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 September 30, 2001
_____ 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 November 12, 2001, there were 53,548,448 shares of the Registrant's
Common Stock outstanding.
Part I - Financial Information
------------------------------
Item 1. Financial Statements
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(dollars in thousands)
September 30, December 31,
Assets 2001 2000
------ ------------ -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 10,616 $ 11,140
Accounts receivable (less allowance for doubtful
accounts of $1,533 at September 30, 2001 and
$1,322 at December 31, 2000) 119,265 114,554
Inventories:
Raw materials 19,229 10,542
Work in progress 9,575 17,338
Prepaid expenses and other 7,060 10,729
Deferred income taxes 4,735 3,356
--------- ---------
Total current assets 170,480 167,659
--------- ---------
Property, plant and equipment, at cost:
Land and buildings 23,185 21,648
Machinery and equipment 130,210 123,043
Office furniture and equipment 33,652 31,638
Automobiles 962 1,117
Leasehold improvements 2,050 1,857
--------- ---------
190,059 179,303
Less accumulated depreciation and amortization (124,881) (119,265)
--------- ---------
Net property, plant and equipment 65,178 60,038
--------- ---------
Intangible assets:
Goodwill 107,756 107,756
Other intangibles 85,347 85,137
--------- ---------
193,103 192,893
Less accumulated amortization (122,602) (120,030)
--------- ---------
Net intangible assets 70,501 72,863
--------- ---------
Equity investments and advances to investees 31,412 18,136
Deferred income taxes 3,938 3,938
Other 4,418 3,083
--------- ---------
Total assets $ 345,927 $ 325,717
========= =========
2
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets, Continued
(dollars in thousands, except per share data)
September 30, December 31,
Liabilities and Stockholders' Deficit 2001 2000
------------------------------------- ----------- -----------
(unaudited)
Current liabilities:
Accounts payable $ 64,885 $ 85,671
Accrued interest ` 1,480 3,919
Accrued expenses 21,938 31,412
Progress billings 50,435 49,029
Income taxes payable 12,226 1,019
----------- -----------
Total current liabilities 150,964 171,050
----------- -----------
Long-term debt 274,445 325,490
Other non-current liabilities - 1,681
Commitments and contingencies
Stockholders' deficit:
Preferred stock of $.01 par value. Authorized 25,000,000
shares; no shares issued or outstanding at September 30,
2001 and December 31, 2000
Common stock of $.01 par value. Authorized 100,000,000
shares; issued 62,955,405 at September 30, 2001 and
62,932,556 at December 31, 2000; outstanding 53,780,170 at
September 30, 2001 and 53,562,676 at December 31, 2000 630 629
Additional paid-in capital 97,057 87,015
Deferred compensation (2,121) (1,983)
Retained earnings 163,585 73,963
Foreign currency translations (511) (460)
Treasury stock, at cost (9,175,235 shares at September 30, 2001
and 9,369,880 shares at December 31, 2000) (338,122) (331,668)
----------- -----------
Total stockholders' deficit (79,482) (172,504)
----------- -----------
Total liabilities and stockholders' deficit $ 345,927 $ 325,717
=========== ===========
NOTE: The balance sheet at December 31, 2000 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
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Income
(dollars in thousands, except per share data)
(unaudited)
Quarter Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ---------------- --------------- --------------
Revenues:
Net sales $ 197,360 $ 190,839 $ 642,282 $ 613,870
Other (primarily legal settlement in 2000) 1,048 234 1,213 27,325
------------- -------------- ------------ -------------
Total revenues 198,408 191,073 643,495 641,195
------------- -------------- ------------ -------------
Costs and expenses:
Cost of products sold 127,578 122,181 406,483 380,590
Selling, general and administrative 21,018 20,033 67,746 57,913
Loss on investments 1,623 858 2,935 2,670
Writedown of impaired assets 6,062 - 6,062 -
Amortization of intangible assets 860 555 2,574 2,131
Interest 3,739 5,884 14,271 16,435
------------- -------------- ------------ -------------
Total costs and expenses 160,880 149,511 500,071 459,739
------------- -------------- ------------ -------------
Earnings before income taxes 37,528 41,562 143,424 181,456
Income taxes 12,817 15,900 52,517 68,000
------------- -------------- ------------ -------------
Net earnings before extraordinary items 24,711 25,662 90,907 113,456
Extraordinary loss, net of tax (1,285) - (1,285) -
------------- -------------- ------------ -------------
