<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 28, 1996
-----------------
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 January 25, 1997 there were 24,310,113 shares of common stock
outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended December 28, 1996
Part I - Financial Information Page
------------------------------ ----
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
December 28, 1996 and September 28, 1996. 2
Consolidated statements of operations -
Three months ended December 28, 1996
and December 30, 1995. 3
Consolidated statements of cash flows -
Three months ended December 28, 1996
and December 30, 1995. 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 4. Submission of Matters to a Vote of
Security Holders. 8
Item 6. Exhibits and Reports on Form 8-K. 8
Signatures 9
<PAGE>
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 28, September 28,
ASSETS 1996 1996
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (1) $ 5,117 $ 13,303
Accounts receivable, net 65,265 62,668
Inventories 5,721 7,518
Prepaid expenses and other current assets 3,759 4,512
Deferred income taxes 16,774 15,839
-------- ---------
Total current assets 96,636 103,840
Property, plant and equipment 147,953 142,029
Less accumulated depreciation and amortization (81,462) (77,854)
--------- ---------
Net property, plant and equipment 66,491 64,175
Other assets 18,077 17,111
-------- ---------
TOTAL ASSETS $ 181,204 $ 185,126
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,003 $ 7,225
Accounts payable 28,321 37,868
Accrued compensation and benefits 20,525 22,892
Other current liabilities 35,633 32,094
--------- ---------
Total current liabilities 91,482 100,079
Long-term debt 157,230 161,125
Deferred income taxes 7,263 6,618
Other liabilities 2,565 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 28,093,450
and 27,900,756 shares, respectively) 281 279
Additional paid-in capital 162,023 160,704
Accumulated deficit (175,728) (181,914)
--------- ---------
(13,424) (20,931)
Less common stock held in
treasury, at cost (63,912) (64,274)
--------- ---------
Total stockholders' deficiency (77,336) (85,205)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS'
DEFICIENCY $ 181,204 $ 185,126
========= =========
</TABLE>
(1) Includes cash and cash equivalents invested with related party of $5,262,000
at December 28, 1996 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>
Three months ended
-----------------------------
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Revenues $ 255,131 $ 256,512
Costs and expenses:
Cost of sales 192,338 199,959
Selling, general and
administrative 47,983 47,069
Gain on sale of business line -- (2,687)
Provision for bad debts 807 1,202
-------- --------
Operating income 14,003 10,969
Interest expense 3,863 --
Interest income-Related Party 127 516
Interest income-Other 20 11
Other expense 152 118
-------- --------
Income before income taxes 10,135 11,378
Provision for income taxes 3,953 4,360
-------- --------
Income from continuing operations 6,182 7,018
Discontinued operations:
Estimated loss on disposal of
discontinued operations, net of tax -- (981)
-------- --------
Net Income $ 6,182 $ 6,037
======== ========
Earnings from continuing operations $ .25 $ .29
Discontinued operations:
Estimated loss on disposal, net of tax -- (.04)
-------- --------
Earnings per share $.25 $ .25
======== ========
Cash dividends declared per share $ -- $ .025
Weighted average common and
common equivalent shares 24,590 23,856
</TABLE>
See Accompanying Notes.
-3-
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
-------------------------
December 28, December 30,
1996 1995
------------- -----------
<S> <C> <C>
Net cash provided by continuing
operating activities $ 325 $ 1,287
Cash flows from continuing
investing activities:
Acquisition of property, plant and
equipment (6,012) (4,246)
Proceeds from disposals of property
and equipment 1 5
Proceeds from sale of business line -- 742
Sales and maturities of
available-for-sale securities -- 39,539
Purchases of available-for-sale securities -- (42,717)
----------- ----------
Net cash used by continuing investing
activities (6,011) (6,677)
Cash flows from continuing financing activities:
Revolving line of credit - net 8,000 --
Payments of long-term borrowings (12,117) --
Tax effect - vesting of restricted
stock/options exercised 37 168
Proceeds from exercise of stock options 1,721 361
Purchase of common stock for treasury (144) (231)
Other 3 --
Cash dividends paid -- (521)
----------- ----------
Net cash used by continuing financing
activities (2,500) (223)
----------- ----------
Net cash used by discontinued operations -- (1,904)
----------- ----------
Decrease in cash and cash equivalents (8,186) (7,517)
Cash and cash equivalents at beginning of
period 13,303 23,849
----------- ----------
Cash and cash equivalents at end of period $ 5,117 $ 16,332
=========== ==========
</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 period ended December 28,
1996 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.
