<PAGE>
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 June 24, 1995
-------------
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to _________________
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
- ------------------------------- --------------------
(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
- ------------------------------------------ ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (203) 285-6100
---------------------
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
----- -----
As of July 22, 1995 there were 20,788,978 shares of common stock
outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended June 24, 1995
<TABLE>
<CAPTION>
Part I - Financial Information Page
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<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -
June 24, 1995 and September 24, 1994 2
Consolidated statements of operations -
Nine months and three months ended
June 24, 1995 and June 25, 1994 3
Consolidated statements of cash flows -
Nine months ended June 24, 1995
and June 25, 1994 4
Notes to consolidated financial statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 7
<CAPTION>
Part II - Other Information
---------------------------
<S> <C>
Item 6. Exhibits and Reports on Form 8-K. 10
Signatures 11
</TABLE>
<PAGE>
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
June 24, September 24,
1995 1994
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents-Related Party $ 18,328 $ 10,891
Cash and cash equivalents-Other 12,704 28,857
-------- --------
Total cash and cash equivalents 31,032 39,748
Available-for-sale securities-Related Party 31,966 31,392
Accounts receivable, net 72,402 55,340
Inventories 6,629 5,138
Prepaid expenses and other current assets 6,040 4,863
Deferred income taxes 13,931 14,619
-------- --------
Total current assets 162,000 151,100
Property, plant and equipment 136,847 117,448
Less accumulated depreciation and amortization (68,921) (60,939)
-------- --------
Net property, plant and equipment 67,926 56,509
Other assets 9,569 18,100
-------- --------
TOTAL ASSETS $239,495 $225,709
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 37,180 $ 28,540
Accrued compensation and benefits 28,311 28,121
Other current liabilities 36,458 47,692
-------- --------
Total current liabilities 101,949 104,353
Deferred income taxes 3,295 4,047
Other liabilities 8,387 9,311
-------- --------
11,682 13,358
STOCKHOLDERS' EQUITY
Series A Convertible preferred stock,
$.01 par value (Authorized 5,000,000
shares, none outstanding) - -
Common stock, $.01 par value (Authorized
40,000,000 shares, issued 24,511,396
and 24,393,108 shares, respectively) 245 244
Additional paid-in capital 137,231 134,881
Unrealized losses on available-for-sale
securities, net of tax (36) -
Retained earnings 51,272 32,146
-------- --------
188,712 167,271
Less common stock held in
treasury, at cost
(62,848) (59,273)
Total stockholders' equity -------- --------
125,864 107,998
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $239,495 $225,709
======== ========
</TABLE>
See Accompanying Notes.
- 2 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
--------------------- ---------------------
June 24, June 25, June 24, June 25,
1995 1994 1995 1994
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $790,514 $732,570 $273,223 $256,082
Costs and expenses:
Cost of sales 596,302 546,001 206,476 187,050
Selling, general and
administrative 159,482 154,823 51,466 53,923
Gain on sale of interest in
joint venture (2,243) - - -
Provision for bad debts 2,178 2,075 669 490
-------- -------- -------- --------
Operating income 34,795 29,671 14,612 14,619
Interest income-Related Party 2,170 1,320 663 395
Interest income-Other 51 42 13 14
Other expense 576 1,044 199 664
-------- -------- -------- --------
Income before income taxes 36,440 29,989 15,089 14,364
Provision for income taxes 14,212 11,396 5,884 5,458
-------- -------- -------- --------
Income before cumulative effect
of accounting change 22,228 18,593 9,205 8,906
Cumulative effect of change in
accounting for postemployment
benefits, net of tax (1,545) - - -
-------- -------- -------- --------
Net income $ 20,683 $ 18,593 $ 9,205 $ 8,906
======== ======== ======== ========
Earnings per share
before cumulative effect
of accounting change $ .96 $ .77 $ .39 $ .38
Cumulative effect of change
in accounting for post-
employment benefits (.07) - - -
-------- -------- -------- --------
Earnings per share (A) $ .89 $ .77 $ .39 $ .38
======== ======== ======== ========
Cash dividends declared per
share $ .075 $ .070 $ .025 $ .025
Weighted average common and
common equivalent shares:
Primary 23,281 24,113 23,458 23,234
Fully diluted 23,306 24,111 23,466 23,229
</TABLE>
(A) Both primary and fully diluted.
