-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R7p1wLuMqC95pGRrGos0Gx4Gqa3dFz2ugIC3IhT+9oAIGD5Hldk+W0tVJZvbh/XA awrWcZ1s1g9jZwshMNqbhA== 0001045969-01-500026.txt : 20010328 0001045969-01-500026.hdr.sgml : 20010328 ACCESSION NUMBER: 0001045969-01-500026 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALASSIS COMMUNICATIONS INC CENTRAL INDEX KEY: 0000883293 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING [7310] IRS NUMBER: 382760940 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10991 FILM NUMBER: 1580629 BUSINESS ADDRESS: STREET 1: 19975 VICTOR PARKWAY CITY: LIVONIA STATE: MI ZIP: 48152 BUSINESS PHONE: 3135913000 MAIL ADDRESS: STREET 1: 19975 VICTOR PARKWAY CITY: LIVONIA STATE: MI ZIP: 48152 10-K405 1 d10k405.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________________________ FORM 10-K ______________________________________ (Mark One) X Annual report pursuant to Section 13 or 15(d) of the Securities ------ Exchange Act of 1934 For the fiscal year ended December 31, 2000 or ______ 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 of Incorporation) (IRS Employer Identification Number) 19975 Victor Parkway Livonia, MI 48152 (address of principal executive offices) Registrant's Telephone Number: (734) 591-3000 ____________________________________________________ Securities registered pursuant to Section 12(b) of the Act: TITLE of each class Exchange on which registered ------------------- ---------------------------- Common Stock, par value $.01 per share New York Stock Exchange 9.55% Senior Notes Due 2003 Not Applicable 6 5/8% Senior Notes Due 2009 Not Applicable Securities registered pursuant to Section 12(g) of the Act: None 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 ______ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 15, 2001, there were 53,465,772 shares of the Registrant's Common Stock outstanding. As of such date, the aggregate market value of the voting stock held by non-affiliates* of the registrant was $1,678,677,000. The applicable portions of the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders to be held on or about May 15, 2001 are incorporated by reference herein into Part III of this Annual Report on Form 10-K. * Without acknowledging that any individual director or executive officer of the Company is an affiliate, the shares over which they have voting control have been included as owned by affiliates solely for purposes of this computation. PART I Item 1. Business -------- The Company Valassis Communications, Inc. leads the marketing services industry by providing a wide range of strategic marketing solutions for manufacturers and retailers. We generate most of our revenues by printing and publishing cents-off coupons and other consumer purchase incentives primarily for package goods manufacturers. We are one of two of the country's largest publishers of these coupons. We offer a broad array of marketing products and services, including: . Free-Standing Inserts ("FSIs") - four-color promotional booklets containing the coupons of multiple advertisers that are distributed by us to over 60 million households through Sunday newspapers; . Valassis Impact Promotions ("VIP") - solo specialized promotional programs for single advertisers; . Targeted Marketing Services ("TMS") - product sampling and advertising, on-page newspaper promotions ("ROP") and security consulting services; . Customer Relationship Marketing - targeted promotions based on consumer purchase behavior. We produced our first FSI in 1972. In 2000, we inserted our cooperative FSIs in the Sunday edition of over 530 newspapers with a combined average paid circulation of over 58 million on 44 publishing dates. By comparison, there were approximately 93.3 million households in the United States, according to information published by the U.S. Census Bureau. Business Strategy We believe that our existing products put us in a strong position to meet the mass and cluster-targeted needs of our clients. Our strategy is to build on the strength of our core FSI product to offer a range of integrated marketing solutions to a broader base of clients. In order to accomplish this, we will continue our commitment to the FSI segment of our business, while providing high levels of product quality and client service. In addition, we will attempt to capitalize on our expertise in consumer promotion to further expand our existing VIP and Targeted Marketing Services divisions, and to further develop our Customer Relationship Marketing and internet initiatives. We will continue to offer more highly-targeted and one-to-one marketing solutions via direct mail and the Internet, utilizing database marketing techniques. The Company's Products We print and publish cents-off coupons, refund offers, premiums, sweepstakes and contests distributed to households throughout the United States. We offer our clients a variety of consumer promotion alternatives. Depending upon the particular promotion goal, a client can choose to include its promotional materials in FSIs or ROP, distribute a customized printed solo insert (VIP), or distribute a product sampling program. We market our products through our own sales force and rely to a significant extent on repeat business. Our Marketing Services Consultants personally call on existing clients to maintain relationships and on potential customers to describe the advantages afforded by our products compared to other promotion alternatives. In addition, approximately 20% - 25% of each cooperative FSI program is sold to direct mail marketers who purchase space (referred to as "remnant space") at reduced costs in exchange for accepting such space on an available basis. 1 Free-Standing Inserts (FSIs) Most of the consumer purchase incentives that we publish are featured in cooperative FSIs, which are four-color promotional booklets printed by us at our own facilities and distributed through Sunday newspapers. Cooperative FSIs are booklets containing promotions from multiple advertisers. We produced our first FSI in 1972. In 2000, we inserted our cooperative FSIs in the Sunday edition of over 530 newspapers with a combined average newspaper circulation of over 58 million on 44 publishing dates. By comparison, there were approximately 93.3 million households in the United States, according to information published by the U.S. Census Bureau. As a natural extension of our U.S. business, Valassis of Canada publishes the Shop & Save FSI in Canada. The Shop & Save FSI is distributed to approximately 5 million Canadian households through weekend home-delivered newspapers. Most FSI sales are made significantly in advance of program dates. We typically announce our annual publication schedule approximately 12 to 18 months in advance of the first publication date and clients may reserve space at any time thereafter. Marketing Services Consultants work closely with customers to select their FSI publication dates from our schedule and coordinate all aspects of FSI printing and publication, as well as to obtain commitments from customers in the form of signed contracts. Our proprietary order entry and ad placement software allows us to produce as many different FSI versions as clients require, typically over 240 different layout versions per publication date. By offering different versions in different markets, we offer our clients greater flexibility to target precise geographic areas or tailor promotional offers to particular markets by varying coupon values, promotion copy and terms of the promotional offer. At the end of the selling cycle for each cooperative FSI program, there is generally space in the booklet that has not been sold. This remnant space is sold at a discount, primarily to direct mail marketers, who are placed on a waiting list for space that may become available. We select direct mail marketers as remnant space clients on the basis of a number of factors, including price, circulation, reputation and credit-worthiness. Remnant space clients are subject to being "bumped" in favor of a regular price client in need of space at the last minute. Remnant space sales are included in total cooperative FSI sales for financial reporting purposes. Total cooperative FSI sales during the year ended December 31, 2000 were $603.0 million, or 70% of our total revenue. The top ten FSI customers accounted for approximately 27% of FSI sales during the year ended December 31, 2000, and no single customer accounted for more than 10% of FSI sales during the same period. Valassis Impact Promotions (VIP) VIP offers its clients specialty print promotion products in customized formats such as die-cuts, posters and calendars, as well as traditional FSI formats. Because these promotions feature only one manufacturer (referred to as "solos"), the customer has the ability to create a completely individualized promotion. While VIP does produce printed material for direct mail programs or for shipment to store locations, its primary product is newspaper-delivered promotions. VIP offers customers the flexibility to run promotions any day of the week in any newspaper throughout the United States. VIP specializes in producing turnkey promotions for franchise retail marketers, such as fast food chains, allowing orders to be placed on a national, regional or local basis. VIP sales during the year ended December 31, 2000 were $136.1 million, or 16% of our total revenue. VIP clients are made up primarily of franchise retailers but include other categories, such as telecommunications and computer hardware. Two VIP clients accounted for 22% of VIP sales for the year ended December 31, 2000, with the top ten clients accounting for approximately 48% of total VIP sales. 2 Targeted Marketing Services The Targeted Marketing Services division comprises the following products and services: Product Sampling and Advertising - -------------------------------- We offer newspaper-delivered sampling products that gives manufacturers the ability to cost-effectively reach up to 65 million households in one weekend. Samples can either be machine-inserted into newspapers (Newspac(R)), placed in a polybag alongside the newspaper, or pre-sealed in a pouch that forms part of the polybag (Newspouch(R)). In addition, Brand Bag(TM) and Brand Bag Plus(TM) offer marketers the opportunity to deliver an impactful advertising message on a newspaper polybag without a sample included. Both products offer clients home- delivered newspaper circulation of up to 46 million households in one weekend. The bags feature the customer's advertising with the option of a weather- resistant tear-off coupon. We increased our competitive advantage in 2000 with the purchase of the consumer direct-to-door product sampling arm of Alternative Marketing Networks. We also offer Targeted Solo Inserts which promote manufacturers' products in conjunction with specific retail locations. In 2000, Product Sampling and Advertising generated total revenue of $55.5 million, or 6% of our total revenue. The top ten clients accounted for approximately 60% of Product Sampling and Advertising sales during the year ended December 31, 2000, with two clients accounting for 23% of such sales during the same period. Run-of-Press (ROP) - ------------------ We arrange for the placement of on-page newspaper ads on behalf of our clients. We serve in an agency role in this regard. Media (newspaper placement fees) is the major cost component of ROP distribution, which generally accounts for approximately 98% of our total direct ROP costs. We believe that our clients use us to place ROP because of our ability to negotiate favorable media rates, our well-developed production and placement capabilities, and our capacity to execute integrated FSI and ROP programs. We do not project this division to be a growth area, but rather an additional service offered to our clients. ROP customers include primarily package goods manufacturers, pharmaceutical companies and their advertising and promotion agencies. Our total ROP sales were $25.7 million during the year ended December 31, 2000, or 3% of our total revenue. The top ten ROP clients accounted for 80% of the ROP sales during the same period. Promotion Watch - --------------- Promotion Watch offers a variety of promotion security consulting services, including the execution of chance promotions such as sweepstakes and contests. We help clients with the entire process, from preliminary planning, through the writing of official rules, overseeing the printing and placement of winning pieces, and conducting background investigations of winners. Customer Relationship Marketing (CRM) Customer Relationship Marketing allows companies to understand consumer purchase behavior and to use that information to deliver intelligent, targeted promotions. The goal of CRM is to provide retailers with a turnkey service that builds long-term consumer relationships and increases profitability. During 1999, we made a strategic investment in Relationship Marketing Group, Inc., which was later reorganized into a limited liability company, (RMG). In August 2000, VNU Marketing Information and RMS, Inc. invested in RMG and RMG was renamed Valassis Retail Marketing Systems (VRMS). We currently own 22.5% of VRMS and have an option to 3 acquire up to and additional 52.5%. VRMS provides a consumer packaged goods- sponsored direct mail vehicle that uses proprietary software to target grocery retail frequent shopper households based on prior purchase behavior. We completed our most significant acquisition to date with the 80% purchase of Boston-based PreVision Marketing(R), a high-end, full-service CRM agency. PreVision had 2000 revenues of $25 million. Competition We compete in the cooperative FSI business principally with News America FSI, Inc., a company owned by The News Corporation Limited. We compete for business primarily on the basis of the following: . client service and sales relationships; . price; and . category availability. We also compete with in-store marketing and other forms of promotional strategies or coupon delivery, and may compete with any new technology or products in the sales promotion field. In the past, new competitors have tried to establish themselves in the FSI market. During such times, the number of FSI programs increased, which led to a meaningful decrease in the number of pages per FSI program. As a result, we experienced periods of intense price competition. These events had a material adverse effect on our financial performance. If new competitors enter the FSI market or our existing competitor tries to increase market share by reducing prices, our financial performance could be materially adversely affected. Although we believe that cooperative FSIs are currently the most efficient means of distributing coupons to the public, we compete with other media for the promotion and marketing dollars of our customers. It is possible that alternative media or changes in promotional strategies could make FSIs less attractive to our customers or could cause a shift in their preference to different promotional materials or coupon delivery modes. The VIP division competes with News America FSI, Inc. for package goods and fast food business, and with commercial printers. The TMS division competes with Sunflower Marketing for polybag advertising and sampling. We compete with several newspaper network groups in the ROP market. As there is no significant capital investment associated with this business, other competitors could easily enter the ROP market. An increase in the number of ROP competitors could result in a loss of market share. Employees As of December 31, 2000, we had approximately 1,400 full-time employees: 432 of these employees are on our sales, sales operations and marketing staff; 791 are involved in manufacturing; 38 are on our management information systems staff; and 139 are involved with administration. None of our employees are represented by a labor union. We consider labor relations with employees to be good and have not experienced any interruption of our operations due to labor disagreements. Segment Reporting For segment financial information for the years 2000, 1999 and 1998, see the table titled "Results of Operations" presented on page 11 under "Management's Discussion & Analysis of Financial Condition & Results of Operations" and in Note 15 of the "Notes to Consolidated Financial Statements" on pages 37 and 38 under Item 8 "Financial Statements and Supplementary Data." 4 Item 2. Properties ---------- Our principal executive offices are located in a leased office complex in Livonia, Michigan. We also lease sales offices in Los Angeles (Seal Beach), Chicago (Schaumburg), Atlanta, Dallas, Minneapolis, Connecticut (Wilton), and various other localities. We operate three printing facilities. We own the Livonia printing facility, which consists of approximately 225,000 square feet and includes VIP, printing and warehouse facilities. We also own printing facilities in Durham, North Carolina and Wichita, Kansas, consisting of approximately 110,000 square feet and 138,000 square feet, respectively. In addition, we lease a facility in Plymouth, Michigan, which houses our pre-press operations. These facilities generally have sufficient capacity to handle present volumes although, during periods of unusual demand, we may require services of a contract printer. Item 3. Legal Proceedings ----------------- In February 1999, the Company filed a lawsuit alleging that Arthur Andersen LLP repudiated a joint venture agreement with the Company relating to the development of its Customer Relationship Marketing (CRM) product. The lawsuit also named The News Corporation Limited and News America Incorporated as defendants. On February 9, 2000, by stipulation made in open court, followed by execution of a settlement agreement on February 29, 2000, the Company settled this litigation in the State of Michigan circuit court for the County of Wayne and related litigation in the form of a declaratory judgment action that Arthur Andersen had commenced against the Company in the State of Illinois Chancery Court for Cook County. The amount paid to the Company by Arthur Andersen LLP against the exchange of mutual releases and stipulations of dismissal with prejudice and without costs as to Arthur Andersen LLP and The News Corporation Limited and News America Incorporated is confidential under the terms of the stipulated settlement. The proceeds of the settlement are included in other revenues in the accompanying consolidated statement of income for the year ended December 31, 2000. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. 5 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters -------------------------------------------------------------------- The Company's common stock is traded on the New York Stock Exchange (ticker symbol VCI). The approximate number of record holders of the Company's common stock at December 31, 2000 was 251. High and low stock prices during the twelve months ended December 31, 2000 and 1999 were: 2000 1999 ----------------------- ---------------------- Sales Price Sales Price Quarter Ended High Low High Low - ---------------------------------------------- ---------------------- March 31 $42.6250 $25.2500 $36.6667 $29.0417 June 30 39.2500 29.6250 40.8125 33.5000 September 30 39.0625 20.5000 46.5000 35.3125 December 31 32.6875 21.2500 44.2500 36.6250 Currently, the Company has no plans to pay cash dividends. In addition, should the Company change its dividend policy, the payment of future dividends would be dependent on future earnings, capital requirements and other alternate uses of cash, as well as, subject to the restrictions described in Note 4 to the consolidated financial statements. 6 Item 6. Selected Financial Data ----------------------- (in thousands of dollars, except per share data)