Net earnings $ 23,426 $ 25,662 $ 89,622 $ 113,456
============= ============== ============= =============
Net earnings per common share before
extraordinary loss, basic $ 0.46 $ 0.47 $ 1.70 $ 2.07
============= ============== ============= =============
Net earnings per common share before
extraordinary loss, diluted $ 0.45 $ 0.47 $ 1.67 $ 2.03
============= ============== ============= =============
Net earnings per common share, basic $ 0.44 $ 0.47 $ 1.67 $ 2.07
============= ============== ============= =============
Net earnings per common share, diluted $ 0.43 $ 0.47 $ 1.65 $ 2.03
============= ============== ============= =============
Shares used in computing net earnings per
share, basic 53,791,838 54,323,011 53,583,513 54,913,788
============= ============== ============= =============
Shares used in computing net earnings per
share, diluted 54,590,276 55,212,491 54,479,891 55,893,000
============= ============== ============= =============
See accompanying notes to condensed consolidated financial statements.
4
VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
Nine Months Ended
-----------------------------
September 30, September 30,
2001 2000
------------- ---------------
Cash flows from operating activities:
Net earnings $ 89,622 $ 113,456
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization 9,991 8,029
Provision for losses on accounts receivable 211 833
Writedown of impaired assets 6,062
Deferred compensation (138) (1,482)
(Gain)/loss on sale of property, plant and equipment (225) 45
Stock-based compensation charge 971 2,816
Changes in assets and liabilities which increase (decrease) cash flow:
Accounts receivable (4,922) (19,844)
Inventories (924) (2,500)
Prepaid expenses and other 4,315 (3,392)
Other liabilities (1,681) (90)
Other assets (294) (4,618)
Accounts payable (20,786) (8,732)
Accrued expenses and interest (11,913) (8,727)
Tax benefit from stock option exercises 31,797 1,053
Income taxes 9,828 2,600
Progress billings 1,406 (3,026)
--------- ---------
Total adjustments 23,698 (37,035)
--------- ---------
Net cash provided by operating activities 113,320 76,421
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (13,570) (5,494)
Proceeds from sale of property, plant and equipment 1,238 206
Investments and acquisitions (20,590) (41,924)
Other (37) (43)
--------- ---------
Net cash used in investing activities (32,959) (47,255)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt (14,261) (2,779)
Borrowings of long-term debt 150,000 -
Net (payments)/borrowings under revolving line of credit (186,800) 39,000
Repurchase of common stock (38,250) (72,525)
Proceeds from the issuance of common stock 8,426 3,259
--------- ---------
Net cash used in financing activities (80,885) (33,045)
--------- ---------
Net decrease in cash (524) (3,879)
Cash at beginning of period 11,140 11,089
--------- ---------
Cash at end of period $ 10,616 $ 7,210
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 16,710 $ 17,070
Cash paid during the period for income taxes $ 33,860 $ 64,795
Non-cash financing activities:
Stock issued under stock-based compensation plan $ 1,617 $ 3,611
See accompanying notes to condensed consolidated financial statements.
5
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 accounting principles generally accepted
in the United States of America 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, 2000. Certain amounts for 2000 have been reclassified to
conform to current period classifications.
2. Recent Accounting Pronouncements
--------------------------------
During July 2001, the Financial Accounting Standards Board ("FASB")
issued two statements, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", that amend APB Opinion No. 16, "Business Combinations," and supersede
APB Opinion No. 17, "Intangible Assets." The two statements modify the method of
accounting for business combinations entered into after September 30, 2001 and
address the accounting for intangible assets. Beginning January 1, 2002, we
anticipate the Company will no longer amortize its goodwill and certain
intangible assets, but will evaluate them for impairment annually. We are
currently reviewing the statements to determine their effect on the Company.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires an entity to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the related long-lived asset. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The Company
does not expect the adoption of SFAS No. 143 to have a material effect on its
financial position or results of operations.
