UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
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 March 31, 2000
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 May 8, 2000, there were 54,783,316 shares of the Registrant's Common Stock
outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
----------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 7,684 $ 11,089
Accounts receivable (less allowance for doubtful
accounts of $1,468 at March 31, 2000 and $1,386 at
December 31, 1999) 106,011 94,105
Inventories:
Raw materials 14,171 11,729
Work in progress 13,962 17,498
Prepaid expenses and other 5,710 5,969
Deferred income taxes 1,473 1,473
Refundable income taxes --- 448
--------- ---------
Total current assets 149,011 142,311
--------- ---------
Property, plant and equipment, at cost:
Land and buildings 21,590 21,590
Machinery and equipment 122,278 121,956
Office furniture and equipment 23,065 21,909
Automobiles 1,041 1,116
Leasehold improvements 1,122 1,166
--------- ---------
169,096 167,737
Less accumulated depreciation and amortization (116,538) (114,926)
--------- ---------
Net property, plant and equipment 52,558 52,811
--------- ---------
Intangible assets:
Goodwill 72,754 72,754
Other intangibles 85,387 85,387
--------- ---------
158,141 158,141
Less accumulated amortization (118,901) (118,050)
--------- ---------
Net intangible assets 39,240 40,091
--------- ---------
Equity investments and advances to investees 9,130 9,580
Other assets 2,226 2,412
--------- ---------
Total assets $ 252,165 $ 247,205
========= =========
2
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 2000 1999
------------ ------------
(unaudited) (note)
Current liabilities:
Accounts payable $ 66,643 $ 77,683
Accrued interest 2,286 3,645
Accrued expenses 16,640 30,503
Progress billings 54,873 57,733
Income taxes payable 29,252 ---
--------- ---------
Total current liabilities 169,694 169,564
--------- ---------
Long-term debt 268,163 291,354
Deferred income taxes 1,871 1,871
Commitments and contingencies
Stockholders' deficit:
Preferred stock of $.01 par value. Authorized 25,000,000 Shares; no shares
issued or outstanding at March 31, 2000 and December 31, 1999
Common stock of $.01 par value. Authorized 100,000,000 628 627
shares; issued 62,843,113 at March 31, 2000 and 62,715,893
at December 31, 1999; outstanding 55,487,193 at
March 31, 2000 and 56,128,478 at December 31, 1999
Additional paid-in capital 79,903 76,898
Retained earnings (accumulated deficit) 1,675 (51,736)
Foreign currency translations (487) (478)
Treasury stock, at cost (7,355,920 shares at March 31, 2000 and
6,587,415 shares at December 31, 1999) (269,282) (240,895)
--------- ---------
Total stockholders' deficit (187,563) (215,584)
--------- ---------
Total liabilities and stockholders' deficit $ 252,165 $ 247,205
========= =========
NOTE: The balance sheet at December 31, 1999 has been derived from the
audited consolidated 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 INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
QUARTER ENDED
MARCH 31, MARCH 31,
2000 1999
----------- -----------
Revenues:
Net sales $ 212,271 $ 222,009
Other (primarily legal settlement in 2000, see Note 2) 26,766 196
----------- -----------
Total revenues 239,037 222,205
----------- -----------
Costs and expenses:
Cost of products sold 128,838 138,421
Selling, general and administrative 18,274 19,737
Loss on investments 664 466
Amortization of intangible assets 865 1,299
Interest 5,285 7,391
----------- -----------
Total costs and expenses 153,926 167,314
----------- -----------
Earnings before income taxes 85,111 54,891
Income taxes 31,700 21,000
----------- -----------
Net earnings $ 53,411 $ 33,891
=========== ===========
Net earnings per common share, basic $ .96 $ .59
=========== ===========
Net earnings per common share, diluted $ .94 $ .58
=========== ===========
Shares used in computing net earnings per share, basic 55,663,375 57,118,800
=========== ===========
Shares used in computing net earnings per share, diluted 56,677,396 58,244,948
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
VALASSIS COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
QUARTER ENDED
-------------------------
MARCH 31, MARCH 31,
2000 1999
--------- ---------
Cash flows from operating activities:
Net earnings $ 53,411 $ 33,891
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 2,774 3,304
Provision for losses on accounts receivable 83 225
Gain on sale of property, plant and equipment (42) (65)
Stock-based compensation charge 2,520 823
Changes in assets and liabilities which increase (decrease) cash flow:
Accounts receivable (11,989) (7,984)
Inventories 1,094 8,602
Prepaid expenses and other 550 1,013
Other assets 636 (176)
Accounts payable (11,040) 874
Accrued expenses and interest (15,222) (4,331)
Income taxes 29,895 20,440
Progress billings (2,860) (9,149)
--------- ---------
Total adjustments (3,601) 13,576
--------- ---------
Net cash provided by operating activities 49,810 47,467
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,692) (1,864)
Investments and acquisitions --- (1,000)
Proceeds from sale of property, plant and equipment 64 110
Other (9) 16
--------- ---------
Net cash used in investing activities (1,637) (2,738)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt (1,991) (108,380)
Borrowings of long-term debt --- 100,348
Net payments under revolving line of credit (21,200) (13,000)
Repurchase of common stock (29,098) (21,441)
Proceeds from the issuance of common stock 711 375
--------- ---------
Net cash used in financing activities (51,578) (42,098)
---------
---------
Net increase/(decrease) in cash (3,405) 2,631
Cash at beginning of period 11,089 6,939
--------- ---------
Cash at end of period $ 7,684 $ 9,570
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 6,644 $ 6,057
Cash paid during the period for income taxes $ 2,253 $ 560
Non-cash financing activities:
Stock issued under stock-based compensation plan $ 2,811 $ 2,169
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, 1999. Certain amounts for 1999 have been reclassified to conform to
current period classifications.
