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, 1997
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)
19975 VICTOR PARKWAY
LIVONIA, MICHIGAN 48152
(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, 1997, there were 40,166,000 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)
June 30, December 31,
ASSETS 1997 1996
_________ ___________
(unaudited) (note)
Current assets:
Cash and cash equivalents $ 40,104 $ 60,172
Accounts receivable (less allowance for doubtful
accounts of $1,188 at June 30, 1997 and $684 at
December 31, 1996) 70,495 92,745
Inventories:
Raw materials 14,177 6,091
Work in progress 6,509 14,734
Prepaid expenses and other 3,116 1,931
Deferred income taxes 2,088 2,088
_________ _________
Total current assets 136,489 177,761
_________ _________
Property, plant and equipment, at cost:
Land and buildings 20,436 19,991
Machinery and equipment 110,082 108,800
Office furniture and equipment 18,589 17,782
Automobiles 984 887
Leasehold improvements 6,745 1,458
_________ _________
156,836 148,918
Less accumulated depreciation and amortization (114,816) (114,100)
_________ _________
Net property, plant and equipment 42,020 34,818
_________ _________
Intangible assets:
Goodwill 67,964 68,594
Other intangibles 83,706 83,706
_________ _________
151,670 152,300
Less accumulated amortization (100,340) (96,396)
_________ _________
Net intangible assets 51,330 55,904
_________ _________
Other assets (primarily debt issuance costs) 2,306 5,251
_________ _________
Total assets $232,145 $273,734
========== ========
2
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 1997 1996
__________ ____________
(unaudited) (note)
Current liabilities:
Accounts payable $ 67,555 $ 67,251
Accrued interest 5,540 6,066
Income taxes payable 1,593 1,124
Accrued expenses 30,356 22,435
Progress billings 32,637 57,234
Current portion, long-term debt --- 7,290
_________ __________
Total current liabilities 137,681 161,400
_________ __________
Long-term debt 383,207 395,865
Deferred income taxes 2,565 2,565
Minority interest 14 498
Stockholders' deficit:
Common stock of $.01 par value. Authorized 100,000,000
shares; issued 43,633,299 at June 30, 1997 and
43,407,906 at December 31, 1996; outstanding
40,250,099 at June 30, 1997 and 42,077,196
at December 31, 1996 436 434
Additional paid-in capital 45,208 41,337
Accumulated deficit (272,513) (306,555)
Foreign currency translations (88) (260)
Treasury stock, at cost (3,383,200 shares at June 30,
1997 and 1,330,800 shares at December 31, 1996) (64,365) (21,550)
__________ _________
Total stockholders' deficit (291,322) (286,594)
__________ _________
Total liabilities and stockholders' deficit $ 232,145 $ 273,734
========== =========
<FN>
NOTE: The balance sheet at December 31, 1996 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 SIX MONTHS ENDED
___________________ ____________________
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
-------- --------- -------- ----------
REVENUES:
Net sales $164,038 $162,117 $353,135 $342,113
Other 216 534 1,078 1,071
________ _________ ________ ________
164,254 162,651 354,213 343,184
________ _________ ________ _________
COST AND EXPENSES:
Cost of products sold 106,037 116,994 229,677 251,284
Selling, general and administrative 24,677 16,994 41,712 33,490
Amortization of intangible assets 2,015 2,058 4,526 4,125
Interest 9,241 9,892 19,340 20,155
Minority interest 6 7 16 (36)
________ ________ ________ ________
Earnings before income taxes 22,278 16,706 58,942 34,166
________ ________ ________ ________
Income taxes 10,534 6,700 24,900 13,700
________ ________ ________ ________
Net earnings $ 11,744 $ 10,006 $ 34,042 $ 20,466
======== ======== ======= ========
Net earnings per common share $ .29 $ .23 $ .82 $ .47
======== ======== ======== =========
Shares used in computing net
earnings per share 40,985,926 43,166,929 41,456,819 43,238,751
========== ========== ========== ==========
<FN>
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,
1997 1996
_________ _________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 34,042 $ 20,466
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 7,850 7,638
Provision for losses on accounts receivable 451 300
Minority interest 16 105
(Gain)/loss on sale of property, plant and equipment (207) 208
Changes in assets and liabilities which increase
(decrease) cash flow:
Accounts receivable 21,799 (7,124)
Inventories 139 3,312
Prepaid expenses and other (1,185) (329)
Other assets 2,945 (357)
Accounts payable 304 354
Accrued expenses and interest 7,395 (3,147)
Income taxes 469 (472)
Progress billings (24,597) (15,327)
________ ________
Total adjustments 15,379 (14,839)
________ ________
Net cash provided by operating activities 49,421 5,627
