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, 1998 or
[] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________.
Commission file number: 333-23519
VESTCOM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3477425
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071
(Address of principal executive office, including zip code)
201-935-7666
(Registrants telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether 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 [ ]
The number of shares of common stock outstanding as of November 1, 1998, was
8,788,590 shares.
<PAGE>
VESTCOM INTERNATIONAL, INC. FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1998 INDEX
Part I: Financial Information Page(s)
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - as of December
31, 1997 and September 30, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations -
For the Three Months and Nine Months Ended
September 30, 1997 (unaudited) and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - For
the Nine Months Ended September 30, 1997
(unaudited) and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview; Disclosures Regarding Forward Looking Statements; Introduction 10-11
Pro Forma Results of Operations 11-12
Liquidity and Capital Resources 12-13
Impact of the Year 2000 Issue 13-14
Recently Issued Accounting Pronouncements 14
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 15
Signature 15
Exhibit - Financial Data Schedule (For Electronic Submission Only) 16
<PAGE>
<TABLE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and September 30, 1998
ASSETS
<CAPTION>
December 31, September 30,
1997 1998
(note 1) (unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents 4,092,000 $ 2,572,885
Marketable securities 13,494,886 356,277
Accounts receivable, net 13,999,511 18,891,328
Other current assets 6,076,847 9,365,309
------------ ------------
Total current assets 37,663,244 31,185,799
PROPERTY AND EQUIPMENT, net 21,684,918 27,648,131
GOODWILL, net 54,336,937 70,160,518
OTHER ASSETS 660,660 684,324
------------ ------------
Total assets $114,345,759 $129,678,772
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt
and capitalized lease obligation 2,627,178 2,989,088
Accounts payable 4,780,082 8,487,212
Other liabilities 13,108,691 15,045,387
---------- ----------
Total current liabilities 20,515,951 26,521,687
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 7,933,572 12,593,328
OTHER NONCURRENT LIABILITIES 2,868,410 2,129,057
---------- ----------
Total liabilities $ 31,317,933 $41,244,072
============ ===========
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock
Class A convertible, 200 shares authorized,
issued and outstanding at December 31, 1997
and -0- shares authorized, issued and
outstanding at September 30, 1998,
respectively
Class B, 1 share authorized, issued and
outstanding at December 31, 1997 and
September 30, 1998 2,651,867 2,651,867
Class C convertible, 100 shares authorized,
issued and outstanding at December 31,
1997 and September 30, 1998
Common stock, no par value; 20,000,000
shares authorized; 8,483,811 and 8,788,590
shares issued and outstanding at December
31, 1997 and September 30, 1998 respectively 84,229,597 86,782,015
Accumulated deficit (3,770,054) (654,924)
Cumulative translation adjustment (83,584) (344,258)
----------- -----------
Total stockholders' equity 83,027,826 88,434,700
Total liabilities and stockholders'
equity $114,345,759 $129,678,772
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1997 and 1998
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30 September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
REVENUES $ 11,050,965 $27,066,068 $ 11,050,965 $ 78,364,313
COST OF REVENUES 6,668,305 16,918,761 6,668,305 49,779,001
---------- ---------- ---------- ------------
Gross Profit 4,382,660 10,147,307 4,382,660 28,585,312
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,557,758 7,752,193 3,904,449 22,086,845
---------- --------- --------- ----------
Income from operations 824,902 2,395,114 478,211 6,498,467
OTHER INCOME (EXPENSE)
Interest expense (358,555) (291,280) (413,249) (771,902)
Interest and other income 275,962 95,015 292,840 357,530
--------- ---------- --------- ----------
Income before provision for income taxes 742,309 2,198,849 357,802 6,084,095
PROVISION FOR INCOME TAXES 393,823 1,015,974 240,020 2,968,965
-------- --------- ------- ---------
Net income $ 348,486 $1,182,875 $117,782 $ 3,115,130
========== ========= ======= =========
Net income per share - basic $ .06 $ .13 $ .04 $ .35
========== ========= ======= =========
Net income per share - diluted $ .06 $ .13 $ .04 $ .34
========== ========= ======= =========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1998
(unaudited)
<CAPTION>
Nine Months Ended September 30,
1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 117,782 $3,115,130
