<PAGE>
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 June 30, 1999
______ 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 July 28, 1999, there were 56,277,239 shares of the Registrant's Common
Stock outstanding.
1
<PAGE>
Part I - Financial Information
- ------------------------------
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1999 1998
- ------ ---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,008 $ 6,939
Accounts receivable (less allowance for doubtful
accounts of $1,722 at June 30, 1999 and $1,354 at
December 31, 1998) 88,971 95,430
Inventories:
Raw materials 11,060 11,817
Work in progress 11,884 20,051
Prepaid expenses and other 5,963 5,817
Deferred income taxes 1,790 1,790
Refundable income taxes --- 1,215
--------- ---------
Total current assets 126,676 143,059
--------- ---------
Property, plant and equipment, at cost:
Land and buildings 21,692 21,456
Machinery and equipment 114,908 114,912
Office furniture and equipment 21,625 20,143
Automobiles 1,035 1,025
Leasehold improvements 1,064 1,022
--------- ---------
160,324 158,558
Less accumulated depreciation and amortization (114,549) (112,200)
--------- ---------
Net property, plant and equipment 45,775 46,358
--------- ---------
Intangible assets:
Goodwill 68,594 68,594
Other intangibles 85,387 85,387
--------- ---------
153,981 153,981
Less accumulated amortization (115,407) (112,806)
--------- ---------
Net intangible assets 38,574 41,175
--------- ---------
Other assets (primarily debt issuance costs) 2,629 1,422
--------- ---------
Total assets $ 213,654 $ 232,014
========= =========
</TABLE>
2
<PAGE>
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets, Continued
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
Liabilities and Stockholders' Deficit 1999 1998
- ------------------------------------- ---- ----
(unaudited) (note)
Current liabilities:
<S> <C> <C>
Accounts payable $ 73,594 $ 69,064
Accrued interest 4,362 4,542
Accrued expenses 26,676 26,345
Income taxes payable 2,916 ---
Progress billings 33,568 58,615
--------- ---------
Total current liabilities 141,116 158,566
--------- ---------
Long-term debt 310,439 340,461
Deferred income taxes 1,511 1,511
Commitments and contingencies
Stockholders' deficit:
Common stock of $.01 par value. Authorized 100,000,000
shares; issued 62,819,742 at June 30, 1999 and 62,854,360
at December 31, 1998; outstanding 56,682,404 at
June 30, 1999 and 57,589,322 at December 31, 1998 627 629
Additional paid-in capital 74,482 69,416
Accumulated deficit (103,543) (165,937)
Foreign currency translations (333) (298)
Treasury stock, at cost (6,137,338 shares at June 30, 1999 and
5,265,038 shares at December 31, 1998) (210,645) (172,334)
--------- ---------
Total stockholders' deficit (239,412) (268,524)
--------- ---------
Total liabilities and stockholders' deficit $ 213,654 $ 232,014
========= =========
</TABLE>
NOTE: The balance sheet at December 31, 1998 has been derived from the audited
consolidated 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>
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-------------------------------------- ------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 195,152 $ 178,406 $ 417,058 $ 383,357
Other (153) 490 146 1,222
----------------- ---------------- ---------------- ----------------
Total revenues 194,999 178,896 417,204 384,579
----------------- ---------------- ---------------- ----------------
Costs and expenses:
Cost of products sold 122,345 118,133 260,766 252,035
Selling, general and administrative 18,863 22,717 39,066 41,170
Amortization of intangible assets 1,301 2,025 2,600 4,049
Interest 6,387 8,767 13,778 17,774
----------------- ---------------- ---------------- ----------------
Total costs and expenses 148,896 151,642 316,210 315,028
----------------- ---------------- ---------------- ----------------
Earnings before income taxes 46,103 27,254 100,994 69,551
Income taxes 17,600 10,350 38,600 26,600
----------------- ---------------- ---------------- ----------------
Net earnings $ 28,503 $ 16,904 $ 62,394 $ 42,951
================= ================ ================ ================
Net earnings per common share, basic $ .50 $ .29 $ 1.09 $ .72
================= ================ ================ ================
