<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 December 24, 1994
-----------------
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
-------
ADVO, Inc.
------------------------------------------------------
(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 January 21, 1995 there were 20,691,831 shares of common stock
outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended December 24, 1994
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
December 24, 1994 and September 24, 1994. 2
Consolidated statements of operations -
Three months ended December 24, 1994
and December 25, 1993. 3
Consolidated statements of cash flows -
Three months ended December 24, 1994
and December 25, 1993. 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 4. Submission of Matters to a Vote of
Security Holders. 9
Item 6. Exhibits and Reports on Form 8-K. 9
Signatures 10
</TABLE>
<PAGE>
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 24, September 24,
1994 1994
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents-Related Party $ 36,436 $ 10,891
Cash and cash equivalents-Other 8,966 28,857
-------- --------
Total cash and cash equivalents 45,402 39,748
Available-for-sale securities-Related Party 30,501 31,392
Accounts receivable, net 62,722 55,340
Inventories 6,184 5,138
Prepaid expenses and other current assets 5,374 4,863
Deferred income taxes 16,713 14,619
-------- --------
Total current assets 166,896 151,100
Property and equipment 122,803 117,448
Less accumulated depreciation and amortization (63,126) (60,939)
-------- --------
Net property and equipment 59,677 56,509
Other assets 10,056 18,100
-------- --------
TOTAL ASSETS $236,629 $225,709
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 30,572 $ 28,540
Accrued compensation and benefits 28,144 28,121
Other current liabilities 52,678 47,692
-------- --------
Total current liabilities 111,394 104,353
Deferred income taxes 3,234 4,047
Other liabilities 9,111 9,311
-------- --------
12,345 13,358
STOCKHOLDERS' EQUITY
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 24,405,983
and 24,393,108 shares, respectively) 244 244
Additional paid-in capital 135,268 134,881
Unrealized losses on available-for-sale
securities, net of tax (217) -
Retained earnings 40,305 32,146
-------- --------
175,600 167,271
Less common stock held in
treasury, at cost
(62,710) (59,273)
Total stockholders' equity -------- --------
112,890 107,998
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $236,629 $225,709
======== ========
</TABLE>
See Accompanying Notes.
- 2 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
------------------------------
December 24, December 25,
1994 1993
------------------------------
<S> <C> <C>
Revenues $ 263,055 $ 246,763
Costs and expenses:
Cost of sales 195,186 184,602
Selling, general and
administrative 53,234 49,995
Gain on sale of interest in
joint venture (2,243) -
Provision for bad debts 699 821
-------- --------
Operating income 16,179 11,345
Interest income-Related Party 772 520
Interest income-Other 25 16
Other expense 219 182
-------- --------
Income before income taxes 16,757 11,699
Provision for income taxes 6,536 4,445
-------- --------
Income before cumulative effect
of accounting change 10,221 7,254
Cumulative effect of change in
accounting for postemployment
benefits, net of tax (1,545) -
-------- --------
Net Income $ 8,676 $ 7,254
======== ========
Earnings per share before
cumulative effect of
accounting change $ .44 $ .29
Cumulative effect of change
in accounting for post-
employment benefits (.07) -
-------- --------
Earnings per share (A) $ .37 $ .29
======== ========
Cash dividends declared per
share $ .025 $ .02
Weighted average common and
common equivalent shares:
Primary 23,213 24,877
Fully diluted 23,216 25,020
</TABLE>
- --------------
(A) Both primary and fully diluted.
See Accompanying Notes.
- 3 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
--------------------------
December 24, December 25,
1994 1993
--------------------------
<S> <C> <C>
Net cash provided by operating activities $ 6,210 13,802
Cash flows from investing activities:
Investment in business ventures/acquisitions (11) -
Acquisition of property and equipment (6,064) (3,168)
Proceeds from disposals of property and equipment - 76
Proceeds from sale of interest in joint venture 9,000 -
Sales and maturities of available-for-sale
securities 14,616 8,023
Purchases of available-for-sale securities (14,172) (17,585)
-------- --------
Net cash provided (used) by investing activities 3,369 (12,654)
Cash flows from financing activities:
Tax effect - vesting of restricted
stock/options exercised 11 292
Proceeds from exercise of stock options 23 68
Purchase of common stock for treasury (3,437) (14,671)
Cash dividends paid (522) (444)
-------- --------
Net cash used by financing activities (3,925) (14,755)
-------- --------
Increase (Decrease) in cash and cash equivalents 5,654 (13,607)
Cash and cash equivalents at beginning of period 39,748 51,080
-------- --------
Cash and cash equivalents at end of period $ 45,402 $ 37,473
======== ========
</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 month period ended December 24,
1994 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
December 24, 1994 Cost Gains Losses Value
-------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Obligations $ 7,999 $ - $142 $ 7,857
Municipal Bonds 22,496 5 205 22,296
U.S. Corporate Securities 366 - 18 348
-------------------------------------------
Total securities $30,861 $ 5 $365 $30,501
===========================================
</TABLE>
The gross realized losses on the sale of available-for-sale securities totaled
$4,900 and there were no realized gains for the quarter ended December 24, 1994.
