VCI-2012.6.30-10Q
Table of Contents


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, 2012
 
¨
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
Incorporation or Organization)
 
(IRS Employer Identification Number)
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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
 
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x
As of August 3, 2012, there were 39,774,180 shares of the Registrant’s Common Stock outstanding.



Table of Contents


VALASSIS COMMUNICATIONS, INC.
Index to Quarterly Report on Form 10-Q
Quarter Ended June 30, 2012 
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 



Table of Contents


PART I – FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets
(U.S. dollars in thousands)
(unaudited)
 
 
June 30,
2012
 
December 31,
2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
75,237

 
$
101,971

Accounts receivable, net (Note 1)
378,706

 
448,320

Inventories (Note 1)
30,366

 
41,120

Prepaid expenses and other
54,269

 
37,655

Total current assets
538,578

 
629,066

Property, plant and equipment, net (Note 1)
138,070

 
148,905

Goodwill (Note 2)
628,886

 
636,471

Other intangible assets, net (Note 2)
224,666

 
213,613

Other assets
15,212

 
16,392

Total assets
$
1,545,412

 
$
1,644,447

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion long-term debt (Note 3)
$
15,000

 
$
15,000

Accounts payable
257,072

 
334,378

Progress billings
39,296

 
39,975

Accrued expenses (Note 4)
90,257

 
98,409

Total current liabilities
401,625

 
487,762

Long-term debt (Note 3)
580,061

 
587,560

Deferred income taxes
66,798

 
67,404

Other non-current liabilities
53,023

 
52,187

Total liabilities
1,101,507

 
1,194,913

Commitments and contingencies (Note 5)

 

Stockholders’ equity:
 
 
 
Preferred stock ($0.01 par value; 25,000,000 shares authorized; no shares issued or outstanding at June 30, 2012 and December 31, 2011)

 

Common stock ($0.01 par value; 100,000,000 shares authorized; 65,394,999 and 65,398,539 shares issued at June 30, 2012 and December 31, 2011, respectively; 39,747,117 and 42,347,368 shares outstanding at June 30, 2012 and December 31, 2011, respectively)
654

 
654

Additional paid-in capital
113,865

 
123,881

Retained earnings
1,069,694

 
1,021,566

Accumulated other comprehensive income
2,349

 
2,775

Treasury stock, at cost (25,647,882 and 23,051,171 shares at June 30, 2012 and December 31, 2011, respectively)
(742,657
)
 
(699,342
)
Total stockholders’ equity
443,905

 
449,534

Total liabilities and stockholders’ equity
$
1,545,412

 
$
1,644,447



See accompanying notes to condensed consolidated financial statements.
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Table of Contents


VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Income
(U.S. dollars in thousands, except per share data)
(unaudited)
 
        
 
Three Months Ended
 
Six Months Ended

June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$
540,238

 
$
565,252

 
$
1,058,823

 
$
1,112,231

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
403,727

 
418,040

 
792,621

 
826,617

Selling, general and administrative
83,523

 
80,831

 
161,140

 
159,258

Amortization expense
3,156

 
3,155

 
6,312

 
6,311

Goodwill impairment (Note 2)
7,585

 

 
7,585

 

Total costs and expenses
497,991

 
502,026

 
967,658

 
992,186

Earnings from operations
42,247

 
63,226

 
91,165

 
120,045

Other expenses and income:
 
 
 
 
 
 
 
Interest expense
6,755

 
11,726

 
13,809

 
21,501

Interest income
(70
)
 
(122
)
 
(128
)
 
(261
)
Loss on extinguishment of debt (Note 3)

 
2,966

 

 
16,318

Other income, net
(77
)
 
(1,436
)
 
(774
)
 
(2,312
)
Total other expenses, net
6,608

 
13,134

 
12,907

 
35,246

Earnings before income taxes
35,639

 
50,092

 
78,258

 
84,799

Income tax expense (Note 1)
13,932

 
19,840

 
30,130

 
33,136

Net earnings
$
21,707

 
$
30,252

 
$
48,128

 
$
51,663

 
 
 
 
 
 
 
 
Net earnings per common share, basic (Note 6)
$
0.53

 
$
0.63

 
$
1.16

 
$
1.06

 
 
 
 
 
 
 
 
Net earnings per common share, diluted (Note 6)
$
0.51

 
$
0.60

 
$
1.11

 
$
1.01

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic (Note 6)
41,170

 
47,877

 
41,642

 
48,903

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, diluted (Note 6)
42,719

 
50,167

 
43,382

 
51,250



See accompanying notes to condensed consolidated financial statements.
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Table of Contents


VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Comprehensive Income
(U.S. dollars in thousands)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Net earnings
$
21,707

 
$
30,252

 
$
48,128

 
$
51,663

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized changes in fair value of cash flow hedges
(575
)
 
(103
)
 
(979
)
 
(240
)
Unrealized changes in fair value of available-for-sale securities

 
20

 

 
(130
)
Realized losses on cash flow hedges reclassified from accumulated other comprehensive income ("AOCI") into earnings

 
2,261

 

 
3,040

Foreign currency translation adjustment
203

 
(58
)
 
553

 
807

Total other comprehensive income (loss)
$
(372
)
 
$
2,120

 
$
(426
)
 
$
3,477

Comprehensive income
$
21,335

 
$
32,372

 
$
47,702

 
$
55,140



See accompanying notes to condensed consolidated financial statements.
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Table of Contents


VALASSIS COMMUNICATIONS, INC.
Condensed Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
(unaudited)

 
Six Months Ended
 
June 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net earnings
$
48,128

 
$
51,663

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,097

 
31,121

Amortization of debt issuance costs
858

 
1,181

Provision for losses on accounts receivable
883

 
1,589

Goodwill impairment
7,585

 

Loss on extinguishment of debt

 
5,748

Gain (loss) on derivatives, net
(1,049
)
 
2,345

Loss on sale of property, plant and equipment
405

 
36

Stock-based compensation expense
4,801

 
4,367

Deferred income taxes
826

 
2,159

Changes in assets and liabilities:
 
 
 
Accounts receivable, net
73,243

 
46,940

Inventories
10,754

 
2,768

Prepaid expenses and other
(16,417
)
 
2,874

Other assets
292

 
(1,116
)
Accounts payable
(79,017
)
 
