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 September 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 October 31, 1997, there were 39,606,793 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,
ASSETS 1997 1996
- ------ ---------- -------
(unaudited) (note)
Current assets:
Cash and cash equivalents $ 51,142 $ 60,172
Accounts receivable (less allowance for doubtful
accounts of $1,367 at September 30, 1997 and $684 at
December 31, 1996) 89,563 92,745
Inventories:
Raw materials 11,626 6,091
Work in progress 13,636 14,734
Prepaid expenses and other 2,019 1,931
Deferred income taxes 2,088 2,088
------- -------
Total current assets 170,074 177,761
------- -------
Property, plant and equipment, at cost:
Land and buildings 20,460 19,991
Machinery and equipment 110,289 108,800
Office furniture and equipment 21,289 17,782
Automobiles 1,043 887
Leasehold improvements 1,007 1,458
------- -------
154,088 148,918
Less accumulated depreciation and amortization (113,009) (114,100)
-------- --------
Net property, plant and equipment 41,079 34,818
------- -------
Intangible assets:
Goodwill 67,964 68,594
Other intangibles 83,706 83,706
------ ------
151,670 152,300
Less accumulated amortization (102,370) (96,396)
------- -------
Net intangible assets 49,300 55,904
------- -------
Other assets (primarily debt issuance costs) 2,462 5,251
------- -------
Total assets $262,915 $273,734
======= =======
2
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPT. 30, DEC. 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 1997 1996
--------- --------
(unaudited) (note)
Current liabilities:
Accounts payable $ 67,407 $ 67,251
Accrued interest 8,725 6,066
Income taxes payable 2,375 1,124
Accrued expenses 22,250 22,435
Progress billings 52,514 57,234
Current portion, long-term debt --- 7,290
------- --------
Total current liabilities 153,271 161,400
------- -------
Long-term debt 383,229 395,865
Deferred income taxes 2,565 2,565
Minority interest (37) 498
Stockholders' deficit:
Common stock of $.01 par value. Authorized 100,000,000
shares; issued 44,393,351 at September 30, 1997 and
43,407,906 at December 31, 1996; outstanding
40,244,051 at September 30, 1997 and 42,077,196 at
December 31, 1996 444 434
Additional paid-in capital 65,239 41,337
Accumulated deficit (254,700) (306,555)
Foreign currency translations (88) (260)
Treasury stock, at cost (4,149,300 shares at
September 30, 1997 and 1,330,800 shares at
December 31, 1996) (87,008) (21,550)
-------- -------
Total stockholders' deficit (276,113) (286,594)
------- -------
Total liabilities and stockholders' deficit $262,915 $ 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 NINE MONTHS ENDED
------------------- --------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1997 1996
--------- -------- -------- ---------
REVENUES:
Net sales $152,619 $151,467 $505,755 $493,580
Other 894 368 1,971 1,439
------- ------- ------- -------
153,513 151,835 507,726 495,019
COST AND EXPENSES:
Cost of products sold 97,861 107,009 327,538 358,292
Selling, general and administrative 17,307 15,690 59,035 49,145
Amortization of intangible assets 2,031 2,042 6,557 6,167
Interest 9,401 9,731 28,741 29,887
------- ------- ------- -------
126,600 134,472 421,871 443,491
------- ------- ------- -------
Earnings before income taxes 26,913 17,363 85,855 51,528
Income taxes 9,100 6,600 34,000 20,300
------- ------- ------- -------
Net earnings $ 17,813 $ 10,763 $ 51,855 $ 31,228
======= ======= ======= =======
Net earnings per common share $ .44 $ .25 $ 1.26 $ .72
======= ======= ======= =======
Shares used in computing net earnings
per share
40,231,768 42,852,044 41,043,981 43,109,929
========== ========== ========== ==========
<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,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 51,855 $ 31,228
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 11,585 11,090
Provision for losses on accounts receivable 675 450
Minority interest (35) 122
(Gain)/loss on sale of property, plant and equipment (385) 200
Changes in assets and liabilities which increase
(decrease) cash flow:
Accounts receivable 2,507 (8,321)
Inventories (4,437) 8,259
Prepaid expenses and other (88) 448
Other assets 2,789 (1,733)
Accounts payable 156 (10,896)
Accrued expenses and interest 2,474 (319)
Income taxes 1,251 (921)
Progress billings (4,720) 4,591
Total adjustments 11,772 2,970
------ ------
Net cash provided by operating activities 63,627 34,198
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (11,655) (3,910)
Return of capital to minority shareholder of Valcheck (500) ---
Proceeds from the sale of property, plant and equipment 862 105
Other 172 37
------- ------
Net cash used in investing activities (11,121) (3,768)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (19,990) (13,000)
Proceeds from the issuance of common stock 23,912 1,521
Purchase of treasury shares (65,458) (11,745)
-------- --------
Net cash used in financing activities (61,536) (23,224)
------- -------
Net (decrease)/increase in cash (9,030) 7,206
Cash at beginning of period 60,172 34,408
-------
Cash at end of period $ 51,142 $ 41,614
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $26,082 $27,611
Cash paid during the period for income taxes $32,749 $21,221
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
September 30, 1997 and December 31, 1996 were written down by
$1,752,000 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 nine months ended
September 30, 1997, and the effect on both the quarter and nine
months ended September 30, 1996 was an increase in paper expense of
approximately $575,000.