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 683,431 4,593,366
Changes in operating assets (increase)
decrease in-
Accounts receivable 145,441 (1,877,725)
Other current assets 956,688 (1,440,114)
Other assets 9,813 4,999
Changes in operating liabilities increase
(decrease) in-
Accounts payable -- 2,369,858
Other current liabilities (643,543) 421,151
Other non-current liabilities 2,200,038 (739,353)
--------- ----------
Net cash provided by
operating activities 3,469,650 6,447,312
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (794,499) (6,676,965)
Acquisition of businesses, net of cash acquired (49,449,722) (20,481,152)
Sale of marketable securities (23,280,965) 13,138,609
------------ -----------
Net cash used in investing activities (73,525,186) (14,019,508)
CASH FLOWS FROM FINANCING ACTIVITIES:
Collection of subscriptions receivable 279,082 --
Net borrowings (7,772,187) 3,761,337
Issuance of common stock 76,316,434 2,552,418
Issuance of preferred stock 2,651,867 --
Cumulative translation adjustments 6,388 (260,674)
---------- ----------
Net cash provided by financing activities 71,481,584 6,053,081
Net increase (decrease) in cash and
cash equivalents 1,426,048 (1,519,115)
---------- -----------
CASH AND CASH EQUIVALENTS, beginning of period 1,344,758 4,092,000
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 2,770,806 $2,572,885
SUPPLEMENTAL SCHEDULE OF NONCASH =========== ==========
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations $ 904,836 $ 24,717
=========== =========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(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. The financial statements
include the accounts of Vestcom International, Inc. (a New Jersey
corporation) ("Vestcom" or the "Company"), the Founding Companies (as
defined below), and subsequent acquisitions since their respective
acquisition dates. The balance sheet at December 31, 1997 has been derived
from the audited financial statements at that date. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three-month and nine-month periods ended September 30, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements of the Company and the notes related thereto contained in
Vestcom's Annual Report on Form 10-K for the year ended December 31, 1997.
(2) NATURE OF BUSINESS
Vestcom was formed in September 1996 to create an international provider of
computer output and document management services. The Company's primary
strategy is to acquire, integrate and facilitate the growth of similar and
complementary companies in the highly fragmented computer output and
document management services industry.
On July 30, 1997, Vestcom announced the initial public offering of
3,850,000 shares of its common stock (the "Common Stock") at a price of
$13.00 per share. The Company's underwriters exercised in full an option to
purchase an additional 577,500 shares of the Company's Common Stock at
$13.00 per share to cover over allotments of the initial public offering.
The initial public offering was consummated on August 4, 1997. The capital
raised by this offering was $53,528,475 net of underwriting discounts.
(3) ACQUISITIONS
Concurrently with the consummation of the Company's initial public
offering, it acquired seven companies in the computer output and document
management services industry - Comvestrix Corp., Morris County Direct Mail
Services, Inc. and related companies, Image Printing Systems, Inc.,
Electronic Imaging Services, Inc., COS Information, Inc., Vestcom
Connecticut, Inc. (formerly known as Computer Output Systems, Inc.) and
Vestcom Massachusetts, Inc. (formerly known as Mystic Graphic Systems,
Inc.) (collectively the "Founding Companies"). The aggregate consideration
paid by the Company to acquire the Founding Companies (including certain
earnouts) was, subject to working capital adjustments, approximately $19.1
million in cash (which includes an obligation to pay $580,000 in the future
in connection with an earnout) and 3,156,890 shares of Vestcom Common
Stock. These acquisitions were accounted for as of August 1, 1997 using the
purchase method of accounting and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based upon
the fair values at the date of acquisition. For purposes of computing the
estimated purchase price for accounting purposes, the value of the shares
was determined using a discount of fifteen percent from the estimated
fair market value at date of issuance due to restrictions on the sale and
transferability of the shares issued. The acquisitions of the Founding
Companies resulted in goodwill of approximately $52.6 million which
is being amortized over 30 years, and is based on preliminary allocations
of the purchase price to the net assets acquired and is subject to
revisions and certain remaining earnout determinations.
