of whether or not an entity is an affiliate of
another entity can be difficult to determine,
- in some instances in similar transactions persons similarly situated to
Evercore Capital Partners have filed a Schedule 13E-3 with the Securities
and Exchange Commission, and
- when complying with federal securities laws, it is prudent to take a
cautious approach.
ADDITIONAL INFORMATION REGARDING THE BIG FLOWER PRESS DEBT TENDER OFFER
On October 29, 1999, in connection with Big Flower Press Holdings, Inc.
offers to purchase and consent solicitations with respect to its outstanding
8 7/8% senior subordinated notes due 2007 and 8 5/8% senior subordinated notes
due 2008, Big Flower Press increased the consent payment payable to each holder
of the notes who validly consents to certain proposed amendments from $10.00 to
$20.00 for each $1,000 principal amount of the notes. Big Flower Press also
extended the date prior to which consents to the proposed amendments may be
revoked to the later of (i) the date on which the
26
supplemental indentures for both series of the notes are executed and (ii)
November 15, 1999, unless extended.
ADDITIONAL INFORMATION REGARDING CERTAIN ESTIMATES OF FUTURE OPERATIONS AND
OTHER INFORMATION
One of the material assumptions underlying the estimates reflecting
management's views as to the possible future performance of Big Flower is that
Big Flower's future expenses will remain consistent with past practice other
than for certain cost savings, including a reduction in overhead costs. This
assumption was reflected in the projections included in the proxy statement and
the cost reductions in those projections did not result from the merger, but
rather were expected to result from elimination of duplication costs in Big
Flower's ongoing acquisitions.
The projections provided in the proxy statement differ from those that were
provided to Big Flower's financial advisors. This difference exists because the
projections provided in the proxy statement take into account Big Flower's
acquisition of Drake Automation Limited and ▇.▇. ▇▇▇▇▇ Incorporated and the
reduction in overhead costs resulting from various acquisitions, and also
include updated, actual results of operation for the time period since the
projections were provided to Big Flower's financial advisors.
The summary of the estimates as of October 11, 1999 that Big Flower included
in the proxy statement are set forth below:
FORECAST
FISCAL YEAR ENDED DECEMBER 31,
1999(1) 2000 2001 2002 2003 2004
(AMOUNTS IN 000'S) ---------- ---------- ---------- ---------- ---------- ----------
Sales.................. $1,879,445 $1,997,514 $2,117,760 $2,242,954 $2,369,788 $2,504,692
% Growth............... 0.3% 6.3% 6.0% 5.9% 5.7% 5.7%
EBITDA................. $ 260,244 $ 298,606 $ 328,671 $ 351,793 $ 373,433 $ 395,683
% Margin............... 13.8% 14.9% 15.5% 15.7% 15.8% 15.8%
EBIT................... $ 158,183 $ 192,050 $ 217,766 $ 239,650 $ 258,314 $ 279,631
% Margin............... 8.4% 9.6% 10.3% 10.7% 10.9% 11.2%
Net Income............. $ 44,290 $ 61,726 $ 82,896 $ 103,002 $ 122,966 $ 141,855
Basic EPS.............. $ 2.22 $ 2.61 $ 3.50 $ 4.35 $ 5.19 $ 5.99
Diluted EPS............ $ 1.94 $ 2.57 $ 3.27 $ 4.04 $ 4.81 $ 5.54
------------------------
(1) Fiscal year 1999 estimates are pro forma for the Drake Automation Limited
acquisition completed July 1, 1999 and the ▇.▇. ▇▇▇▇▇ Incorporated
acquisition completed August 3, 1999.
