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 June 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
(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 August 1, 1998, was
8,788,590 shares.
<PAGE>
VESTCOM INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
Part I: Financial Information
Page(s)
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - as of December 31, 1997
and June 30, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations - For the
Three Months and Six Months Ended June 30, 1997 (unaudited)
and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - For the
Six Months Ended June 30, 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 10-11
Pro Forma Results of Operations 11-12
Liquidity and Capital Resources 12-13
Impact of the Year 2000 Issue 13
Recently Issued Accounting Pronouncements; Inflation 14
Part II: Other Information
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 15
Exhibit - Financial Data Schedule (For Electronic Submission Only) 16
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 and June 30, 1998
ASSETS
December 31, June 30,
1997 1998
(note 1) (unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 4,092,000 $ 2,481,788
Marketable securities 13,494,886 263,501
Accounts receivable, net 13,999,511 17,024,154
Other current assets 6,076,847 9,010,914
------------- ---------------
Total current assets 37,663,244 28,780,357
PROPERTY AND EQUIPMENT, net 21,684,918 26,217,985
GOODWILL, net 54,336,937 67,781,499
OTHER ASSETS 660,660 648,515
------------- ---------------
Total assets $ 114,345,759 $ 123,428,356
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligation $ 2,627,178 $ 2,698,329
Accounts payable 4,780,082 7,800,679
Other liabilities 13,108,691 15,844,137
------------- ------------
Total current liabilities 20,515,951 26,343,145
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 7,933,572 7,014,761
OTHER NONCURRENT LIABILITIES 2,868,410 2,719,464
------------- ------------
Total liabilities $ 31,317,933 $ 36,077,370
------------ -------------
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 June 30, 1998, respectively
Class B, 1 share authorized, issued and
outstanding at December 31, 1997 and
June 30, 1998 2,651,867 2,651,867
Class C convertible, 100 shares authorized,
issued and outstanding at December 31, 1997
and June 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 June 30, 1998 respectively 84,229,597 86,782,015
Accumulated deficit (3,770,054) (1,837,799)
Cumulative translation adjustment (83,584) (245,097)
------------- -------------
Total stockholders' equity 83,027,826 87,350,986
------------- --------------
Total liabilities and stockholders' equity $114,345,759 $ 123,428,356
============ ============
</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 Six Months Ended
June 30, 1997 and 1998
(unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES $ -- $25,738,749 $ -- $ 51,298,245
COST OF REVENUES -- 16,628,905 -- 32,860,240
---------------- ------------ ------------- ------------
Gross profit -- 9,109,844 -- 18,438,005
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 342,794 7,133,086 346,691 14,334,652
---------------- ------------ ------------- ------------
Income (loss) from operations (342,794) 1,976,758 (346,691) 4,103,353
OTHER INCOME (EXPENSE)
Interest expense (27,881) (238,103) (54,694) (480,622)
Interest and other income 5,018 114,972 16,878 262,515
---------------- ------------ --------------- ------------
Income (loss) before provision for (365,657) 1,853,627 (384,507) 3,885,246
income taxes
PROVISION FOR INCOME TAXES -- 951,769 -- 1,952,991
---------------- ------------ --------------- ------------
Net income (loss) $ (365,657) $ 901,858 $ (384,507) $ 1,932,255
================ ============ =============== ============
Net income per share - basic $ .10 $ .22
============ ============
Net income per share - diluted $ .10 $ .21
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1998
(unaudited)
Six Months Ended June 30,
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (384,507) $1,932,255
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 878 2,956,526
Changes in operating assets (increase) decrease in-
Accounts receivable -- (345,905)
Other current assets (1,756,530) (1,259,509)
Other assets -- 40,806
Changes in operating liabilities increase (decrease) in-
Accounts payable -- 1,758,143
Other current liabilities 772,133 1,235,702
Other non-current liabilities -- (148,946)
----------- ------------
Net cash provided by (used in) operating activities (1,368,026) 6,169,072
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (17,438) (4,210,437)
Acquisition of businesses, net of cash acquired -- (17,083,148)
Sale of marketable securities -- 13,231,385
----------- ----------
Net cash (used in) investing activities (17,438) (8,062,200)
CASH FLOWS FROM FINANCING ACTIVITIES:
Collection of subscriptions receivable 279,082 --
Net payments on borrowings and capital leases -- (2,107,989)
Cumulative translation adjustments -- (161,513)
Issuance of common stock -- 2,552,418
----------- -----------
Net cash provided by financing activities 279,082 282,916
----------- ------------
Net (decrease) in cash and cash equivalents (1,106,382) (1,610,212)
------------ -----------
CASH AND CASH EQUIVALENTS, beginning of period 1,344,758 4,092,000
----------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 238,376 $2,481,788
=========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations $ -- $ 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 six-month periods
ended June 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
$1,160,000 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 $52.4 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.
