<PAGE> 1
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, 1997 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
8-7/8% Senior Notes Due 1999 Not Applicable
9-3/8% Senior Subordinated Notes Due 1999
9.55% Senior Notes Due 2003
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. [ ]
<PAGE> 2
As of March 4, 1998, there were 40,175,987 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 $1,523,215,000.
The applicable portions of the Company's Proxy Statement for the 1998 Annual
Meeting of Stockholders 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.
<PAGE> 3
PART I
ITEM 1. BUSINESS
OVERVIEW
Valassis Communications, Inc. ("VCI" or the "Company") is a leading print
media company in the field of sales promotion. The Company generates most of its
revenues by printing and publishing cents-off coupons and other consumer
purchase incentives primarily for package goods manufacturers. The Company is
one of the country's largest printers and publishers of these coupons.
Most of the consumer purchase incentives published by the Company are
featured in cooperative free- standing inserts ("FSIs"), which are four-color
promotional booklets printed by the Company at its own facilities. Valassis
produced its first FSI in 1972. The Company's cooperative FSIs were inserted in
the Sunday edition of over 500 newspapers with a combined average paid
circulation of 57 million, on 47 publishing dates in calendar year 1997. By
comparison, there were approximately 93.3 million households in the United
States, based upon information published in 1990 by the U.S. Census Bureau.
In addition to FSIs, the Company arranges for the publication of its
customers'consumer promotions directly on the pages of newspapers through its
run-of-press ("ROP") division begun in 1986, which has the capacity to place
promotions in any newspaper. Another division of the Company, Valassis Impact
Promotions ("VIP"), established in 1989 in response to growing demand from its
customers for customized solo printed promotions, offers customized design,
printing and distribution services primarily for solo promotional programs.
The Company expanded its product line in 1994 by introducing newspaper-
delivered sampling products ("Newspac" and "Newspouch"). In 1995, the Company
continued its expansion with the purchase of McIntyre & Dodd, a Canadian sales
promotion company, now known as Valassis of Canada.
BACKGROUND OF THE COMPANY
The Company is the successor to a business founded in 1970 and operated
under the names George F. Valassis & Company and GFV Communications, Inc. In
December 1986, the assets of this business were acquired by Valassis Inserts,
Inc. ("Valassis"), a corporation indirectly owned by Consolidated Press
Holdings, Ltd. ("CPH"), a privately-owned Australian holding company. In March
1992, the Company sold 22,100,000 shares to the public. In March 1993, Valassis
was merged into its corporate parent, Valassis Communications, Inc. In 1997, the
Company's former majority stockholder, Conpress International (Netherlands
Antilles) N.V., sold its entire stock ownership (20,173,800 shares of common
stock) in the Company at $24 per share through a secondary offering.
THE COMPANY'S PRODUCTS
The Company offers its customers a variety of consumer promotion
alternatives. Depending upon the particular promotion goal, a customer can
choose to include its promotional materials in cooperative FSIs or ROP, can
elect to distribute a customized printed solo insert (VIP), or distribute a
product sampling program. Approximately 20% 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 a space-
available basis. The Company prints and publishes cents-off coupons, refund
offers, premiums, sweepstakes and contests distributed to households throughout
the United States. The Company relies, to a significant extent, on repeat
business. The Company markets its products through its own sales force.
Account Managers personally call on existing customers to maintain relationships
and on potential customers to describe the advantages afforded by the Company's
products compared to other promotion alternatives.
<PAGE> 4
FREE-STANDING INSERTS (FSIs)
The Company's FSIs are distributed 46 to 48 times per year, depending upon
the number of Sundays in any particular year that the Company considers viable
publishing dates (generally, any non-holiday weekend). The Company printed and
published approximately 79.7 billion cooperative FSI pages during the year ended
December 31, 1997, representing over 49% of the estimated 162 billion
cooperative FSI pages printed and distributed nationally. During that period,
the Company's cooperative FSIs were inserted in the Sunday edition of over 500
newspapers with a combined average paid circulation of 56.9 million.
Many FSI sales are made significantly in advance of program dates. The
Company typically announces its annual publication schedule approximately 18
months in advance of the first publication date and customers may reserve
categories at any time thereafter. Account Managers work closely with customers
to select their FSI publication dates from the Company's schedule and
coordinate all aspects of FSI printing and publication, as well as to obtain
commitments from customers in the form of signed contracts. The Company's
proprietary order entry and ad placement software allows it to produce as many
different FSI versions as customers require, typically over 270 different layout
versions per publication date. By offering different versions in different
markets, the Company offers its customers 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.
Cooperative FSI sales during the year ended December 31, 1997 were $521.3
million, which represented approximately 77.2% of the Company's net sales. No
single customer accounted for more than 10% of FSI sales during the year ended
December 31, 1997. The top ten FSI customers accounted for approximately 33%
of FSI sales during the same period.
REMNANT SPACE
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 space, which
typically accounts for about 20% of an FSI program, is referred to as "remnant
space" and is sold at a discount, primarily to direct mail marketers, who place
themselves on a waiting list for space that may become available. Remnant space
sales are included in total cooperative FSI sales for financial reporting
purposes.
The Company selects direct mail marketers as remnant space customers on the
basis of a number of factors, including price, circulation, reputation and
credit-worthiness. Remnant space customers are subject to being "bumped" in
favor of a regular price customer in need of space at the last minute.
VALASSIS IMPACT PROMOTIONS (VIP)
VIP offers its customers specialty print promotion products in multiple,
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 year in any newspaper throughout the United States.
VIP specializes in producing turnkey promotions for franchise and retail
marketers (e.g., fast food chains) allowing orders to be placed on a national,
regional or local basis.
VIP sales during the year ended December 31, 1997 were $89.2 million. VIP
customers are made up primarily of franchise food and retail operations. Two VIP
customers accounted for 30% of VIP sales for the year ended December 31, 1997,
with the top ten customers accounting for approximately 61.8% of total VIP
sales.
<PAGE> 5
RUN-OF-PRESS (ROP)
The Company arranges for the publication of ROP promotions in either a
cooperative or solo format. Cooperative programs, which group the promotions of
several customers together, are sold on a product exclusive basis, and usually
run each week when a newspaper runs its food section. Solo programs (featuring
a single advertiser) offer the marketer the flexibility to run in any newspaper
throughout the United States (including newspapers targeted to specific
demographic groups), on any day of the year and in any section of the newspaper.
Media (newspaper placement fees) is the major cost component of ROP
distribution, accounting for approximately 98% of the Company's total direct ROP
costs during the year ended December 31, 1997. Management believes that its
customers use the Company to place ROP because of the Company's ability to
negotiate favorable media rates, its well-developed production and placement
capabilities, and its capacity to execute integrated FSI and ROP programs.
ROP customers include primarily package goods manufacturers, and their
advertising and promotion agencies. The Company's total ROP sales were $23.8
million during the year ended December 31, 1997. The top three customers
accounted for 66% of ROP sales during 1997. The top ten ROP customers accounted
for approximately 84% of the total ROP sales during the same period.
VALASSIS SAMPLING
In August 1993, Valassis began offering a newspaper-delivered sampling
product that gives manufacturers the ability to reach up to 40 million
households in one weekend, cost-effectively. Samples can either be machine-
inserted into newspapers (Newspac), placed in a polybag alongside the
newspaper, or pre-sealed in a pouch that forms part of the polybag (Newspouch).
In 1997, Valassis Sampling expanded its product line with the addition of Brand
Bag and Brand Bag Plus. Both products offer customers home-delivered newspaper
circulation of up to 32 million households in one weekend. This product is for
marketers who do not want to deliver a sample. The bags feature the customer's
advertising with the option of a weather-resistant tear-off coupon.
In 1997, Valassis Sampling produced total revenue of $15.8 million. Three
customers accounted for 65% of Sampling sales during 1997. The top 10 customers
accounted for approximately 93% of total Sampling sales during the same period.
VALASSIS OF CANADA
In March 1995, Valassis acquired McIntyre & Dodd Marketing (now renamed
Valassis of Canada), a leader in consumer promotion and direct response
merchandising in Canada. Several challenges were faced in 1995 including an
industry price/market share battle, poor economy, and mail order volume decline.
Since then, the Company has streamlined or repositioned existing products,
dropped unprofitable offerings, and added new products and services to better
meet the needs of its customers. In 1997, Valassis of Canada joined forces with
GeoMedia to produce a consumer research database called AdHome Navigator. This
database provides demographic, lifestyle, product purchase, and other key data
on nearly 1 million Canadian households.
