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, 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 November 11, 1999, there were 56,248,131 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)
September 30, December 31,
Assets 1999 1998
- ------ --------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 7,699 $ 6,939
Accounts receivable (less allowance for doubtful
accounts of $2,081 at September 30, 1999 and
$1,354 at December 31, 1998) 106,535 95,430
Inventories:
Raw materials 9,416 11,817
Work in progress 16,298 20,051
Prepaid expenses and other 5,389 5,817
Deferred income taxes 1,790 1,790
Refundable income taxes -- 1,215
--------- ---------
Total current assets 147,127 143,059
--------- ---------
Property, plant and equipment, at cost:
Land and buildings 21,693 21,456
Machinery and equipment 116,418 114,912
Office furniture and equipment 22,340 20,143
Automobiles 976 1,025
Leasehold improvements 1,135 1,022
--------- ---------
162,562 158,558
Less accumulated depreciation and amortization (116,302) (112,200)
--------- ---------
Net property, plant and equipment 46,260 46,358
--------- ---------
Intangible assets:
Goodwill 68,594 68,594
Other intangibles 85,387 85,387
--------- ---------
153,981 153,981
Less accumulated amortization (116,707) (112,806)
--------- ---------
Net intangible assets 37,274 41,175
--------- ---------
Other assets 7,066 1,422
--------- ---------
Total assets $ 237,727 $ 232,014
========= =========
2
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets, Continued
(dollars in thousands, except per share data)
September 30, December 31,
Liabilities and Stockholders' Deficit 1999 1998
- ------------------------------------- ------------- ------------
(unaudited) (note)
Current liabilities:
Accounts payable $ 65,607 $ 69,064
Accrued interest 5,655 4,542
Accrued expenses 25,793 26,345
Income taxes payable 1,423 ---
Progress billings 61,093 58,615
--------- ---------
Total current liabilities 159,571 158,566
--------- ---------
Long-term debt 303,951 340,461
Deferred income taxes 1,511 1,511
Commitments and contingencies
Stockholders' deficit:
Preferred stock of $.01 par value. Authorized 25,000,000
shares; no shares issued or outstanding at September 30,
1999 and December 31, 1998.
Common stock of $.01 par value. Authorized 100,000,000
shares; issued 62,715,191 at September 30, 1999 and
62,854,360 at December 31, 1998; outstanding 56,403,096 at
September 30, 1999 and 57,589,322 at December 31, 1998 627 629
Additional paid-in capital 75,764 69,416
Accumulated deficit (77,588) (165,937)
Foreign currency translations (359) (298)
Treasury stock, at cost (6,312,095 shares at September 30,
1999 and 5,265,038 shares at December 31, 1998) (225,750) (172,334)
--------- ---------
Total stockholders' deficit (227,306) (268,524)
--------- ---------
Total liabilities and stockholders' deficit $ 237,727 $ 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 Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues:
Net sales $ 177,247 $ 166,467 $ 594,305 $ 549,824
Other 238 636 384 1,858
----------- ----------- ----------- -----------
Total revenues 177,485 167,103 594,689 551,682
----------- ----------- ----------- -----------
Costs and expenses:
Cost of products sold 108,233 107,377 368,999 359,412
Selling, general and administrative 19,677 16,799 58,743 57,969
Amortization of intangible assets 1,299 2,024 3,899 6,073
Interest 6,361 8,758 20,139 26,532
----------- ----------- ----------- -----------
Total costs and expenses 135,570 134,958 451,780 449,986
----------- ----------- ----------- -----------
Earnings before income taxes 41,915 32,145 142,909 101,696
Income taxes 15,860 12,275 54,460 38,875
----------- ----------- ----------- -----------
Net earnings before extraordinary items 26,055 19,870 88,449 62,821
Extraordinary loss, net of tax (100) --- (100) ---
----------- ----------- ----------- -----------
Net Earnings $ 25,955 $ 19,870 $ 88,349 $ 62,821
=========== =========== =========== ===========
Net earnings per common share before
extraordinary loss, basic $ .46 $ .34 $ 1.56 $ 1.07
=========== =========== =========== ===========
Net earnings per common share before
extraordinary loss, diluted $ .45 $ .34 $ 1.52 $ 1.06
=========== =========== =========== ===========
Net earnings per common share, basic $ .46 $ .34 $ 1.56 $ 1.07
=========== =========== =========== ===========
Net earnings per common share, diluted $ .45 $ .34 $ 1.52 $ 1.06
=========== =========== =========== ===========
Shares used in computing net earnings per
share, basic 56,417,692 57,795,488 56,797,976 58,901,642
=========== =========== =========== ===========
Shares used in computing net earnings per