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
On November, 14, 1997 the Company acquired substantially all of the assets
of Vestcom Rhode Island, Inc. (formerly known as New England Laser
Printing, Inc.). On December 15, 1997, the Company acquired the stock of
Moreau Promotional Services, Inc., now doing business as Vestcom Ontario
(formerly known as Campbell Abbot Laser Mail), an Ontario corporation
located in Toronto, Canada. The aggregate price paid for these acquisitions
was approximately $7,000,000 in cash and 134,520 unregistered shares of
Vestcom Common Stock, the fair market value of which was based on a fifteen
percent discount from the fair market value due to length and type of
restrictions in the purchase agreements. The estimated goodwill associated
with these acquisitions aggregated approximately $8,200,000.
As of January 20, 1998, the Company acquired substantially all of the
assets of Creative Data Services, Inc. ("CDS") and D.B. Acquisition, Inc.
doing business as Business Mail Express ("BME"). The combined purchase
price was $9,500,000 in cash plus the potential to receive an earnout of up
to $2,500,000 payable 50% in cash and 50% in shares of the Company's Common
Stock. The estimated fair value of the assets purchased was $4,705,000 and
the estimated goodwill was $4,795,000.
The above four acquisitions were accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the
assets acquired and the liabilities assumed based upon the fair values at
the dates of acquisition. The estimated goodwill values reflected above are
based on preliminary estimates and assumptions and are subject to revision.
In management's opinion the preliminary allocations are not expected to be
materially different than the final allocations subject to the potential
earnout for CDS and BME.
On April 14, 1998, the Company acquired through Vestcom Massachusetts, Inc.
(formerly known as Mystic Graphic Systems, Inc.), a wholly owned subsidiary
based in Woburn Massachusetts, substantially all of the assets of Dee Cee
Graphics Inc., also located in Woburn Massachusetts. The operations of Dee
Cee Graphics were consolidated into the Vestcom Massachusetts operations.
Dee Cee's 1997 revenues were less than $1,000,000.
On August 4, 1998, the Company, through Vestcom Retail Solutions Group,
Inc., one of its wholly-owned subsidiaries, acquired substantially all of
the assets and liabilities of Graphic Technology Systems, Inc. ("GTS"), a
company based in Los Angeles, California. GTS had 1997 revenues of
approximately $3 million.
The following Pro Forma Statements of Operations for Vestcom assume that
all acquisitions were consummated on January 1, respectively, of 1997 and
1998. This information is not necessarily indicative of the results the
Company would have obtained had these events actually then occurred or of
the Company's actual or future results. The nine months ending September
30, 1997, results include corporate expenses only from the date of
acquisition of the Founding Companies.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
Pro Forma Pro Forma Pro Forma Pro Forma
Combined Combined Combined Combined
<S> <C> <C> <C> <C>
Revenues $25,192,983 $27,277,661 $78,424,680 $ 81,836,829
Income from operations 1,914,074 2,457,207 7,648,538 7,094,742
Net income $ 1,081,106 $ 1,222,101 $ 3,970,045 $ 3,454,659
Net income per share - basic $ .12 $ .14 $.45 $.39
Net income per share - diluted $ .12 $ .13 $.43 $.37
</TABLE>
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(4) EARNINGS PER SHARE
In December 1997, the Company adopted the provisions of Financial
Accounting Standards Board Statement No. 128, "Earnings per Share". This
statement supersedes APB Opinion No. 15, "Earnings per Share" and
simplifies the computation of earnings per share ("EPS"). Primary EPS is
replaced with a presentation of basic EPS.
Basic EPS includes no dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Fully diluted EPS is replaced with diluted EPS.
Diluted EPS reflects the potential dilution if certain securities are
converted and also includes certain shares that are contingently issuable.