DISPOSITIONS
In September 1994, VCI purchased an 80% interest in GAPP, a sales promotion
company in France, which specialized in cooperative refund and couponing
programs, and customized consumer print promotions. During 1995, Valassis France
distributed the first national FSI program in France, which was delivered via
direct mail. In April 1997, the Company decided to discontinue the operations
of Valassis France. The effect of the close down of this subsidiary was not
material to the Company's financial condition and results of
operations.
<PAGE> 6
VCI had a 50% joint venture interest in Valassis de Mexico. This company
was expected to capitalize on the growth of the Mexican retail industry by
offering a wide variety of promotion marketing services. However, due to the
state of the economy and less-than-desirable test results, the Company decided
to exit this business in the first quarter of 1997. The disposal of the business
involved minimal costs and did not have a material effect on Company earnings.
The Company sold the assets of its personal check direct marketing
division, Valcheck, in 1995. In addition, a decision was made at the end of 1995
to discontinue the in-store electronic sign network, Valassis In-Store
Marketing. The assets of Valassis In-Store Marketing were subsequently sold in
April 1996. Neither of these product lines demonstrated the profit potential
necessary to warrant continued investment and marketing support.
COMPETITION
The Company currently competes in the cooperative FSI business principally
with News America FSI, Inc. The Company competes for business primarily on the
basis of category availability; frequency and availability of publication dates;
customer service and sales relationships; and accuracy and price. In addition,
the Company competes with in-store advertising and other forms of coupon
delivery.
Several times in the past, new competitors have attempted to establish
themselves in the FSI market. This has resulted in periods of intense price
competition. Furthermore, the increase in the number of FSI programs published
has led to a decrease in the number of pages per FSI program and the average
revenue per page with a consequent material adverse effect on the Company's
financial performance. The Company's results for the fiscal year ended
June 30, 1994 and the six months ended December 31, 1994 were severely
impacted by business booked under competitive pricing conditions, which
accompanied the efforts of Sullivan Marketing, Inc. to enter the FSI market.
Sullivan withdrew from the FSI market in February 1994. Some FSI price
recovery took place during 1995, with further increases in FSI prices in 1996.
The VIP division competes with News America for package goods and fast food
business, and with commercial printers. VIP continues to add new services and
product formats to meet the needs of an expanding customer base. Due to
anticipated strong demand for VIP products, the Company will install a new
printing press in May of 1998.
The Company competes with several newspaper network groups in the ROP
market. As there are no significant capital investments associated with that
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 for the
Company's ROP division.
BUSINESS STRATEGY
The Company's strategy is to remain focused on the FSI segment of its
business and improve pricing, while offering its customers other products and
services which complement its FSI expertise. In order to accomplish the
foregoing, the Company will continue its commitment to minimize costs through
the use of computerized information systems and state-of-the-art production
facilities, while providing high levels of product quality and customer service.
In addition, the Company will attempt to capitalize on its expertise in
consumer promotion by further developing its existing VIP, Sampling and Canadian
divisions. Regarding new businesses, the Company's strategy has been one of
investigating opportunities, while minimizing financial risk. The Company will
divest of new businesses that do not show the potential to grow into substantial
profit centers within the foreseeable future. The Company expects to investigate
strategic acquisitions that enhance shareholder value.
The Company has made a commitment to print all of its own promotional
products and continue development of its proprietary software systems. The
Company continues to invest in the further training of its personnel to
maintain high levels of customer service.
<PAGE> 7
EMPLOYEES
At December 31, 1997, the Company had approximately 1,170 employees.
Approximately 350 of these employees are on the Company's sales, sales
operations and marketing staff; approximately 722 are involved in manufacturing;
approximately 31 are on its management information systems staff; and
approximately 67 are involved with administration. None of the Company's
employees are represented by a labor union. The Company considers labor
relations with employees to be good and has not experienced any interruption
of its operations due to labor disagreements.
<PAGE> 8
ITEM 2. PROPERTIES
The principal executive offices of the Company are located in an office
complex in Livonia, Michigan. The Company also leases sales offices in Los
Angeles (Seal Beach), Chicago (Schaumburg), Atlanta, Dallas, Boston,
Minneapolis, Connecticut (Wilton), and various other localities.
The Company operates three printing facilities. The Livonia printing
facility is owned by the Company and consists of approximately 225,000 square
feet and includes VIP, printing and warehouse facilities. The Company owns a
printing facility in Durham, North Carolina and leases (with an option to
purchase for a nominal amount at the end of the lease term) a printing facility
in Wichita, Kansas, consisting of approximately 110,000 square feet and 138,000
square feet, respectively. In addition, the Company leases a facility in
Plymouth, Michigan which houses its pre-press operations. These facilities
generally have sufficient capacity to handle present volumes although, during
periods of unusual demand, the Company may require services of a contract
printer.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine litigation arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE> 9
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, 1997 was 365.
High and low stock prices and dividends during the twelve months ended
December 31, 1997 and 1996 were:
<TABLE>
<CAPTION>
1997 1996
------------------------- ----------------------------
CASH CASH
SALES PRICE DIVIDENDS SALES PRICE DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED HIGH LOW DECLARED
- ------------- ------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $23 $18 1/8 $--- $17 5/8 $15 1/2 $---
June 30 28 1/8 21 --- 19 3/8 14 5/8 ---
September 30 33 23 3/4 --- 18 3/8 14 7/8 ---
December 31 37 27 3/8 --- 21 1/8 14 5/8 ---
</TABLE>
On June 21, 1993, the Company suspended its policy of paying quarterly cash
dividends in light of the Company's earnings outlook at that time. Currently,
the Company has no plans to pay dividends, as the Board feels that share and
debt repurchase are a preferable use of cash flow. 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.
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
- --------------------------------------------------- ---------------- -------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 JUNE 30 JUNE 30
1997 1996 1995 1994 1994 1993
- --------------------------------------------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales and
other revenues $675,496 $659,108 $613,752 $279,034 $542,609 $661,378
Earnings from
continuing
operations before
extraordinary
loss 69,930 42,902 9,574 1,923 5,173 81,934
Total assets 240,885 273,734 258,932 234,330 239,709 275,165
Long-term debt,
less current
portion 367,075 395,865 416,034 417,927 419,000 418,741
Earnings per
share before
extraordinary
loss* 1.72 1.00 .22 .04 .12 1.89
Net earnings
(loss) per share,
basic 1.72 1.00 .22 (.05) .12 1.89
Net earnings
(loss) per share,
diluted 1.69 1.00 .22 (.05) .12 1.89
Cash dividends
declared per
share --- --- --- --- --- .42^
</TABLE>
^Dividends were paid for the first three quarters of fiscal year 1993 only.
*The Company recorded a $4.2 million extraordinary loss (net of taxes) during
the six-months ended December 31, 1994, as a result of early retirement of a
portion of its public debt.
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."
<PAGE> 11
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 Conditions 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.
<PAGE> 12
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
- ------------------------------------------------------------------------------------------
(dollar amounts in % of % of % of
millions) Actual Revenues Actual Revenues Actual Revenues
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FSI sales $521.3 77.2% $504.1 76.5% $480.7 78.3%
VIP sales 89.2 13.2 89.4 13.6 76.8 12.5
ROP sales 23.8 3.5 25.5 3.9 19.4 3.2
Other sales 41.2 6.1 40.1 6.0 36.9 6.0
- ------------------------------------------------------------------------------------------
Revenues 675.5 100.0 659.1 100.0 613.8 100.0
Cost of products sold 436.2 64.6 473.1 71.8 466.1 75.9
- ------------------------------------------------------------------------------------------
Gross profit 239.3 35.4 186.0 28.2 147.7 24.1
Selling, general and
administrative expenses 77.4 11.5 67.1 10.2 59.5 9.7
Amortization of
intangibles 8.6 1.3 8.2 1.2 9.6 1.5
Minority interest --- --- --- --- (1.4) (.2)
Write-downs/sale of
business --- --- --- --- 16.9 2.8
- ------------------------------------------------------------------------------------------
Operating earnings 153.3 22.6 110.7 16.8 63.1 10.3
Interest expense 38.3 5.7 39.6 6.0 40.5 6.6
- ------------------------------------------------------------------------------------------
Earnings before
income taxes 115.0 16.9 71.1 10.8 22.6 3.7
Income taxes 45.1 6.7 28.2 4.3 13.0 2.1
- ------------------------------------------------------------------------------------------
Net earnings $69.9 10.2% $42.9 6.5% $9.6 1.6%
==========================================================================================
</TABLE>
As a result of the acquisition of Valassis in 1986, the Company recorded
significant amounts of intangible assets. As a consequence, the Company's
results of operations include non-cash expenses related to the amortization of
intangible assets, including goodwill.