See Accompanying Notes.
- 3 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
----------------------
June 24, June 25,
1995 1994
----------------------
<S> <C> <C>
Net cash provided by operating activities $ 7,720 $35,707
Cash flows from investing activities:
Investment in business ventures/acquisitions (61) -
Acquisition of property, plant and equipment (20,713) (10,239)
Proceeds from disposals of property
and equipment 11 82
Proceeds from sale of interest in joint venture 9,000 -
Sales and maturities of available-for-sale
securities 41,362 26,246
Purchases of available-for-sale securities (42,210) (36,929)
-------- --------
Net cash used in investing activities (12,611) (20,840)
Cash flows from financing activities:
Tax effect - vesting of restricted
stock/options exercised 506 7,102
Proceeds from exercise of stock options 803 549
Purchase of common stock for treasury (3,575) (43,868)
Cash dividends paid (1,559) (1,398)
-------- --------
Net cash used by financing activities (3,825) (37,615)
-------- --------
Decrease in cash and cash equivalents (8,716) (22,748)
Cash and cash equivalents at beginning of period 39,748 51,080
-------- --------
Cash and cash equivalents at end of period $ 31,032 $ 28,332
======== ========
</TABLE>
See Accompanying Notes.
- 4 -
<PAGE>
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 (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
June 24, 1995 are not necessarily indicative of the results that may be expected
for the fiscal year ending September 30, 1995. 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 24, 1994.
Certain reclassifications have been made in the fiscal 1994 financial statements
to conform with the fiscal 1995 presentation.
2. Available-for-sale securities
In May 1993 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". The Company adopted the provisions of the new
standard in the first quarter of fiscal 1995. In accordance with the Statement,
prior period financial statements have not been restated.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
The Company's securities are classified as available-for-sale. Available-for-
sale securities are carried at fair value, with unrealized gains and losses, net
of tax, reported in a separate component of stockholders' equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest income.
The cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are
included in interest income.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
June 24, 1995 Cost Gains Losses Value
----------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government
Obligations $ 4,002 $ - $ 19 $ 3,983
Municipal Bonds 20,351 8 28 20,331
U.S. Corp. Securities 7,669 3 20 7,652
----------------------------------------------
Total securities $32,022 $ 11 $ 67 $31,966
==============================================
</TABLE>
There were no realized gains or losses on the sale of available-for-sale
securities for the quarter ended June 24, 1995. For the nine months ended June
24, 1995, gross realized gains and losses were $10 thousand and $5 thousand,
respectively.
- 5 -
<PAGE>
The amortized cost and estimated fair value of available-for-sale securities at
June 24, 1995, by contractual maturity, are shown below (in thousands).
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
-----------------------
<S> <C> <C>
Due in one year or less $28,985 $ 28,924
Due after one year through three years 3,037 3,042
-----------------------
Total securities $32,022 $ 31,966
=======================
</TABLE>
3. Postemployment Benefits
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" ("SFAS No. 112") in
accounting for short-term disability benefits and severance and related medical
benefits during the Company's first quarter of fiscal 1995. Under SFAS No. 112,
the Company accrues these benefits when it becomes probable that such benefits
will be paid and when sufficient information exists to make reasonable estimates
of the amounts to be paid. The Company previously recognized the cost of
providing these benefits on a cash basis.
The cumulative effect of this change in accounting for postemployment benefits
resulted in a one-time after-tax charge of $1.5 million or $.07 per share. The
Company estimates that the ongoing annual effect of this accounting change will
not be material to the Company's financial statements. As required by SFAS No.
