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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, 1998
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)
Registrant's Telephone Number: (734) 591-3000
_______________________________________________
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, 1998, there were 38,652,946 shares of the Registrant's
Common Stock outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
June 30, December 31,
1998 1997
-------- --------
(unaudited) (note)
ASSETS
Current assets:
Cash and cash equivalents $15,445 $35,437
Accounts receivable (less allowance for
doubtful accounts of $1,597 at June 30, 1998
and $1,171 at December 31, 1997) 73,283 81,681
Inventories:
Raw materials 15,932 10,975
Work in progress 7,975 15,720
Prepaid expenses and other 6,020 4,536
Deferred income taxes 1,966 1,966
Refundable income taxes --- 772
-------- --------
Total current assets 120,621 151,087
-------- --------
Property, plant and equipment, at cost:
Land and buildings 20,133 20,133
Machinery and equipment 113,951 108,167
Office furniture and equipment 19,176 17,995
Automobiles 977 1,012
Leasehold improvements 1,007 1,022
-------- --------
155,244 148,329
Less accumulated depreciation and amortization (109,725) (108,098)
-------- --------
Net property, plant and equipment 45,519 40,231
-------- --------
Intangible assets:
Goodwill 68,594 68,594
Other intangibles 85,387 83,387
-------- --------
153,981 151,981
Less accumulated amortization (108,758) (104,709)
-------- --------
Net intangible assets 45,223 47,272
-------- --------
Other assets (primarily debt issuance costs) 1,468 2,295
-------- --------
Total assets $212,831 $240,885
======== ========
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VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets, Continued
(dollars in thousands, except share data)
June 30, December 31,
1998 1997
--------- ------------
(unaudited) (note)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion, long-term debt $107,644 $ ---
Accounts payable 62,356 59,226
Accrued interest 4,973 5,098
Income taxes payable 1,484 ---
Accrued expenses 24,564 25,890
Progress billings 30,426 58,239
--------- ---------
Total current liabilities 231,447 148,453
--------- ---------
Long-term debt 254,924 367,075
Deferred income taxes 2,315 2,315
Minority interest 2 9
Stockholders' deficit:
Common stock of $.01 par value. Authorized
100,000,000 shares; issued 45,775,254 at
June 30, 1998 and 44,515,599 at December 31,
1997; outstanding 38,871,354 at June 30, 1998
and 39,515,599 at December 31, 1997 458 445
Additional paid-in capital 104,263 72,399
Accumulated deficit (193,674) (236,625)
Foreign currency translations (310) (146)
Treasury stock, at cost (6,903,900 shares at
June 30, 1998 and 5,000,000 shares at
December 31, 1997) (186,594) (113,040)
--------- ---------
Total stockholders' deficit (275,857) (276,967)
--------- ---------
Total liabilities and stockholders' deficit $212,831 $240,885
========= =========
NOTE: The balance sheet at December 31, 1997 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.