The following Pro Forma Statements of Operations for Vestcom 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998
Pro Forma Combined Pro Forma Combined Pro Forma Combined Pro Forma Combined
<S> <C> <C> <C> <C>
Revenues $25,549,732 $25,771,416 $51,731,611 $53,191,834
Income from operations 2,638,253 1,987,559 5,495,037 4,304,072
Net income $ 1,276,102 $ 907,841 2,745,468 2,026,775
Net income per share - basic $.15 $.10 $.31 $.23
Net income per share - diluted $.14 $.10 $.30 $.22
</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
six months ended June 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 June 30, 1998 For the Six Months Ended June 30, 1998
---------------------------------------- --------------------------------------
Per Share Per-Share
Net Income Shares Amount Net Income Shares Amount
<S> <C> <C> <C> <C> <C>
Basic Earnings Per Share:
Net income/weighted average
shares outstanding $901,858 8,790,565 $0.10 $ 1,932,255 8,789,583 $0.22
-------- --------- ----- ------------ --------- -----
Diluted Earnings Per Share:
Net income/weighted average
shares outstanding 901,858 8,790,565 1,932,255 8,789,583
Goodwill adjustment on
earnouts (23,287) (23,287)
Stock Options 314 1,620
Assumed shares earned
by Founding Companies 240,291 210,024
--------- --------- ----------- ---------
Net income/weighted average
shares outstanding adjusted
for assumed conversions to
common stock $ 878,571 9,031,170 $0.10 $1,908,968 9,001,227 $0.21
---------- --------- ----- ---------- --------- -----
</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 June 30, 1998 the
Company had paid Oppenheimer $1.0 million in connection with that
Agreement and had agreed to pay Oppenheimer the additional $800,000 in
four quarterly installments.
<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. In
connection with a determination of the earnout payments to three of the
Founding Companies (including two earnouts which ended as of December 31,
1997 and the early settlement of an 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. 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 is approximately
$5,000,000.
The maximum additional earnouts which could be paid if certain of the
other acquired companies attained their revenue and profit goals during
certain periods ending on or before December 31, 1998 would be $3,800,000
in cash (including the $1,160,000 referred to above,) and up to
approximately 325,000 shares of Common Stock (based upon current market
prices).
(6) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards Number 130, "Reporting
Comprehensive Income" ("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 January
1, 1998.
The following represents comprehensive income:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Net income (loss) $(365,657) $ 878,571 $(384,507) $ 1,908,968
Foreign Currency Translation
Adjustment -- (129,236) -- (161,513)
---------- ---------- ---------- ---------
Comprehensive Income(loss) $(365,657) $ 749,335 $(384,507) $ 1,747,455
========== ========= ========== ===========
</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 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.
<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, 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
the Company's assessment of and ability to 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. 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
The Company's Condensed Consolidated Balance Sheet as of June 30, 1998 includes
the Founding Companies and Vestcom Rhode Island, Inc., Vestcom Ontario, CDS, BME
and Dee Cee. The results of operations for the three months and six months ended
June 30, 1998, and the statement of cash flows for the six months ended June 30,
1998, include the results of Vestcom and all of the companies acquired in 1997
for the entire period, and CDS and BME from January 20, 1998, and Dee Cee from
April 14, 1998 respectively.
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
December 31, 1998. 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 $3,800,000 in cash (including the $1,160,000 referred to
above) and up to another approximately 325,000 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 six months of 1997. Therefore,
Management's Discussion and Analysis based on actual results would compare three
and six months of operating activity in 1998 to limited corporate expenses in
the three months and six 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 and six months ended June 30, 1998 and the three and six months
ended June 30, 1997, which assumes that all of the companies owned at June 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
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Pro Forma revenues increased $1,460,000, or 2.8%, from $51,732,000 for the six
months ended June 30, 1997 to $53,192,000 for the six months ended June 30,
1998. This increase was primarily attributable to increased volume of Vestcom's
production of statements, point-of purchase labels and micrographics. This
increase offset the loss of a major customer, at one of the Founding Companies,
and lower revenues from two of the companies acquired in 1998. These two
companies closed certain facilities in 1997, 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 $989,000, or 5.5%, from $18,112,000
for the six months ended June 30, 1997 to $19,101,000 for the six months ended
June 30, 1998. The Pro Forma gross profit margin increased from 35.0% in 1997 to
35.9% 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 $2,180,000, or
17.3%, from $12,617,000 for the six months ended June 30, 1997 to $14,797,000
for the six months ended June 30, 1998. As a percentage of revenues, selling
general and administrative expenses increased from 24.4% in 1997 to 27.8% 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.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Pro Forma revenues increased $221,000, or 0.9%, from $25,550,000 for the three
months ended June 30, 1997 to $25,771,000 for the three months ended June 30,
1998. This increase was primarily attributable to increased volume of Vestcom's
production of statements, point-of purchase labels and micrographics. This
increase offset the loss of a major customer, at one of the Founding Companies,
and lower revenues from two of the companies acquired in 1998. These companies
closed certain facilities in 1997 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 $258,000, or 2.9%, from $8,868,000
for the three months ended June 30, 1997 to $9,126,000 for the three months
ended June 30, 1998. The Pro Forma gross profit margin increased from 34.7% in
1997 to 35.4% in 1998 primarily due to improved capacity utilization.
