<PAGE>
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, 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 May 1, 1999 was 9,056,806
shares.
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VESTCOM INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
Part I: Financial Information
<TABLE>
<CAPTION>
Page(s)
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<S> <C>
Item 1: Financial Statements
- ------- --------------------
Condensed Consolidated Balance Sheets - as of December 31, 1998 and
March 31, 1999 (unaudited) 3
Condensed Consolidated Statements of Operations - For the Three Months
Ended March 31, 1998 (unaudited) and 1999 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1998 (unaudited) and 1999 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6-8
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
- ----------------------------------------------------------------------------------------------
Overview; Disclosures Regarding Forward Looking Statements; Introduction 9-10
Results of Operations 10-11
Liquidity and Capital Resources 11-12
Impact of the Year 2000 Issue 12-13
Item 3: Quantitative and Qualitative Disclosures About Market Risk 13
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Part II: Other Information
Item 2: Changes in Securities and Use of Proceeds 14
- -------------------------------------------------
Item 6: Exhibits and Reports on Form 8-K 14
- ----------------------------------------
Signature 14
Exhibit - Financial Data Schedule (For Electronic Submission Only) 15
</TABLE>
2
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1998 and March 31, 1999
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1998 1999
------------- --------------
(note 1) (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,887,971 $ 1,766,317
Marketable securities 360,480 364,359
Accounts receivable, net 21,190,379 23,728,169
Other current assets 9,552,929 9,875,401
------------- -------------
Total current assets 34,991,759 35,734,246
PROPERTY AND EQUIPMENT, net 27,576,892 30,796,991
GOODWILL, net 79,192,856 79,712,887
OTHER ASSETS 782,729 1,533,816
------------- -------------
Total assets $142,544,236 $ 147,777,940
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations 2,331,545 3,243,706
Accounts payable 10,761,607 10,074,374
Other liabilities 18,153,399 15,514,957
------------- -------------
Total current liabilities 31,246,551 28,833,037
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 16,592,754 20,583,925
OTHER NONCURRENT LIABILITIES 4,793,591 5,260,244
------------- -------------
Total liabilities $ 52,632,896 $ 54,677,206
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred Stock
Class B, 1 share authorized, issued and outstanding at
December 31, 1998 and March 31, 1999 2,651,867 2,651,867
Class C convertible, 100 shares authorized, issued and
outstanding at December 31, 1998 and no shares issued - -
and outstanding at March 31, 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 March 31, 1999, respectively 86,782,015 88,888,863
Retained earnings 857,367 1,914,869
Accumulated other comprehensive income (379,909) (354,865)
------------- -------------
Total stockholders' equity $ 89,911,340 $ 93,100,734
------------- -------------
Total liabilities and stockholders' equity $142,544,236 $ 147,777,940
============= =============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
3
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
REVENUES $ 25,559,496 $ 31,923,061
COST OF REVENUES 16,231,335 20,473,040
------------ ------------
Gross profit 9,328,161 11,450,021
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,201,566 9,180,905
------------ ------------
Income from operations 2,126,595 2,269,116
OTHER INCOME (EXPENSE)
Interest expense (242,519) (367,022)
Interest and other income 147,543 73,718
------------ ------------
Income before provision for income taxes 2,031,619 1,975,812
PROVISION FOR INCOME TAXES 1,001,222 918,311
------------ ------------
Net income $ 1,030,397 $ 1,057,501
============ ============
Net income per share - basic $ .12 $ .12
============ ============
Net income per share - diluted $ .11 $ .12
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1998 and 1999
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,030,397 $ 1,057,501
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 1,349,947 1,785,254
Changes in operating assets (increase) decrease in-
Accounts receivable (1,128,816) (1,763,808)
Other current assets 791,703 240,531
Other assets (69,960) (732,487)
Changes in operating liabilities increase (decrease) in-
Accounts payable 547,738 (2,326,772)
Other current liabilities (562,773) (2,826,520)
Other non-current liabilities (55,009) 191,653
----------- ------------
Net cash provided by (used in) operating activities 1,903,227 (4,374,648)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,179,036) (3,523,424)
Acquisition of businesses, net of cash acquired (9,888,483) (1,258,806)
Sale of marketable securities 12,440,748 -
----------- ------------
Net cash provided by (used in) investing activities 373,229 (4,782,230)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of long term debt (1,356,849) 4,903,332
Issuance of common stock -- 2,106,848
----------- ------------
Net cash (used in) provided by financing activities (1,356,849) 7,010,180
----------- ------------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES (32,277) 25,044
Net increase (decrease) in cash and cash equivalents 887,330 (2,121,654)
----------- ------------
CASH, beginning of period 4,092,000 3,887,971
----------- ------------
CASH, end of period $ 4,979,330 $ 1,766,317
============ ============
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.
