<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 March 25, 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 April 22, 1995 there were 20,792,052 shares of common stock
outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended March 25, 1995
Part I - Financial Information
------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -
March 25, 1995 and September 24, 1994 2
Consolidated statements of operations -
Six months and three months ended
March 25, 1995 and March 26, 1994 3
Consolidated statements of cash flows -
Six months ended March 25, 1995
and March 26, 1994 4
Notes to consolidated financial statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 7
Part II - Other Information
---------------------------
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>
March 25, September 24,
1995 1994
---------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents-Related Party $ 21,292 $ 10,891
Cash and cash equivalents-Other 16,362 28,857
-------- --------
Total cash and cash equivalents 37,654 39,748
Available-for-sale securities-Related Party 31,195 31,392
Accounts receivable, net 66,372 55,340
Inventories 7,113 5,138
Prepaid expenses and other current assets 5,463 4,863
Deferred income taxes 16,316 14,619
-------- --------
Total current assets 164,113 151,100
Property, plant and equipment 132,700 117,448
Less accumulated depreciation and amortization (65,767) (60,939)
-------- --------
Net property, plant and equipment 66,933 56,509
Other assets 10,555 18,100
-------- --------
TOTAL ASSETS $241,601 $225,709
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 40,862 $ 28,540
Accrued compensation and benefits 27,149 28,121
Other current liabilities 45,630 47,692
-------- --------
Total current liabilities 113,641 104,353
Deferred income taxes 3,501 4,047
Other liabilities 8,234 9,311
-------- --------
11,735 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 24,481,316
and 24,393,108 shares, respectively) 245 244
Additional paid-in capital 136,434 134,881
Unrealized losses on available-for-sale
securities, net of tax (109) -
Retained earnings 42,589 32,146
-------- --------
179,159 167,271
Less common stock held in
treasury, at cost (62,934) (59,273)
-------- --------
Total stockholders' equity 116,225 107,998
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $241,601 $225,709
======== ========
</TABLE>
See Accompanying Notes.
- 2 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended Three months ended
---------------------------- ------------------------------
March 25, March 26, March 25, March 26,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 517,291 $ 476,489 $ 254,236 $ 229,726
Costs and expenses:
Cost of sales 392,479 358,952 197,293 174,350
Selling, general and
administrative 105,362 100,900 52,129 50,905
Gain on sale of interest in
joint venture (2,243) - - -
Provision for bad debts 1,510 1,585 810 764
--------- --------- ---------- ---------
Operating income 20,183 15,052 4,004 3,707
Interest income-Related Party 1,508 926 736 406
Interest income-Other 37 27 11 12
Other expense 377 380 157 199
--------- --------- --------- ---------
Income before income taxes 21,351 15,625 4,594 3,926
Provision for income taxes 8,327 5,937 1,791 1,492
--------- --------- --------- ---------
Income before cumulative effect
of accounting change 13,024 9,688 2,803 2,434
Cumulative effect of change in
accounting for postemployment
benefits, net of tax (1,545) - - -
--------- --------- --------- ---------
Net income $ 11,479 $ 9,688 $ 2,803 $ 2,434
--------- ========= ========= =========
Primary earnings per share
before cumulative effect
of accounting change $ .57 $ .39 $ .12 $ .10
Cumulative effect of change
in accounting for post-
employment benefits (.07) - - -
--------- --------- --------- ---------
Primary earnings per share $ .50 $ .39 $ .12 $ .10
========= ========= --------- ---------
Fully diluted earnings per
share before cumulative
effect of accounting
change $ .56 $ .39 $ .12 $ .10
Cumulative effect of change
in accounting for post-
employment benefits (.07) - - -
--------- --------- -------- ---------
Fully diluted earnings
per share $ .49 $ .39 $ .12 $ .10
========= ========= ======== ========
Cash dividends declared per
share $ .050 $ .045 $ .025 $ .025
Weighted average common and
common equivalent shares:
Primary 23,186 24,554 23,161 24,240
Fully diluted 23,327 24,668 23,269 24,252
</TABLE>
See Accompanying Notes.
