GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

9 Months Ended

Sep. 30, 2013

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.

Condensed Consolidating Balance Sheet

September 30, 2013

(in thousands of U.S. dollars)



	Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Assets
Current assets:
Cash and cash equivalents	$	41,025		$	14,329		$	19,631		$	—		$	74,985
Accounts receivable, net	100,152			282,914			25,256			—			408,322
Inventories	27,249			9,453			3			—			36,705
Prepaid expenses and other (including intercompany)	1,971,516			5,232,562			3,085			(7,158,157		)	49,006
Total current assets	2,139,942			5,539,258			47,975			(7,158,157		)	569,018
Property, plant and equipment, net	19,014			89,854			958			—			109,826
Goodwill	23,700			601,750			6,988			—			632,438
Other intangible assets, net	11,517			192,467			—			—			203,984
Investments	717,055			19,912			—			(732,964		)	4,003
Intercompany note receivable (payable)	326,622			(314,292		)	(12,330		)	—			—
Other assets	6,392			3,029			12			—			9,433
Total assets	$	3,244,242		$	6,131,978		$	43,603		$	(7,891,121	)	$	1,528,702

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion, long-term debt	$	33,750		$	—		$	—		$	—		$	33,750
Accounts payable and intercompany payable	2,132,824			5,271,181			18,296			(7,158,157		)	264,144
Progress billings	13,128			15,065			9,891			—			38,084
Accrued expenses	52,508			35,842			7,992			—			96,342
Total current liabilities	2,232,210			5,322,088			36,179			(7,158,157		)	432,320
Long-term debt	502,650			—			—			—			502,650
Deferred income taxes	(3,421		)	65,398			(4,009		)	—			57,968
Other non-current liabilities	15,041			31,020			(8,059		)	—			38,002
Total liabilities	2,746,480			5,418,506			24,111			(7,158,157		)	1,030,940
Stockholders’ equity	497,762			713,472			19,492			(732,964		)	497,762
Total liabilities and stockholders’ equity	$	3,244,242		$	6,131,978		$	43,603		$	(7,891,121	)	$	1,528,702

Condensed Consolidating Balance Sheet

December 31, 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	$	62,836		$	10,745		$	21,130		$	—		$	94,711
Accounts receivable, net	116,821			287,230			22,848			—			426,899
Inventories	35,421			7,829			3			—			43,253
Prepaid expenses and other (including intercompany)	1,520,526			3,706,682			1,998			(5,192,617		)	36,589
Total current assets	1,735,604			4,012,486			45,979			(5,192,617		)	601,452
Property, plant and equipment, net	19,159			105,667			1,006			—			125,832
Goodwill	23,699			601,750			6,989			—			632,438
Other intangible assets, net	11,534			203,637			—			—			215,171
Investments	645,411			15,375			—			(658,355		)	2,431
Intercompany note receivable (payable)	364,921			(360,830		)	(4,091		)	—			—
Other assets	7,543			4,157			11			—			11,711
Total assets	$	2,807,871		$	4,582,242		$	49,894		$	(5,850,972	)	$	1,589,035

Liabilities and Stockholders’ Equity
Current liabilities:
Current portion, long-term debt	$	22,500		$	—		$	—		$	—		$	22,500
Accounts payable and intercompany payable	1,653,928			3,804,209			15,800			(5,192,617		)	281,320
Progress billings	16,459			7,758			15,378			—			39,595
Accrued expenses	61,741			38,878			6,848			—			107,467
Total current liabilities	1,754,628			3,850,845			38,026			(5,192,617		)	450,882
Long-term debt	565,061			—			—			—			565,061
Deferred income taxes	(4,131		)	65,398			(4,009		)	—			57,258
Other non-current liabilities	18,750			22,722			799			—			42,271
Total liabilities	2,334,308			3,938,965			34,816			(5,192,617		)	1,115,472
Stockholders’ equity	473,563			643,277			15,078			(658,355		)	473,563
Total liabilities and stockholders’ equity	$	2,807,871		$	4,582,242		$	49,894		$	(5,850,972	)	$	1,589,035

Condensed Consolidating Statement of Comprehensive Income

Three Months Ended September 30, 2013

(in thousands of U.S. dollars)