<PAGE> 13
Calendar 1997 Compared to Calendar 1996
Net earnings increased 63.0% to $69.9 million in 1997 from $42.9 million in
1996. This increase was due to the strength of the Company's core free-standing
insert business, coupled with a significant decrease in the average cost of
paper in 1997 versus 1996.
Revenues for 1997 were $675.5 million, up 2.5% from $659.1 million in 1996. FSI
revenue increased 3.4% to $521.3 million in 1997. This was due to slightly
higher FSI prices and increased volume due to improved market share. VIP
revenue was flat for 1997 at $89.2 million, due largely to the fact that two
major customers reduced spending on print promotions, which offset the growth
experienced from other customers. ROP revenue was down 6.7% to $23.8 million in
1997, still within the Company's targeted range of $20 to $25 million in revenue
per year. Management does not rely upon ROP as a growth business. Valassis
Sampling sales were up 10.5% in 1997.
Gross profit as a percentage of revenue increased to 35.4% in 1997 compared to
28.2% in 1996. This increase was primarily due to lower average paper costs in
1997 versus 1996, as well as smaller declines in media and print costs. After
declining throughout 1996 and early 1997, paper prices began to increase during
1997, with a further modest increase expected in 1998.
Selling, general and administrative expenses increased to $77.4 million in 1997
versus $67.1 million in 1996. 1997 includes a one-time charge of $7.3 million,
for a non-recurring special payment to certain VCI executives, funded by
Consolidated Press Holdings, parent of the selling shareholder of the Company's
secondary offering. The remaining increase was due to increased advertising and
promotional activity, as well as incentive/reward programs associated with the
increased level of earnings.
Interest expense was down in 1997 to $38.3 million from $39.6 million in 1996.
The Company retired $36.2 million and $13.0 million of its public subordinated
debt in 1997 and 1996, respectively.
CALENDAR 1996 COMPARED TO CALENDAR 1995
Net earnings increased 347% to $42.9 million in 1996 from $9.6 million in 1995.
This increase was due primarily to improved pricing in the core business of
FSIs. In addition, 1995 earnings included an after-tax charge of $12.5 million
due to writedowns of assets related to the discontinuance of Valassis In-Store
Marketing and the goodwill of Valassis of Canada.
Revenues for calendar 1996 were $659.1 million, up 7.4% from $613.8 million in
calendar 1995. FSI revenue increased 4.9% to $504.1 million in 1996. Again this
increase was primarily attributable to higher FSI pricing. Volume was down
slightly as the result of fewer publishing dates; however, the Company's market
share increased. A significant increase in VIP revenue was experienced, with
$89.4 million in 1996 versus $76.8 million in 1995. This 16.4% increase was due
to increased promotional activity by core customers, and new customers, as well
as strong demand for VIP's expanded product line. ROP revenue rose 31.4% to
$25.5 million in 1996 as the result of increased activity by retail accounts and
the pharmaceutical industry. Although ROP is not expected to be an area of
growth, the Company continues to look for ways to make it more efficient.
Revenue from other businesses also increased, particularly in the area of
sampling.
Gross profit as a percentage of revenue increased to 28.2% in 1996 compared to
24.1% in 1995. The increase was due to improved FSI pricing. Paper costs began
to fall during 1996 after the dramatic increases seen in 1995; however, the
average cost for 1996 was up slightly from the 1995 average. The declining
paper prices experienced throughout 1996 had an even greater positive effect in
1997.
Selling, general and administrative expenses increased to $67.1 million in 1996
versus $59.5 million in 1995. A $1 million insurance refund was netted against
1995 SG&A expenditures. The remaining increase was due in part to increased
selling cost associated with higher revenues and a full year of operations for
Valassis of Canada in 1996.
<PAGE> 14
Interest expense was down in 1996 to $39.6 million from $40.5 million in 1995.
The Company purchased $13 million and $2 million of its public subordinated debt
in 1996 and 1995, respectively.
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.
The Company also had the ability as of December 31, 1997 to incur $40 million of
additional indebtedness under its existing credit facility. The Company has
scheduled principal payments on indebtedness of $112.2 million on March 15, 1999
and $255.0 million on December 1, 2003.
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 repurchase stock through the Company's stock
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.
CASH FLOW - CALENDAR 1997 AND 1996
The Company experienced a significant improvement in free cash flow during 1997,
due primarily to increased earnings. Cash provided by operating activities was
$83.8 million in 1997, compared with $65.8 million in 1996. The Company used its
excess cash to purchase $91.5 million of its common stock and to retire $36.2
million of its public debt in 1997. The Company expects to continue its share
and debt repurchase programs in 1998.
CASH FLOW - CALENDAR 1996 AND 1995
The Company experienced a significant improvement in cash flow during 1996, due
to increased earnings. Cash provided by operating activities was $65.8 million
in 1996, compared with $26.2 million in 1995. The Company used a portion of this
excess cash flow to purchase $13.0 million of its outstanding subordinated debt
and $21.6 million of its common stock in 1996.
CAPITAL EXPENDITURES - The Company operates three printing facilities. Capital
expenditures were $13.0 million for the year ended December 31, 1997. Management
expects future capital expenditure requirements of approximately $10 million to
$15 million over each of the next three to five years to meet increased capacity
needs and to replace or rebuild equipment as required. It is expected that
equipment will be purchased using funds provided by operations.
<PAGE> 15
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the year. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than 2000. This problem could force computers to either
shut down or provide incorrect data or information.
In response to the Year 2000 issue, the Company has created two project plans;
one for program modifications and the second for implementing new financial
software upgrades. The Company estimates the costs related to the implementation
of the program modification plan and the financial software upgrade plan to be
approximately $550,000 and $350,000, respectively, which will be funded through
operating cash flows. The Company plans for all critical systems to be Year 2000
compliant by the end of 1998.
In addition, the Company has begun to ask its vendors, service providers and
customers about their progress in identifying and addressing problems that their
computer systems may face in correctly processing date information related to
the Year 2000. It is not possible to quantify the aggregate cost to the Company
with respect to vendors, service providers and customers with Year 2000
problems, although the Company does not anticipate it will have a material
adverse impact on its business.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" was issued by the Financial Accounting
Standards Board ("FASB"). SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. This Statement requires that
all items that are required as components of comprehensive income be displayed
in a financial statement. The Company has not determined the impact on the
Company's consolidated financial statement disclosure. SFAS No. 130 is
effective for the Company's consolidated financial statements for the year
ending December 31, 1998.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued by the FASB. SFAS No. 131 establishes standards
for the way that public business enterprises report financial and descriptive
information about its reporting operating segments. The Company has not
determined the impact on the Company's consolidated financial statement
disclosure. SFAS No. 131 is effective for the Company's consolidated financial
statements for the year ending December 31, 1998.
<PAGE> 16
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 a 4-6% increase in FSI revenue for
1998.
- -- Due to price increases during 1997, the average price of paper in 1998, which
is a major cost factor in the Company's business, is expected to increase
over the average price in 1997.
- -- Media and print costs are expected to decline in 1998.
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 war; new technology that would make free-standing
inserts less attractive; a shift in customer preference for different
promotional materials, promotional strategies or coupon delivery methods,
including in-store advertising systems and other forms of coupon delivery; an
increase in the Company's paper costs; or general business and economic
conditions.
The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION?>
THREE MONTHS ENDED
- ----------------------------------------------------------------------------------------
Thousands of dollars,
except per share data Mar. 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year ended December 31, 1997
Revenue $189,959 $164,254 $153,513 $167,770
Cost of products sold 123,607 106,037 97,861 108,736
Net earnings 22,298 11,744* 17,813 18,075
Net earnings per common share .53 .29 .44 .46
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- -----------------------------------------------------------------------------------------
Thousands of dollars,
except per share data Mar. 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year ended December 31, 1996
Revenue $180,533 $162,651 $151,835 $164,089
Cost of products sold 134,290 116,994 107,009 114,831
Net earnings 10,460 10,006 10,763 11,674
Net earnings per common share .24 .23 .25 .28
</TABLE>
* Net earnings for the quarter ended June 30, 1997 include a one-time charge
of $6.4 million (net of taxes) for a non-recurring special payment to certain
VCI executives, funded by Consolidated Press Holdings (CPH), parent of the
selling stockholder of the Company's secondary offering.
