<PAGE> 1
UNITED STATES
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, 1998
______ Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 1-10991
VALASSIS COMMUNICATIONS, INC.
(Exact Name of Registrant
as Specified in its Charter)
Delaware 38-2760940
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
19975 Victor Parkway
Livonia, Michigan 48152
(address of principal executive offices)
Registrant's Telephone Number: (734) 591-3000
_______________________________________________
Indicate by check mark whether the 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 ________
As of April 30, 1998, there were 39,199,521 shares of the Registrant's
Common Stock outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
ASSETS (unaudited) (note)
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,519 $ 35,437
Accounts receivable (less allowance
for doubtful accounts of $1,396 at
March 31, 1998 and $1,171 at
December 31, 1997) 100,029 81,681
Inventories:
Raw materials 13,884 10,975
Work in progress 10,474 15,720
Prepaid expenses and other 8,818 4,536
Deferred income taxes 1,966 1,966
Refundable income taxes --- 772
-------- --------
Total current assets 145,690 151,087
-------- --------
Property, plant and equipment, at cost:
Land and buildings 20,132 20,133
Machinery and equipment 112,341 108,167
Office furniture and equipment 17,521 17,995
Automobiles 971 1,012
Leasehold improvements 1,022 1,022
-------- --------
151,987 148,329
-------- --------
Less accumulated depreciation
and amortization (107,929) (108,098)
-------- --------
Net property, plant and equipment 44,058 40,231
-------- --------
Intangible assets:
Goodwill 68,594 68,594
Other intangibles 83,387 83,387
-------- --------
151,981 151,981
Less accumulated amortization (106,733) (104,709)
-------- --------
Net intangible assets 45,248 47,272
-------- --------
Other assets (primarily debt issuance costs) 2,189 2,295
-------- --------
Total assets $237,185 $240,885
======== ========
</TABLE>
2
<PAGE> 3
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets, Continued
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
Liabilities and Stockholders' Deficit (unaudited) (note)
--------- ---------
<S> <C> <C>
Current liabilities:
Accounts payable $76,601 $59,226
Accrued interest 8,546 5,098
Income taxes payable 6,250 ---
Accrued expenses 14,546 25,890
Progress billings 43,278 58,239
Current portion, long-term debt 108,009 ---
--------- ---------
Total current liabilities 257,230 148,453
--------- ---------
Long-term debt 254,903 367,075
Deferred income taxes 2,315 2,315
Minority interest 6 9
Stockholders' deficit:
Common stock of $.01 par value.
Authorized 100,000,000 shares; issued
45,743,812 at March 31, 1998 and
44,515,599 at December 31, 1997; out-
standing 39,292,912 at March 31,1998
and 39,515,599 at December 31, 1997 457 445
Additional paid-in capital 102,368 72,399
Accumulated deficit (210,578) (236,625)
Foreign currency translations (310) (146)
Treasury stock, at cost (6,450,900
shares at March 31, 1998 and
5,000,000 shares at December 31, 1997) (169,206) (113,040)
--------- ---------
Total stockholders' deficit (277,269) (276,967)
--------- ---------
Total liabilities and
stockholders' deficit $237,185 $240,885
========= =========
</TABLE>
NOTE: The balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31, December 31,
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Net sales $204,951 $189,307
Other 732 652
--------- ---------
Total revenues 205,683 189,959
Costs and expenses:
Cost of products sold 133,902 123,607
Selling, general and administrative 18,453 17,045
Amortization of intangible assets 2,024 2,544
Interest 9,007 10,099
--------- ---------
Total costs and expenses 163,386 153,295
--------- ---------
Earnings before income taxes 42,297 36,664
Income taxes 16,250 14,366
--------- ---------
Net earnings $26,047 $22,298
========= =========
Net earnings per common share, basic $ .65 $ .53
========= =========
Net earnings per common share, diluted $ .64 $ .53
========= =========
Shares used in computing net earnings
per share, basic 40,113,479 41,870,395
========== ==========
Shares used in computing net earnings
per share, diluted 40,556,560 42,170,455
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
March 31, December 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $26,047 $22,298
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,939 4,332
Provision for losses on accounts receivable 225 225
Minority interest (3) 10
Loss on sale of property, plant and equipment 6 154
Changes in assets and liabilities which
increase (decrease) cash flow:
Accounts receivable (18,573) 7,293
Inventories 2,337 1,507
Prepaid expenses and other (4,282) (1,127)
Other assets 105 (93)
Accounts payable 17,375 2,330
Accrued expenses and interest (7,896) (1,666)
Income taxes 14,915 13,074
Progress billings (14,961) (10,477)
--------- ---------
Total adjustments (6,812) 15,562
--------- ---------
Net cash provided by operating activities 19,235 37,860
