FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 30, 2000
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or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 1-11720
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ADVO, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-0885252
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Univac Lane, P.O. Box 755, Windsor, CT 06095-0755
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (860) 285-6100
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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
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As of January 27, 2001 there were 20,272,605 shares of common stock
outstanding.
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended December 30, 2000
Part I - Financial Information
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Page
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Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
December 30, 2000 and September 30, 2000. 2
Consolidated statements of operations -
Three months ended December 30, 2000
and December 25, 1999. 3
Consolidated statements of cash flows -
Three months ended December 30, 2000
and December 25, 1999. 4
Notes to consolidated financial statements. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 7
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. 10
Part II - Other Information
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Item 4. Submission of Matters to a Vote of
Security Holders. 11
Item 5. Other Information. 11
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures 12
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
December 30, September 30,
ASSETS 2000 2000
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Current assets:
Cash and cash equivalents $ 11,481 $ 6,003
Accounts receivable, net 111,872 114,093
Inventories 2,940 3,025
Prepaid expenses and other current assets 6,155 6,192
Investment in deferred compensation plan 13,894 14,546
Deferred income taxes 10,352 10,457
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Total current assets 156,694 154,316
Property, plant and equipment 239,256 231,980
Less accumulated depreciation and amortization (124,317) (120,449)
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Net property, plant and equipment 114,939 111,531
Other assets 29,507 23,330
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TOTAL ASSETS $ 301,140 $ 289,177
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LIABILITIES
Current liabilities:
Current portion of long-term debt $ 10,000 $ 10,000
Notes payable - short term 2,315 --
Accounts payable 33,470 43,674
Accrued compensation and benefits 23,352 27,230
Deferred compensation plan 13,894 14,546
Other current liabilities 47,615 43,649
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Total current liabilities 130,646 139,099
Long-term debt 184,000 180,000
Notes payable - long term 1,715 --
Deferred income taxes 6,114 5,800
Other liabilities 4,863 4,850
STOCKHOLDERS' DEFICIENCY
Series A Convertible preferred stock,
$.01 par value (Authorized 5,000,000
shares, none issued) -- --
Common stock, $.01 par value (Authorized
40,000,000 shares, issued 30,101,578
and 29,908,609 shares, respectively) 301 299
Additional paid-in capital 190,538 185,949
Accumulated deficit (16,726) (31,671)
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174,113 154,577
Less common stock held in
treasury, at cost (197,556) (195,149)
Accumulated other comprehensive income (loss) (2,755) --
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Total stockholders' deficiency (26,198) (40,572)
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TOTAL LIABILITIES & STOCKHOLDERS'
DEFICIENCY $ 301,140 $ 289,177
=========== ===========
See Accompanying Notes.
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ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three months ended
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December 30, December 25,
2000 1999
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Revenues $ 297,541 $ 274,203
Costs and expenses:
Cost of sales 213,000 195,021
Selling, general and
administrative 54,970 54,006
Provision for bad debts 1,093 2,236
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Operating income 28,478 22,940
Interest expense 4,638 3,999
Other expense, net 119 63
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Income before income taxes 23,721 18,878
Provision for income taxes 8,777 6,985
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Net Income $ 14,944 $ 11,893
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Basic earnings per common share $ .75 $ .58
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Diluted earnings per common share $ .73 $ .57
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Weighted average common shares 20,027 20,625
Weighted average diluted shares 20,588 20,774
See Accompanying Notes.
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ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three months ended
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December 30, December 25,
2000 1999
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Net cash provided (used) by operating activities $ 13,268 $ (3,647)
Cash flows from investing activities:
Acquisition of property, plant and equipment (7,795) (3,977)
Proceeds from disposals of property, plant and equipment -- 189
Acquisitions/joint ventures, net of cash acquired (8,255) --
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Net cash used by investing activities (16,050) (3,788)
Cash flows from financing activities:
Revolving line of credit - net 4,000 (23,791)
Proceeds on long-term borrowings -- 30,725
Increase in note payable - net 4,030 --
Payment of debt issue costs -- (2,290)
Proceeds from exercise of stock options 2,637 98
Purchase of common stock for treasury (2,407) (4,631)
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Net cash provided by financing activities 8,260 111
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Increase (decrease) in cash and cash equivalents 5,478 (7,324)
Cash and cash equivalents at beginning of period 6,003 9,341
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Cash and cash equivalents at end of period $ 11,481 $ 2,017
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See Accompanying Notes
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ADVO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three month period ended December 30, 2000 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 29, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto included in ADVO's annual report on Form 10-K for the fiscal
year ended September 30, 2000. Certain reclassifications have been made in the
fiscal 2000 financial statements to conform with the fiscal 2001 presentation.
