11. GUARANTOR AND NON-GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The following information is presented in accordance with Rule 3-10 of Regulation S-X. The operating and investing activities of the separate legal entities included in the consolidated financial statements are fully interdependent and integrated. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other services. The 2021 Notes issued by Valassis (referred to for purposes of this note only as the “Parent Company”) are guaranteed by substantially all of the Parent Company’s domestic wholly-owned subsidiaries (collectively, the “Guarantor Subsidiaries”) on a senior unsecured basis. Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Parent Company and has guaranteed the 2021 Notes on a joint and several, full and unconditional basis. Non-wholly-owned subsidiaries, joint ventures, partnerships and foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) are not guarantors of these obligations. Substantially all of the Guarantor Subsidiaries also guarantee the Parent Company’s senior secured credit facility.

The following tables present the condensed consolidating balance sheets as of September 30, 2011 and December 31, 2010, the condensed consolidating statements of income for the three and nine months ended September 30, 2011 and 2010, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2011 and 2010. As a result of combining our general ledgers of record into an existing, single general ledger module within our enterprise resource planning system on July 1, 2010, the condensed consolidating statement of income for the nine months ended September 30, 2011 below reflects certain revenues and costs and expenses between the Parent Company and the Guarantor Subsidiaries differently than the condensed consolidating statement of income for the nine months ended September 30, 2010. Although it is not practicable to reclassify the amounts presented for the nine months ended September 30, 2010 to reflect these changes in presentation, if such reclassifications could be made they would have no effect on any of the “Consolidated Total” amounts included below and would have no effect on the net income of the Parent Company or the Non-Guarantor Subsidiaries.

Condensed Consolidating Balance Sheet

September 30, 2011

(in thousands of U.S. dollars)


Assets	Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Current assets:
Cash and cash equivalents	$	65,249		$	1,759		$	24,026		$	—		$	91,034
Accounts receivable, net		107,605			274,747			24,934			—			407,286
Inventories		25,331			10,801			3			—			36,135
Prepaid expenses and other (including intercompany)		1,067,181			1,244,125			1,710			(2,249,608	)		63,408

Total current assets		1,265,366			1,531,432			50,673			(2,249,608	)		597,863

Property, plant and equipment, net		26,373			129,000			1,627			—			157,000
Goodwill		23,584			605,898			6,989			—			636,471
Other intangible assets, net		19,145			205,205			—			—			224,350
Investments		434,949			20,587			—			(452,466	)		3,070
Intercompany note receivable (payable)		(92,419	)		104,867			(12,448	)		—			—
Other assets		10,225			(187	)		3,656			—			13,694

Total assets	$	1,687,223		$	2,596,802		$	50,497		$	(2,702,074	)	$	1,632,448


Liabilities and Stockholders’ Equity	Parent Company			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Current liabilities:
Current portion, long-term debt	$	15,000		$	—		$	—		$	—		$	15,000
Accounts payable and intercompany payable		523,939			2,008,714			12,067			(2,249,608	)		295,112
Progress billings		25,354			13,310			13,944			—			52,608
Accrued expenses		50,793			35,875			6,923			—			93,591

Total current liabilities		615,086			2,057,899			32,934			(2,249,608	)		456,311

Long-term debt		591,310			—			—			—			591,310
Deferred income taxes		(5,403	)		87,657			(3,996	)		—			78,258
Other non-current liabilities		19,399			18,320			2,019			—			39,738

Total liabilities		1,220,392			2,163,876			30,957			(2,249,608	)		1,165,617
Stockholders’ equity		466,831			432,926			19,540			(452,466	)		466,831

Total liabilities and stockholders’ equity	$	1,687,223		$	2,596,802		$	50,497		$	(2,702,074	)	$	1,632,448

Condensed Consolidating Balance Sheet

December 31, 2010

(in thousands of U.S. dollars)


Assets	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Current assets:
Cash and cash equivalents	$	211,933		$	8,026		$	25,976		$	—		$	245,935
Accounts receivable, net		175,115			259,001			25,836			—			459,952
Inventories		33,305			8,679			3			—			41,987
Prepaid expenses and other (including intercompany)		278,489			630,972			2,083			(872,887	)		38,657

Total current assets		698,842			906,678			53,898			(872,887	)		786,531

Property, plant and equipment, net		31,475			142,006			2,086			—			175,567
Goodwill		23,584			605,898			6,989			—			636,471
Other intangible assets, net		19,161			214,656			—			—			233,817
Investments		400,404			12,486			—			(409,744	)		3,146
Intercompany note receivable (payable)		479,365			(460,369	)		(18,996	)		—			—
Other assets		6,982			3,130			14			—			10,126