(9,409
)
Progress billings
(679
)
 
(8,386
)
Accrued expenses
(9,124
)
 
(41,018
)
Other non-current liabilities
(783
)
 
(1,829
)
Total adjustments
21,675

 
39,370

Net cash provided by operating activities
69,803

 
91,033

Cash flows from investing activities:
 
 
 
Additions to property, plant and equipment
(11,770
)
 
(11,626
)
Digital acquisitions, net of cash acquired
(18,362
)
 

Proceeds from sale of property, plant and equipment
217

 
20

Proceeds from sale of available-for-sale securities

 
1,494

Net cash used in investing activities
(29,915
)
 
(10,112
)
Cash flows from financing activities:
 
 
 
Borrowings of long-term debt

 
610,000

Repayments of long-term debt
(7,500
)
 
(706,169
)
Debt issuance costs

 
(11,266
)
Repurchases of common stock
(65,900
)
 
(105,856
)
Proceeds from issuance of common stock
6,305

 
4,672

Net cash used in financing activities
(67,095
)
 
(208,619
)
Effect of exchange rate changes on cash and cash equivalents
473

 
725

Net decrease in cash and cash equivalents
(26,734
)
 
(126,973
)
Cash and cash equivalents at beginning of period
101,971

 
245,935

Cash and cash equivalents at end of period
$
75,237

 
$
118,962

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for interest
$
13,675

 
$
17,011

Cash paid during the period for income taxes
$
48,744

 
$
58,042

Non-cash financing activities:
 
 
 
Stock issued under stock-based compensation plans
$

 
$
2,684



See accompanying notes to condensed consolidated financial statements.
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Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)



1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 (“GAAP”) 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 GAAP 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 Valassis Communications, Inc. (“Valassis,” “we,” and “our”) Annual Report on Form 10-K for the year ended December 31, 2011, as amended (the “2011 Form 10-K”).
Significant Accounting Policies
Accounts Receivable
The allowance for doubtful accounts was $6.9 million as of June 30, 2012 and December 31, 2011.
Income Taxes
We are required to adjust our effective tax rate each quarter to be consistent with our estimated annual effective tax rate. We are also required to record the tax impact of certain unusual or infrequently occurring items, including the effects of changes in tax laws or rates, in the interim period in which they occur. The effective tax rate during a particular quarter may be higher or lower as a result of the timing of actual earnings versus annual projections.
Inventories
Inventories are accounted for at the lower of cost, determined on a first in, first out (“FIFO”) basis, or market. Inventories included on the condensed consolidated balance sheets consisted of:

(in thousands of U.S. dollars)
June 30,
2012
 
December 31,
2011
Raw materials
$
23,241

 
$
28,075

Work in progress
7,125

 
13,045

Inventories
$
30,366

 
$
41,120


Property, Plant and Equipment
The following table summarizes the costs and ranges of useful lives of the major classes of property, plant and equipment and the total accumulated depreciation related to property, plant and equipment, net included on the condensed consolidated balance sheets:

 
Useful Lives
 
June 30,
2012
 
December 31, 2011
 
(in years)
 
(in thousands of U.S. dollars)
Land, at cost
N/A
 
$
7,176

 
$
7,167

Buildings, at cost
10 - 30
 
37,742

 
37,511

Machinery and equipment, at cost
3 - 20
 
226,823

 
217,764

Office furniture and equipment, at cost
3 - 10
 
235,591

 
236,994

Leasehold improvements, at cost
5 - 10
 
29,284

 
28,563

 
 
 
536,616

 
527,999

Less accumulated depreciation
 
 
(398,546
)
 
(379,094
)
Property, plant and equipment, net
 
 
$
138,070

 
$
148,905



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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


2. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the six months ended June 30, 2012 are as follows:

(in thousands of U.S. dollars)
Shared Mail
 
Neighborhood Targeted
 
Free-standing Inserts
 
International, Digital Media & Services
 
Total
Balance as of December 31, 2011
 
 
 
 
 
 
 
 
 
     Total goodwill acquired
$
721,384

 
$
5,325

 
$
22,357

 
$
93,405

 
$
842,471

     Accumulated impairment losses
(187,200
)
 

 

 
(18,800
)
 
(206,000
)
     Goodwill
534,184

 
5,325

 
22,357

 
74,605

 
636,471

 
 
 
 
 
 
 
 
 
 
     Impairment charges

 
(3,985
)
 

 
(3,600
)
 
(7,585
)
 
 
 
 
 
 
 
 
 
 
Balance as of June 30, 2012
 
 
 
 
 
 
 
 
 
     Total goodwill acquired
721,384

 
5,325

 
22,357

 
93,405

 
842,471

     Accumulated impairment losses
(187,200
)
 
(3,985
)
 

 
(22,400
)
 
(213,585
)
     Goodwill
$
534,184

 
$
1,340

 
$
22,357

 
$
71,005

 
$
628,886


The impairment charges of $7.6 million recognized during the three and six months ended June 30, 2012 resulted from our decision to exit our newspaper polybag advertising and sampling business, a reporting unit within our Neighborhood Targeted reportable segment, and our solo direct mail business, a reporting unit within International, Digital Media & Services.

The components of other intangible assets, net included on the condensed consolidated balance sheets consisted of:

 
June 30, 2012
 
December 31, 2011
(in thousands of U.S. dollars)
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
Weighted
Average
Remaining
Useful Life
(in years)
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
Weighted
Average
Remaining
Useful Life (in years)
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
Mailing lists, non-compete agreements and other
$
41,520

 
$
(10,904
)
 
$
30,616

 
14.3
 
$
40,457

 
$
(9,894
)
 
$
30,563

 
15.1
Customer relationships
140,000

 
(49,892
)
 
90,108

 
8.5
 
140,000

 
(44,591
)
 
95,409

 
9.0
Total
$
181,520

 
(60,796
)
 
120,724

 
 
 
$
180,457

 
(54,485
)
 
125,972

 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
Valassis name, tradenames, trademarks and other
 
 
 
 
103,942

 
 
 
 
 
 
 
87,641

 
 
Other intangible assets, net
 
 
 
 
$
224,666

 
 
 

 
 
 
$
213,613

 
 

The increase in the gross amount of mailing lists, non-compete agreements and other finite-lived intangible assets during the six months ended June 30, 2012 reflects the acquisition of technology related to our digital business. The $16.3 million increase in indefinite-lived intangible assets during the six months ended June 30, 2012 relates to the acquisition of Brand.net, which is described in Note 9, Brand.net Acquisition.

