Exhibit 99.4
Unaudited Pro Forma Condensed Combined Financial Information
The unaudited pro forma condensed combined financial statement information set forth below is presented to reflect the pro forma effects of the following transactions (collectively, the “Transactions”) as if they occurred on the dates indicated:
| • | The March 2, 2007 merger of a wholly-owned subsidiary of Valassis Communications, Inc. (“Valassis”) into ADVO, Inc. (“ADVO”) in exchange for an amount in cash equal to $ 33.02 for each outstanding share of ADVO’s common stock; |
• | Valassis’ concurrent sale of $540.0 million of 8 1/4% Senior Notes due 2015; |
| • | Valassis’ concurrent entering into a new $ 870.0 million senior secured credit facility; |
| • | the repayment of all existing ADVO debt; |
| • | the payment of related fees and expenses; and |
| • | the use of the proceeds from the sale of the notes’ together with a portion of Valassis’ available cash and initial borrowings under Valassis’ new senior secured credit facility. |
The unaudited pro forma condensed combined statement of income for the year ended December 31, 2006 gives effect to the Transactions as if they occurred on January 1, 2006. The unaudited pro forma condensed combined statement of income for the year ended December 31, 2006 was derived by (A) adding financial results from (i) Valassis’ historical audited consolidated statement of income for the year ended December 31, 2006, which is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the United States Securities and Exchange Commission (the “SEC”) on February 13, 2007, as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on February 28, 2007, (ii) ADVO’s historical audited consolidated statement of operations for the year ended September 30, 2006, which is filed as Exhibit 99.3 to this Current Report on Form 8-K/A; and (iii) ADVO’s unaudited consolidated statement of operations for the three months ended December 30, 2006, which is filed as Exhibit 99.2 to this Current Report on Form 8-K/A, and (B) subtracting financial results from ADVO’s unaudited consolidated statement of operations for the three months ended December 24, 2005, which is filed as Exhibit 99.2 to this Current Report on Form 8-K/A, and gives effect to the unaudited pro forma adjustments necessary to account for the Transactions.
The unaudited pro forma condensed combined balance sheet as of December 31, 2006 has been prepared as if the Transactions occurred on December 31, 2006. The unaudited pro forma condensed combined balance sheet as of December 31, 2006 combines Valassis’ historical audited consolidated balance sheet as of December 31, 2006, which is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC on February 13, 2007, as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on February 28, 2007, and ADVO’s historical unaudited consolidated balance sheet as of December 30, 2006, which is filed as Exhibit 99.2 to this Current Report on Form 8-K/A, and gives effect to the unaudited pro forma adjustments necessary to account for the Transactions.
The ADVO acquisition is being accounted for under the purchase method of accounting in accordance with accounting principles generally accepted in the United States. Accordingly, ADVO’s operating results have been included in Valassis’ operating results since the closing of the transaction on March 2, 2007.
The pro forma adjustments related to the ADVO acquisition are based on an analysis of intercompany revenues and associated costs, estimated interest expense and income taxes. In addition, Valassis performed an assessment of purchase price allocations by identifying intangible assets and estimating the fair market value of intangible and tangible assets, including mailing lists, customer contracts, customer relationships, trademarks/tradenames, property and equipment. Valassis also made adjustments to certain tax assets and liabilities and accrued expenses. Differences between the preliminary and final purchase price allocations could have a material impact on the accompanying unaudited pro forma condensed combined financial statement information and Valassis’ future results of operations and financial position. A final determination of the purchase price allocation, which is still in progress, will be based on actual, tangible and identifiable intangible assets of ADVO that existed on the date of completion of the merger.
The unaudited pro forma condensed combined financial statement information is based on, and should be read together with: (1) Valassis’ consolidated financial statements as of and for the year ended December 31, 2006, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 filed with the SEC on February 13, 2007, as amended by Amendment No. 1 on Form 10-K/A filed with the SEC on February 28, 2007; and (2) ADVO’s consolidated financial statements as of and for the year ended September 30, 2006, which are filed as Exhibit 99.3 to this Current Report on Form 8-K/A, ADVO’s unaudited consolidated financial statements as of and for the three months ended December 30, 2006, which are filed as Exhibit 99.2 to this Current Report on Form 8-K/A, and ADVO’s unaudited consolidated financial statements as of and for the three months ended December 24, 2005, which are filed as Exhibit 99.2 to this Current Report on Form 8-K/A.
