<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 28, 1997
-------------
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: (860) 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 26 , 1997 there were 24,323,213 shares of common stock
outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended June 28, 1997
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I - Financial Information
------------------------------
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
June 28, 1997 and September 28, 1996. 2
Consolidated statements of operations -
Nine months and three months ended
June 28, 1997 and June 29, 1996. 3
Consolidated statements of cash flows -
Nine months ended June 28, 1997
and June 29, 1996. 4
Notes to consolidated financial statements. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 6
Part II - Other Information
---------------------------
Item 5. Other Information 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>
June 28, September 28,
ASSETS 1997 1996
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (1) $ 11,932 $ 13,303
Accounts receivable, net 62,287 62,668
Inventories 3,898 7,518
Prepaid expenses and other current assets 5,711 4,512
Deferred income taxes 13,982 15,839
--------- ---------
Total current assets 97,810 103,840
Property, plant and equipment 160,571 142,029
Less accumulated depreciation and amortization (87,504) (77,854)
--------- ---------
Net property, plant and equipment 73,067 64,175
Other assets 17,719 17,111
--------- ---------
TOTAL ASSETS $ 188,596 $ 185,126
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 8,241 $ 7,225
Accounts payable 32,984 37,868
Accrued compensation and benefits 24,854 22,892
Other current liabilities 31,883 32,094
--------- ---------
Total current liabilities 97,962 100,079
Long-term debt 146,364 161,125
Deferred income taxes 8,517 6,618
Other liabilities 2,658 2,509
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 28,352,450
and 27,900,756 shares, respectively) 284 279
Additional paid-in capital 162,884 160,704
Accumulated deficit (163,686) (181,914)
--------- ---------
(518) (20,931)
Less common stock held in
treasury, at cost (66,387) (64,274)
--------- ---------
Total stockholders' deficiency (66,905) (85,205)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS'
DEFICIENCY $ 188,596 $ 185,126
========= =========
</TABLE>
(1) Includes cash and cash equivalents invested with related party of $3,312,000
at June 28, 1997 and $5,362,000 at September 28, 1996.
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 28, June 29, June 28, June 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $755,868 $734,221 $258,243 $245,698
Costs and expenses:
Cost of sales 565,541 575,562 188,929 190,246
Selling, general and
administrative 145,562 134,546 48,190 43,302
Nonrecurring charges -- 12,082 -- --
Provision for bad debts 3,674 2,916 1,993 496
Gain on sale of business line -- (2,687) -- --
-------- -------- -------- --------
Operating income 41,091 11,802 19,131 11,654
Interest expense 11,211 5,618 3,631 4,264
Interest income-Related Party 356 1,083 117 123
Interest income-Other 130 57 32 7
Other expense 490 397 167 158
-------- -------- -------- --------
Income before income taxes 29,876 6,927 15,482 7,362
Provision for income taxes 11,651 2,674 6,038 2,971
-------- -------- -------- --------
Income from continuing operations 18,225 4,253 9,444 4,391
Loss on disposal of discontinued
operations, net of tax -- (8,199) -- --
-------- -------- -------- --------
Net income (loss) $ 18,225 $ (3,946) $ 9,444 $ 4,391
======== ======== ======== ========
Earnings from continuing
operations $ .74 $ .17 $ .38 $ .18
Loss on disposal of discontinued
operations, net of tax -- (.33) -- --
-------- -------- -------- --------
Earnings (loss) per share $ .74 $ (.16) $ .38 $ .18
======== ======== ======== ========
Cash dividends declared per share $ -- $ 10.025 $ -- $ --
Weighted average common and
common equivalent shares 24,636 24,642 24,671 25,003
</TABLE>
See Accompanying Notes.
-3-
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
---------------------------
June 28, June 29,
1997 1996
---------- ----------
<S> <C> <C>
Net cash provided by continuing operating activities $ 33,398 $ 12,682
Cash flows from continuing investing activities:
Acquisition of property, plant and equipment (20,914) (11,112)
Proceeds from disposals of property and equipment 19 12
Proceeds from sale of business line -- 742
Sales and maturities of available-for-sale
securities -- 80,482
Purchases of available-for-sale securities -- (49,604)
--------- ---------
Net cash (used) provided by continuing investing activities (20,895) 20,520
Cash flows from continuing financing activities:
Proceeds from long-term borrowings - term loans -- 155,000
Payments on long-term borrowings - term loans (15,744) --
Revolving line of credit - net 2,000 25,000
Payment of debt issue costs -- (5,458)
Tax effect - employee stock plans 328 3,510
Proceeds from the exercise of warrants -- 7,200
Proceeds from exercise of stock options 2,162 2,431
Purchases of common stock for treasury (2,619) (925)
Other (1) 13
Cash dividends paid -- (240,613)
--------- ---------
Net cash used by continuing financing activities (13,874) (53,842)
--------- ---------
Net cash provided by discontinued operations -- 5,648
--------- ---------
Decrease in cash and cash equivalents (1,371) (14,992)
Cash and cash equivalents at beginning of period 13,303 23,849
--------- ---------
Cash and cash equivalents at end of period $ 11,932 $ 8,857
========= =========
</TABLE>
Excluded from the consolidated statements of cash flows was the effect of a
certain noncash activity in which the Company received a note for $3.5 million
in conjunction with the sale of MidCoast Press during the first quarter of
fiscal 1996.