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


3. LONG-TERM DEBT
Long-term debt included on the condensed consolidated balance sheets consisted of:
(in thousands of U.S. dollars)
June 30,
2012
 
December 31,
2011
Senior Secured Revolving Credit Facility
$
50,000

 
$
50,000

Senior Secured Term Loan A
285,000

 
292,500

Senior Secured Convertible Notes due 2033, net of discount
61

 
60

6 5/8% Senior Notes due 2021
260,000

 
260,000

Total debt
595,061

 
602,560

Current portion long-term debt
15,000

 
15,000

Long-term debt
$
580,061

 
$
587,560


Senior Secured Credit Facility
General
On June 27, 2011, we entered into a senior secured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and a syndicate of lenders jointly arranged by J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and RBS Securities Inc. (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility and related loan documents replaced and terminated our prior credit agreement, dated as of March 2, 2007, as amended (the “Prior Senior Secured Credit Facility”), by and among Valassis, Bear Stearns Corporate Lending Inc., as Administrative Agent, and a syndicate of lenders jointly arranged by Bear, Stearns & Co. Inc. and Banc of America Securities LLC. In connection with the termination of the Prior Senior Secured Credit Facility, all obligations and rights under the related guarantee, security and collateral agency agreement, dated as of March 2, 2007, as amended (the “Prior Security Agreement”), by Valassis and certain of its domestic subsidiaries signatory thereto, as grantors, in favor of Bear Stearns Corporate Lending Inc., in its capacity as collateral agent for the benefit of the Secured Parties (as defined in the Prior Security Agreement), were also simultaneously terminated.
 
The Senior Secured Credit Facility consists of:
a five-year term loan A in an aggregate principal amount equal to $300.0 million, with principal repayable in quarterly installments at a rate of 5.0% during each of the first two years from issuance, 10.0% during the third year from issuance, 15.0% during the fourth year from issuance and 11.25% during the fifth year from issuance, with the remaining 53.75% due at maturity (the “Term Loan A”);
a five-year revolving credit facility in an aggregate principal amount of $100.0 million (the “Revolving Line of Credit”), including $15.0 million available in Euros, Pounds Sterling or Canadian Dollars, $50.0 million available for letters of credit and a $20.0 million swingline loan subfacility, of which $50.0 million was drawn at closing and remains outstanding as of June 30, 2012 (exclusive of outstanding letters of credit described below); and
an incremental facility pursuant to which, prior to the maturity of the Senior Secured Credit Facility, we may incur additional indebtedness in an amount up to $150.0 million under the Revolving Line of Credit or the Term Loan A or a combination thereof, subject to certain conditions, including receipt of additional lending commitments for such additional indebtedness. The terms of the incremental facility will be substantially similar to the terms of the Senior Secured Credit Facility, except with respect to the pricing of the incremental facility, the interest rate for which could be higher than that for the Revolving Line of Credit and the Term Loan A.
We used the initial borrowing under the Revolving Line of Credit, the proceeds from the Term Loan A and existing cash of $120.0 million to repay the $462.2 million outstanding under our Prior Senior Secured Credit Facility (reflecting all outstanding borrowings thereunder), to pay accrued interest with respect to such loans and to pay the fees and expenses related to the Senior Secured Credit Facility. We recognized a pre-tax loss on extinguishment of debt of $3.0 million during the three and six months ended June 30, 2011, which represents the write-off of related capitalized debt issuance costs. In addition, as further discussed in Note 7, Derivative Financial Instruments and Fair Value Measurements, we recorded in interest expense a pre-tax loss of $2.6 million related to the discontinuation of hedge accounting on the related interest rate swap. We capitalized related debt issuance costs of approximately $6.2 million, which will be amortized over the term of the Senior Secured Credit Facility.
All borrowings under our Senior Secured Credit Facility, including, without limitation, amounts drawn under the Revolving Line of Credit, are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of June 30, 2012, we had approximately $40.1 million available under the Revolving Line of

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Credit portion of our Senior Secured Credit Facility (after giving effect to the reductions in availability pursuant to $9.9 million in standby letters of credit outstanding as of June 30, 2012).
Interest and Fees
Borrowings under our Senior Secured Credit Facility bear interest, at our option, at either the alternate base rate (defined as the higher of the prime rate announced by the Administrative Agent, the federal funds effective rate or one-month LIBOR, in each case, plus an applicable interest rate margin) (the “Base Rate”) or at the Eurodollar Rate (one-, two-, three- or six-month LIBOR, at our election, as defined in the credit agreement governing the Senior Secured Credit Facility), except for borrowings made in alternate currencies which may not accrue interest based upon the alternate base rate, in each case, plus an applicable interest rate margin. The applicable margins are currently 0.75% per annum for Base Rate loans and 1.75% per annum for Eurodollar Rate loans. The margins applicable to the borrowings under our Senior Secured Credit Facility may be adjusted based on our consolidated leverage ratio, with 1.00% being the maximum Base Rate margin and 2.00% being the maximum Eurodollar Rate. See Note 7, Derivative Financial Instruments and Fair Value Measurements, for discussion regarding our various interest rate swap agreements.
Guarantees and Security
Our Senior Secured Credit Facility is guaranteed by certain of our existing and future domestic restricted subsidiaries pursuant to a Guarantee and Collateral Agreement. In addition, our obligations under our Senior Secured Credit Facility and the guarantee obligations of the subsidiary guarantors are secured by first priority liens on substantially all of our and our subsidiary guarantors’ present and future assets and by a pledge of all of the equity interests in our domestic subsidiary guarantors and 65% of the capital stock of certain of our existing and future foreign subsidiaries.
 
The Guarantee and Collateral Agreement also secures our Senior Secured Convertible Notes due 2033 on an equal and ratable basis with the indebtedness under our Senior Secured Credit Facility to the extent required by the indenture governing such notes.
Prepayments
The Senior Secured Credit Facility also contains a requirement that we make mandatory principal prepayments on the Term Loan A and Revolving Line of Credit in certain circumstances, including, without limitation, with 100% of the aggregate net cash proceeds from certain asset sales, casualty events or condemnation recoveries (in each case, to the extent not otherwise used for reinvestment in our business or related business and subject to certain other exceptions). The Senior Secured Credit Facility further provides that, subject to customary notice and minimum amount conditions, we may make voluntary prepayments without payment of premium or penalty.