share, diluted 58,013,140 58,259,070 58,166,281 59,454,404
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
Nine Months Ended
-----------------------------------------
Sept. 30, Sept. 30,
1999 1998
----------------- ------------------
Cash flows from operating activities:
Net earnings $ 88,349 $ 62,821
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 10,105 11,822
Provision for losses on accounts receivable 1,606 675
Minority interest -- 7
(Gain)/loss on sale of property, plant and equipment (108) 1
Stock-based compensation charge 1,730 3,378
Changes in assets and liabilities which increase (decrease) cash flow:
Accounts receivable (12,711) (12,801)
Inventories 6,154 (2,309)
Prepaid expenses and other 1,266 (4,132)
Other assets (1,394) 887
Accounts payable (3,457) 5,133
Accrued expenses and interest 561 (266)
Income taxes 6,446 (130)
Progress billings 2,478 (802)
---------- --------
Total adjustments 12,676 1,463
---------- --------
Net cash provided by operating activities 101,025 64,284
---------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (6,174) (10,454)
Investments and acquisitions (4,250) (450)
Proceeds from sale of property, plant and equipment 176 97
Other (91) (145)
---------- --------
Net cash used in investing activities (10,339) (10,952)
---------- --------
Cash flows from financing activities:
Repayment of long-term debt (110,368) (4,549)
Borrowings of long-term debt 100,358 ---
Net payments under revolving line of credit (26,500) ---
Proceeds from the issuance of common stock 10,345 30,898
Purchase of treasury shares (63,761) (95,526)
---------- --------
Net cash used in financing activities (89,926) (69,177)
---------- --------
Net increase/(decrease) in cash 760 (15,845)
Cash at beginning of period 6,939 35,437
---------- --------
Cash at end of period $ 7,699 $ 19,592
========== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 19,026 $ 23,086
Cash paid during the period for income taxes $ 51,822 $ 30,213
Non-cash financing activities:
Stock issued under stock-based compensation plan $ 2,568 $ 3,819
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
"Court"). The Complaint seeks $150 million in compensatory 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. On
May 10, 1999, the Company filed a motion to dismiss this Illinois action which
was denied on July 12, 1999. The Company moved for reconsideration of this
decision. The Illinois Court denied the reconsideration motion. On August 18,
1999, the Company filed its answer and counterclaims in the Illinois action.
On April 12, 1999, the Company amended its lawsuit against News Corp. and
News America to add Arthur Andersen as a defendant. The Company asserts claims
of breach of contract and breach of fiduciary duty against Arthur Andersen.
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. News Corp. and
News America sought leave to appeal the Court's finding that jurisdiction
exists. The application for leave to appeal was denied by the Michigan Court of
Appeals on August 30, 1999. On May 21, 1999, Arthur Andersen filed a motion to
dismiss the breach of fiduciary duty claim. The Court denied that motion on
September 24, 1999. The Court found that the Company sufficiently pled a breach
of fiduciary duty claim. News Corp. and News America moved to dismiss the
Company's claim for punitive damages on June 30, 1999. On September 17, 1999,
the Court concluded that punitive damages were not recoverable under Michigan
law and dismissed the punitive damages claim. On October
6
21, 1999, News Corp. and News America moved to dismiss all claims against them.
The Company's opposition to that motion is expected to be filed on November 15,
1999.
At a hearing held on October 29, 1999, the Court ordered that discovery be
completed in this case by December 22, 1999. The trial is scheduled to begin on
March 20, 2000. At the hearing, Arthur Andersen informed the Court that it would
stay the Illinois action pending the resolution of the litigation before the
Court. The Company and Arthur Andersen have agreed to sign a stipulation to that
effect.
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. Stock Split
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 of Treasury Stock.
4. Stockholders' Equity
On September 1, 1999, the Board of Directors adopted a Stockholder Rights
Agreement (the "Agreement"). Under the Agreement, the Board declared a dividend
of one Preferred Stock Purchase Right ("Right") for each outstanding share of
the Company's common stock. The dividend is payable on September 27, 1999 to the
shareholders of record on September 15, 1999. The Rights are attached to and
automatically trade with the outstanding shares of the Company's common stock.