YEAR ENDED - --------------------------------------------------------------------------------------------------------------------------------- December 31 December 31 December 31 December 31 December 31 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Net sales and other revenues $863,121 $794,566 $741,383 $675,496 $659,108 Earnings from continuing operations before extraordinary loss 202,117 121,134 84,286 69,930 39,775 Total assets 325,717 247,205 232,014 240,885 273,734 Long-term debt, less current portion 325,490 291,354 340,461 367,075 395,865 Earnings per share before extraordinary loss, basic** 2.30 2.14 1.44 1.15 0.62 Net earnings per share, basic 2.30 2.02 1.21 1.15 0.62 Net earnings per share, diluted 2.27 1.97 1.19 1.13 0.62 Cash dividends declared per share --- --- --- --- --- Ratio of earnings to fixed charges (1) 9.44x 7.98x 4.83x 3.92x 2.61x
**The Company recorded a $6.9 million extraordinary loss (net of taxes) during the year ended December 31, 1999 and a $13.6 million extraordinary loss (net of taxes) during the year ended December 31, 1998, as a result of early retirement of a portion of its public debt. (1) The ratio of earnings to fixed charges was computed by dividing (a) earnings before fixed charges, income taxes and extraordinary items by (b) fixed charges, which consist of interest expense, amortization of debt issuance costs and the interest portion of rent expense. This information should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto appearing elsewhere in this Report. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 7 Item 7. 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," including specifically statements made in "Business Outlook" and elsewhere in this report on Form 10-K 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. GENERAL Valassis Communications, Inc. ("VCI" and the "Company") derives revenues primarily from the sale of space in promotional materials printed on the Company's printing presses. The Company's prime cost components include paper, payments to newspapers for insertion of promotional materials (media), printing costs (including labor) and shipping. Paper represents approximately 41% of the cost of products sold for the Company's FSI business. In 1996, the Company's paper prices experienced dramatic fluctuations, before returning in early 1997 to levels approximating those in 1994. Paper prices again increased in 1997 and the first half of 1998, although at a much lesser rate. Paper costs decreased during the second half of 1998 and throughout 1999. Paper costs increased again in 2000. Valassis purchases a combination of coated groundwood #5 and uncoated Super Calendared grade (SCA). All supplies of coated groundwood #5 paper are purchased from three paper companies under long-term contracts. These contracts limit the amount of increases or decreases (to approximately 10% in any twelve- month period) of the Company's cost of paper. Such cost is adjusted quarterly. As of January 1, 2001, approximately 72% of our paper requirements are under long-term contract. The remainder of the Company's paper requirement is bought pursuant to contracts that are typically three to six months in duration. The Company maintains on average less than 30 days of paper inventory. 8 RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain income and expense items from continuing operations and the percentages that such items bear to revenues:
YEAR ENDED YEAR ENDED YEAR ENDED Dec. 31, Dec. 31, Dec. 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- % of % of % of (dollar amounts in millions) Actual Revenues Actual Revenues Actual Revenues - -------------------------------------------------------------------------------------------------------------------------- FSI sales $603.0 69.9% $586.7 73.8% $567.7 76.6% VIP sales 136.1 15.8 116.5 14.7 103.1 13.9 Targeted Marketing Services 84.2 9.8 69.0 8.7 48.4 6.5 Other sales 39.8 4.6 22.4 2.8 22.2 3.0 - -------------------------------------------------------------------------------------------------------------------------- Revenues 863.1 100.0 794.6 100.0 741.4 100.0 Cost of products sold 527.5 61.1 491.6 61.9 485.1 65.4 - -------------------------------------------------------------------------------------------------------------------------- Gross profit 335.6 38.9 303.0 38.1 256.3 34.6 Selling, general and administrative expenses 81.6 9.5 81.8 10.3 77.2 10.4 Amortization of intangibles 3.1 0.4 5.2 0.7 8.1 1.1 Loss on investments 14.9 1.7 1.3 0.2 --- --- - -------------------------------------------------------------------------------------------------------------------------- Operating earnings 236.0 27.3 214.7 27.0 171.0 23.1 Interest expense 22.9 2.6 26.0 3.3 34.5 4.7 Writedown of impaired assets 11.0 1.3 --- --- --- --- - -------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes and extra- ordinary loss 202.1 23.4 188.7 23.7 136.5 18.4 Income taxes 76.4 8.8 67.5 8.5 52.2 7.1 - -------------------------------------------------------------------------------------------------------------------------- Earnings before extra- ordinary loss 125.7 14.6 121.1 15.2 84.3 11.3 Extraordinary loss (net of taxes) --- --- 6.9 0.9 13.6 1.8 - -------------------------------------------------------------------------------------------------------------------------- Net earnings $125.7 14.6% $114.2 14.4% $ 70.7 9.5% ==========================================================================================================================
9 Calendar 2000 Compared to Calendar 1999 - --------------------------------------- Total revenues for 2000 increased 8.6% to $863.1 million from $794.6 million for 1999. Revenues for 2000 include $26.6 million related to net proceeds from a lawsuit settlement. Revenues for 1999 include $15.1 million in sales from the direct merchandising division of Valassis of Canada, which was discontinued in the fourth quarter of 1999. Without the effects of these items, the increase in revenues would be 7.3%. This increase was partially a result of a 1.8% rise in FSI revenue from $592.2 million in 1999 to $603.0 million in 2000. The FSI revenue increase is attributable to overall industry page growth partially offset by a reduction in remnant pricing. In addition, VIP experienced a 16.8% increase in sales in 2000 compared to 1999 as a result of the continued strength of its core client base as well as increased demand from new categories. Targeted Marketing Services rose 22.0% in 2000 to $84.2 million, from $69.0 million in 1999. This increase was primarily a result of growth in the sampling and advertising business. Gross margin increased from 38.1% in 1999 to 38.9% for 2000. Excluding the impact of a lawsuit settlement included in other revenues in the first quarter of 2000, gross margin would have decreased to 36.9%. This decrease was due primarily to increases in paper costs, a reduction in remnant pricing and the publication of four "custom co-ops" which operate at a lower margin than the regular co-op FSI. Losses on equity investments (Save.com, IDS and VRMS) in 2000 totaled $14.9 million. This included a charge of $10.3 million for Save.com losses which were recognized after the original investment was written off as an offset to outstanding loan balances, due to the fact that VCI was the sole financing source for Save.com. Due to the uncertainty in the public markets regarding internet start-ups and the difficulty that Save.com and IDS are having securing additional financial backing at this time, the Company has fully reserved against its investments, receivables and commitments with these companies. The Company also wrote off the goodwill of The Net's Best in the amount of $4.0 million due to the discontinuance of the business and related products and services. These actions resulted in an additional pre-tax charge of $11.0 million. Interest expense was down for the year ended December 31, 2000 to $22.9 million from $26.0 million in 1999. The Company retired $114.0 million of its public debt in 1999. During the fourth quarter of 1999, the Company repurchased on the open market approximately $114.0 million in aggregate principal amount of its 9.55 % Senior Notes due 2003 for $129.4 million. See Liquidity and Capital Resources for further information. The effective tax rate was 37.8% for the year ended December 31, 2000, compared with 35.8% for the same period in 1999. The effective tax rate increase is primarily the result of a lower tax rate in 1999 due to tax benefits associated with the writedown of our foreign investment associated with the Valassis of Canada direct mail merchandising division. Earnings for the year ended December 31, 2000 were up 3.8% to $125.7 million versus $121.1 million (before extraordinary item) for last year. 10 Calendar 1999 Compared to Calendar 1998 - --------------------------------------- Total revenues for 1999 increased 7.2% to $794.6 million from $741.4 million for 1998. This increase was partially a result of a 3.3% rise in FSI revenue from $567.7 million in 1998 to $586.7 million in 1999. The FSI revenue increase is attributable to overall industry page growth and moderate price increases. In addition, VIP experienced a 14.5% increase in sales in 1999 compared to 1998 as a result of increased demand. Targeted Marketing Services revenue rose 42.6% from $48.4 million in 1998 to $69.0 million in 1999. This growth is attributable to increased demand from core consumer package goods customers and greater demand from new customer categories such as automotive, e-commerce and telecommunications. Gross margin increased from 34.6% in 1998 to 38.1% for 1999. This increase was due primarily to decreases in paper costs and media efficiencies gained by increased average page counts in our FSI booklets. As of March 1999, the Company had signed long-term contracts for 75% of its paper requirements, which include pricing collars that help stabilize the Company's paper costs. Selling, general and administrative expenses increased to $81.7 million in 1999. The Company's results for 1998 include a one-time charge of $6.0 million related to the early retirement of the Company's former CEO. Without this one-time charge, SG&A would have increased 14.8% during 1999, versus the prior year. This increase is primarily the result of costs associated with new business development and higher incentive based pay programs as a result of stronger sales and profits in 1999 as compared to 1998. Interest expense was down for the year ended December 31, 1999 to $26.0 million from $34.5 million in 1998. The Company retired $114.0 million of its public debt in 1999 and $129.7 million of its public debt in 1998. During the fourth quarter of 1999, the Company repurchased on the open market approximately $114.0 million in aggregate principal amount of its 9.55 % Senior Notes due 2003 for $129.4 million. See Liquidity and Capital Resources for further information. The effective tax rate was 35.8% for the year ended December 31, 1999, compared with 38.3% for the same period in 1998. The effective tax rate decrease is primarily the result of tax benefits associated with the writedown of our foreign investment associated with the Valassis of Canada direct mail merchandising division. Earnings before extraordinary item for the year ended December 31, 1999 were up 43.7% to $121.1 million versus $84.3 million for last year. This earnings improvement was driven by growth across all of our business segments and gross margin improvements. In connection with the buyback of the 9.55% Senior Notes due 2003 discussed above, the Company paid a premium in an amount equal to $10.8 million and wrote off $0.4 million of unamortized debt issuance costs. Accordingly, the Company incurred extraordinary charges of $6.9 million (net of tax) due to the early extinguishment of $114.0 million of debt in 1999. 11 Liquidity and Capital Resources - ------------------------------- The Company's liquidity requirements arise mainly from its working capital needs, primarily accounts receivable, inventory and debt service requirements. The Company does not offer financing to its customers. FSI customers are billed for 75% of each order eight weeks in advance of the publication date and are billed for the balance immediately prior to the publication date. The Company inventories its work in progress at cost, while it accrues progress billings as a current liability at full sales value. Although the Company receives considerable payments from its customers prior to publication of promotions, revenue is recognized only upon publication dates. Therefore, the progress billings on the balance sheet include any profits in the related receivables and, accordingly, the Company can operate with low, or even negative, working capital. Cash and cash equivalents totaled $11.1 million at December 31, 2000, flat from December 31, 1999. This was the result of cash provided by operating activities of $114.1 million, and cash used in investing activities and financing activities of $56.7 million and $57.5 million, respectively, in 2000. Cash flow from operating activities decreased to $114.1 million for the year ended December 31, 2000 from $146.7 million for the year ended December 31, 1999. The Company used this cash flow during 2000, in addition to amounts available under its credit facility, to repurchase $90.8 million of its common stock. In addition, during 2000 the Company used $43.0 million of its cash flow to fund strategic acquisitions and equity investments. For further details, see Note 13 of the "Notes to Consolidated Financial Statements" on page 36. 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. In February 2000, the Company entered into a forward share repurchase agreement with a financial institution allowing the Company to acquire approximately 1.7 million shares of its common stock at a price of $29.72 per share, plus interest. The purchases settled as follows: 0.7 million shares on April 3, 2000; 0.5 million shares on July 3, 2000; and 0.5 million shares on October 2, 2000. As of December 31, 2000, the Company had authorization to repurchase an additional 2,324,300 shares of its common stock under its existing share repurchase program. Management believes the Company will generate sufficient funds from operations and will have sufficient lines of credit available to meet currently anticipated liquidity needs, including interest and required principal payments on indebtedness. Capital expenditures were $14.0 million for the year ended December 31, 2000. Management expects future capital expenditure requirements of approximately $15 million over each of the next three to five years to meet increased capacity needs at its three printing facilities and to replace or rebuild equipment as required. It is expected that equipment will be purchased using funds provided by operations. Recent Accounting Pronouncements - -------------------------------- In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB No. 101B to defer the effective date of implementation of SAB No. 101 until the fourth quarter of fiscal 2000. The adoption of SAB 101 did not have a material effect on the Company's financial position or results of operations. 12 Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS 133 effective January 1, 2001. Management does not expect the adoption of SFAS 133 to have a significant impact on the financial position, results of operations, or cash flows of the Company. Business Outlook - ---------------- The following statements are based on current expectations. These statements are forward looking and actual results may differ materially. - --Price and volume increases for the Company's principal product, the free- standing insert, are expected to result in approximately a 4% increase in FSI revenue for 2001. - --The average price of paper, which is a major cost factor in the Company's business, increased in 2000. The average price of paper in 2001 is expected to be flat versus the average in 2000. The above expectations are forward-looking statements that involve a number of risks and uncertainties. Among the factors that could affect expectations are the following: a new competitor in the Company's core free-standing insert business and consequent price pressure; new products that would make free- standing inserts less attractive; a shift in customer preference for different promotional materials, promotional strategies or coupon delivery methods; an increase in the Company's paper costs; or general business and economic conditions. 13 The following is a summary of the quarterly results of operations for the years ended December 31, 2000 and December 31, 1999.