<PAGE> 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VALASSIS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $35,437 $60,172
Accounts receivable (less allowance for
doubtful accounts of $1,171 at December 31,
1997 and $684 at December 31, 1996). 81,681 92,745
Inventories:
Raw materials 10,975 6,091
Work in progress 15,720 14,734
Prepaid expenses and other 4,536 1,931
Deferred income taxes (Note 6) 1,966 2,088
Refundable income taxes 772 ---
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 151,087 177,761
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and buildings 20,133 19,991
Machinery and equipment 108,167 108,800
Office furniture and equipment 17,995 17,782
Automobiles 1,012 887
Leasehold improvements 1,022 1,458
- --------------------------------------------------------------------------------
148,329 148,918
Less accumulated depreciation and amortization (108,098) (114,100)
- --------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 40,231 34,818
- --------------------------------------------------------------------------------
INTANGIBLE ASSETS (NOTE 3):
Goodwill 68,594 68,594
Other intangibles 83,387 83,706
- --------------------------------------------------------------------------------
151,981 152,300
Less accumulated amortization (104,709) (96,396)
- --------------------------------------------------------------------------------
NET INTANGIBLE ASSETS 47,272 55,904
- --------------------------------------------------------------------------------
OTHER ASSETS (PRIMARILY DEBT ISSUANCE COSTS) 2,295 5,251
- --------------------------------------------------------------------------------
TOTAL ASSETS $240,885 $273,734
================================================================================
</TABLE>
<PAGE> 18
VALASSIS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
(in thousands, except share data) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $59,226 $67,251
Accrued interest 5,098 6,066
Accrued expenses 25,890 22,435
Progress billings 58,239 57,234
Current portion, long-term debt --- 7,290
Income taxes payable --- 1,124
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 148,453 161,400
LONG-TERM DEBT (Note 4) 367,075 395,865
Deferred income taxes (Note 6) 2,315 2,565
Minority interests 9 498
STOCKHOLDERS' DEFICIT (Notes 9, 10 and 11):
Common stock of $.01 par value. Authorized
100,000,000 shares; issued 44,515,599 at
December 31, 1997 and 43,407,906 at
December 31, 1996; outstanding 39,515,599
at December 31, 1997 and 42,077,196 at
December 31, 1996 445 434
Additional paid-in capital 72,399 41,337
Accumulated deficit (236,625) (306,555)
Foreign currency translations (146) (260)
Treasury stock, at cost (5,000,000 shares at
December 31, 1997 and 1,330,800 shares at
December 31, 1996) (113,040) (21,550)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (276,967) (286,594)
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $240,885 $273,734
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 19
VALASSIS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
- --------------------------------------------------------------------------------
(in thousands, except per share data) DEC. 31, DEC. 31, DEC. 31,
1997 1996, 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Net sales $672,622 $656,602 $609,969
Other 2,874 2,506 3,783
- -------------------------------------------------------------------------------
TOTAL REVENUES 675,496 659,108 613,752
- --------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of products sold 436,174 473,123 466,120
Selling, general and administrative 77,440 67,139 59,445
Amortization of intangible assets 8,574 8,181 9,626
Interest 38,312 39,625 40,451
Minority interests (34) (12) (1,374)
Write downs/sale of business
(Note 3 and 13) --- --- 16,870
- --------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 560,466 588,056 591,138
- --------------------------------------------------------------------------------
Earnings before income taxes 115,030 71,052 22,614
Income taxes (Note 6) 45,100 28,150 13,040
- --------------------------------------------------------------------------------
NET EARNINGS $69,930 $42,902 $9,574
================================================================================
NET EARNINGS PER COMMON SHARE, BASIC $1.72 $1.00 $.22
================================================================================
NET EARNINGS PER COMMON SHARE, DILUTED $1.69 $1.00 $.22
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 20
VALASSIS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL FOREIGN TOTAL
COMMON PAID-IN ACCUMULATED TREASURY CURRENCY STOCKHOLDERS'
(IN THOUSANDS) STOCK CAPITAL DEFICIT STOCK TRANSLATION DEFICIT
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1994 $433 $39,566 $(359,031) $--- $--- $(319,032)
Net earnings 9,574 9,574
Exercise of stock
options 24 24
Foreign currency
translation 160 160
- ------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1995 433 39,590 (349,457) --- 160 (309,274)
Net earnings 42,902 42,902
Stock repurchase (21,550) (21,550)
Exercise of stock
options 1 851 852
Stock grants 896 896
Foreign currency
translation (420) (420)
- ------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1996 434 41,337 (306,555) (21,550) (260) (286,594)
Net earnings 69,930 69,930
Share repurchase (91,490) (91,490)
Exercise of stock
options 10 22,299 22,309
Stock Grants 1 1,500 1,501
Foreign currency
translation 114 114
Capital contribution 7,263 7,263
- ------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1997 $445 $72,399 $(236,625) $(113,040) $(146) $(276,967)
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 21
VALASSIS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED
- ------------------------------------------------------------------------------------------
(in thousands) DEC. 31, DEC. 31, DEC. 31
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $69,930 $42,902 $9,574
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 6,798 6,864 9,251
Amortization of intangibles and bond discount 8,757 8,334 9,733
Provision for losses on accounts receivable 900 600 675
(Gain)/loss on sale of property, plant and
equipment (157) 54 82
Deferred income taxes (128) 1,778 (3,202)
Minority interest (489) 129 (1,374)
Write-down of assets --- --- 15,920
Changes in assets and liabilities
which increase (decrease) cash flow:
Accounts receivable 10,164 (8,918) (21,659)
Inventories (5,870) 7,282 (6,206)
Prepaid expenses and other (2,605) 1,755 (732)
Other assets 2,956 (378) 1,252
Accounts payable (8,025) (4,685) 133
Accrued interest and expenses 2,487 872 1,957
Income taxes (1,896) 1,221 980
Progress billings 1,005 8,025 9,776
- ------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 13,897 22,933 16,586
- ------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $83,827 $65,835 $26,160
==========================================================================================
</TABLE>
<PAGE> 22
VALASSIS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW, CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED
- ------------------------------------------------------------------------------------------
(in thousands) DEC. 31, DEC. 31, DEC. 31
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment $(13,023) $(7,104) $(6,530)
Proceeds from sale of property, plant and
equipment 969 255 207
Purchase of McIntyre & Dodd --- --- (6,575)
Sale of Valcheck --- --- 950
Contribution to Valcheck by minority shareholder --- --- 846
Foreign currency translation 114 (420) 160
Capital contribution 7,263 --- ---
- ------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (4,677) (7,269) (10,942)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 23,810 1,748 24
Repurchase of common stock (91,490) (21,550) ---
Repayments on long-term debt (36,205) (13,000) (2,000)
- ------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (103,885) (32,802) (1,976)
- ------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents (24,735) 25,764 13,342
Cash and cash equivalents at beginning of the year 60,172 34,408 21,166
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $35,437 $60,172 $34,408
==========================================================================================
Supplemental disclosure of cash flow information:
- ------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR INTEREST $39,280 $39,984 $40,781
==========================================================================================
CASH PAID DURING THE YEAR FOR INCOME TAXES $47,124 $25,151 $15,171
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 23
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 segment 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 fiscal periods ending in 1995, 1996, or 1997.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Valassis
Communications, Inc. and its majority- owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
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
generally accepted accounting principles 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 stated at the lower of cost or market (net realizable value).
Cost has been determined by the last-in, first-out (LIFO) method for the
material component which represents 80% and 76% of total inventory at
December 31, 1997 and December 31, 1996, respectively. As a result of decreases
in material costs compared to prior years, LIFO inventories at December 31, 1997
and 1996 were written down by $672,000 and $1,701,000, respectively, which
represents the excess of LIFO costs over market.
During 1996, inventory quantities were reduced, resulting in a liquidation of
LIFO inventory quantities carried at higher costs prevailing in prior years, as
compared with the cost of 1996 purchases; the effect of which decreased net
income by approximately $1,402,000 for the year ended December 31, 1996.