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 and nine month periods
ended June 28, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 27, 1997. 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 28, 1996. Certain reclassifications have been made in the fiscal 1996
financial statements to conform with the fiscal 1997 presentation.
2. FINANCING ARRANGEMENTS
Included as long-term debt at September 28, 1996 was approximately $11 million
in excess cash flow payments, as defined by the credit agreement. During the
first quarter of fiscal 1997, this amount was paid and applied toward the term
loans. The Company paid these funds through use of available revolving line of
credit commitments which are classified as long-term.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In February of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share". The Statement
establishes standards for computing and presenting earnings per share ("EPS").
This Statement simplifies the standards for computing EPS previously found in
APB Opinion No. 15, "Earnings Per Share", and makes them comparable to
international EPS standards. The statement requires the presentation of basic
and diluted EPS. Basic EPS 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 EPS reflects the potential
dilution that could occur if common stock equivalents, such as stock options,
were exercised. The Company will adopt this Statement in the first quarter of
fiscal 1998 and expects that there will not be a material dilution to the
Company's earnings per share as a result of the adoption, based on the current
market price of the stock and the number of outstanding common stock
equivalents. If the market price and/or the number of common stock equivalents
were to increase, the diluted EPS could be significantly impacted.
-5-
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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. 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 accompanied by
cautionary factors which could cause the Company's actual results to differ
materially from those in the forward looking statements. The cautionary factors
presented should not be construed as exhaustive.
RESULTS OF OPERATIONS
- ---------------------
Revenues for the third quarter of fiscal 1997 were $258.2 million or $12.5
million higher than fiscal 1996 third quarter results. This 5.1% growth in
revenues was primarily volume related and the result of the substantial growth
in average shared mail pieces per package. Pieces per package increased 11.6%
from 7.77 in the third quarter of fiscal 1996 to 8.67 pieces in the third
quarter of fiscal 1997.
On a year to date basis the 2.9% increase in revenues over the prior year was
primarily a result of volume gains, offset to a degree by shifts in product mix
and weight. The volume gains for the nine month period were demonstrated in
the 10.0% growth in average shared mail pieces per package to 8.48 pieces over
the prior year. These volume gains were somewhat offset by a strategically
driven reduction in shared mail packages, associated with the discontinuation of
the second in-home date program in Texas and the closing of unprofitable
markets. Total shared mail packages delivered decreased 3.1% to 2,329.3 million
packages for the nine months ended June 28, 1997. The volume gains were also
offset by the decline in product weights associated with the Company's preprint
customers.
Third quarter cost of sales as a percentage of revenue decreased 4.2% to 73.2%
and in absolute terms decreased $1.3 million over the same period of the prior
year. The decrease for the third quarter was mainly attributable to lower print
and paper costs along with the postal reclassification implemented by the United
States Postal Service in July 1996. The postage savings were offset to a degree
by increased preprint product weights during the third quarter. This represents
a reversal of preprint product weight declines experienced through the second
quarter of fiscal 1997 when compared to the prior year.
Fiscal 1997 year to date cost of sales as a percentage of revenue decreased 3.6%
to 74.8% and in absolute terms $10.0 million over the comparable period of
fiscal 1996. Postage costs along with print and paper costs contributed to the
decline in costs of sales. Postage costs were favorably impacted by the postal
reclassification mentioned above and also by the decline in preprint product
weights. These declines were offset by additional postage costs incurred with
the volume growth as demonstrated by the 6.7% increase in total shared mail
pieces distributed, to approximately 19.8 billion pieces . Print and paper
costs decreased as a result of lower paper prices and lower turnkey volume.