2. CONTINGENCIES
In February 1999, the Company filed a lawsuit alleging that Arthur
Andersen LLP repudiated a joint venture agreement with the Company relating to
the development of its Customer Relationship Marketing (CRM) product. The
lawsuit also named The News Corporation Limited and News America Incorporated as
defendants.
On February 9, 2000, by stipulation made in open court, followed by
execution of a settlement agreement on February 29, 2000, the Company settled
this litigation in the State of Michigan circuit court for the County of Wayne
and related litigation in the form of a declaratory judgment action that Arthur
Andersen had commenced against the Company in the State of Illinois Chancery
Court for Cook County. The amount paid to the Company by Arthur Andersen LLP
against the exchange of mutual releases and stipulations of dismissal with
prejudice and without costs as to Arthur Andersen LLP and The News Corporation
Limited and News America Incorporated is confidential under the terms of the
stipulated settlement. The proceeds of the settlement are included in other
revenues in the accompanying condensed consolidated statement of income for the
quarter ended March 31, 2000.
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, results of operations or liquidity.
3. SHARE REPURCHASE
The Company recently entered into a forward share repurchase agreement
with a financial institution allowing the Company to acquire approximately 1.7
million shares of its common stock at a price of $29.72 per share, plus
interest. The purchase of 0.7 million shares settled on April 3, 2000. The
purchase of the remaining 1 million shares settle on July 3, 2000 and October 2,
2000 in 0.5 million share increments. The agreement expires on October 2, 2000.
6
4. SEGMENT REPORTING
The Company has two reportable segments, cooperative free-standing
inserts (FSIs) and Valassis Impact Promotions (VIP). FSIs are four-color
booklets containing promotions from multiple advertisers distributed through
Sunday newspapers. VIP offers its customers individualized specialty print
promotion products in customized formats. These reportable segments are
strategic business units that offer different products and services. They are
managed separately because each business requires different marketing strategies
and caters to a different customer base.
Assets are not allocated to reportable segments and are not used to assess the
performance of a segment. Intersegment sales are accounted for at cost.
(IN MILLIONS) THREE MONTHS ENDED MARCH 31
----------------------------------------------------------------
FSI VIP ALL OTHERS* TOTAL
---------- --------- -------------- ----------
2000
Revenues from external customers $ 164.2 $ 34.1 $ 14.0 $ 212.3
Intersegment revenues --- --- --- ---
Depreciation/amortization 2.3 0.5 --- 2.8
Segment profit 51.3 4.5 2.6 58.4
1999
Revenues from external customers $ 167.7 $ 34.0 $ 20.3 $ 222.0
Intersegment revenues 2.2 --- --- 2.2
Depreciation/amortization 2.8 0.5 --- 3.3
Segment profit 50.9 3.1 0.7 54.7
* Segments below the quantitative thresholds are primarily attributable to two
divisions of the Company. Those divisions are Targeted Marketing Services
which includes a product sampling and advertising business, a run-of-press
business, and a promotion security service, and Valassis of Canada, a sales
promotion business in Canada. None of these segments has met any of the
quantitative thresholds for determining reportable segments.