2. Summary of accounting policies
Derivatives and hedging activities
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and
138 requires companies to recognize all derivatives on the balance sheet at fair
value. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company's interest rate swap agreements are considered 'effective' under SFAS
No. 133 and as a result, changes in the fair value of the agreements are
recorded in current assets or liabilities with the offset amount recorded to
accumulated other comprehensive income (loss) in stockholders' deficiency.
The Company's existing interest rate swap agreements (derivatives) convert a
portion of its floating rate debt to a fixed rate basis through December 2002,
thus limiting substantial risk should interest rates fluctuate. In accordance
with its credit agreement, at December 30, 2000, $100 million of the Company's
outstanding variable rate debt was designated as hedged relating to the interest
rate swap agreements. The Company adopted SFAS No 133, as amended, on October 1,
2000 and recorded an unrealized loss of $1.2 million in accumulated other
comprehensive income (loss), offsetting the fair value of the swap agreements
recorded in other current liabilities.
3. Comprehensive Income
Comprehensive income for a period encompasses net income and all other changes
in a company's equity other than from transactions with the company's owners.
Comprehensive income was $13.3 million for the quarter ended December 30, 2000
which consisted of net income of $14.9 million and the change in the unrealized
loss on the fair value of derivative instruments of $1.6 million.
Accumulated other comprehensive income (loss) at December 30, 2000 consisted of
the following:
Unrealized loss from derivative instruments at adoption
of SFAS No. 133 $ 1.2 million
Change in the fair value of derivative instruments for
the first quarter of fiscal 2001 1.6 million
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Total accumulated other comprehensive income (loss) $ 2.8 million
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ADVO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. Acquisition
On November 2, 2000 the Company announced the acquisition of Mail Marketing
Systems, Inc., ("MMSI") a privately held direct mail advertising company for
$7.3 million, net of $1.7 million cash acquired. The purchase price was
comprised of a $5.0 million cash payment and $4.0 million financed by the owner
of MMSI. The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the results of operations of the acquired company
have been included in the consolidated statements of operations from its
acquisition date. The acquired assets were recorded at their estimated fair
values.
5. Earnings per share
Basic earnings per share excludes common stock equivalents, such as stock
options, and is computed by dividing earnings by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect the
potential dilution that could occur if common stock equivalents, such as stock
options, were exercised.
Three months ended
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December 30, December 25,
2000 1999
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Net income $ 14,944 $ 11,893
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Weighted average common shares 20,027 20,625
Effect of dilutive securities:
Stock options 523 130
Restricted stock 38 19
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Dilutive potential common shares 561 149
Weighted average diluted shares 20,588 20,774
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Basic earnings per common share $ .75 $ .58
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Diluted earnings per common share $ .73 $ .57
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6. Consulting Agreement
The Company recorded a special charge of $2.2 million during the first quarter
of the previous year related to the expensing of a long-term consulting
agreement with the Company's former Chairman and Chief Executive Officer who was
no longer providing services to the Company.
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ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This section should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto.
RESULTS OF OPERATIONS
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REVENUES Revenues for the first quarter ended December 30, 2000 increased $23.3
million or 8.5% over fiscal 2000's first quarter results. The revenue growth was
primarily due to increased volume as reflected in the 5.5% growth in shared mail
pieces delivered. Also driving the increase was a 7.1% increase in shared mail
packages delivered from 738.1 million packages in the prior year to 790.4
million packages delivered in the current year. Contributing to the package
growth were additional mailings due to the second in-home date programs in two
of the Company's markets, and also increased customer demand during the December
holiday season.