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Covenants
Subject to customary and otherwise agreed upon exceptions, our Senior Secured Credit Facility contains affirmative and negative covenants, including, but not limited to:
the payment of other obligations;
the maintenance of organizational existences, including, but not limited to, maintaining our property and insurance;
compliance with all material contractual obligations and requirements of law;
limitations on the incurrence of indebtedness;
limitations on creation and existence of liens;
limitations on certain fundamental changes to our corporate structure and nature of our business, including mergers;
limitations on asset sales;
limitations on restricted payments, including certain dividends and stock repurchases and redemptions;
limitations on capital expenditures;
limitations on any investments, provided that certain “permitted acquisitions” and strategic investments are allowed;
limitations on optional prepayments and modifications of certain debt instruments;
limitations on modifications to organizational documents;
limitations on transactions with affiliates;
limitations on entering into certain swap agreements;
limitations on negative pledge clauses or clauses restricting subsidiary distributions;
limitations on sale-leaseback and other lease transactions; and
limitations on changes to our fiscal year.
Our Senior Secured Credit Facility also requires us to comply with:
a maximum consolidated leverage ratio, as defined in our Senior Secured Credit Facility (generally, the ratio of our consolidated total debt to consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA, for the most recent four quarters), of 3.50:1.00; and
a minimum consolidated interest coverage ratio, as defined in our Senior Secured Credit Facility (generally, the ratio of our consolidated EBITDA to consolidated interest expense for the most recent four quarters), of 3.00:1.00.
The following table shows the required and actual financial ratios under our Senior Secured Credit Facility as of June 30, 2012:

 
Required Ratio
 
Actual Ratio
Maximum consolidated leverage ratio
No greater than 3.50:1.00
 
1.97:1.00
Minimum consolidated interest coverage ratio  
No less than 3.00:1.00
 
10.90:1.00

In addition, we are required to give notice to the administrative agent and the lenders under our Senior Secured Credit Facility of defaults under the facility documentation and other material events, make any new wholly-owned domestic subsidiary (other than an immaterial subsidiary) a subsidiary guarantor and pledge substantially all after-acquired property as collateral to secure our and our subsidiary guarantors’ obligations in respect of the facility.
Events of Default
Our Senior Secured Credit Facility contains customary events of default, including upon a change in control. If such an event of default occurs, the lenders under our Senior Secured Credit Facility would be entitled to take various actions, including in certain circumstances increasing the effective interest rate and accelerating the amounts due under our Senior Secured Credit Facility.

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


8 1/4% Senior Notes due 2015
On January 13, 2011, we commenced a cash tender offer and consent solicitation to purchase any and all of our outstanding 8 1/4% Senior Notes due 2015 (the “2015 Notes”) and to amend the indenture governing the 2015 Notes (the "2015 Indenture") to eliminate substantially all of the restrictive covenants and certain events of default. We used the net proceeds from the 2021 Notes (described below) to fund the purchase of the 2015 Notes, the related consent payments pursuant to the tender offer and consent solicitation, and the subsequent redemption of the 2015 Notes that were not tendered and remained outstanding after the expiration of the tender offer and consent solicitation. We recognized a pre-tax loss on extinguishment of debt of $13.3 million during the six months ended June 30, 2011, which represents the difference between the aggregate purchase price and the aggregate principal amount of the 2015 Notes purchased and the write-off of related capitalized debt issuance costs.
6 5/8% Senior Notes due 2021
On January 28, 2011, we issued in a private placement $260.0 million aggregate principal amount of our 6 5/8% Senior Notes due 2021 (the “2021 Notes”). The net proceeds were used to fund the purchase of the outstanding 2015 Notes and the related consent payments in a concurrent tender offer and consent solicitation as described above and the redemption of the remaining outstanding 2015 Notes. We capitalized related debt issuance costs of approximately $5.1 million, which are being amortized over the term of the 2021 Notes.
Interest on the 2021 Notes is payable every six months on February 1 and August 1. The 2021 Notes are fully and unconditionally guaranteed, jointly and severally, by substantially all of our existing and future domestic restricted subsidiaries on a senior unsecured basis.
In July 2011, in accordance with the terms of the registration rights agreement between us and the initial purchasers of the 2021 Notes, we completed an exchange offer to exchange the original notes issued in the private placement for a like principal amount of exchange notes registered under the Securities Act of 1933, as amended. An aggregate principal amount of $260.0 million, or 100%, of the original notes were exchanged for exchange notes in the exchange offer. The exchange notes are substantially identical to the original notes, except that the exchange notes are not subject to certain transfer restrictions.
The 2021 Notes were issued under an indenture with Wells Fargo Bank, National Association, as trustee (the “2021 Indenture”). Subject to a number of exceptions, the 2021 Indenture restricts our ability and the ability of our restricted subsidiaries (as defined in the 2021 Indenture) to incur or guarantee additional indebtedness, transfer or sell assets, make certain investments, pay dividends or make distributions or other restricted payments, create certain liens, merge or consolidate, repurchase stock, create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us and enter into transactions with affiliates.
 
We may redeem all or a portion of the 2021 Notes at our option at any time prior to February 1, 2016, at a redemption price equal to 100% of the principal amount of 2021 Notes to be redeemed, plus a make-whole premium as described in the 2021 Indenture, plus accrued and unpaid interest to the redemption date, if any. At any time on or after February 1, 2016, we may redeem all or a portion of the 2021 Notes at our option at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on February 1 of the years set forth below:

Year
 
Percentage
2016
 
103.313%
2017
 
102.208%
2018
 
101.104%
2019 and thereafter
 
100.000%

In addition, we must pay accrued and unpaid interest to the redemption date, if any. On or prior to February 1, 2014, we may also redeem at our option up to 35% of the principal amount of the outstanding 2021 Notes with the proceeds of certain equity offerings at the redemption price specified in the 2021 Indenture, plus accrued and unpaid interest to the date of redemption, if any. Upon the occurrence of a change of control, as defined in the 2021 Indenture, we must make a written offer to purchase all of the 2021 Notes for cash at a purchase price equal to 101% of the principal amount of the 2021 Notes, plus accrued and unpaid interest to the date of repurchase, if any.