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 $.44
and $.43, respectively, for the three months ended September 30,
1997, and $1.26 and $1.25, respectively, for the nine months ended
September 30, 1997. Both the Company's basic and diluted EPS
amounts for the three months and nine months ended September 30,
1996 would have been identical to the EPS amounts presented in its
consolidated statements of operations.
6
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 parent of the selling
shareholder in the Company's secondary offering. A portion of this
charge is considered non-deductible, resulting in a tax rate for
the second quarter and year of 1997 that is higher than would
normally be expected.
7
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 SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
Total revenues rose slightly for the quarter ended September 30, 1997 to
$153.5 million from $151.8 million for the year ago quarter. Free-
standing insert (FSI) revenue fell 2.8% from $120.1 million for the three
months ended September 30, 1996 to $116.7 million for the quarter ended
September 30, 1997. This decline was attributable to a softness in the
FSI industry during the quarter. Based on contracted business, management
expects page volume to rebound in the fourth quarter of 1997. Valassis
Impact Promotions (VIP) revenue continued to climb with an 11.7% increase
from $19.6 million for the third quarter 1996 to $21.9 million for the
third quarter of 1997. This increase occurred as a result of strong
demand from VIP's core customer base, which more than offset the loss of
several large one-time event orders which were placed in 1996. Sampling
revenues were up 93.8% to $3.1 million for the three months ended
September 30, 1997, primarily due to the variable timing of orders. Thus,
sales will not necessarily track from one quarter to the next.
Gross profit margin, up 23.1% to 36.3%, was favorably impacted by lower
paper costs in the quarter ended September 30, 1997, as compared to the
year-ago quarter, and, to a lesser extent, media purchasing and printing
efficiencies. Paper costs were higher than last quarter, and management
anticipates a modest paper price increase during the last quarter of
1997.
Selling, general and administrative expenses increased 10.2% to $17.3
million for the quarter ended September 30, 1997 from $15.7 million in
the comparable year-ago period. This increase was primarily the result of
additional expenses for various incentive programs, due to the increased
level of earnings, and to an increased emphasis on advertising.
Management expects selling, general and administrative expenses to remain
at these levels for the remainder of the year.
The effective tax rate for the quarter ended September 30, 1997 was
unusually low at 33.8%, as the result of credits due to foreign losses.
Net earnings increased 64.8% from $10.8 million for the three months
ended September 30, 1996, to $17.8 million for the same period of 1997.
This increase is primarily due to lower paper pricing during 1997,
combined with increased activity in diversified businesses.
8
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
For the nine months ended September 30, 1997, total revenues increased
2.6% to $507.7 million from $495.0 million for the comparable period in
1996. This increase was a result of a .6% rise in FSI revenue from $386.0
million in the first nine months of 1996, to $388.2 million for the first
nine months of 1997, along with an 8% increase in VIP sales. Continued
strong demand from VIP's core customer base drove up sales to $66.2
million for the first nine months of 1997, compared to $61.3 million for
the same period in 1996. Management expects a solid year for VIP and
accelerated growth in 1998. In addition, Valassis Sampling revenue rose
18.8% for the nine months ended September 30, 1997 to $13.9 million,
compared to $11.7 million for the nine months ended September 30, 1996.
Management expects continued growth for this business. Run-of-Press sales
also contributed to the overall increase in total revenues. ROP sales
were up 18.6% from $17.7 million for the first nine months of 1996, to
$21.0 million for the comparable period in 1997. ROP sales for 1997
benefited from strong demand in the health and beauty category.
Increased sales, along with favorable paper pricing, resulted in a 28.6%
increase in gross profit margin from 27.6% for the first nine months of
1996, to 35.5% for the same period in 1997. Although lower paper pricing
has favorably impacted the 1997 gross margin, management expects modest
paper price increases during the remainder of 1997.
Selling, general and administrative expenses rose 19.9% to $59.0 million,
versus $49.2 million for the comparable prior year period. The nine
months ended September 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 parent of the selling
shareholder in the Company's secondary offering. SG&A would have
increased 5.3% for the nine months ended September 30, 1997 without this
one-time charge. Increases in current year SG&A expenses are attributable
to higher incentive plan costs, as a result of stronger sales and profits
in 1997 as compared to 1996.
The effective tax rate was 39.6% for the nine months ended September 30,
1997, compared with 39.4% for the same period in 1996. The effective tax
rate increase is the result of a portion of the special one-time charge,
referred to above, which is non-deductible, nearly offset by credits due
to foreign losses.
Net earnings for the first nine months of 1997 were up 66.3% to $51.9
million versus $31.2 million for the same nine month period last year.
This earnings improvement is the result of higher volumes in VIP, ROP and
Sampling sales, along with increased pricing in the FSI business and
lower paper pricing.
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents totaled $51.1 million at September 30, 1997,
down $9.0 million from December 31, 1996. Cash outflows from financing
activities increased $38.3 million, as the Company repurchased 2,818,500
shares for $65.5 million and retired $20.0 million of the Company's long-
term debt, while generating $23.9 million from the issuance of common
stock through employees' stock option plans.
Cash flow from operating activities increased $29.4 million for the nine
months ended September 30, 1997 to $63.6 million, as a result of
increased earnings and other positive working capital changes.
9
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. which it received as partial consideration for its sale
of its check business in 1995. Accordingly, Valcheck 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 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:
10.4(i)Credit Agreement dated September 11, 1997
(27) Financial Data Schedule
b. Forms 8-K
The Company filed a Form 8-K, dated September 30, 1997, reporting a
change in auditors.
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: November 12, 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.
12