THREE MONTHS ENDED - ---------------------------------------------------------------------------------------------------------------------- Thousands of dollars, except per share data Mar. 31 June 30 Sept. 30 Dec. 31 - ---------------------------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 2000 Revenue $239,037** $211,085 $191,073 $221,926 Cost of products sold 128,838 129,571 122,181 146,883 Earnings, before extraordinary item 53,411 34,383 25,662 12,243 Earnings per common share, before extraordinary item, basic 0.96 0.63 0.47 0.24 Net earnings 53,411 34,383 25,662 12,243+ Net earnings per common share, diluted 0.94 0.62 0.47 0.23 Thousands of dollars, except per share data Mar. 31 June 30 Sept. 30 Dec. 31 - ---------------------------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1999 Revenue $222,205 $194,999 $177,485 $199,877 Cost of products sold 138,421 122,345 108,233 122,594 Earnings, before extraordinary item 33,891 28,503 26,055 32,685* Earnings per common share, before extraordinary item, basic 0.59 0.50 0.46 0.59 Net earnings 33,891 28,503 25,955# 25,852#
** Revenue includes the proceeds from the settlement of a lawsuit. See Note 8 to the Consolidated Financial Statements. * Earnings before extraordinary item include a one-time tax benefit of $4.4 million associated with the writedown of our foreign investment in Valassis of Canada direct mail merchandising division, and $1.7 million in close-down costs. # Net earnings for the quarter ended September 30, 1999 and December 31, 1999 include an extraordinary loss (net of taxes) of $0.1 million and $6.8 million, respectively, as a result of the early retirement of a portion of the Company's public debt. + Includes the effect of impairment charges to record losses on investments, loans and commitments related to Save.com and IDS, and the write off of goodwill related to The Net's Best. Item 7a. Quantitative and Qualitative Disclosures about Market Risk The Company has exposure to interest rate risk from its long-term debt. A portion of the Company's debt is fixed rate, the remainder being a revolving credit facility at a variable rate. See Note 4 of the Notes to Consolidated Financial Statements for components of the Company's long-term debt. The Company has performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates applied to its variable debt. As of December 31, 2000, the analysis indicated that such market movements would result in additional expense of approximately $800,000 and would not have a material effect on the Company's consolidated results of operations or on the fair value of its risk-sensitive financial instruments. The Company does not have a material exposure to risks associated with foreign currency fluctuations related to our operations and does not use derivative financial instruments. 14 Item 8. Financial Statements and Supplementary Data ------------------------------------------- VALASSIS COMMUNICATIONS, INC. Consolidated Balance Sheets
December 31, December 31, (in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------ Assets Current assets: Cash and cash equivalents $ 11,140 $ 11,089 Accounts receivable (less allowance for doubtful accounts of $1,322 at December 31, 2000 and $1,386 at December 31, 1999) 114,554 94,105 Inventories: Raw materials 10,542 11,729 Work in progress 17,338 17,498 Prepaid expenses and other 10,729 4,581 Deferred income taxes (Note 6) 3,356 1,473 Refundable income taxes --- 448 - ------------------------------------------------------------------------------------------------------ Total current assets 167,659 140,923 - ------------------------------------------------------------------------------------------------------ Property, plant and equipment, at cost: Land and buildings 21,648 21,590 Machinery and equipment 123,043 121,956 Office furniture and equipment 31,638 21,909 Automobiles 1,117 1,116 Leasehold improvements 1,857 1,166 - ------------------------------------------------------------------------------------------------------ 179,303 167,737 Less accumulated depreciation and amortization (119,265) (114,926) - ------------------------------------------------------------------------------------------------------ Net property, plant and equipment 60,038 52,811 - ------------------------------------------------------------------------------------------------------ Intangible asset (Note 3): Goodwill 107,756 72,754 Other intangibles 85,137 85,387 - ------------------------------------------------------------------------------------------------------ 192,893 158,141 Less accumulated amortization (120,030) (118,050) - ------------------------------------------------------------------------------------------------------ Net intangible assets 72,863 40,091 - ------------------------------------------------------------------------------------------------------ Equity investments and advances to investees (Notes 13 and 14) 18,136 9,580 Other assets 3,083 2,412 Deferred income taxes (Note 6) 3,938 --- - ------------------------------------------------------------------------------------------------------ Total assets $ 325,717 $ 245,817 ======================================================================================================
15 VALASSIS COMMUNICATIONS, INC. Consolidated Balance Sheets, Continued
December 31, December 31, (in thousands, except share data) 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 85,671 $ 77,683 Accrued interest 3,919 3,645 Accrued expenses 31,412 30,250 Progress billings 49,029 57,733 Income taxes payable 1,019 - - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 171,050 169,311 - ---------------------------------------------------------------------------------------------------------------- Long-term debt (Note 4) 325,490 291,354 Deferred income taxes (Note 6) - 1,871 Other non-current liabilities 1,681 - Commitments and contingencies (Notes 7 and 8) Stockholders' deficit (Notes 9, 10 and 11): Preferred stock of $.01 par value. Authorized 25,000,000 shares; no shares issued or outstanding at December 31, 2000 and December 31, 1999. Common stock of $.01 par value. Authorized 100,000,000 shares; issued 62,932,556 at December 31, 2000 and 62,715,893 at December 31, 1999; outstanding 53,562,676 at December 31, 2000 and 56,128,478 at December 31, 1999 629 627 Additional paid-in capital 87,015 76,898 Deferred compensation (1,983) (1,135) Retained earnings (accumulated deficit) 73,963 (51,736) Foreign currency translations (460) (478) Treasury stock, at cost (9,369,880 shares at December 31, 2000 and 6,587,415 shares at December 31, 1999) (331,668) (240,895) - ---------------------------------------------------------------------------------------------------------------- Total stockholders' deficit (172,504) (216,719) - ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' deficit $ 325,717 $ 245,817 ================================================================================================================
See accompanying notes to consolidated financial statements. 16 VALASSIS COMMUNICATIONS, INC. Consolidated Statements of Income
YEAR ENDED - --------------------------------------------------------------------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, (in thousands, except per share data) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Revenues: $835,342 $793,860 $739,208 Net sales Other (see Note 8) 27,779 706 2,175 - --------------------------------------------------------------------------------------------------------------------- Total revenues 863,121 794,566 741,383 - --------------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of products sold 527,473 491,593 485,103 Selling, general and administrative 81,588 81,770 77,224 Loss on equity investments 14,919 1,342 --- Amortization of intangible assets 3,080 5,243 8,097 Interest 22,924 25,968 34,450 Writedown of impaired assets 11,020 - - - --------------------------------------------------------------------------------------------------------------------- Total costs and expenses 661,004 605,916 604,874 - --------------------------------------------------------------------------------------------------------------------- Earnings before income taxes and extraordinary loss 202,117 188,650 136,509 Income taxes (Note 6) 76,418 67,516 52,223 - --------------------------------------------------------------------------------------------------------------------- Earnings before extraordinary loss 125,699 121,134 84,286 Extraordinary loss (net of tax benefit) - 6,933 13,598 - --------------------------------------------------------------------------------------------------------------------- Net earnings $125,699 $114,201 $ 70,688 ===================================================================================================================== Earnings per common share before extraordinary loss, basic $ 2.30 $ 2.14 $ 1.44 ===================================================================================================================== Earnings per common share before extraordinary loss, diluted $ 2.27 $ 2.09 $ 1.42 ===================================================================================================================== Net earnings per common share, basic $ 2.30 $ 2.02 $ 1.21 ===================================================================================================================== Net earnings per common share, diluted $ 2.27 $ 1.97 $ 1.19 =====================================================================================================================
See accompanying notes to consolidated financial statements. 17 VALASSIS COMMUNICATIONS, INC. Consolidated Statements of Stockholders' Deficit
Retained Total Additional Deferred Earnings Foreign Stock- Common Paid-in Compen- (Accumulated Treasury Currency holders' (in thousands) Stock Capital sation Deficit) Stock Translation Deficit - -------------------------------------------------------------------------------------------------------------------------- Balances at January 1, 1998 $445 $ 72,399 - ($236,625) ($113,040) ($146) ($276,967) Net earnings 70,688 70,688 Stock repurchase (105,745) (105,745) Exercise of stock options 16 40,660 40,676 Stock grants 1 2,975 2,976 Foreign currency translation (152) (152) - -------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1998 462 116,034 - (165,937) (218,785) (298) (268,524) Net earnings 114,201 114,201 Stock repurchase (80,498) (80,498) 3-for-2 stock split 165 (46,616) 46,451 - Exercise of stock options 4,732 11,937 16,669 Deferred compensation (1,135) (1,135) Stock grants 2,748 2,748 Foreign currency translation (180) (180) - -------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1999 627 76,898 (1,135) (51,736) (240,895) (478) (216,719) Net earnings 125,699 125,699 Stock repurchase (94,429) (94,429) Exercise of stock options 1 1,227 3,656 4,884 Deferred compensation (848) (848) Stock grants 1 8,890 8,891 Foreign currency translation 18 18 - -------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2000 $629 $ 87,015 $(1,983) $ 73,963 $ (331,668) $ (460) $ (172,504) ==========================================================================================================================
See accompanying notes to consolidated financial statements. 18 VALASSIS COMMUNICATIONS, INC. Consolidated Statements of Cash Flow
(in thousands) YEAR ENDED - ----------------------------------------------------------------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $125,699 $114,201 $ 70,688 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 8,222 7,660 7,622 Amortization of intangibles and bond discount 3,080 5,243 8,222 Provision for losses on accounts receivable 1,208 1,867 900 Writedown of impaired assets 11,020 - - Losses on equity investments 14,919 1,342 - Stock-based compensation charge 3,801 2,194 2,714 (Gain)/loss on sale of property, plant and equipment 295 (55) 25 Deferred income taxes (7,693) 677 (628) Changes in assets and liabilities which increase (decrease) cash flow: Accounts receivable (18,905) (542) (14,649) Inventories 1,347 2,641 (5,173) Prepaid expenses and other (5,715) 433 (1,019) Other assets (17,351) (5,413) 894 Other liabilities 1,106 - - Accounts payable 1,825 8,619 9,838 Accrued interest and expenses (1,183) 3,261 (2,101) Income taxes 1,441 5,499 10,242 Progress billings (8,930) (882) 376 - ----------------------------------------------------------------------------------------------------------------- Total adjustments (11,513) 32,544 17,263 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $114,186 $146,745 $ 87,951 =================================================================================================================
19 VALASSIS COMMUNICATIONS, INC. Consolidated Statements of Cash Flow, Continued
(in thousands) YEAR ENDED - ------------------------------------------------------------------------------------------------------------------ Dec. 31, Dec. 31, Dec. 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Additions to property, plant and equipment $(14,044) $ (14,261) $ (13,418) Proceeds from sale of property, plant and equipment 263 203 73 Acquisition of PreVision Marketing, net of cash acquired (29,929) - - Other investments and acquisitions (12,127) (10,659) (450) Other (828) (210) (161) - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (56,665) (24,927) (13,956) - ------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from issuance of common stock 3,656 11,937 29,991 Purchase of treasury shares (94,429) (80,498) (105,745) Repayment of long-term debt (2,797) (219,745) (153,739) Borrowings of long-term debt - 99,738 127,000 Net borrowings under revolving line of credit 36,100 70,900 - - ------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (57,470) (117,668) (102,493) - ------------------------------------------------------------------------------------------------------------------ Net increase / (decrease) in cash and cash equivalents 51 4,150 (28,498) Cash and cash equivalents at beginning of the year 11,089 6,939 35,437 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of the year $ 11,140 $ 11,089 $ 6,939 ================================================================================================================== Supplemental disclosure of cash flow information Cash paid during the year for interest $ 22,650 $ 26,865 $ 35,006 Cash paid during the year for income taxes $ 82,643 $ 56,625 $ 34,186 Non-cash financing activities: Stock issued under stock-based compensation plan $ 8,890 $ 2,748 $ 2,976