5
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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 period ended March 31, 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 notes related 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) ACQUISITIONS
In January 1998, the Company acquired substantially all the assets of
Creative Data Services, Inc. ("CDS") and D.B. Acquisition, Inc. (doing
business as Business Mail Express, "BME"). In April 1998, the Company
acquired substantially all the assets of Dee Cee Graphics Inc. and in
August 1998, the Company acquired substantially all the assets of Graphic
Technology Systems, Inc. ("GTS"). In October 1998, the Company acquired
substantially all the assets of Manus Services Corporation.
The aggregate price paid for these acquisitions, including certain
earnout payments made in 1999, was approximately $17,100,000 in cash plus
the Company issued a note payable for $612,500 payable in January, 2000
bearing interest at 5%, a note payable for $1,150,000 payable in March,
2001 bearing interest at 5%, an aggregate of 40,000 shares of Common
Stock, plus incurred a potential future obligation to pay an additional
$650,000 in cash due to an earnout. The estimated goodwill associated
with these acquisitions, including provisions for earnouts, aggregated
approximately $16,000,000.
All of the above 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 February 12, 1999, the Company acquired substantially all the
assets of Conversion Printing Systems, Inc. ("CPS"). For the twelve
months ended December 31, 1998, CPS' revenues were approximately $8
million, of which approximately 60% were derived from sales to Vestcom
operating units.
6
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(4) EARNINGS PER SHARE
Basic EPS includes no dilution and is computed by dividing income (loss)
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution if certain securities are converted and also includes certain
shares that are contingently issuable.
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
-------------------------- --------------------------
March 31, 1998 March 31, 1999
-------------- --------------
Per Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share:
Net income/weighted average
shares outstanding $1,030,397 8,541,365 $0.12 $1,057,501 9,056,806 $0.12
---------- --------- ----- ------------ --------- -----
Diluted Earnings Per Share:
Net income/weighted average
shares outstanding 1,030,397 8,541,365 1,057,501 9,056,806
Goodwill adjustment on
earnouts (53,158) (3,911)
Stock Options 467,533 267
----------- --------- ------------ ----------
Net income/weighted average
shares outstanding adjusted
for assumed conversions to
common stock $ 977,239 9,008,898 $0.11 $1,053,591 9,057,073 $0.12
----------- --------- ----- ---------- --------- -----
</TABLE>
Options on approximately 133,318 and 432,148 shares of common stock were
not included in computing diluted earnings per share for the periods
ending March 31, 1998 and 1999, respectively, because their effects were
antidulitive.
(5) 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. In
February 1999, Vestcom paid $375,984 in cash and in March 1999, issued an
aggregate of 228,216 shares of Common Stock in connection with the
determination of an earnout for a Founding Company. Also in March 1999,
Vestcom paid $580,000 in cash to settle an earnout obligation to another
Founding Company. In March 1999, Vestcom paid $325,000, issued a note
payable for $612,500 at 5% interest due in January, 2000 and issued an
aggregate of 40,000 shares of Common Stock in connection with the
determination of an earnout of an acquired company.
After the March payments, the aggregate maximum earnout amount which the
Company could be required to pay if certain of the other acquired
companies attain their revenue and profit goals during certain periods
ending on July 31, 1999 is $650,000 in cash.
7
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(6) COMPREHENSIVE INCOME
The following represents comprehensive income:
Three Months Ended
March 31,
1998 1999
---- ----
Net income $ 1,030,397 $ 1,057,501
Foreign Currency Translation Adjustment (32,277) 25,044
----------- -----------
Comprehensive Income $ 998,120 $ 1,082,545
=========== ===========
(7) NEW ACCOUNTING PRONOUNCEMENTS
The Accounting Standards Executive Committee (AcSec) issued SOP 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," in March, 1998. The objective of the SOP is to provide
guidance that specifically addresses the accounting for the costs related
to developing, obtaining, modifying and/or implementing internal use
software. SOP 98-1 is intended to eliminate the diversity in practice
that exists in the accounting for internal use software and improve
financial reporting for what has become a significant unrecorded asset
for many companies. AcSec believes that the costs of computer software
developed or obtained for internal use are specifically identifiable,
have determinate lives, relate to probable future economic benefits, and
meet the criteria for recognition as an asset in the financial
statements. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998 and should be applied
prospectively to all costs incurred in connection with internal use
software development projects in those fiscal years including costs
incurred subsequent to adopting the SOP on projects that commenced in
earlier years. The Company has adopted this SOP as of January 1, 1999.
