<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
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, 1999 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, 1999 was
9,056,806 shares.
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
Part I: Financial Information
Page(s)
-------
<S> <C>
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - as of December 31, 1998 and
June 30, 1999 (unaudited) 3
Condensed Consolidated Statements of Operations - For the Three Months and Six Months
Ended June 30, 1998 (unaudited) and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - For the Six Months Ended
June 30, 1998 (unaudited) and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview; Disclosures Regarding Forward Looking Statements 8
Results of Operations 9
Liquidity and Capital Resources 11
Impact of the Year 2000 Issue 12
Item 3: Quantitative and Qualitative Disclosures About Market Risk 14
Part II: Other Information
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
</TABLE>
2
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and June 30, 1999
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1998 1999
------------ -----------
(note 1) (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,887,971 $ 2,753,918
Marketable securities 360,480 24,831
Accounts receivable, net 21,190,379 24,057,252
Other current assets 9,552,929 9,640,659
------------ ------------
Total current assets 34,991,759 36,476,660
PROPERTY AND EQUIPMENT, net 27,576,892 33,025,736
GOODWILL, net 79,192,856 79,102,897
OTHER ASSETS 782,729 1,605,460
------------ ------------
Total assets $142,544,236 $150,210,753
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations 2,331,545 3,586,162
Accounts payable 10,761,607 10,589,350
Other liabilities 18,153,399 13,818,832
------------ ------------
Total current liabilities 31,246,551 27,994,344
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 16,592,754 25,152,691
OTHER NONCURRENT LIABILITIES 4,793,591 6,437,377
------------ ------------
Total liabilities $ 52,632,896 $ 59,584,412
============ ============
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock
Class B, 1 share authorized, issued and outstanding at
December 31, 1998 and June 30, 1999 2,651,867 2,651,867
Class C convertible, 100 shares authorized, issued and
outstanding at December 31, 1998 and 0 shares issued and - -
outstanding at June 30, 1999
Common stock, no par value; 20,000,000 shares authorized;
8,788,590 and 9,056,806 shares issued and outstanding at
December 31, 1998 and June 30, 1999, respectively 86,782,015 88,888,863
Retained earnings (deficit) 857,367 (628,506)
Accumulated other comprehensive income (379,909) (285,883)
------------ ------------
Total stockholders' equity $ 89,911,340 $ 90,626,341
------------ ------------
Total liabilities and stockholders' equity $142,544,236 $150,210,753
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
3
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES $25,738,749 $31,393,561 $51,298,245 $63,316,622
COST OF REVENUES 16,628,905 21,120,043 32,860,240 41,593,083
------------ ----------- ----------- -----------
Gross profit 9,109,844 10,273,518 18,438,005 21,723,539
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,133,086 9,630,426 14,334,652 18,811,331
RESTRUCTURING CHARGES - 3,987,880 - 3,987,880
------------ ----------- ---------- -----------
Income (loss) from operations 1,976,758 (3,344,788) 4,103,353 (1,075,672)
OTHER INCOME (EXPENSE)
Interest expense (238,103) (459,748) (480,622) (826,770)
Interest and other income 114,972 23,235 262,515 96,953
------------ ----------- ---------- -----------
Income (loss) before provision for (benefit from)
income taxes 1,853,627 (3,781,301) 3,885,246 (1,805,489)
PROVISION FOR (BENEFIT FROM) INCOME TAXES
951,769 (1,237,926) 1,952,991 (319,616)
------------ ------------ ---------- -----------
Net income (loss) $ 901,858 $(2,543,375) $1,932,255 $(1,485,873)
============ =========== ========== ===========
Net income (loss) per share - basic $ .10 $ (.28) $ .22 $ (.16)
============ =========== ========== ==========
Net income (loss) per share - diluted $ .10 $ (.28) $ .21 $ (.16)
============ =========== =========== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,932,255 $(1,485,873)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 2,956,526 3,957,217
Loss on disposal of equipment - 4,391
Restructuring charges - 740,399
Changes in operating assets (increase) decrease in-
Accounts receivable (345,905) (2,092,891)
Other current assets (1,259,509) 479,152
Other assets 40,806 (804,131)
Changes in operating liabilities increase (decrease) in-
Accounts payable 1,758,143 (1,811,796)
Other current liabilities 1,235,702 (4,522,645)
Other non-current liabilities (148,946) 1,368,786
------------ -----------