The estimates, which were provided to Big Flower's financial advisors on a
confidential basis, are summarized below:
FORECAST
FISCAL YEAR ENDED DECEMBER 31,
(AMOUNTS IN 000'S) 1999 2000 2001 2002 2003 2004
------------------ ---------- ---------- ---------- ---------- ---------- ----------
Sales.................. $1,922,565 $2,037,142 $2,157,761 $2,283,065 $2,410,483 $2,545,898
EBITDA................. $ 267,681 $ 294,919 $ 318,336 $ 339,930 $ 360,359 $ 381,716
EBIT................... $ 165,639 $ 192,859 $ 212,885 $ 232,985 $ 250,402 $ 270,316
Net Income............. $ 49,656 $ 64,750 $ 81,731 $ 100,006 $ 118,642 $ 135,432
Basic EPS.............. $ 2.49 $ 2.73 $ 3.44 $ 4.21 $ 4.99 $ 5.70
Diluted EPS............ $ 2.15 $ 2.69 $ 3.22 $ 3.92 $ 4.64 $ 5.28
27
Similarly, the projections provided to Big Flower's financial advisors
differ from those that were provided to third party bidders at the beginning of
Big Flower's sale process. This difference exists because the projections
provided to third party bidders only reflected results as of December 31, 1998
and did not take into account Big Flower's recent acquisitions. The estimates,
which were provided to the third party bidders on a confidential basis, are
summarized below:
FORECAST
FISCAL YEAR ENDED DECEMBER 31,
(AMOUNTS IN 000'S) 1999 2000 2001 2002 2003 2004
------------------ ---------- ---------- ---------- ---------- ---------- ----------
Sales.................. $1,950,388 $2,070,703 $2,198,839 $2,327,300 $2,457,789 $2,596,500
EBITDA................. $ 274,140 $ 298,750 $ 324,061 $ 347,024 $ 368,408 $ 391,890
EBIT................... $ 170,975 $ 196,863 $ 217,782 $ 237,275 $ 252,479 $ 270,866
Net Income............. $ 52,000 $ 67,100 $ 83,856 $ 101,242 $ 117,674 $ 132,922
Basic EPS.............. $ 2.60 $ 2.81 $ 3.51 $ 4.24 $ 4.92 $ 5.56
Diluted EPS............ $ 2.23 $ 2.75 $ 3.26 $ 3.91 $ 4.52 $ 5.09
In addition, because these estimates are inherently subject to significant
economic and competitive uncertainties and other contingencies beyond Big
Flower's control, there can be no assurance that these estimates will be
realized; actual results may be higher or lower than those estimated. Given the
fact that each year since 1994 Big Flower has acquired in excess of 5 entities
per year on average, any year over year comparison beyond 1999 is unlikely to
provide a realistic view of Big Flower's business or performance. Big Flower
does not generally publish its business plans and strategies or make external
disclosures of its anticipated financial position or results of operations.
Accordingly, Big Flower does not intend to, and specifically declines any
obligation to, update or otherwise revise the prospective financial information
to reflect circumstances existing since their preparation or to reflect the
occurrence of unanticipated events, even if any or all of the underlying
assumption s are shown to be in error. Also, Big Flower does not intend to, and
specifically declines any obligation to, update or revise the prospective
financial information to reflect changes in general economic or industry
conditions. Neither Big Flower's auditors nor any other independent accountants
have compiled, examined or performed any procedures with respect to information
or its achievability, and assume no responsibility for, and disclaim any
association with, this prospective financial information. Further, ▇▇▇▇▇▇ ▇. ▇▇▇
Equity Fund IV, Evercore Capital Partners and their affiliates were not involved
in the preparation of these estimates in any manner.
The proxy statement includes additional projections and a disclaimer to the
effect that none of Big Flower, ▇▇▇▇▇▇ ▇. ▇▇▇ Company, Evercore Capital Partners
or their respective affiliates or Big Flower's independent auditors assume any
responsibility for the accuracy of the financial forecasts. Big Flower withdraws
its disclaimer of responsibility and instead Big Flower confirms that these
forecasts are the actual internal forecasts of Big Flower and were not prepared
by ▇▇▇▇▇▇ ▇. ▇▇▇ Equity Fund IV, Evercore Capital Partners or their affiliates.
ADDITIONAL INFORMATION REGARDING LITIGATION CHALLENGING THE MERGER
As disclosed on page 71 of the proxy statement under the caption "Special
Factors--Litigation Challenging the Merger", there is pending in the Delaware
Court of Chancery a class action lawsuit arising out of the original merger
agreement. On October 29, 1999, the plaintiffs in that action filed a second
amended class action complaint relating to the merger agreement. The second
amended class action complaint also alleges that the proxy statement is
deficient because, among other things, it does not include adequate information
concerning effect of the earnings shortfall on future years' results, does not
quantify the differences between June and October projections, does not disclose
a range of values determination by ▇▇▇▇▇▇▇ ▇▇▇▇▇ or ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ or why such
a range was not calculated by them, does not disclose that ▇▇▇▇▇▇▇ Sachs did not
perform a discounted cash flow analysis with
28
respect to the merger agreement or why they did not, does not disclose that
▇▇▇▇▇▇▇ ▇▇▇▇▇ did not separately value Big Flower's Internet investments and
does not include an analysis of the reasoning and work performed by ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇ regarding the original merger agreement. On November 2, 1999, Big Flower
entered into an oral agreement in principle with representatives of the
plaintiffs in the shareholders litigation to settle the action by providing
additional disclosure relating to the transaction, which disclosure is contained
herein.