During October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121 and
provisions of APB Opinion No. 30 for the disposal of segments of a business. The
statement creates one accounting model, based on the framework established in
Statement No. 121, to be applied to all long-lived assets including discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001 The Company does not expect the adoption of SFAS No. 144 to have a
material effect on its financial position or results of operations.
6
3. Contingencies
-------------
On July 27, 2001 a federal court jury returned a verdict against Dennis
D. Garberg & Associates, Inc. d/b/a The Sunflower Group (Sunflower) awarding the
Company $16.6 million which included damages for past and future lost profits.
The lawsuit, brought by the Company against Sunflower in February of 1999,
asserted that Sunflower wrongfully obtained proprietary information from the
Company's newspaper delivered sampling business. The jury found Sunflower liable
for misappropriating the Company's trade secrets and inducing an individual to
breach his duty of loyalty to the Company. The Company will request that the
judge enter a judgment on the verdict. A reasonable estimation of the Company's
ultimate recovery can not be made at this time and the Company has not recorded
any amount in its financial statements.
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.
4. Long-Term Debt
--------------
On June 6, 2001, the Company issued zero coupon convertible notes due
2021 for $150 million. The net proceeds from such offering were used to repay
outstanding indebtedness under the Credit Facility. The issue price of each note
represents a yield to maturity of 3.0% per year calculated from the issuance
date. In connection with the Company's issuance of its zero coupon convertible
notes, the Company reduced the amount permitted to be borrowed under its
Revolving Credit Facility from $230 million to $125 million.
During September 2001, the Company retired its 9.55% Senior Notes due
2003 with a face value of $15.8 million prior to maturity. The debt retirement
resulted in an extraordinary loss after tax of $1.3 million.
5. Segment Reporting
----------------
The Company's products are broken into three types, as follows:
1. Mass-Distributed Products - products which provide mass reach at low
cost, including:
- Free-standing inserts (FSI) - four color booklets containing
promotions from multiple advertisers distributed through Sunday
newspapers.
- Run-of-press (ROP) - on-page newspaper promotions
2. Cluster-Targeted Products - products targeted around geographic and
demographic clusters, including:
- Targeted Print and Media Services (formerly Valassis Impact
Promotions) and Targeted Sampling & Media Solutions (polybag samples
and advertising), which have recently been combined into one
segment, known as Targeted Print and Media Services
3. One-to-One Products - products and services that pinpoint individuals
to build loyalty to a brand, including:
- Customer Relationship Marketing (which includes PreVision)
- Promotion Watch - security consulting
- Non-consolidated investments in one-to one promotion companies
7
The Company has two reportable segments, cooperative free-standing inserts
(FSIs) and Targeted Print & Media Services (TP&MS). 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.
