<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 June 30, 2000 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.)
5 Henderson Drive
West Caldwell, New Jersey 07006
(Address of principal executive office, including zip code)
973-882-7000
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
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, 2000 was
9,056,806 shares.
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Part I: Financial Information
Page(s)
-------
<S> <C>
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - as of December 31, 1999 and
June 30, 2000 (unaudited) 3
Condensed Consolidated Statements of Operations - For the Three Months and Six Months
Ended June 30, 1999 (unaudited) and 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - For the Six Months Ended
June 30, 1999 (unaudited) and 2000 (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; Results of Operations 7
Liquidity and Capital Resources 9
Item 3: Quantitative and Qualitative Disclosures About Market Risk 10
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Part II: Other Information
Item 4: Submission of Matters to a Vote of Security Holders 10
------------------------------------------------------------
Item 6: Exhibits and Reports on Form 8-K 10
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Signature 10
</TABLE>
2
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and June 30, 2000
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------- -------------
(note 1) (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,458,613 $ 970,053
Accounts receivable, net 27,228,690 26,363,109
Other current assets 14,613,707 12,757,430
------------- -------------
Total current assets 43,301,010 40,090,592
PROPERTY AND EQUIPMENT, net 37,518,273 37,979,080
GOODWILL, net 77,894,965 76,469,730
OTHER ASSETS 665,345 506,701
------------- -------------
Total assets $ 159,379,593 $ 155,046,103
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 5,421,376 $ 4,175,642
Accounts payable 15,067,563 12,936,358
Other liabilities 14,948,004 14,591,537
------------- -------------
Total current liabilities 35,436,943 31,703,537
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 27,506,522 26,424,304
OTHER NONCURRENT LIABILITIES 6,637,579 6,106,662
------------- -------------
Total liabilities $ 69,581,044 $ 64,234,503
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock
Class B, 1 share authorized, issued and outstanding at
December 31, 1999 and June 30, 2000 $ 2,651,867 $ 2,651,867
Common stock, no par value; 20,000,000 shares authorized;
9,056,806 shares issued and outstanding at
December 31, 1999 and June 30, 2000 88,888,863 88,888,863
(Accumulated deficit) (1,475,638) (414,769)
Accumulated other comprehensive (loss) (266,543) (314,361)
------------- -------------
Total stockholders' equity $ 89,798,549 $ 90,811,600
------------- -------------
Total liabilities and stockholders' equity $ 159,379,593 $ 155,046,103
============= =============
</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 and Six Months Ended June 30, 1999 and 2000
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 31,393,561 $ 33,669,461 $ 63,316,622 $ 69,412,543
COST OF REVENUES 22,443,873 24,446,645 44,247,718 49,429,782
------------ ------------ ------------ ------------
Gross profit 8,949,688 9,222,816 19,068,904 19,982,761
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 8,306,596 8,255,343 16,156,695 16,583,503
RESTRUCTURING AND OTHER NON-
RECURRING CHARGES 3,987,880 (104,416) 3,987,880 (104,416)
------------ ------------ ------------ ------------
Income (loss) from operations (3,344,788) 1,071,889 (1,075,671) 3,503,674
OTHER INCOME (EXPENSE)
Interest expense (459,748) (734,438) (826,770) (1,485,965)
Interest and other income 23,235 40,655 96,953 104,030
------------ ------------ ------------ ------------
Income (loss) before provision for
(benefit from) income taxes (3,781,301) 378,106 (1,805,488) 2,121,739
PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,237,926) 189,053 (319,615) 1,060,870
------------ ------------ ------------ ------------
Net income (loss) $ (2,543,375) $ 189,053 $ (1,485,873) $ 1,060,869
============ ============ ============ ============
Net income (loss) per share - basic $ (.28) $ .02 $ (.16) $ .12
============ ============ ============ ============
Net income (loss) per share - diluted $ (.28) $ .02 $ (.16) $ .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 Six Months Ended June 30, 1999 and 2000