See accompanying notes to consolidated financial statements. 20 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements (1) THE COMPANY Valassis Communications, Inc. (VCI or the Company) became a publicly-held company upon completion of its initial public offering on March 18, 1992. The Company operates in a single industry and principally produces free-standing inserts for customers in the package goods industry throughout the United States. No single customer accounted for more than 10 percent of the Company's sales during the years ended December 31, 1998, 1999, or 2000. (2) SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Valassis Communications, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts for 1999 and 1998 have been reclassified to conform to current period classifications. REVENUE RECOGNITION Sales and earnings are recognized in the period the product is inserted for distribution. Progress billings represent customer billings in advance of the insertion date. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are accounted for using the first in, first out (FIFO) method of inventory valuation. ADVERTISING The Company expenses the cost of advertising as incurred. Advertising expense for the years ended December 31, 2000, 1999 and 1998 was $1,457,000, $1,369,000 and $1,953,000, respectively. 21 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment are stated at cost. Expenditures and improvements that add significantly to the productive capacity or extend the useful life of an asset are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the estimated life of the related asset or the lease-term using the straight-line method. Property, plant and equipment are reviewed annually for impairment. The useful lives of the major classes of property, plant and equipment are as follows: Class Range ----- ----- Buildings 5 - 20 years Machinery and equipment 5 - 15 years Office furniture and fixtures 3 - 5 years Automobiles 3 years Leasehold improvements 3 - 10 years INTANGIBLE ASSETS Intangible assets are amortized using the straight-line method over their estimated useful lives, which range from 10 to 40 years. Fully amortized intangible assets are removed from the cost and accumulated amortization accounts. In accordance with SFAS No. 121, "Accounting for Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of," as well as APB No. 17, "Intangible Assets," the carrying value of goodwill is reviewed if circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of discounted cash flows. As part of this review, the Company assesses the useful lives assigned to intangible assets. In 2000, goodwill totaling $4.0 million related to The Net's Best was written off due to discontinuance of the business and related products and services. During 1999, the lives of certain intangible assets (primarily goodwill and the Valassis name) associated with the purchase of the assets and FSI business of GFV Communications in December 1996 were changed from 20 years to 40 years. This change was deemed appropriate based on the continuing significance of the FSI business to Valassis. In 1999, the effect of this change was to increase earnings before income taxes and extraordinary item and net earnings by approximately $3.1 million and EPS by approximately $0.05 per share on a diluted basis. See Note 3 for further details. INCOME TAXES Deferred income tax assets and liabilities are computed annually for differences between the consolidated financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. STOCK BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price at least equal to or greater than the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes no compensation expense for the stock option grants. COMPREHENSIVE INCOME Foreign currency translation is the Company's only component of other comprehensive income and is not considered material to the Company's consolidated financial statements. 22 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB No. 101B to defer the effective date of implementation of SAB No. 101 until the fourth quarter of fiscal 2000. The adoption of SAB 101 did not have a material effect on the Company's financial position or results of operations. Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS 133 effective January 1, 2001. Management does not expect the adoption of SFAS 133 to have a significant impact on the financial position, results of operations, or cash flows of the Company. CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and accounts receivable. The Company places its temporary cash investments (none at December 31, 2000 and December 31, 1999) with high credit quality financial institutions. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different industries and geographies. Generally, the Company does not require collateral or other security to support customer receivables. The Company's debt is also a financial instrument with excess of stated value over fair market value of $3.7 million at December 31, 2000 and an excess of stated value over fair market value of $5.7 million at December 31, 1999. See Note 4 for additional fair value disclosure. FOREIGN CURRENCY TRANSLATION The financial statements of foreign subsidiaries have been translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation". All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported separately as a component of stockholders' deficit. Summarized financial information for the foreign operations is not presented herein, since revenues and assets of the foreign operations are each less than 10% of the respective consolidated amounts and, accordingly, are not considered material in relation to the consolidated financial statements. Additionally, foreign translation gains and losses were insignificant for all years presented. 23 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements (3) INTANGIBLE ASSETS Intangible assets, which principally arose from the 1986 acquisition of specific net assets from GFV Communications, Inc., and its related affiliates, consist of the following:
Remaining (dollars in thousands) Amortizable Original Unamortized Unamortized Life in Amortizable Intangible Balance at Balance at Years at Intangible Assets Life in Years Assets, at Cost Dec. 31, 1999 Dec. 31, 2000 Dec. 31, 2000 - --------------------------------------------------------------------------------------------------------- Goodwill 20 - 40 $107,756 $24,705 $58,960 20 - 26 The Valassis name and other 40 32,100 12,251 11,796 26 Pressroom operating systems 13.375 50,000 808 --- --- Other 10 - 40 3,037 2,327 2,107 8-26 - --------------------------------------------------------------------------------------------------------- $192,893 $40,091 $72,863 =========================================================================================================
As a result of the impairment of The Net's Best product line in 2000, goodwill totaling $4.0 million was written-off in 2000. (4) LONG-TERM DEBT Long-term debt is summarized as follows: Dec. 31, Dec. 31, (in thousands) 2000 1999 - ---------------------------------------------------------------------------- Revolving Credit Facility $210,000 $173,900 9.55% Senior Notes due 2003 15,771 17,767 6 5/8% Senior Notes due 2009 99,719 99,687 - ---------------------------------------------------------------------------- 325,490 291,354 Less current portion ---- ---- - ---------------------------------------------------------------------------- $325,490 $291,354 ============================================================================ In January 1999, the Company issued $100 million of public debt due 2009. The net proceeds from such offering were used to retire outstanding indebtedness under the Credit Facility. The Company borrowed additional amounts under the Credit Facility to refinance the debt that was due March 15, 1999. Minimum long- term debt maturities are approximately $16 million in 2003 and $100 million in 2009. During 1998, the Company repurchased on the open market approximately $125.2 million in the aggregate principal amount of its 9.55% Senior Notes due 2003 for $146.6 million using approximately $70 million pursuant to its Revolving Credit Agreement, approximately $40.0 million under its then existing revolving line of credit and $36.6 million of cash. The Company incurred an extraordinary charge of $13.6 million (net of tax) due to this early retirement of debt. 24 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements During 1999, the Company repurchased on the open market approximately $114.0 million in the aggregate principal amount of its 9.55% Senior Notes due 2003 for $129.4 million. The Company incurred an extraordinary charge of $6.9 million (net of tax) due to this early retirement of debt. CREDIT FACILITY In November 1998, the Company replaced its revolving line of credit with a $160 million revolving credit facility pursuant to an agreement with Comerica Bank and several other banks (collectively, the "Banks") with Comerica acting as Agent for the Banks (the "Revolving Credit Agreement"). The Revolving Credit Agreement was amended in August 1999 to increase the available credit to $230 million. The Revolving Credit Agreement matures in October 2002. The floating- rate interest is calculated on either a Eurocurrency-based rate or a prime rate. At December 31, 2000, there was $210.0 million outstanding under this facility. The Revolving Credit Agreement requires the Company to meet certain financial covenants. At December 31, 2000, under the most restrictive covenant, VCI would have been able to declare a dividend up to $12.5 million. In addition, the Revolving Credit Agreement contains certain restrictive covenants that prescribe limits on VCI's ability to, among other things, create or incur additional indebtedness, make certain investments and other restricted payments, incur liens, purchase or redeem its capital stock, pay dividends and make other distributions, make acquisitions, engage in transactions with affiliates, enter into mergers or consolidations, liquidate, sell, lease, or otherwise transfer their business or property to another entity, engage in any business other than the business engaged in by VCI or substantially similar lines of business, and to enter into certain sales and leaseback transactions. PUBLIC DEBT At December 31, 2000, the Company's public debt consists of 9.55% Senior Notes due 2003 issued under an indenture dated November 15, 1994 and 6 5/8% Senior Notes due 2009 issued under an indenture dated January 12, 1999. The Senior Notes are general unsecured obligations of VCI and rank on parity in right of payment with all other Senior Indebtedness of VCI. Interest is payable on the 2003 Senior Notes semiannually on June 1 and December 1 of each year. Interest is payable on the 2009 Senior Notes semi-annually on January 15 and July 15 of each year. The stated amount of the Company's public debt under the 9.55% Senior Notes due 2003 at December 31, 2000 is $15.8 million. The stated amount of the public debt under the 6 5/8% Senior Notes due 2009 at December 31, 2000 is $100 million. Debt discount is being amortized utilizing the interest method over the term of the notes. The difference between the stated and effective interest rates is nominal. The debt is traded in the over-the-counter market. At December 31, 2000, the estimated fair market value of the debt was $3.7 million under stated value. The debt had an estimated fair market value of $5.7 million under stated value at December 31, 1999. The fair market value was estimated using discounted cash flow analyses, based on discount rates equivalent to comparable U.S. Treasury securities plus a spread for credit risk and other factors. The public debt contains certain restrictive covenants similar to those described for the Revolving Credit Agreement. 25 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements (5) PROFIT SHARING AND BONUS PLANS The Company has discretionary profit sharing and team achievement dividend/bonus plans covering substantially all salaried and hourly employees. Expenses under the aforementioned plans were as follows: YEAR ENDED - ---------------------------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, (in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------- Profit sharing plan $ 3,062 $ 4,262 $ 3,357 Bonus plans for salaried, sales and hourly personnel 8,298 11,190 7,674 Bonus plan for executives 1,342 1,823 2,105 (6) INCOME TAXES For financial reporting purposes, earnings before income taxes and extraordinary loss include the following components. YEAR ENDED - ---------------------------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, (in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------- Pre-tax income (loss): United States $201,605 $188,414 $136,722 Foreign 511 236 (213) - ---------------------------------------------------------------------------- $202,116 $188,650 $136,509 ============================================================================ 26 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements Income taxes have been charged to earnings before extraordinary loss as follows: YEAR ENDED - -------------------------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, (in thousands) 2000 1999 1998 - -------------------------------------------------------------------------- Federal: Current $76,706 $60,440 $48,442 Deferred (credit)/provision (7,693) 677 (628) State and Local 7,405 6,399 4,409 - -------------------------------------------------------------------------- $76,418 $67,516 $52,223 ========================================================================== The actual income tax expense differs from expected amounts computed by applying the U.S. federal income tax rate to earnings before income taxes and extraordinary item as follows:
YEAR ENDED - ---------------------------------------------------------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, (in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Expected income tax expense $70,741 $66,028 $47,778 Increase (decrease) in taxes resulting from: Tax effect of non-deductible foreign losses --- 83 (75) Tax effect of writedown in foreign investments --- (2,823) --- Amortization of intangibles 427 427 1,500 State and local income taxes, net of federal benefit 4,813 4,159 2,866 Other items, net 437 (358) 154 - ---------------------------------------------------------------------------------------------------------- Actual income tax expense, before extraordinary item $76,418 $67,516 $52,223 ==========================================================================================================
27 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements The sources of deferred income taxes and effects of each were as follows:
YEAR ENDED - --------------------------------------------------------------------------------------------------- Dec. 31, Dec. 31, Dec. 31, (in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------- Equity losses $(3,160) $ --- $ --- Depreciation and amortization 798 96 529 Allowance for uncollectable accounts (1,134) 13 64 General reserves (1,088) --- --- Consulting agreement 155 333 (1,297) Prepaid revenues (646) 117 --- Deferred compensation (1,651) --- --- Restricted stock grants (621) 150 --- Other items, net (346) (32) 76 - --------------------------------------------------------------------------------------------------- $(7,693) $ 677 $ (628) ===================================================================================================