	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues	$	126,994		$	453,902		$	13,813		$	(105,326	)	$	489,383
Costs and expenses:
Cost of sales	100,190			308,615			9,893			(57,361		)	361,337
Selling, general and administrative	23,682			95,278			3,582			(47,965		)	74,577
Amortization expense	6			3,723			—			—			3,729
Total costs and expenses	123,878			407,616			13,475			(105,326		)	439,643
Earnings from operations	3,116			46,286			338			—			49,740
Other expenses and income:
Interest expense	7,287			—			—			—			7,287
Interest income	(18		)	—			(12		)	—			(30		)
Intercompany interest	(9,082		)	9,082			—			—			—
Other income, net	(816		)	(835		)	(62		)	—			(1,713		)
Total other expenses (income), net	(2,629		)	8,247			(74		)	—			5,544
Earnings before income taxes	5,745			38,039			412			—			44,196
Income tax expense	684			15,557			242			—			16,483
Equity in net earnings of subsidiaries	22,652			170			—			(22,822		)	—
Net earnings	$	27,713		$	22,652		$	170		$	(22,822	)	$	27,713
Other comprehensive income (loss)	907			(707		)	(707		)	1,414			907
Comprehensive income (loss)	$	28,620		$	21,945		$	(537	)	$	(21,408	)	$	28,620

Condensed Consolidating Statement of Comprehensive Income

Three Months Ended September 30, 2012

(in thousands of U.S. dollars)



	Parent Company			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues	$	172,888		$	445,063	$	12,868		$	(106,997	)	$	523,822
Costs and expenses:
Cost of sales	145,467			286,533		9,093			(52,809		)	388,284
Selling, general and administrative	23,033			101,614		2,899			(54,188		)	73,358
Amortization expense	6			3,239		—			—			3,245
Total costs and expenses	168,506			391,386		11,992			(106,997		)	464,887
Earnings from operations	4,382			53,677		876			—			58,935
Other expenses and income:
Interest expense	7,563			—		—			—			7,563
Interest income	(20		)	3		(29		)	—			(46		)
Intercompany interest	(9,062		)	9,062		—			—			—
Other expenses, net	49			197		3			—			249
Total other expenses (income), net	(1,470		)	9,262		(26		)	—			7,766
Earnings before income taxes	5,852			44,415		902			—			51,169
Income tax expense (benefit)	(3,429		)	17,632		226			—			14,429
Equity in net earnings of subsidiaries	27,459			4,276		—			(31,735		)	—
Net earnings	$	36,740		$	31,059	$	676		$	(31,735	)	$	36,740
Other comprehensive income (loss)	(9		)	197		197			(394		)	(9		)
Comprehensive income	$	36,731		$	31,256	$	873		$	(32,129	)	$	36,731

Condensed Consolidating Statement of Comprehensive Income

Nine Months Ended September 30, 2013

(in thousands of U.S. dollars)



	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues	$	399,108		$	1,342,934		$	46,112		$	(320,362	)	$	1,467,792
Costs and expenses:
Cost of sales	312,523			909,324			33,065			(168,264		)	1,086,648
Selling, general and administrative	73,578			296,882			10,270			(152,098		)	228,632
Amortization expense	17			11,170			—			—			11,187
Total costs and expenses	386,118			1,217,376			43,335			(320,362		)	1,326,467
Earnings from operations	12,990			125,558			2,777			—			141,325
Other expenses and income:
Interest expense	22,464			—			—			—			22,464
Interest income	(70		)	—			(68		)	—			(138		)
Intercompany interest	(20,315		)	20,315			—			—			—
Other income, net	(874		)	(1,459		)	(303		)	—			(2,636		)
Total other expenses (income), net	1,205			18,856			(371		)	—			19,690
Earnings before income taxes	11,785			106,702			3,148			—			121,635
Income tax expense	2,220			42,582			665						45,467
Equity in net earnings of subsidiaries	66,603			2,483						(69,086		)	—
Net earnings	$	76,168		$	66,603		$	2,483		$	(69,086	)	$	76,168
Other comprehensive income	222			929			929			(1,858		)	222
Comprehensive income	$	76,390		$	67,532		$	3,412		$	(70,944	)	$	76,390

Condensed Consolidating Statement of Comprehensive Income

Nine Months Ended September 30, 2012

(in thousands of U.S. dollars)



