1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
__________________________________
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1996
Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 1-10991
VALASSIS COMMUNICATIONS, INC.
(Exact Name of Registrant
as Specified in its Charter)
Delaware 38-2760940
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
36111 Schoolcraft
Livonia, Michigan 48150
(address of principal executive offices)
Telephone Number: (313) 591-3000
(registrant's telephone number, including area code)
______________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and, (2) has been
subject to such filing requirements for the past 90 days:
Yes /X/ No
As of July 31, 1996, there were 42,904,893 shares of the Registrant's
Common Stock outstanding.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
1996 1995
JUNE 30, DEC. 31,
(unaudited) (note)
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 18,436 $ 34,408
Accounts receivable (less allowance for doubtful
accounts of $743 at June 30, 1996 and $810 at
December 31, 1995) 91,251 84,427
Inventories:
Raw materials 17,249 13,840
Work in progress 7,546 14,267
Prepaid expenses and other 4,015 3,686
Deferred income taxes 4,330 4,330
Refundable income taxes 569 97
----------- ---------
Total current assets 143,396 155,055
----------- ---------
Property, plant and equipment, at cost:
Land and buildings 19,627 19,617
Machinery and equipment 105,569 107,615
Office furniture and equipment 17,742 17,215
Automobiles 769 789
Leasehold improvements 1,443 1,443
---------- ---------
145,150 146,679
Less accumulated depreciation and amortization (111,021) (111,792)
---------- ---------
Net property, plant and equipment 34,129 34,887
---------- ---------
Intangible assets:
Goodwill 68,631 68,631
Other intangibles 88,524 88,524
--------- ---------
157,155 157,155
Less accumulated amortization (97,163) (93,038)
--------- ---------
Net intangible assets 59,992 64,117
--------- ---------
Other assets (primarily debt issuance costs) 5,230 4,873
--------- ---------
Total assets $242,747 $258,932
======== ========
3
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DEC. 31
1996 1995
(unaudited) (note)
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 72,290 $ 71,936
Accrued interest 6,066 6,425
Accrued expenses 18,416 21,204
Progress billings 33,882 49,209
--------- ---------
Total current liabilities 130,654 148,774
--------- ---------
Long-term debt 403,107 416,034
Deferred income taxes 3,029 3,029
Minority interest 474 369
Stockholders' deficit:
Common stock of $.01 par value. Authorized
100,000,000 shares; issued 43,360,145 shares
at June 30, 1996 and 43,302,500 at
December 31, 1995; outstanding 42,980,145
shares at June 30, 1996 and 43,302,500 at
June 30, 1995 433 433
Additional paid-in capital 40,395 39,590
Accumulated deficit (328,991) (349,457)
Foreign currency translations 196 160
Treasury stock, at cost (380,000 shares at
June 30, 1996) (6,550) 0
--------- ---------
Net stockholders' deficit (294,517) (309,274)
--------- ---------
Total liabilities and stockholders' deficit $ 242,747 $ 258,932
======== ========
NOTE: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
4
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
---------------- -----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
-------- -------- -------- --------
REVENUES:
Net Sales $162,117 $154,563 $342,113 $311,177
Other 534 947 1,071 1,705
-------- -------- -------- --------
162,651 155,510 343,184 312,882
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of products sold 116,994 116,356 251,284 231,582
Selling, general and admin 16,994 15,809 33,490 30,470
Amortization of intangibles 2,058 2,329 4,125 4,676
Interest 9,892 10,054 20,155 20,260
Sale of business-Valcheck --- 950 --- 950
Minority interest (7) (498) (36) (764)
-------- -------- -------- --------
145,945 145,000 309,018 287,174
-------- -------- -------- --------
Earnings before income taxes 16,706 10,510 34,166 25,708
Income taxes 6,700 3,815 13,700 10,175
-------- -------- -------- --------
Net earnings $ 10,006 $ 6,695 $ 20,466 $ 15,533
======== ======= ======= =======
Net earnings per common share $ .23 $ .16 $ .47 $ .36
======== ======= ======= =======
Shares used in computing net
earnings per share 43,166,929 43,302,500 43,238,751 43,301,250
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
4
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------
JUNE 30, JUNE 30,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 20,466 $ 15,533
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 7,638 9,653
Provision for losses on accounts receivable 300 300
Minority interest 105 (764)
(Gain)/loss on sale of property, plant and equipment 208 (24)
Deferred income taxes --- 2
Changes in assets and liabilities which increase
(decrease) cash flow:
Accounts receivable (7,124) (7,306)
Inventories 3,312 448
Prepaid expenses and other (329) (110)
Other assets (357) 425
Accounts payable 354 (5,222)
Accrued expenses and interest (3,147) 2,603
Income taxes (472) 1,439
Progress billings (15,327) (2,002)
-------- --------
Total adjustments (14,839 (559)
-------- --------
Net cash provided by operating activities 5,627 14,975
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,976) (2,497)
Contribution to Valcheck by minority shareholder --- 850
Sale of business operations and assets of Valcheck --- 950
Purchase of McIntyre & Dodd (Valassis of Canada) --- (6,575)
Proceeds from the sale of property, plant and equipment 86 187
Other 36 (16)
-------- --------
Net cash used in investing activities (2,854) (7,101)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (13,000) ---
Proceeds from the issuance of common stock 805 24
Purchase of treasury shares (6,550) ---
-------- --------
Net cash provided (used) by financing activities (18,745) 24
-------- --------
Net increase (decrease) in cash (15,972) 7,898
Cash at beginning of period 34,408 21,166
-------- --------
Cash at end of period $18,436 $29,064
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $20,514 $20,531
Cash paid during the period for income taxes $14,172 $ 8,533
Dividends declared but unpaid $ --- $ ---
See accompanying notes to condensed consolidated financial statements.