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
June 30, 1999 June 30, 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,485,873) $ 1,060,869
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 3,957,217 4,685,659
Loss on disposal of equipment 4,391 20,868
Restructuring charges 740,399 279,442
Changes in operating assets (increase) decrease in-
Accounts receivable (2,092,891) 865,581
Other current assets 479,152 1,856,277
Other assets (804,131) 62,712
Changes in operating liabilities (decrease) increase in-
Accounts payable (1,811,796) (2,131,205)
Other current liabilities (4,522,645) (352,687)
Other non-current liabilities 1,368,786 (530,917)
------------ ------------
Net cash provided by (used in) operating activities (4,167,391) 5,816,599
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (7,136,381) (3,935,389)
Acquisition of businesses, net of cash acquired (1,274,570) --
Proceeds from sale of assets 12,050 6,000
Sale of marketable securities 335,649 --
------------ ------------
Net cash used in investing activities (8,063,252) (3,929,389)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of long term debt 8,895,716 (2,327,952)
Issuance of common stock 2,106,848 --
------------ ------------
Net cash provided by (used in) financing activities 11,002,564 (2,327,952)
------------ ------------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 94,026 (47,818)
Net decrease in cash and cash equivalents (1,134,053) (488,560)
------------ ------------
CASH, beginning of period 3,887,971 1,458,613
------------ ------------
CASH, end of period $ 2,753,918 $ 970,053
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations 918,838 351,553
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest 719,560 1,404,697
Cash paid (refunded) for income taxes $ 1,203,340 $ (353,817)
</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, 1999 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. Certain prior year
amounts have been reclassified in order to conform with the 2000
presentation. Operating results for the six month period ended June 30,
2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. 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, 1999.
(2) EARNINGS PER SHARE
Basic EPS is calculated by dividing income 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 for the three
and six months ended June 30, 2000 and 1999, respectively.
Diluted EPS is calculated by dividing income 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
9,113,767 and 9,056,806 for the three months ended June 30, 2000 and
1999, respectively; and 9,109,972 and 9,056,806 for the six months ended
June 30, 2000 and 1999, respectively; and reflects 56,961 and 53,166
additional shares issuable in connection with stock options, for the
three months ended June 30, 2000 and the six months ended June 30, 2000,
respectively.
Options to purchase approximately 646,460 and 554,134 shares of common
stock were not included in the computation of diluted earnings per share
for the three months ended June 30, 2000 and 1999, respectively, and
options to purchase 671,899 and 431,564 shares of common stock were not
included in the computations of diluted earnings per share for the six
months ended June 30, 2000 and 1999, respectively, because the effects
would have been antidilutive.
(3) COMPREHENSIVE INCOME (LOSS):
The comprehensive income (loss) includes foreign currency translation
gains and losses. The balance sheet translation adjustment was ($50,928)
and $68,982 for the three months ending June 30, 2000 and 1999,
6
<PAGE>
respectively; and ($47,818) and $94,026 for the six months ending June
30, 2000 and 1999, respectively.
(4) RESTRUCTURING AND OTHER NON RECURRING CHARGES:
During 1999, the Company recorded an aggregate restructuring charge of
$5,178,000 related to the consolidation and integration of operations in
three of the Company's operating locations. During the second quarter of
2000, the Company reversed approximately $383,000 of previously recorded
restructuring reserves no longer required due to the revision of certain
estimates. At June 30, 2000, the Company had approximately $725,000 of
accrued restructuring costs related to personnel ($35,000) and facilities
($690,000).
During the second quarter of 2000, the Company recorded a non-recurring
charge of $279,000 for assets written down to fair value. Based on
management's assessment of fair value, certain equipment was
identified to be impaired due to the restructuring of the Company's
facilities.