(in millions) Three Months Ended September 30
------------- --------------------------------------------
FSI TP&MS All Others* Total
--------------------------------------------
2001
----
Revenues from external customers $ 141.0 $ 37.3 $ 19.1 $ 197.4
Intersegment revenues $ - $ - $ - $ -
Depreciation/amortization $ 2.4 $ 0.5 $ 0.5 $ 3.4
Segment profit $ 39.7 $ 3.0 $ (6.2) $ 36.5
2000
----
Revenues from external customers $ 134.6 $ 49.2 $ 7.2 $ 191.0
Intersegment revenues $ - $ - $ - $ -
Depreciation/amortization $ 2.0 $ 0.4 $ 0.1 $ 2.5
Segment profit $ 33.4 $ 7.2 $ 0.9 $ 41.5
* Segments below the quantitative thresholds are primarily attributable to
three segments of the Company. Those include a customer relationship
marketing segment business, 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:
Three Months Ended
September 30,
-----------------------
2001 2000
-------- -------
Profit for reportable segments $ 42.7 $ 40.6
Profit for other segments (6.2) 0.9
Unallocated amounts:
Interest income - 0.1
Other income 1.0 -
-------- -------
Earnings before taxes $ 37.5 $ 41.6
======== =======
Domestic and foreign revenues for each of the three-month periods ended
September 30 were as follows:
2001 2000
--------- ----------
United States $ 197.4 $ 189.4
Canada 1.0 1.7
--------- ---------
Total $ 198.4 $ 191.1
========= =========
8
(in millions) Nine Months Ended September 30
------------- ----------------------------------------------
FSI TP&MS All Others* Total
----------------------------------------------
2001
----
Revenues from external customers $ 447.4 $ 143.7 $ 51.3 $ 642.4
Intersegment revenues $ - $ - $ - $ -
Depreciation/amortization $ 7.0 $ 1.5 $ 1.5 $ 10.0
Segment profit/(loss) $ 132.1 $ 16.5 $ (6.4) $ 142.2
2000
----
Revenues from external customers $ 459.5 $ 134.5 $ 20.2 $ 614.2
Intersegment revenues $ - $ - $ - $ -
Depreciation/amortization $ 6.6 $ 1.3 $ 0.1 $ 8.0
Segment profit $ 131.5 $ 21.5 $ 1.5 $ 154.5
* Segments below the quantitative thresholds are primarily attributable to
three segments of the Company. Those include a customer relationship
marketing segment business, 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:
Nine Months Ended
September 30,
----------------------------
2001 2000
---------- -----------
Profit for reportable segments $ 148.6 $ 153.0
(Loss)/Profit for other segments (6.4) 1.5
Unallocated amounts:
Interest income 0.1 0.5
Other income 1.1 26.5
---------- -----------
Earnings before taxes $ 143.4 $ 181.5
========== ===========
Domestic and foreign revenues for each of the six-month periods ended September
30 were as follows:
2001 2000
----------- -----------
United States $ 639.6 $ 636.3
Canada 3.9 4.9
----------- -----------
Total $ 643.5 $ 641.2
=========== ===========
9
6. Earnings Per Share
------------------
Earnings per common share ("EPS") data were computed as follows:
Three Months
Ended September 30,
----------------------------
2001 2000
-------- --------
Net Earnings $ 23,426 $ 25,662
======== ========
Basic EPS:
Weighted average common shares outstanding 53,792 54,323
======== ========
Earnings per common share - basic
Before extraordinary item $ 0.46 $ 0.47
Extraordinary item (0.02) --
-------- --------
Total $ 0.44 $ 0.47
======== ========
Diluted EPS:
Weighted average common shares outstanding 53,792 54,323
Weighted average shares purchased on exercise of dilutive options 4,166 3,712
Shares purchased with proceeds of options (3,418) (2,839)
Shares contingently issuable 50 16
-------- --------
Shares applicable to diluted earnings 54,590 55,212
======== ========
Earnings per common share - diluted
Before extraordinary item $ 0.45 $ 0.47
Extraordinary item (0.02) --
-------- --------
Total $ 0.43 $ 0.47
======== ========
10
Nine Months
Ended September 30,
-------------------------------
2001 2000
-------------- -----------
Net Earnings $ 89,622 $113,456
=============== ===========
Basic EPS:
Weighted average common shares outstanding 53,584 54,914
=============== ===========
Earnings per common share - basic
Before extraordinary item $ 1.70 $ 2.07
Extraordinary item (0.03) -
--------------- -----------
Total $ 1.67 $ 2.07
=============== ===========
Diluted EPS:
Weighted average common shares outstanding 53,584 54,914
Weighted average shares purchased on exercise of dilutive options 4,480 3,792
Shares purchased with proceeds of options (3,634) (2,829)
Shares contingently issuable 50 16
--------------- -----------
Shares applicable to diluted earnings 54,480 55,893
=============== ===========
Earnings per common share - diluted
Before extraordinary item $ 1.67 $ 2.03
Extraordinary item (0.02) -
--------------- -----------
Total $ 1.65 $ 2.03
=============== ===========
7. Reverse Repurchase Agreement
----------------------------
During September 2001, the Company entered into a reverse repurchase
agreement transaction relating to $234.5 million of U.S. Treasury Securities.