Net earnings per common share, diluted $ .49 $ .29 $ 1.07 $ .72
================= ================ ================ ================
Shares used in computing net earnings
per share, basic 56,896,255 58,765,316 57,006,912 59,463,887
================= ================ ================ ================
Shares used in computing net earnings
per share, diluted 58,307,258 59,287,715 58,252,699 60,058,556
================= ================ ================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------
June 30, June 30,
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 62,394 $ 42,951
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 6,803 7,819
Provision for losses on accounts receivable 1,345 450
Minority interest --- (7)
Loss (gain) on sale of property, plant and equipment (38) 1
Stock-based compensation charge 823 2,632
Changes in assets and liabilities which increase (decrease) cash flow:
Accounts receivable 5,114 7,948
Inventories 8,924 2,788
Prepaid expenses and other 1,200 (869)
Other assets (207) 827
Accounts payable 4,530 3,130
Accrued expenses and interest 151 (3,451)
Income taxes 4,783 10,601
Progress billings (25,047) (27,813)
--------------- --------------
Total adjustments 8,381 4,056
--------------- --------------
Net cash provided by operating activities 70,775 47,007
--------------- --------------
Cash flows from investing activities:
Additions to property, plant and equipment (3,694) (8,660)
Proceeds from the sale of property, plant and equipment 112 93
Investment in Save.com (1,000) ---
Acquisitions --- (450)
Other (64) (164)
--------------- --------------
Net cash used in investing activities (4,646) (9,181)
--------------- --------------
Cash flows from financing activities:
Repayment of long-term debt (108,380) (4,549)
Borrowings of long-term debt 100,358 ---
Net borrowings (payments) under revolving line of credit (22,000) ---
Proceeds from the issuance of common stock 2,273 20,285
Purchase of treasury shares (38,311) (73,554)
--------------- --------------
Net cash used in financing activities (66,060) (57,818)
--------------- --------------
Net increase/(decrease) in cash 69 (19,992)
Cash at beginning of period 6,939 35,437
--------------- --------------
Cash at end of period 7,008 $ 15,445
=============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 13,958 $ 17,899
Cash paid during the period for income taxes $ 34,469 $ 15,999
Non-cash financing activities:
Stock issued under stock-based compensation plan $ 2,169 $ 3,247
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
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, 1998.
Certain amounts for 1998 have been reclassified to conform to current period
classifications.
2. Contingencies
-------------
On February 24, 1999, the Company commenced litigation against The News
Corporation Limited ("News Corp") and News America Incorporated (News America")
in the State of Michigan Circuit Court for the County of Wayne. The Complaint
seeks $150 million in compensatory damages, $300 million in punitive damages and
injunctive relief based on allegations of tortious interference with prospective
contractual relations and aiding and abetting a breach of fiduciary duty. The
principal factual allegation is that Arthur Andersen LLP ("Arthur Andersen"),
with the inducement of News Corp and News America, repudiated a joint venture
agreement with the Company relating to the development of a new product. On
April 7, 1999, Arthur Andersen rejected alternative dispute resolution and filed
a declaratory judgment action in the Chancery Division of the Cook County,
Illinois Circuit Court. This action asks the Illinois Court to make a
determination as to whether the Company and Arthur Andersen had a contract.
On April 12, 1999, the Company amended its lawsuit against News Corp and
News America to add Arthur Andersen as a defendant. News Corp and News America
filed a motion to dismiss the case against News Corp and News America for lack
of jurisdiction. On May 7, 1999, the Court found that Michigan jurisdiction was
proper and denied their motion. News Corp and News America filed an application
for leave to appeal this decision. The Company has opposed the application for
leave to appeal. The application is currently pending before the Michigan Court
of Appeals.