Management believes that upon initial adoption of SOP 98-1 there will be
the effect of increasing gross profit, income from operations, net income
and earnings per share due to the capitalization of certain costs
previously charged to expense. Generally, however, management believes
the effect will not be material due to the increased amortization expense
on capitalized costs consistent with SOP 98-1.
In April 1998, AcSec issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of
start-up costs and organization costs. It requires the costs of start-up
activities and organization costs to be expensed as incurred. The SOP is
effective for financial statements for fiscal years beginning after
December 15, 1998. Management believes that the adoption of SOP No. 98-5
will not have a material impact on its financial statements.
8
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
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 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, 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, variations in quarterly results and the sufficiency of the
Company's working capital. Other factors are described from time to time in the
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.
INTRODUCTION
Vestcom International, Inc. was incorporated in September 1996.
Concurrently with the consummation of Vestcom's initial public offering (the
"Offering") on August 4, 1997, Vestcom acquired seven companies that create,
manage and distribute business critical documents (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 Vestcom as the acquirer.
Since the Offering, Vestcom has acquired additional companies that create,
manage and distribute business critical documents, as detailed below
(collectively with the Founding Companies referred to herein as "Acquired
Companies").
Vestcom acquired substantially all the assets of New England Laser Printing,
Inc. (now known as Vestcom Rhode Island, Inc.) in November, 1997, and the stock
of Moreau Promotional Services, Inc. (now known as Vestcom Canada) in December
1997. As of January 20, 1998 Vestcom acquired substantially all the assets of
Creative Data Services, Inc. ("CDS") and D.B. Acquisition Inc. (doing business
as Business Mail Express) ("BME"), a wholly owned subsidiary of CDS, and on
April 14, 1998 Vestcom acquired substantially all the assets of Dee Cee Graphics
Inc. ("Dee Cee"). The operations of Dee Cee were consolidated into Vestcom
Massachusetts' operations. On August 4, 1998, Vestcom acquired substantially all
the assets of Graphic Technology Systems, Inc. ("GTS"). The operations of GTS
were consolidated into Vestcom's Retail Solutions'
9
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
operations. On October 30, 1998, Vestcom acquired substantially all the assets
of Manus Services Corporation ("Manus"), a company based in Seattle, Washington.
As of February 12, 1999, Vestcom acquired substantially all the assets of
Conversion Printing Systems, Inc. ("CPS"). The Acquired Companies were managed
prior to their acquisition as independent private companies, and their results
of operations reflect different tax structures (S corporations and C
corporations for the U.S. Acquired Companies), which have influenced, among
other things, the Acquired Companies historical levels of owners' compensation.
In connection with the acquisition of the Acquired Companies, these owners and
certain key employees agreed to certain reductions in their compensation which
commenced as of the date of acquisition.
The Company's Condensed Consolidated Balance Sheet as of March 31, 1999 includes
the Founding Companies and Vestcom Rhode Island, Inc., Vestcom Ontario, CDS,
BME, Dee Cee, GTS, Manus and CPS. The results of operations for the three months
ended March 31, 1999, and the statement of cash flows for the three months ended
March 31, 1999, include the results of Vestcom and all of the companies acquired
in 1997, and the companies acquired in 1998 and 1999, from their respective
dates of acquisition.
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. In connection with a determination of an earnout for one of the Founding
Companies made in April 1998, Vestcom incurred an obligation to pay $1,160,000
in cash. The Company paid $580,000 of the $1,160,000 obligation in September
1998 and the remaining $580,000 in March 1999. In February 1999, Vestcom paid
$375,984 and in March 1999, issued an aggregate of 228,216 shares of Common
Stock in connection with the determination of an earnout for another Founding
Company. In March 1999, Vestcom paid $325,000, issued a note payable for
$612,500 at 5% interest due in January, 2000 and issued an aggregate of 40,000
shares of Common Stock in connection with the determination of an earnout of an
acquired company. After the February 1999 and March 1999 payments, the aggregate
maximum earnout payments which Vestcom may be required to make going forward are
$650,000 in cash.