________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (10,453) (2,976)
Return of capital to minority shareholder of Valcheck (500) ----
Proceeds from the sale of property, plant and equipment 224 86
Other 172 36
__________ _________
Net cash used in investing activities (10,557) (2,854)
__________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (19,990) (13,000)
Proceeds from the issuance of common stock 3,873 805
Purchase of treasury shares (42,815) (6,550)
________ _________
Net cash used in financing activities (58,932) (18,745)
________ _________
Net decrease in cash (20,068) (15,972)
Cash at beginning of period 60,172 34,408
________ _________
Cash at end of period $40,104 $18,436
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $19,866 $20,514
Cash paid during the period for income taxes $24,431 $14,172
Dividends declared but unpaid $ --- $ ---
<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, except as
noted below in footnote 5. 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, 1996.
2. 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. As a result of decreases in material costs compared to
prior years, LIFO inventories at June 30, 1997 and December 31, 1996
were written down by $2,951,000 and $1,701,000, respectively, which
represents the excess of LIFO costs over market. There was no LIFO
impact on results of operations for the quarter and six months ended
June 30, 1997, and the effect on the quarter and six months ended June
30, 1996 was to reduce paper expense by $2,775,000 and $2,905,000,
respectively.
3. 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.
4. EARNINGS PER SHARE
The Company will be required to adopt Statement of Financial Accounting
Standards No. 128-Earnings per Share effective for the annual period
ending after December 15, 1997. This standard revises the calculation
of EPS and will require the Company to report diluted EPS in addition
to basic EPS. Basic EPS is based on the average shares outstanding
while diluted EPS gives effect to all dilutive potential common shares
outstanding. Under SFAS No. 128, the Company's basic and diluted EPS
amounts would have been $.29 and $.28, respectively, for the three
months ended June 30, 1997, and $.82 and $.81, respectively, for the six
months ended June 30, 1997. Both the Company's basic and diluted EPS
amounts for the three months and six months ended June 30, 1996 would have
been identical to the EPS amounts presented in its consolidated statements of
operations.
5. UNUSUAL ITEMS
During the quarter ended June 30, 1997 the Company recorded a one-time,
pre-tax charge of $7.3 million ($6.4 million, net of taxes) for a
non-recurring, special payment to certain VCI executives, funded by
Consolidated Press Holdings, the selling shareholder of the Company's
secondary offering. A portion of this charge is considered non-deductible,
resulting in a tax rate for the quarter that is higher than would normally be
expected.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain statements under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations", constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks
and uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following: a new competitor in the Company's core free-standing insert
business and consequent price competition; an increase in the Company's paper
costs, new technology that would make free-standing inserts less attractive;
a shift in customer preference for different promotional materials,
promotional strategies or coupon delivery modes, including in-store
advertising systems and other forms of coupon delivery; or general business
and economic conditions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Total revenues for the quarter ended June 30, 1997 increased 1.0% to $164.3
million from $162.7 million for the year ago quarter. Total revenues rose as
a result of increased volume due to the publication of one additional FSI
program and slightly higher pricing in the core FSI product. Free-standing
insert (FSI) revenue increased nearly 8% for the quarter ended June 30, 1997,
rising to $130.2 million from $120.7 million for the quarter ended June 30,
1996. FSI pricing showed a modest improvement, and volume and market share
were both up for the second quarter of 1997. After a strong first quarter,
VIP revenue was down 17% from $23.1 million for the second quarter 1996 to
$19.1 million for the same quarter in 1997, due to the variable timing of
orders. ROP revenue was $3.8 million for the quarter, versus $7.6 million in
the prior year quarter. The decrease in ROP revenue was due to several large
ROP promotions in the health and beauty aid category in the second quarter of
last year, which were not present for the quarter ended June 30, 1997.