VOTING PROCEDURES
FOR STOCKHOLDERS WHO HAVE ALREADY VOTED: We have enclosed a second proxy
card (and a return envelope) for your use, in case you wish to change your vote.
If you have already voted your proxy and you do not wish to change your vote,
you do not need to return this second proxy card. If Big Flower receives the
enclosed proxy card, properly executed and dated, prior to the Big Flower
meeting, any proxy previously granted by you will be, without further action on
your part, revoked. Any proxy granted to Big Flower may be revoked before it is
exercised by submitting to Big Flower written notice of revocation or a properly
executed proxy of a later date, or by attending the Big Flower meeting and
electing to vote in person. Written notices of revocation and other
communications with respect to the revocation of proxies should be addressed to
▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Associate General Counsel, Big Flower Holdings, Inc., ▇ ▇▇▇▇
▇▇(▇▇) ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇. All shares of Big Flower common stock
represented by valid proxies received pursuant to this solicitation, and not
revoked before they are exercised, will be voted in the manner specified by the
proxy. If no specification is made, the proxies will be voted in favor of the
matters to be voted upon at the Big Flower meeting, including approval of the
merger agreement.
IF YOU HAVE ALREADY RETURNED A PROXY CARD AND DO NOT WISH TO CHANGE YOUR
VOTE, NO FURTHER ACTION IS REQUIRED.
FOR STOCKHOLDERS WHO HAVE NOT ALREADY VOTED: Enclosed for your convenience
is a duplicate proxy card and a return envelope for your use. You may use either
the proxy card which was originally sent to you, or you may use the second proxy
card which is enclosed. You do not need to return both the original and this
second proxy card. If Big Flower receives the enclosed proxy card, property
executed and dated, prior to the Big Flower meeting, any proxy previously
granted by you will be, without further action, revoked. Any proxy granted to
Big Flower may be revoked before it is exercised, by submitting to Big Flower
written notice of revocation or a properly executed proxy of a later date, or by
attending the Big Flower meeting and electing to vote in person. Written notices
of revocation and other communications with respect to the revocation of proxies
should be addressed to ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Associate General Counsel, Big Flower
Holdings Inc., ▇ ▇▇▇▇ ▇▇(▇▇) ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇. All shares of
Common Stock represented by valid proxies received pursuant to this
solicitation, and not revoked before they are exercised, will be voted in the
manner specified by the proxy. If no specification is made, the proxies will be
voted in favor of the matters to be voted upon at the Big Flower meeting,
including approval of the merger agreement.
INFORMATION ABOUT VOTING. Stockholders of record may vote by signing,
dating and mailing the proxy card in the postage-paid envelope provided. If your
shares of Big Flower common stock are held by a bank, broker or other nominee,
you will receive instructions from them. Whichever of these methods you select
to transmit your instructions, the persons named on the enclosed proxy card will
vote your shares in accordance with your instructions. If you sign a proxy card
without giving specific voting instructions, your shares will be voted in favor
of the merger agreement, unless your shares of Big Flower common stock are held
by a bank, broker or other nominee, in which case your shares will not be voted.
The method by which you vote will not limit your right to vote at the Big
Flower meeting if you decide to attend in person. If your shares of common stock
are held by a bank, broker or other holder
29
of record, you will need proof of ownership to be admitted to the Big Flower
meeting. A recent brokerage statement or letter from your bank or broker are
examples of proof of ownership. Even though proof of ownership will entitle you
to admission to the Big Flower meeting, if you are a beneficial owner of Big
Flower common stock and want to vote your shares in person, you must obtain a
completed and executed proxy in your name from your bank, broker or other holder
of record in order to vote at the Big Flower meeting.
If you have questions or require an additional copy of the Proxy Statement,
please contact Big Flower Holdings, Inc. at (▇▇▇) ▇▇▇-▇▇▇▇.
Dated November 3, ▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇
By order of the Board of Directors,
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Executive Vice President--Office of
the
Chairman, General Counsel and
Secretary
30