The Rights will become exercisable only in the event that any person or
group of persons not approved by the Board of Directors acquires 15% or more of
the Company's common stock or commences a tender offer for 15% or more of the
Company's common stock. Once the Rights become exercisable they entitle the
shareholder to purchase one one-hundredth of one share of a new series of
preferred stock at an exercise price of $170. The Rights expire on September 1,
2009. The Company is entitled to redeem the Rights at $.01 per Right at any
time, prior to the expiration of the Rights, before a person or group acquires
15% or more of the Company's common stock.
5. Related Party Transactions
The Company owns 50% of Save.com. The Company has a note receivable from
Save.com due July 2002. The note bears interest at 10% annually. At September
30, 1999, the balance of the note receivable was $1.1 million. The investment
in Save.com and the note receivable are included in other assets in the
accompanying consolidated balance sheet.
7
6. 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 September 30
- ------------- ---------------------------------------------------------
FSI VIP All Others* Total
---------- ---------- --------------- ----------
1999
----
Revenues from external customers $132.7 $25.2 $19.6 $177.5
Intersegment revenues 1.3 -- 3.1 4.4
Depreciation/amortization 2.8 0.5 -- 3.3
Segment profit 31.1 6.1 4.7 41.9
1998
----
Revenues from external customers $135.8 $21.0 $ 9.8 $166.6
Intersegment revenues 0.8 -- 0.5 1.3
Depreciation/amortization 3.6 0.3 0.1 4.0
Segment profit 31.7 -- (0.1) 31.6
*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 Sept. 30,
------------------------------
(in millions) 1999 1998
- ------------- ----- -----
Profit for reportable segments $37.2 $31.7
Profit for other segments 4.7 (0.1)
Unallocated amounts:
Interest income -- 0.5
----- -----
Earnings before taxes $41.9 $32.1
----- -----
Domestic and foreign revenues for each of the three-month periods ended
September 30 were as follows:
(in millions) 1999 1998
- ------------- ------ ------
United States $174.3 $164.1
Canada 3.2 3.0
------ ------
Total $177.5 $167.1
====== ======
8
(in millions) Nine Months Ended September 30
- ------------- ------------------------------------------------------------
FSI VIP All Others* Total
----------- ---------- --------------- ----------
1999
----
Revenues from external customers $446.1 $86.7 $61.8 $594.6
Intersegment revenues 3.8 -- 5.4 9.2
Depreciation/amortization 8.5 1.5 0.1 10.1
Segment profit 122.0 11.0 9.8 142.8
1998
----
Revenues from external customers $427.8 $73.6 $49.0 $550.4
Intersegment revenues 3.1 -- 0.6 3.7
Depreciation/amortization 10.6 1.0 0.2 11.8
Segment profit 93.5 2.6 4.3 100.4
*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:
Nine Months Ended Sept. 30,
----------------------------
(in millions) 1999 1998
- ------------- ------ ------
Profit for reportable segments $133.0 $ 96.1
Profit for other segments 9.8 4.3
Unallocated amounts:
Interest income 0.1 1.3
------ ------
Earnings before taxes $142.9 $101.7
------ ------
Domestic and foreign revenues for each of the nine-month periods ended September
30 were as follows:
(in millions) 1999 1998
- ------------- ------ ------
United States $580.9 $538.3
Canada 13.8 13.4
------ ------
Total $594.7 $551.7
====== ======
9
7. Earnings Per Share
Earnings per common share ("EPS") data were computed as follows:
Three Months
Ended Sept. 30,
----------------------------
1999 1998
------------ ------------
(in thousands except for
per share amounts)
Net Earnings $25,955 $19,870
======= =======
Basic EPS:
Weighted average common shares outstanding 56,418 57,795
======= =======
Earnings per common share - basic
Before extraordinary item $ .46 $ .34
Extraordinary item -- --
------- -------
Total $ .46 $ .34
======= =======
Diluted EPS:
Weighted average common shares outstanding 56,418 57,795
Weighted average shares purchased on exercise of dilutive options 6,196 4,861
Shares purchased with proceeds of options (4,630) (4,408)
Shares contingently issuable 29 11
------ ------
Shares applicable to diluted earnings 58,013 58,259
======= =======
Earnings per common share - diluted
Before extraordinary item $ .45 $ .34
Extraordinary item -- --
------- -------
Total $ .45 $ .34
======= =======
10
Nine Months
Ended Sept. 30,
----------------------------
1999 1998
------------ ------------
(in thousands except for
per share amounts)
Net Earnings $88,349 $62,821
======= =======
Basic EPS:
Weighted average common shares outstanding 56,798 58,902
======= =======
Earnings per common share - basic
Before extraordinary item $ 1.56 $ 1.07
Extraordinary item -- --
------- -------
Total $ 1.56 $ 1.07
======= =======
Diluted EPS:
Weighted average common shares outstanding 56,798 58,902
Weighted average shares purchased on exercise of dilutive options 6,295 6,046
Shares purchased with proceeds of options (4,956) (5,505)
Shares contingently issuable 29 11
------- -------
Shares applicable to diluted earnings 58,166 59,454
======= =======
Earnings per common share - diluted
Before extraordinary item $ 1.52 $ 1.06
Extraordinary item -- --
------- -------
Total $ 1.52 $ 1.06
======= =======
11
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
Three Months Ended September 30, 1999 and September 30, 1998
Total revenues rose 6.2% for the quarter ended September 30, 1999 to $177.5
million from $167.1 million for the year-ago quarter. Free-standing insert (FSI)
revenue decreased 2.3% from $135.8 million for the three months ended September
30, 1998 to $132.7 million for the quarter ended September 30, 1999. This slight
decrease was primarily attributable to one less publishing date during the
quarter resulting in lower market share, offset by FSI industry page growth and
slight price increases during the quarter. Valassis Impact Promotions (VIP)
revenue was up 20.0% to $25.2 million for the third quarter of 1999 compared to
$21.0 million for the year-ago period. This increase was due to heightened
demand from traditional customers, as well as new business opportunities.