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 Vestcom's management as well as assumptions made by and
information currently available to Vestcom's management. Such statements reflect
the current views of Vestcom 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 Vestcom's expectations include, but are not limited to, the
following: the ability of the Company to execute and manage its renewed
profitability and growth strategy, the results of the Company's investment
spending, the ability to effectively consolidate production facilities and
functions as part of the Company's integration program, the ability to realize
reduced overhead costs, increased production capacity and operating
efficiencies, improved financial results, operational synergies and enhanced
services at the newly consolidated facilities, acceptance of Vestcom's products
and services, including Internet related services, in the marketplace, the entry
of new competitors in the marketplace, the ability to attract and retain key
customers, the ability to positively modify its revenue mix, variations in
quarterly results, the sufficiency of the Company's working capital, changes in
the business document outsourcing industry, the availability of suitable
acquisition candidates and the assimilation of new acquisitions with existing
business. Other factors are described from time to time in Vestcom'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. Vestcom 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.
7
<PAGE>
VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
-----------------------------------------------------------------------------
Revenues increased $2,275,000 or 7%, to $33,669,000 for the three months ended
June 30, 2000, from $31,394,000 for the three months ended June 30, 1999. This
increase was primarily attributable to increased sales to new and existing
customers resulting from a change in sales strategy, refining of our business
mix and an increased capacity at our newly upgraded facilities, partially offset
by a temporary reduction in volume from a major customer.
Certain 1999 expenses have been reclassified from selling, general and
administrative expenses to cost of sales in order to conform to the 2000
presentation. The Company believes these expenses relate more directly to
revenue generation activities and have been reclassified to more accurately
reflect gross margins.
Gross profit increased $273,000, or 3%, to $9,223,000 for the three months ended
June 30, 2000, from $8,950,000 for the three months ended June 30, 1999. The
increase in gross profit was primarily attributable to the increased sales
activity over the prior year. The gross profit margin decreased from 29% for the
three months ended June 30, 1999 to 27% for the same period in 2000. The
decrease in the gross profit margin was due to increased costs related to the
operations of the Company's upgraded facilities, which has provided the Company
a platform for future growth and profitability. In addition, the Company
incurred start up costs related to its internet products and other new business
opportunities.
Selling, general and administrative expenses increased $52,000, or less than 1%,
to $8,255,000 for the three months ended June 30, 2000, from $8,307,000 for the
three months ended June 30, 1999. As a percentage of revenues, selling general
and administrative expenses decreased from 26% in 1999 to 25% in 2000. The
increase in selling, general and administrative expenses was primarily due to
increased compensation expense including increased commissions on higher sales
and increased staffing of new technical and administrative personnel to support
the greater volume of business. The Company has reduced selling, general and
administrative expenses as a percentage of revenues; these reductions include
corporate sales expenses and the absence of redundant overhead and
facility costs incurred during the prior year's integration process.
In the second quarter of 2000, the Company reversed $383,000 of its previously
recorded restructuring reserves incurred in 1999 during the consolidation and
integration of operating locations. The Company also recorded a nonrecurring
charge of $279,000 for impaired assets as a result of the restructuring plan
implemented at the Company's facilities.
Interest expense increased $275,000, to $734,000 for the three months ended June
30, 2000, from $460,000 for the three months ended June 30, 1999. This increase
was attributable to higher interest rates and increased borrowings on the
Company's credit facility to finance equipment purchases, leasehold improvements
and payments relating to earnout agreements.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
-------------------------------------------------------------------------
Revenues increased $6,096,000, or 10%, to $69,413,000 for the six months ended
June 30, 2000, from $63,317,000 for the six months ended June 30, 1999. This
increase was primarily attributable to increased sales volumes from new and
existing customers and an increased capacity of our newly upgraded facilities.
Certain 1999 expenses have been reclassified from selling, general and
administrative expenses to cost of sales in order to conform to the 2000
presentation. The Company believes these expenses relate more directly to
revenue generating activities and have been reclassified to more accurately
reflect gross margins.