Net cash provided by (used in) operating activities 6,169,072 (4,167,391)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (4,210,437) (7,136,381)
Acquisition of businesses, net of cash acquired 17,083,148) (1,274,570)
Sale of marketable securities 13,231,385 335,649
Proceeds from sale of assets - 12,050
------------ -----------
Net cash used in investing activities (8,062,200) (8,063,252)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of long term debt (2,107,989) 8,895,716
Issuance of common stock 2,552,418 2,106,848
------------ -----------
Net cash provided by financing activities 444,429 11,002,564
------------ -----------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES (161,513) 94,026
Net decrease in cash and cash equivalents (1,610,212) (1,134,053)
------------ -----------
CASH, beginning of period 4,092,000 3,887,971
------------ -----------
CASH, end of period $ 2,481,788 $ 2,753,918
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations $ 24,717 $ 918,838
============ ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
<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"), seven document management service
companies acquired simultaneously with the Company's initial public offering
(collectively, the "Founding Companies"), and all subsequent acquisitions
since their respective acquisition dates. The balance sheet at December 31,
1998 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, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements of the Company and the related notes thereto contained
in Vestcom's Annual Report on Form 10-K for the year ended December 31,
1998.
(2) NATURE OF BUSINESS
Vestcom was formed in September 1996 to create an international document
management service provider focusing on the creation, management and
distribution of business critical documents. The Company's primary strategy
is to acquire, integrate and facilitate the growth of similar and
complementary companies in the highly fragmented document management
services industry.
(3) EARNINGS PER SHARE
Basic EPS is calculated by dividing income (loss) available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. The weighted average number of shares of
common stock used in determining basic EPS was 9,056,806 and 8,790,565 for
the three months ended June 30, 1999 and 1998, respectively; and 9,056,806
and 8,789,583 for the six months ended June 30, 1999 and 1998, respectively.
Diluted EPS is calculated by dividing income (loss) available to common
shareholders, adjusted to reflect the effects of earnouts and stock options,
by the weighted average number of shares of common stock outstanding, plus
additional common shares that could be issued in connection with potentially
dilutive securities. The weighted average number of shares of common stock
used in determining diluted EPS was 9,056,806 and 9,031,170 for the three
months ended June 30, 1999 and 1998, respectively; and 9,056,806 and
9,001,227 for the six months ended June 30, 1999 and 1998, respectively, and
reflects additional shares issuable in connection with earnouts and stock
options, 240,605 shares for the three months ended June 30, 1998, and
211,644 for the six months ended June 30, 1998.
Options to purchase approximately 554,134 and 227,935 shares of common stock
were not included in the computation of diluted earnings per share for the
three months ended June 30, 1999 and 1998, respectively and options to
purchase 431,564 and 177,299 shares of common stock were not included in the
computations of diluted earnings per share for the six months ended June 30,
1999 and 1998, respectively, because the effects would have been
antidilutive.
6
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
(4) COMMITMENTS AND CONTINGENCIES
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. As of June 30, 1999, the
aggregate maximum earnout amount which the Company could be required to pay
if certain of the acquired companies attain their revenue and profit goals
during certain periods ending on July 31, 1999 is $650,000 in cash.
(5) COMPREHENSIVE INCOME (LOSS):
The following represents comprehensive income (loss):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 1998 June 30, 1999 June 30, 1998 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (Loss) $ 878,571 $(2,543,375) $1,908,968 $(1,485,873)
Foreign Currency Translation
Adjustment (129,236) 68,982 (161,513) 94,026
---------- ----------- ---------- -----------
Comprehensive Income (Loss) $ 749,335 $(2,474,393) $1,747,455 $(1,391,847)
========== =========== ========== ============
</TABLE>
(6) RESTRUCTURING CHARGES
In the second quarter of 1999, the Company recorded a restructuring charge
of $4.0 million. The restructuring plan comprises consolidation of certain
facilities and the integration of operations in three of the Company's
operating locations, the Mid-Atlantic area, the New England area and Canada.