Significant components of the Company's deferred tax liabilities and assets are as follows:
Dec. 31, Dec. 31, (in thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------- Long term deferred income tax assets (liabilities): Fixed assets $(3,570) $ (2,787) Deferred compensation 1,651 --- General reserves 1,088 --- Restricted stock 935 --- Consulting agreement 810 964 Equity losses 3,160 --- Other (136) (48) - ---------------------------------------------------------------------------------------------------- Total long term deferred income tax assets (liabilities) $ 3,938 ($1,871) ==================================================================================================== Current deferred income tax assets: Inventory $ 619 $ 629 Allowance for uncollectible accounts 1,621 487 Minority interest net operating loss carryforward 1,428 134 Prepaid advertising revenue 763 117 Other - net 353 240 - ---------------------------------------------------------------------------------------------------- Current total deferred income tax assets 4,784 1,607 Valuation allowance (1,428) (134) - ---------------------------------------------------------------------------------------------------- Net current deferred income tax assets $ 3,356 $ 1,473 ====================================================================================================
28 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements (7) COMMITMENTS Total operating lease rentals, for various office space, charged to expense was $3.1 million, $3.2 million and $3.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. Entire minimum rental payments required under noncancelable operating leases as of December 31, 2000 are as follows: Year Ending December 31, (in thousands) -------------------------------------------------- 2001.............................. $ 3,229 2002.............................. 2,814 2003.............................. 2,480 2004.............................. 2,129 2005.............................. 1,894 Thereafter........................ 12,172 -------------------------------------------------- $24,718 ================================================== On January 20, 1992 and February 11, 1992, VCI's Board of Directors approved employment agreements, which include non-compete clauses, for certain executives which became effective upon the public offering of its common stock. All such agreements have since been amended. Future commitments pursuant to such employment agreements are as follows: (in thousands) Year Ended Base Salary Maximum Cash Bonus --------------------------------------------------------------- Dec. 31, 2001............. $2,025 $2,025 Dec. 31, 2002............. 1,285 1,285 Dec. 31, 2003............. 935 935 The Company's obligation to pay the maximum cash bonus is based on the Company attaining certain EPS targets. The Company also provides stock options to certain of its executives (See Note 9). (8) CONTINGENCIES In February 1999, the Company filed a lawsuit alleging that Arthur Andersen LLP repudiated a joint venture agreement with the Company relating to the development of its Customer Relationship Marketing (CRM) product. The lawsuit also named The News Corporation Limited and News America Incorporated as defendants. On February 9, 2000, by stipulation made in open court, followed by execution of a settlement agreement on February 29, 2000, the Company settled this litigation in the State of Michigan circuit court for the County of Wayne and related litigation in the form of a declaratory judgment action that Arthur Andersen had commenced against the Company in the State of Illinois Chancery Court for Cook County. The amount paid to the Company by Arthur Andersen LLP against the exchange of mutual releases and stipulations of dismissal with prejudice and without costs as to Arthur Andersen LLP and The News Corporation Limited and News America Incorporated is confidential under the terms of the stipulated settlement. The proceeds of the settlement are included in other revenues in the accompanying condensed consolidated statement of income for the year ended December 31, 2000. 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. 29 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements (9) STOCKHOLDERS' EQUITY The Company's stockholders' equity is negative, despite continued profitability, due to approximately $900 million in dividends paid to its former parent company in 1992, prior to and as a result of its initial public offering. On April 1, 1999, the Board of Directors approved a three-for-two split of the Company's Common Stock, effected in the form of a 50% stock dividend, issued May 12, 1999, to stockholders of record as of April 16, 1999. Accordingly, all common share and per common share data have been restated to reflect this stock split. The stock split was accomplished through the issuance of 16,481,134 new shares and the use of 2,536,462 of Treasury Stock. On September 1, 1999, the Board of Directors adopted a Stockholder Rights Agreement (the "Agreement"). Under the Agreement, the Board declared a dividend of one Preferred Stock Purchase Right ("Right") for each outstanding share of the Company's common stock. The dividend was paid on September 27, 1999 to the shareholders of record on September 15, 1999. The Rights are attached to and automatically trade with the outstanding shares of the Company's common stock. The Rights will become exercisable only in the event that any person or group of persons not approved by the Board of Directors acquires 15% or more of the Company's common stock or commences a tender offer for 15% or more of the Company's common stock. Once the Rights become exercisable they entitle the shareholder to purchase one one-hundredth of one share of a new series of preferred stock at an exercise price of $170. The Rights expire on September 1, 2009. The Company is entitled to redeem the Rights at $.01 per Right at any time, prior to the expiration of the Rights, before a person or group acquires 15% or more of the Company's common stock. Options granted under the Company's Amended and Restated 1992 Long-Term Incentive Plan, which authorized the issuance of a maximum of 11,045,921 shares of common stock with exercise prices at least equal to the fair market value of the shares at date of grant and, subject to termination of employment, expire not later than ten years from date of grant, are not transferable other than on death, and fully vest over terms ranging from six months to five years from date of grant. Options granted under the Company's Broad-Based Incentive Plan, which authorized the issuance of a maximum of 965,000 shares of common stock with exercise prices at least equal to the fair market value of the shares at date of grant and, subject to termination of employment, expire not later than ten years from date of grant, are not transferable other than on death, and fully vest over terms ranging from six months to five years from date of grant. At December 31, 2000, there were outstanding options among 1,619 participants for the purchase of 6,714,502 shares. At December 31, 2000, there were 483,331 shares available for grant. 30 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements The following options to purchase the Company's common shares were outstanding under the Plan on December 31, 2000.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - -------------------------------------------------------------------------------- ------------------------------- Weighted- Weighted- Outstanding Average Weighted- Exercisable Average Range of As of Contractual Average As of Exercise Exercise Prices 12/31/2000 Life Exercise Price 12/31/2000 Price - ----------------------- --------------- ------------- ------------------ -------------- ----------- $ 4.5501 - $ 9.1000 10,500 2.9 $ 6.50 10,500 $ 6.50 $ 9.1001 - $13.6500 256,240 4.5 $11.3333 215,876 $11.3333 $13.6501 - $18.2000 160,824 6.0 $14.1846 135,392 $14.2036 $18.2001 - $22.7500 3,203,708 6.1 $21.4181 2,347,028 $21.4516 $22.7501 - $27.3000 57,200 9.6 $26.1260 4,500 $25.5417 $27.3001 - $31.8500 718,750 9.9 $28.4091 22,010 $29.5307 $31.8501 - $36.4000 2,026,325 4.8 $34.6478 1,199,925 $34.6511 $36.4001 - $40.9500 74,155 8.6 $37.7655 17,933 $37.8137 $40.9501 - $45.5000 206,800 9.0 $42.3037 9,860 $42.2960 ----------- ---- -------- --------- -------- 6,714,502 6.2 $26.4414 3,963,024 $24.7851 =========== ==== ======== ========= ========
A summary of the Company's stock option activity for the years ended December 31, 2000, 1999 and 1998, is as follows:
Year Ended December 31, Year Ended December 31, 2000 1999 -------------------------------------- -------------------------------------- Weighted Weighted Average Average per Share per Share Shares Exercise Price Shares Exercise Price ------------ ------------------ ------------ ----------------------- Outstanding at beginning of year 5,758,077 $25.05 4,370,135 $19.97 Granted 1,306,775 $30.00 2,008,890 $34.77 Exercised (178,135) $18.43 (555,481) $20.54 Forfeited (172,215) $29.45 (65,467) $22.99 ---------- ---------- Outstanding at end of year 6,714,502 $26.44 5,758,077 $25.05 ========== ========== Options exercisable at year end 3,963,024 $24.79 3,586,887 $24.82 ========== ========== Year Ended December 31, 1998 -------------------------------------- Weighted Average per Share Shares Exercise Price ------------ ------------------ Outstanding at beginning of year 3,917,770 $13.85 Granted 2,866,275 $21.75 Exercised (2,396,457) $12.18 Forfeited (17,453) $13.81 ---------- Outstanding at end of year 4,370,135 $19.97 ========== Options exercisable at year end 311,123 $11.43 ==========
31 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Because the exercise price of the Company's employee stock options is greater than or equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock Based Compensation" and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999 and 1998, respectively: weighted-average dividend yield of 0%, 0% and 0%, expected volatility of 36%, 34% and 34%, weighted-average risk-free interest rates of 5.23%, 5.00% and 4.80%, and weighted-average expected lives of 7.8, 5.7 and 5.0 years. No options were granted at greater than market value in 2000, 1999 and 1998. The weighted average per share fair value of options granted at market value was $15.29 in 2000, $14.21 in 1999 and $12.42 in 1998. The weighted average exercise price of options granted in 2000, 1999 and 1998 was $30.00, $34.77 and $21.75, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings and earnings per share follows (in thousands except for earnings per share information): 2000 1999 1998 -------- -------- -------- Pro forma net earnings $116,824 $94,549 $66,604 Pro forma earnings per share, basic $ 2.14 $ 1.67 $ 1.71 Pro forma earnings per share, diluted $ 2.11 $ 1.63 $ 1.68 The pro forma effects in 2000, 1999 and 1998 are not necessarily indicative of future pro forma adjustments. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. (10) STOCK COMPENSATION PLANS The following summarizes the Company's stock compensation plans: Employee and Director Restricted Stock Award Plan The Employee and Director Restricted Stock Award Plan provides for the grant of restricted stock to executives in lieu of or as a supplement to a cash raise, to non-employee, non-affiliated directors as a portion of their fee, and to participants in the Employee Stock Purchase Plan as described in the following paragraph. A total of 300,000 shares of restricted stock have been reserved for this plan. Pursuant to an employment agreement between the Company and its then Chief Operating Officer, Alan F. Schultz, 11,250 shares of restricted stock were issued to Mr. Schultz annually in January 1996, 1997 and 1998, respectively, with each grant vesting ratably from date of grant over a three-year period. The expense related to the aggregate of such restricted stock will be recognized on the straight-line method over the vesting period. Such pre-tax expense was approximately $94,000, $94,000 and $196,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In addition, several executives 32 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements received restricted stock grants totaling 54,000 shares, 57,750 shares and 39,000 shares in 2000, 1999 and 1998, respectively, each vesting over a three- year period. The expense related to this plan is recognized over the vesting period and was approximately $1,546,000, $1,145,000 and $694,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Also during 2000, 1999 and 1998, a portion of the total payments to the outside directors, was paid in restricted stock from this plan, with a total value of approximately $120,000, $124,500 and $95,000, respectively. Employee Stock Purchase Plan All full-time employees are eligible to participate in VCI's Employee Stock Purchase Plan. The plan provides that participants may authorize VCI to withhold a portion of earnings to be used to purchase VCI's common stock at prevailing market prices. Under the plan, VCI contributed on behalf of each participant 25% of the participant's contributions during the year. The value of the Company's stock contributed by the Company and expensed totaled approximately $210,000, $172,000 and $302,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Executive Restricted Stock Plan The Executive Restricted Stock Plan provides for the grant of restricted stock, with a minimum one-year vesting, to certain executive officers. The maximum number of restricted shares that may be issued under this plan is 375,000, provided that not more than 60% of such shares are awarded to any one participant. Pursuant to a previous employment agreement between the Company and David A. Brandon, the Company's former President and Chief Executive Officer, Mr. Brandon received 67,500 shares of restricted stock in 1998 and 45,000 shares in 1997. Compensation expense was recognized over the vesting period and was dependent on the market value of stock at the end of each quarter. Pursuant to an employment agreement between the Company and its then Chief Executive Officer, Alan F. Schultz, 22,500 shares of restricted stock were issued to Mr. Schultz in 2000. This grant vests in one year from the date of grant. Pre-tax compensation expense related to the plan for years ended December 31, 2000, 1999 and 1998 was approximately $.7 million, $.6 million and $1.1 million, respectively. 401(k) Plan The Company's 401(k) Plan includes a 25% match, payable in VCI stock, on each participant's annual contributions to the Plan that are invested in VCI stock at the end of the year. The expense related to this plan for the year ended December 31, 2000, 1999 and 1998 was approximately $228,000, $230,000 and $160,000, respectively. (11) DIVIDENDS On June 21, 1993, the Company suspended its policy of paying quarterly cash dividends. In addition, the payment of future dividends is subject to the restrictions described in Note 4. 