Gross profit increased $914,000, or 5%, to $19,983,000 for the six months ended
June 30, 2000, from $19,069,000 for the six months ended June 30, 1999. The
8
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
increase in the gross profit was primarily attributable to the increased sales
activity over the prior year. The gross profit margin decreased from 30% to 29%
for the same period in 2000. The decrease in the gross profit margin was due to
the increased costs related to the operations of the Company's upgraded
facilities.
Selling, general and administrative expenses increased $427,000, or 3% to
$16,584,000 for the six months ended June 30, 2000 from $16,157,000 for the six
months ended June 30, 1999. As a percentage of revenues, selling, general and
administrative expenses decreased from 26% to 24%. The increase in selling,
general and administrative expenses was primarily due to increased compensation
expense including increased commissions on higher sales offset by the decreases
in corporate sales expenses and the absence of redundant overhead and
facility costs incurred during the prior year's integration process.
In the second quarter of 2000, the Company reversed $383,000 of restructuring
reserves incurred during 1999 in the consolidation and integration of operating
locations. The Company also recorded a nonrecurring charge of $279,000 for
impaired assets as a result of the restructuring plan implemented at the
Company's facilities.
Interest expense increased $659,000, to $1,486,000 for the six months ended June
30, 2000 from $827,000 for the six months ended June 30, 1999. This increase was
attributable to higher interest rates and increased borrowings on the Company's
credit facility to finance equipment purchases, leasehold improvements and
payments relating to earnout agreements.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, Vestcom had working capital of approximately $8,387,000 compared to
approximately $7,864,000 at December 31, 1999. The increase was primarily
attributable to the reduction in current debt and accrued expenses. Net cash
provided by operating activities for the six months ended June 30, 2000, was
approximately $5,817,000 which consisted primarily of net income plus
approximately $4,686,000 generated from depreciation and amortization charges.
Net cash used in investing activities for the six months ended June 30, 2000,
was approximately $3,929,000 which consisted primarily of purchases of property
and equipment and leasehold improvements. Net cash used in financing activities
for the six months ended June 30, 2000, was approximately $2,328,000 for net
repayments of long-term debt.
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 May 8, 2000 the Company and Summit Bank entered into an
amendment to the Credit Facility, which, among other things, increased the
Credit Facility by $1,500,000 and increased the equipment loan availibility by
approximately $1,000,000. On June 30, 2000, $22,799,000 was outstanding and
$7,819,000 remained available under the Credit Facility.
On August 14, 2000, the Company announced that CIBC World Markets had completed
their review of Vestom's strategic direction and alternatives. The Company had
concluded that shareholder interests would be best served at this time by
focusing on implementing Vestcom's growth strategy, executing its plan to more
efficiently utilize its assets, and exploring additional financing opportunities
with the goal of enhancing shareholder value
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, 2000 the Company had postage
advances from customers in the amount of approximately $5,876,000 and had
prepaid postage and postage receivables of approximately $4,114,000. 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 $10,000,000 are expected in 2000. However,
as additional revenue generating opportunities arise the Company may be required
to expend additional capital to support those opportunities. The anticipated
expenditures relate to technology and production equipment needs of the
9
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
business. As of June 30, 2000, the Company had incurred approximately $3,935,000
of such anticipated expenditures.
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 for the foreseeable future. The immediately preceding sentence
constitutes a forward-looking statement under the Private Securities Litigation
Reform Act of 1995.
Item 3: - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable - no significant change from Annual Report on Form 10-K.
Part II: Other Information
Item 4: - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on June 14, 2000. All of
the Board's nominees for director were elected, with the following votes:
For Authority Withheld
--------- ------------------
Stephen R. Bova 8,105,017 575,048
Joel Cartun 8,087,417 592,648
Leonard J. Fassler 8,096,017 584,048
Brendan Keating 8,095,417 584,648
Fred S. Lafer 8,095,817 584,248
Robert J. Levenson 8,096,017 584,048
Richard D. White 8,096,017 584,048
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/ Michael D. Helfand
--------------------------
Michael D. Helfand, Chief Financial Officer
Dated: August 14, 2000
10