As expected, shifts in calendar timing resulted in the inclusion of a seasonally
soft final week in the first quarter of fiscal 2001, a week which fell into the
Company's second fiscal quarter in the prior year. As a result of this, as well
as the additional mailings during the quarter, average pieces per package were
8.55 for the three months ended December 30, 2000, a decrease of 1.5% from the
same period in the prior year.
Also driving the first quarter increase in revenues was a 2.0% growth in revenue
per piece, from $39.25 for the first quarter of prior year to $40.05 for the
first quarter of the current year. In addition, favorable revenue growth from
MailCoups, the Company's targeted coupon distributor and the Company's A.N.N.E.
(ADVO National Network Extension) brokered distribution program also contributed
to the increase in revenues for the first quarter of fiscal 2001. Furthermore,
the first quarter of fiscal 2001 included revenues from the Company's
acquisition of Mail Marketing Systems, Inc., ("MMSI"), a privately held direct
mail advertising company acquired during the quarter.
OPERATING EXPENSES Cost of sales as a percentage of revenues increased slightly,
0.5 percentage points, from 71.1% during the first quarter of fiscal 2000 to
71.6% during the first quarter of fiscal 2001. In absolute terms cost of sales
increased $18.0 million for the quarter ended December 30, 2000 over the
comparable period in the prior year. The increase in cost of sales was mainly
attributable to higher postage costs as a result of the 7.1% volume growth in
the number of shared mail packages delivered. Print costs, which are another
component of cost of sales, also increased for the first quarter of fiscal 2001
due to higher turnkey product revenue and moderately higher paper prices.
Subsequent to the end of the first quarter, on January 7, 2001, new postage
rates became effective. The new rates represent a 3.5% increase in the Company's
core shared mail piece rate. The Company expects its preplanning activities in
the past months will result in a full pass-through of the new rate increase.
Selling, general and administrative costs (including the provision for bad
debts) were 18.8% of revenue for the first quarter of fiscal 2001, a decrease of
1.7 percentage points over the same quarter of the prior year. Excluding the
$2.2 million charge related to the expensing of a long-term consulting agreement
with the Company's former Chairman and Chief Executive Officer recorded in the
first quarter of the prior year, selling general and administrative costs would
have decreased 0.9 percentage points over fiscal 2000 costs.
In absolute terms, selling, general and administrative costs (including the
provision for bad debts) for the first quarter of fiscal 2001 decreased $0.2
million over the first quarter of fiscal 2000. Excluding the $2.2 million charge
recorded in the prior year, selling, general and administrative costs would have
increased $2.0 million over prior year's first quarter. This $2.0 million
increase is due to higher commission expense as a result of the revenue growth
partially, offset by lower bad debt expense.
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ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OPERATING INCOME The above activity resulted in the Company reporting an
increase of $5.5 million, or 24.1%, in operating income for the first quarter of
fiscal 2001 when compared to the same period in the prior year. Operating income
as a percentage of revenue improved to 9.6%, representing an increase of 1.2
percentage points versus prior year's first quarter.
INTEREST EXPENSE Interest expense increased $0.6 million for the first quarter
of fiscal 2001 over the first quarter of fiscal 2000. The increase was due to
higher interest rates under the renegotiated credit agreement, which was signed
during the latter part of the first quarter of fiscal 2000.
INCOME TAXES The effective income tax rate for the three months ended December
30, 2000 and December 25, 1999 was approximately 37% for both periods.
EARNINGS PER SHARE Diluted earnings per share increased $.16, or 28.1%, over the
prior year period from $.57 to $.73 for the quarter ended December 30, 2000.
This increase was principally reflective of the Company's improved earnings.
Excluding the one-time charge recorded in the prior year, diluted earnings per
share would have increased $.09.
FINANCIAL CONDITION
-------------------
Working capital increased $10.8 million from September 30, 2000 to December 30,
2000. The change in working capital resulted from a $2.4 million increase in
current assets and an $8.4 million decrease in current liabilities. The change
in current assets was primarily attributable to a higher ending cash balance at
the end of December versus the end of September, offset by a decrease in
accounts receivable. The decrease in accounts receivable was achieved despite
the Company's continued revenue growth.