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VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations
(dollar in thousands, except per share data)
(unaudited)
Quarter Ended Six Months Ended
------------------- -------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Net sales $178,406 $164,038 $383,357 $343,135
Other 490 216 1,222 1,078
-------- -------- -------- --------
Total revenues 178,896 164,254 384,579 354,213
-------- -------- -------- --------
Costs and expenses:
Cost of products sold 118,133 106,037 252,035 229,677
Selling, general and
administrative 22,717 24,683 41,170 41,728
Amortization of intangible
assets 2,025 2,015 4,049 4,526
Interest 8,767 9,241 17,774 19,340
-------- -------- -------- --------
Total costs and expenses 151,642 141,976 315,028 295,271
-------- -------- -------- --------
Earnings before income taxes 27,254 22,278 69,551 58,942
Income taxes 10,350 10,534 26,600 24,900
-------- -------- -------- --------
Net earnings $16,904 $11,744 $42,951 $34,042
======== ======== ======== ========
Net earnings per common
share, basic $ .43 $ .29 $ 1.08 $ .82
Net earnings per common
share, diluted $ .43 $ .29 $ 1.07 $ .81
Shares used in computing
net earnings per share 39,176,877 40,985,926 39,642,591 41,456,819
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
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VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
---------------------
June 30, June 30,
1998 1997
-------- --------
Cash flows from operating activities:
Net earnings $42,951 $34,042
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 7,819 7,850
Provision for losses on accounts receivable 450 451
Minority interest (7) 16
Loss (gain) on sale of property, plant and
equipment 1 (207)
Changes in assets and liabilities which
increase(decrease) cash flow:
Accounts receivable 7,948 21,799
Inventories 2,788 139
Prepaid expenses and other (1,484) (1,185)
Other assets 827 2,945
Accounts payable 3,130 304
Accrued expenses and interest (3,451) 7,395
Income taxes 10,601 469
Progress billings (27,813) (24,597)
-------- --------
Total adjustments 809 15,379
-------- --------
Net cash provided by operating activities 43,760 49,421
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (8,660) (10,453)
Return of capital to minority shareholder
of Valcheck --- (500)
Proceeds from the sale of property, plant
and equipment 93 224
Acquisitions (450) ---
Other (164) 172
-------- --------
Net cash used in investing activities (9,181) (10,557)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (4,549) (19,990)
Proceeds from the issuance of common stock 23,532 3,873
Purchase of treasury shares (73,554) (42,815)
-------- --------
Net cash used in financing activities (54,571) (58,932)
-------- --------
Net decrease in cash (19,992) (20,068)
Cash at beginning of period 35,437 60,172
-------- --------
Cash at end of period $15,445 $40,104
======== ========
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VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows, Continued
(in thousands)
(unaudited)
Six Months Ended
---------------------
June 30, June 30,
1998 1997
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $17,899 $19,866
Cash paid during the period for income taxes $15,999 $24,431
See accompanying notes to condensed consolidated financial statements.
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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, 1997.
2. Accounting Change
During the quarter ended March 31, 1998, the Company changed its
method of accounting for inventories from the last-in, first-out
(LIFO) method to the first-in, first-out (FIFO) method. The
Company believes the change is preferable because the FIFO method
better reflects the economic reality of its inventory management
practices and provides a better matching of current costs with
revenues.
The change in method of inventory costing has been applied
retroactively. Due to debit balance LIFO reserves and
corresponding lower-of-cost-or-market reserves, the change had no
effect on the balance sheet at December 31, 1997 or the income
statement for the quarter or six-month period ended June 30, 1997.
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 adopted Statement of Financial Accounting Standards
No. 128 "Earnings per Share," effective for the annual period
ending after December 15, 1997. This standard revised the
calculation of EPS and requires 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.
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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
5. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," beginning January 1,
1998. The effect of this pronouncement is not material to the
Company's financial statements.
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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
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, 1998 and June 30, 1997
- --------------------------------------------------
Total revenues for the quarter ended June 30, 1998 increased 8.9% to
$178.9 million from $164.3 million for the year ago quarter. Total
revenues rose primarily as a result of increased volume, despite the
publication of one less FSI program. Free-standing insert (FSI) revenue
increased 3.8% for the quarter ended June 30, 1998, rising to $135.1
million from $130.2 million for the quarter ended June 30, 1997. FSI
pricing showed a modest improvement, and volume and market share were
both up for the second quarter of 1998. VIP revenue was up 18.8% from
$19.1 million for the second quarter 1997, to $22.7 million for the
same quarter in 1998. Sampling revenue was $11.5 million for the
quarter, versus $5.0 million in the prior year quarter.
Paper costs were up significantly from the year ago period,
contributing to an overall decrease in the gross profit margin to 34.0%
in the quarter ended June 30, 1998, from 35.4% in the same quarter last
year. Due to increased page volume, resulting in a greater average book
size, media and print costs decreased on a unit basis for the second quarter
of 1998 versus the same quarter last year.