33 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements (12) DISPOSALS The Company discontinued the direct mail merchandising division of Valassis of Canada in the fourth quarter of 1999. Costs associated with the discontinuance of this division totaled $1.7 million in 1999. The Company received a special one-time tax benefit of $4.4 million associated with the write-down of our foreign investment in Valassis of Canada as a result of this discontinuation. The Company discontinued the business and related products and services of The Net's Best in 2000. As a result, goodwill totaling $4.0 million was written off. (13) ACQUISITIONS AND INVESTMENTS On August 11, 2000, the Company acquired 80% of the outstanding membership interest in PreVision Marketing, LLC for $30 million cash and approximately $5 million in restricted stock. PreVision Marketing, LLC is a customer relationship marketing firm specializing in one-to-one marketing, customer retention and customer acquisition. The acquisition of PreVision Marketing was accounted for using the purchase method of accounting for acquisitions and, accordingly, the results of operations for PreVision have been included in the Company's financial statements since the date of acquisition. Cost in excess of net assets acquired is amortized in a straight-line basis over 20 years. The purchase agreement executed in connection with this transaction also contains additional payments contingent on the future earnings performance of PreVision Marketing. Any additional payments made, when the contingency is resolved, will be accounted for as additional costs of the acquisition and amortized over the remaining life of the assets. (14) RELATED PARTY TRANSACTIONS/IMPAIRMENT RESERVES The Company owns 22.5% of Valassis Relationship Marketing Systems, LLC ("VRMS"). At December 31, 2000, the Company had amounts receivable from VRMS totaling $6.0 million. The receivable from VRMS is included in equity investments and advances to investees in the accompanying consolidated balance sheet The Company owns approximately 50% of Save.com. The Company has notes receivable from Save.com due July 2002. The notes bear interest at 10% and 8% annually. At December 31, 2000, the balances of the notes receivable were $1.8 million and $8.5 million, respectively. Since Valassis was the sole financing source for Save.com, 100% of Save.com's losses were recognized in 2000 to the extent of the outstanding loan balances, resulting in a reserve of $10.3 million. In addition, the Company has a commitment to fund Save.com $2.9 million in the future. The Company indirectly owns 54% of Independent Delivery Services ("IDS"). At December 31, 2000, the Company's investment totaled $1.0 million, and the amount receivable from IDS totaled $2.2 million. In addition, the Company has a commitment to fund IDS $0.8 million in the future. Due to the deterioration of Save.com's and IDS's financial condition in 2000, the uncertainty in the public markets regarding Internet start ups, and the difficulty Save.com and IDS are having securing additional financial backing at this time, the Company has fully reserved against the investments, receivables and commitments with these companies, as it is unlikely that these funds will be recovered. The investments in Save.com and IDS and the related reserves are included in equity investments and advances to investees in the accompanying consolidated balance sheet. The receivables from Save.com and IDS and the related reserves are included in prepaid expenses and other in the accompanying consolidated balance sheet. The funding commitments are included in accounts payable in the accompanying consolidated balance sheet. 34 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements (15) SEGMENT REPORTING The Company has two reportable segments, cooperative free-standing inserts (FSIs) and Valassis Impact Promotions (VIP). FSIs are four-color booklets containing promotions from multiple advertisers distributed through Sunday newspapers. VIP offers its customers individualized specialty print promotion products in customized formats. These reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different marketing strategies and caters to a different customer base. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performances based on earnings before taxes. Assets are not allocated to reportable segments and are not used to assess the performance of a segment. Intersegment sales are accounted for at cost. Year Ended December 31 ---------------------- (in millions) FSI VIP All Others* Totals - ------------- --- --- ----------- ------ 2000 - ---- Revenues from external customers $603.0 $136.1 $ 96.6 $835.7 Intersegment revenue - - - - Depreciation / amortization 9.4 1.7 .2 11.3 Operating profit 169.5 15.5 (10.3) 174.7 1999 - ---- Revenues from external customers 585.4 116.5 92.5 794.4 Intersegment revenue 6.1 - - 6.1 Depreciation / amortization 11.0 1.8 .1 12.9 Operating profit 161.8 12.2 14.5 188.5 1998 - ---- Revenues from external customers 567.7 103.1 69.4 740.2 Intersegment revenue 4.4 - - 4.4 Depreciation / amortization 13.2 2.2 .3 15.7 Operating profit 121.5 9.0 4.8 135.3 *Segments below the quantitative thresholds are primarily attributable to four segments of the Company. Those segments are a product sampling and advertising business, a run-of-press business, and a promotion security service, and Valassis of Canada, a sales promotion business in Canada. These segments have not met any of the quantitative thresholds for determining reportable segments. 35 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements Reconciliations to consolidated financial statement totals are as follows: Year Ended December 31, ----------------------- 2000 1999 1998 ---- ---- ---- Revenues for reportable segments $739.1 $703.5 $670.8 Revenues for other segments 96.6 90.9 69.4 Other income 27.4 .2 1.2 ------ ------ ------ Total consolidated revenues $863.1 $794.6 $741.4 ====== ====== ====== Profit for reportable segments $185.0 $174.0 $130.5 Profit (loss) for other segments (10.3) 14.5 4.8 Unallocated amounts: Other income 27.4 .2 1.2 ------ ------ ------ Earnings before taxes $202.1 $188.7 $136.5 ====== ====== ====== Domestic and foreign revenues for each of the three years ended December 31 were as follows: 2000 1999 1998 ---- ---- ---- United States $856.6 $774.0 $721.1 Canada 6.5 20.6 20.3 ------ ------ ------ $863.1 $794.6 $741.4 ====== ====== ====== 36 VALASSIS COMMUNICATIONS, INC. Notes to Consolidated Financial Statements (16) EARNINGS PER SHARE Earnings per common share ("EPS") data were computed as follows:
Year ended December 31, ----------------------- 2000 1999 1998 ---- ---- ---- (in thousands except for per share amounts) Net earnings $125,699 $114,201 $ 70,688 ==================================== Basic EPS: Weighted average common shares outstanding 54,587 56,628 58,532 ==================================== Earnings (loss) per common share - basic Before extraordinary item $ 2.30 $ 2.14 $ 1.44 Extraordinary item - (0.12) (0.23) ------------------------------------ Total $ 2.30 $ 2.02 $ 1.21 ==================================== Diluted EPS: Weighted average common shares outstanding 54,587 56,628 58,532 Shares issued on exercise of dilutive options 4,575 6,301 4,998 Shares purchased with proceeds of options (3,734) (4,918) (4,233) Shares contingently issuable 50 73 12 ------------------------------------ Shares applicable to diluted earnings 55,478 58,084 59,309 ==================================== Earnings (loss) per common share - diluted Before extraordinary item $ 2.27 $ 2.09 $ 1.42 Extraordinary item - (0.12) (0.23) ------------------------------------ Net earnings per common share, diluted $ 2.27 $ 1.97 $ 1.19 ====================================
Unexercised employee stock options to purchase 2,307,620 shares, 46,600 shares and 4,500 shares of the Company's common stock as of December 31, 2000, 1999 and 1998, respectively, were not included in the computations of diluted EPS because the options exercise prices were greater than the average market price of the Company's common stock during the respective periods. Subsequent to December 31, 2000, the Company has repurchased approximately 210,700 of its common shares. 37 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Valassis Communications, Inc. We have audited the accompanying consolidated balance sheets of Valassis Communications, Inc. and subsidiaries (the "Company") at December 31, 2000 and 1999 and the related consolidated statements of income, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Valassis Communications, Inc. and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Detroit, Michigan February 6, 2001 38 Item 9. Changes and disagreements with Accountants on Accounting and Financial ---------------------------------------------------------------------- Disclosure ---------- Not applicable. PART III Certain information required by Part III is omitted from this report in that the registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Item 10. Directors and Executive Officers of the Registrant The information required by this Item is set forth in the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders, which information is hereby incorporated herein by reference. Item 11. Executive Compensation ---------------------- The information required by this Item is set forth in the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders, which information is hereby incorporated herein by reference, excluding the Stock Price Performance Graph and the Compensation/Stock Option Committee Report on Executive Compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The information required by this Item is set forth in the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders, which information is hereby incorporated herein by reference. Item 13. Certain Relationships and Related Transactions ---------------------------------------------- The information required by this Item is set forth in the Company's Proxy Statement for the 2001 Annual Meeting of Stockholders, which information is hereby incorporated herein by reference. 39 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------------------------------------- (a) The following documents are filed as a part of this Report: 1. Financial Statements. The following consolidated financial --------------------- statements of Valassis Communications, Inc. and subsidiaries are included in Item 8: Consolidated Balance Sheets as of December 31, 2000 and 1999. Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998. Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 2000, 1999 and 1998. Consolidated statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements Independent Auditors' Reports 2. Financial Statement Schedules. The following consolidated financial ------------------------------ statement schedule of Valassis Communications, Inc. for the years ended December 31, 2000, 1999 and 1998. Schedule Page -------- ---- II Valuation and Qualifying Accounts................... S-2 Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. Exhibits. The Exhibits on the accompanying Index to Exhibits --------- immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Report. (b) Reports on Form 8-K. No Reports on Form 8-K were filed during the quarter ended December 31, 2000. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. VALASSIS COMMUNICATIONS, INC. By: /s/ Alan F. Schultz March 23, 2001 ---------------------------------- -------------------- Alan F. Schultz Date President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - ----------------------------------- ---------------------------------- --------------- /s/Alan F. Schultz Chairman of the Board of Directors, March 23, 2001 - ----------------------------------- -------------- Alan F. Schultz President and Chief Executive Officer (Principal Executive Officer) /s/Richard N. Anderson Director March 23, 2001 - ----------------------------------- -------------- Richard N. Anderson /s/Patrick F. Brennan Director March 23, 2001 - ----------------------------------- -------------- Patrick F. Brennan /s/Seth Goldstein Director March 23, 2001 - ----------------------------------- -------------- Seth Goldstein /s/Brian J. Husselbee Director March 23, 2001 - ----------------------------------- -------------- Brian J. Husselbee /s/Robert L. Recchia Chief Financial Officer and Director March 23, 2001 - ----------------------------------- -------------- Robert L. Recchia (Principal Financial and Accounting Officer) /s/Marcella A. Sampson Director March 23, 2001 - ----------------------------------- -------------- Marcella A. Sampson /s/Faith Whittlesey Director March 23, 2001 - ----------------------------------- -------------- Faith Whittlesey
41 Schedule II VALASSIS COMMUNICATIONS, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 2000, 1999 and 1998 (in thousands)
Balance Balance at Charged to at Beginning Costs and Deductions End of Description of Period Expenses (1) Period - ------------------------------------------------- -------------- ------------- -------------- ------------ Allowance for doubtful accounts (deducted from accounts receivable): Year Ended December 31, 2000............... 1,386 1,208 1,272 1,322 Year Ended December 31, 1999............... 1,354 1,464 1,432 1,386 Year Ended December 31, 1998............... 1,171 900 717 1,354