The decrease in current liabilities associated with the working capital change
was primarily attributable to the decrease in accounts payable due to the
seasonal timing of vendor payments, and a decrease in accrued compensation and
benefits due to the incentive compensation payout in fiscal 2001 which was
related to fiscal 2000. Offsetting these decreases were increases in taxes
payable associated with the Company's improved year to date earnings and timing
of payments.
The working capital ratio increased from 1.11 at September 30, 2000 to 1.20 at
December 30, 2000.
Stockholders' deficiency decreased $14.4 million to a net deficiency of $26.2
million at December 30, 2000 from $40.6 million at September 30, 2000. The
decrease in net deficiency was primarily the result of the Company's net income
of $14.9 million for the first quarter of fiscal 2001, $4.7 million of
stock/option related transactions by associates, offset by treasury stock
purchases of $2.4 million. The treasury stock purchases consisted of $1.6
million made on the open market associated with the Company's buyback program
and $0.8 million pursuant to elections by employees to satisfy withholding
requirements under the Company's restricted stock and stock option plans. In
addition, the Company recorded an unrealized loss of $2.8 million to accumulated
other comprehensive income (loss) related to the adoption of SFAS No. 133 and
the change in fair value of the derivative instruments during the quarter.
-8-
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS Nos. 137 and 138 requires companies to recognize all derivatives
on the balance sheet at fair value. If the derivative is a hedge, depending on
the nature of the hedge, changes in the fair value are either offset against the
change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The Company's interest rate swap agreements are
considered `effective' under SFAS No. 133 and, as a result changes in the fair
value of the agreements are recorded in current assets or liabilities with the
offset amount recorded to accumulated other comprehensive income (loss) in
stockholders' deficiency.
The Company's existing interest rate swap agreements (derivatives) convert a
portion of its floating rate debt to a fixed rate basis through December 2002,
thus limiting substantial risk should interest rates fluctuate. In accordance
with its credit agreement, at December 30, 2000, $100 million of the Company's
outstanding variable rate debt was designated as hedged relating to the interest
rate swap agreement. The Company adopted SFAS No 133, as amended, on October 1,
2000 and recorded an unrealized loss of $1.2 million in accumulated other
comprehensive income (loss), offsetting the fair value of the swap agreements
recorded in other current liabilities.
PROPERTY, PLANT & EQUIPMENT
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Property, plant and equipment investments of $7.8 million for the quarter ended
December 30, 2000 consisted mainly of capital expenditures for the development
of new software for the client management, order fulfillment and order
management systems, renovations at certain of the Company's facilities,
deployment of computer hardware and the purchase of computerized mail sorters
(Alphaliners) for the Company's production facilities. The Company expects its
capital expenditure plan for the entire year to be approximately $39.0 million.
LIQUIDITY
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The Company's main source of liquidity continues to be funds generated from
operating activities. In addition, the Company has available unused credit
commitments of $99.4 million which may be used to fund working capital.
The net cash provided by operating activities for the three months ended
December 30, 2000 was $13.3 million versus $3.6 million net cash used for
operating activities for the same period of the prior year. The year over year
increase was the result of improved operating results and changes in accounts
receivable, accounts payable, accrued compensation and benefits and other
current liabilities.
The overall increase in cash and cash equivalents of $5.5 million for the
quarter ended December 30, 2000 was comprised of net cash provided by operating
activities of $13.3 million and net financing activities of $8.3 million offset
by investing activities of $16.1 million.
Investing activities consisted of $7.8 million for the capital expenditures
detailed above and $8.3 million, net of cash acquired, for acquisitions and
joint ventures made during the quarter. During the first quarter of fiscal 2001,
the Company announced the acquisition of MMSI, a privately held direct mail
advertising company for $7.3 million, net of cash acquired. The acquisition has
been accounted for under the purchase method of accounting and, accordingly, the
results of operations of the acquired company have been included in the
consolidated statements of operations from its acquisition date.