Targeted Marketing Services revenue, which includes the Company's Sampling and
advertising products, its Run-of-Press promotions, and its security consulting
business increased 142.4%. Sampling and advertising revenues increased 312.5% to
$9.9 million for the three months ended September 30, 1999. This increase was
the result of an increased demand from a more diverse customer base and more
even staging of business throughout the year. ROP revenue was up 48.6% to $5.2
million for the three months ended September 30, 1999 versus the year-ago
period.
The gross profit margin was impacted by continued favorable trends in the
Company's three major cost components, paper, media and printing. This led to an
increase in gross profit margin to 39.0%, from 35.7% in the year-ago quarter.
Selling, general and administrative expenses increased to $19.7 million for the
quarter ended September 30, 1999, compared to $16.8 million for the quarter
ended September 30, 1998. This increase is primarily the result of higher
incentive plan costs as a result of stronger sales and profits in the third
quarter of 1999, as compared to the same period in 1998.
Net earnings increased 30.7% from $19.9 million for the three months ended
September 30, 1998, to $26.0 million for the same period of 1999. This increase
is primarily due to the strong quarter experienced by the VIP and Targeted
Marketing Services divisions.
12
Nine Months Ended September 30, 1999 and September 30, 1998
For the nine months ended September 30, 1999, total revenues increased 7.8% to
$594.7 million from $551.7 million for the comparable period in 1998, primarily
as a result of a 4.3% rise in FSI revenue from $427.8 million in the first nine
months of 1998, to $446.1 million for the first nine months of 1999. The FSI
increase is attributable to overall industry page growth and moderate price
increases. In addition, VIP experienced a 17.8% increase in sales during the
nine-month period ended September 30, 1999. The VIP division is on track to meet
its stated goal of 15% annual revenue growth. Targeted Marketing Services
revenue rose 32.9% for the nine months ended September 30, 1999 to $46.5
million, compared to $35.0 million for the nine months ended September 30, 1998.
Management expects growth in excess of 30% for this division in 1999.
Gross margin increased from 34.9% for the first nine months of 1998, to 38.0%
for the same period in 1999, due primarily to decreases in paper costs. In March
1999, the Company signed long-term contracts for 75% of its paper requirements,
which include pricing collars that help stabilize the Company's paper cost.
Selling, general and administrative expenses remained relatively flat at $58.7
million, versus $58.0 million for the comparable prior-year period. The
Company's results for the nine months ended September 30, 1998 include a one-
time charge of $6.0 million related to the early retirement of the Company's
former CEO. SG&A would have increased 13% for the nine months ended September
30, 1999, versus the prior year period, without this one-time charge. This
increase is primarily the result of higher incentive plan costs as a result of
stronger sales and profits for the first nine months of 1999, as compared to the
same period in 1998.
The effective tax rate was 38.1% for the nine months ended September 30, 1999,
compared with 38.2% for the same period in 1998. The effective tax rate decrease
is the result of a portion of the special one-time charge in the nine months
ended September 30, 1998, referred to above, being non-deductible.
Net earnings for the first nine months of 1999 were up 40.6% to $88.3 million,
versus $62.8 million for the same nine-month period last year. This earnings
improvement is primarily the result of higher volumes and improved margins in
the FSI business, combined with the improved performance of the VIP and Targeted
Marketing Services divisions.