ADVERTISING
The Company expenses the cost of advertising as incurred, except for Valcheck's
direct-response advertising, which was capitalized and amortized over its
expected period of future benefits. Direct-response advertising consisted of
the costs of direct mail order forms in FSI newspaper inserts. The capitalized
costs were amortized over a three-month period following the distribution date
of the insert. The assets and operations of Valcheck were sold during 1995.
Advertising expense for the years ended December 31, 1997, 1996 and 1995 was
$1,614,000, $180,000 and $5,037,000, respectively.
<PAGE>
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost. Expenditures and improvements
which 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. 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 - 10 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 5 to 20 years. Fully amortized
intangible assets are removed from the cost and accumulated amortization
accounts. The Company adopted SFAS No. 121, "Accounting for Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" in 1995. 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. The effects of the
adoption of SFAS No. 121 are discussed in Note 3.
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 expected
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.
EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share", at December 31, 1997,
the statement requires presentation of both basic and diluted earnings per share
and has been applied to all prior-period EPS data. The calculation of earnings
per share is discussed in Note 14.
<PAGE>
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Financial instruments which 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 ($30.6 million and
$56.6 million at December 31, 1997 and 1996, respectively) with high credit
quality financial institutions. The carrying value of the cash and temporary
investments approximates fair value. 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 an excess of fair market
value over stated value of $35.3 million and $17.6 million at December 31, 1997
and 1996, respectively. 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 shareholders' 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.
(3) INTANGIBLE ASSETS (dollars in thousands)
Intangible assets, which arose from the 1986 acquisition of specific net assets
from GFV Communications, Inc., and its related affiliates, consist of the
following:
<TABLE>
<CAPTION>
REMAINING
AMORTIZABLE
ORIGINAL UNAMORTIZED UNAMORTIZED LIFE IN
AMORTIZABLE INTANGIBLE BALANCE AT BALANCE AT YEARS AT
INTANGIBLE LIFE IN ASSETS, AT COST DEC. 31, 1996 DEC. 31, 1997 DEC. 31, 1997
ASSETS YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Goodwill 15 - 20 $68,594 $26,716 $24,035 9 to 12
The Valassis name
and other 20 32,100 15,916 14,312 9.0
Pressroom
operating
systems 13.375 50,000 12,088 8,328 2.375
Other 5 - 20 1,287 1,184 597 up to 9.67
- -----------------------------------------------------------------------------------------
$151,981 $55,904 $47,272
=========================================================================================
</TABLE>
<PAGE> 24
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Valassis adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets" in the fourth quarter of 1995. SFAS No. 121 requires impairment losses
to be recorded on long-lived assets when indicators of impairment are present.
It was determined based on undiscounted projected cash flows currently estimated
to be generated by Valassis of Canada, that the carrying amount of goodwill was
overstated and a write-down of $6.2 million was recorded. The writedown was
related to the deterioration of pricing in the Canadian FSI market and in the
mail order business.
In addition, as a result of the Company's decision to discontinue its in-store
division, goodwill of $5.3 million associated with that business was also
written down in fiscal year 1995.
(4) LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
(in thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Credit Facility $ ---- $ ----
GAPP Debt Facility ---- 10
8 3/8% Senior Notes due 1997 ---- 7,290
8 7/8% Senior Notes due 1999 6,146 6,142
9 3/8% Senior Subordinated Notes due 1999 106,031 134,833
9.55% Senior Notes due 2003 254,898 254,880
- -----------------------------------------------------------------------------
367,075 403,155
Less current portion ---- 7,290
- -----------------------------------------------------------------------------
$367,075 $395,865
=============================================================================
</TABLE>
Minimum long-term debt maturities are approximately $112 million in 1999 and
$255 million in 2003.
<PAGE> 25
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CREDIT FACILITY
The Company has a $40 million Revolving Credit Agreement with Comerica Bank,
Harris Trust and Savings Bank, and The Long-Term Credit Bank of Japan, Ltd.
Chicago Branch (collectively, the "Banks") with Comerica acting as Agent for the
Banks. The Agreement matures on September 11, 2000. The floating-rate interest
is calculated on either a Eurocurrency-based rate or a prime rate.
There were no amounts outstanding on the Revolving Line at December 31, 1997 or
1996.
The Banks have a first-priority security interest in all of VCI's, and its
subsidiaries', real and personal property.
The Credit Facility requires the Company to meet certain financial covenants. At
December 31, 1997, under the most restrictive covenant, VCI would have been able
to declare a dividend up to $12,500,000. In addition, the Credit Facility
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, provide guarantees, pay
dividends and make other distributions, make acquisitions, engage in trans-
actions 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 substantial-
ly similar lines of business, and to enter into certain sales and leaseback
transactions.
PUBLIC DEBT
The Public Debt consisting of Senior Notes due on March 15, 1999, and Senior
Subordinated Notes due March 15, 1999, was issued under indentures dated March
15, 1992. All of the Senior Notes are general unsecured obligations of VCI and
rank on a parity in right of payment with all other Senior Indebtedness of VCI.
The Senior Subordinated Notes are general unsecured obligations of VCI and are
subordinated to all Senior Indebtedness of VCI. Interest is payable on the 2003
Senior Notes semiannually on June 1 and December 1 of each year and on March 15
and September 15 of each year, for the remaining public debt.
The stated amount of the Public Debt at December 31, 1997 is as follows:
(in thousands) STATED VALUE
__________________________________________________________________________
8 7/8% Senior Notes Due 1999.................................. 6,150
9 3/8% Senior Subordinated
Notes due 1999............................................... 106,105
9.55% Senior Notes due 2003................................... 255,000
___________________________________________________________________________
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,
1997, the estimated fair market value of the debt was $35.3 million over stated
value. The debt had an estimated excess of fair market value over stated value
of $17.6 million at December 31, 1996. 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 Credit Facility.
<PAGE> 26
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:
<TABLE>
<CAPTION>
YEAR ENDED
- -----------------------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31,
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Profit sharing plan $3,556 $4,067 $3,115
Bonus plans for salaried,
sales and hourly personnel 7,809 7,021 5,535
Bonus plan for executives 2,295 2,295 1,800
</TABLE>
(6) INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components.
<TABLE>
<CAPTION>
YEAR ENDED
- -----------------------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31,
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax income (loss):
United States $115,120 $73,147 $31,611
Foreign (90) (2,095) (8,997)
- -----------------------------------------------------------------------------
$115,030 $71,052 $22,614
=============================================================================
<PAGE> 27
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income taxes have been charged to earnings as follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
- -----------------------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31,
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $41,048 $23,953 $14,901
Deferred (credit)/provision (128) 1,778 (3,111)
State and Local 4,180 2,419 1,250
- -----------------------------------------------------------------------------
$45,100 $28,150 $13,040
=============================================================================
</TABLE>
The actual income tax expense differs from expected amounts computed by applying
the U.S. federal income tax rate to earnings before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
- -----------------------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31,
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Expected income tax expense $40,261 $24,868 $7,915
Increase (decrease) in taxes
resulting from:
Tax effect of non-deductible
foreign losses (347) 733 2,948
Amortization of intangibles 1,500 1,500 1,500
State and local income taxes,
net of federal benefit 2,717 1,572 813
Other items, net 969 (523) (136)
- ----------------------------------------------------------------------------------------
ACTUAL INCOME TAX EXPENSE $45,100 $28,150 $13,040
========================================================================================
</TABLE>
<PAGE> 28
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The sources of deferred income taxes and effects of each were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
- -----------------------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31,
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation and amortization $(198) $(689) $(944)
Accrued expenses (63) --- 175
Write-down of assets --- 3,407 (3,407)
Other items, net 133 (940) 1,065
- -----------------------------------------------------------------------------
$(128) $1,778 $(3,111)
=============================================================================
</TABLE>
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31,
(in thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Long term deferred income tax liabilities:
Fixed assets $1,844 $1,826
Intangible assets 439 638
Other 32 101
- -------------------------------------------------------------------------------
TOTAL LONG TERM DEFERRED INCOME TAX LIABILITIES 2,315 2,565
Current deferred income tax assets:
Inventory 547 595
Allowance for uncollectible accounts 410 239
Foreign net operating loss carryforward 708 1,611
Other - net 1,009 1,254
- ------------------------------------------------------------------------------
CURRENT TOTAL DEFERRED INCOME TAX ASSETS 2,674 3,699
Valuation allowance for foreign
net operating loss carryforward (708) (1,611)
- ------------------------------------------------------------------------------
NET CURRENT DEFERRED INCOME TAX LIABILITY $349 $477
==============================================================================
</TABLE>
The Company has foreign net operating loss carryforwards of $1,745,000, of which
$630,000 expires in 2002 and $1,115,000 expires in 2003.