On May 10, 1999, the Company filed a motion to dismiss the Illinois action.
The Illinois Court denied the motion to dismiss on July 12, 1999. To address the
potential for duplicative litigation raised by this decision, the Company has
moved to bifurcate contractual issues in the Michigan action and for
reconsideration in the Illinois action.
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, results of operations or liquidity.
6
<PAGE>
3. Stock Split
-----------
On April 1, 1999, the Board of Directors approved a three-for-two split of
the Company's Common Stock, effected in the form of a 50% stock dividend, issued
May 12, 1999, to stockholders of record as of April 16, 1999. Accordingly, all
common share and per common share data have been restated to reflect this stock
split. The stock split was accomplished through the issuance of 16,481,134 new
shares and the use of 2,536,462 shares of Treasury Stock.
7
<PAGE>
4. Segment Reporting
-----------------
The Company has two reportable segments, cooperative free-standing inserts
(FSIs) and Valassis Impact Promotions (VIP). FSIs are four-color booklets
containing promotions from multiple advertisers distributed through Sunday
newspapers. VIP offers its customers specialty print promotion products in
customized formats. These reportable segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different marketing strategies and caters to a different
customer base.
Assets are not allocated to reportable segments and are not used to assess the
performance of a segment. Intersegment sales are accounted for at cost.
<TABLE>
<CAPTION>
(in millions) Three Months Ended June 30
- ------------- ----------------------------------------------------------
FSI VIP All Others* Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1999
----
Revenues from external customers $ 145.8 $ 27.5 $ 21.7 $ 195.0
Intersegment revenues 0.2 --- 2.3 2.5
Depreciation/amortization 3.0 0.5 --- 3.5
Segment profit 42.3 1.6 2.2 46.1
1998
----
Revenues from external customers $ 135.1 $ 22.7 $ 21.1 $ 178.9
Intersegment revenues 0.6 --- --- 0.6
Depreciation/amortization 3.4 0.4 --- 3.8
Segment profit 23.3 0.4 3.6 27.3
</TABLE>
* Segments below the quantitative thresholds are primarily attributable to four
segments of the Company. Those segments include a product sampling business, a
sales promotion company in Canada, a run-of-press business, and a promotion
security service. None of these segments has met any of the quantitative
thresholds for determining reportable segments.
Reconciliations to consolidated financial statement totals are as follows:
<TABLE>
<CAPTION>
(in millions) Three Months Ended June 30,
----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Profit for reportable segments $ 41.8 $ 23.7
Profit for other segments 4.3 3.6
Unallocated amounts:
Interest income --- ---
------------- -------------
Earnings before taxes $ 46.1 $ 27.3
============= =============
</TABLE>
Domestic and foreign revenues for each of the three-month periods ended June 30
were as follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998
------------- -------------
<S> <C> <C>
United States $ 190.2 $ 174.1
Canada 4.8 4.8
------------- -------------
Total $ 195.0 $ 178.9
============= =============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
(in millions) Six Months Ended June 30
- ------------- ----------------------------------------------------------
FSI VIP All Others* Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1999
----
Revenues from external customers $ 313.5 $ 61.5 $ 42.1 $ 417.1
Intersegment revenues 2.5 --- 2.3 4.8
Depreciation/amortization 5.7 1.0 0.1 6.8
Segment profit 90.9 4.9 5.1 100.9
1998
----
Revenues from external customers $ 292.0 $ 52.6 $ 39.2 $ 383.8
Intersegment revenues 2.4 --- --- 2.4
Depreciation/amortization 7.0 0.7 0.1 7.8
Segment profit 61.8 2.7 4.3 68.8
</TABLE>
* Segments below the quantitative thresholds are primarily attributable to four
segments of the Company. Those segments include a product sampling business, a
sales promotion company in Canada, a run-of-press business, and a promotion
security service. None of these segments has met any of the quantitative
thresholds for determining reportable segments.