Total assets	$	1,659,813		$	1,424,485		$	43,991		$	(1,282,631	)	$	1,845,658


Liabilities and Stockholders’ Equity	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Current liabilities:
Current portion, long-term debt	$	7,058		$	—		$	—		$	—		$	7,058
Accounts payable and intercompany payable		323,277			866,614			12,598			(872,887	)		329,602
Progress billings		26,353			11,751			14,897			—			53,001
Accrued expenses		51,035			41,300			7,277			—			99,612

Total current liabilities		407,723			919,665			34,772			(872,887	)		489,273

Long-term debt		699,169			—			—			—			699,169
Deferred income taxes		(4,044	)		86,804			(3,996	)		—			78,764
Other non-current liabilities		28,081			19,575			1,912			—			49,568

Total liabilities		1,130,929			1,026,044			32,688			(872,887	)		1,316,774
Stockholders’ equity		528,884			398,441			11,303			(409,744	)		528,884

Total liabilities and stockholders’ equity	$	1,659,813		$	1,424,485		$	43,991		$	(1,282,631	)	$	1,845,658

Condensed Consolidating Statement of Income

Three Months Ended September 30, 2011

(in thousands of U.S. dollars)


	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues	$	173,543		$	443,671		$	17,008		$	(105,831	)	$	528,391

Cost and expenses:
Cost of sales		148,817			287,173			12,368			(52,630	)		395,728
Selling, general and administrative		30,065			100,223			3,433			(53,201	)		80,520
Amortization expense		5			3,151			—			—			3,156

Total costs and expenses		178,887			390,547			15,801			(105,831	)		479,404

Earnings (loss) from operations		(5,344	)		53,124			1,207			—			48,987

Other expenses and income:
Interest expense		8,148			—			—			—			8,148
Interest income		(28	)		—			(26	)		—			(54	)
Intercompany interest		(1,179	)		1,179			—			—			—
Other income, net		(2,877	)		(972	)		(7	)		—			(3,856	)

Total other expenses (income), net		4,064			207			(33	)		—			4,238

Earnings (loss) before income taxes		(9,408	)		52,917			1,240			—			44,749
Income tax (benefit) expense		(10	)		16,891			374			—			17,255
Equity in net earnings of subsidiaries		36,892			866			—			(37,758	)		—

Net earnings	$	27,494		$	36,892		$	866		$	(37,758	)	$	27,494

Condensed Consolidating Statement of Income

Three Months Ended September 30, 2010

(in thousands of U.S. dollars)


	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues	$	273,629		$	421,906		$	15,003		$	(138,132	)	$	572,406

Cost and expenses:
Cost of sales		225,822			275,137			11,231			(90,680	)		421,510
Selling, general and administrative		38,596			96,825			3,830			(47,451	)		91,800
Amortization expense		6			3,151			—			(1	)		3,156

Total costs and expenses		264,424			375,113			15,061			(138,132	)		516,466

Earnings (loss) from operations		9,205			46,793			(58	)		—			55,940

Other expenses and income:
Interest expense		14,091			—			—			—			14,091
Interest income		(98	)		—			(18	)		—			(116	)
Intercompany interest		(16,355	)		16,356			(1	)		—			—
Other income, net		(1,240	)		(799	)		(81	)		—			(2,120	)

Total other expenses (income), net		(3,602	)		15,557			(100	)		—			11,855

Earnings before income taxes		12,807			31,236			42			—			44,085
Income tax expense		6,133			10,788			185			—			17,106
Equity in net earnings (loss) of subsidiaries		20,305			(143	)		—			(20,162	)		—

Net earnings (loss)	$	26,979		$	20,305		$	(143	)	$	(20,162	)	$	26,979

Condensed Consolidating Statement of Income

Nine Months Ended September 30, 2011

(in thousands of U.S. dollars)


	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues	$	572,298		$	1,317,568		$	54,658		$	(303,902	)	$	1,640,622

Cost and expenses:
Cost of sales		483,751			851,885			38,660			(151,951	)		1,222,345
Selling, general and administrative		76,040			305,162			10,527			(151,951	)		239,778
Amortization expense		16			9,451			—			—			9,467

Total costs and expenses		559,807			1,166,498			49,187			(303,902	)		1,471,590

Earnings from operations		12,491			151,070			5,471			—			169,032

Other expenses and income:
Interest expense		29,649			—			—			—			29,649
Interest income		(242	)		—			(73	)		—			(315	)
Intercompany interest		(15,533	)		15,371			162			—			—
Loss on extinguishment of debt		16,318			—			—			—			16,318
Other income, net		(3,095	)		(3,242	)		169			—			(6,168	)