5
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the information contained
herein reflects all adjustments necessary for a fair presentation of the
information presented. All such adjustments are of a normal recurring nature.
The results of operations for the interim periods are not necessarily indicative
of results to be expected for the fiscal year. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
2. CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position.
3. SIGNIFICANT ACCOUNTING POLICIES - INVENTORIES
Inventories are stated at the lower of cost or market (net realized value).
Cost has been principally determined by the last-in, first-out (LIFO) method.
If the first-in, first-out (FIFO) method of determining cost had been used,
inventories would have been $2,270,000 higher than reported at June 30, 1996,
and $5,175,000 higher than reported at December 31, 1995. The change in LIFO
reserve reduced paper expense by $2,775,000 and $2,905,000 for the quarter and
six months ended June 30, 1996, respectively.
4. STOCK COMPENSATION PLANS
The following stock compensation plans have been implemented in 1996:
EMPLOYEE AND DIRECTOR RESTRICTED STOCK AWARD PLAN
The Employee and Director Restricted Stock Award Plan provides for the grant of
restricted stock to executives in lieu of a cash raise, to non-employee, non-
affiliated directors as a portion of their fee, and to participants in the
Employee Stock Purchase Plan as described in the following paragraph. A total
of 200,000 shares of restricted stock have been reserved for this plan.
Pursuant to an employment agreement between the Company and its Chief Operating
Officer, Alan F. Schultz, 7,500 shares of restricted stock will be issued to
6
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements (Cont.)
Mr. Schultz annually as of January, in 1996, 1997, 1998 and 1999, respectively,
with each grant vesting ratably from date of grant over a three-year period.
The expense related to the aggregate of such restricted stock will be
recognized on the straight-line method over the vesting period. Such pre-tax
expense was approximately $20,000 for the quarter ended June 30, 1996, and
$40,000 year-to-date. In addition, several executives received one-time
restricted stock grants totaling 36,500 shares and vesting over a three-year
period. The related expense will be recognized over the vesting period and was
approximately $51,000 in the quarter ended June 30, 1996, and $106,000 year to
date. Also during 1996, one-half of the annual Director's fee of $40,000, to
the four outside directors, will be paid in restricted stock from this plan.
EMPLOYEE STOCK PURCHASE PLAN
All full-time employees are eligible to participate in VCI's Employee Stock
Purchase Plan. The plan provides that participants may authorize VCI to
withhold a portion of earnings to be used to purchase VCI's common stock at
prevailing market prices. Under the plan, VCI contributes, on behalf of each
participant, 15% of the participant's contributions. The Company's
contribution is made in the form of restricted stock with a one-year transfer
restriction and vesting. The value of the Company's stock contributed by the
Company and expensed for the quarter ended June 30, 1996 totaled approximately
$4,000, and $50,000 year-to-date.
EXECUTIVE RESTRICTED STOCK PLAN
The Executive Restricted Stock Plan provides for the grant of restricted stock,
with one-year vesting, to certain executive officers. Currently, the Company's
Chief Executive Officer, David A. Brandon, is the only executive eligible to
receive restricted stock under this plan. The maximum number of restricted
shares which may be issued under this plan is 250,000, provided that not more
than 60% of such shares are awarded to any one participant. Pursuant to an
employment agreement between the Company, CPH and Mr. Brandon, Mr. Brandon
is eligible to receive 30,000 shares of restricted stock each year beginning
with 1996 through 2000, if 70% or more of the year's performance target, set by
the Compensation/Stock Option Committee, is met. The remaining 100,000 shares
are undesignated as of June 30, 1996. Compensation expense will be recognized
over the vesting period and will be dependent on the market value of stock at
the end of each quarter. Pre-tax compensation expense related to this plan for
the quarter and six months ended June 30, 1996 was approximately $70,000 and
$135,000, respectively.
