<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 September 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 November 1, 2000 was
9,056,806 shares.
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Part I: Financial Information
Page(s)
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<S> <C>
Item 1: Financial Statements
Condensed Consolidated Balance Sheets - as of December 31, 1999 and
September 30, 2000 (unaudited) 3
Condensed Consolidated Statements of Operations - For the Three Months and Nine Months
Ended September 30, 1999 (unaudited) and 2000 (unaudited) 4
Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended
September 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
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K 10
Signature 10
</TABLE>
2
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and September 30, 2000
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(note 1) (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,458,613 $ 535,283
Accounts receivable, net 27,228,690 27,434,169
Other current assets 14,613,707 11,982,508
------------- ---------------
Total current assets 43,301,010 39,951,960
PROPERTY AND EQUIPMENT, net 37,518,273 37,702,240
GOODWILL, net 77,894,965 75,770,530
OTHER ASSETS 665,345 438,811
------------- ---------------
Total assets $159,379,593 $ 153,863,541
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations $ 5,421,376 $ 4,303,108
Accounts payable 15,067,563 15,066,081
Other liabilities 14,948,004 11,516,881
------------- ---------------
Total current liabilities 35,436,943 30,886,070
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 27,506,522 25,632,169
OTHER NONCURRENT LIABILITIES 6,637,579 6,101,265
------------- ---------------
Total liabilities $ 69,581,044 $ 62,619,504
------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred Stock
Class B, 1 share authorized, issued and outstanding at
December 31, 1999 and September 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 September 30, 2000 88,888,863 88,888,863
(Accumulated deficit) retained earnings (1,475,638) 27,138
Accumulated other comprehensive (loss) (266,543) (323,831)
------------- ---------------
Total stockholders' equity $ 89,798,549 $ 91,244,037
------------- ---------------
Total liabilities and stockholders' equity $159,379,593 $ 153,863,541
============ ===============
</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 Nine Months Ended September 30, 1999 and 2000
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, 1999 September 30, 2000 September 30, 1999 September 30, 2000
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES $31,786,369 $ 37,101,850 $ 95,102,991 $106,514,394
COST OF REVENUES 23,580,804 26,566,043 67,828,523 75,995,826
------------ -------------- -------------- ---------------
Gross profit 8,205,565 10,535,807 27,274,468 30,518,568
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES 9,194,470 8,988,263 25,351,165 25,571,765
RESTRUCTURING AND OTHER NON-
RECURRING CHARGES 1,930,144 - 5,918,024 (104,416)
------------ -------------- -------------- ---------------
Income (loss) from operations (2,919,049) 1,547,544 (3,994,721) 5,051,219
OTHER INCOME (EXPENSE)
Interest expense (773,853) (700,926) (1,600,623) (2,186,892)
Interest and other income (expense) (8,528) 37,195 88,426 141,225
--------------- -------------- -------------- --------------
Income (loss) before provision for
(benefit from) income taxes (3,701,430) 883,813 (5,506,918) 3,005,552
PROVISION FOR (BENEFIT FROM)
INCOME TAXES (1,400,000) 441,906 (1,719,615) 1,502,776
--------------- -------------- ------------- --------------
Net income (loss) $ (2,301,430) $ 441,907 $ (3,787,303) $ 1,502,776
=============== ============== =============== ==============
Net income (loss) per share - basic $ (.25) $ .05 $ (.42) $ .17
============== ============== ============== ==============
Net income (loss) per share - diluted $ (.25) $ .05 $ (.42) $ .17
============== ============== ============== ==============
</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 Nine Months Ended September 30, 1999 and 2000
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 1999 September 30, 2000
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,787,303) $ 1,502,776
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 6,308,626 7,120,937
Loss on disposal of equipment 5,995 20,868
Restructuring charges 1,099,100
279,442
Changes in operating assets (increase) decrease in-
Accounts receivable (3,377,652) (215,479)
Other current assets (2,009,217) 2,641,199
Other assets (268,580) 110,189
Changes in operating liabilities (decrease) increase in-
Accounts payable (998,651) (1,482)
Other current liabilities (1,790,559) (3,427,343)
Other non-current liabilities 249,491 (536,314)
----------------- ----------------
Net cash provided by (used in) operating activities (4,568,750) 7,494,793
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (9,452,837) (5,374,214)
Acquisition of businesses, net of cash acquired (1,781,349) -
Proceeds from sale of assets 29,825 6,000
Sale of marketable securities 335,212 -
----------------- ----------------
Net cash used in investing activities (10,869,149) (5,368,214)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of long term debt 12,618,918 (2,992,621)
Issuance of common stock 2,106,848 -
----------------- ----------------
Net cash provided by (used in) financing activities 14,725,766 (2,992,621)
----------------- ----------------
EFFECTS OF EXCHANGE RATES ON CASH BALANCES 45,637 (57,288)
Net decrease in cash and cash equivalents (666,496) (923,330)
CASH, beginning of period 3,887,971 1,458,613
----------------- ----------------
CASH, end of period $ 3,221,475 $ 535,283
=============== ================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations $ 1,844,440 $ 212,393
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest 1,223,184 2,173,147
Cash paid (refunded) for income taxes $ 1,085,411 $ (57,268)
</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 of
Vestcom International, Inc. (a New Jersey corporation) ("Vestcom" or the
"Company") 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 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 nine month period ended
September 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 (EPS)
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 nine months ended September 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
9,061,536 and 9,056,806 for the three months ended September 30, 2000 and
1999, respectively; and 9,097,176 and 9,056,806 for the nine months ended
September 30, 2000 and 1999, respectively; and reflects 4,730 and 40,370
additional shares issuable in connection with stock options, for the
three months ended September 30, 2000 and the nine months ended September
30, 2000 , respectively.