As a percentage of revenue, selling expense, including the provision for bad
debts, for both the three and nine months ended June 28, 1997 increased from
13.2% of a year earlier to 13.9%. In terms of dollars, selling expense
increased $3.5 million and $8.1 million, respectively, for the three and nine
month periods when compared to the same periods of the prior year. Increased
commissions associated with the volume growth and higher bad debt expense
resulted in higher selling expense for the third quarter of fiscal 1997. On a
year to date basis, the realignment of the sales organization associated with
the Company's re-engineering efforts during fiscal 1996 as well as the items
discussed above resulted in the increased selling expense during the current
year.
General and administrative costs for the three months ended June 28, 1997
increased $2.9 million over the prior year's quarter. General and
administrative costs also increased from 4.6% to 5.5% as a percentage of revenue
for the same period. Year to date, fiscal 1997 costs compared to fiscal 1996
costs increased $3.7 million in absolute terms and from 5.5% to 5.9% as a
percentage of revenue. The continued cost savings associated with the Company's
re-engineering efforts were offset by increases in severance, incentive and
other compensation related expenses.
-6-
<PAGE>
During the second quarter of the prior year, the Company obtained credit
facilities totaling $250 million as a result of the payment of a special $10 per
share dividend (the "Special Dividend"). In connection with the declaration of
the Special Dividend, the Company recorded $12.1 million in nonrecurring charges
in the second quarter of fiscal 1996. These charges were comprised of $8.8
million in noncash compensation expense, as a result of equitable adjustments to
outstanding employee stock options, and $3.3 million in legal and various other
fees associated with the Special Dividend and the Company's exploration of its
strategic alternatives related to enhancing shareholder value.
As a result of the aforementioned, the Company reported operating income of
$19.1 million for the third quarter and $41.1 million for the first nine months
of fiscal 1997, increases of $7.5 million and $29.3 million, respectively, over
the same periods of the prior year.
Interest expense relating to the credit facilities totaled $3.6 million and
$11.2 million, respectively, for the three and nine month periods ended June 28,
1997. In the prior year, at the onset of the credit facilities, interest
expense totaled $4.3 million for the quarter and $5.6 million year to date.
Interest income declined in fiscal 1997 primarily as a result of the available-
for-sale securities which were subsequently sold in fiscal 1996 at the time of
the Special Dividend payment.
The effective income tax rate from continuing operations for the nine months
ended June 28, 1997 and June 29, 1996 was approximately 39%. For the third
quarter of fiscal 1997 and fiscal 1996, the effective income tax rate was
approximately 39% and 40%, respectively.
Earnings per share from continuing operations for third quarter of fiscal 1997
were $.38 compared to $.18 for the third quarter of fiscal 1996. Year to date
earnings per share from continuing operations for fiscal 1997 were $.74 versus
$.17 in fiscal 1996. Prior year earnings were impacted by the $12.1 million in
nonrecurring charges.
FINANCIAL CONDITION
- -------------------
Working capital decreased $3.9 million from September 28, 1996. Decreases in
paper inventory and cash primarily caused the decrease in current assets. The
decrease in paper inventory was due to a change in the Company's inventory
strategy. The $2.1 million decrease in current liabilities was the result of
the decline in accounts payable and customer advances due to the timing of
vendor payments and customer receipts offset by an increase in federal and state
taxes payable associated with the Company's improved year to date earnings.
These factors which affected current assets and current liabilities caused the
decline in working capital and the working capital ratio decline from 1.04 at
September 28, 1996 to 1.00 at June 28, 1997.
Total stockholders' deficiency decreased $18.3 million to a net deficiency of
$66.9 million as of June 28, 1997. The decrease was mainly the result of the
fiscal 1997 year to date net income of $18.2 million. In addition, $2.2 million
from employee option exercises offset by $2.6 million used to purchase the
Company's common stock for treasury under the Company's repurchase program and
pursuant to elections by employees to satisfy withholding tax requirements under
the Company's restricted stock and stock option plans, contributed to the change
in stockholders' deficiency. On April 29, 1997 the Board of Directors approved
the purchase by the Company of up to two million shares of the Company's common
stock. The purchase will be made from time to time within the next 12 months at
prevailing market prices. Subsequent to the quarter ended June 28, 1997 the
Company made additional open market purchases of approximately $1.3 million in
the month of July.
LIQUIDITY
- ---------
The Company's main source of liquidity continues to be funds from operating
activities. In addition, the Company has $78.0 million in available credit
commitments which may be used to fund working capital. Cash flows provided by
continuing operating activities increased $20.7 million for fiscal 1997 as
compared to the same period of the prior year. The overall improvement was
predominately the result of higher earnings in the current year.