The restructuring plan is aimed at reducing the Company's operating cost
structure by reducing the number of locations, consolidating facilities and
reducing personnel costs. The restructuring charge includes the facility
closure and consolidation costs from these facilities of $2,980,000
(including the write-down of fixed assets of $740,000), personnel costs of
$652,000 relating to the termination of employees and incurred moving
expenses of $356,000 related to the various relocations during the second
quarter. Consistent with the Company's plans to continue its consolidation
in the Mid-Atlantic area during the third quarter, the Company expects to
incur additional charges in the third quarter related to moving expenses and
personnel costs.
The restructuring plan does not contemplate the Company eliminating any of
its current products or services; the consolidations are designed to make
the Company's existing businesses more efficient.
7
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
The components of the restructuring charges as of June 30, 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
1999 Reserves Personnel Costs (1) Facility Closure & Moving Costs Total
Consolidation Costs
(2)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------
Restructuring Accrual $652 $2,239 $ - $2,891
======
1999 Spending 166 - 356 522
---- ------ ---- ======
Restructuring Accrual
At June 30, 1999 $486 $2,239 $ - $2,725
==== ====== ======
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Personnel Costs - consist of severance costs related to the closing
and/or relocation of certain operating facilities.
(2) Facility Closure and Consolidation Costs - consist of the estimated
costs to close redundant facilities, lease costs and other costs
associated with closed facilities and facilities scheduled to be closed.
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. The Company's Condensed Consolidated Balance Sheet as of June
30, 1999 includes all of the Acquired Companies. The results of operations and
the statement of cash flows for the six months ended June 30, 1999, include the
results of Vestcom and all of the companies acquired in 1997 and 1998 and the
company acquired in 1999 from its date of acquisition.
DISCLOSURES REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended that are based on
the beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. Such statements
reflect the current views of the Company with respect to future events based on
currently available information and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in such
forward-looking statements. Factors that could cause actual results to differ
materially from the Company's expectations include, but are not limited to, the
following: the ability of the Company to execute and manage the Company's growth
strategy, the results of the Company's investment spending, the ability to
effectively consolidate and integrate its production facilities and functions as
part of the Company's integration program, the ability to realize reduced
overhead costs, increased operating efficiencies and enhanced services at the
newly consolidated facilities, acceptance of the Company's new products in the
marketplace, the entry of new competitors into the marketplace, changes in the
business document outsourcing industry, the availability of suitable acquisition
candidates and of acquisition financing, the assimilation of new acquisitions
with existing business, the ability to attract and retain key customers, the
ability to improve its business pipeline, the ability to positively modify its
revenue mix, variations in quarterly results and the sufficiency of the
Company's working capital. Other factors are described from time to time in the
8
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
Company's public filings with the Securities and Exchange Commission, news
releases and other communications. Also, when Vestcom uses the words "believes,"
"expects," "anticipates," "estimates," "plans," "intends," "objectives,"
"goals," "aims," "projects" or similar words or expressions, Vestcom is making
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company does not undertake any obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues increased $5,654,000, or 22%, from $25,739,000 for the three months
ended June 30, 1998 to $31,393,000 for the three months ended June 30, 1999.
This increase was primarily attributable to acquisitions which accounted for
approximately $3,853,000 of such increase. The remainder of the increase, or
approximately $1,801,000, was attributable to internal growth. This internal
growth was due to increased sales to new and existing customers primarily in the
financial services and retail markets. The Company's internal growth rate during
the quarter was 7%.
