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 March 31, 1999
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 5, 1999, there were 57,059,600 shares of the Registrant's Common Stock
outstanding, after giving effect to the 3 for 2 stock split issued on May 12,
1999 to shareholders of record on April 16, 1999.
Part I - Financial Information
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
March 31, December 31,
Assets 1999 1998
--------------- --------------
(unaudited)
Current assets:
Cash and cash equivalents $9,570 $6,939
Accounts receivable (less allowance for doubtful
accounts of $1,980 at March 31, 1999 and $1,354 at
December 31, 1998) 103,189 95,430
Inventories:
Raw materials 10,849 11,817
Work in progress 12,417 20,051
Prepaid expenses and other 6,150 5,817
Deferred income taxes 1,790 1,790
Refundable income taxes --- 1,215
------------- -------------
Total current assets 143,965 143,059
-------------- -------------
Property, plant and equipment, at cost:
Land and buildings 21,756 21,456
Machinery and equipment 115,124 114,912
Office furniture and equipment 20,906 20,143
Automobiles 956 1,025
Leasehold improvements 1,048 1,022
-------------- --------------
159,790 158,558
Less accumulated depreciation and amortization (113,618) (112,200)
-------------- --------------
Net property, plant and equipment 46,172 46,358
-------------- --------------
Intangible assets:
Goodwill 68,594 68,594
Other intangibles 85,387 85,387
-------------- ---------------
153,981 153,981
Less accumulated amortization (114,106) (112,806)
--------------- ---------------
Net intangible assets 39,875 41,175
---------------- ---------------
Other assets (primarily debt issuance costs) 2,598 1,422
---------------- ---------------
Total assets $232,610 $232,014
================ ================
2
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets, Continued
(dollars in thousands, except per share data)
March 31, December 31,
Liabilities and Stockholders' Deficit 1999 1998
---------------- ------------------
(unaudited) (note)
Current liabilities:
Accounts payable $69,938 $69,064
Accrued interest 5,876 4,542
Accrued expenses 20,680 26,345
Income paxes payable 19,225 ---
Progress billings 49,466 58,615
---------------- ------------------
Total current liabilities 165,185 158,566
---------------- ------------------
Long-term debt 319,429 340,461
Deferred income taxes 1,511 1,511
Commitments and contingencies
Stockholders' deficit:
Common stock of $.01 par value. Authorized 100,000,000 627 629
shares; issued 62,732,604 at March 31, 1999 and 62,854,360
at December 31, 1998; outstanding 57,048,266 at
March 31, 1999 and 57,589,322 at December 31, 1998
Additional paid-in capital 71,962 69,416
Accumulated deficit (132,046) (165,937)
Foreign currency translations (283) (298)
Treasury stock, at cost (5,684,338 shares at March 31, 1999 and
5,265,038 shares at December 31, 1998) (193,775) (172,334)
---------------- ------------------
Total stockholders' deficit (253,515) (268,524)
---------------- ------------------
Total liabilities and stockholders' deficit $232,610 $232,014
================ ==================
NOTE: The balance sheet at December 31, 1998 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 per share data)
(unaudited)
Quarter Ended
March 31, March 31,
1999 1998
---------------- -----------------
Revenues:
Net sales $221,906 $204,951
Other 299 732
---------------- -----------------
Total revenues 222,205 205,683
---------------- -----------------
Costs and expenses:
Cost of products sold 138,421 133,902
Selling, general and administrative 20,203 18,453
Amortization of intangible assets 1,299 2,024
Interest 7,391 9,007
---------------- -----------------
Total costs and expenses 167,314 163,386
---------------- -----------------
Earnings before income taxes 54,891 42,297
Income taxes 21,000 16,250
---------------- -----------------
Net earnings $33,891 $26,047
================ =================
Net earnings per common share, basic $ .59 $ .43
================ =================
Net earnings per common share, diluted $ .58 $ .43
================ =================
Shares used in computing net earnings per share, basic 57,118,800 60,170,219
================ =================
Shares used in computing net earnings per share, diluted 58,244,948 60,834,840
================ =================
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,
1999 1998
----------------- ------------------
Cash flows from operating activities:
Net earnings $33,891 $26,047
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 3,304 3,939
Provision for losses on accounts receivable 225 225
Minority interest --- (3)
(Gain)/loss on sale of property, plant and equipment (65) 6
Stock-based compensation charge 823 1,551
Changes in assets and liabilities which increase (decrease) cash flow:
Accounts receivable (7,984) (18,573)
Inventories 8,602 2,337
Prepaid expenses and other 1,013 (3,494)
Other assets (176) 105
Accounts payable 874 17,375
Accrued expenses and interest (4,331) (7,896)
Income taxes 20,440 14,915
Progress billings (9,149) (14,961)
----------------- ------------------
Total adjustments 13,576 (4,474)
----------------- ------------------
Net cash provided by operating activities 47,467 21,573
----------------- ------------------
Cash flows from investing activities:
Additions to property, plant and equipment (1,864) (5,770)
Investment in Merge L.L.C. (1,000) ---
Proceeds from sale of property, plant and equipment 110 ---
Other 16 (121)
----------------- ------------------
Net cash used in investing activities (2,738) (5,891)
----------------- ------------------
Cash flows from financing activities:
Repayment of long-term debt (108,380) (4,184)
Proceeds from the issuance of common stock 375 19,750
Borrowings of long-term debt 100,348 ---
Net borrowings (payments) under revolving line of credit (13,000) ---
Repurchase of common stock (21,441) (56,166)
----------------- ------------------
Net cash used in financing activities (42,098) (40,600)
----------------- ------------------
Net increase/(decrease) in cash 2,631 (24,918)
Cash at beginning of period 6,939 35,437
----------------- ------------------
Cash at end of period $ 9,570 $10,519
================= ==================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 6,057 $ 5,559
Cash paid during the period for income taxes $ 560 $ 1,335
Non-cash financing activities:
Stock issued under stock-based compensation plan $ 2,169 $ 2,338
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, 1998. Certain amounts for 1998 have been reclassified to conform to
current period classifications.
2. Contingencies
On February 24, 1999, the Company commenced litigation against The
News Corporation Limited ("News Corp") and News America Incorporated ("News
America") in the State of Michigan Circuit Court for the County of Wayne. The
Complaint seeks $150 million in compenstory damages, $300 million in punitive
damages and injunctive relief based on allegations of tortious interference
with prospective contractual relations and aiding and abetting a breach of
fiduciary duty. The principal factual allegation is that Arthur Andersen LLP
("Arthur Andersen"), with the inducement of News Corp and News America,
repudiated a joint venture agreement with the Company relating to the
development of a new product. On April 7, 1999, Arthur Andersen rejected
alternative dispute resolution and filed a declaratory judgment action in the
Chancery Division of the Cook County, Illinois Circuit Court. This action asks
the Illinois Court to make a determination as to whether the Company and Arthur
Andersen had a contract. The Company has filed a motion to dismiss this Illinois
action.
On April 12, 1999, the Company amended its lawsuit against News Corp
and News America to add Arthur Andersen as a defendant. News Corp and News
America filed a motion to dismiss the case against News Corp and News America
for lack of jurisdiction. On May 7, 1999, the Court found that Michigan
jurisdiction was proper and denied their motion. The time for defendants to
answer or move with respect to the Complaint has not yet expired.
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. Supplemental Benefit Plan
The Company established a Supplemental Benefit Plan (the "Plan") in
1998. The Plan covers management employees who are designated by the Company's
Compensation/Stock Option Committee. Participating employees earn credited
service for each year of continuous service with the Company. The annual amount
of supplemental benefit is calculated by multiplying a participant's years of
credited service by one and one-half percent of the participant's average annual
base pay while employed by the Company 36 months immediately preceding
retirement or other termination of employment. The amount of supplemental
benefit provided by the Plan is payable semi-annually for a period of ten years,
commencing upon retirement, death or other termination of employment.