The unaudited pro forma condensed combined financial statement information is presented for illustrative purposes only and is not necessarily indicative of the financial position or operating results that would have been achieved had the Transactions occurred on the dates indicated, or of the financial position or results of operations that may be attained by the combined company in the future.
VALASSIS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Year Ended December 31, 2006
| Historical Valassis(1) | “Adapted” ADVO(2) | Merger Adjustments | Valassis Pro Forma | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Revenues | $ | 1,043,491 | $ | 1,469,591 | $ | (8,381 | )(3) | $ | 2,504,701 | |||||||
Costs and expenses: | ||||||||||||||||
Cost of sales | 789,588 | 1,163,215 | (8,381 | )(3) | 1,944,422 | |||||||||||
Selling, general and administrative | 151,914 | 286,999 | 10,360 | (4) | 449,273 | |||||||||||
Total costs and expenses | 941,502 | 1,450,214 | 1,979 | 2,393,695 | ||||||||||||
Earnings from operations | 101,989 | 19,377 | (10,360 | ) | 111,006 | |||||||||||
Other expenses (income): | ||||||||||||||||
Interest expense | 24,749 | 9,965 | 80,382 | (5) | 115,096 | |||||||||||
Other income, net | (6,298 | ) | (3,598 | ) | — | (9,896 | ) | |||||||||
Total other expenses (income) | 18,451 | 6,367 | 80,382 | 105,200 | ||||||||||||
Earnings (loss) before income taxes | 83,538 | 13,010 | (90,742 | ) | 5,806 | |||||||||||
Income taxes (benefit) | 32,256 | 3,482 | (36,297 | )(6) | (559 | ) | ||||||||||
Net earnings | $ | 51,282 | $ | 9,528 | $ | (54,445 | ) | $ | 6,365 | |||||||
Net earnings per common share, basic | $ | 1.07 | $ | 0.30 | $ | 0.13 | ||||||||||
Net earnings per common share, diluted | 1.07 | 0.30 | 0.13 | |||||||||||||
Shares used in computing net earnings per share, basic | 47,757 | 31,446 | (31,446 | ) | 47,757 | |||||||||||
Shares used in computing net earnings per share, diluted | 47,780 | 31,580 | (31,580 | ) | 47,780 | |||||||||||
| (1) | The “Historical Valassis” column represents the consolidated statement of income of Valassis for the fiscal year ended December 31, 2006, as reported in Valassis’ Annual Report on Form 10-K for such period. |
| (2) | Represents the unaudited consolidated statement of operations of ADVO for the twelve months ended December 31, 2006, which is calculated below. |
ADVO 2006 | Subtract: December 24, 2005 | Add: ADVO December 30, | ADVO “Adapted” Twelve Months Ended December 31, 2006 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Revenues | $ | 1,443,537 | $ | 358,225 | $ | 384,279 | $ | 1,469,591 | ||||||||
Costs and expenses: | ||||||||||||||||
Cost of products sold | 1,141,283 | 276,348 | 298,280 | 1,163,215 | ||||||||||||
Selling, general and administrative | 264,361 | 61,229 | 83,867 | 286,999 | ||||||||||||
Total costs and expenses | 1,405,644 | 337,577 | 382,147 | 1,450,214 | ||||||||||||
Earnings from operations | 37,893 | 20,648 | 2,132 | 19,377 | ||||||||||||
Other expenses (income): | ||||||||||||||||
Interest expense | 9,455 | 1,986 | 2,496 | 9,965 | ||||||||||||
Other income, net | (3,627 | ) | (866 | ) | (837 | ) | (3,598 | ) | ||||||||
Total other expenses (income) | 5,828 | 1,120 | 1,659 | 6,367 | ||||||||||||
Earnings before income taxes | 32,065 | 19,528 | 473 | 13,010 | ||||||||||||
Income taxes | 11,268 | 7,557 | (229 | ) | 3,482 | |||||||||||
Net earnings | $ | 20,797 | $ | 11,971 | $ | 702 | $ | 9,528 | ||||||||
2
| (3) | The pro forma adjustment reflects the elimination of intercompany sales between Valassis and ADVO. |
| (4) | Represents amortization of $200.0 million of intangible assets with an average life of 20 years and depreciation related to the fair valuation of fixed assets. However these valuations are preliminary and subject to change based upon completion of Valassis’ final valuation analysis. |