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Additional Provisions
The indenture governing the Senior Secured Convertible Notes due 2033 contains a cross-default provision which becomes applicable if we default under any mortgage, indenture or instrument evidencing indebtedness for money borrowed by us and the default results in the acceleration of such indebtedness prior to its express maturity, and the principal amount of any such accelerated indebtedness aggregates in excess of $25.0 million. The 2021 Indenture contains a cross-default provision which becomes applicable if we (a) fail to pay the stated principal amount of any of our indebtedness at its final maturity date, or (b) default under any of our indebtedness and the default results in the acceleration of indebtedness, and, in each case, the principal amount of any such indebtedness, together with the principal amount of any other such indebtedness under which there has been a payment default or the maturity of which has been so accelerated, aggregates $50.0 million or more. Our credit agreement contains a cross-default provision which becomes applicable if we (a) fail to make any payment under any indebtedness for money borrowed by us (other than the obligations under such credit agreement) in an aggregate outstanding principal amount of at least $50.0 million or, (b) otherwise default under any such indebtedness, or trigger another event which causes such indebtedness to become due or to be repurchased, prepaid, defeased or redeemed or become subject to an offer to repurchase, prepay, defease or redeem such indebtedness prior to its stated maturity.
Repurchases of Debt
Subject to applicable limitations in our Senior Secured Credit Facility and indentures, we may from time to time repurchase our debt in the open market, through tender offers, through exchanges for debt or equity securities, in privately negotiated transactions or otherwise.
Covenant Compliance
As of June 30, 2012, we were in compliance with all of our indenture and Senior Secured Credit Facility covenants.

4. ACCRUED EXPENSES
Accrued expenses included on the condensed consolidated balance sheets consisted of:

(in thousands of U.S. dollars)
June 30,
2012
 
December 31,
2011
Accrued interest
$
7,305

 
$
7,205

Accrued compensation and benefits
45,408

 
55,030

Other accrued expenses
37,544

 
36,174

Accrued expenses
$
90,257

 
$
98,409


5. COMMITMENTS AND CONTINGENCIES
The application and interpretation of applicable state sales tax laws to certain of our products is uncertain. Accordingly, we may be exposed to additional sales tax liability to the extent various state jurisdictions determine that certain of our products are subject to such jurisdictions’ sales tax. As of June 30, 2012, we have recorded a liability of $6.8 million, reflecting our best estimate of our potential sales tax liability.
In addition to the above matter, we are 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 effect on our financial position, results of operations or liquidity.



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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


6. EARNINGS PER SHARE
Earnings per common share data were as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands, except per share data)
2012
 
2011
 
2012
 
2011
Net earnings
$
21,707

 
$
30,252

 
$
48,128

 
$
51,663

Weighted-average common shares outstanding, basic
41,170

 
47,877

 
41,642

 
48,903

Shares issued on exercise of dilutive options
4,350

 
5,591

 
4,622

 
6,142

Shares purchased with assumed proceeds of options and unearned restricted shares
(2,801
)
 
(3,305
)
 
(2,883
)
 
(3,799
)
Shares contingently issuable

 
4

 
1

 
4

Weighted-average common shares outstanding, diluted
42,719

 
50,167

 
43,382

 
51,250

Net earnings per common share, diluted
$
0.51

 
$
0.60

 
$
1.11

 
$
1.01

Anti-dilutive options excluded from calculation of weighted-average common shares outstanding, diluted
3,521

 
3,285

 
3,403

 
2,915



7. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
We are exposed to market risks arising from adverse changes in foreign exchange rates and interest rates. We manage these risks through a variety of strategies which include the use of derivatives. Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others do not qualify or have not been designated as hedges and are marked to market through earnings. The notional amounts of derivative financial instruments and related fair values measured on a recurring basis and included in the condensed consolidated balance sheets were as follows:

 
Notional Amounts
 
Fair Values
 
 
(in millions of U.S. dollars)
June 30,
2012
 
December 31,
2011
 
June 30,
2012
 
December 31,
2011
 
Balance Sheet Location
Derivatives designated as cash flow hedging instruments:
Interest rate swap contract
$
186.3

 
$
186.3

 
$
(6.2
)
 
$
(4.6
)
 
Other non-current liabilities
Derivatives not receiving hedge accounting treatment:
Interest rate swap contract

 
140.0

 

 
(0.8
)
 
Accrued expenses
Foreign exchange contracts
10.7

 
11.7

 
(0.1
)
 
(1.0
)
 
Accrued expenses
Total derivative financial instruments
$
197.0

 
$
338.0

 
$
(6.3
)
 
$
(6.4
)
 
 

The fair values of our interest rate swap contracts and foreign exchange contracts are determined based on third-party valuation models and observable foreign exchange forward contract rates, respectively, both of which represent Level 2 fair value inputs.

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following tables summarize the impact of derivative financial instruments on the condensed consolidated financial statements for the indicated periods:

 
Three Months Ended
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
(in millions of U.S. Dollars)
Amount of Pre-tax Loss Recognized in
Earnings*
 
Amount of Pre-tax Loss
Recognized in OCI
 
Amount of Pre-tax Loss
Reclassified from AOCI
into Earnings*
Derivatives designated as cash flow hedging instruments:
Interest rate swap contract
$

 
$

 
$
(0.9
)
 
$
(0.2
)
 
$

 
$
(3.7
)
Derivatives not receiving hedge accounting treatment:
Interest rate swap contracts
$

 
$
(0.1
)
 
$

 
$

 
$

 
$

Foreign exchange contracts
(0.2
)
 
(0.2
)
 

 

 

 

 
$
(0.2
)
 
$
(0.3
)
 
$
(0.9
)
 
$
(0.2
)
 
$

 
$
(3.7
)

 
Six Months Ended
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
(in millions of U.S. Dollars)
Amount of Pre-tax Gain
(Loss) Recognized in
Earnings*
 
Amount of Pre-tax Loss
Recognized in OCI
 
Amount of Pre-tax Loss
Reclassified from AOCI
into Earnings*
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
 
Interest rate swap contract
$

 
$

 
$
(1.6
)
 
$
(0.4
)
 
$

 
$
(5.0
)
Derivatives not receiving hedge accounting treatment:
 
 
 
 
 
 
 
 
Interest rate swap contracts
$
(0.1
)
 
$
(0.1
)
 
$

 
$

 
$

 
$

Foreign exchange contracts
0.9

 

 

 

 

 

 
$
0.8

 
$
(0.1
)
 
$
(1.6
)
 
$
(0.4
)
 
$

 
$
(5.0
)

 *
Amounts recognized in earnings related to interest rate swap contracts are included in interest expense in the unaudited condensed consolidated statements of income and amounts recognized in earnings related to foreign exchange contracts are included in cost of sales in the unaudited condensed consolidated statements of income.