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (5,770) (5,786)
Other (121) 113
--------- ---------
Net cash used in investing activities (5,891) (5,673)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt (4,184) (18,690)
Proceeds from the issuance of common stock 22,088 1,555
Repurchase of common stock (56,166) (14,323)
--------- ---------
Net cash used in financing activities (38,262) (31,458)
--------- ---------
Net increase/(decrease) in cash (24,918) 729
Cash at beginning of period 35,437 60,172
--------- ---------
Cash at end of period $10,519 $60,901
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 5,559 $ 7,434
Cash paid during the period for income taxes $ 1,335 $ 1,292
Dividends declared but unpaid $ --- $ ---
Common stock repurchase commitment $ --- $14,323
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
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. In the opinion of management, the
information contained herein reflects all adjustments necessary for
a fair presentation of the information presented. All such
adjustments are of a normal recurring nature. The results of
operations for the interim periods are not necessarily indicative
of results to be expected for the fiscal year. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
2. Accounting Change
-------------------
During the quarter ended March 31, 1998, the Company changed its
method of accounting for inventories from the last-in, first-out
(LIFO) method to the first-in, first-out (FIFO) method. The Company
believes the change is preferable because the FIFO method better
reflects the economic reality of its inventory management practices
and provides a better matching of current costs with revenues.
The change in method of inventory costing has been applied
retroactively. Due to debit balance LIFO reserves and corresponding
lower-of-cost-or-market reserves, the change had no effect on the
balance sheet at December 31, 1997 or the income statement for the
quarter ended March 31, 1997.
3. Contingencies
---------------
The Company is involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position.
4. Earnings Per Share
--------------------
The Company adopted Statement of Financial Accounting Standards No.
128 "Earnings per Share," effective for the annual period ending
after December 15, 1997. This standard revised the calculation of
EPS and requires the Company to report diluted EPS in addition to
basic EPS. Basic EPS is based on the average shares outstanding
while diluted EPS gives effect to all dilutive potential common
shares outstanding.
6
<PAGE> 7
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
5. Comprehensive Income
----------------------
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," beginning January 1, 1998.
The effect of this pronouncement is not material to the Company's
financial statements.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Certain statements under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," constitute
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks and uncertainties and other
factors which may cause the actual results, performance or achievements
of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following:
a new competitor in the Company's core free-standing insert business
and consequent price war; new technology that would make free-standing
inserts less attractive; a shift in customer preference for different
promotional materials, promotional strategies or coupon delivery modes,
including in-store advertising systems and other forms of coupon
delivery; an increase in the Company's paper costs; or general business
and economic conditions.
Results of Operations
- -----------------------
Total revenues increased 8.3% from $190.0 million for the first quarter
of 1997 to $205.7 million for the first quarter of 1998. Free-standing
insert (FSI) revenues were up 10.9% from $141.4 million for the quarter
ended March 31, 1997 to $158.8 million for the same quarter of 1998.
This increase is the result of higher prices and page volume, greater
market share and one more FSI publishing date during the first quarter
of 1998 than in 1997. Valassis Impact Promotions (VIP) sales were up
18.7% to $29.9 million for the March 31, 1998 quarter, as compared to
$25.2 million for the previous year's quarter. This increase is a
result of continued strong demand by core customers as well as the
addition of a large 1998 contract. Run-of-Press (ROP) sales were down
significantly during the first quarter to $2.2 million, from $10.7
million for the comparable period last year. ROP sales do not
necessarily track quarter to quarter, and ROP revenue for the quarter
ended March 31, 1997 was primarily driven by one-time events. The ROP
division is not projected to be a growth area.
Gross profit margin was 34.9% in the first quarter of 1998, the same as
the first quarter of 1997. This was primarily the result of the
increase in paper prices from the prior year's quarter being offset by
media and print savings.