Supplemental benefits are provided on a non-contributing basis. Expense
associated with the cost of future benefits under the Plan for the quarter ended
March 31, 1999 totaled approximately $148,000.
4. Subsequent Event
On April 1, 1999, the Board of Directors approved a three-for-two
split of the Company's Common Stock, effected in the form of a 50% stock
dividend, issued May 12, 1999, to stockholders of record as of April 16, 1999.
Accordingly, all common share and per common share data have been restated to
reflect this stock split. The stock split was accomplished through the issuance
of 16,481,134 new shares and the use of 2,536,462 shares of Treasury Stock.
6
5. 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
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
1998
----
Revenues from external customers $156.8 $29.9 $18.3 $205.0
Intersegment revenues 1.8 --- --- 1.8
Depreciation/amortization 3.6 0.3 --- 3.9
Segment profit 38.5 2.3 0.8 41.6
* Segments below the quantitative thresholds are primarily attributable to four
segments of the Company. Those segments include a product sampling business, a
sales promotion company in Canada, a run-of-press business, and a promotion
security service. None of these segments has met any of the quantitative
thresholds for determining reportable segments.
Reconciliations to consolidated financial statement totals are as follows:
Three Months Ended March 31,
---------------------------------
1999 1998
--------------- --------------
Profit for reportable segments $54.0 $40.8
Profit for other segments 0.7 0.8
Unallocated amounts:
Interest income 0.2 0.7
--------------- --------------
Earnings before taxes $54.9 $42.3
--------------- --------------
Domestic and foreign revenues for each of the three-month periods ended March 31
were as follows:
1999 1998
------- --------
United States $216.4 $200.2
Canada 5.8 5.5
------- --------
Total $222.2 $205.7
======= ========
7
6. Earnings Per Share
Earnings per common share ("EPS") data were computed as follows:
Three Months
Ended March 31,
-----------------------------
1999 1998
------------- ------------
(in thousands except for
per share amounts)
Net Earnings $33,891 $26,047
============= ============
Basic EPS:
Weighted average common shares outstanding 57,119 60,170
============= ============
Earnings per common share - basic $ 0.59 $ 0.43
============= ============
Diluted EPS:
Weighted average common shares outstanding 57,119 60,170
Weighted average shares purchased on exercise of dilutive options 4,364 2,616
Shares purchased with proceeds of options (3,267) (1,962)
Shares contingently issuable 29 11
------------- ------------
Shares applicable to diluted earnings 58,245 60,835
============= ============
Earnings per common share - diluted $ 0.58 $ 0.43
============= ============
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; the inability of material third parties upon
which the Company relies to be Year 2000 compliant in a timely manner; 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
Total revenues increased 8.0% from $205.7 million for the first quarter of 1998
to $222.2 million for the first quarter of 1999. Free-standing insert (FSI)
revenues were up 7.0% from $156.8 million for the quarter ended March 31, 1998
to $167.7 million for the same quarter of 1999. This increase is the result of
continued industry page growth and moderate price increases, despite one less
FSI publishing date during the first quarter of 1999 than in 1998. Retail
Services revenues, which include Valassis Impact Promotions (VIP) and the newly-
developed Customer Attainment and Retention System (CARS), were up 16% to $34.8
million compared to $29.9 million in the prior-year period. This increase is a
result of continued strong demand from VIP's traditional customer base of food
service companies.
Gross profit margin was 37.7% in the first quarter of 1999, up from 34.9% in the
first quarter of 1998. This was primarily the result of the continued decline
in the Company's three major cost components, paper, media and printing on a per
unit basis. The Company recently negotiated multi-year contracts with several
major suppliers of coated groundwood paper designed to stabilize paper costs.
The contracts, which stipulate pricing collars preventing the price of paper
from going up or down more than 6-10% in any 12-month period, represent over 75%
of the Company's paper requirements.