Paper costs were down significantly from the year ago period, resulting in an
overall increase in the gross profit margin to 35.4% in the quarter ended
June 30, 1997, from 28.1% in the same quarter last year. Management
anticipates small increases in paper prices during the second half of 1997.
Print and media costs were relatively flat on a unit basis.
Selling, general and administrative expenses increased to $24.7 million for
the three months ended June 30, 1997, from $17.0 million in the comparable
period of 1996. The three months ended June 30, 1997, includes a one-time
charge of $7.3 million, for a non-recurring special payment to certain VCI
executives, funded by Consolidated Press Holdings (CPH), the selling
shareholder of the Company's secondary offering. Without this one-time
charge, SG&A would have been $17.4 million in the quarter ended June 30,
1997, a 2.4% increase from the year-ago quarter. Management expects selling,
general and administrative expenses to remain at these levels, excluding this
one-time charge, during the remainder of the year.
The effective tax rate for the quarter ended June 30, 1997 was 47% compared
to 40% in the quarter ended June 30, 1996. The increase in the rate was due
to a portion of the special one-time charge referred to above being
considered non-deductible.
7
Net earnings were $11.7 million, compared to $10.0 million for the same
quarter last year. Net earnings rose primarily as a result of strong FSI
volume and favorable paper prices.
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
The Company's revenue for the first six months of 1997 was up 3.2% to $354.2
million, as compared to $343.2 million for the same period in 1996. This
increase was fueled by an 2.1% gain in FSI revenue from $265.9 million in the
first six months of 1996, to $271.6 million in the comparable 1997 period.
FSI revenue rose as a result of higher volume due, in part, to improved
market share and slightly improved pricing during the first six months of
1997. In addition, stronger VIP, ROP and Sampling sales all contributed to
the overall increase in revenue. VIP revenue was up 6.2% to $44.3 million for
the first six months of 1997, as compared to $41.7 million in the same period
of 1996. 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 6.5% from $10.1 million for the first six months of
1996, to $10.8 million for the first six months of 1997. Demand for the
Newspac and Newspouch sampling products remain strong. ROP revenue increased
27.2% to $14.5 million for the six months ended June 30, 1997, compared to
$11.4 million for the six months ended June 30, 1996, due to continued demand
particularly in the health and beauty category.
Gross margin increased 31.3% from 26.8% during the first six months of 1996,
to 35.2% for the same period of 1997, as increased sales were coupled with
significant declines in paper costs. Although the Company has experienced
lower paper costs in 1997 versus a year ago, paper prices have increased
slightly in the first half of 1997. Management expects a further, small paper
price increase in 1997.
Selling, general and administrative expenses rose $41.7 million for the six
months ended June 30, 1997, compared with $33.5 million for the same period
last year. The six months ended June 30, 1997, includes a one-time charge of
$7.3 million, for a non-recurring special payment to certain VCI executives,
funded by Consolidated Press Holdings (CPH), the selling shareholder of the
Company's secondary offering. Without this one-time charge, SG&A would have
increased 3% for the six months ended June 30, 1997.
The effective tax rate for the six months ended June 30, 1997 was 42%
compared with 40% for the six months ended June 30, 1996. The increase was
due to a portion of the special one-time charge referred to above being
considered non-deductible.
For the six months, net earnings were $34.0 million, versus $20.5 million for
the same six months last year. The increase in net earnings is attributable
to increased volume and pricing in the FSI business, combined with the
increased volume of VIP, ROP and Sampling sales, as well as significantly
lower paper costs.