| (5) | The pro forma adjustment reflects amortization of deferred financing fees related to the new issuance of debt in connection with completion of the merger and assumes financing fees will be deferred over the life of the related debt. Valassis used the effective interest rate method to calculate amortization expense. The pro forma adjustment also eliminates the impact of interest expense associated with the ADVO debt. |
| Year Ended December 31, 2006 | ||||
| (Dollars in thousands) | ||||
Amortization of deferred financing fees | $ | 2,610 | ||
Interest expense related to new borrowings | 87,737 | |||
Elimination of interest expense from ADVO debt | (9,965 | ) | ||
Pro forma adjustment to interest expense | $ | 80,382 | ||
| (6) | The pro forma adjustment to income tax was calculated by applying the statutory tax rate to the overall impact of pro forma adjustments. |
3
VALASSIS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of December 31, 2006
| Historical | Merger Adjustments | Valassis Pro Forma | |||||||||||
| Valassis | ADVO | ||||||||||||
| (Dollars in thousands) | |||||||||||||
Assets | |||||||||||||
Current assets: | |||||||||||||
Cash and cash equivalents | $ | 52,619 | $ | 24,790 | $ | 10,570 | (a) | $ | 87,979 | ||||
Auction-rate securities | 102,533 | — | (102,533 | )(b) | — | ||||||||
Accounts receivable, net | 339,079 | 222,554 | 1,029 | (c) | 562,662 | ||||||||
Inventories | 25,834 | 5,231 | — | 31,065 | |||||||||
Prepaid expenses and other | 16,681 | 10,884 | (585 | )(d) | 26,980 | ||||||||
Refundable income taxes | 3,957 | — | — | 3,957 | |||||||||
Deferred income taxes | 1,789 | 16,683 | 4,425 | (e) | 22,897 | ||||||||
Total current assets | 542,492 | 280,142 | (87,094 | ) | 735,540 | ||||||||
Property, plant and equipment, net | 109,386 | 194,404 | 40,437 | (f) | 344,227 | ||||||||
Goodwill | 121,088 | 22,835 | 661,414 | (g) | 805,337 | ||||||||
Other intangibles | 12,321 | — | 316,000 | (g) | 328,321 | ||||||||
Investments | 4,899 | — | — | 4,899 | |||||||||
Other assets | 11,240 | 20,753 | 17,642 | (d) | 49,635 | ||||||||
Total assets | $ | 801,426 | $ | 518,134 | $ | 948,399 | $ | 2,267,959 | |||||
| Historical | Merger Adjustments | Valassis Pro Forma | |||||||||||
| Valassis | ADVO | ||||||||||||
| (Dollars in thousands) | |||||||||||||
Liabilities and Stockholders’ Equity | |||||||||||||
Current liabilities: | |||||||||||||
Current portion, long-term debt | $ | — | $ | 2,500 | $ | (2,500 | )(h) | $ | — | ||||
Accounts payable | 268,834 | 55,626 | — | 324,460 | |||||||||
Federal and state taxes payable | — | 9,496 | 1,369 | (e) | 10,865 | ||||||||
Accrued expenses | 44,128 | 59,417 | 18,735 | (i) | 122,280 | ||||||||
Progress billings | 49,258 | 14,450 | — | 63,708 | |||||||||
Total current liabilities | 362,220 | 141,489 | 17,604 | 521,313 | |||||||||
Long-term debt | 259,931 | 124,103 | 1,005,897 | (h) | 1,389,931 | ||||||||
Other non-current liabilities | 8,195 | 30,359 | — | 38,554 | |||||||||
Deferred income taxes | 3,506 | 13,917 | 133,164 | (e) | 150,587 | ||||||||
Stockholders’ equity | 167,574 | 208,266 | (208,266 | )(j) | 167,574 | ||||||||
Total liabilities and stockholders’ equity | $ | 801,426 | $ | 518,134 | $ | 948,399 | $ | 2,267,959 | |||||
4
| (a) | The pro forma adjustment gives effect to cash sources and uses associated with the ADVO acquisition and the proceeds of the offering of the notes and Valassis’ new senior secured credit facility and repayment of ADVO’s debt. |
Sources: | |||
Proceeds from liquidation of auction rate securities | $ | 102,533 | |
Proceeds from credit facilities borrowings | 590,000 | ||
Proceeds from issuance of senior notes | 540,000 | ||
