UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 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 October 31, 1996, there were 42,189,052 shares of the Registrant's
Common Stock outstanding.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPT.30, DEC. 31,
1996 1995
------- -------
(unaudited) (note)
ASSETS
- ------
Current assets:
Cash and cash equivalents.................................$41,614 $34,408
Accounts receivable (less allowance for doubtful accounts
of $876 at September 30,1996 and $810 at
December 31,1995) 92,298 84,427
Inventories:
Raw materials.............................................8,954 13,840
Work in progress..........................................10,894 14,267
Prepaid expenses and other...................................3,238 3,686
Deferred income taxes........................................4,330 4,330
Refundable income taxes......................................1,018 97
------- -------
Total current assets.....................162,346 155,055
------- -------
Property, plant and equipment, at cost:
Land and buildings..........................................19,950 19,617
Machinery and equipment....................................106,071 107,615
Office furniture and equipment..............................17,712 17,215
Automobiles....................................................798 789
Leasehold improvements.......................................1,443 1,443
------- -------
145,974 146,679
Less accumulated depreciation and amortization ..........(112,308) (111,792)
------- -------
Net property, plant and equipment.........33,666 34,887
------- -------
Intangible assets:
Goodwill....................................................68,631 68,631
Other intangibles...........................................88,524 88,524
------- -------
157,155 157,155
Less accumulated amortization.............................(99,205) (93,038)
------- -------
Net intangible assets.....................57,950 64,117
Other assets (primarily debt issuance costs)..................6,606 4,873
------- -------
Total assets............................$260,568 $258,932
======== ========
2
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPT. 30, DEC. 31,
1996 1995
----------- --------
(unaudited) (note)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable...........................................$61,040 $71,936
Accrued interests............................................8,701 6,425
Accrued expenses............................................18,609 21,204
Progress billings...........................................53,800 49,209
------- -------
Total current liabilities.....................142,150 148,774
------- -------
Long-term debt..............................................403,131 416,034
Deferred income taxes.........................................3,029 3,029
Minority interests..............................................491 369
Stockholders' deficit:
Common stock of $.01 par value. Authorized 100,000,000
shares; issued 43,394,680 shares at September 30, 1996
and 43,302,500 at December 31, 1995: outstanding 42,683,480
shares at September 30, 1996 and 43,302,500 at
December 31, 1995.............................................434 433
Additional paid-in capital..................................41,110 39,590
Accumulated deficit.......................................(318,229) (349,457)
Foreign currency translations..................................197 160
Treasury stock, at cost
(711,200 shares at September 30, 1996)....................(11,745) 0
-------- --------
Net stockholders' deficit....................(288,233) (309,274)
Total liabilities and
stockholders' deficit $260,568 $ 258,932
======== ========
<FN>
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.
3
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
1996 1995 1996 1995
-------- -------- -------- --------
REVENUES:
Net sales..................$151,467.......$137,082.... $493,580........$448,259
Other...........................368............949........1,439...........2,654
-------- -------- -------- --------
151,835 138,031 495,019 450,913
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of products sold.......107,009........106,564......358,292.........338,146
Selling, general and
Administrative..............15,673.........13,489.......49,164..........43,959
Amortization of intangible
assets.......................2,042..........2,351........6,167...........7,027
Interest......................9,731.........10,160.......29,887..........30,420
Sale of business-Valcheck.........0..............0............0.............950
Minority interests...............17...........(186).........(19)..........(950)
-------- -------- -------- --------
134,472 132,378 443,491 419,552
-------- -------- -------- --------
Earnings before income taxes.17,363..........5,653.......51,528..........31,361
Income taxes...................6,600..........2,325.......20,300..........12,500
-------- -------- -------- --------
Net earnings................$10,763.........$3,328......$31,228.........$18,861
======== ======== ======== ========
Net earnings per common share...$.25...........$.08.........$.72............$.44
====== ====== ====== ======
Shares used in computing
net earnings per share....42,852,044.....43,302,500...43,109,929.....43,301,667
========== ========== ========== ==========
<FN>
See accompanying notes to condensed consolidated financial statements.