112, prior year financial statements have not been restated to reflect the
change in accounting principle.
4. Gain on sale of interest in joint venture
During the first quarter ended December 24, 1994, the Company sold its 50%
ownership in Infobase Services to Acxiom Corporation and recognized a before tax
gain on this transaction of $2.2 million ($1.4 million after tax or $.06 per
share).
5. Financing Arrangements
On May 24, 1995, the Company canceled and replaced its existing $25 million
credit facility. The new Revolving Credit Agreement expires April 30, 2000 and
provides up to $50 million of combined borrowing availability with a bank.
Borrowing under the agreement may take the form of either a domestic loan or a
Eurodollar loan, as defined in the agreement. The interest rate for such
borrowing will be at least equal to the bank's base rate for the particular type
of loan and will vary from the rate depending upon the borrowing period. The
Company pays a commitment fee of one-eighth of one percent on the average daily
balance of the unused portion of the commitment. The terms of the agreement
include certain covenants which provide restrictions to the maintenance of net
worth and include requirements to maintain certain financial ratios. At June
24, 1995 there are no borrowings under the Revolving Credit Agreement.
- 6 -
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
- ---------------------
Revenues increased 7% or $17.1 million for the third quarter of fiscal 1995 and
8% or $57.9 million for the nine months ended June 24, 1995 over the comparable
periods of the prior fiscal year. The Company experienced both pricing and
volume gains for the three and nine month periods ended June 24, 1995. Pricing
gains during the three month period ended June 24, 1995 were slightly higher
than volume gains when compared to the third quarter of fiscal 1994 primarily
due to the impact of the postal rate increase effective January 1, 1995. Pieces
per package increased 3% to 8.05 and shared mail packages delivered decreased 1%
to .8 billion during the third fiscal quarter of 1995 over the comparable period
of a year earlier. The decrease in packages delivered during the quarter was
due to the discontinuation of the Company's second weekly mailing in the Chicago
market, without these discontinued packages, pieces per package would have grown
1% and total packages delivered would have increased 3%. The majority of the
fiscal 1995 year-to-date revenue growth was volume related, resulting from a 4%
increase in average shared mail pieces per package to 7.99 and a 1% gain in
packages mailed to 2.4 billion. Pricing gains were also present for the nine
month period due to the postal rate increase mentioned above. Sales at the
Company's Marketing Force subsidiary were up 10% to $16.5 million and 7% to
$46.1 million for the three and nine month periods ended June 24, 1995,
respectively, over the comparable periods of fiscal 1994.
Cost of sales as a percentage of revenue remained relatively constant at 75% for
the first nine months of fiscal 1995 and increased 3% to 76% for the three
months ended June 24, 1995 when compared to the same periods ended June 25,
1994. The increase as a percentage of sales, as well as in absolute terms, was
reflective of increased postal and paper costs. Overall, cost of sales increased
$19.4 million or 10% and $50.3 million or 9% for the three and nine month
periods ended June 24, 1995, respectively, when compared with the prior year.
The increase in postage costs was 11% for the quarter and 9% year-to-date,
primarily reflective of the postal rate increase effective January 1, 1995 and
to a lesser degree volume growth in average shared mail pieces per package over
the prior periods. Print expense increased 13% for both the three and nine
month periods ended June 24, 1995 over the same periods ended June 25, 1994.
Higher paper costs and volume gains accounted for the majority of the increase.
Total shared mail pieces distributed increased 5% to 18.9 billion for the nine
months ended June 24, 1995 while the third quarter experienced a 2% increase to
6.3 billion versus the comparable period in fiscal 1994.
As a percentage of revenue, selling expense, including the provision for bad
debts, remained constant at approximately 12% for the three and nine month
periods ended June 24, 1995 and June 25, 1994. In absolute terms, selling
expense increased $1.0 million or 3% for the third quarter ended June 24, 1995
when compared to the same period of a year earlier. For the nine month period,
selling expense increased $4.5 million or 5% over the prior year. Both the
quarter and nine month increases were primarily related to increased commission
expense resulting from the fiscal 1995 revenue growth over fiscal 1994. Also
contributing to the increase for both periods were marketing promotional
expenditures and sales support costs.