Total other expenses, net		27,097			12,129			258			—			39,484

Earnings (loss) before income taxes		(14,606	)		138,941			5,213			—			129,548
Income tax expense		556			48,199			1,636			—			50,391
Equity in net earnings of subsidiaries		94,319			3,577			—			(97,896	)		—

Net earnings	$	79,157		$	94,319		$	3,577		$	(97,896	)	$	79,157

Condensed Consolidating Statement of Income

Nine Months Ended September 30, 2010

(in thousands of U.S. dollars)


	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total
Revenues	$	678,002		$	1,158,915		$	51,959		$	(186,518	)	$	1,702,358

Cost and expenses:
Cost of sales		538,485			813,050			36,195			(139,066	)		1,248,664
Selling, general and administrative		110,790			201,115			10,967			(47,451	)		275,421
Amortization expense		17			9,451			—			(1	)		9,467

Total costs and expenses		649,292			1,023,616			47,162			(186,518	)		1,533,552

Gain from litigation settlement, net		490,085			—			—			—			490,085

Earnings from operations		518,795			135,299			4,797			—			658,891

Other expenses and income:
Interest expense		52,084			—			—			—			52,084
Interest income		(471	)		3			(42	)		—			(510	)
Intercompany interest		(49,899	)		49,788			111			—			—
Loss on extinguishment of debt		23,873			—			—			—			23,873
Other income, net		(2,053	)		(2,215	)		(203	)		—			(4,471	)

Total other expenses (income), net		23,534			47,576			(134	)		—			70,976

Earnings before income taxes		495,261			87,723			4,931			—			587,915
Income tax expense		194,876			30,966			1,461			—			227,303
Equity in net earnings of subsidiaries		60,227			3,470			—			(63,697	)		—

Net earnings	$	360,612		$	60,227		$	3,470		$	(63,697	)	$	360,612

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2011

(in thousands of U.S. dollars)

		000000			000000			000000			000000		000000
	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments		Consolidated Total
Net cash provided by (used in) operating activities	$	246,069		$	(120,960	)	$	(1,911	)	$	—	$	123,198

Cash flows from investing activities:
Additions to property, plant and equipment		(11,101	)		(6,829	)		(197	)		—		(18,127	)
Proceeds from sale of property, plant and equipment		46			—			—			—		46
Proceeds from sale of available-for-sale securities		1,494			—			—			—		1,494

Net cash used in investing activities		(9,561	)		(6,829	)		(197	)		—		(16,587	)

Cash flows from financing activities:
Cash provided by (used in) intercompany activity		(121,522	)		121,522			—			—		—
Borrowings of long-term debt		610,000			—			—			—		610,000
Repayments of long-term debt		(709,919	)		—			—			—		(709,919	)
Debt issuance costs		(11,580	)		—			—			—		(11,580	)
Repurchases of common stock		(155,817	)		—			—			—		(155,817	)
Proceeds from issuance of common stock		5,646			—			—			—		5,646

Net cash provided (used in) by financing activities		(383,192	)		121,522			—			—		(261,670	)

Effect of exchange rate changes on cash and cash equivalents		—			—			158			—		158
Net decrease in cash and cash equivalents		(146,684	)		(6,267	)		(1,950	)		—		(154,901	)
Cash and cash equivalents at beginning of period		211,933			8,026			25,976			—		245,935

Cash and cash equivalents at end of period	$	65,249		$	1,759		$	24,026		$	—	$	91,034

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2010

(in thousands of U.S. dollars)


	Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments		Consolidated Total
Net cash provided by operating activities	$	317,477		$	100,198		$	4,532		$	—	$	422,207

Cash flows from investing activities:
Additions to property, plant and equipment		(9,352	)		(6,800	)		(295	)		—		(16,447	)
Additions to intangible assets		(7,581	)		—			—			—		(7,581	)
Proceeds from sale of property, plant and equipment		59			—			—			—		59

Net cash used in investing activities		(16,874	)		(6,800	)		(295	)		—		(23,969	)

Cash flows from financing activities:
Cash provided by (used in) intercompany activity		99,091			(99,091	)		—			—		—
Repayments of long-term debt		(303,079	)		—			—			—		(303,079	)
Repurchase of common stock		(58,225	)		—			—			—		(58,225	)
Proceeds from issuance of common stock		41,603			—			—			—		41,603

Net cash used in financing activities		(220,610	)		(99,091	)		—			—		(319,701	)

Effect of exchange rate changes on cash and cash equivalents		—			—			137			—		137
Net increase (decrease) in cash and cash equivalents		79,993			(5,693	)		4,374			—		78,674
Cash and cash equivalents at beginning of period		104,477			7,614			17,755			—		129,846

Cash and cash equivalents at end of period	$	184,470		$	1,921		$	22,129		$	—	$	208,520