4
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
---------------------
SEPT 30, SEPT 30,
1996 1995
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..............................................$31,228......$18,861
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization............................11,090.......14,094
Provision for losses on accounts receivable.................450..........450
Minority interests..........................................122........(950)
(Gain) loss on sale of property, plant and equipment.........200...........29
Deferred income taxes.........................................0............4
Changes in assets and liabilities which
increase (decrease) cash flow:
Accounts receivable...................................(8,321)....(24,824)
Inventories............................................8,259......(3,178)
Prepaid expenses and other...............................448........(686)
Other assets..........................................(1,733).........574
Accounts payable.....................................(10,896)......(8,924)
Accrued expenses and interest...........................(319).......3,270
Income taxes............................................(921)........(424)
Progress billings......................................4,591.......19,803
-------- --------
Total adjustments...................................2,970.........(762)
-------- --------
Net cash provided by operating activities................34,198.......18,099
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.................(3,910)......(5,400)
Contribution to Valcheck by minority shareholder................0..........850
Sale of business operations and assets of Valcheck..............0..........950
Purchase of McIntyre & Dodd (Valassis of Canada)................0.......(6,575)
Proceeds from the sale of property, plant and equipment.......105..........188
Other..........................................................37...........50
-------- --------
Net cash used in investing activities....................(3,768)......(9,937)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt...............................(13,000)...........0
Proceeds from the issuance of common stock..................1,521...........24
Purchase of treasury shares...............................(11,745)...........0
-------- --------
Net cash provided/(used) by financing activities........(23,224)..........24
-------- --------
Net increase in cash.........................................7,206........8,186
Cash at beginning of period.................................34,408.......21,166
-------- --------
Cash at end of period......................................$41,614......$29,352
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest..................$27,611......$28,408
Cash paid during the period for income taxes..............$21,221......$15,303
Dividends declared but unpaid.............................$ 0......$ 0
<FN>
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
realizable 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 $337,000 higher than reported at September 30, 1996, and
$5,175,000 higher than reported at December 31, 1995.
During 1996, inventory quantities were reduced. This reduction
resulted in a liquidation of LIFO inventory quantities carried at
higher costs prevailing in prior years as compared with the cost of
1996 purchases, the effect of which decreased net income by
approximately $575,000 for the quarter ended and the nine months
ended September 30, 1996. During the periods ended September 30,
1995, inventory quantities were reduced. This reduction resulted
in a liquidation of LIFO inventory quantities carried at lower
costs prevailing in prior years, the effect of which increased net
income by approximately $300,000 and $500,000 for the quarter and
the nine-months ended September 30, 1995, respectively.
6
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
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 have
been or will be issued to Mr. Schultz annually in January 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 $19,000 for the quarter ended September 30, 1996,
and $59,000 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 $53,000 in the quarter ended September 30, 1996,
and $159,000 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 September 30, 1996
totaled approximately $8,000, and $58,000 year to date.
7
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
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 September 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 the plan for the quarter
and nine months ended September 30, 1996 was approximately $67,000
and $202,000, 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 nine months
ended September 30, 1996 was approximately $51,000.
8
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 cost. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which statements are made pursuant to the
Securities Litigation Reform Act of 1995, and as such, speak only as of
the date made.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Total revenues were up 10.0% for the quarter ended September 30, 1996
from $138.0 million to $151.8 million as compared to the same period last
year. Total revenue increased principally as a result of improved pricing
of the free-standing insert (FSI), as well as increased FSI market share.
FSI revenue for the quarter ended September 30, 1996 rose 8.4% from
$110.8 million to $120.1 million. In addition, VIP revenue experienced
another strong quarter with an increase of 24.1% in sales from $15.8
million in the third quarter 1995 to $19.6 million in the third quarter
1996. VIP's growth is due to increased activity by several customers,
along with the continued positive demand for VIP's expanded product line.