The related receivable and payable from the transaction have been offset on the
consolidated balance sheet. As a result of the transaction, the Company released
$3.7 million of its deferred tax valuation allowance and recorded a $1.4 million
reduction in income taxes.
8. Writedown of Impaired Assets
----------------------------
During September 2001, the Company took a one-time charge of $6.1
million relating to the closedown of Save.com, its approximately 50% owned
investment, and resulting reorganization costs.
11
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; 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 September 30, 2001 and September 30, 2000
------------------------------------------------------------
Net sales increased 3.5% from $190.8 million for the third quarter of 2000 to
$197.4 million for the third quarter of 2001. Free-standing insert (FSI)
revenues were up from $134.6 million for the quarter ended September 30, 2000 to
$141.0 million for the same quarter of 2001. The increase is driven primarily by
an increase in volume for the quarter with two extra insert dates. Revenues for
cluster-targeted products decreased 24.2% to $37.3 million for the quarter,
largely due to heavy competition from commercial printers. Additionally, net
sales included a 109% increase to $9.4 million in ROP (run-of-press) sales
attributable to additional sales focus and an increase in demand for this
product in the current economic climate.
Gross profit margin was 35.4% in the third quarter of 2001, down from 36.0% in
the third quarter of 2000. The decline in average pages per book due to two more
insert dates in the third quarter of 2001 and our strategy to reduce direct
response pages in an effort to improve pricing resulted in increased media and
print costs on a per-thousand-page basis which was partially offset by lower
paper costs.
Selling, general and administrative expenses increased 4.9% from $20.0 million
in the third quarter of 2000 to $21.0 million in the third quarter of 2001. The
increase was due to the inclusion of PreVision for the entire quarter in the
current year. PreVision was purchased during the third quarter of 2000.
During September 2001, the Company took a one-time charge of $6.1 million
relating to the closedown of Save.com, its 50% owned investment, and resulting
reorganization costs.
Interest expense was down for the quarter ended September 30, 2001 to $3.7
million from $5.9 million for the same quarter in 2000. The Company issued zero
coupon convertible notes in June 2001 for $150 million. The proceeds were used
to repay outstanding indebtedness under The Revolving Credit Facility. During
the third quarter of 2001, the Company retired $15.8 million in aggregate
principal amount of its 9.55% Senior Notes due 2003.
12
The effective tax rate was 34.2% for the quarter ended September 30, 2001,
compared with 38.3% for the same period in 2000. The effective tax rate decrease
is primarily the result of tax benefits associated with the reverse repurchase
agreement described in Note 7 and resulting utilization of the Company's capital
losses.
In connection with the retirement of the 9.55% Senior Notes due 2003 discussed
above, in September 2001, the Company paid a premium in an amount equal to $2.0
million. Accordingly, the Company incurred extraordinary charges of $1.3 million
(net of tax) due to the early extinguishment of $15.8 million of debt in the
third quarter of 2001.
Earnings before extraordinary items were $24.7 million for the third quarter of
2001 versus $25.7 million for the same period last year.
Nine Months Ended September 30, 2001 and September 30, 2000
-----------------------------------------------------------
For the nine months ended September 30, 2001, net sales increased 4.6% to $642.3
million from $613.9 million for the comparable period in 2000. Free-standing
insert (FSI) revenues were down from $459.5 million for the first nine months of
2000 to $447.4 million for the first nine months of 2001. This decrease is
primarily the result of a reduction in direct response pages as part of a price
improvement strategy, as well as lower levels of e-commerce client
participation. Revenues for cluster-targeted products increased 6.8% to $143.7
million for the nine month period, driven primarily by strong demand in
sampling/advertising polybag programs in the first half of 2001. Net sales of
the Company included revenues of $20.4 million from PreVision, which was
acquired in August 2000. Other revenues decreased to $1.2 million for the nine
months ended September 30, 2001, from $27.3 million for the comparable period as
a result of the recording of the settlement of a lawsuit in 2000.
