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, 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
(Registrant's 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 May 1, 1998, was
8,788,590 shares.
<PAGE>
VESTCOM INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Part I: Financial Information Page(s)
Item 1: Financial Statements
Vestcom International, Inc.:
Condensed Consolidated Balance Sheets - as
of December 31, 1997 and March 31, 1998
(unaudited) 3
Condensed Consolidated Statements of
Operations - For the Three Months Ended March 31,
1997 (unaudited) and 1998 (unaudited) 4
Condensed Consolidated Statements of
Cash Flows - For the Three Months Ended March 31,
1997 (unaudited) and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6-10
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview; Disclosures Regarding Forward
Looking Statements; Introduction 11-12
Pro Forma Results of Operations 12-13
Liquidity and Capital Resources 13
Recently Issued Accounting Pronouncements;
Inflation 14
Part II: Other Information
Item 2. Changes in Securities and Use of Proceeds 15-16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 16
Exhibit - Financial Data Schedule (For Electronic Submission Only) 17
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and March 31, 1998
December 31, March 31,
1997 1998
------------ -----------
(note 1) (unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,092,000 $ 4,979,330
Marketable securities 13,494,886 1,054,138
Accounts receivable, net 13,999,511 17,807,065
Other current assets 6,076,847 6,940,281
---------- ----------
Total current assets 37,663,244 30,780,814
PROPERTY AND EQUIPMENT, net 21,684,918 25,186,168
GOODWILL, net 54,336,937 61,476,108
OTHER ASSETS 660,660 496,423
----------- -----------
Total assets $ 114,345,759 $ 117,939,513
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt and capitalized lease
obligation $ 2,627,178 $ 2,875,807
Accounts payable 4,780,082 6,590,274
Other liabilities 13,108,691 14,045,662
---------- ----------
Total current liabilities 20,515,951 23,511,743
LONG-TERM DEBT AND CAPITAL
LEASE OBLIGATIONS 7,933,572 7,588,422
OTHER NONCURRENT LIABILITIES 2,868,410 2,813,402
------------ ------------
Total liabilities $ 31,317,933 $ 33,913,567
============ ============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock
Class A convertible, 200
shares authorized, issued
and outstanding at March 31,
1998 and Decmber 31, 1997
Class B 1 share authorized,
issued and outstanding at
March 31, 1998 and December
31, 1997 2,651,867 2,651,867
Class C convertible, 100 shares
authorized, issued and outstanding
at March 31, 1998 and December 31,
1997
Common stock, no par value; 20,000,000
shares authorized; 8,483,811 shares
issued and outstanding at March 31,
1998 and December 31, 1997 84,229,597 84,229,597
Accumulated deficit (3,770,054) (2,739,657)
Cumulative translation adjustment (83,584) (115,861)
----------- -----------
Total stockholders' equity 83,027,826 84,025,946
----------- -----------
Total liabilities and
stockholders' equity $114,345,759 $117,939,513
=========== ===========
The accompanying notes to condensed consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1997
and the Three Months Ended March 31, 1998
(unaudited)
Three Months Ended
----------------------------------------
March 31, 1997 March 31, 1998
-------------- ---------------
REVENUES $ -- $ 25,559,496
COST OF REVENUES -- 16,231,335
--------- ----------
Gross profit -- 9,328,161
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,897 7,201,566
--------- ----------
Income (loss) from operations (3,897) 2,126,595
OTHER INCOME (EXPENSE)
Interest expense (26,813) (242,519)
Interest and other income 11,860 147,543
Income (loss) before provision --------- ----------
for income taxes (18,850) 2,031,619
PROVISION FOR INCOME TAXES -- 1,001,222
-------- ---------
Net income (loss) $(18,850) $ 1,030,397
======== =========
Net income per share - basic $ .12
=========
Net income per share - diluted $ .11
=========
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997
and the Three Months Ended March 31, 1998
(unaudited)
Three Months Ended March 31,
-----------------------------
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (18,850) $ 1,030,397
Adjustments to reconcile net income
to net cash provided by operating
activities-
Depreciation and amortization 246 1,349,947
Changes in operating assets (increase)
decrease in-
Accounts receivable -- (1,128,816)
Other current assets (1,090,814) 791,703
Other assets -- (69,960)
Changes in operating liabilities
increase (decrease) in-
Accounts payable -- 547,738
Other current liabilities 212,257 (562,773)
Other non-current liabilities -- (55,009)
-------- ----------
Net cash provided by (used in)
operating activities (897,161) 1,903,227
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (7,587) (2,179,036)
Acquisition of businesses, net of cash
acquired -- (9,888,483)
Sale of marketable securities -- 12,440,748
-------- -----------
Net cash provided by (used in) investing
activities (7,587) 373,229
CASH FLOWS FROM FINANCING ACTIVITIES:
Collection of subscriptions receivable 279,082 --
Net payments on borrowings and capital leases -- (1,356,849)
Cumulative translation adjustments -- (32,277)
---------- -----------
Net cash provided by (used in)
financing activities 279,082 (1,389,126)
----------- -----------
Net increase (decrease) in cash
and cash equivalents (625,666) 887,330
------------ ---------
CASH AND CASH EQUIVALENTS,
beginning of period 1,344,758 4,092,000
------------ ---------
CASH AND CASH EQUIVALENTS, end of period $ 719,092 $4,979,330