General and administrative costs, as a percentage of revenue, were 7% for the
quarter ended June 24, 1995 versus 9% for the comparable period of the prior
year. Year-to-date fiscal 1995 general and administrative costs remained flat at
approximately 9% of revenues when compared to same period in fiscal 1994. In
absolute terms, general and administrative expenses decreased $3.2 million for
the three months ended June 24, 1995 and increased only $0.3 million for the
nine month
- 7 -
<PAGE>
period when compared to the same periods in the previous fiscal year. Both the
three and nine month periods experienced increases in employee costs over the
comparable periods of the prior fiscal year. For the three month period, this
increase was offset by savings achieved in leases and rents, training and
relocation, incentive wages and favorable experience in workers compensation
costs. In addition, favorable sales tax rulings during the quarter resulted in
further cost reductions.
During the Company's first fiscal quarter, ended December 24, 1994, the Company
recognized a $2.2 million pretax gain, or $1.4 on an after tax basis, on the
sale of its 50% ownership in Infobase, its database joint venture with the
Acxiom Corporation.
As a result of the above, operating income remained constant at $14.6 million
for the third fiscal quarter of 1995 and increased $5.1 million or 17% to $34.8
million for the nine month period when compared to the same periods of a year
earlier.
The increase in the Company's interest income for the nine month period ended
June 24, 1995 over the prior year was due to the general increase in interest
rates.
The effective income tax rate for the three and nine month periods ended June
24, 1995 was 39% versus 38% for the comparable periods of fiscal 1994.
During the Company's first quarter of fiscal 1995, ended December 24, 1994, the
Company adopted Statements of Financial Reporting Accounting Standards No.112
("SFAS no. 112"), "Employers' Accounting for Postemployment Benefits", and No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
cumulative effect of adopting SFAS No. 112 was an after tax charge of $1.5
million or $.07 per share. The Company estimates the ongoing annual effect of
this accounting change will not be material to the Company's results of
operations or financial position.
Financial Condition
- -------------------
Working capital increased $13.4 million to $60.1 million at June 24, 1995 from
$46.7 million at September 24, 1994. The increase from September 24, 1994 was
mainly attributable to the Company's improved operating results. The working
capital ratio increased to 1.59 at June 24, 1995 from 1.45 at September 24,
1994.
Total stockholders' equity increased $17.9 million to $125.9 million since the
end of the prior fiscal year. The increase was primarily related to the
Company's net income of $20.7 million for the first nine months of fiscal 1995,
the $1.3 million recorded for the exercise of stock options and related tax
benefit under the Company's employee stock plans and $1.0 million for the
amortization of deferred compensation. These increases were offset to a degree
by $3.6 million used for the purchase of the Company's common stock for
treasury, primarily related to an open market purchase of $3.1 million in
December 1994 and $1.5 million for the Company's normal quarterly dividend.
Liquidity
- ---------
Cash provided from operating activities decreased $28.0 million to $7.7 million
when comparing the first nine months of fiscal 1995 to fiscal 1994. During the
nine months ended June 24, 1995 the Company experienced a $17.1 million increase
in accounts receivable, primarily related to the revenue growth and timing of
customer receipts. Offsetting the receivable increase to a degree was the
increase in accounts payable during the same nine month period of $8.6 million.
The accounts payable increase was related to the timing of payments to the
Company's vendors. Also contributing to the decrease in cash flows from
operating activities were decreases to customer advances and the reserve for
restructuring. The Company's main source of liquidity continues to be funds
from operating activities.