401(K) PLAN
The Company has also amended its 401(k) Plan to include a 15% match, payable in
VCI stock, on each participant's annual contributions to the Plan that are
invested in VCI stock at the end of the year. The expense related to this plan
for the six months ended June 30, 1996 was approximately $50,000.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding declines in paper prices and any impact on
the Company's financial performance related thereto and shifts in customer
promotional strategies, are based upon current expectations. These statements
are forward looking in nature and involve a number of risks and uncertainties.
Actual results may differ materially. Among the factors that could affect
expectations are the following: a new competitor in the Company's core free-
standing insert business and consequent price war, new technology that would
make free-standing inserts less attractive, shifts in customer preference for
different promotional materials or an increase in the Company's paper
costs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Total revenues for the quarter ended June 30, 1996 increased 4.6% from $155.5
million to $162.7 million. Total revenues rose as a result of higher volumes in
the Valassis Impact Promotions (VIP) and Run-of-Press (ROP) product lines. VIP
revenue was up 25.5% from $18.4 million for the second quarter 1995 to $23.1
million for the same quarter in 1996. This growth in VIP revenue is
attributable to increased activity by several major customers, along with
strong demand for VIP's expanded product line. ROP revenue rose a significant
81.0% to $7.6 million from $4.2 million in the prior year quarter. The increase
in ROP revenue was driven by several large ROP promotions and increased activity
in the health and beauty aid category. Free-standing insert (FSI) revenue
remained relatively level for the second quarter rising just .7% from $119.9
million to $120.7 million for the quarter ended June 30, 1996. Even though FSI
pricing continued to improve during the second quarter of 1996, the impact on
revenue was offset by a decline in industry pages. Recent announcements by
certain package goods manufacturers to offer lower prices to their customers has
caused what management believes to be a short-term reduction in FSI pages.
Higher revenues during the quarter ended June 30, 1996 were somewhat offset by
increased print, paper and media costs, resulting in an overall increase in the
gross profit margin to 28.1% in the quarter ended June 30, 1996 from 25.2% in
the same quarter last year. Print and media costs were up on a unit basis due to
lower average pages per book. Although paper prices began declining during the
quarter, the cost still exceeded that of the prior year. Management anticipates
further declines in paper prices during the second half of 1996.
Selling, general and administrative expenses increased 7.5% to $17.0 million for
the three months ended June 30, 1996 from $15.8 million in the comparable period
of 1995, partly as a result of the expenses associated with the new restricted
stock plans. Management expects selling, general and administrative expenses to
return to levels consistent with last quarter.
Net earnings were $10.0 million compared to $6.7 million for the same quarter
last year. Net earnings rose as a result of stronger FSI pricing and higher VIP
and ROP sales.
8
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
The Company's revenue for the first six months of 1996 was up 9.7% to $343.2
million as compared to $312.9 million for the same period in 1995. This increase
was fueled by an 8.8% gain in FSI revenue from $244.5 million in the first six
months of 1995 to $265.9 million in the comparable 1996 period. FSI revenue rose
as a result of stronger pricing which more than offset the decline in market
share and industry volume during the first six months of 1996. In addition,
stronger VIP and Sampling sales contributed to the overall increase in revenue.
VIP revenue was up 20.9% to $41.7 million for the six months of 1996, as
compared to $34.5 million in the same period of 1995. VIP's growth was spurred
by increased promotions by several major customers, along with stronger demand
for VIP's expanded product line. Sampling revenue rose 68.3% from $6.0 million
for the first six months of 1995 to $10.1 million for the same six months of
1996. Sampling revenue rose due to improved lead times and manufacturing
efficiencies. ROP revenue declined 5.8% to $11.4 million for the six months
ended June 30, 1996, compared to $12.1 million for the six months ended
June 30, 1995. ROP revenue was negatively impacted by declines in ROP pricing
during the first six months of 1996, as management focused on improving FSI
pricing during this period.
Despite the growth in FSI, VIP and Sampling revenues, gross margin only
increased 3.1% from 26.0% during the first six months of 1995 to 26.8% for the
same period of 1996 as pricing gains were offset by escalating paper costs.
Although the Company has experienced a paper cost decrease from the first
quarter of 1996 to the second quarter, paper prices still remain higher than
average 1995 pricing. Management expects further paper price decreases will have
a positive impact on the remainder of 1996.