Reconciliations to consolidated financial statement totals are as follows:
<TABLE>
<CAPTION>
(in millions) Six Months Ended June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Profit for reportable segments $ 97.9 $ 64.5
Profit for other segments 3.0 4.3
Unallocated amounts:
Interest income 0.1 0.8
------------ ------------
Earnings before taxes $ 101.0 $ 69.6
------------ ------------
</TABLE>
Domestic and foreign revenues for each of the six-month periods ended June 30
were as follows:
<TABLE>
<CAPTION>
(in millions) 1999 1998
------------ ------------
<S> <C> <C>
United States $ 406.7 $ 374.3
Canada 10.5 10.3
------------ ------------
Total $ 417.2 $ 384.6
============ ============
</TABLE>
9
<PAGE>
6. Earnings Per Share
------------------
Earnings per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------------------
1999 1998
---------- -----------
(in thousands except for
per share amounts)
<S> <C> <C>
Net Earnings $28,503 $16,904
========== ===========
Basic EPS:
Weighted average common shares outstanding 56,896 58,765
========== ===========
Earnings per common share - basic $ 0.50 $ 0.29
========== ===========
Diluted EPS:
Weighted average common shares outstanding 56,896 58,765
Weighted average shares purchased on exercise of dilutive options 6,271 2,144
Shares purchased with proceeds of options (4,889) (1,632)
Shares contingently issuable 29 11
---------- -----------
Shares applicable to diluted earnings 58,307 59,288
========== ===========
Earnings per common share - diluted $ 0.49 $ 0.29
========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------------
1999 1998
---------- -----------
(in thousands except for
per share amounts)
<S> <C> <C>
Net Earnings $62,394 $42,951
========== ===========
Basic EPS:
Weighted average common shares outstanding 57,007 59,464
========== ===========
Earnings per common share - basic $ 1.09 $ .72
========== ===========
Diluted EPS:
Weighted average common shares outstanding 57,007 59,463
Weighted average shares purchased on exercise of dilutive options 4,466 2,381
Shares purchased with proceeds of options (3,249) (1,796)
Shares contingently issuable 29 11
---------- -----------
Shares applicable to diluted earnings 58,253 60,059
========== ===========
Earnings per common share - diluted $ 1.07 $ .72
========== ===========
</TABLE>
<PAGE>
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 methods, including in-store advertising systems
and other forms of coupon delivery; the inability of material third parties upon
which the Company relies to be Year 2000 compliant in a timely manner; an
increase in the Company's paper costs; or general business and economic
conditions. The Company disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
Results of Operations
Three Months Ended June 30, 1999 and June 30, 1998
- --------------------------------------------------
Total revenues for the quarter ended June 30, 1999 increased 9.0% to $195.0
million, from $178.9 million for the year-ago quarter. Free-standing insert
(FSI) revenue increased 7.9% for the quarter ended June 30, 1999, rising to
$145.8 million from $135.1 million for the quarter ended June 30, 1998. This
increase can be attributed to page (unit) growth and moderate price increases.
VIP revenue was up 21.1% from $22.7 million for the second quarter of 1998, to
$27.5 million for the same quarter in 1999. Targeted Marketing Services (TMS)
revenue, which includes the Company's Sampling and polybag advertising products,
as well as Run-of-Press (ROP) promotions and advertising, was $15.4 million for
the quarter, versus $15.1 million in the prior year quarter.
For the quarter, paper costs were down over 10% from the year ago period,
contributing to an overall increase in the gross profit margin to 37.3%, versus
34.0% in the same quarter last year. Media costs were down due to increased FSI
book sizes and lower contract rates, while efficiencies at the Company's three
printing facilities contributed to lower printing costs for the quarter.