(1) Accounts deemed to be uncollectible. S-2 EXHIBIT INDEX Exhibit Number ------ 3.1 Restated Certificate of Incorporation of Valassis Communications, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-45189) 3.2 Amended and Restated By-laws of Valassis Communications, Inc. (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-45189) 3.2(a) Amended and Restated By-laws of Valassis Communications, Inc. (incorporated by reference to Exhibit 3 (ii) to the Company's Form 10-Q for the period ended March 31, 1999). 4.1 Indenture between Valassis Communications, Inc. and The Bank of New York, as trustee, relating to the 9.55% Senior Notes due 2003 (incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for the transition period July 1, 1994 to December 31, 1994) 4.1(a) First Supplemental Indenture dated as of January 6, 2000 (incorporated by reference to Exhibit 4.1(a) to the Company's 1999 Form 10-K) 4.2 Form of Indenture between Valassis Communications, Inc. and The Bank of New York, as trustee, relating to the 6 5/8% Senior Notes due 2009 (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement No. 333-75041) 4.2(a) First Supplemental Indenture dated as of March 9, 1999 (incorporated by reference to Exhibit 4.1(a) to the Company's Registration Statement No. 333-75041) 4.4 Certificate of Designations of Preferred Stock of Valassis Communications, Inc. filed with the Office of the Secretary of State of Delaware on September 21, 1999, Authentication No. 9983607 (incorporated by reference to Exhibit (4) to the Company's Form 8-K filed on September 23, 1999) 10.1 Credit Agreement dated as of November 16, 1998 (the "Credit Facility"), among Valassis Communications, Inc., the institutions named therein as issuing banks, and Comerica Bank, as Agent (incorporated by reference to Exhibit 10.1 to the Company's 1998 Form 10-K) 10.1(a) Amendment No. 1 to the Credit Facility, dated as of November 25, 1998 (incorporated by reference to Exhibit 10.1(a) to the Company's 1998 Form 10-K) 43 10.1(b) Amendment No. 2 to the Credit Agreement by and among the Company and a group of banks for which Comerica Bank is acting as administrative agent dated as of August 19, 1999 (incorporated by reference to Exhibit 10 to the Company's Form 10-Q filed on November 12, 1999) 10.3* Employment Agreement, dated January 20, 1992 among Robert L. Recchia, Valassis Communications, Inc. and Valassis Inserts, Inc., including amendment dated February 11, 1992 (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement No. 33-45189) 10.3(a)* Amendment to Employment Agreement and Non Qualified Stock Option Agreement of Robert Recchia dated January 2, 1996 (incorporated by reference to Exhibit 10.6(a) to the Company's 1995 Form 10-K) 10.3(b)* Amendment to Employment Agreement and Non Qualified Stock Option Agreement of Robert Recchia dated January 3, 1997 (incorporated by reference to Exhibit 10.6(b) to the Company's 1996 Form 10-K) 10.3(c)* Amendment to Employment Agreement and Non Qualified Stock Option Agreement of Robert L. Recchia dated December 9, 1998 (incorporated by reference to Exhibit 10.3(c)* to the Company's 1998 Form 10-K) 10.3(d)* Amendment to Employment Agreement of Robert L. Recchia dated December 23, 1999 (incorporated by reference to Exhibit 10.3(d) to the Company's 1999 Form 10-K) 10.3(e)* Amendment to Employment Agreement of Robert L. Recchia dated March 14, 2001 10.4* Employment Agreement, dated January 20, 1992, among Barry P. Hoffman, Valassis Communications, Inc. and Valassis Inserts, Inc., including amendment dated February 11, 1992 (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement No. 33-45189) 10.4(a)* Amendment to Employment Agreement and Non Qualified Stock Option Agreement of Barry P. Hoffman dated December 19, 1995 (incorporated by reference to Exhibit 10.7(a) to the Company's 1995 Form 10-K) 10.4(b)* Amendment to Employment Agreement and Non-Qualified Stock Option Agreement of Barry P. Hoffman dated December 12, 1997 (incorporated by reference to Exhibit 10.7(b) to the Company's 1997 Form 10-K) 10.4(c)* Amendment to Employment Agreement and Non Qualified Stock Option Agreement of Barry P. Hoffman dated December 9, 1998 (incorporated by reference to Exhibit 10.4(c)* to the Company's 1998 Form 10-K) 10.4(d)* Amendment to Employment Agreement of Barry P. Hoffman dated December 16, 1999 (incorporated by reference to Exhibit 10.4(d) to the Company's 1999 Form 10-K) 10.4(e)* Amendment to Employment Agreement of Barry P. Hoffman dated March 14, 2001 10.5* Employment Agreement of Richard P. Herpich dated as of January 17, 44 1994 (incorporated by reference to Exhibit 10.5* to the Company's 1998 Form 10.K) 10.5(a)* Amendment to Employment Agreement of Richard P. Herpich dated June 30, 1994 (incorporated by reference to Exhibit 10.5(a)* to the Company's 1998 Form 10-K) 10.5(b)* Amendment to Employment Agreement and Non Qualified Stock Option Agreements of Richard P. Herpich dated December 19, 1995 (incorporated by reference to Exhibit 10.5(b)* to the Company's 1998 Form 10-K) 10.5(c)* Amendment to Employment Agreement and Non Qualified Stock Option Agreements of Richard P. Herpich dated February 18, 1997 (incorporated by reference to Exhibit 10.5(c)* to the Company's 1998 Form 10-K) 10.5(d)* Amendment to Employment Agreement and Non Qualified Stock Option Agreements of Richard P. Herpich dated December 30, 1997 (incorporated by reference to Exhibit 10.5(d)* to the Company's 1998 Form 10-K) 10.5(e)* Amendment to Employment Agreement and Non Qualified Stock Option Agreements of Richard P. Herpich dated December 15, 1998 (incorporated by reference to Exhibit 10.5(e)* to the Company's 1998 Form 10-K) 10.5(f)* Amendment to Employment Agreement of Richard P. Herpich dated January 4, 2000 (incorporated by reference to Exhibit 10.5(f) to the Company's 1999 Form 10-K) 10.5g* Amendment to Employment Agreement of Richard P. Herpich dated December 21, 2000 10.7 Valassis Inserts, Inc. Employees' 401(k) Retirement Savings Plan (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement No. 33-45189) 10.7(a) First Amendment of the Valassis Communications, Inc. Employees' 401(k) Retirement Savings Plan (incorporated by reference to Exhibit 10.9(a) to the Company's 1995 Form 10- K) 10.8 Valassis Inserts, Inc. Employees' Profit Sharing Plan (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement No. 33-45189) 10.8(a) First Amendment of the Valassis Communications, Inc. Employees' Profit Sharing Plan (incorporated by reference to Exhibit 10.10(a) to the Company's 1995 Form 10-K) 10.9 Valassis Inserts, Inc. Plant Employees Pension Plan (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement No. 33-45189) 10.10* Employment Agreement among Richard N. Anderson, Valassis Communications, Inc. and Valassis Inserts, Inc. (incorporated by reference 45 to Exhibit 10.16 to the Company's Registration Statement No. 33-45189) 10.10(a)* Amendment to Employment Agreement among Richard N. Anderson, Valassis Communications, Inc. and Valassis Inserts, Inc. (incorporated by reference to Exhibit 10.15(a) to the Company's Form 10-K for the transition period of July 1, 1994 to December 31, 1994) 10.10(b)* Amendment to Employment Agreement and Non Qualified Stock Option Agreement of Richard N. Anderson dated December 15, 1995 (incorporated by reference to Exhibit 10.15(b) to the Company's 1995 Form 10-K) 10.10(c)* Amendment to Employment Agreement and Non Qualified Stock Option Agreement of Richard N. Anderson dated December 11, 1998 (incorporated by reference to Exhibit 10.10(c)* to the Company's 1998 Form 10-K) 10.10(d)* Amendment to Employment Agreement of Richard N. Anderson dated December 22, 1999 (incorporated by reference to Exhibit 10.10(d) to the Company's 1999 Form 10-K) 10.10(e)* Amendment to Employment Agreement of Richard N. Anderson dated March 14, 2001 10.11* Employment Agreement among Alan F. Schultz, Valassis Communications, Inc. and Valassis Inserts, Inc. (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement No. 33-45189) 10.11(a)* Amendment to Employment Agreement among Alan F. Schultz, Valassis Communications, Inc. and Valassis Inserts, Inc. (incorporated by reference to Exhibit 10.16(a) to the Form 10-K for the transition period of July 1, 1994 to December 31, 1994) 10.11(b)* Amendment to Employment Agreement and Non Qualified Stock Option of Alan F. Schultz dated December 19, 1995 (incorporated by reference to Exhibit 10.16(b) to the Company's 1995 Form 10-K) 10.11(c)* Amendment to Employment Agreement and Non Qualified Stock Option Agreement of Alan F. Schultz dated September 15, 1998 (incorporated by reference to Exhibit 10.16(c) to the Company's Quarterly Report on Form 10-Q for the period ending September 30, 1998) 10.11(d)* Amendment to Employment Agreement of Alan F. Schultz dated December 16, 1999 (incorporated by reference to Exhibit 10.11(d) to the Company's 1999 Form 10-K) 10.11(e)* Amendment to Employment Agreement of Alan F. Schultz dated March 14, 2001 10.12* Senior Executive Annual Bonus Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement dated October 24, 1994) 10.12(a) First Amendment to Senior Executive Annual Bonus Plan (incorporated by reference to Exhibit E to the Company's Proxy Statement dated April 15, 1996. 46 10.14 Lease for New Headquarters Building (incorporated by reference to Exhibit 10.21 to the Company's Form 10-Q for the period ended June 30, 1996) 10.15 Executive Restricted Stock Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 25, 1996) 10.16 First Amendment of Executive Restricted Stock Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 25, 1996) 10.17 Employee and Director Restricted Stock Award Plan (incorporated by reference to Exhibit B to the Company's Proxy Statement dated April 25, 1996) 10.18 Employee Stock Purchase Plan (incorporated by reference to Exhibit C to the Company's Proxy Statement dated April 25, 1996) 10.22 Valassis Communications, Inc. Amended and Restated 1992 Long- Term Incentive Plan (incorporated by reference to Exhibit 10.22 to the Company's 1998 Form 10-K) 12.1 Statements of Computation of Ratios 21.1 Subsidiaries of Valassis Communications, Inc. 23.1 Consent of Independent Auditors 99 Rights Agreement dated as of September 1, 1999 by and between the Company and the Bank of New York (incorporated by reference to Exhibit 99.1 to the Company's Form 8-A 12B/A filed on November 8, 1999) *Constitutes a management contract or compensatory plan or arrangement. 47 EX-10.3(E) 2 dex103e.txt AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.3(e) AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made March 14, 2001 by and between Valassis Communications, Inc. (the "Corporation") and Robert L. Recchia (the "Executive"). WHEREAS, the Corporation and the Executive entered into that certain Employment Agreement effective as of March 18, 1992, as amended on January 2, 1996, January 3, 1997 and December 9, 1998, December 23, 1999 and June 8, 2000 (the "Employment Agreement"); and WHEREAS, the Corporation and the Executive desire to amend the Employment Agreement to extend the term of employment under the Employment Agreement, reflect an increase in the Executive's Annual Base Salary and amend the terms of Section 8.(b) of the Employment Agreement. NOW THEREFORE, in consideration of the above recitals, the parties hereto agree as set forth below. 1. Section 1(b) of the Employment Agreement shall be amended to read in its entirety as follows: "The Employment Period shall commence as of March 18, 1992 (the "Effective Date") and shall continue until the close of business on December 31, 2003." 2. The first sentence of Section 3(a) of the Employment Agreement shall be amended to read as follows: "The Executive's Annual Base Salary ("Annual Base Salary"), payable on a biweekly basis, shall be at the annual rate of not less than $320,000 effective January 1, 2001." 3. Section 8.(b) of the Employment Agreement shall be amended to read in its entirety as follows: "(b) Covenant Not to Compete or Solicit. So long as the Executive is ---------------------------------- employed by the Corporation, the Executive shall not offer or sell any products or services that compete in any market with the business of VCI, including its subsidiaries, affiliated corporations and businesses in which the Corporation has a minority position (collectively, "VCI"), nor shall he render services to any firm, person or corporation so competing with VCI, nor shall he have any interest, direct or indirect, in any business that is so competing with the businesses of VCI, provided, however, that ownership of 5 percent or less of any class of debt or equity securities which are publicly traded securities shall not be a violation of this covenant. The foregoing provisions of this Section 8.(b) shall apply during the Severance Period, if any, so long as the Corporation fulfills its obligations to the Executive under Section 5 and shall extend for an additional period of two years after the end of any Severance Period, or, if there is no Severance Period, for an additional period of two years after termination of the Executive's employment for any reason, other than disability or death, and whether the termination is by the Corporation or by the Executive (any such two year period being referred to as the "Mandatory Consulting and Non-Competition Period"). During any Severance Period and any Mandatory Consulting and Non-Competition Period, the Executive shall be available to furnish advisory and consulting services to the Corporation, including any subsidiaries, affiliated corporations and businesses in which the Corporation has a minority position, for the equivalent of two full business days per month. The Corporation shall pay an amount to the Executive equal to Annual Base Salary in biweekly installments for the two years of any Mandatory Consulting and Non-Competition Period, notwithstanding the provisions of Section 5(b). So long as the Executive is employed hereunder, during any Severance Period and during any Mandatory Consulting and Non-Competition Period, the Executive shall not, directly or indirectly, (i) solicit any employee of VCI with a view to inducing or encouraging such employee to leave the employ of VCI for the purpose of being hired by the Executive or any employer affiliated with the Executive; or (ii) solicit, take away, attempt to take away, or otherwise interfere with VCI's business relationships with any of its respective customers." 4. All other terms of the Employment Agreement shall remain in full force and effect. This instrument, together with the Employment Agreement, contains the entire agreement of the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive and the Corporation have caused this Agreement to be executed as of the day and year first above written. /s/ Valassis Communications, Inc. --------------------------------- /s/ Robert L. Recchia --------------------------------- EX-10.4(E) 3 dex104e.txt AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.4(e) AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made March 14, 2001 by and between Valassis Communications, Inc. (the "Corporation") and Barry P. Hoffman (the "Executive"). WHEREAS, the Corporation and the Executive entered into that certain Employment Agreement effective as of March 18, 1992, as amended on December 19, 1995, December 12, 1997 and December 9, 1998, December 16, 1999 and June 5, 2000 (the "Employment Agreement"); and WHEREAS, the Corporation and the Executive desire to amend the Employment Agreement to extend the term of employment under the Employment Agreement, reflect an increase in the Executive's Annual Base Salary and amend the terms of Section 8.(b) of the Employment Agreement. NOW THEREFORE, in consideration of the above recitals, the parties hereto agree as set forth below. 1. Section 1(b) of the Employment Agreement shall be amended to read in its entirety as follows: "The Employment Period shall commence as of March 18, 1992 (the "Effective Date") and shall continue until the close of business on December 31, 2003." 2. The first sentence of Section 3(a) of the Employment Agreement shall be amended to read as follows: "The Executive's Annual Base Salary ("Annual Base Salary"), payable on a biweekly basis, shall be at the annual rate of not less than $320,000 effective January 1, 2001." 