SFAS No. 128 requires dual presentation of basic and diluted EPS by
entities that issue any securities other than ordinary common stock. The
computation of net income per share for the three and nine months ended
September 30, 1998, is based upon shares of common stock outstanding and
common stock equivalents. The following is the computation of earnings per
share:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, 1998 September 30, 1998
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
Basic Earnings Per Share:
<S> <C> <C> <C> <C> <C> <C>
Net income/weighted average
shares outstanding $1,182,875 8,968,356 $0.13 $ 3,115,130 8,849,829 $0.35
--------- --------- ---- ---------- --------- ----
Diluted Earnings Per Share:
Net income/weighted average
shares outstanding 1,182,875 8,968,356 3,115,130 8,849,829
Goodwill adjustment on
earnouts (25,787) (77,361)
Stock Options 466 2,354
Assumed shares earned
by Founding Companies 110,715 185,599
---------- -------- ----------- --------- ------- -----
Net income/weighted average
shares outstanding adjusted
for assumed conversions to
common stock $1,157,088 9,079,537 $0.13 $3,037,769 9,037,782 $0.34
----------- --------- ----------- ---------- --------- -----
</TABLE>
(5) COMMITMENTS AND CONTINGENCIES
In May 1997 the Company entered into an agreement with CIBC Oppenheimer
Corp. (formerly known as Oppenheimer & Co., Inc., and referred to herein as
"Oppenheimer") pursuant to which the Company agreed to pay Oppenheimer an
aggregate amount of up to $1.8 million for advisory services provided by
Oppenheimer. In addition, Vestcom reimbursed Oppenheimer $75,000 for
out-of-pocket expenses related to such services. As of September 30, 1998
the Company had paid Oppenheimer $1.6 million in connection with that
Agreement and had agreed to pay Oppenheimer the remaining $200,000 in one
final installment in December.
Certain of the companies acquired by Vestcom are eligible to earn
additional amounts, consisting of a combination of cash and securities, as
adjustments to the purchase prices paid for those companies. In connection
with a determination of an earnout payment to one of the Founding
Companies, the Company incurred a future obligation to pay $1,160,000 in
cash of which $580,000 was paid in September, 1998.
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
After the September payment, the aggregate maximum earnouts which the
Company could be required to pay if certain of the other acquired companies
attained their revenue and profit goals during certain periods ending on or
before July 31, 1999 is $2,610,000 in cash (including the $580,000
remaining on the $1,160,000 obligation referred to above,) and up to
approximately 328,000 shares of Common Stock (based upon current market
prices).
(6) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards Number 130, "Reporting
Comprehensive Income" ("SFAS 13"), establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. The objective of SFAS 130 is to report a
measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than
transactions with owners ("comprehensive income"). Comprehensive income is
the total of net income and all other non-owner changes in equity. SFAS 130
is effective for fiscal years beginning after December 15, 1997, with
earlier application allowed but not required. Upon adoption,
reclassification of comparative financial statements provided for prior
periods is required. The Company has adopted this standard as of January 1,
1998.
The following represents comprehensive income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net income $348,486 $ 1,182,875 $117,782 $ 3,115,130
Foreign Currency Translation
Adjustment 6,388 (99,161) (89,972) (260,674)
------- ----------- -------- ----------
Comprehensive Income $354,874 $ 1,083,714 $ 27,810 $ 2,854,456
======== ========== ======= ==========
</TABLE>
(7) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued a new statement.
Statement of Financial Accounting Standards Number 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), introduces
a new model for segment reporting, called the "management approach."
The management approach is based on the way that the chief operating
decision maker organizes segments within a company for making operating
decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure -
any manner in which management disaggregates a company. The management
approach replaces the notion of industry and geographic segments in current
FASB standards. SFAS 131 is effective for fiscal years beginning after
December 15, 1997 and early adoption is encouraged. However, SFAS 131 need
not be applied to interim statements in the initial year of application.
SFAS 131 requires restatement of all prior period information reported.
Management believes that adoption of SFAS 131 will not have an impact on
its method of reporting since it believes that its business operates in one
reportable segment.
(8) SUBSEQUENT EVENT
On October 30, 1998, the Company, through Vestcom Northwest, Inc., a
wholly-owned subsidiary, acquired substantially all of the assets and
assumed substantially all of the liabilities of Manus Services Corporation,
a company based in Seattle, Washington ("Manus"). Manus' revenues for the
12 month period ending September 30, 1998, were approximately $8 million.