- 3 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
--------------------------
March 25, March 26,
1995 1994
--------------------------
<S> <C> <C>
Net cash provided by operating activities $ 9,368 $ 15,911
Cash flows from investing activities:
Investment in business ventures/acquisitions (61) -
Acquisition of property, plant and equipment (16,372) (6,726)
Proceeds from disposals of property
and equipment 6 78
Proceeds from sale of interest in joint venture 9,000 -
Sales and maturities of available-for-sale
securities 27,336 13,181
Purchases of available-for-sale securities (27,527) (23,850)
-------- --------
Net cash used in investing activities (7,618) (17,317)
Cash flows from financing activities:
Tax effect - vesting of restricted
stock/options exercised 384 7,070
Proceeds from exercise of stock options 471 433
Purchase of common stock for treasury (3,660) (32,341)
Cash dividends paid (1,039) (870)
-------- --------
Net cash used by financing activities (3,844) (25,708)
-------- --------
Decrease in cash and cash equivalents (2,094) (27,114)
Cash and cash equivalents at beginning of period 39,748 51,080
-------- --------
Cash and cash equivalents at end of period $ 37,654 $ 23,966
======== ========
Non-cash financing and investing activities:
Purchase of ADVO Common Stock
for treasury, paid subsequent
to March 26, 1994 $ - $ 6,077
</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 six month periods ended March
25, 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
March 25, 1995 Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Obligations $14,890 $ - $ 64 $14,826
Municipal Bonds 16,168 3 104 16,067
U.S. Corporate Securities 317 - 15 302
-------------------------------------------------------
Total securities $31,375 $ 3 $183 $31,195
=======================================================
</TABLE>
The gross realized gains on the sale of available-for-sale securities totaled
$10 thousand and there were no realized losses for the quarter ended March 25,
1995. For the six months ended March 25, 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
March 25, 1995, by contractual maturity, are shown below (in thousands).
<TABLE>
<CAPTION>
Estimated
Cost Fair Value
------------------------
<S> <C> <C>
Due in one year or less $22,634 $ 22,556
Due after one year through three years 8,741 8,639
------------------------
Total securities $31,375 $ 31,195
========================
</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).
- 6 -
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
- ---------------------
Revenues for the second quarter of fiscal 1995 increased 11% or $24.5 million
over the comparable period of the prior fiscal year. Year-to-date fiscal 1995
revenues increased 9% or $40.8 million over the comparable six month period of
fiscal 1994. Volume gains contributed to the majority of the increases for the
three and six month periods. The volume growth was attributable to increased
business in existing markets, particularly with the Company's heavier non-
turnkey products. Pricing gains were also achieved in several of the Company's
shared mail products for each of the periods ended March 25, 1995 over the
comparable periods of the prior year, mainly attributable to the pass through of
the postal rate increase effective January 1, 1995.
Pieces per package increased 6% for the second quarter and 5% for the first six
months of fiscal 1995 to 7.80 and 7.96, respectively, when compared to fiscal
1994. Shared mail packages delivered also increased for each of the periods to
0.8 billion, or 1%, for the second fiscal quarter and 1.6 billion, or 2%, for
the first half of fiscal 1995. The Company's management continues to remain
cautiously optimistic about the near term due to the continued consolidation of
the retail sector, the ongoing impact of the postal rate increase and the
continued increase in paper costs.
As a percentage of revenues, cost of sales increased 2% to 78% for the three
months ended March 25, 1995 and 1% to 76% for the first six months of fiscal
1995 when compared to the prior year. These increases as a percentage of sales
were reflective of increased postal and paper costs. Both periods experienced
increases, in absolute terms, of $22.9 million and $33.5 million for the three
and six month periods ended March 25, 1995, respectively, when compared with the
prior year. Postage and print costs accounted for the majority of the increase
for each of the periods and resulted primarily from the volume growth and the
postal rate increase effective January 1, 1995, and to a lesser extent paper
cost increases. Postage costs increased 15% and 8%, respectively, for the three
and six months ended March 25, 1995 over the comparable periods ended March 26,
1994 and resulted from the increase in postage rates as well as the shared mail
package and piece growth. Print expense, inclusive of paper costs, increased
roughly 11% over prior year for the second quarter and 13% for the first six
months of fiscal 1995 and was related to growth in the previously mentioned
shared mail piece volume. Overall, the Company distributed 6.3 billion and 12.6
billion shared mail pieces in the second quarter and first six months of fiscal
1995, respectively, representing increases of 7% for both periods over the prior
year.
Selling expense, including the provision for bad debt, remained constant as a
percentage of revenues at approximately 12% for the second quarter and the first
half of fiscal 1995 over fiscal 1994. The second quarter of fiscal 1995
experienced an absolute increase of $1.7 million in selling costs when compared
to the second quarter of fiscal 1994. The first half of fiscal 1995's selling
costs increased $3.5 million, in absolute terms, when compared with the same
period of a year earlier. Both the quarter and first half increases were
primarily related to increased commission expense resulting from the fiscal 1995
revenue growth over fiscal 1994.
General and administrative costs, as a percentage of revenue, were 9% for the
quarter ended March 25, 1995 versus 10% for the quarter ended March 26, 1994.
For the first half of fiscal 1995, general and administrative costs remained
flat at 9% when compared to same period in fiscal 1994. In absolute terms,
general and administrative expenses decreased $0.4 million during the second
quarter of fiscal 1995 and increased $0.9 million for the six month period when
compared to the previous fiscal year. The decrease in the second quarter was
attributable to reductions in advertising and promotion expenditures,
- 7 -
<PAGE>
while the increase for the six month period was reflective of higher
infrastructure costs and professional and consulting fees.