Interest Rate Swaps
On December 17, 2009, we entered into an interest rate swap agreement with an initial notional amount of $300.0 million to fix three-month LIBOR at 2.005%, for an effective rate of 4.255%, including the applicable margin, for an equivalent portion of our variable rate debt under our Prior Senior Secured Credit Facility. The effective date of this agreement was December 31, 2010. The notional amount of $300.0 million amortized by $40.0 million at the end of every quarter until it reached $100.0 million for the quarter ended June 30, 2012, the expiration date. The swap was designated as, and qualified as, a cash flow hedge through the termination of the Prior Senior Secured Credit Facility on June 27, 2011. Changes in the fair value of this swap subsequent to the termination of hedge accounting were recognized in earnings as a component of interest expense until expiration of the swap.
On July 6, 2011, we entered into an interest rate swap agreement with an initial notional amount of $186.3 million. The effective date of this agreement was June 30, 2012. Under the swap agreement, we are required to make quarterly payments at a fixed interest rate of 1.8695% per annum to the counterparty on an amortizing notional amount in exchange for receiving

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


variable payments based on the three-month LIBOR interest rate for the same notional amount. After giving effect to the swap agreement, our effective interest rate for the notional amount, based on the current applicable margin under our Senior Secured Credit Facility, is 3.6195% per annum. The initial notional amount of $186.3 million amortizes quarterly by (i) $2,812,500 from the effective date through the quarter ending September 30, 2013, (ii) $5,625,000 from September 30, 2013 through the quarter ending September 30, 2014, and (iii) $8,437,500 from September 30, 2014 until June 30, 2015, the expiration date of the agreement. The swap is designated as and qualifies as a cash flow hedge.
Foreign Currency
Currencies to which we have exposure are the Mexican peso, Canadian dollar, British pound, Polish zloty and Euro. Currency restrictions are not expected to have a significant effect on our cash flows, liquidity, or capital resources. We purchase the Mexican peso and Polish zloty under two to twelve-month forward foreign exchange contracts to stabilize the cost of production. As of June 30, 2012, we had a commitment to purchase $10.2 million in Mexican pesos and $0.5 million in Polish zlotys over the next year.
Long-Term Debt
The estimated fair market value of our long-term debt was $14.3 million and $25.0 million below carrying value as of June 30, 2012 and December 31, 2011. Our 2021 Notes are traded in an active market with the fair value determined based on quoted active market prices, which represents a Level 1 fair value input. Borrowings under our Senior Secured Credit Facility are not traded in an active market and are valued based on an implied price derived from industry averages and relative loan performance, which represent Level 3 fair value inputs.
Cash and Cash Equivalents
The carrying amounts of cash and cash equivalents and accruals approximate fair value due to the near-term maturity of these instruments.

8. REPURCHASES OF COMMON STOCK
The following table summarizes our repurchases of common stock during the indicated periods:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
in thousands, except per share data
2012
 
2011
 
2012
 
2011
Shares repurchased
3,236

 
2,144

 
3,295

 
3,767

Aggregate repurchase price
$
64,535

 
$
60,326

 
$
65,900

 
$
105,856

Average price paid per share
$
19.94

 
$
28.14

 
$
20.00

 
$
28.10


As of June 30, 2012, we had authorization to repurchase an additional 4.2 million shares of our common stock under the share repurchase program approved by our Board of Directors.


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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)



9. BRAND.NET ACQUISITION
On June 20, 2012, we acquired, through a wholly-owned subsidiary, Brand.net, an online display, video and mobile advertising platform. The acquisition was accounted for as a purchase under the acquisition method in accordance with Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") No. 805, Business Combinations. The total purchase price was approximately $18.0 million and is subject to adjustment for the indebtedness, transaction expenses and net working capital of Brand.net. The purchase price did not include direct acquisition costs of approximately $0.7 million. The acquisition was recorded by allocating the purchase price to the assets acquired, including identifiable intangible assets and liabilities assumed, based on their estimated fair values at the date of acquisition. The acquisition of Brand.net did not have a material impact on our revenues or net earnings for the three and six months ended June 30, 2012, and would not have had a material impact on our revenues or net earnings for any of the periods included in the unaudited, condensed consolidated statements of income if the acquisition had been consummated at the beginning of such periods.
In accordance with FASB ASC No. 805, the preliminary purchase price allocation is subject to adjustment within one year after the acquisition as additional information on asset and liability valuations becomes available.

10. SEGMENT REPORTING
Our segments meeting the quantitative thresholds to be considered reportable are Shared Mail, Neighborhood Targeted and Free-standing Inserts (FSI). All other lines of business fall below a materiality threshold and are, therefore, combined together in an “other” segment named International, Digital Media & Services. These business lines include NCH Marketing Services, Inc., our coupon clearing and analytics business, as well as our digital and in-store businesses. Our reportable segments are strategic business units that offer different products and services and are subject to regular review by our chief operating decision-maker. They are managed separately because each business requires different executional strategies and caters to different client marketing needs.
The accounting policies of the segments are the same as those described in the 2011 Form 10-K and Note 1, Basis of Presentation and Significant Accounting Policies. We evaluate reportable segment performance based on segment profit, which we define as earnings from operations excluding unusual or infrequently occurring items. Assets are not allocated to reportable segments and are not used to assess the performance of a reportable segment.
 