-9-
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Net cash provided by financing activities included net borrowings of $4.0
million under the Company's renegotiated credit agreement, $4.0 million of a
note payable incurred with the acquisition of MMSI and $2.6 million of proceeds
from option exercises under the Company's stock option plan offset by treasury
stock purchases of $2.4 million.
FINANCING ARRANGEMENTS
----------------------
The Company maintains a credit agreement which provides for total credit
facilities of $300 million, consisting of a $135 million term loan and a $165
million revolving line of credit. At December 30, 2000 there was $194.0 million
of debt outstanding, with $10.0 million classified as current. Although the
Company does not a have scheduled principal payment due until March, 2002, the
Company's operating cash flow will likely provide the flexibility to pay down
approximately $10 million of the debt. The Company anticipates it will be able
to meet its long-term debt obligations through funds generated from operations.
During January 2001, the Company had net borrowings of $12 million under the
revolving line of credit.
Under the terms of the credit agreement, the Company is required to maintain
certain financial ratios. In addition, the credit agreement also places
restrictions on disposals of assets, mergers and acquisitions, dividend
payments, investments and additional debt.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The Company's interest expense is sensitive to changes in interest rates. In
this regard, changes in interest rates affect the interest paid on its debt. To
mitigate the impact of interest rate fluctuations, the Company has historically
maintained interest rate swap agreements on notional amounts totaling $100
million which is currently over 50% of its outstanding debt balance.
The Company believes that the interest rate swap agreements limit substantial
risk if interest rates should fluctuate. If interest rates should change by 2
percentage points for the remainder of the 2001 fiscal year from those rates in
effect at December 30, 2000, assuming no change in the outstanding debt balance
and considering the effects of the Company's interest rate swap agreements,
interest expense would increase/decrease by approximately $1.4 million. These
amounts are determined by considering the hypothetical interest rates on the
Company's borrowing cost and interest rate swap agreements. The sensitivity
analysis also assumes no changes in the Company's financial structure.
FORWARD LOOKING STATEMENTS
--------------------------
Except for the historical information stated herein, the matters discussed in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. Such forward looking
statements are based on current information and expectations and are subject to
risks and uncertainties which could cause the Company's actual results to differ
materially from those in the forward looking statements. Such risks and
uncertainties include but are not limited to: possible governmental regulation
or legislation affecting aspects of the Company's business, changes in customer
demand and pricing, the possibility of consolidation throughout the retail
sector, postal and paper prices, the efficiencies achieved with technology
upgrades, the amount of shares the Company will purchase in the future under its
buyback program, fluctuations in interest rates related to the outstanding debt
and other general economic factors.
-10-
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
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At the 2001 Annual Meeting of Stockholders of ADVO, Inc. (the "Company"), held
on January 18, 2001, the following matters were submitted to a vote of the
stockholders.
1. The election of eight Directors to serve until the Annual Meeting of
Stockholders in 2002.
2. The approval of an amendment to increase the number of shares of Common
Stock issuable under the Company's 1998 Incentive Compensation Plan
3. The ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending September 29, 2001.
Each of the three proposals was approved by the stockholders in its entirety.
For a list of the directors elected and the votes cast for and against each of
the proposals, reference is made to Exhibit No. 22, Report of Inspector of
Election for ADVO, Inc.'s Annual Meeting, attached hereto.
Item 5. Other Information
-----------------
Subsequent to the quarter ended December 30, 2000, the Company announced the
election of John J. Mahoney to its Board of Directors. Board membership is now
eight.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Index
Exhibit No. Exhibits
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22 Report of Inspector of Election for
ADVO, Inc.'s Annual Meeting.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
A report on Form 8-K dated October 10, 2000 was filed by the Company
during the quarter ended December 30, 2000. The Form 8-K reported under Item 5
thereof the Company's announcement of a new stock repurchase program for up to
0.9 million shares.
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Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
-11-
SIGNATURES
Pursuant to the requirements 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.
ADVO, Inc.
Date: February 12, 2001 By: /s/ JULIE ABRAHAM
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Julie Abraham
Senior Vice President
of Finance and Controller
(Principal Accounting Officer)
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