ROP revenue was up again for the third quarter 1996 to $6.3 million from
$3.3 million in the third quarter 1995. This increase in ROP sales
resulted from several large ROP promotions and increased activity in the
health and beauty aid category.
Gross profit margin increased from 22.8% in the third quarter of 1995 to
29.5% in the third quarter of 1996. This increase is mainly the result of
higher pricing in the core FSI business, combined with decreasing paper
costs.
Selling, general and administrative expenses increased 16.3% to $15.7
million for the three months ended September 30, 1996 from $13.5 million
in the same period of 1995. This increase is due in part to a $1 million
insurance settlement received in 1995 with no comparable settlement
booked in 1996, along with the added expenses attributable to the value
of restricted stock issued under the new restricted stock plans which
were initiated in 1996.
Net earnings rose from $3.3 million for the three months ended September
30, 1995 to $10.8 million for the same three months of 1996. This
increase is attributable to stronger FSI pricing and increased market
share, along with decreases in paper prices during 1996.
9
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
For the nine months ended September 30, 1996, revenues were up 8.7% to
$386.0 million versus $355.0 million in the same nine months of 1995.
This revenue growth was principally attributable to higher FSI pricing.
The Company is on track to achieve its stated objective of publishing
between 1325-1400 national equivalent FSI pages* for the year. This
range is optimal for the mix of printing efficiencies, newspaper media
rates, paper purchasing, and staffing levels. In addition, the Company
reported a 21.9% increase in VIP sales to $61.3 million for the nine
months ended September 30, 1996 compared to $50.3 million for the same
nine months of 1995. VIP's sales growth is due to increased activity by
several customers and continued demand for new product offerings.
Sampling revenue jumped 53.9% from $7.6 million for the first three
quarters of 1995 to $11.7 million for the same three quarters of 1996
as a result of an increased number of sampling programs.
The Company's gross profit margin was up 10.4% to 27.6% for the nine
months ended September 30, 1996 compared with 25.0% for the same period
in 1995 due to higher FSI pricing and favorable paper pricing.
Selling, general and administrative expenses were up 11.8% from $44.0
million to $49.2 million for the first nine months of 1995 and 1996,
respectively. This increase is primarily due to additional selling expenses
in 1996 resulting from increased revenues and an insurance settlement
of $1 million received in the first nine months of 1995. Although
SG&A expenses have increased in total, they have remained relatively
flat as a percentage of total revenue.
As a result of higher FSI revenues and decreasing paper costs, net
income rose 65.6% to $31.2 million for the nine months ended September
30, 1996, as compared to $18.9 million for the same period of 1995.
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents totaled $41.6 million at September 30, 1996,
up $7.2 million from December 31, 1995. Cash flows from financing
activities decreased by $23.2 million, as the Company repurchased $13.0
million of the Company's long-term debt and 711,200 shares ($11.7
million) of the Company's common stock during the first nine months of
1996. In May, 1996, the Board of Directors approved the purchase
of 5,000,000 shares of the Company's common stock for an aggregate
price not to exceed $140 million.
Management believes the Company will generate sufficient funds from
operations and will have sufficient borrowing capacity available to
meet its currently anticipated liquidity requirements. As of November
13, 1996, the Company had a line of credit in the amount of $40 million
available and unused under its revolving credit agreement by and among
the Company, Comerica Bank, Westpac Banking Corporation and The Long-
Term Credit Bank of Japan, Ltd. Chicago Branch.
* A national equivalent FSI page is defined as the equivalent of a full
page ad run across VCI's full market list circulation.
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are included herein:
27 Financial Data Schedule
b. Forms 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 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.
Valassis Communications, Inc.
(Registrant)
DATE: November 13, 1996 /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.
12