Selling, general and administrative expenses increased to $18.5 million
from $17.0 million for the same quarter last year, due mainly to
additional advertising expenses, settlement of a lawsuit and the
increased value of restricted stock compensation. Management expects
selling, general and administrative expenses to remain at consistent
levels during 1998.
Interest expense was down for the quarter ended March 31, 1998 due to
early retirement of debt since the year-ago quarter. Included in
interest expense for the quarter ended March 31, 1998 is $143,000
representing premiums paid to repurchase debt.
8
<PAGE> 9
Net earnings were $26.0 million for the first quarter 1998 versus $22.3
million for the same period last year. These improved results were
mainly due to strong FSI sales.
Financial Condition, Liquidity and Sources of Capital
- -------------------------------------------------------
Cash flow from operating activities decreased from $37.9 million at
March 31, 1997 to $19.2 million at March 31, 1998, despite increased
earnings. This was due to a build up of trade receivables resulting
from a higher level of sales near the end of the period in 1998 than in
1997, and increased payments for profit sharing and bonus plans based
on higher earning levels attained in 1997.
During the quarter ended March 31, 1998, the Company used $4.2 million
of cash to retire outstanding debt early and another $56.2 million to
repurchase Company stock.
A portion of the Company's debt, in the amount of $108 million, will be
due in March of 1999. The Company is currently evaluating its options
with respect to this debt, including refinancing or retiring some or
all of this debt.
Management believes the Company will generate sufficient funds from
operations and will have sufficient lines of credit available to meet
currently anticipated liquidity needs, including interest and required
principal payments on indebtedness.
Year 2000 Compliance
- ----------------------
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the year. Any of the
Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. This
problem could force computers to either shut down or provide incorrect
data or information.
In response to the Year 2000 issue, the Company has created two project
plans; one for program modifications and the second for implementing
new financial software upgrades. The Company estimates the costs
related to the implementation of the program modification plan and the
financial software upgrade plan to be approximately $550,000 and
$350,000, respectively, which will be funded through operating cash
flows. The Company plans for all critical systems to be Year 2000
compliant by the end of 1998.
In addition, the Company has begun to ask its vendors, service
providers and customers about their progress in identifying and
addressing problems that their computer systems may face in correctly
processing date information related to the Year 2000. It is not
possible to quantify the aggregate cost to the Company with respect to
vendors, service providers and customers with Year 2000 problems,
although the Company does not anticipate it will have a material
adverse impact on its business.
9
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
The following exhibits are included herein:
10.4 (j) Amendment No. 1 to Credit Agreement dated as of
September 11, 1997. 12
18.1 Letter from independent auditor regarding change
in accounting principle. 14
(27) Financial Date Schedule
b. Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1998.
10
<PAGE> 11
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: May 8, 1997
Valassis Communications, Inc.
(Registrant)
By: /s/Robert L. Recchia
----------------------------------
Robert L. Recchia
V.P. of Finance - Chief Financial
Officer
Signing on behalf of the Registrant
and as principal financial officer.
11
<PAGE> 12
Exhibit 10.4(j)
AMENDMENT NO. 1 TO CREDIT AGREEMENT
This Amendment dated as of March 31, 1998 among Valassis
Communications, Inc. ("Company"), the financial institutions which are
signatories hereto ("Banks") and Comerica Bank, as Agent for the Bank
(in such capacity, "Agent").
R E C I T A L S:
A. Company, Banks and Agent entered into that certain Credit
Agreement dated as of September 11, 1997 ("Agreement").
B. Company, Banks and Agent desire to amend the Agreement as set
forth below.
The parties agree as follows:
1. Section 9.1 of the Agreement is amended to read as follows:
"Capital Structure and Redemptions. Purchase, acquire or redeem
any of its capital stock (other than (i) redemptions of stock of
Company not to exceed One Hundred Thirty Five Million Dollars
($135,000,000) in aggregate purchase price from September 11,
1997 through February 28, 1999 and (ii) on or after March 1,
1999, purchases, acquisitions or redemptions of stock of Company
not to exceed Two Million Dollars ($2,000,000) in any fiscal
year paid, provided that such stock is purchased solely for use
in connection with an employee benefit plan or other employee
incentive plan and is held by Company as treasury stock until
use for such purpose) or make any material change in its
structure other than the issuance of the additional stock."