Selling, general and administrative expenses increased from $18.5 million in the
first quarter of 1998 to $20.2 million in the first quarter of 1999. This is
primarily the result of higher incentive plan costs as a result of stronger
sales and profits in the first quarter of 1999 as compared to the same period in
1998, as well as costs associated with new business development.
As a result of the Company's recently completed multi-phased debt-restructuring
plan, interest expense was down for the quarter ended March 31, 1999. The debt-
restructuring plan included the addition of a $160 million unsecured bank
facility, a ratings upgrade by both Moody's and S&P, the repurchase of $125.1
million of the Company's senior notes due 2003, and the issuance of $100 million
in senior notes due 2009.
9
Net earnings were $33.9 million for the first quarter of 1999 versus $26.0
million for the same period last year. These improved results were primarily
the result of strong FSI sales.
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 $9.6 million at March 31, 1999 versus $10.5
million at March 31, 1998. This was the result of cash provided by operating
activities of $47.5 million, and cash used in investing activities and financing
activities of $2.7 million and $42.1 million, respectively, in the first quarter
of 1999.
Cash flow from operating activities increased from $21.6 million at March 31,
1998 to $47.5 million at March 31, 1999 as a result of increased earnings and
other positive working capital changes.
During the first quarter of 1999, the Company retired $107 million in debt due
March 1999 using amounts borrowed under its $160 million Revolving Credit
Facility and $17 million of existing cash. As of March 31, 1999 the Company's
debt has been reduced to $319 million, which consists of $90 million under its
Revolving Credit Facility, $100 million of its 6-5/8% Senior Notes due 2009 and
$129 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. As of March 31, 1999, the Company had authorization to
repurchase an additional 1.8 million shares of its common stock under its
existing share repurchase program.
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 $1.9 million for the three month period ended March 31, 1999.
Management expects future capital expenditure requirements of approximately $10
million to $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
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable 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 generate erroneous data or information.
In response to the Year 2000 issue, the Company has implemented a multi-faceted
project plan, which covers both IT and non-IT systems. This plan encompasses
three areas: (1) program modifications; (2) implementing new financial software
upgrades; and (3) testing readiness of vendors and customers. Phases associated
with the project plan are: identification and ranking of components of the
Company's systems and equipment and those of its suppliers that may be
vulnerable to Year 2000 problems; assessment of those components; remediation or
replacement of non-compliant systems and components; testing of systems and
components following remediation; and the development of contingency plans.
With regard to program modification and implementing new software upgrades, the
Company has completed its plan and has all critical systems Year 2000 compliant.
With regard to readiness of vendors and customers, the Company is currently in
the assessment phase and will have testing plans completed by June 30, 1999.
The Company's plans include the development of a full contingency plan. The
Company believes that by June 30, 1999, it will be able to fully determine its
most likely worst case scenarios and will have its contingency plans in place.
Potential sources of risk include the inability of suppliers (principally paper
suppliers) to be Year 2000 compliant in a timely manner, which could result in
delays in product deliveries from such suppliers, the disruption of the
distribution of the Company's products to the consumer, and disruption of the
Company's own production facilities as a result of general failure of necessary
infrastructure such as electricity supply.
The Company estimates the total costs related to the implementation of the
program modification plan and the financial software upgrade plan to be
approximately $400,000 and $300,000, respectively, which will be funded through
operating cash flows and expensed as incurred. To date, expenses have totaled
approximately $300,000 for program modifications and $30,000 for financial
software upgrades. It is not possible to quantify the aggregate cost to the
Company with respect to vendors, service providers and customers who fail to
become Year 2000 compliant. This is a Year 2000 Readiness Disclosure Statement
within the meaning of the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271).
11
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are included herein:
(3)(ii) By-Laws
(27) Financial Data Schedule
b. Form 8-K
The Company filed a report on Form 8-K, dated January 12, 1999, announcing
the completion of a debt-restructuring plan.
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: May 14, 1999
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