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.
13
Cash and cash equivalents totaled $7.7 million at September 30, 1999, versus
$6.9 million at December 31, 1998. This was the result of cash provided by
operating activities of $101.0 million, and cash used in investing activities
and financing activities of $10.3 million and $89.9 million, respectively, in
the first nine months of 1999.
Cash flow from operating activities increased from $64.3 million for the nine
months ended at September 30, 1998 to $101.0 million at September 30, 1999, as a
result of increased earnings and other positive working capital changes.
During the nine months ended September 30, 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 September 30,
1999 the Company's debt has been reduced to $304 million, which consists of $76
million under its Revolving Credit Facility, $100 million of its 6-5/8% Senior
Notes due 2009 and $128 million of its 9.55% Senior Notes due 2003. During the
quarter, the Company retired, at a premium, $2 million of its 9.55% Senior Notes
due 2003. Accordingly, the Company recorded an extraordinary loss of $100,000,
net of an income tax benefit of $60,000, related to the early retirement of
debt.
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 September 30, 1999, the Company had
authorization to repurchase an additional 600,000 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 $6.2 million for the nine-month period ended September 30,
1999. Management expects future capital expenditure requirements of
approximately $10 million to $15 million annually 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.
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.
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With regard to program modification and implementing new software upgrades, the
Company has completed its plan and believes that all critical systems are Year
2000 compliant. The Company has assessed Year 2000 compliance of customers and
vendors through a survey method.
The Company's plans include the development of a full contingency plan. The
Company completed two planned tests of the contingency plan in June and July.
Further vendor contingencies will be determined as testing with vendors and
customers is completed. 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 $400,000 for program modifications and $28,000 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).
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Part II - Other Information
Item 1. Legal Proceedings
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
"Court"). The Complaint seeks $150 million in compensatory 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. On
May 10, 1999, the Company filed a motion to dismiss this Illinois action which
was denied on July 12, 1999. The Company moved for reconsideration of this
decision. The Illinois Court denied the reconsideration motion. On August 18,
1999, the Company filed its answer and counterclaims in the Illinois action.
On April 12, 1999, the Company amended its lawsuit against News Corp. and News
America to add Arthur Andersen as a defendant. The Company asserts claims of
breach of contract and breach of fiduciary duty against Arthur Andersen.
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. News Corp.
and News America sought leave to appeal the Court's finding that jurisdiction
exists. The application for leave to appeal was denied by the Michigan Court of
Appeals on August 30, 1999. On May 21, 1999, Arthur Andersen filed a motion to
dismiss the breach of fiduciary duty claim. The Court denied that motion on
September 24, 1999. The Court found that the Company sufficiently pled a breach
of fiduciary duty claim. News Corp. and News America moved to dismiss the
Company's claim for punitive damages on June 30, 1999. On September 17, 1999,
the Court concluded that punitive damages were not recoverable under Michigan
law and dismissed the punitive damages claim. On October 21, 1999, News Corp.
and News America moved to dismiss all claims against them. The Company's
opposition to that motion is expected to be filed on November 15, 1999.
At a hearing held on October 29, 1999, the Court ordered that discovery be
completed in this case by December 22, 1999. The trial is scheduled to begin on
March 20, 2000. At the hearing, Arthur Andersen informed the Court that it
would stay the Illinois action pending the resolution of the litigation before
the Court. The Company and Arthur Andersen have agreed to sign a stipulation to
that effect.
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.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are included herein:
(4) Certificate of Designations of Preferred Stock of Valassis
Communications, Inc. filed with the Office of the Secretary of State of Delaware
on September 21, 1999, Authentication No. 9983607 (incorporated by reference to
Exhibit (4) to the Company's Form 8-K filed on September 23, 1999).
(10) Amendment No. 2 to the Credit Agreement by and among the Company and a
group of banks for which Comerica Bank is acting as administrative agent dated
as of August 19, 1999.
(27) Financial Data Schedule
(99) Rights Agreement dated as of September 1, 1999 by and between the
Company and the Bank of New York (incorporated by reference to Exhibit 99.1 to
the Company's Form 8-A 12B/A filed on November 8, 1999).
b. Form 8-K
The Company filed a report on Form 8-K, dated September 1, 1999 announcing
the adoption by the Board of Directors of a Stockholders' Rights Agreement.
The Company filed a report on Form 8-K, dated September 21, 1999, regarding
the filing of a Certificate of Designations of Preferred Stock with the Office
of the Secretary of State of Delaware.
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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: November 12, 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.
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