<PAGE> 29
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) COMMITMENTS
Total operating lease rentals, for various office space, charged to expense was
$3,324,000, $3,498,000 and $3,161,000 for the years ended December 31, 1997,
1996 and 1995, respectively. Entire minimum rental payments required under non-
cancelable operating leases as of December 31, 1997, are as follows:
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
____________________________________________________________________
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,704
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,198
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,063
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,349
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,099
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . 18,250
--------------------------------------------------------------------
$32,663
====================================================================
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:
YEAR ENDED BASE SALARY MAXIMUM CASH BONUS
____________________________________________________________________
Dec. 31, 1998 $2,295,000 $2,295,000
Dec. 31, 1999 1,919,375 1,919,375
Dec. 31, 2000 1,000,000 1,000,000
Dec. 31, 2001 1,000,000 ---
Dec. 31, 2002 1,000,000 ---
Thereafter 4,500,000 ---
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
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.
(9) COMMON STOCK
Options granted under the 1992 qualified stock option plan, which authorized the
issuance of a maximum of 3,028,947 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 one to five years from date of grant. In December 1997, the Board
approved a resolution to increase the number of available shares by 750,000 to
3,778,947. However, this is still subject to shareholder approval at the Annual
Meeting to be held May 1998.
At December 31, 1997, there were outstanding options among 116 participants for
the purchase of 2,611,847 shares. At December 31, 1997, there were 75,993 shares
available for grant, pending shareholder approval.
<PAGE> 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, 1997.
<TABLE>
<CAPTION>
YEAR OF NUMBER OF EXERCISE EXPIRATION SHARES EXERCISABLE
GRANT SHARES PRICE DATE AT DEC. 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1992 1,239,426 $17.00 03/18/02 1,239,426
1993 111,544 $17.00 06/17/02 111,544
1994 25,500 $9.75 11/16/03 25,500
1994 20,386 $17.00 11/22/03 20,386
1994 113,079 $17.00 05/10/04 83,079
1995 26,449 $17.00 07/31/05 2
1996 129,419 $17.00 01/01/06 32,849
1996 43,579 $17.00 04/22/06 8,716
1996 45,579 $17.00 05/06/06 9,116
1997 136,886 $21.125 01/01/07 ---
1997 15,000 $22.75 04/24/07 ---
1997 705,000 $30.3125 12/02/07 ---
</TABLE>
A summary of the Company's stock option activity for the years ended
December 31, 1997, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 1996
--------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PER SHARE PER SHARE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,795,532 $16.78 2,681,914 $16.72
Granted 862,386 $28.66 250,544 $17.00
Exercised (1,035,211) $16.60 (53,394) $14.58
Forfeited (10,860) $19.09 (83,532) $17.00
---------- ----------
Outstanding at end of year 2,611,847 $20.77 2,795,532 $16.78
========== ==========
Options exercisable at year end 1,530,618 2,280,641
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995
---------------------------
WEIGHTED
AVERAGE
PER SHARE
SHARES EXERCISE PRICE
---------------------------
<S> <C> <C>
Outstanding at beginning of year 2,662,955 $16.68
Granted 44,079 $17.00
Exercised (2,500) $9.75
Forfeited (22,620) $12.67
----------
Outstanding at end of year 2,681,914 $16.72
==========
Options exercisable at year end 2,140,245
==========
</TABLE>
<PAGE> 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
Statement of Financial Accounting Standards 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
1997, 1996 and 1995, respectively: weighted-average dividend yield of 0%, 0% and
0%, expected volatility of 36%, 34% and 36%, weighted-average risk-free interest
rates of 5.60%, 5.84% and 6.43%, and weighted-average expected lives of 5.8, 5.9
and 6.5 years.
The weighted average per share fair value of options granted during 1996 and
1995 was $6.84 and $6.09, respectively, for options granted at greater than
market value. No such options were granted in 1997. The weighted average per
share fair value of options granted at market value was $12.66 in 1997 and
$7.07 in 1996. No such options were granted in 1995.
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 income and earnings per share follows (in thousands except for
earnings per share information):
1997 1996 1995
------- ------- ------
Pro forma net income $68,872 $42,409 $9,535
Pro forma earnings
per share $1.69 $.99 $.22
The pro forma effects in 1997, 1996 and 1995 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 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
200,000 shares of restricted stock have been reserved for this plan. Pursuant to
an employment agreement between the Company and its Chief Operating Officer,
Alan F. Schultz, 7,500 shares of restricted stock have been or will be issued to
Mr. Schultz annually in January 1996, 1997, 1998 and 1999, 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
<PAGE> 32
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $207,000 and $74,000 for the years ended December 31, 1997 and
1996, respectively. In addition, several executives received restricted stock
grants totaling 23,000 shares and 36,500 shares in 1997 and 1996, respectively,
vesting over a three-year period. The related expenses will be recognized over
the vesting period and was approximately $373,000 and $212,000 for the years
ended December 31, 1997 and 1996, respectively. Also during 1997 and 1996, one-
half of the total payments to the five outside directors, was paid in
restricted stock from this plan, with a total value of $83,000 and $40,000,
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 in 1997 and 15% in 1996. The Company's
contribution is made in the form of restricted stock with a one-year transfer
restriction and vesting. The value of the Company's stock contributed by the
Company and expensed for the year ended December 31, 1997 totaled approximately
$204,000 and $56,000 for 1996.
EXECUTIVE RESTRICTED STOCK PLAN
The Executive Restricted Stock Plan provides for the grant of restricted stock,
with one-year vesting, to certain executive officers. Currently, the Company's
Chief Executive Officer, David A. Brandon, is the only executive eligible to
receive restricted stock under this plan. The maximum number of restricted
shares which may be issued under this plan is 250,000, provided that not more
than 60% of such shares are awarded to any one participant. Pursuant to an
employment agreement between the Company, and Mr. Brandon, Mr. Brandon is
eligible to receive 30,000 shares of restricted stock each year beginning with
1996 through 2000, if 70% or more of the year's performance target, set by the
Compensation/Stock Option Committee, is met. The remaining 100,000 shares are
undesignated as of December 31, 1997. Compensation expense is recognized over
the vesting period and is dependent on the market value of stock at the end of
each quarter. Pre-tax compensation expense related to the plan for year ended
December 31, 1997 and 1996 was approximately $922,000 and $266,000,
respectively.
401(K) PLAN
The Company has also amended its 401(k) Plan to include a 25% match in 1997 and
a 15% match in 1996, 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, 1997
and 1996 was approximately $148,000 and $47,000, 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.
(12) ACQUISITIONS
On March 28, 1995, the Company, through an indirectly wholly-owned subsidiary,
purchased 100% of the capital stock of McIntyre & Dodd Marketing, Inc., a print
media company in Canada involved in sales promotion and direct response
marketing. The acquisition was made for $6,575,000 U.S. from available cash and
has been accounted for as a purchase with the acquired operations included in
the consolidated financial statements from the date of acquisition.
<PAGE> 33
VALASSIS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 8, 1994, the Company, through its wholly-owned subsidiary,
Valassis International, Inc., purchased an 80% stockholder interest in
GAPP (Valassis France) for $453,000. The acquisition has been accounted for as a
purchase and resulted in $706,000 of goodwill being recorded. During 1996, the
Company purchased the remaining 20% from the minority shareholder. The Company
discontinued operations of this subsidiary in April 1997.
(13) DISPOSALS
On May 31, 1995, the Company sold substantially all of the assets and operations
of Valcheck, a marketer and printer of personal checks, to Artistic Greetings
Incorporated in exchange for 500,000 shares of Artistic common stock valued at
$2,100,000 and a portion of revenues received by Artistic from advertising
previously placed by Valcheck. The sale resulted in a pretax loss of $950,000.
An 80% interest of Valcheck's operations and assets was originally acquired by
the Company on July 8, 1994.
The Company decided at the end of 1995 to discontinue its Valassis In-Store
Marketing division and wrote off certain assets, which consisted principally of
goodwill, in-store LED signs, and related computer hardware and software, and
accrued the estimated cost of removing the equipment from the stores. This
resulted in a pretax charge of $9.7 million in 1995. This division accounted
for $.8 million and $8.1 million in revenues in 1996 and 1995, respectively.