=========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations $ -- $ 24,717
========== =========
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 period ended March 31, 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 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 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., Computer Output Systems, Inc. and Mystic Graphic
Systems, Inc. (the "Founding Companies"). The aggregate consideration paid by
the Company to acquire the Founding Companies was, subject to working capital
adjustments and earnouts, approximately $16.6 million in cash and 2,852,111
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 an estimated fair value of $11.05 per share, which
represents a discount of fifteen percent from the initial public offering price
of $13.00 due to restrictions on the sale and transferability of the shares
issued. Included in other liabilities are approximately $1.8 million of
additional acquisition costs. The acquisitions resulted in goodwill of
approximately $47.0 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 potential earnout payments.
<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
Rhode Island based New England Laser Printing, Inc. ("NEL"). On December 15,
1997, the Company acquired the stock of Moreau Promotional Services, Inc., doing
business as Campbell Abbot Laser Mail ("CALM"), 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.
The above two 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.
As of January 20, 1998, the Company acquired substantially all of the assets of
Creative Data Services, Inc. ("CDS") and Business Mail Express ("BME"). The
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 date of acquisition.
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 estimated fair market
values reflected above are 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.
The following Pro Forma Statements of Operations for Vestcom International,
Inc., assume that all acquisitions were consummated on January 1 of the periods
presented. 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.
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1998
Pro Forma Combined Pro Forma Combined
------------------- -------------------
Revenues $26,024,462 $27,204,418
Income from operations 2,861,472 2,276,562
Net income $ 1,489,815 $ 1,108,688
Net income per share - basic $ .17 $ .13
Net income per share - diluted $ .16 $ .12
<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 months ended March 31, 1998, is based upon shares of common stock
outstanding and common stock equivalents. The conversion of stock options
outstanding are not included in the computations. The following is the
computation of earnings per share:
For the Three Months Ended March 31, 1998
------------------------------------------
Per Share
Income Shares Amount
------ ------ ----------
Basic Earnings Per Share:
Net income/weighted average
shares outstanding $1,030,397 8,541,365 $ 0.12
--------- --------- ------
Diluted Earnings Per Share:
Net income/weighted average
shares outstanding 1,030,397 8,541,365
Goodwill adjustment on earnouts (53,158)
Assumed shares earned
by Founding Companies -- 467,533
--------- ---------
Net income/average weighted shares
outstanding adjusted for assumed
conversions to common stock $ 977,239 9,008,898 $ 0.11
--------- --------- -------
(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 March 31, 1998 the
Company paid Oppenheimer $1.0 million in connection with that Agreement and has
agreed to pay Oppenheimer the additional $800,000 in four quarterly
installments.
Certain executives of the Company have each entered into employment agreements
with the Company. Each of the employment agreements provides that, in the event
of a termination of employment by the Company without cause, such employee will
be entitled to receive from the Company an amount in cash equal to the
employee's then current annual base salary for the remainder of the term.
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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. At December 31, 1997, the Company
recorded an accrual for the estimated earnout for Computer Output Systems whose
earnout period ended at December 31, 1997, of $278,000 in cash and 54,779 shares
of the Company's Common Stock. The maximum additional earnouts which could be
paid if certain of the other acquired companies attained their revenue and
profit goals during various periods ending no later than June 30, 1999 would be
$3,630,000 in cash, and up to 542,307 shares of Common Stock plus up to
approximately 114,000 shares of Common Stock (based upon current market prices).
(6) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued two new statements.
Statements of Financial Accounting Standards Numbers 130, "Reporting
Comprehensive Income" ("SFAS 130"), and 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131").
SFAS 130 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 March 31, 1998.
The following represents comprehensive income:
Three months ended March 31,
------------------------------
1997 1998
---- ----
Net income (loss) $(18,850) $1,030,397
Foreign Currency Translation
Adjustment -- (32,277)
-------- ----------
Comprehensive Income $(18,850) $ 998,120
======== =========
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>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(7) SUBSEQUENT EVENTS
On April 14, 1998, the Company acquired through 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 are being consolidated into Mystic Graphic's
operations. The purchase price was less than $1,000,000.