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and the related notes thereto
appearing elsewhere herein.
DISCLOSURES REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 ("Forward-Looking Statements"), which involve risks and
uncertainties. Important factors that could cause actual results to differ
materially from those indicated by such Forward-Looking Statements include
the risks and uncertainties relating to the Company's ability to acquire
and successfully integrate acquired companies and the costs associated with
the integration, to execute its growth strategy, to conduct activities in a
competitive environment, to develop and implement new products and
services, to attract and retain customers and key executives, to assess and
implement its Year 2000 program and to the variations in quarterly results,
the sufficiency of the Company's working capital, the ability of the
Company to obtain consolidation synergies, including through the
consolidation of administrative functions and facilities, and the effects
of cross selling on the Company's revenue, as well as the factors referred
to in the Company's Annual Report on Form 10-K for the year ended December
31, 1997 filed with the Securities and Exchange Commission. Such factors
also may cause substantial volatility in the Company's Common Stock.
INTRODUCTION
Vestcom International, Inc. was incorporated in September 1996.
Concurrently with the consummation of the Company's initial public offering
(the "Offering") on August 4, 1997, the Company acquired seven computer
output and document management service companies (the "Founding Companies")
each of which had been operating as a separate independent entity. For
accounting purposes, the acquisitions of the Founding Companies were deemed
to be made August 1, 1997, using purchase accounting, with the Company as
the acquirer. Following the Offering, the Company has acquired additional
computer output and document management services companies which are
detailed below (collectively with the Founding Companies referred to herein
as "Acquired Companies").
The Company acquired Vestcom Rhode Island, Inc. (formerly known as New
England Laser Printing, Inc.) and Vestcom Ontario (formerly known as
Campbell Abbot Laser Mail) in November and December 1997, respectively, and
as of January 20, 1998 the Company acquired substantially all of the assets
of Creative Data Services, Inc. ("CDS") and of DB Acquisition Inc. (d/b/a
Business Mail Express), a wholly owned subsidiary of CDS ("BME"). On April
14, 1998 the Company acquired through Vestcom Massachusetts, Inc. (formerly
known as Mystic Graphic Systems, Inc.), a wholly owned subsidiary,
substantially all of the assets of Dee Cee Graphics Inc. ("Dee Cee"). The
operations of Dee Cee Graphics were consolidated into Vestcom
Massachusetts' operations. On August 4, 1998, the Company, through Vestcom
Retail Solutions Group, Inc., one of its wholly-owned subsidiaries,
acquired substantially all of the assets and liabilities of Graphic
Technology Systems, Inc. ("GTS"). The operations of GTS were consolidated
into Vestcom Retail Solutions' operations. The Acquired Companies were
managed prior to their acquisition as independent private companies, and
their results of operations reflect different tax structures (S
corporations and C corporations for the U.S. Acquired Companies), which
have influenced, among other things, the Acquired Companies historical
levels of owners' compensation. In connection with the acquisition of the
Acquired Companies, these owners and certain key employees agreed to
certain reductions in their compensation which commenced as of the date of
acquisition.
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company's Condensed Consolidated Balance Sheet as of September 30, 1998
includes the Founding Companies and Vestcom Rhode Island, Inc., Vestcom
Ontario, CDS, BME, Dee Cee and GTS. The results of operations for the three
months and nine months ended September 30, 1998, and the statement of cash
flows for the nine months ended September 30, 1998, include the results of
Vestcom and all of the companies acquired in 1997 for the entire period,
and the companies acquired in 1998 from their respective dates of
acquisition.
In connection with the Company's acquisitions, Vestcom has made certain
earnout payments and may be required to pay additional earnouts if
specified revenue thresholds, margins or earnings are attained during
certain periods ending July 31, 1999. In connection with a determination of
an earnout for one of the Founding Companies, the Company incurred a future
obligation to pay $1,160,000 in cash of which $580,000 was paid in
September, 1998. After the September payment, the aggregate maximum earnout
payments which Vestcom may be required to make going forward are $2,610,000
in cash (including $580,000 remaining on the $1,160,000 obligation referred
to above) and up to another approximately 328,000 shares of Vestcom Common
Stock (based upon current market prices). Any payments of earnouts will
increase the goodwill recorded for the acquisition of the applicable
company. The amortization of any additional goodwill and the increased
number of shares issued in connection with earnouts will negatively affect
the Company's future earnings per share.