Selling, general and administrative expenses decreased to $22.7 million
for the three months ended June 30, 1998, from $24.7 million in the
comparable period of 1997. The three months ended June 30, 1998
included a one-time charge of $6.0 million related to the early
retirement and resulting amendment to the employment contract of the
former CEO, and the three months ended June 30, 1997, included 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
these one-time charges, SG&A would have been $16.7 million in the
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quarter ended June 30, 1998 and $17.4 million in the quarter ended
June 30, 1997. Management expects selling, general and administrative
expenses to remain at similar levels during the remainder of the year.
The effective tax rate for the quarter ended June 30, 1998 was 38%,
compared to 47% in the quarter ended June 30, 1997. The decrease in the
rate was due to a portion of the special one-time charge in 1997,
referred to above, being considered non-deductible in calculating the
necessary tax provision for the prior-year quarter.
Net earnings were $16.9 million, compared to $11.7 million for the same
quarter last year. Net earnings rose primarily as a result of strong
FSI volume, and the after-tax effect of the one-time charges referred
to earlier being greater on the prior year results than on the current
year results.
Six Months Ended June 30, 1998 and June 30, 1997
- ------------------------------------------------
The Company's revenue for the first six months of 1998 was up 8.6% to
$384.6 million, as compared to $354.2 million for the same period in
1997. This increase was fueled by a 7.5% gain in FSI revenue from
$271.6 million in the first six months of 1997, to $292.0 million in
the comparable 1998 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 1998. In addition, stronger VIP
and Sampling sales contributed to the overall increase in revenue. VIP
revenue was up 18.7% to $52.6 million for the first six months of 1998,
as compared to $44.3 million in the same period of 1997. Management
expects continued growth for VIP due to the additional capacity
provided by a new printing press installed in June 1998, as well as the
addition of a large 1998 contract. Sampling revenue rose 100.0% from
$10.8 million for the first six months of 1997, to $21.6 million for
the first six months of 1998. Based on the current level of
prebookings, management expects growth in excess of 50% for this
division in 1998. ROP revenue decreased 60.0% to $5.8 million for the
six months ended June 30, 1998, compared to $14.5 million for the six
months ended June 30, 1997.
Gross margin decreased from 35.2% during the first six months of 1997,
to 34.5% for the same period in 1998, as increased sales were offset by
significant increases in paper costs. Although the Company has
experienced higher paper costs in 1998 versus a year ago, management
believes paper prices have peaked and expects no further increases for the
year. In addition, management expects the cost of paper to decrease in 1999.
Selling, general and administrative expenses were $41.2 million for the
six months ended June 30, 1998, compared with $41.7 million for the
same period last year. The six months ended June 30, 1998 included a
one-time charge of $6.0 million related to the early retirement and
resulting amendment to the employment contract of the former CEO, and
the six months ended June 30, 1997, included 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 these one-time charges, SG&A
would have increased 2.0% for the six months ended June 30, 1998,
versus the year-ago period, due primarily to additional advertising
expenditures in the first half of 1998 versus the same period a year
ago.
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The effective tax rate for the six months ended June 30, 1998 was
38.2%, compared with 42.2% for the six months ended June 30, 1997. The
decrease was due to a portion of the special one-time charge in 1997,
referred to above, being considered non-deductible for the year-ago
quarter.
For the six months, net earnings were $43.0 million, versus $34.0
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 and Sampling sales.
Financial Condition, Liquidity and Sources of Capital
- -----------------------------------------------------
Cash and cash equivalents totaled $15.4 million at June 30, 1998, down
$20.0 million from December 31, 1997. This was the result of cash
provided by operating activities of $43.8 million, and cash used in
investing activities and financing activities of $9.2 million and $54.6
million, respectively.