- 8 -
<PAGE>
Cash and cash equivalents decreased $8.7 million to $31.0 million for the nine
months ended June 24, 1995 versus a decrease of $22.7 million for the same
period of a year earlier. The decrease was reflective of $20.7 million in
capital expenditures related to the purchase of the Company's corporate
headquarters building, the modernization and replacement of existing production
equipment, and computer hardware purchases. Also adding to the decrease was $3.6
million in purchases of common stock for treasury. These decreases were offset
to a degree by the operating cash flows and $9.0 million received from the sale
of the Company's 50% ownership in its Infobase joint venture. The $22.7 million
decrease for the nine months of fiscal 1994 was primarily reflective of the
$43.9 million used for the purchase of the Company's common stock for treasury.
Funds from operating activities continue to be adequate to fund the Company's
plan of restructuring. There have been no material changes in the Company's
plan of restructuring or the benefits anticipated to be realized from the plan's
implementation.
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<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
<TABLE>
<CAPTION>
(a) Exhibit Index
Sequential
Exhibit No. Exhibits Page Number
----------- -------- -----------
<S> <C> <C>
11 Statement re computation of per share
earnings.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
-------------------
No report on Form 8-K was filed by the Company with respect to the
quarter ended June 24, 1995.
________________________________________________________________________________
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
- 10 -
<PAGE>
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: August 3, 1995 By:ROBERT S. HIRST\s\
-------------- -----------------------------
Robert S. Hirst
Vice President and Controller
(Principal Accounting Officer)
- 11 -
<PAGE>
Exhibit 11
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Page 1 of 2
ADVO, Inc.
COMPUTATION OF PRIMARY PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
------------------- --------------------
June 24, June 25, June 24, June 25,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS APPLICABLE TO COMMON STOCK $20,683 $18,593 $ 9,205 $ 8,906
======= ======= ======= =======
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES
Average common shares outstanding 20,651 21,240 20,669 20,721
Assumed conversion or exercise of:
Warrants 2,273 2,236 2,307 2,238
Stock Options 317 586 434 235
Restricted Stock 40 51 48 40
------- ------- ------- -------
Weighted average common
equivalent shares 23,281 24,113 23,458 23,234
======= ======= ======= =======
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ .89 $ .77 $ .39 $ .38
======= ======= ======= =======
</TABLE>
<PAGE>
Exhibit 11
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Page 2 of 2
ADVO, Inc.
COMPUTATION OF FULLY DILUTED PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
------------------- --------------------
June 24, June 25, June 24, June 25,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS APPLICABLE TO FULLY
DILUTED SHARES $20,683 $ 18,593 $ 9,205 $ 8,906
======= ======== ======= =======
FULLY DILUTED SHARES
Average common shares outstanding 20,651 21,240 20,669 20,721
Assumed conversion or exercise of:
Warrants 2,273 2,236 2,307 2,238
Stock Options 317 586 434 235
Restricted Stock 65 49 56 35
------- ------- ------- -------
Fully diluted shares 23,306 24,111 23,466 23,229
======= ======= ======= =======
EARNINGS PER SHARE ASSUMING
FULL DILUTION $ .89 $ .77 $ .39 $ .38
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> SEP-25-1994
<PERIOD-END> JUN-24-1995
<CASH> 31,032
<SECURITIES> 31,966
<RECEIVABLES> 76,581
<ALLOWANCES> 4,179
<INVENTORY> 6,629
<CURRENT-ASSETS> 162,000
<PP&E> 136,847
<DEPRECIATION> (68,921)
<TOTAL-ASSETS> 239,495
<CURRENT-LIABILITIES> 101,949
<BONDS> 0
<COMMON> 245
0
0
<OTHER-SE> 125,619
<TOTAL-LIABILITY-AND-EQUITY> 239,495
<SALES> 0
<TOTAL-REVENUES> 790,514
<CGS> 0
<TOTAL-COSTS> 596,302
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,178
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 36,440
<INCOME-TAX> 14,212
<INCOME-CONTINUING> 22,228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,545)
<NET-INCOME> 20,683
<EPS-PRIMARY> .89
<EPS-DILUTED> .89
</TABLE>