Gross profit increased $1,163,000, or 12.8%, from $9,110,000 for the three
months ended June 30, 1998 to $10,273,000 for the three months ended June 30,
1999. The increase in gross profit was primarily attributable to acquisitions
which accounted for approximately $1,295,000. The gross profit margin decreased
from 35.4% for the three months ended June 30, 1998 to 32.7% for the same period
in 1999. The gross profit margin decrease was due to costs incurred as the
Company continues consolidating its operations, excess capacity in the Company's
fulfillment operations and the effects of the renegotiations of certain of the
capital lease obligations with one of Vestcom's vendors which reclassified
certain of the obligations from capital leases to operating leases. This
renegotiation resulted in expense being moved from interest expense to cost of
revenue thereby reducing gross profit. The Company expects that, as it continues
to consolidate its operations, gross margins will continue to be negatively
affected due to, among other factors, the continuation of redundant facility,
equipment and personnel costs during the integration process.
Selling, general and administrative expenses increased $2,497,000, or 35%, from
$7,133,000 for the three months ended June 30, 1998 to $9,630,000 for the three
months ended June 30, 1999. As a percentage of revenues, selling general and
administrative expenses increased from 27.7% in 1998 to 30.7% in 1999. The
increase was attributable in part to acquisitions which accounted for
approximately $627,000, or 25.1% of the total increase. The remaining increase
in selling, general and administrative expenses was primarily due to increased
compensation expense including increased commissions on higher sales, increased
staffing for new technical and administrative personnel to support the greater
volume of business, increased spending in sales and marketing programs and the
costs associated with the increased Vestcom corporate management staff. In
addition, the Company incurred costs in connection with its efforts to integrate
its acquired companies. These costs included redundant overhead and facility
costs and other integration costs. The Company expects that it will continue to
incur such costs in connection with its ongoing integration process and the
additional facility consolidations expected to occur during the remainder of
1999.
In the second quarter of 1999, the Company recorded a restructuring charge of
$4.0 million. Of that amount, $522,000 has been spent through June 30, 1999. The
restructuring plan comprises consolidation of certain facilities and the
integration of operations in three of the Company's operating locations, the
Mid-Atlantic area, the New England area and Canada. The restructuring plan is
aimed at reducing the Company's operating cost structure by reducing the number
9
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
of locations, consolidating facilities and reducing personnel costs. The
restructuring charge includes the facility closure and consolidation costs from
these facilities of $2,980,000 (including the write-down of fixed assets of
$740,000), personnel costs of $652,000 relating to the termination of employees
and incurred moving expenses of $356,000 related to the various relocations
during the second quarter. Consistent with the Company's plans to continue its
consolidation in the Mid-Atlantic area during the third quarter, the Company
expects to incur additional charges in the third quarter related to both moving
expenses and personnel costs. The restructuring plan does not contemplate the
Company eliminating any of its current products or services; the consolidations
are designed to make the Company's existing businesses more efficient
Interest expense increased $222,000, from $238,000 for the three months ended
June 30, 1998 to $460,000 for the three months ended June 30, 1999. This
increase was attributable to increased borrowings on the Company's credit
facility to finance acquisitions, equipment purchases, leasehold improvements
and payments relating to earnout agreements which offset the effects of the
capital lease renegotiations discussed above.
Interest and other income decreased $92,000, from $115,000 for the three months
ended June 30, 1998 to $23,000 for the three months ended June 30, 1999. This
decrease was due to reduced interest income resulting from the utilization of
cash to finance acquisitions.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues increased $12,019,000, or 23.4%, from $51,298,000 for the six months
ended June 30, 1998 to $63,317,000 for the six months ended June 30, 1999. This
increase was primarily attributable to acquisitions which accounted for
approximately $6,811,000 of such increase. The remainder of the increase, or
approximately $5,208,000, was attributable to internal growth. This internal
growth was due to increased sales to new and existing customers primarily in the
financial services and retail markets. The Company's internal growth rate during
this period was 10.2%.