2. The above amendment shall be effective as of the date hereof.
3. Except as expressly set forth herein, all the terms and
conditions of the Agreement shall remain in full force and
effect.
4. Company hereby represents and warrants that, after giving
effect to the amendments contained herein, (a) execution,
delivery and performance of this Amendment and any other
documents and instruments required under this Amendment or the
Agreement are within Company's corporate powers, have been duly
authorized, are not in contravention of law or the terms of
Company's Articles of Incorporation or Bylaws, and do not
require the consent or approval of any governmental body,
agency, or authority; and this Amendment and any other documents
and instruments required under this Amendment or the Agreement,
will be valid and binding in accordance with their terms; (b)
the continuing representations and warranties of Company set
forth in Sections 7.1 through 7.23 and 7.25 of the Agreement are
true and correct on and as of the date hereof with the same
force and effect as if made on and as of the date hereof; (c)
the continuing representations and warranties of Company set
12
<PAGE> 13
forth in Section 7.24 of the Agreement are true and correct as
of the date hereof with respect to the most recent financial
statements furnished to the Bank by Company in accordance with
Section 8.3 of the Agreement; and (d) no Event of Default, or
condition or event which, with the giving of notice or the
running of time, or both, would constitute an Event of Default
under the Agreement, has occurred and is continuing as of the
date hereof.
COMPANY: VALASSIS COMMUNICATIONS, INC.
By: /s/ Barry P. Hoffman
---------------------------
Barry P. Hoffman
Its: Secretary
AGENT: COMERICA BANK, as Agent
By: /s/ Scot Zimmerman
----------------------------
Its: International Banking Officer
REVOLVING CREDIT BANKS: COMERICA BANK
By: /s/ Scot Zimmerman
----------------------------
Its: International Banking Officer
HARRIS TRUST AND SAVINGS BANK
By: /s/ Kirby M. Law
----------------------------
Its: Vice President
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By: /s/ Richard E. Stahl
-----------------------------
Its: Executive Vice President
13
<PAGE> 14
Exhibit 18.1
April 24, 1998
Valassis Communications, Inc.
19975 Victor Parkway
Livonia, Michigan 48152
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly
Report on Form 10-Q to the Securities and Exchange Commission for the
quarter ended March 31, 1998, of the facts relating to the change in
inventory valuation from the last-in, first-out method to the first-in,
first-out method. We believe, on the basis of the facts so set forth and
other information furnished to us by appropriate officials of the
Company, that the accounting change described in your Form 10-Q is to an
alternative accounting principle that is preferable under the
circumstances.
We have not audited any consolidated financial statements of Valassis
Communications, Inc. and its consolidated subsidiaries as of any date or
for any period subsequent to December 31, 1997. Therefore, we are unable
to express, and we do not express, an opinion on the facts set forth in
the above-mentioned Form 10-Q, on the related information furnished to
us by officials of the Company, or on the financial position, results of
operations, or cash flows of Valassis Communications, Inc. and its
consolidated subsidiaries as of any date or for any period subsequent to
December 31, 1997.
Yours truly,
DELOITTE AND TOUCHE LLP
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,519
<SECURITIES> 0
<RECEIVABLES> 101,425
<ALLOWANCES> 1,396
<INVENTORY> 24,358
<CURRENT-ASSETS> 145,690
<PP&E> 151,987
<DEPRECIATION> 107,929
<TOTAL-ASSETS> 237,185
<CURRENT-LIABILITIES> 257,230
<BONDS> 254,903
0
0
<COMMON> 457
<OTHER-SE> (277,726)
<TOTAL-LIABILITY-AND-EQUITY> (277,269)
<SALES> 204,951
<TOTAL-REVENUES> 205,683
<CGS> 133,902
<TOTAL-COSTS> 133,902
<OTHER-EXPENSES> 20,702
<LOSS-PROVISION> 225
<INTEREST-EXPENSE> 9,007
<INCOME-PRETAX> 42,297
<INCOME-TAX> 16,250
<INCOME-CONTINUING> 26,047
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,047
<EPS-PRIMARY> .65
<EPS-DILUTED> .64
</TABLE>