- 5 -
<PAGE>
The amortized cost and estimated fair value of available-for-sale securities at
December 24, 1994, by contractual maturity, are shown below (in thousands).
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
-----------------------
<S> <C> <C>
Due in one year or less $ 2,069 $ 2,059
Due after one year through three years 28,792 28,442
-----------------------
Total securities $30,861 $ 30,501
=======================
</TABLE>
3. Postemployment Benefits
Beginning with the first quarter of fiscal 1995, 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. 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 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).
- 6 -
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
- ---------------------
Revenues for the first fiscal quarter of 1995 were $263.1 million or $16.3
million over fiscal 1994's first quarter results. The 6.6% increase in revenues
was primarily related to volume growth both in shared mail packages and shared
mail pieces delivered. Shared mail packages increased 2.1% to 786.4 million and
shared mail piece distribution increased 5.5% to 6,390.9 million over the
comparable three month period of a year earlier. These sales gains were a
result of increases in shared mail pieces per package and expanded market
coverage within existing programs. Pricing increases were also achieved in
several of the Company's shared mail products. Despite the continuing
consolidation within the retail sector, the higher than expected postal rate
increase effective January 1, 1995 and significantly higher paper prices the
Company's management remains confident in the achievement of its earnings
objectives for fiscal 1995.
Cost of sales as a percentage of revenues was 74.2% for the quarter ended
December 24, 1994 versus 74.8% for the quarter ended December 25, 1993. The
decrease in cost of sales as a percentage of revenues was a result of increased
postage utilization as reflected in the shared mail pieces per package growth of
3.4% to 8.1 pieces per package. In absolute terms, cost of sales increased 5.7%
or $10.6 million over the comparable period of a year earlier. The increase was
mainly attributable to increases in delivery and print costs associated with the
volume growth in shared mail packages and pieces.
Selling expense, including the provision for bad debts, remained relatively
constant at 12.1% of revenues for the first quarter of fiscal 1995 when compared
with 12.2% for the same quarter of fiscal 1994. The absolute increase of $1.8
million resulted from increased commission expense from the volume growth in
revenues, and advertising and promotion costs.
General and administrative costs remained flat as a percentage of revenues at
8.4% for the first quarter of fiscal 1995 versus the comparable period of fiscal
1994. The increase of $1.3 million in general and administrative costs for the
three months ended December 24, 1994 over a year earlier was mainly attributable
to employee related costs.
During the quarter ended December 24, 1994 the Company recognized a $2.2 million
pretax gain on the sale of its 50% ownership in Infobase, its database joint
venture with the Acxiom Corporation.
As a result of the aforementioned, the Company reported a 42.6% increase in
operating income to $16.2 million for the first three months of fiscal 1995 when
compared with the same period of fiscal 1994.
The effective income tax rate for three months ended December 24, 1994 was 39%
versus 38% for the first three months of fiscal 1994
During the first quarter of fiscal 1995 the Company adopted Statements of
Financial 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.
- 7 -
<PAGE>
FINANCIAL CONDITION
- -------------------
Working capital increased $8.8 million to $55.5 million at December 24, 1994
from $46.7 million at September 24, 1994. The increase was primarily
attributable to the Company's improved operating results and the increase in
accounts receivable resulting from the revenue growth. The working capital ratio
improved to 1.50 at December 24, 1994 from 1.45 at fiscal 1994 year end.
Total stockholders' equity increased to $112.9 million at December 24, 1994 from
$108.0 million at September 24, 1994. The increase was a result of the Company's
net income of $8.7 million for the first three months of fiscal 1995 offset to a
degree by $3.4 million used for the purchase of the Company's common stock for
treasury on the open market.
LIQUIDITY
- ---------
The Company's main source of liquidity continues to be funds from operating
activities. Cash provided by operating activities decreased $7.6 million to $6.2
million for the first quarter of fiscal 1995 versus $13.8 million in the first
quarter of fiscal 1994 mainly attributable to the timing of customer payments.
Cash and cash equivalents increased $5.7 million to $45.4 million for the three
months ended December 24, 1994 versus a decrease of $13.6 million for the
comparable period of fiscal 1994. The increase was reflective of the $9.0
million received from the sale of the Company's 50% ownership in its Infobase
joint venture and fewer purchases of the Company's common stock for treasury for
the quarter ended December 24, 1994 than in the quarter ended December 25, 1993.
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.
- 8 -
<PAGE>
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 1995 Annual Meeting of Stockholders of ADVO, Inc. (the "Company"), held
on January 19, 1995, the following matters were submitted to a vote of the
stockholders.
1. The election of nine Directors to serve until the Annual Meeting of
Stockholders in 1996.
2. The approval of an amendment to the 1988 Non-qualified Stock Option
Plan and the 1993 Stock Option Subplan, as amended.
3. The approval of the Company's Short-term Corporate Management and
Division/Regional Incentive Plans.
4. The ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending
September 30, 1995.
Each of the four proposals were approved by the stockholders in their 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. Common Stock, attached hereto.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Index
Sequential
Exhibit No. Exhibits Page Number
----------- -------- -----------
11 Statement re computation of per share
earnings.