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, the Company reported operating income of $4.0 million
for the second quarter and $20.2 million for the first half of fiscal 1995
versus $3.7 million for the second quarter and $15.1 million for the first half
of fiscal 1994.
The effective income tax rate for the three and six month periods ended March
25, 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 $3.8 million to $50.5 million at March 25, 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 remained relatively constant at 1.44 at March 25, 1995 versus 1.45
at September 24, 1994.
Total stockholders' equity increased $8.2 million to $116.2 million at March
25, 1995. The increase was reflective of the Company's net income of $11.5
million for the first six months of fiscal 1995, the $0.9 million recorded for
the exercise of stock options and related tax benefit under the Company's
employee stock plans and $0.7 million for the amortization of deferred
compensation. These increases were offset to a degree by $3.7 million used for
the purchase of the Company's common stock for treasury, primarily related to an
open market purchase of $3.1 million.
Liquidity
- ---------
The Company's main source of liquidity continues to be funds from operating
activities. Cash provided from operating activities decreased $6.5 million to
$9.4 million for the six months ended March 25, 1995 versus $15.9 million for
the comparable period of fiscal 1994. During the first six months of fiscal 1995
the Company experienced an $11.0 million increase in accounts receivable,
primarily related to the revenue growth and timing of customer receipts.
Accounts payable also increased during this six month period by $12.3 million,
offsetting the receivables increase. The accounts payable increase was related
to the timing of payments to the Company's vendors. Cash and cash equivalents
decreased $2.1 million to $37.7 million for the six months ended March 25, 1995
versus a decrease of $27.1 million for the same period of a year earlier. The
decrease was reflective of $16.4 million of 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 $3.7 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 $27.1 million decrease for the first six months of
fiscal 1994 was primarily reflective of the $32.3 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.
- 8 -
<PAGE>
PART II - OTHER INFORMATION
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.
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 March 25, 1995.
________________________________________________________________________________
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: May 3, 1995 By:ROBERT S. HIRST\s\
----------- -----------------------------
Robert S. Hirst
Vice President and Controller
(Principal Accounting Officer)
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<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>
Six months ended Three months ended
------------------------- -----------------------
March 25, March 26, March 25, March 26,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS APPLICABLE TO COMMON STOCK $11,479 $ 9,688 $ 2,803 $ 2,434
======= ======= ======= =======
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES
Average common shares outstanding 20,641 21,499 20,590 21,304
Assumed conversion or exercise of:
Warrants 2,253 2,235 2,260 2,264
Stock Options 257 763 273 640
Restricted Stock 35 57 38 32
------- ------- -------- -------
Weighted average common
equivalent shares 23,186 24,554 23,161 24,240
======= ======= ======== =======
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ .50 $ .39 $ .12 $ .10
======= ======= ======== =======
</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>
Six months ended Three months ended
------------------------ ---------------------
March 25, March 26, March 25, March 26,
1995 1994 1995 1994
-------- -------- ------- --------
<S> <C> <C> <C> <C>
EARNINGS APPLICABLE TO FULLY
DILUTED SHARES $11,479 $ 9,688 $ 2,803 $ 2,434
======= ======= ======= =======
FULLY DILUTED SHARES
Average common shares outstanding 20,641 21,499 20,590 21,304
Assumed conversion or exercise of:
Warrants 2,280 2,268 2,280 2,268
Stock Options 353 831 349 650
Restricted Stock 53 70 50 30
------ ------- ------ -------
Fully diluted shares 23,327 24,668 23,269 24,252
======= ======= ======= =======
EARNINGS PER SHARE ASSUMING
FULL DILUTION $ .49 $ .39 $ .12 $ .10
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> SEP-25-1995
<PERIOD-END> MAR-25-1995
<CASH> 37,654
<SECURITIES> 31,195
<RECEIVABLES> 70,863
<ALLOWANCES> 4,491
<INVENTORY> 7,113
<CURRENT-ASSETS> 164,113
<PP&E> 132,700
<DEPRECIATION> 65,767
<TOTAL-ASSETS> 241,601
<CURRENT-LIABILITIES> 113,641
<BONDS> 0
<COMMON> 245
0
0
<OTHER-SE> 115,980
<TOTAL-LIABILITY-AND-EQUITY> 241,601
<SALES> 0
<TOTAL-REVENUES> 517,291
<CGS> 0
<TOTAL-COSTS> 392,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,510
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 21,351
<INCOME-TAX> 8,327
<INCOME-CONTINUING> 13,024
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,545)
<NET-INCOME> 11,479
<EPS-PRIMARY> .50
<EPS-DILUTED> .49
</TABLE>