Selling, general and administrative expenses decreased to $18.9 million for the
quarter ended June 30, 1999, from $22.7 million in the comparable period of
1998. The three months ended June 30, 1998 included a one-time charge of $6.0
million related to the early retirement and resulting amendment to the
employment contract of the former CEO. Without this one-time charge, SG&A would
have increased 13.2% for the quarter ended June 30, 1999, versus the year-ago
period. This increase can primarily be attributed to higher incentive plan costs
as a result of stronger sales and profits in the second quarter of 1999, as
compared to the same period in 1998.
The effective tax rate for the quarter ended June 30, 1999 was 38%, which is
comparable to the quarter ended June 30, 1998.
Net earnings were $28.5 million, compared to $16.9 million for the same quarter
last year. Net earnings rose primarily as a result of strong FSI volume and
significantly improved VIP results.
11
<PAGE>
Six Months Ended June 30, 1999 and June 30, 1998
- ------------------------------------------------
The Company's revenue for the first six months of 1999 was up 8.5% to $417.2
million, as compared to $384.6 million for the same period in 1998. This
increase was fueled by a 7.4% gain in FSI revenue from $292.0 million in the
first six months of 1998, to $313.5 million in the comparable 1999 period. FSI
revenue rose as a result of higher volume due, in part, to improved market
share, as well as slightly improved pricing during the first six months of 1999.
In addition, stronger VIP sales contributed to the overall increase in revenue.
VIP revenue was up 16.9% to $61.5 million for the first six months of 1999, as
compared to $52.6 million in the same period of 1998. Management expects to
exceed its stated goal of 15% annual revenue growth for this division in 1999.
TMS revenue increased 3.6% from $27.4 million for the first six months of 1998,
to $28.4 million for the first six months of 1999. The Sampling component of TMS
sales in 1998 was heavily weighted toward the first half of the year, however,
in 1999, Sampling sales have staged more evenly. Management expects sales growth
in excess of 20% for Sampling in 1999.
Gross margin increased from 34.5% during the first six months of 1998, to 37.5%
for the same period in 1999, primarily due to decreases in paper costs.
Management expects the cost of paper to continue to decrease during the
remainder of 1999. Management noted that in March 1999, the Company signed long-
term contracts for 75% of its paper requirements which include pricing collars
that help stabilize the Company's paper cost.
Selling, general and administrative expenses were $39.1 million for the six
months ended June 30, 1999, compared with $41.2 million for the same period last
year. The six months ended June 30, 1998 included a one-time charge of $6.0
million related to the early retirement and resulting amendment to the
employment contract of the former CEO. Without this one-time charge, SG&A would
have increased 11.1% for the six months ended June 30, 1999, versus the year-ago
period.
The effective tax rate for the six months ended June 30, 1999 was the same as
the prior year period at 38.2%.
For the six months ended June 30, 1999, net earnings were $62.4 million, versus
$43.0 million for the same six months last year. The increase in net earnings is
attributable to increased volume and pricing in the FSI business, combined with
the improved performance of VIP.
Financial Condition, Liquidity and Sources of Capital
The Company's liquidity requirements arise mainly from its working capital
needs, primarily accounts receivable, inventory and debt service requirements.
The Company does not offer financing to its customers. FSI customers are billed
for 75% of each order eight weeks in advance of the publication date and are
billed for the balance immediately prior to the publication date. The Company
inventories its work in progress at cost, while it accrues progress billings as
a current liability at full sales value. Although the Company receives
considerable payments from its customers prior to publication of promotions,
revenue is recognized only upon publication dates. Therefore, the progress
billings on the balance sheet include any profits in the related receivables and
accordingly, the Company can operate with low, or even negative working capital.
Cash and cash equivalents totaled $7.0 million at June 30, 1999, versus $6.9
million at December 31, 1998. This was the result of cash provided by operating
activities of $70.8 million, and cash used in investing activities and financing
activities of $4.6 million and $66.1 million, respectively, in the first six
months of 1999.
Cash flow from operating activities increased from $47.0 million for the six
months ended at June 30, 1998 to $70.8 million at June 30, 1999, as a result of
increased earnings and other positive working capital changes.