Losses before cost of discontinuing the business were $.3 million and $1.9
million for the years ended December 31, 1996 and 1995, respectively. Valassis
In-Store Marketing, Inc. was dissolved on March 3, 1997.
The Company discontinued operations of its joint venture, Valassis de Mexico and
exited this business during the first quarter of 1997. The effect on earnings of
the disposal of this business was immaterial. In addition, the Company
discontinued operations of Valassis France, the effect of which was also not
material.
(14) EARNINGS PER SHARE
Earnings per common share ("EPS") data were computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(in thousands except for share amounts) 1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Net earnings $69,930 $42,902 $9,574
=============================
Basic EPS:
Weighted average common shares outstanding 40,691 42,889 43,302
=============================
Net earnings per common share, basic $1.72 $1.00 $0.22
=============================
Diluted EPS:
Weighted average common shares outstanding 40,691 42,889 43,302
Shares issued on exercise of dilutive options 2,604 2,796 103
Shares purchased with proceeds of options (2,002) (2,737) (76)
Shares contingently issuable 15 23 ---
Shares applicable to diluted earnings 41,308 42,971 43,329
-----------------------------
Net earnings per common share, diluted $1.69 $1.00 $0.22
=============================
</TABLE>
<PAGE> 34
Unexercised employee stock options to purchase 705,000 and 2,579,000 of the
Company's common stock as of December 31, 1997 and 1995, 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. There were no such dilutive options as of December 31,
1996. Subsequent to December 31, 1997, the Company has repurchased in excess of
1.4 million of its common shares.
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Valassis Communications, Inc.
Livonia, Michigan
We have audited the accompanying consolidated balance sheet of Valassis
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1997
and the related consolidated statements of income, stockholders' deficit, and
cash flows for the year then ended. Our audit 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
the consolidated financial statements and financial statement schedule based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, such 1997 consolidated financial statements present fairly
in all material respects, the financial position of Valassis Communications,
Inc. and subsidiaries at December 31, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles. 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 10, 1998
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Valassis Communications, Inc.
We have audited the accompanying consolidated balance sheet of Valassis
Communications, Inc. as of December 31, 1996 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
the years ended December 31, 1996 and 1995. Our audits also included the 1996
and 1995 financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Valassis Communications, Inc. at December 31, 1996, and the consolidated
results of its operations and its cash flows for the years ended December 31,
1996 and 1995, in conformity with generally accepted accounting principles.
Also in our opinion, the related 1996 and 1995 financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Detroit, Michigan
February 10, 1997
<PAGE> 37
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Disclosure responsive to this item has been previously reported (as
that term is defined under the Securities Exchange Act of 1934, as amended) in
the Company's Current Report on Form 8-K dated September 30, 1997.
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 the Item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement, 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 incorporated herein by reference
to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement.
<PAGE> 38
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, 1997 and 1996.
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1997, 1996 and 1995.
Consolidated statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
Independent Auditors' Reports
2. Financial Statement Schedules. The following consolidated financial
statement schedule of Valassis Communications, Inc. for the year
ended December 31, 1997, 1996 and 1995.
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 by the Company during the fiscal
quarter ended December 31, 1997.
<PAGE> 39
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/David A. Brandon March 25, 1998
----------------------------- -----------------
David A. Brandon 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/David A. Brandon Chairman of the Board of Directors, March 25, 1998
- -------------------- President and Chief Executive Officer
(Principal Executive Officer)
/s/Larry L. Johnson Director March 25, 1998
- --------------------
s/Mark C. Davis Director March 25, 1998
- --------------------
/s/Jon M. Huntsman, Jr. Director March 25, 1998
- --------------------
/s/Brian M. Powers Director March 25, 1998
- --------------------
/s/Robert L. Recchia Chief Financial Officer and Director March 25, 1998
- -------------------- (Principal Financial and
Accounting Officer)
/s/Alan F. Schultz Chief Operating Officer March 25, 1998
- -------------------- and Director
/s/Faith Whittlesey Director March 25, 1998
- -------------------
<PAGE> 40
Schedule II
VALASSIS COMMUNICATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED BALANCE
BALANCE AT TO AT
BEGINNING COSTS AND DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES (1) PERIOD
- ------------------------------------ ----------- ---------- ----------- ---------
<S> <C> <C> <C>
Allowance for doubtful
accounts (deducted from
accounts receivable):
Year Ended December 31, 1997 . . . $684 $900 $413 $1,171
Year Ended December 31, 1996 . . . 810 600 726 684
Year Ended December 31, 1995 . . . 1,162 675 1,027 810
</TABLE>
(1) Accounts deemed to be uncollectible.
S-2
<PAGE> 41
EXHIBIT INDEX
Exhibit
Number Page
- ---------
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)
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)
10.1 Form of Indenture between Valassis Communications, Inc. and
The Bank of New York, as trustee, relating to the 8-3/8%
Senior Notes due 1997 (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement No. 33-45285)
10.1(a) First Supplemental Indenture dated as of March 31, 1993
(incorporated by reference to Exhibit 10.1(a) to the Company's
1993 Form 10-K)
10.2 Form of Indenture between Valassis Communications, Inc. and
The Bank of New York, as trustee, relating to the 8-7/8%
Senior Notes due 1999 (incorporated by reference to Exhibit
4.3 to the Company's Registration Statement No. 33-45285)
10.2(a) First Supplemental Indenture dated as of March 31, 1993
(incorporated by reference to Exhibit 10.2(a) to the Company's
1993 Form 10-K)
10.3 Form of Indenture between Valassis Communications, Inc. and
The Bank of New York, as trustee, relating to the 9-3/8%
Senior Subordinated Notes due 1999 (incorporated by reference
to Exhibit 4.2 to the Company's Registration Statement No. 33-
45285)
10.3(a) First Supplemental Indenture dated as of March 31, 1993
(incorporated by reference to Exhibit 3 to the Company's Form
8-K dated as of March 31, 1993)
10.4 Credit Agreement dated as of March 6, 1992 (the "Credit
Facility"), among Valassis Communications, Inc., the
institutions named therein, the institutions named therein as
issuing banks, CitiCorp USA, Inc., as agent and administrative
agent, and Westpac Banking Corporation, as agent (incorporated
by reference to Exhibit 10.3 to the Company's Registration
Statement No. 33-45189)
<PAGE> 42
10.4(a) Amended and Restated Amendment No. 1 to the Credit Facility,
dated as of March 6, 1992 (incorporated by reference to
Exhibit 10.3(a) to the Company's Registration Statement No.
33-45189)
10.4(b) Amendment No. 2 to the Credit Facility, dated as of May 15,
1992 (incorporated by reference to Exhibit 10.3(b) to the 1992
Form 10-K)
10.4(c) Amendment No. 3 to the Credit Facility, dated as of June 10,
1992 (incorporated by reference to Exhibit 10.3(c) to the 1992
Form 10-K)
10.4(d) Amendment No. 4 to the Credit Facility, dated as of August 24,
1992 (incorporated by reference to Exhibit 10.3(d) to the 1992
Form 10-K)
10.4(e) Amended and Restated Credit Agreement dated as of March 31,
1993 (incorporated by reference to Exhibit 10.3(e) to the
Company's 1993 Form 10-K)
10.4(f) Amendment No. 1 to the Amended and Restated Credit Agreement
dated as of July 26, 1993 (incorporated by reference to
Exhibit 10.3(f) to the Company's 1993 Form 10-K)
10.4(g) Amended and Restated Credit Agreement dated as of December 29,
1993 (incorporated by reference to Exhibit 10.4(g) to the
Company's 1994 Form 10-K)
10.4(h) Amendment No. 4 to the Amended and Restated Credit Agreement
dated as of December 29, 1993 (incorporated by reference to
Exhibit 10.4(h) to the Company's Form 10-K for the transition
period July 1, 1994 to December 31, 1994)
10.5* Employment Agreement, dated January 20, 1992, among David A.