Cash flow from operating activities decreased from $49.4 million for
the six months ended June 30, 1997 to $43.8 million for the six months
ended June 30, 1998, despite an increase in earnings. This decrease was
mainly due to changes in accounts receivable and progress billings. The
net receivable balance at December 31, 1996 was unusually high, leading
to above average collections during the first half of 1997.
A portion of the Company's debt(which totaled $362.6 million as of June 30,
1998), in the amount of $107.6 million, will be due in March of 1999. The
Company is currently evaluating its options with respect to this debt,
including refinancing or retiring some or all of this debt. The Company also
had the ability as of June 30, 1998 to incur $40.0 million of additional
indebtedness under its existing credit facility.
Management believes the Company will generate sufficient funds from
operations and will have sufficient lines of credit available to meet
currently anticipated liquidity needs, including interest and required
principal payments on indebtedness.
Year 2000 Compliance
- --------------------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the year. Any of the
Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. This
problem could force computers to either shut down or provide incorrect
data or information.
In response to the Year 2000 issue, the Company has created two project
plans; one for program modifications and the second for implementing
new financial software upgrades. The Company estimates the costs
related to the implementation of the program modification plan and the
financial software upgrade plan to be approximately $550,000 and
$350,000, respectively, which will be funded through operating cash
flows. The Company plans for all critical systems to be Year 2000
compliant by the end of 1998.
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In addition, the Company has begun to ask its vendors, service
providers and customers about their progress in identifying and
addressing problems that their computer systems may face in correctly
processing date information related to the Year 2000. It is not
possible to quantify the aggregate cost to the Company with respect to
vendors, service providers and customers with Year 2000 problems,
although the Company does not anticipate it will have a material
adverse impact on its business.
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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 19, 1998.
c. The election of the nominees for directors who will serve for a term to
expire at the next Annual Meeting of Stockhoders or until their respective
successors have been duly elected and qualified was voted on by the stock-
holders. The nominees, all of whom were elected, were: David A. Brandon,
Mark C. Davis, Jon M Huntsman, Jr., Larry L. Johnson, Brian M. Powers,
Robert L. Recchia, Alan F. Schultz and Faith Whittlesey. The Inspector of
Election certified the following vote tabulations with respect thereto:
Director For Withheld Broker Non-Votes
-------------------- ----------- -------------- ----------------
David A. Brandon 33,808,490 334,320 0
Mark C. Davis 33,812,489 330,321 0
Jon M. Huntsman, Jr. 33,851,135 291,675 0
Larry L. Johnson 33,815,680 327,130 0
Brian M. Powers 33,817,528 325,282 0
Robert L. Recchia 33,812,438 330,372 0
Alan F. Schultz 33,850,562 292,248 0
Faith Whittlesey 33,812,168 330,702 0
2. A proposal to approve Amendment Number 4 to the Company's 1992 Long-Term
Incentive Plan to increase the number of shares reserved for issuance thereunder
was approved by the stockholders.
The Inspector of Election certified the following vote tabulations:
For Against Abstain Broker Non-Votes
--------- ----------- ----------- ----------------
31,216,097 2,799,505 47,818 79,390
3. A proposal to ratify the selection of Deloitte & Touch LLP, as auditors
of the Company for the 1998 fiscal year was approved by the stockholders.
The Inspector of Election certified the following vote tabulations:
For Against Abstain Broker Non-Votes
-------- ----------- ----------- ----------------
34,074,637 7,537 60,636 0
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are included herein:
10.5 (d) Amendment to Employment Agreement of David A. Brandon
dated as of June 3, 1998.
(27) Financial Data Schedule
b. Form 8-K
The Company filed a report on Form 8-K, dated June 4, 1998,
announcing that Alan F. Schultz had been named President and CEO,
succeeding David A. Brandon.
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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 7, 1998
Valassis Communications, Inc.
(Registrant)
By: /s/ Robert L. Recchia
-----------------------------
Robert L. Recchia
Executive Vice President -
Chief Financial Officer
Signing on behalf of the
Registrant and as principal
financial officer.
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