In connection with a determination of the earnout payments to three of the
Founding Companies (including the early settlement of the earnout which
previously extended through June 1999), in April, 1998, the Company paid, in the
aggregate, $1,278,000 in cash, and issued 304,779 shares of its Common Stock to
certain former stockholders of those Founding Companies, including the amounts
accrued for the earnout for Computer Output Systems, Inc. In addition, the
Company incurred a future obligation to pay $1,160,000 in cash. The increase to
goodwill as a result of the above payments will be approximately $5,000,000.
<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. All dollar amounts are presented in U.S. dollars.
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, 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 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 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
acquiror. The Founding 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. Founding
Companies), which have influenced, among other things, the Founding Companies
historical levels of owners' compensation. In connection with the acquisition of
the Founding Companies, these owners and certain key employees agreed to certain
reductions in their compensation which commenced as of the date of acquisition.
The Company acquired New England Laser Printing, Inc. ("NEL") and Campbell Abbot
Laser Mail ("CALM") 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").
The Company's Condensed Consolidated Balance Sheet as of March 31, 1998,
includes the Founding Companies and NEL, CALM, CDS and BME. The results of
operations for the three months ended March 31, 1998, and the statement of cash
flows for the three months ended March 31, 1998 include the results of Vestcom
and all of the companies acquired in 1997 for the entire period, and CDS and BME
only from January 20, 1998.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 various periods ending no
later than December 31, 1998. At March 31, 1998, the aggregate maximum amount
Vestcom would have been required to pay pursuant to such earnouts was $3,630,000
in cash and 542,307 shares of the Company's Common Stock, plus up to an
additional 114,000 shares of the Company's Common Stock (based upon current
market prices). In April, 1998, the Company paid an aggregate of $1,278,000 in
cash and issued 304,779 shares of Vestcom Common Stock to former stockholders of
certain of the Founding Companies in connection with a determination of the
earnout payments owed to three Founding Companies, and incurred a future
obligation to pay $1,160,000 in cash. After the payments and determinations in
April, the aggregate maximum earnout payments which Vestcom may be required to
make going forward are $3,110,000 in cash (including the $1,160,000 referred to
above) and 292,307 shares of Vestcom Common Stock, plus up to another
approximately 114,000 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 earning 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 or
operating expenses in the first three months of 1997. Therefore, Management's
Discussion and Analysis based on actual results would compare three months of
operating activity in 1998 to no operating activity in the first three months of
1997. For this and other reasons discussed above, 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 months ended
March 31, 1998 and the three months ended March 31, 1997, which assumes that all
of the companies owned at March 31, 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
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Pro Forma revenues increased $1,180,000, or 4.5%, from $26,024,000 for the three
months ended March 31, 1997 to $27,204,000 for the three months ended March 31,
1998. This increase was primarily attributable to increased volumes of Vestcom's
production of statements, point-of purchase labels and micrographics, although
revenues also increased in most other areas of Vestcom's business.
Vestcom' Pro Forma gross profit increased $690,000, or 7.5%, from $9,173,000 for
the three months ended March 31, 1997 to $9,863,000 for the three months ended
March 31, 1998. The Pro Forma gross profit margin increased from 35.2% in 1997
to 36.3% in 1998 primarily due to improved capacity utilization resulting from
the increased volume of business and the refinancing through capital leases of
certain existing production equipment which resulted in reduced lease and
maintenance costs.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Pro Forma selling, general and administrative expenses increased $1,275,000, or
20.2% from $6,312,000 for the three months ended March 31, 1997 to $7,587,000
for the three months ended March 31, 1998. As a percentage of revenues, selling
general and administrative expenses increased from 24.3% in 1997 to 27.9% 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 to support the greater
volume of business 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.
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 March 31, 1998, Vestcom had working capital of $7,269,000. Net cash provided
by operating activities for the three months ended March 31, 1998, was
$1,903,000. Net cash provided from investing activities for the three months
ended March 31, 1998, was $373,000 which consisted of $12,441,000 from the sale
of marketable securities, $9,888,000 of cash used for acquisitions, and
$2,179,000 used for the purchase of property and equipment. Net cash used by
financing activities for the three months ended March 31, 1998, was $1,389,000
which included debt and capital lease repayments of $1,357,000. On August 13,
1997, the Company and Summit Bank entered into an Equipment Loan and Revolving
Credit Agreement in the amount of $30,000,000. At March 31, 1998, the entire
credit line was available.