Gross profit increased $3,285,000, or 17.8%, from $18,438,000 for the six months
ended June 30, 1998 to $21,723,000 for the six months ended June 30, 1999. The
increase in gross profit was primarily attributable to acquisitions which
accounted for approximately $1,590,000, with the remaining increase relating to
the increased volume of business. The gross profit margin decreased from 35.9%
for the six months ended June 30, 1998 to 34.3% for the same period in 1999. The
gross profit margin decrease was due to costs incurred as the Company continues
consolidating its operations, excess capacity in the Company's fulfillment
operations and the effects of the renegotiation of certain of the capital lease
obligations with one of Vestcom's vendors which reclassified certain of the
obligations from capital leases to operating leases. This renegotiation resulted
in expense being moved from interest expense to cost of revenue thereby reducing
gross profit. The Company expects that, as it continues to consolidate its
operations, gross margins will continue to be negatively affected due to, among
other factors, the continuation of redundant facility, equipment and personnel
costs during the integration process.
Selling, general and administrative expenses increased $4,476,000, or 31.2%,
from $14,335,000 for the six months ended June 30, 1998 to $18,811,000 for the
six months ended June 30, 1999. As a percentage of revenues, selling general and
administrative expenses increased from 27.9% in 1998 to 29.7% in 1999. The
increase was attributable in part to acquisitions which accounted for
approximately $1,084,000, or 24.2% of the total increase. The remaining increase
in selling, general and administrative expenses was primarily due to increased
compensation expense including increased commissions on higher sales, increased
staffing for new technical and administrative personnel to support the greater
volume of business, increased spending in sales and marketing programs and the
costs associated with the increased Vestcom corporate management staff. In
addition, the Company incurred costs in connection with its efforts to integrate
its acquired companies. These costs included redundant overhead and facility
costs and other integration costs. The Company expects that it will continue to
incur such costs in connection with its ongoing integration process and the
additional facility consolidations expected to occur during the remainder of
1999.
10
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
In the second quarter of 1999, the Company recorded a restructuring charge of
$4.0 million. Of that amount, $522,000 has been spent through June 30, 1999. The
restructuring plan comprises consolidation of certain facilities and the
integration of operations in three of the Company's operating locations, the
Mid-Atlantic area, the New England area and Canada. The restructuring plan is
aimed at reducing the Company's operating cost structure by reducing the number
of locations, consolidating facilities and reducing personnel costs. The
restructuring charge includes the facility closure and consolidation costs from
these facilities of $2,980,000 (including the write-down of fixed assets of
$740,000), personnel costs of $652,000 relating to the termination of employees
and incurred moving expenses of $356,000 related to the various relocations
during the second quarter. Consistent with the Company's plans to continue its
consolidation in the Mid-Atlantic area during the third quarter, the Company
expects to incur additional charges in the third quarter related to both moving
expenses and personnel costs. The restructuring plan does not contemplate the
Company eliminating any of its current products or services; the consolidations
are designed to make the Company's existing businesses more efficient.
Interest expense increased $346,000, from $481,000 for the six months ended June
30, 1998 to $827,000 for the six months ended June 30, 1999. This increase was
attributable to increased borrowings on the Company's credit facility to finance
acquisitions, equipment purchases, leasehold improvements and payments relating
to earnout agreements which offset the effects of the capital lease
renegotiations discussed above.
Interest and other income decreased $166,000, from $263,000 for the six months
ended June 30, 1998 to $97,000 for the six months ended June 30, 1999. This
decrease was due to reduced interest income resulting from the utilization of
cash to finance acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, Vestcom had working capital of approximately $8,482,000
compared to approximately $3,745,000 at December 31, 1998. The increase was
primarily attributable to increased accounts receivable and the reduction of
accounts payable and other current liabilities. Net cash used in operating
activities for the six months ended June 30, 1999, was approximately $4,167,000
which consisted of approximately $2,471,000 generated primarily from
depreciation and amortization charges minus the net loss, offset by
approximately $2,093,000 representing an increase in accounts receivable,
approximately $1,812,000 used in reducing accounts payable and approximately
$4,523,000 used in reducing other current liabilities. Net cash used in
investing activities for the six months ended June 30, 1999, was approximately
$8,063,000 which consisted of approximately $1,275,000 of cash used for
acquisitions, and approximately $7,136,000 used for the purchase of property and
equipment and leasehold improvements. Net cash provided by financing activities
for the six months ended June 30, 1999, was approximately $11,003,000 which
included approximately $8,896,000 from net borrowings and $2,107,000 from the
issuance of common stock 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 June 30, 1999, $21,060,000 was outstanding and $8,940,000
remained available under the Credit Facility.