3. Section 8.(b) of the Employment Agreement shall be amended to read in its entirety as follows: "(b) Covenant Not to Compete or Solicit. So long as the Executive is ---------------------------------- employed by the Corporation, the Executive shall not offer or sell any products or services that compete in any market with the business of VCI, including its subsidiaries, affiliated corporations and businesses in which the Corporation has a minority position (collectively, "VCI"), nor shall he render services to any firm, person or corporation so competing with VCI, nor shall he have any interest, direct or indirect, in any business that is so competing with the businesses of VCI, provided, however, that ownership of 5 percent or less of any class of debt or equity securities which are publicly traded securities shall not be a violation of this covenant. The foregoing provisions of this Section 8.(b) shall apply during the Severance Period, if any, so long as the Corporation fulfills its obligations to the Executive under Section 5 and shall extend for an additional period of two years after the end of any Severance Period, or, if there is no Severance Period, for an additional period of two years after termination of the Executive's employment for any reason, other than disability or death, and whether the termination is by the Corporation or by the Executive (any such two year period being referred to as the "Mandatory Consulting and Non-Competition Period"). During any Severance Period and any Mandatory Consulting and Non-Competition Period, the Executive shall be available to furnish advisory and consulting services to the Corporation, including any subsidiaries, affiliated corporations and businesses in which the Corporation has a minority position, for the equivalent of two full business days per month. The Corporation shall pay an amount to the Executive equal to Annual Base Salary in biweekly installments for the two years of any Mandatory Consulting and Non-Competition Period, notwithstanding the provisions of Section 5(b). So long as the Executive is employed hereunder, during any Severance Period and during any Mandatory Consulting and Non-Competition Period, the Executive shall not, directly or indirectly, (i) solicit any employee of VCI with a view to inducing or encouraging such employee to leave the employ of VCI for the purpose of being hired by the Executive or any employer affiliated with the Executive; or (ii) solicit, take away, attempt to take away, or otherwise interfere with VCI's business relationships with any of its respective customers." 4. All other terms of the Employment Agreement shall remain in full force and effect. 5. This instrument, together with the Employment Agreement, contains the entire agreement of the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive and the Corporation have caused this Agreement to be executed as of the day and year first above written. /s/ Valassis Communications, Inc. ---------------------------------- /s/ Barry P. Hoffman ---------------------------------- EX-10.5(G) 4 dex105g.txt AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.5(g) AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made December 21, 2000 by and between Valassis Communications, Inc. (the "Corporation") and Richard P. Herpich (the "Executive"). WHEREAS, the Corporation and the Executive entered into that certain Employment Agreement effective as of January 17, 1994, as amended June 30, 1994, December 19, 1995, February 18, 1997, December 30, 1997, December 15, 1998 and January 4, 2000 (the "Employment Agreement"); and WHEREAS, the Corporation and the Executive desire to amend the Employment Agreement to reflect an increase in the Executive's Annual Base Salary. NOW THEREFORE, in consideration of the above recitals, the parties hereto agree as set forth below. 1. The first sentence of Section 3(a) of the Employment Agreement shall be amended to read as follows: "The Executive's Annual Base Salary ("Annual Base Salary"), payable on a biweekly basis, shall be at the annual rate of not less than $275,000 effective January 1, 2001." 2. All other terms of the Employment Agreement shall remain in full force and effect. 3. This instrument, together with the Employment Agreement, contains the entire agreement of the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive and the Corporation have caused this Agreement to be executed as of the day and year first above written. /s/ Valassis Communications, Inc. --------------------------------- _________________________________ /s/ Richard P. Herpich EX-10.10(E) 5 dex1010e.txt AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.10(e) AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made March 14, 2001 by and between Valassis Communications, Inc. (the "Corporation") and Richard N. Anderson (the "Executive"). WHEREAS, the Corporation and the Executive entered into that certain Employment Agreement effective as of March 18, 1992, as amended on December 22, 1994, December 15, 1995, December 11, 1998, December 22, 1999 and June 6, 2000 (the "Employment Agreement"); and WHEREAS, the Corporation and the Executive desire to amend the Employment Agreement to reflect an increase in the Executive's Annual Base Salary and amend the terms of Section 8(b) of the Employment Agreement. NOW THEREFORE, in consideration of the above recitals, the parties hereto agree as set forth below. 1. The first sentence of Section 3(a) of the Employment Agreement shall be amended to read as follows: "The Executive's Annual Base Salary ("Annual Base Salary"), payable on a biweekly basis, shall be at the annual rate of not less than $345,000 effective January 1, 2001." 2. Section 8(b) of the Employment Agreement shall be amended to read in its entirety as follows: "(b) Covenant Not to Compete or Solicit. So long as the Executive is ---------------------------------- employed by the Corporation, the Executive shall not offer or sell any products or services that compete in any market with the business of VCI, including its subsidiaries, affiliated corporations and businesses in which the Corporation has a minority position (collectively, "VCI"), nor shall he render services to any firm, person or corporation so competing with VCI, nor shall he have any interest, direct or indirect, in any business that is so competing with the businesses of VCI, provided, however, that ownership of 5 percent or less of any class of debt or equity securities which are publicly traded securities shall not be a violation of this covenant. The foregoing provisions of this Section 8(b) shall apply during the Severance Period, if any, so long as the Corporation fulfills its obligations to the Executive under Section 5 and shall extend for an additional period of two years after the end of any Severance Period, or, if there is no Severance Period, for an additional period of two years after termination of the Executive's employment for any reason, other than disability or death, and whether the termination is by the Corporation or by the Executive (any such two year period being referred to as the "Mandatory Consulting and Non-Competition Period"). During any Severance Period and any Mandatory Consulting and Non-Competition Period, the Executive shall be available to furnish advisory and consulting services to the Corporation, including any subsidiaries, affiliated corporations and businesses in which the Corporation has a minority position, for the equivalent of two full business days per month. The Corporation shall pay an amount to the Executive equal to Annual Base Salary in biweekly installments for the two years of any Mandatory Consulting and Non-Competition Period, notwithstanding the provisions of Section 5(b). So long as the Executive is employed hereunder, during any Severance Period and during any Mandatory Consulting and Non-Competition Period, the Executive shall not, directly or indirectly, (i) solicit any employee of VCI with a view to inducing or encouraging such employee to leave the employ of VCI for the purpose of being hired by the Executive or any employer affiliated with the Executive; or (ii) solicit, take away, attempt to take away, or otherwise interfere with VCI's business relationships with any of its respective customers." 3. All other terms of the Employment Agreement shall remain in full force and effect. 4. This instrument, together with the Employment Agreement, contains the entire agreement of the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive and the Corporation have caused this Agreement to be executed as of the day and year first above written. /s/ Valassis Communications, Inc. --------------------------------- /s/ Richard N. Anderson --------------------------------- EX-10.11(E) 6 dex1011e.txt AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10.11(e) AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made March 14, 2001 between Valassis Communications, Inc. (the "Corporation") and Alan F. Schultz (the "Executive"). WHEREAS, the Corporation and the Executive entered into that certain Employment Agreement effective as of March 18, 1992, as amended on January 3, 1995, December 19, 1995 and September 15, 1998 and December 16, 1999 (the "Employment Agreement"); and WHEREAS, the Corporation and the Executive desire to amend the Employment Agreement to reflect an increase in the Executive's Annual Base Salary and amend the terms of Section 8.(b) of the Employment Agreement. NOW THEREFORE, in consideration of the above recitals, the parties hereto agree as set forth below. 1. The first sentence of Section 3(a) of the Employment Agreement shall be amended to read as follows: "The Executive's Annual Base Salary ("Annual Base Salary"), payable on a biweekly basis, shall be at the annual rate of not less than $615,000 effective January 1, 2001." 2. Section 8.(b) of the Employment Agreement shall be amended to read in its entirety as follows: "(b) Covenant Not to Compete or Solicit. So long as the Executive is ---------------------------------- employed by the Corporation, the Executive shall not offer or sell any products or services that compete in any market with the business of VCI, including its subsidiaries, affiliated corporations and businesses in which the Corporation has a minority position (collectively, "VCI"), nor shall he render services to any firm, person or corporation so competing with VCI, nor shall he have any interest, direct or indirect, in any business that is so competing with the businesses of VCI, provided, however, that ownership of 5 percent or less of any class of debt or equity securities which are publicly traded securities shall not be a violation of this covenant. The foregoing provisions of this Section 8(b) shall apply during the Severance Period, if any, so long as the Corporation fulfills its obligations to the Executive under Section 5 and shall extend for an additional period of seven years after the end of any Severance Period, or, if there is no Severance Period, for an additional period of seven years after termination of the Executive's employment for any reason, other than disability or death, and whether the termination is by the Corporation or by the Executive (any such seven year period being referred to as the "Mandatory Non-Competition Period"). The Corporation shall pay an amount to the Executive equal to Annual Base Salary in biweekly installments during each of the first three years of any Mandatory Non-Competition Period and an amount equal to one-half of Annual Base Salary during each of the last four years of any Mandatory Non-Competition Period, notwithstanding the provisions of Section 5(b). So long as the Executive is employed hereunder and for any additional period of time described in the preceding sentences, the Executive shall not, directly or indirectly, (i) solicit any employee of VCI with a view to inducing or encouraging such employee to leave the employ of VCI for the purpose of being hired by the Executive or any employer affiliated with the Executive; or (ii) solicit, take away, attempt to take away, or otherwise interfere with VCI's business relationships with any of its respective customers." 3. All other terms of the Employment Agreement shall remain in full force and effect. 4. This instrument, together with the Employment Agreement, contains the entire agreement of the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive and the Corporation have caused this Agreement to be executed as of the day and year first above written. /s/ Valassis Communications, Inc. ---------------------------------- /s/ Alan F. Schultz ---------------------------------- EX-12.1 7 dex121.txt STATEMENT OF COMPUTATION EXHIBIT 12.1
Year Ended December 31, 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Fixed Charges: Interest expense $ 22,924 $ 25,968 $ 34,450 $ 38,312 $ 39,625 Portion of rent expense representative of interest 1,033 1,067 1,200 1,108 1,166 ----------------------------------------------------------------- Total Fixed Charges $ 23,957 $ 27,035 $ 35,650 $ 39,420 $ 40,791 ================================================================= Earnings: Income from continuing operations before tax $202,117 $188,650 $136,509 $115,030 $ 65,873 Fixed charges per above 23,957 27,035 35,650 39,420 40,791 ----------------------------------------------------------------- Total earnings $226,074 $215,685 $172,159 $154,450 $106,664 ================================================================= Ratio of Earnings to Fixed Charges 9.44 7.98 4.83 3.92 2.61 =================================================================
EX-21.1 8 dex211.txt SUBSIDIARIES EXHIBIT 21.1 Subsidiaries of Valassis Communications, Inc. VCI Enterprises, Inc. Valassis International, Inc. Promotion Watch, Inc. VCI Electronic Commerce, Inc. Valassis Retail Connection, Inc. VCI Direct Mail, Inc. Valassis Data Management, Inc. Valassis Private Delivery, Inc. VCI Account Specific Marketing, Inc. EX-23.1 9 dex231.txt INDEPENDENT AUDITORS CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference of our report dated February 6, 2001, appearing in this Annual Report on Form 10-K of Valassis Communications, Inc. for the year ended December 31, 2000 in the following Registration Statements of Valassis Communications, Inc.: Form Registration No. Description - ---- ---------------- ----------- Form S-8 33-59670 1992 Long-Term Incentive Plan 1992 Non-Employee Directors' Stock Compensation Plan Form S-8 333-00022 1992 Long-Term Incentive Plan Form S-8 333-00024 Employees' 401(k) Retirement Savings Plan Employee Stock Purchase Plan Employee and Director Restricted Stock Award Plan Executive Restricted Stock Award Plan Form S-8 333-52919 1992 Long-Term Incentive Plan Form S-8 333-74263 Amended and Restated 1992 Long-Term Incentive Plan DELOITTE & TOUCHE LLP Detroit, Michigan March 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----