Vestcom, which conducted no operations prior to the consummation of the
Offering other than in connection with the acquisitions of the Founding
Companies and the financing activities related thereto, including the
Offering, had no revenues and limited corporate expenses in the first seven
months of 1997. Therefore, Management's Discussion and Analysis based on
actual results would compare three and nine months of operating activity in
1998 to two months operating activity in the three months and nine months
of 1997. Accordingly, management believes that Management's Discussion and
Analysis would only be meaningful based on the unaudited Pro Forma Results
of Operations of Vestcom for the three and nine months ended September 30,
1998 and the three and nine months ended September 30, 1997, which assumes
that all of the companies owned at September 30, 1998 were acquired on
January 1, respectively, of 1997 and 1998.
The following discussion of Pro Forma Results of Operations is not
necessarily indicative of the results the Company would have obtained had
all of these acquisitions actually then occurred or of the Company's actual
or future results.
PRO FORMA RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared to Nine Months
Ended September 30, 1997
Pro Forma revenues increased $3,412,000, or 4.4%, from $78,425,000 for the
nine months ended September 30, 1997 to $81,837,000 for the nine months
ended September 30, 1998. This increase was primarily attributable to
increased sales to new and existing customers primarily in the financial
services and retail industry. This increase was net of lower revenues from
two of the companies acquired in 1998. These two companies closed certain
facilities in 1997, prior to their acquisition by Vestcom, in an effort to
downsize and reduce costs, resulting in a decrease in revenues for those
companies in 1998.
Vestcom's Pro Forma gross profit increased $2,591,000, or 9.4%, from
$27,444,000 for the nine months ended September 30, 1997 to $30,035,000 for
the nine months ended September 30, 1998. The Pro Forma gross profit margin
increased from 35.0% in 1997 to 36.7% in 1998 primarily due to improved
capacity utilization resulting from the increased volume of business and
also through consolidated procurement savings negotiated with several of
the Company's vendors.
Pro Forma selling, general and administrative expenses increased
$3,144,000, or 15.9%, from $19,796,000 for the nine months ended September
30, 1997 to $22,940,000 for the nine months ended September 30, 1998. As a
percentage of revenues, selling general and administrative expenses
increased from 25.2% in 1997 to 28.0% in 1998. The increase in Pro Forma
selling, general and administrative expenses was primarily due to increased
compensation expense for new technical personnel, increased commissions,
increased administrative expenses
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
to support the greater volume of business, investment spending in selling
programs and the costs associated with the increased Vestcom corporate
management staff. The majority of the expenses of the Vestcom corporate
staff operations did not come into existence until after the consummation
of the initial public offering in August of 1997.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Pro Forma revenues increased $2,085,000, or 8.3%, from $25,193,000 for the
three months ended September 30, 1997 to $27,278,000 for the three months
ended September 30, 1998. This increase was primarily attributable to
increased sales to new and existing customers primarily in the financial
services and retail industry. This increase was net of lower revenues from
two of the companies acquired in 1998. These two companies closed certain
facilities in 1997, prior to their acquisition by Vestcom, in an effort to
downsize and reduce costs, resulting in a decrease in revenues for those
companies in 1998.
Vestcom's Pro Forma gross profit increased $1,564,000, or 17.9%, from
$8,715,000 for the three months ended September 30, 1997 to $10,279,000 for
the three months ended September 30, 1998. The Pro Forma gross profit
margin increased from 34.6% in 1997 to 37.7% in 1998 primarily due to
improved capacity utilization resulting from the increased volume of
business and also through consolidated procurement savings negotiated with
several of the Company's vendors.