Selling, general and administrative expenses rose 9.8% to $33.5 million for the
six months ended June 30, 1996 compared with $30.5 million for the same period
last year. This was partially due to the expense associated with the new
restricted stock plans.
Net earnings were $20.5 million versus $15.5 million for the same six months
last year. The increase in net earnings is attributable to increased pricing in
the FSI business, combined with the increased volume of VIP and Sampling sales.
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents totaled $18.4 million at June 30, 1996, down $16.0
million from December 31, 1995. Cash flow from financing activities decreased
by $18.7 million, as the Company repurchased 380,000 shares of common stock and
$13.0 million of the Company's long-term debt during the six-months ended
June 30, 1996.
Management believes the Company will generate sufficient funds from operations
and will have sufficient lines of credit available to meet current anticipated
liquidity needs, including interest and required principal payments on
indebtedness.
9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
a. The Company held its Annual Meeting of Stockholders on May 21, 1996.
c. The following matters were voted upon at the Annual Meeting of
Stockholders:
1. The election of the nominees for directors who will serve for a term
to expire at the next Annual Meeting of Stockholders or until their
respective successors have been duly elected and qualified was voted on
by the stockholders. The nominees, all of whom were elected and the vote
tabulations certified by the Inspector of Election with respect therto,
were:
DIRECTOR FOR WITHHELD BROKER NON-VOTES
David A. Brandon 37,312,352 168,077 0
Graham A. Cubbin 36,623,792 856,637 0
Mark C. Davis 37,325,742 154,687 0
Cartha D. DeLoach 37,323,678 156,751 0
Jon M. Huntsman, Jr. 37,312,352 154,437 0
James D. Packer 37,312,352 154,437 0
Brian M. Powers 36,624,292 856,137 0
Robert L. Recchia 37,326,057 154,372 0
Alan F. Schultz 37,320,846 159,583 0
Faith Whittlesey 37,325,992 154,437 0
2. A proposal to approve the Company's Executive Restricted Stock Plan,
as amended by Amendment No. 1 to such Plan was approved by the
stockholders.
The Inspector of Election certified the following vote tabulations:
FOR AGAINST ABSTAIN BROKER NON-VOTES
37,126,355 221,407 63,967 68,700
3. A proposal to approve the Company's Employee and Director Restricted
Stock Plan was approved by the stockholders.
The Inspector of Election certified the following vote tabulations:
FOR AGAINST ABSTAIN BROKER NON-VOTES
37,124,026 224,730 62,973 68,700
4. A proposal to approve the Company's Employee Stock Purchase Plan was
approved by the stockholders.
The Inspector of Election certified the following vote tabulations:
FOR AGAINST ABSTAIN BROKER NON-VOTES
37,317,363 59,096 35,270 68,700
10
5. A proposal to approve Amendment No. 3 to the Company's 1992 Long-Term
Incentive Plan was approved by the stockholders.
The Inspector of Election certified the following vote tabulations:
FOR AGAINST ABSTAIN BROKER NON-VOTES
37,121,258 224,827 65,644 68,700
6. A proposal to approve Amendment No. 1 to the Company's Senior Executive's
Bonus Plan was approved by the stockholders.
The Inspector of Election certified the following vote tabulations:
FOR AGAINST ABSTAIN BROKER NON-VOTES
35,725,395 1,646,080 40,254 68,700
7. A proposal to ratify the re-appointment of Ernst & Young, Detroit,
Michigan, as auditors of the Company for the 1996 fiscal year was approved
by the stockholders.
The Inspector of Election certified the following vote tabulations:
FOR AGAINST ABSTAIN BROKER NON-VOTES
37,438,062 19,053 23,314 0
8. A proposal to approve an agreement with Conpress Cayman, LDC, the
Company's principal stockholder was approved by the stockholders.
The Inspector of Election certified the following vote tabulations:
FOR AGAINST ABSTAIN BROKER NON-VOTES
35,982,733 48,692 77,834 1,371,170
The number of votes cast other than shares beneficially owned by
Consolidated Press Holdings Limited were certified by the Inspector of
Election as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
14,782,733 48,692 77,834 22,571,170
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are included herein:
10.20 Conpress Stock Option Agreement
10.21 Lease for New Headquarters Building
27 Financial Data Schedule
b. Forms 8-K
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1996.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: August 14, 1996
Valassis Communications, Inc.
(Registrant)
By:/s/ Robert L. Recchia
--------------------------------------
Robert L. Recchia
V.P. of Finance - Chief Financial Officer
Signing on behalf of the Registrant and
as principal financial officer.