	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues	$	515,716		$	1,332,741		$	44,754		$	(310,566	)	$	1,582,645
Costs and expenses:
Cost of sales	435,750			864,353			34,637			(153,835		)	1,180,905
Selling, general and administrative	76,842			305,097			9,290			(156,731		)	234,498
Amortization expense	17			9,540			—			—			9,557
Goodwill impairment	3,985			3,600			—			—			7,585
Total costs and expenses	516,594			1,182,590			43,927			(310,566		)	1,432,545
Earnings (loss) from operations	(878		)	150,151			827			—			150,100
Other expenses and income:
Interest expense	21,372			—			—			—			21,372
Interest income	(80		)	3			(97		)	—			(174		)
Intercompany interest	(19,817		)	19,770			47			—			—
Other expenses (income), net	34			(526		)	(33		)	—			(525		)
Total other expenses (income), net	1,509			19,247			(83		)	—			20,673
Earnings (loss) before income taxes	(2,387		)	130,904			910			—			129,427
Income tax expense (benefit)	(6,016		)	49,540			1,035			—			44,559
Equity in net earnings of subsidiaries	81,239			3,475			—			(84,714		)	—
Net earnings (loss)	$	84,868		$	84,839		$	(125	)	$	(84,714	)	$	84,868
Other comprehensive income (loss)	(435		)	750			750			(1,500		)	(435		)
Comprehensive income	$	84,433		$	85,589		$	625		$	(86,214	)	$	84,433

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2013

(in thousands of U.S. dollars)



	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments		Consolidated Total
Net cash provided by (used in) operating activities	$	11,300		$	95,666		$	(1,145	)	$	—	$	105,821
Cash flows from investing activities:
Additions to property, plant and equipment	(1,744		)	(12,715		)	(287		)	—		(14,746		)
Proceeds from sale of property, plant and equipment	79			5,200			9			—		5,288
Net cash used in investing activities	(1,665		)	(7,515		)	(278		)	—		(9,458		)
Cash flows from financing activities:
Cash provided by (used in) intercompany activity	84,567			(84,567		)	—			—		—
Repayments of long-term debt	(51,161		)	—			—			—		(51,161		)
Dividends paid on common shares and restricted stock	(35,732		)	—			—			—		(35,732		)
Repurchases of common stock	(60,325		)	—			—			—		(60,325		)
Proceeds from stock options exercises	31,205			—			—			—		31,205
Net cash used in financing activities	(31,446		)	(84,567		)	—			—		(116,013		)
Effect of exchange rate changes on cash and cash equivalents	—			—			(76		)	—		(76		)
Net increase (decrease) in cash and cash equivalents	(21,811		)	3,584			(1,499		)	—		(19,726		)
Cash and cash equivalents at beginning of period	62,836			10,745			21,130			—		94,711
Cash and cash equivalents at end of period	$	41,025		$	14,329		$	19,631		$	—	$	74,985

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2012

(in thousands of U.S. dollars)



	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments		Consolidated Total
Net cash provided by (used in) operating activities	$	153,569		$	(40,611	)	$	(1,764	)	$	—	$	111,194
Cash flows from investing activities:
Additions to property, plant and equipment	(4,472		)	(11,100		)	(211		)	—		(15,783		)
Digital acquisitions, net of cash acquired	—			(18,344		)	—			—		(18,344		)
Proceeds from sale of property, plant and equipment	250			—			6			—		256
Net cash used in investing activities	(4,222		)	(29,444		)	(205		)	—		(33,871		)
Cash flows from financing activities:
Cash provided by (used in) intercompany activity	(70,042		)	70,042			—			—		—
Repayments of long-term debt	(11,250		)	—			—			—		(11,250		)
Repurchases of common stock	(87,130		)	—			—			—		(87,130		)
Proceeds from stock option exercises	8,956			—			—			—		8,956
Net cash provided by (used in) financing activities	(159,466		)	70,042			—			—		(89,424		)
Effect of exchange rate changes on cash and cash equivalents	—			—			474			—		474
Net decrease in cash and cash equivalents	(10,119		)	(13		)	(1,495		)	—		(11,627		)
Cash and cash equivalents at beginning of period	68,887			7,543			25,541			—		101,971
Cash and cash equivalents at end of period	$	58,768		$	7,530		$	24,046		$	—	$	90,344