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, 1999, the Company had postage
advances from customers in the amount of approximately $4,320,000 and had
prepaid postage and postage receivables of approximately $2,385,000. 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.
11
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
Capital expenditures of approximately $9,000,000 are expected in 1999. The
anticipated expenditures relate to leasehold improvements, furniture and
fixtures, and equipment due to the opening of new facilities to support the
consolidation and integration of production sites and the anticipated production
needs of the business. As of June 30, 1999, the Company had incurred
approximately $7,136,000 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.
In connection with Vestcom's acquisitions, Vestcom has made certain earnout
payments and may be required to pay an additional earnout if specified revenue
thresholds, margins or earnings are attained during the period ending July 31,
1999. As of June 30, 1999, the aggregate maximum earnout payments which Vestcom
may be required to make going forward are $650,000 in cash.
While no assurance can be given, management believes that its anticipated 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
Vestcom 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 Vestcom's facilities and equipment. Vestcom 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 Vestcom's approach are awareness, assessment,
remediation, validation, implementation and contingency planning.
Vestcom has separate plans to complete the year 2000 project for each operating
unit, with central review and audit being performed by the headquarters
organization. All units have completed the awareness and assessment phases.
Remediation, validation and implementation were substantially near completion in
all units at the end of the second quarter of 1999. Full validation and
implementation is scheduled to be complete by the end of the third quarter of
1999 and all operating units are substantially on plan to complete year 2000
projects. Certain of Vestcom's operating facilities are moving to new facilities
during the third quarter, and for various reasons, including efficiencies, new
telephone and computer hardware is being upgraded or replaced simultaneously
with these moves instead of prior to the moves.
Since each Vestcom unit uses many different kinds of computers, procedures to
implement year 2000 corrections vary greatly. Each unit has been following a
plan to test all year 2000 changes during the first nine months of 1999. This
includes upgrades to mainframe hardware and software operating systems, laser
printer software upgrades, microfiche and CD software replacements, PC
replacements and financial software upgrades. These activities are substantially
complete with some small projects to be tested during the third quarter. 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.
Vestcom has contacted its major software and hardware suppliers to verify that
the systems Vestcom uses are Year 2000 compliant. All major vendors have
replied, and have either repaired, replaced or are in the process of upgrading
hardware and software installed at Vestcom. A few pieces of hardware are being
replaced during the third quarter of 1999. There can be no assurances that other
companies' systems on which Vestcom'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 Vestcom'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. Vestcom has assessed the extent to which
its customers may experience Year 2000 issues and has completed testing with
12
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
certain major customers. If customers or others with whom Vestcom does business
experience problems relating to the Year 2000 issue, Vestcom's business,
financial condition, liquidity or results of operations could be adversely
affected. A loss of business could result from Vestcom's customers' inability to
implement new work projects while focusing their information technology
resources on Year 2000 issues within their existing systems.
Vestcom estimates that the aggregate cost of its Year 2000 project will be
approximately $1,000,000, 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 Vestcom.
Vestcom incurred total costs of approximately $625,000 for this project during
1998 and the first half of 1999, on plan with the overall project estimate. Out
of the $625,000, approximately $300,000 was incremental expense. The majority of
the remaining planned costs in 1999 are to cover the replacement of PC hardware
and new telephone equipment. The anticipated costs of the project, as well as
the date on which Vestcom 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.
During the first quarter of 1999, the Company, with the assistance of an
external year 2000 compliance specialist, performed a review of each of its
operating companies. The review showed the Company was on schedule with its
validation and implementation phases. As a result of this review the Company was
able to provide additional support in those locations that required greater
assistance and during the second quarter, Vestcom's Year 2000 projects proceeded
on plan.