22 Report of Inspector of Election for
ADVO, Inc. Common Stock.
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No report on Form 8-K was filed by the Company with respect to the
quarter ended December 24, 1994.
- --------------------------------------------------------------------------------
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
- 9 -
<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: February 1, 1995 By: /s/ ROBERT S. HIRST
---------------- --------------------------
Robert S. Hirst
Vice President and Controller
(Principal Accounting Officer)
- 10 -
<PAGE>
Exhibit 11
----------
Page 1 of 2
ADVO, Inc.
COMPUTATION OF PRIMARY PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
-----------------------------
December 24, December 25,
1994 1993
------------ ------------
<S> <C> <C>
EARNINGS APPLICABLE TO COMMON STOCK $ 8,676 $ 7,254
======= ========
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES
Average common shares outstanding 20,692 21,694
Assumed conversion or exercise of:
Warrants 2,245 2,201
Stock Options 245 899
Restricted Stock 31 83
------ ------
Weighted average common and common
equivalent shares 23,213 24,877
====== ======
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ .37 $ .29
======= =======
</TABLE>
<PAGE>
Exhibit 11
----------
Page 2 of 2
ADVO, Inc.
COMPUTATION OF FULLY DILUTED PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
--------------------------
December 24, December 25,
1994 1993
---------- ------------
<S> <C> <C>
EARNINGS APPLICABLE TO FULLY
DILUTED SHARES $ 8,676 $ 7,254
======= =======
FULLY DILUTED SHARES
Average common shares outstanding 20,692 21,694
Assumed conversion or exercise of:
Warrants 2,245 2,245
Stock Options 245 975
Restricted Stock 34 106
------- -------
Fully diluted shares 23,216 25,020
======= =======
EARNINGS PER SHARE ASSUMING
FULL DILUTION $ .37 $ .29
======= =======
</TABLE>
<PAGE>
Exhibit 22
----------
Page 1 of 2
REPORT OF INSPECTOR OF ELECTION
FOR ADVO, INC. ANNUAL MEETING
HELD ON JANUARY 19, 1995
The undersigned, appointed as Inspector of Election, hereby reports and
certifies the following results based on the proxies voted at the Annual Meeting
of shareholders on January 19, 1995.
Shares Voted: 18,773,273 89.96%
The following votes of common stock were cast:
For Directors
-------------
<TABLE>
<CAPTION>
Durrett Fritz Kamerschen Morris Rockwell
---------- ---------- ---------- ---------- ----------
Votes
in Favor 18,686,935 18,689,050 18,687,732 18,688,199 18,615,377
Votes
Withheld 86,338 84,223 85,541 85,074 157,896
<CAPTION>
Lachman Newman Stowe Vogelstein
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Votes
in Favor 18,615,040 18,615,377 18,615,377 18,319,032
Votes
Withheld 158,233 157,896 157,896 454,241
</TABLE>
Proposition 2, Approval of an Amendment of
------------------------------------------
the 1988 Non-Qualified Stock Option Plan and the 1993
-----------------------------------------------------
Stock Option Subplan, as amended
--------------------------------
<TABLE>
<CAPTION>
Common
----------
<S> <C> <C>
Votes in Favor 15,446,032 74.01%
Votes Against 2,613,696 12.53%
Abstain 713,545 3.42%
</TABLE>
Proposition 3, Approval of the
------------------------------
Company's Short-term Corporate Management and
---------------------------------------------
Division/Regional Incentive Plans
---------------------------------
<TABLE>
<S> <C> <C>
Votes in Favor 17,872,917 85.64%
Votes Against 393,818 1.89%
Abstain 506,538 2.43%
</TABLE>
<PAGE>
Exhibit 22
----------
Page 2 of 2
Proposition 4, Ratification of the Appointment
----------------------------------------------
of Ernst & Young LLP Independent Auditors for Fiscal 1995
---------------------------------------------------------
<TABLE>
<CAPTION>
Common
----------
<S> <C> <C>
Votes in Favor 18,705,125 89.63%
Votes Opposed 63,824 .31%
Abstain 4,324 .02%
</TABLE>
JOHN J. BORYCZSKI /s/
----------------------------
John J. Boryczki
Assistant Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> SEP-25-1994
<PERIOD-END> DEC-24-1994
<CASH> 45,402
<SECURITIES> 30,501
<RECEIVABLES> 67,846
<ALLOWANCES> 5,124
<INVENTORY> 6,184
<CURRENT-ASSETS> 166,896
<PP&E> 122,803
<DEPRECIATION> 63,126
<TOTAL-ASSETS> 236,629
<CURRENT-LIABILITIES> 111,394
<BONDS> 0
<COMMON> 244
0
0
<OTHER-SE> 112,646
<TOTAL-LIABILITY-AND-EQUITY> 236,629
<SALES> 0
<TOTAL-REVENUES> 263,055
<CGS> 0
<TOTAL-COSTS> 195,186
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 699
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,757
<INCOME-TAX> 6,536
<INCOME-CONTINUING> 16,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,545)
<NET-INCOME> 8,676
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