-7-
<PAGE>
Cash and cash equivalents decreased $1.4 million to $11.9 million for the nine
months ended June 28, 1997. The overall decrease was a result of cash outlays
of $34.8 million associated with investing and financing activities offset by
cash provided from continuing operations of $33.4 million. Investing activities
consisted mainly of capital expenditures for the upgrade and technological
advancements of the Company's desktop computer resources primarily related to
the Company's sales force and the development of financial and operational
software. Debt repayments, net of borrowings, of $13.7 million, accounted for
the majority of the financing activity.
FINANCING ARRANGEMENTS
- ----------------------
During March of 1996 the Company entered into a credit agreement which provided
for total credit facilities of $250 million, consisting of $155 million in term
loans and a $95 million reducing revolving line of credit. At June 28, 1997
there was $154.6 million of debt outstanding, with $8.2 million classified as
current. The Company anticipates it will be able to meet its long-term debt
obligations through funds generated from operations. During July of 1997, the
Company had additional net borrowings of $5.0 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. The Company was in compliance with
all applicable covenants as of June 28, 1997.
FORWARD LOOKING STATEMENTS
- --------------------------
The forward looking statements contained in this filing are subject to many
uncertainties in the Company's operations and business environment. Examples of
such uncertainties include changes in customer demand, the cost of postal and
paper resources, the realization of benefits associated with the Company's re-
engineering initiative, the impact of future postal rate increases, and other
general economic factors.
-8-
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
-----------------
Subsequent to the quarter ended June 28, 1997, the Company announced
the election of David F. Dyer to its Board of Directors on July 21,
1997. Total Board membership is now ten.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Index
Exhibit No. Exhibits
----------- --------
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 June 28, 1997.
- --------------------------------------------------------------------------------
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: August 8, 1997 By: /s/ ROBERT S. HIRST
-------------- ----------------------------
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 (LOSS)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
------------------------------------ -------------------------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK $18,225 $(3,946) $ 9,444 $ 4,391
======= ======= ======= =======
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES
Average common shares outstanding 24,324 22,379 24,406 23,999
Assumed conversion or exercise of:
Warrants -- 1,151 -- --
Stock Options 300 1,091 255 993
Restricted Stock 12 21 10 11
------- ------- ------- -------
Weighted average common and common
equivalent shares 24,636 24,642 24,671 25,003
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ .74 $ (.16) $ .38 $ .18
======= ======= ======= =======
</TABLE>
<PAGE>
Exhibit 11
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Page 2 of 2
ADVO, Inc.
COMPUTATION OF FULLY DILUTED PER SHARE EARNINGS (LOSS)
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
----------------------------------- ---------------------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
------------ ------------ ------------- ----------
<S> <C> <C> <C> <C>
EARNINGS (LOSS) APPLICABLE TO
FULLY DILUTED SHARES $ 18,225 $ (3,946) $ 9,444 $ 4,391
============ =========== ============ ========
FULLY DILUTED SHARES
Average common shares outstanding 24,324 22,379 24,406 23,999
Assumed conversion or exercise of:
Warrants -- 1,151 -- --
Stock Options 517 1,091 449 993
Restricted Stock 13 34 13 18
FULLY DILUTED SHARES 24,854 24,655 24,868 25,010
============ =========== ============ ========
EARNINGS (LOSS) PER SHARE
ASSUMING FULL DILUTION $ .73 $ (.16) $ .38 $ .18
============ =========== ============ ========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADUO,INC'S
FORM 10Q FOR THE QUARTER ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1997
<PERIOD-END> JUN-28-1997
<CASH> 11,932
<SECURITIES> 0
<RECEIVABLES> 67,043
<ALLOWANCES> 4,756
<INVENTORY> 3,898
<CURRENT-ASSETS> 97,810
<PP&E> 160,571
<DEPRECIATION> 87,504
<TOTAL-ASSETS> 188,596
<CURRENT-LIABILITIES> 97,962
<BONDS> 146,364
0
0
<COMMON> 284
<OTHER-SE> (67,189)
<TOTAL-LIABILITY-AND-EQUITY> 188,596
<SALES> 0
<TOTAL-REVENUES> 755,868
<CGS> 0
<TOTAL-COSTS> 565,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,674
<INTEREST-EXPENSE> 11,211
<INCOME-PRETAX> 29,876
<INCOME-TAX> 11,651
<INCOME-CONTINUING> 18,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,225
<EPS-PRIMARY> .74
<EPS-DILUTED> .73
</TABLE>