Pro Forma selling, general and administrative expenses increased
$1,020,000, or 15.0%, from $6,801,000 for the three months ended September
30, 1997 to $7,821,000 for the three months ended September 30, 1998. As a
percentage of revenues, selling general and administrative expenses
increased from 27.0% in 1997 to 28.7% in 1998. The increase in Pro Forma
selling, general and administrative expenses was due to the same factors
discussed in the nine month comparison. In addition, the Company incurred
costs in connection with its efforts to integrate its acquired companies in
either geographic or vertical market operating units. These costs included
redundant overhead and facility costs. The Company expects that it will
continue to incur such costs in future periods in connection with its
integration and regionalization process.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources reflects the
Company's actual results of operations and financial position for the
periods discussed.
On July 30, 1997 Vestcom International, Inc. announced the initial public
offering of 3,850,000 shares of its Common Stock at a price of $13.00 per
share. The Company's underwriters exercised in full an option to purchase
an additional 577,500 shares of the Company's Common Stock at $13.00 per
share to cover over allotments of the initial public offering. The capital
raised by this offering was approximately $54,000,000 net of underwriting
discounts, of which approximately $35,000,000 was used for the cash portion
of the Company's acquisitions and approximately $12,000,000 was used for
the repayment of debt and capital leases.
At September 30, 1998, Vestcom had working capital of approximately
$4,664,000. Net cash provided by operating activities for the nine months
ended September 30, 1998, was approximately $6,447,000 and was generated
primarily from net income and depreciation and amortization charges. Net
cash used in investing activities for the nine months ended September 30,
1998, was approximately $14,019,000 which consisted of approximately
$13,139,000 from the sale of marketable securities, approximately
$20,481,000 of cash used for acquisitions, and approximately $6,677,000
used for the purchase of property and equipment. Net cash provided by
financing activities for the nine months ended September 30, 1998, was
approximately $6,053,000 which included approximately $3,761,000 from net
borrowings and $2,552,000 from the issuance of common stock to former
stockholders of certain of the Founding Companies in connection with
earnout provisions. On August 13, 1997, the Company and Summit Bank entered
into an Equipment Loan and Revolving Credit Agreement ("the Credit
Facility") in the amount of $30,000,000. On September 30, 1998, $23,337,000
remained available under the Credit Facility.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company incurs postage costs on behalf of customers of approximately
$4,000,000 to $6,000,000 each month. The Company seeks to collect such
postage costs from its customers in advance. At September 30, 1998, the
Company had postage advances from customers in the amount of approximately
$4,300,000 and had prepaid postage and postage receivables of approximately
$3,100,000. To the extent the Company is unsuccessful in obtaining postage
costs in advance, cash flow is negatively affected and Vestcom may be
required to utilize its working capital or credit facility to cover the
cash outlay.
Capital expenditures of approximately $6,000,000 to $8,000,000 for plant
and equipment and leasehold improvements are anticipated in 1998. This
investment, which is expected to be financed primarily by working capital
and vendor financing, relates to the anticipated facility consolidations of
certain of the operating companies and the purchase of supplemental
production equipment to meet customer output processing demands. As of
September 30, 1998, the Company had incurred approximately $6,677,000 of
such anticipated expenditures. There are no other significant commitments
for future capital expenditures, although it is likely that cash outflows
for business acquisitions and leases will continue. While no assurance can
be given, management believes that its cash flow from operations combined
with existing cash and the availability of funds under the Credit Facility,
and potential additional credit capacity, will be sufficient to meet its
working capital, capital expenditure and debt service requirements and its
current plans to acquire additional related businesses for the foreseeable
future. The immediately preceding sentence constitutes a forward-looking
statement under the Private Securities Litigation Reform Act of 1995.
IMPACT OF THE YEAR 2000 ISSUE
The Company utilizes computer technologies in the form of both software and
hardware (including electronic digital printers) to effectively carry out
its day-to-day operations. In addition to information technology, there is
embedded computer technology in the Company's facilities and equipment. The
Company is utilizing a multi-phased concurrent approach to determine
whether its systems are capable of recognizing and processing date
sensitive information properly as the year 2000 approaches. The phases
included in the Company's approach are awareness, assessment, remediation,
validation and implementation.