Total cash sources | $ | 1,232,533 | |
Uses: | |||
Cash outlay for repayment of ADVO revolving credit facility | 2,500 | ||
Cash outlay for repayment of ADVO long-term debt, net of $0.9 million fair value hedge | 124,103 | ||
Cash outlay for purchase of ADVO common shares | 1,060,700 | ||
Cash outlay for fees associated with the issuance of new indebtedness | 19,212 | ||
Transaction-related expenses | 15,448 | ||
Total cash uses | $ | 1,221,963 | |
Pro forma adjustment to cash | $ | 10,570 | |
| (b) | Valassis’ auction-rate securities of $102,533 will be liquidated to partially finance the purchase of ADVO. |
| (c) | Pro forma adjustment to record receivable related to a preacquisition contingency. |
| (d) | Represents the write-off of deferred financing fees of $1,155 related to ADVO’s debt and ADVO equity investment of $1,000, offset by the deferred financing fees related to Valassis’ new debt of $19,212. |
| (e) | Pro forma adjustment to record the tax impact of the purchase accounting entries. |
| (f) | Represents the increase of the book value of property plant and equipment to fair market value. |
5
| (g) | For purposes of this pro forma condensed combined financial information, adjustments have been made to the assets and liabilities reflected on ADVO’s balance sheet to adjust to estimated fair value and record other purchase accounting adjustments. Valassis believes its estimations and underlying assumptions of the initial purchase price allocations and fair values of ADVO’s assets and liabilities provide its current best estimate and are based upon the information available to us at this time. However, these valuations are preliminary and subject to change based upon completion of a final valuation analysis. Additionally, the final purchase price is subject to adjustments. Accordingly, the final amounts may differ from the amounts shown below: |
Cash paid to ADVO | 1,060,700 | ||
Debt assumed | 126,603 | ||
Transaction-related expenses | 15,448 | ||
Total purchase price | 1,202,751 | ||
Book value of ADVO stock holders equity | 208,266 | ||
Purchase price in excess of book value | 994,485 | ||
Allocation of purchase price in excess of book value to ADVO’s identifiable assets and liabilities: | |||
Fair value of receivable related to preacquisition event | 1,029 | ||
ADVO property fair market value adjustment | 40,437 | ||
Fair value of ADVO identifiable intangible assets | 316,000 | ||
Fair value adjustment to ADVO goodwill | (22,835 | ) | |
Fair value of ADVO debt assumed | 126,603 | ||
Accrued expenses for severance and bonuses | (18,735 | ) | |
Write-off ADVO deferred financing fees | (1,155 | ) | |
Taxes payable | (1,369 | ) | |
Write-off of equity investment | (1,000 | ) | |
Deferred tax asset, current | 4,425 | ||
Deferred tax liability, long term | (133,164 | ) | |
Total allocations | 310,236 | ||
Goodwill | 684,249 | ||
Less ADVO goodwill | (22,835 | ) | |
Pro forma adjustment to goodwill | 661,414 | ||
Pro forma adjustment to intangible assets, net | 316,000 | ||
| (h) | The pro forma adjustment reflects the borrowings under the term loan B and issuance of the senior notes offset by the extinguishment of ADVO debt and the repayment of the revolving credit facility as set forth: |
Term loan B | $ | 590,000 | ||
Senior notes | 540,000 | |||
| 1,130,000 | ||||
Less: extinguishment of ADVO long term debt | (124,103 | ) | ||
Pro forma adjustment to long term debt | $ | 1,005,897 | ||
Repayment of ADVO revolving credit facility | $ | (2,500 | ) | |
| (i) | Accrued expenses for severance and bonus payments that were or will be paid after the transaction closed. |
| (j) | The pro forma adjustment eliminates ADVO’s equity upon Valassis purchase of ADVO common equity shares. |
6