Pro Forma selling, general and administrative expenses increased $909,000, or
14.6%, from $6,230,000 for the three months ended June 30, 1997 to $7,139,000
for the three months ended June 30, 1998. As a percentage of revenues, selling
general and administrative expenses increased from 24.4% in 1997 to 27.7% in
1998. The increase in Pro Forma selling, general and administrative expenses was
due to the same factors discussed in the six month comparison.
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 June 30, 1998, Vestcom had working capital of approximately $2,437,000. Net
cash provided by operating activities for the six months ended June 30, 1998,
was approximately $6,169,000 and was generated primarily from net income and
depreciation and amortization charges. Net cash used in investing activities for
the six months ended June 30, 1998, was approximately $8,062,000 which consisted
of approximately $13,231,000 from the sale of marketable securities,
approximately $17,083,000 of cash used for acquisitions, and approximately
$4,210,000 used for the purchase of property and equipment. Net cash provided by
financing activities for the six months ended June 30, 1998, was approximately
$283,000 which included approximately $2,552,000 from the issuance of common
stock to former stockholders of certain of the Founding Companies in connection
with earnout provisions and debt and capital lease repayments of approximately
$2,108,000. 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
June 30, 1998, the entire credit line was available.
<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 June 30, 1998, the Company had postage
advances from customers in the amount of approximately $5,600,000 and had
prepaid postage and postage receivables of approximately $3,600,000. 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 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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is primarily the result of computer programs being written
using two digits rather than four to define the applicable year. Certain
computer programs may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activity.
Vestcom has conducted an assessment of all its systems and prepared a plan to
repair or replace systems that are not currently Year 2000 compliant. The
Company anticipates that the majority of these changes will be completed during
1998. 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 has not yet assessed the extent to which its customers may
experience Year 2000 Issues. 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 materially
adversely affected. A loss of business could result from our customers inability
to implement new work projects while focusing their information technology
resources on Year 2000 issues within their existing systems.
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.
<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
In connection with the payments of earnouts to three of the companies previously
acquired by Vestcom, the Company issued, in April 1998, an aggregate of 304,779
unregistered shares of its Common Stock to certain former stockholders of such
acquired companies. These shares were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 28, 1998, in
Secaucus, New Jersey. At that meeting, each of the Board of Director's six (6)
nominees were elected to the Board and the stockholders ratified the appointment
of Arthur Andersen LLP as the Company's independent public accountants for 1998.
The following table sets forth the vote which was realized for each nominee:
- ----------------------------------------- --------------------------------------
Name For Authority Withheld
- ----------------------------------------- --------------------------------------
- ----------------------------------------- --------------------------------------
Stephen Bova 6,732,660 2,617
- ----------------------------------------- --------------------------------------
- ----------------------------------------- --------------------------------------
Joel Cartun 6,732,660 2,617
- ----------------------------------------- --------------------------------------
- ----------------------------------------- --------------------------------------
Leonard Fassler 6,732,660 2,617
- ----------------------------------------- --------------------------------------
- ----------------------------------------- --------------------------------------
Brendan Keating 6,732,660 2,617
- ----------------------------------------- --------------------------------------
- ----------------------------------------- --------------------------------------
Fred Lafer 6,732,660 2,617
- ----------------------------------------- --------------------------------------
- ----------------------------------------- --------------------------------------
Richard White 6,732,660 2,617
- ----------------------------------------- --------------------------------------
The results of the ratification of the appointment of Arthur Andersen LLP were
as follows 6,734,208 For, 669 Against, 460 Abstain, -0- Broker non-votes.
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: August 13, 1998
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