Gross margin decreased to 36.7% for the first nine months of 2001, from 38.0%
for the same period in 2000 (excluding the impact of a lawsuit settlement
included in other revenues in the first nine months of 2000). The decline in
average pages per book due to our strategy to reduce direct response pages in an
effort to improve pricing resulted in increased media and print costs on a
per-thousand-page basis. Also, revenue increases in non-FSI products, which
command lower margins, contributed to the overall decrease.
Selling, general and administrative expenses were $67.7 million, versus $57.9
million for the comparable prior-year period. This increase is primarily the
result of the SG&A expenses of PreVision, which was acquired in August 2000, and
initiatives commenced during the later part of 2000 to increase the sales force.
During September 2001, the Company took a one-time charge of $6.1 million
relating to the closedown of Save.com, its 50% owned investment, and resulting
reorganization costs.
Interest expense was down 12.8% for the nine months ended September 30, 2001 to
$14.3 million from $16.4 million for the same period in 2000. The Company issued
zero coupon convertible notes in June 2001 for $150 million. The proceeds were
used to repay outstanding indebtedness under The Revolving Credit Facility.
During the third quarter of 2001, the Company retired $15.8 million in aggregate
principal amount of its 9.55% Senior Notes due 2003.
13
Earnings before extraordinary items were $90.9 million for the nine months ended
September 30, 2001 versus $113.5 million for the same period last year.
Excluding the impact of the settlement of a lawsuit in the nine months ended
September 30, 2000, earnings before extraordinary items would have decreased by
6.2%.
In connection with the retirement of the 9.55% Senior Notes due 2003 discussed
above, in September 2001, the Company paid a premium in an amount equal to $2.0
million. Accordingly, the Company incurred extraordinary charges of $1.3 million
(net of tax) due to the early extinguishment of $15.8 million of debt in the
nine months ended September 30, 2001.
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
generally 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 $10.6 million at September 30, 2001 versus
$11.1 million at December 31, 2000. This was the result of cash provided by
operating activities of $113.3 million, and cash used in investing activities
and financing activities of $33.0 million and $80.9 million, respectively,
during the first nine months of 2001.
Cash flow from operating activities increased from $76.4 million at September
30, 2000 to $113.3 million at September 30, 2001, primarily due from tax
benefits received from employee stock option exercises.
As of September 30, 2001, the Company's debt has been reduced to $274.4 million,
which consists of $23.2 million under its Revolving Credit Facility and $251.2
million in public debt. As discussed in Note 4, in June 2001, the Company issued
zero coupon convertible notes due 2021 for $150 million. The net proceeds from
such offering were used to repay outstanding indebtedness under the Revolving
Credit Facility. During September 2001, the Company retired its 9.55% Senior
Notes due 2003 with a face value of $15.8 million prior to maturity. The
retirement resulted in an extraordinary loss of $1.3 million (net of tax).
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 September 30, 2001, the Company had authorization to repurchase an
additional 2.0 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.
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Capital Expenditures - The Company operates three printing facilities. Capital
expenditures were $13.6 million for the nine month period ended September 30,
2001. Management expects future capital expenditure requirements of
approximately $15 million 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.
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Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
(4.1) Second Supplemental Indenture dated as of August 21, 2001, between
Valassis Communications, Inc. and The Bank of New York with respect to
the Company's 9.55% Senior Notes due 2003.
b. Form 8-K
The Company filed a report on Form 8-K, dated July 24, 2001, announcing
that it has elected Kenneth V. Darish to its Board of Directors.
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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: November 14, 2001
Valassis Communications, Inc.
(Registrant)
By: /s/ Robert L. Recchia
--------------------------
Robert L. Recchia
Executive Vice President and
Chief Financial Officer
Signing on behalf of the
Registrant and as principal
financial and accounting
officer.
17