12
<PAGE>
During the six months ended June 30, 1999, the Company retired $107 million in
debt due March 1999 using amounts borrowed under its $160 million Revolving
Credit Facility and $17 million of existing cash. As of June 30, 1999 the
Company's debt has been reduced to $310 million, which consists of $81 million
under its Revolving Credit Facility, $100 million of its 6-5/8% Senior Notes due
2009 and $129 million of its 9.55% Senior Notes due 2003.
The Company intends to use cash generated by operations to meet interest and
principal repayment obligations, for general corporate purposes, to reduce its
indebtedness and from time to time to repurchase stock through the Company's
stock repurchase program. As of June 30, 1999, the Company had authorization to
repurchase an additional 1.3 million shares of its common stock under its
existing share repurchase program.
Management believes that 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 payments of
indebtedness.
Capital Expenditures - The Company operates three printing facilities. Capital
expenditures were $3.7 million for the six-month period ended June 30, 1999.
Management expects future capital expenditure requirements of approximately $10
million to $15 million annually over each of the next three to five years to
meet increased capacity needs and to replace or rebuild equipment as required.
It is expected that equipment will be purchased using funds provided by
operations.
13
<PAGE>
Year 2000 Compliance
- --------------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable 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 generate erroneous data or information.
In response to the Year 2000 issue, the Company has implemented a multi-faceted
project plan, which covers both IT and non-IT systems. This plan encompasses
three areas: (1) program modifications; (2) implementing new financial software
upgrades; and (3) testing readiness of vendors and customers. Phases associated
with the project plan are: identification and ranking of components of the
Company's systems and equipment, and those of its suppliers that may be
vulnerable to Year 2000 problems; assessment of those components; remediation or
replacement of non-compliant systems and components; testing of systems and
components following remediation; and the development of contingency plans.
With regard to program modification and implementing new software upgrades, the
Company has completed its plan and believes that all critical systems are Year
2000 compliant. The Company has assessed Year 2000 compliance of customers and
vendors through a survey method.
The Company's plans include the development of a full contingency plan. The
Company completed the first test of its contingency plan in June. Further vendor
contingencies will be determined as testing with vendors and customers is
completed. Potential sources of risk include the inability of suppliers
(principally paper suppliers) to be Year 2000 compliant in a timely manner,
which could result in delays in product deliveries from such suppliers, the
disruption of the distribution of the Company's products to the consumer, and
disruption of the Company's own production facilities as a result of general
failure of necessary infrastructure such as electricity supply.
The Company estimates the total costs related to the implementation of the
program modification plan and the financial software upgrade plan to be
approximately $400,000 and $300,000, respectively, which will be funded through
operating cash flows and expensed as incurred. To date, expenses have totaled
approximately $360,000 for program modifications and $50,000 for financial
software upgrades. It is not possible to quantify the aggregate cost to the
Company with respect to vendors, service providers and customers who fail to
become Year 2000 compliant. This is a Year 2000 Readiness Disclosure Statement
within the meaning of the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271).
14
<PAGE>
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings
On February 24, 1999, the Company commenced litigation against The News
Corporation Limited ("News Corp") and News America Incorporated (News America")
in the State of Michigan Circuit Court for the County of Wayne. The Complaint
seeks $150 million in compensatory damages, $300 million in punitive damages and
injunctive relief based on allegations of tortious interference with prospective
contractual relations and aiding and abetting a breach of fiduciary duty. The
principal factual allegation is that Arthur Andersen LLP ("Arthur Andersen"),
with the inducement of News Corp and News America, repudiated a joint venture
agreement with the Company relating to the development of a new product. On
April 7, 1999, Arthur Andersen rejected alternative dispute resolution and filed
a declaratory judgment action in the Chancery Division of the Cook County,
Illinois Circuit Court. This action asks the Illinois Court to make a
determination as to whether the Company and Arthur Andersen had a contract.