The Company has separate plans to complete the Y2000 project for each
region, with central review and audit being performed by the headquarters
organization. All regions have completed the awareness and assessment
phases. Remediation, validation and implementation are scheduled to be near
completion in most regions in 1998. Full validation and implementation is
scheduled to be complete by July 1999. Since Vestcom processes data
prepared by its customers, and does not have extensive date dependent
proprietary software to repair or replace, management believes that the
required changes to Vestcom's systems will not be extensive. The
immediately preceding sentences constitute forward-looking statements under
the Private Securities Litigation Reform Act of 1995.
Vestcom has contacted its major software and hardware suppliers to verify
that the systems Vestcom uses are Year 2000 compliant. Most vendors have
replied, however, written responses are still to be obtained from certain
vendors. Their can be no assurances that other companies' systems on which
the Company's systems rely will be timely converted or that any such
failure to convert by another company would not have a materially adverse
effect on the Company's systems. Certain of Vestcom's customers may need to
make appropriate changes to modify the data that they send to Vestcom to
make the information Year 2000 compliant. The Company is in the process of
assessing the extent to which its customers may experience Year 2000 Issues
and has begun testing with certain customers. If customers or others with
whom the Company does business experience problems relating to the Year
2000 issue, the Company's business, financial condition or results of
operations could be adversely affected. A loss of business could result
from the Company's customers' inability to implement new work projects
while focusing their information technology resources on Year 2000 issues
within their existing systems.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company estimates that the aggregate cost of its Year 2000 project will
be approximately $750,000, including costs already incurred. Significant
portions of these costs are not likely to be incremental costs, but rather
will represent the redeployment of existing resources. This reallocation of
resources is not expected to have a significant impact on the day-to-day
operations of the Company. Total costs of approximately $200,000 were
incurred by the Company for this project during the first nine months of
1998, of which $100,000 was incremental expense. The anticipated costs of
the project, as well as the date on which the Company expects to complete
the project are based on management's best estimate using information
currently available and numerous assumptions about future events. However
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Based on its current
estimates and information currently available the Company does not
anticipate that the costs associated with this project will have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows in the future. The immediately preceding sentence
constitutes a forward-looking statement under the Private Securities
Litigation Reform Act of 1995.
In the event that the efforts of the Company's Year 2000 project do not
address all relevant problems, the Company intends to develop contingency
plans. In addition, the Company's decentralized operational structure
allows for a single region to have a software or hardware failure, while
another region can provide backup support. This provides reduced risk if a
single region does not successfully complete the required changes to become
Year 2000 compliant as planned.
The Company is continuing its efforts to timely address the Year 2000
issues. Actual results could differ materially from the forward-looking
statements contained herein as a result of a variety of factors, including
potential unavailability of technological resources, increased expenses
associated with obtaining such resources and unanticipated technological
difficulties.
The Company is currently evaluating the Year 2000 readiness of the business
and assets acquired from Manus Services Corporation ("Manus") on October
30,1998. As such the above discussion does not reflect the impact of Manus.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement Number 131,
"Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131").
SFAS 131 introduces a new model for segment reporting, called the
"management approach". The management approach is based on the way that the
chief operating decision maker organizes segments within a company for
making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure - any manner in which management disaggregates a company. The
management approach replaces the notion of industry and geographic segments
in current FASB standards. SFAS 131 is effective for fiscal years beginning
after December 15, 1997 and early adoption is encouraged. However, SFAS 131
need not be applied to interim statements in the initial year of
application. SFAS 131 requires restatement of all prior period information
reported. Management believes that adoption of SFAS 131 will not have an
impact on its method of reporting since it believes that its business
operates in one reportable segment.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Part II: Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule (For Electronic Submission Only)
(b) Reports on Form 8-K:
None
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.
VESTCOM INTERNATIONAL, INC.
By: /s/ Harvey Goldman
Harvey Goldman, Executive Vice President
and Chief Financial Officer
Dated: November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM VESTCOM INTERNATIONAL, INC.'S FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001034941
<NAME> VESTCOM INTERNATIONAL, INC.
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<S> <C>
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