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 March 31, 1998, the Company had postage
advances from customers in the amount of $4,900,000 and had prepaid postage and
postage receivables of approximately $2,000,000. 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.
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 marketable securities
and the availability of funds under the Equipment Loan and Revolving Credit
Agreement 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
INFLATION
Inflation has not had a material effect on the Company's results of operations.
<PAGE>
Part II: Other Information
Item 2 - Changes in Securities and Use of Proceeds
The Company's initial public offering was effected pursuant to a registration
statement on Form S-1 (No. 333-23519) declared effective by the Securities and
Exchange Commission (the "SEC") on July 29, 1997. The offering commenced on July
30, 1997 and terminated after all securities were sold. Pursuant to Rule 463
promulgated by the SEC, the Company provides the following information regarding
its initial public offering.
(a) The managing underwriters were Oppenheimer & Co., Inc. (now known as CIBC
Oppenheimer Corp, and referred to herein as "Oppenheimer") and Prudential
Securities Incorporated.
(b) The title of the class of stock registered was Common Stock, no par value.
The Company sold all 4,427,500 shares that were registered (including 577,500
shares which were sold pursuant to the exercise of the Underwriters'
over-allotment option). There were no selling security holders. The aggregate
price of the offering amount registered and sold was $57,557,500.
(c) From July 30, 1997 through March 31, 1998, the Company's reasonable estimate
of the amount of expenses incurred for the Company's account in connection with
the issuance and distribution of the securities registered for underwriting
discounts and commissions was $4,029,025, for finders' fees was $0, for expenses
paid to or for underwriters was $0 and for other expenses was $4,308,897. Thus,
the total amount of such expenses was $8,337,922 and the net proceeds to the
Company was $49,219,578. Except as set forth in the immediately following
sentence, none of the above-mentioned expenses represented direct or indirect
payments to directors or officers of the Company or their associates, to persons
owning ten percent or more of any class of equity security of the Company or to
affiliates of the Company. As set forth in the above-mentioned registration
statement, one of the Company's directors (Richard D. White) was a Managing
Director at Oppenheimer, one of the managing underwriters of the Company's
initial public offering and now is a Managing Director at an affiliate of
Oppenheimer.
(d) From July 30, 1997 through March 31, 1998, the Company has used the
following amount of such net proceeds for the following categories enumerated by
the SEC:
Reasonable
Category Estimated Amount
-------- ----------------
Construction of plant, building and
facilities 0
Purchase and installation of machinery
and equipment $ 2,196,581
Purchases of real estate 0
Acquisition of businesses $ 34,773,648
Repayment of indebtedness $ 12,249,349
Working capital 0
Short term investments 0
Other purposes for which at least
$100,000 has been used 0
None of the above-mentioned uses of proceeds represented direct or indirect
payments to directors or officers of the Company or their associates, to persons
owning ten percent or more of any class of equity security of the Company or to
affiliates of the Company other than as set forth below. As described in the
Company's registration statement, simultaneously with the consummation of the
Company's initial public offering, the Company acquired seven companies which
provide computer output and document management services (the "Founding
Companies"). The following directors and executive officers of the Company
received the following cash payments as part of the consideration paid to them
as stockholders of their respective Founding Companies. Joel Cartun (the
Company's President, Chief Executive Officer and Chairman of the Board) received
$4,129,610, Gary Marcello (a director of the Company) received $3,271,303,
Howard April (a director of the Company) received $502,640 and Leslie Abcug (an
executive officer of the Company) received $90,813. As of March 31, 1998, the
Company paid an aggregate of $1.3 million to Oppenheimer for advisory services
and has agreed (pursuant to an agreement entered into with Oppenheimer in May
1997) to pay Oppenheimer an additional $800,000 for advisory services in four
quarterly installments which began April 1, 1998.
None of the uses described above represents a material change in the use of
proceeds described in the above-mentioned registration statement.
In connection with the payments of earnouts to three of the companies acquired
by Vestcom, the Company issued, in April 1998, an aggregate of 304,779 shares of
its Common Stock to certain former stockholders of such acquired companies.
<PAGE>
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:
On February 4, 1998, the Company filed a current report on Form 8-K
pertaining to its acquisition of a substantial portion of the assets
and a substantial portion of the liabilities of Creative Data
Services, Inc. ("CDS") and of DB Acquisition, Inc. (d/b/a Business
Mail Express), a wholly-owned subsidiary of CDS. The current report
contained certain historical consolidated financial statements of CDS
and BME and pro forma financial statements of the Company.
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: May 14, 1998
<PAGE>
Exhibit
Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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