Based on its current estimates and information currently available Vestcom does
not anticipate that the costs associated with this project will have a material
adverse effect on Vestcom's consolidated financial position, liquidity, results
of operations or cash flows in the future. The preceding sentence constitutes a
forward-looking statement.
In the event that the efforts of Vestcom's Year 2000 project do not address all
relevant problems, Vestcom has developed contingency plans. Vestcom uses
multiple suppliers for most critical processes. Reliance on multiple suppliers
lessens risk to any single critical business process. In the limited cases where
there is a single supplier, Vestcom is performing extensive testing and planning
for onsite support at year-end to minimize the length and impact of a potential
outage. In addition, Vestcom's decentralized operational structure allows for a
single operating unit to have a software or hardware failure, while another unit
can provide backup support. This provides reduced risk if a single unit does not
successfully complete the required changes to become Year 2000 compliant as
planned. As part of its contingency planning, Vestcom has arranged to have
professionals on site at the turn of the century to monitor and support any
potential problems internally or with external vendors.
13
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
Vestcom uses the services of many public utilities such as telecommunications
common carriers, both local and long distance, water, gas, electrical power and
municipal services such as fire and security. The Company cannot effectively
test these services for year 2000 readiness. These organizations have made
public statements regarding readiness for year 2000 and the Company is unable to
assess the accuracy of these statements. Since Vestcom is located in many
different geographic areas, and relies on many different public utility
suppliers, the failure of one of these entities could affect the Company.
Vestcom 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.
Item 3: - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable - no significant change from Annual Report on Form 10-K.
14
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
Part II: Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 26, 1999, in
Secaucus, New Jersey. At that meeting, each of the Board of Directors' seven (7)
nominees were elected to the Board and the stockholders approved the amendment
to the Company's 1997 Equity Compensation Program to authorize the issuance of
additional shares of Common Stock under the Program. The following table sets
forth the vote which was realized for each nominee:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Name For Authority Withheld
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen R. Bova 6,459,658 635,350
- ------------------------------------------------------------------------------------------------------
Joel Cartun 6,459,358 635,050
- ------------------------------------------------------------------------------------------------------
Leonard J. Fassler 6,459,658 635,350
- ------------------------------------------------------------------------------------------------------
Brendan Keating 6,459,658 635,350
- ------------------------------------------------------------------------------------------------------
Fred S. Lafer 6,459,658 635,350
- ------------------------------------------------------------------------------------------------------
Robert J. Levenson 6,459,658 635,350
- ------------------------------------------------------------------------------------------------------
Richard D. White 6,459,658 635,350
- ------------------------------------------------------------------------------------------------------
</TABLE>
The results of the ratification of the approval of the amendment to the
Company's 1997 Equity Compensation Program were as follows 5,837,853 For,
1,252,690 Against, 4,165 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
Signature
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/ Joel Cartun
----------------------------------------
Joel Cartun, Chief Executive Officer
Dated: August 13, 1999
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,753,918
<SECURITIES> 24,831
<RECEIVABLES> 25,176,359
<ALLOWANCES> 1,119,107
<INVENTORY> 5,040,795
<CURRENT-ASSETS> 36,476,660
<PP&E> 40,101,881
<DEPRECIATION> (7,076,145)
<TOTAL-ASSETS> 150,210,753
<CURRENT-LIABILITIES> 27,994,344
<BONDS> 0
0
2,651,867
<COMMON> 88,888,863
<OTHER-SE> (914,389)
<TOTAL-LIABILITY-AND-EQUITY> 150,210,753
<SALES> 63,316,622
<TOTAL-REVENUES> 63,316,622
<CGS> (41,593,083)
<TOTAL-COSTS> (22,799,211)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (826,770)
<INCOME-PRETAX> (1,805,489)
<INCOME-TAX> (319,616)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,485,873)
<EPS-BASIC> (.16)
<EPS-DILUTED> (.16)
</TABLE>