On April 12, 1999, the Company amended its lawsuit against News Corp and News
America to add Arthur Andersen as a defendant. News Corp and News America filed
a motion to dismiss the case against News Corp and News America for lack of
jurisdiction. On May 7, 1999, the Court found that Michigan jurisdiction was
proper and denied their motion. News Corp and News America filed an application
for leave to appeal this decision. The Company has opposed the application for
leave to appeal. The application is currently pending before the Michigan Court
of Appeals.
On May 10, 1999, the Company filed a motion to dismiss the Illinois action. The
Illinois Court denied the motion to dismiss on July 12, 1999. To address the
potential for duplicative litigation raised by this decision, the Company has
moved to bifurcate contractual issues in the Michigan action and for
reconsideration in the Illinois action.
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, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
a. The Company held its Annual Meeting of Stockholders on May 18, 1999.
c. The election of the nominees for directors who will serve for a term to
expire at the next Annual Meeting of Stockholders or until their respective
successors have been duly elected and qualified was voted on by the
stockholders. The nominees, all of whom were elected were: Richard N.
Anderson, Patrick F. Brennan, Seth Goldstein, Brian J. Husselbee, Robert L.
Recchia, Marcella A. Sampson, Alan F. Schultz and Faith Whittlesey. The
Inspector of Election certified the following vote tabulations with respect
thereto:
15
<PAGE>
<TABLE>
<CAPTION>
Director For Withheld Broker Non-Votes
-------- --- -------- ----------------
<S> <C> <C> <C>
Richard N. Anderson 34,058,260 75,227 0
Patrick F. Brennan 34,047,669 85,818 0
Seth Goldstein 34,052,001 81,486 0
Brian J. Husselbee 34,059,169 74,318 0
Robert L. Recchia 34,060,269 73,218 0
Marcella A. Sampson 34,046,870 86,617 0
Alan F. Schultz 34,055,746 77,741 0
Faith Whittlesey 34,060,318 73,169 0
</TABLE>
2. A proposal to ratify the selection of Deloitte & Touche LLP, as auditors of
the Company for the 1999 fiscal year was approved by the stockholders.
The Inspector of Election certified the following vote tabulations:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C>
34,106,077 7,813 19,597 0
</TABLE>
3. A proposal to approve the Company's Amended and Restated Long-Term Incentive
Plan was approved by the stockholders.
The Inspector of Election certified the following vote tabulations:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C>
28,994,860 3,579,470 24,339 1,534,818
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a. The following exhibits are included herein:
(27) Financial Data Schedule
b. Form 8-K
The Company did not file any current report on Form 8-K during the three
months ended June 30, 1999.
16
<PAGE>
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: August 2, 1999
Valassis Communications, Inc.
(Registrant)
By: /s/Robert L. Recchia
-----------------------------------------
Robert L. Recchia
Executive Vice President-Chief Financial Officer
Signing on behalf of the Registrant and as principal
financial officer.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,008
<SECURITIES> 0
<RECEIVABLES> 90,693
<ALLOWANCES> 1,722
<INVENTORY> 22,944
<CURRENT-ASSETS> 126,676
<PP&E> 160,324
<DEPRECIATION> 114,549
<TOTAL-ASSETS> 213,654
<CURRENT-LIABILITIES> 141,116
<BONDS> 310,439
0
0
<COMMON> 627
<OTHER-SE> (240,039)
<TOTAL-LIABILITY-AND-EQUITY> 213,654
<SALES> 417,058
<TOTAL-REVENUES> 417,204
<CGS> 260,766
<TOTAL-COSTS> 302,432
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,345
<INTEREST-EXPENSE> 13,778
<INCOME-PRETAX> 100,994
<INCOME-TAX> 38,600
<INCOME-CONTINUING> 62,394
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,394
<EPS-BASIC> 1.09
<EPS-DILUTED> 1.07
</TABLE>