Options to purchase approximately 1,068,624 and 953,618 shares of common
stock were not included in the computation of diluted earnings per share
for the three months ended September 30, 2000 and 1999, respectively, and
options to purchase 759,916 and 572,015 shares of common stock were not
included in the computations of diluted earnings per share for the nine
months ended September 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 ($9,470)
and $48,389 for the three months ending September 30, 2000 and 1999,
respectively, and ($57,288) and $45,637 for the nine months ending
September 30, 2000 and 1999, respectively.
6
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(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 September 30, 2000, the Company had approximately $546,000
of accrued restructuring costs related to facilities.
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 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 and changes in the business document outsourcing industry. 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
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RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues increased $5,315,000 or 17%, to $37,102,000 for the three months ended
September 30, 2000, from $31,786,000 for the three months ended September 30,
1999. This increase was primarily attributable to increased sales volumes for
the Comapany's financial services and retail clients, and new customers in the
fulfillment business utilizing the Company's database services.
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 $2,330,000, or 28%, to $10,536,000 for the three months
ended September 30, 2000, from $8,206,000 for the three months ended September
30, 1999. The increase in gross profit was primarily attributable to the
increased sales activity over the prior year period. The gross profit margin
increased from 26% for the three months ended September 30, 1999 to 28% for the
same period in 2000. The increase in the gross profit margin was due to
increased sales growth and more efficient utilization of the Company's existing
assets. However, the profit margin was negatively impacted by start up costs for
new customers and the continued investment in developing the Company's Internet
offerings.
Selling, general and administrative expenses decreased $206,000, or 2%, to
$8,988,000 for the three months ended September 30, 2000 from $9,194,000 for the
three months ended September 30, 1999. As a percentage of revenues, selling
general and administrative expenses decreased from 29%, for the three month
period in 1999, to 24% in 2000. The decrease in selling, general and
administrative expenses was primarily due to the reduction of corporate sales
expenses and other corporate expenses and the absence of redundant overhead and
facility costs incurred during the prior year's integration process.
Interest expense decreased $73,000, or 10%, to $701,000 for the three months
ended September 30, 2000, from $774,000 for the three months ended September 30,
1999. The decrease was a result of repayments to the Company's credit facility
as a result of improved cash flows.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues increased $11,411,000, or 12%, to $106,514,000 for the nine months
ended September 30, 2000, from $95,103,000 for the nine months ended September
30, 1999. This increase was primarily attributable to increased sales volumes
from new and existing customers, particularly from customers in the financial
services and retail industries, and the Company's increased capacity in its
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 $3,244,000, or 12%, to $30,518,000 for the nine months
ended September 30, 2000, from $27,274,000 for the nine months ended September
30, 1999. The increase in gross profit was primarily attributable to the
increased sales activity over the prior year period. The gross profit margin
remained consistent at 29% for the same period in 2000. The profit margins were
negatively impacted by the increased costs of the Company's upgraded facilities
and continued Internet investments.
Selling, general and administrative expenses increased $221,000, or 1% to
$25,572,000 for the nine months ended September 30, 2000 from $25,351,000 for
the nine months ended September 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.
8
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VESTCOM INTERNATIONAL, INC. AND SUBSIDIARIES
During the second quarter of 2000, the Company reversed approximately $383,000
of restructuring reserves incurred during 1999 in connection with the
consolidation and integration of operating locations. The Company also recorded
a nonrecurring charge of $279,000 for impaired assets which resulted from the
restructuring plan implemented at the Company's facilities.
Interest expense increased $586,000, or 37%, to $2,187,000 for the nine months
ended September 30, 2000 from $1,601,000 for the nine months ended September 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 September 30, the Company had working capital of approximately $9,066,000
compared to approximately $7,864,000 at December 31, 1999. The increase was
primarily attributable to the reduction in current debt and accrued expenses
which was partially offset by a decrease in other current receivables. Net cash
provided by operating activities for the nine months ended September 30, 2000,
was approximately $7,495,000 which consisted primarily of net income plus
approximately $7,121,000 generated from depreciation and amortization charges.
Net cash used in investing activities for the nine months ended September 30,
2000, was approximately $5,368,000 which consisted primarily of purchases of
property and equipment, software and leasehold improvements. Net cash used in
financing activities for the nine months ended September 30, 2000, was
approximately $2,993,000 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 to $31,500,000. On September 30, 2000, $22,328,000 was
outstanding and $8,028,000 remained available under the Credit Facility.
The Company incurs postage costs on behalf of customers of approximately
$3,000,000 to $5,000,000 each month. The Company seeks to collect such postage
costs from its customers in advance. At September 30, 2000 the Company had
postage advances from customers in the amount of approximately $4,758,000 and
had prepaid postage and postage receivables of approximately $2,995,000. 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
business. As of September 30, 2000 , the Company had incurred approximately
$5,374,000 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.
9
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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 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: November 13, 2000
10