Brandon, Valassis Communications, Inc. and Valassis Inserts,
Inc. (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement No. 33-45189)
10.5(a)* Amendment To Employment Agreement and Non Qualified Stock
Option Agreement of David A. Brandon dated as of June 18, 1993
(incorporated by reference to Exhibit 10.4(a) to the Company's
1993 Form 10-K)
10.5(b)* Amendment to Employment Agreement and Non Qualified Stock
Option Agreement of David A. Brandon dated as of July 9, 1995
(incorporated by reference to Exhibit 10.5(b) to the Company's
1995 Form 10-K)
10.5(c)* Amendment to Employment Agreement of David A. Brandon dated as
of December 22, 1995 (incorporated by reference to Exhibit
10.5(c) to the Company's 1995 Form 10-K)
<PAGE> 43
10.6* 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)
10.6(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)
10.6(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)
10.7* 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)
10.7(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)
10.7(b)* Amendment to Employment Agreement and Non-Qualified Stock
Option Agreement of Barry P. Hoffman dated December 12, 1997
10.8 1992 Long-Term Incentive Plan, as amended (incorporated by
reference to Exhibits 4.1 and 4.2 to the Company's Form S-8
filed on February 17, 1993, No. 33-59670)
10.8(a) Third Amendment of 1992 Long-Term Incentive Plan (incorporated
by reference to Exhibit D of the Company's Proxy Statement
dated as of April 26, 1996
10.9 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)
10.9(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)
10.10 Valassis Inserts, Inc. Employees' Profit Sharing Plan
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement No. 33-45189)
10.10(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)
10.11 Tax Sharing Agreement, dated as of December 31, 1991, among
CII Holdings Group, Inc. and each of its U.S. subsidiaries and
Valassis Communications, Inc. (incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement No. 33-
45189)
<PAGE> 44
10.12 Access Agreement, dated as of December 31, 1991, among
Valassis Communications, Inc., Consolidated Press Holdings
Limited and certain of its affiliates (incorporated by
reference to Exhibit 10.11 to the Company's Registration
Statement No. 33-45189)
10.13 Consolidated Federal Income Tax Liability Allocation
Agreement, dated July 1, 1989, between Valassis
Communications, Inc. and certain subsidiaries (incorporated by
reference to Exhibit 10.13 to the Company's Registration
Statement No. 33-45189)
10.14 Valassis Inserts, Inc. Plant Employees Pension Plan
(incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement No. 33-45189)
10.15* Employment Agreement among Richard N. Anderson, Valassis
Communications, Inc. and Valassis Inserts, Inc. (incorporated
by reference to Exhibit 10.16 to the Company's Registration
No. 33-45189)
10.15(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)
10.15(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)
10.16* 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)
10.16(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)
10.16(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)
10.17 Valassis Communications, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.17 to the 1992 Form
10-K)
10.18* Valassis Communications, Inc. Non-Employee Directors' Stock
Compensation Plan (incorporated by reference to Exhibit 4.3 to
the Company's Form S-8 filed on February 17, 1993, No. 33-
59670)
<PAGE> 45
10.19* Senior Executive Annual Bonus Plan (incorporated by reference
to Exhibit A to the Company's Proxy Statement dated October
24, 1994
10.19(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.
10.20 Conpress Stock Option Agreement (incorporated by reference to
Exhibit 10.20 to the Company's June 30, 1996 Form 10-Q)
10.21 Lease for New Headquarters Building (incorporated by reference
to Exhibit 10.21 to the Company's June 30, 1996 Form 10-Q)
10.22 Revolving Credit Agreement dated as of August 11, 1995
(incorporated by reference to Exhibit 10.25(a) to the
Company's Registration Statement No. 333-28685)
10.23 First Amendment to Revolving Credit Agreement dated as of
December 15, 1995 (incorporated by reference to Exhibit
10.26(b) to the Company's Registration Statement No. 333-
28685)
10.24 Amendment Number 2 to Revolving Credit Agreement dated as of
May 20, 1996 (incorporated by reference to Exhibit 10.26(b) to
the Company's Registration Statement No. 333-28685)
10.25 Waiver to Revolving Credit Agreement dated as of June 23, 1995
(incorporated by reference to Exhibit 10.26(b) to the
Company's Registration Statement No. 333-28685)
10.26 Executive Restricted Stock Plan (incorporated by reference to
Exhibit A to the Company's Proxy Statement dated April 25,
1996)
10.27 First Amendment of Executive Restricted Stock Plan
(incorporated by reference to Exhibit A to the Company's Proxy
Statement dated April 25, 1996)
10.28 Employee and Director Restricted Stock Award Plan
(incorporated by reference to Exhibit B to the Company's Proxy
Statement dated April 25, 1996)
10.29 Employee Stock Purchase Plan (incorporated by reference to
Exhibit C to the Company's Proxy Statement dated April 25,
1996)
10.30 Form of Registration Rights Agreement between the Company and
the Selling Stockholder (incorporated by reference to Exhibit
10.18 to the Company's Registration Statement No. 333-28685)
10.31 Assignment of Stock Option Agreement dated June 5, 1997 among
Conpress Cayman, LDC, Consolidated Press International
(Netherlands Antilles) N.V. and the Company (incorporated by
reference Exhibit 10.19 to the Company's Registration
Statement No. 333-28685)
<PAGE> 46
21.1 Subsidiaries of Valassis Communications, Inc.
23.1 Consent of Independent Auditors
23.2 Consent of Independent Auditors
27.0 Financial Data Schedule
*Constitutes a management contract or compensatory plan or arrangement.
<PAGE> 47
EXHIBIT 21.1
Subsidiaries of Valassis Communications, Inc.
VCI Enterprises, Inc.
VCI Properties, Inc.
Valassis Direct Response, Inc.
Valassis International, Inc.
Destination Marketing Group, Inc.
Blue Streak, Inc.
Promotion Watch, Inc.
<PAGE> 48
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our report dated February 10,
1998, appearing in this Annual Report on Form 10-K of Valassis Communications,
Inc. for the year ended December 31, 1997 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-8 333-022 1992 Long-Term Incentive Plan
Form S-8 333-024 Employees' 401(k) Retirement Savings Plan
Employee Stock Purchase Plan
Employee and Director Restricted Stock Award Plan
Executive Restricted Stock Award Plan
DELOITTE & TOUCHE LLP
Detroit, Michigan
March 26, 1998
<PAGE> 49
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-59670) pertaining to the Valassis Communications, Inc. 1992
Long-Term Incentive Plan and the Valassis Communications, Inc. 1992 Non-
Employee Directors' Stock Compensation Plan, in the Registration Statement
(Form S-8 No. 333-022) pertaining to the Valassis Communications, Inc. 1992
Long-Term Incentive Plan, in the Registration Statement (Form No. 333-024)
pertaining to the Valassis Communications, Inc. Employees' 401(k) Retirement
Savings Plan, the Valassis Communications, Inc. Employee Stock Purchase Plan,
the Valassis Communications, Inc. Employee and Director Restricted Stock
Award Plan and the Valassis Communications, Inc. Executive Restricted Stock
Award Plan and in the Registration Statement (Form S-3 No. 33-83640) and in
the related Prospectus of our report dated February 10, 1997, with respect to
the 1996 and 1995 consolidated financial statements and schedule of Valassis
Communications, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1997.
ERNST & YOUNG LLP
Detroit, Michigan
March 23, 1998
<PAGE> 50
AMENDMENT
TO
EMPLOYMENT AGREEMENT
AND
NON-QUALIFIED STOCK OPTION AGREEMENT
This AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made
December 12, 1997 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 January 2, 1996
(the "Employment Agreement");
WHEREAS, the Corporation entered into a NON-QUALIFIED STOCK OPTION
AGREEMENT with the Executive effective on March 18, 1992, as amended
February 11, 1992 (the "Option Agreement"); and
WHEREAS, the Corportion and the Executive desire to amend the Employment
Agreement and the Option Agreement to extend the term of employment under 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 the consummation date (the
"Effective Date") of the initial public offering of the common stock of VCI (the
"IPO") and shall continue until the close of business on June 30, 1999."
2. All other terms of the Employment Agreement and the Option Agreement
shall remain in full force and effect.
3. This instrument, together with the Employment Agreement and the
Option Agreement, contains the entire agreement of the parties with respect to
the subject matter hereof. The amendments to the Employment Agreement and the
Option Agreement contained in this Amendment shall be effective from and after
January 1, 1997.
<PAGE> 51
IN WITNESS WHEREOF, the Executive and the Corporation have caused this
Agreement to be executed as of the day and year first above written.
VALASSIS COMMUNICATION, INC.
By: __________________________________
Name: ________________________________
Title: _______________________________
/s/ Barry P. Hoffman
_____________________________________
Barry P. Hoffman
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