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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following tables set forth, by segment, revenues, depreciation/amortization and segment profit for the indicated periods:

 
Three Months Ended
 
June 30,
(in millions of U.S. dollars)
Shared Mail
 
Neighborhood
Targeted
 
FSI
 
International,
Digital Media &
Services
 
Total
2012
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
348.8

 
$
77.5

 
$
70.5

 
$
43.4

 
$
540.2

Intersegment revenues
$
3.9

 
$
13.6

 
$
10.1

 
$

 
$
27.6

Depreciation/amortization
$
8.2

 
$
1.0

 
$
3.2

 
$
2.0

 
$
14.7

Segment profit (loss)
$
52.3

 
$
(2.4
)
 
$
7.3

 
$
2.3

 
$
59.5

2011
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
337.2

 
$
88.8

 
$
89.2

 
$
50.0

 
$
565.3

Intersegment revenues
$
4.1

 
$
12.9

 
$
9.8

 
$
0.1

 
$
26.9

Depreciation/amortization
$
9.5

 
$
1.0

 
$
3.0

 
$
1.9

 
$
15.4

Segment profit
$
47.7

 
$
0.8

 
$
8.3

 
$
6.4

 
$
63.2

 
 
 
Six Months Ended
 
June 30,
(in millions of U.S. dollars)
Shared Mail
 
Neighborhood
Targeted
 
FSI
 
International,
Digital Media &
Services
 
Total
2012
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
676.9

 
$
149.7

 
$
146.8

 
$
85.4

 
$
1,058.8

Intersegment revenues
$
8.4

 
$
26.6

 
$
20.1

 
$

 
$
55.1

Depreciation/amortization
$
16.5

 
$
2.1

 
$
6.4

 
$
4.1

 
$
29.1

Segment profit (loss)
$
94.8

 
$
(4.0
)
 
$
12.7

 
$
5.0

 
$
108.5

2011
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
659.8

 
$
178.9

 
$
178.4

 
$
95.1

 
$
1,112.2

Intersegment revenues
$
8.6

 
$
22.2

 
$
19.6

 
$
0.2

 
$
50.6

Depreciation/amortization
$
19.5

 
$
2.0

 
$
6.0

 
$
3.6

 
$
31.1

Segment profit
$
89.8

 
$
2.7

 
$
15.7

 
$
11.8

 
$
120.0



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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table provides reconciliations of total segment profit to earnings from operations for the indicated periods (nonoperating expenses are not allocated to reportable segments and are not used to assess the performance of a reportable segment):

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in millions of U.S. dollars)
2012
 
2011
 
2012
 
2011
Total segment profit
$
59.5

 
$
63.2

 
$
108.5

 
$
120.0

Unallocated amounts:
 
 
 
 
 
 
 
  Goodwill impairment
$
7.6

 
$

 
$
7.6

 
$

  Restructuring and other charges
$
9.7

 
$

 
$
9.7

 
$

Earnings from operations
$
42.2

 
$
63.2

 
91.2

 
$
120.0


The $9.7 million of restructuring and other charges recognized during the three and six months ended June 30, 2012 consisted of $5.3 million of severance and related costs and $0.7 million of Brand.net acquisition costs, both of which were included in selling, general and administrative expenses in the unaudited, condensed consolidated statements of income, and $3.7 million of lease termination, severance, asset impairment and other costs associated with our decision to exit our solo direct mail business and our newspaper polybag advertising and sampling business, which were included in cost of sales in the unaudited, condensed consolidated statements of income. The results of operations of these businesses were immaterial to our consolidated results of operations for each of the three and six months ended June 30, 2012 and 2011.

Domestic and foreign revenues were as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in millions of U.S. dollars)
2012
 
2011
 
2012
 
2011
United States
$
529.7

 
$
550.4

 
$
1,035.9

 
$
1,085.2

Foreign
10.5

 
14.9

 
22.9

 
27.0

Revenues
$
540.2

 
$
565.3

 
$
1,058.8

 
$
1,112.2


Domestic and foreign long-lived assets (property, plant and equipment, net) were as follows:

(in millions of U.S. dollars)
June 30,
2012
 
December 31,
2011
United States
$
130.3

 
$
140.7

Foreign
7.8

 
8.2

Property, plant and equipment, net
$
138.1

 
$
148.9



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VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


11. GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following information is presented in accordance with Rule 3-10 of Regulation S-X. The operating and investing activities of the separate legal entities included in the consolidated financial statements are fully interdependent and integrated. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other services. The 2021 Notes issued by Valassis (referred to for purposes of this note only as the “Parent Company”) are guaranteed by substantially all of the Parent Company’s domestic wholly-owned subsidiaries (collectively, the “Guarantor Subsidiaries”) on a senior unsecured basis. Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Parent Company and has guaranteed the 2021 Notes on a joint and several, full and unconditional basis, subject to certain customary exceptions. Pursuant to the terms of the 2021 Indenture, the Guarantor Subsidiaries are subject to release under certain customary conditions as described below. Non-wholly-owned subsidiaries, joint ventures, partnerships and foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of these obligations. Substantially all of the Guarantor Subsidiaries also guarantee the Parent Company’s Senior Secured Credit Facility.

The 2021 Indenture provides for a Guarantor Subsidiary to be automatically and unconditionally released and discharged from its guarantee obligations in certain circumstances, including:

The sale or other transfer or disposition of all of the Guarantor Subsidiary's capital stock to any person that is not an affiliate of the Parent Company;
The sale or other transfer of all or substantially all the assets or capital stock of a Guarantor Subsidiary, by way of merger, consolidation or otherwise, to any person that is not an affiliate of the Parent Company;
If a Guarantor Subsidiary ceases to be a “Domestic Restricted Subsidiary” for purposes of the indenture covenants; and
Legal defeasance or covenant defeasance of the indenture obligations when provision has been made for them to be fully satisfied.