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 Vestcom's future earnings per share.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- -------------------------------------------------------------------------------
Revenues increased $6,364,000, or 24.9%, from $25,559,000 for the three months
ended March 31, 1998 to $31,923,000 for the three months ended March 31, 1999.
This increase was primarily attributable to acquisitions which accounted for
approximately $3,050,000 of such increase. The remainder of the increase, or
approximately $3,314,000, 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, measuring the year over year revenue growth of companies owned by
the Company for more than one year, was 8.2%.
Gross profit increased $2,122,000, or 22.7%, from $9,328,000 for the three
months ended March 31, 1998 to $11,450,000 for the three months ended March 31,
1999. The increase in gross profit was primarily attributable to acquisitions
which accounted for approximately $1,137,000, with the remaining increase
relating to the increased volume of business. The gross profit margin decreased
from 36.5% for the three months ended March 31, 1998 to 35.9% for the same
period in 1999. The gross profit margin decrease was due to costs
10
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 $1,979,000, or 27.5%,
from $7,202,000 for the three months ended March 31, 1998 to $9,181,000 for the
three months ended March 31, 1999. As a percentage of revenues, selling general
and administrative expenses increased from 28.2% in 1998 to 28.8% in 1999. The
increase was attributable in part to acquisitions which accounted for
approximately $568,000, or 28.7% 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 severance obligations. The Company expects that it will continue to
incur such costs in future periods in connection with its integration process,
and that such costs may increase in the future due to additional facility
consolidations expected to occur during the remainder of 1999.
Interest expense increased $124,000, from $243,000 for the three months ended
March 31, 1998 to $367,000 for the three months ended March 31, 1999. This
increase was attributable to 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 $74,000, from $148,000 for the three months
ended March 31, 1998 to $74,000 for the three months ended March 31, 1999. This
decrease was due to reduced interest income resulting from the utilization of
cash from the initial public offering to finance acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, Vestcom had working capital of approximately $6,901,000
compared to approximately $3,745,00 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 three months ended March 31, 1999, was approximately
$4,375,000 which consisted of approximately $2,843,000 generated primarily from
net income and depreciation and amortization charges, offset by approximately
$1,764,000 representing an increase in accounts receivable, approximately
$2,327,000 used in reducing accounts payable and approximately $2,827,000 used
in reducing other current liabilities. Net cash used in investing activities for
the three months ended March 31, 1999, was approximately $4,782,000 which
consisted of approximately $1,259,000 of cash used for acquisitions, and
approximately $3,523,000 used for the purchase of property and equipment. Net
cash provided by financing activities for the three months ended March 31, 1999,
was approximately $7,035,000 which included approximately $4,903,000 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 March 31, 1999, $18,804,000 was outstanding and $11,196,000
remained available under the Credit Facility.
11
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
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 March 31, 1999, the Company had postage
advances from customers in the amount of approximately $4,541,000 and had
prepaid postage and postage receivables of approximately $2,531,000. 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 $7,000,000 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 March 31, 1999, the Company had incurred
approximately $3,523,000 of such anticipated expenditures. There are no other
significant commitments for future capital expenditures, although it is likely
that cash outflows for business acquisitions and leases will continue. While no
assurance can be given, management believes that its 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 near completion in all units at
the end of 1998. Full validation and implementation is scheduled to be complete
by the end of July 1999. Since each Vestcom unit uses many different kinds of
computers, procedures to implement year 2000 corrections vary greatly. Each unit
has a plan to test all year 2000 changes during the first half 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. 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, with some work to be completed
during the second 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
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 or results of operations could be adversely affected. A loss
of business could result from Vestcom's customers' inability to implement new
work
12
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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 $425,000 for this project during
1998 and the first quarter of 1999, of which about $200,000 was incremental
expense. Major planned costs in 1999 are to cover the replacement of billing
software and PC hardware. 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.
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, 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.
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 10K.
13
<PAGE>
Part II: Other Information
Item 2 - Changes in Securities and Use of Proceeds
In connection with the payments of earnouts regarding two companies previously
acquired by Vestcom, the Company issued, in March, 1999, an aggregate of 268,216
unregistered shares of its Common Stock. These shares were issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
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/ Harvey Goldman
-----------------------------------------------
Harvey Goldman, Executive Vice President
and Chief Financial Officer
Dated: May 12, 1999
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