Reconciliations to consolidated financial statement totals are as follows:
2000 1999
---------- ----------
Profit for reportable segments $ 55.8 $ 54.0
Profit for other segments 2.6 0.7
Unallocated amounts:
Interest income 0.2 0.2
Other income 26.5 ---
---------- ----------
Earnings before taxes $ 85.1 $ 54.9
========== ==========
Domestic and foreign revenues for each of the three-month periods ended March 31
were as follows:
2000 1999
---------- ----------
United States $ 237.6 $ 216.4
Canada 1.4 5.8
---------- ----------
Total $239.0 $ 222.2
========== ==========
7
5. Earnings Per Share
Earnings per common share ("EPS") data were computed as follows:
THREE MONTHS
ENDED MARCH 31,
-----------------------
2000 1999
-------- --------
(in thousands except for
per share amounts)
Net Earnings $ 53,411 $ 33,891
======== ========
Basic EPS:
Weighted average common shares outstanding 55,663 57,119
======== ========
Earnings per common share - basic $ 0.96 $ 0.59
======== ========
Diluted EPS:
Weighted average common shares outstanding 55,663 57,119
Weighted average shares purchased on exercise of dilutive options 3,903 4,364
Shares purchased with proceeds of options (2,908) (3,267)
Shares contingently issuable 19 29
-------- --------
Shares applicable to diluted earnings 56,677 58,245
======== ========
Earnings per common share - diluted $ 0.94 $ 0.58
======== ========
8
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 war; new technology that would make free-standing inserts less
attractive; a shift in customer preference for different promotional materials,
promotional strategies or coupon delivery methods, including in-store
advertising systems and other forms of coupon delivery; an increase in the
Company's paper costs; or general business and economic conditions. The Company
disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS
Net sales decreased 2.3% from $217.3 million for the first quarter of 1999
(after deducting $4.8 million to reflect the Company's Canadian direct
merchandising division, which was discontinued in the fourth quarter of 1999) to
$212.3 million for the first quarter of 2000. Free-standing insert (FSI)
revenues were down from $167.7 million for the quarter ended March 31, 1999 to
$164.2 million for the same quarter of 2000. This decrease is primarily the
result of a shift in spending from March to April as a result of the late Easter
Holiday. Valassis Impact Promotions (VIP) revenues were flat at $34.1 million
compared to $34.8 million in the prior-year period, in which VIP posted record
sales. Other revenues increased from $0.2 million for the first quarter of 1999
to $26.8 million for the first quarter of 2000, primarily as a result of the
settlement of a lawsuit.
Gross profit margin was 46.1% in the first quarter of 2000, up from 37.7% in the
first quarter of 1999. Excluding the impact of a lawsuit settlement in the first
quarter of 2000, gross margin would have increased 4.5% to 39.4%. This was
primarily the result of a slight decline in the Company's paper and printing
costs on a per unit basis. Although the Company received a paper price increase
in the fourth quarter of 1999, management expects flat paper costs in 2000.
Valassis has long-term contracts for 75% of its paper requirements, which
includes pricing collars that stabilize the Company's paper costs. Media costs
(newspaper insertion fees) were flat for the quarter, while printing costs
continued to decline.
Selling, general and administrative expenses decreased 7.1% from $19.7 million
in the first quarter of 1999 to $18.3 million in the first quarter of 2000. This
decrease is primarily the result of cost-containment initiatives observed during
the first quarter of 2000 in response to the softness in revenues, as well as
reduced bad debt expense versus the year-ago quarter.
Net earnings were $53.4 million for the first quarter of 2000 versus $33.9
million for the same period last year. Excluding the impact of the settlement of
a lawsuit in the first quarter of 2000, net earnings would have increased 8.3%
to $36.7 million. This increase is primarily the result of cost reductions.
9
FINANCIAL CONDITION, LIQUIDITY AND SOURCES OF CAPITAL
The Company's liquidity requirements arise mainly from its working capital
needs, primarily accounts receivable, inventory and debt service requirements.
The Company does not offer financing to its customers. FSI customers are billed
for 75% of each order eight weeks in advance of the publication date and are
billed for the balance immediately prior to the publication date. The Company
inventories its work in progress at cost while it accrues progress billings as a
current liability at full sales value. Although the Company receives
considerable payments from its customers prior to publication of promotions,
revenue is recognized only upon publication dates. Therefore, the progress
billings on the balance sheet include any profits in the related receivables and
accordingly, the Company can operate with low, or even negative, working
capital.
Cash and cash equivalents totaled $7.7 million at March 31, 2000 versus $11.1
million at December 31, 1999. This was the result of cash provided by operating
activities of $49.8 million, and cash used in investing activities and financing
activities of $1.6 million and $51.6 million, respectively, in the first quarter
of 2000.
Cash flow from operating activities increased from $47.5 million at March 31,
1999 to $49.8 million at March 31, 2000, primarily as a result of increased
earnings.
As of March 31, 2000, the Company's debt has been reduced to $268.2 million,
which consists of $152.7 million under its Revolving Credit Facility, $100
million of its 6-5/8% Senior Notes due 2009 and $15.5 million of its 9.55%
Senior Notes due 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 to repurchase stock through the Company's
stock repurchase program. The Company intends to use proceeds of the settlement
paid by Arthur Andersen to accelerate the development of the Customer
Relationship Marketing initiative.
As of March 31, 2000, the Company had authorization to repurchase an additional
4.5 million shares of its common stock under its existing share repurchase
program, which includes the 1.7 million share repurchase agreement discussed in
Note 3 to the condensed consolidated financial statements.
Management believes that 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 payments of
indebtedness.
CAPITAL EXPENDITURES - The Company operates three printing facilities. Capital
expenditures were $1.7 million for the three month period ended March 31, 2000.
Management expects future capital expenditure requirements of approximately $15
million over each of the next three to five years to meet increased capacity
needs and to replace or rebuild equipment as required. It is expected that
equipment will be purchased using funds provided by operations.
10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are included herein:
(10) Forward Share Purchase Agreement dated February 22, 2000
(10.1) Valassis Communications, Inc. Broad-Based Incentive Plan dated
March 14, 2000
(27) Financial Data Schedule
b. Form 8-K
The Company did not file any current report on Form 8-K during the three
months ended March 31, 2000.
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: May 12, 2000
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