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents totaled $40.1 million at June 30, 1997, down $20.1
million from December 31, 1996. The Company repurchased 2,052,400 shares of
common stock and $13.0 million of the Company's long-term debt during the six
months ended June 30, 1997.
Cash flow from operating activities increased from $5.6 million for the six
months ended June 30, 1996 to $49.4 million for the six months ended June 30,
1997. This increase was mainly due to increased earnings and other positive
working capital changes.
8
The Company had the ability as of June 30, 1997 to incur $40.0 million of
additional indebtedness under its existing credit facility.
The Company has scheduled principal payments on indebtedness of $128.5
million on March 15, 1999 and $255.0 million on December 1, 2003. The Company
intends to use cash generated by operations to meet interest and principal
repayment obligations, for general corporate purposes, to reduce its
indebtedness and from time to time repurchase stock through the Company's
stock repurchase program.
On May 30, 1997, Valcheck Company (a partnership owned 80% indirectly by the
Company and 20% by a third party) exercised a put option for $5.00 per share
in connection with 500,000 shares of common stock of Artistic Greetings, Inc.
it received as partial consideration for its sale of its check business in
1995. Accordingly, it received $2.5 million on June 30, 1997, 20% of which
has been paid to the third party investor.
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.
10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a. The Company held its Annual Meeting of Shareholders on May 20, 1997.
The following matters were voted upon at the Annual Meeting of
Shareholders:
Item 4b.
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 thereto, were:
DIRECTOR FOR WITHHELD BROKER NON VOTES
David A. Brandon 40,039,944 129,130 0
Graham A. Cubbin* 40,039,944 129,485 0
Mark C. Davis 40,046,044 123,030 0
Jon M. Huntsman, Jr. 40,046,444 123,630 0
James D. Packer* 40,046,644 122,430 0
Brian M. Powers 39,269,089 899,985 0
Robert L. Recchia 40,046,651 122,423 0
Alan A. Schultz 40,046,144 122,930 0
Faith Whittlesey 40,045,171 123,903 0
2. A proposal to ratify the re-appointment of Ernst & Young, LLP, Detroit,
Michigan, as auditors of the Company for the 1997 fiscal year was approved by
the stockholders.
The Inspector of Election certified the following vote:
FOR AGAINST ABSTAIN BROKER NON VOTES
40,150,784 7,901 10,389 0
[FN]
* On July 3, 1997, Graham A. Cubbin and James D. Packer (both of whom were
affiliated with Conpress International (Netherlands Antilles) N.V., the
Company's former majority stockholder) resigned from the Company's Board of
Directors.
11
Item 5. Other Information
On July 8, 1997, the Company's former majority stockholder, Conpress
International (Netherlands Antilles) N.V. (the "Selling Stockholder"), sold
its entire stock ownership (20,173,800 shares of common stock, par value $.01
per share) in the Company at $24 per share through an underwritten offering
(the "Offering"). The Company did not receive any of the proceeds from the
Offering.
In connection with the Offering, Graham A. Cubbin and James D. Packer (both
affiliated with the Selling Stockholder) have resigned from the Company's
Board of Directors. In addition, David A. Brandon was appointed Chairman of
the Board of Directors replacing Brian M. Powers, the Company's former
Chairman. Mr. Powers remains a member of the Company's Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are included herein:
(10.18) Form of Registration Rights Agreement between the Company and
Conpress International (Netherlands Antilles) N.V. (incorporated by
reference to Exhibit 10.18 to the Company's Registration Statement on Form
S-3 No. 333-28685).
(10.19) Assignment of Stock Option Agreement dated June 5, 1997 among
Conpress Cayman, LDC., Consolidated Press International Limited, Compress
International (Netherlands Antilles) N.V. and the Company (incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement No. 333-
28685).
(10.25)(d) Waiver to Revolving Credit Agreement dated June 23, 1997
(incorporated by reference to Exhibit 10.25(d) to the Company's Registration
Statement on Form S-3 No. 333-28685).
(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, 1997.
12
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 11, 1997
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
13