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Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Balance Sheet
June 30, 2012
(in thousands of U.S. dollars)

 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
54,185

 
$
4,379

 
$
16,673

 
$

 
$
75,237

Accounts receivable, net
98,314

 
259,624

 
20,768

 

 
378,706

Inventories
22,968

 
7,395

 
3

 

 
30,366

Prepaid expenses and other (including intercompany)
1,253,998

 
2,744,699

 
1,451

 
(3,945,879
)
 
54,269

Total current assets
1,429,465

 
3,016,097

 
38,895

 
(3,945,879
)
 
538,578

Property, plant and equipment, net
20,184

 
116,763

 
1,123

 

 
138,070

Goodwill
23,699

 
598,198

 
6,989

 

 
628,886

Other intangible assets, net
11,546

 
213,120

 

 

 
224,666

Investments
615,571

 
15,328

 

 
(627,303
)
 
3,596

Intercompany note receivable (payable)
346,383

 
(342,912
)
 
(3,471
)
 

 

Other assets
8,721

 
2,881

 
14

 

 
11,616

Total assets
$
2,455,569

 
$
3,619,475

 
$
43,550

 
$
(4,573,182
)
 
$
1,545,412

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion, long-term debt
$
15,000

 
$

 
$

 
$

 
$
15,000

Accounts payable and intercompany payable
1,324,569

 
2,865,584

 
12,798

 
(3,945,879
)
 
257,072

Progress billings
14,529

 
10,892

 
13,875

 


 
39,296

Accrued expenses
50,708

 
33,552

 
5,997

 


 
90,257

Total current liabilities
1,404,806

 
2,910,028

 
32,670

 
(3,945,879
)
 
401,625

Long-term debt
580,061

 

 

 

 
580,061

Deferred income taxes
(3,446
)
 
74,241

 
(3,997
)
 

 
66,798

Other non-current liabilities
30,243

 
22,314

 
466

 

 
53,023

Total liabilities
2,011,664

 
3,006,583

 
29,139

 
(3,945,879
)
 
1,101,507

Stockholders’ equity
443,905

 
612,892

 
14,411

 
(627,303
)
 
443,905

Total liabilities and stockholders’ equity
$
2,455,569

 
$
3,619,475

 
$
43,550

 
$
(4,573,182
)
 
$
1,545,412



19

Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Balance Sheet
December 31, 2011
(in thousands of U.S. dollars)
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
68,887

 
$
7,543

 
$
25,541

 
$

 
$
101,971

Accounts receivable, net
123,558

 
302,096

 
22,666

 

 
448,320

Inventories
32,159

 
8,958

 
3

 

 
41,120

Prepaid expenses and other (including intercompany)
1,157,263

 
1,993,450

 
23,217

 
(3,136,275
)
 
37,655

Total current assets
1,381,867

 
2,312,047

 
71,427

 
(3,136,275
)
 
629,066

Property, plant and equipment, net
24,790

 
122,565

 
1,550

 

 
148,905

Goodwill
23,584

 
605,898

 
6,989

 

 
636,471

Other intangible assets, net
11,558

 
202,055

 

 

 
213,613

Investments
547,366

 
21,385

 

 
(565,261
)
 
3,490

Intercompany note receivable (payable)
359,649

 
(333,683
)
 
(25,966
)
 

 

Other assets
9,710

 
5,271

 
(2,079
)
 

 
12,902

Total assets
$
2,358,524

 
$
2,935,538

 
$
51,921

 
$
(3,701,536
)
 
$
1,644,447

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion, long-term debt
$
15,000

 
$

 
$

 
$

 
$
15,000

Accounts payable and intercompany payable
1,210,296

 
2,246,381

 
13,976

 
(3,136,275
)
 
334,378

Progress billings
15,952

 
10,358

 
13,665

 

 
39,975

Accrued expenses
52,675

 
38,543

 
7,191

 

 
98,409

Total current liabilities
1,293,923

 
2,295,282

 
34,832

 
(3,136,275
)
 
487,762

Long-term debt
587,560

 

 

 

 
587,560

Deferred income taxes
(2,840
)
 
74,241

 
(3,997
)
 

 
67,404

Other non-current liabilities
30,347

 
20,887

 
953

 

 
52,187

Total liabilities
1,908,990

 
2,390,410

 
31,788

 
(3,136,275
)
 
1,194,913

Stockholders’ equity
449,534

 
545,128

 
20,133

 
(565,261
)
 
449,534

Total liabilities and stockholders’ equity
$
2,358,524

 
$
2,935,538

 
$
51,921

 
$
(3,701,536
)
 
$
1,644,447



20

Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Statement of Comprehensive Income
Three Months Ended June 30, 2012
(in thousands of U.S. dollars)
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Revenues
$
171,537

 
$
457,664

 
$
14,504

 
$
(103,467
)
 
$
540,238

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
145,141

 
294,725

 
13,616

 
(49,755
)
 
403,727

Selling, general and administrative
33,439

 
100,689

 
3,107

 
(53,712
)
 
83,523

Amortization expense
5

 
3,151

 

 

 
3,156

Goodwill impairment
3,985

 
3,600

 

 

 
7,585

Total costs and expenses
182,570

 
402,165

 
16,723

 
(103,467
)
 
497,991

Earnings from operations
(11,033
)
 
55,499

 
(2,219
)
 

 
42,247

Other expenses and income:
 
 
 
 
 
 
 
 
 
Interest expense
6,755

 

 

 

 
6,755

Interest income
(38
)
 

 
(32
)
 

 
(70
)
Intercompany interest
(1,788
)
 
1,741

 
47

 

 

Other expenses (income), net
129

 
(107
)
 
(99
)
 

 
(77
)
Total other expenses (income), net
5,058

 
1,634

 
(84
)
 

 
6,608

Earnings before income taxes
(16,091
)
 
53,865

 
(2,135
)
 

 
35,639

Income tax expense
(5,005
)
 
18,548

 
389

 

 
13,932

Equity in net earnings of subsidiaries
32,793

 
(2,524
)
 

 
(30,269
)
 

Net earnings (loss)
$
21,707

 
$
32,793

 
$
(2,524
)
 
$
(30,269
)
 
$
21,707

Other comprehensive income (loss)
(372
)
 
203

 
203

 
(406
)
 
(372
)
Comprehensive income (loss)
$
21,335

 
$
32,996

 
$
(2,321
)
 
$
(30,675
)
 
$
21,335



21

Table of Contents
VALASSIS COMMUNICATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Condensed Consolidating Statement of Comprehensive Income
Three Months Ended June 30, 2011
(in thousands of U.S. dollars)

 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Total
Revenues
$
200,589

 
$
444,629

 
$
20,281

 
$
(100,247
)
 
$
565,252

Costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
168,597

 
286,880

 
13,973

 
(51,410
)
 
418,040

Selling, general and administrative
21,461

 
104,561

 
3,646

 
(48,837
)
 
80,831

Amortization expense
5

 
3,150

 

 

 
3,155

Total costs and expenses
190,063

 
394,591

 
17,619

 
(100,247