-5-
<PAGE>
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 would 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 first quarter of fiscal 1997 remained constant with the fiscal
1996 first quarter results, slightly decreasing by 0.5%. Adjusting for the sale
of MidCoast Press, which took place in the first quarter of fiscal 1996, the
exit of a second in-home date program in two of the Company's larger markets and
underperforming products, revenue would have increased 7%. Increased volume
growth was more than offset by a shift in product mix and weight, associated
with the Company's large Preprint customers, resulting in an overall decline in
revenues. The volume growth was illustrated by the 8.9% increase in total pieces
per package from 7.77 in fiscal 1996 to 8.46 in fiscal 1997. Total packages
mailed decreased 4.3% to 765.3 million, mainly due to the discontinuation of a
second in-home date program in two of the Company's larger markets and pruning
of unprofitable markets.
Cost of sales as a percentage of revenues decreased from 78.0% in the first
quarter of fiscal 1996 to 75.4% in the first quarter of fiscal 1997. In terms
of dollars, cost of sales decreased $7.6 million or 3.8% due to decreases in
postage costs and, to a lesser extent, print and paper costs. Postage costs
were favorably impacted by the postage reclassification implemented by the
United States Postal Service in July 1996 and the decline in product weights.
These declines were partially offset by the increases in production costs and
additional postage expense associated with the volume growth, particularly with
the Company's Preprint customers. Print and paper expenses decreased as a
result of lower turnkey volume as well as lower paper prices.
Selling expense, including the provision for bad debts, as a percentage of
revenue increased to 13.7% during the first three months of fiscal 1997 as
compared to 12.4% for the same period of the prior fiscal year. The increase in
selling expense was a result of the realignment of the sales organization
associated with the Company's re-engineering efforts during fiscal 1996.
General and administrative costs decreased $2.7 million or 16.2% as compared to
the same period of the prior year. The decline can be attributed to the
Company's re-engineering program which reduced headcount and realigned its
administrative functions.
Operating income for the quarter ended December 28, 1996 increased 27.7% over
the prior year to $14.0 million, as a result of the aforementioned. Adjusting
for the $2.7 million pretax gain related to the sale of MidCoast Press during
the first quarter of the prior fiscal year, operating income would have
increased $5.7 million or 69.1%.
The Company obtained credit facilities totaling $250 million in connection with
the payment of a special $10 per share dividend (the "Special Dividend") during
the second quarter of fiscal 1996. Interest expense relating to the credit
facilities totaled $3.9 million during the first quarter of fiscal 1997.
Interest income in fiscal 1996 related to available-for-sale securities which
were subsequently sold at the time of the Special Dividend payment.
The effective income tax rate for the three months ended December 28, 1996 and
December 30, 1995 was approximately 39%.
-6-
<PAGE>
FINANCIAL CONDITION
- -------------------
Working capital increased $1.4 million to $5.2 million at December 28, 1996 from
$3.8 million at September 28, 1996. The increase in working capital from
September 28, 1996 was mainly attributable to the decrease in accounts payable
which was primarily due to the timing of vendor payments. Partially offsetting
this decrease was the decline of $8.2 million in cash and cash equivalents.
The working capital ratio improved to 1.06 at December 28, 1996 from 1.04 at
September 28, 1996.
Total stockholders' deficiency decreased $7.9 million to a net deficiency of
$77.3 million at December 28, 1996. The decrease was primarily a result of the
Company's operating results for the first quarter of fiscal 1997.
LIQUIDITY
- ---------
The Company's main source of liquidity continues to be funds from operating
activities. In addition, the Company has available unused credit commitments of
$72 million which may be used to fund working capital. The net cash provided by
operating activities for the three months ended December 28, 1996, decreased
approximately $1 million over the same period of the prior fiscal year.
Decreases in accounts payable due to the timing of vendor payments accounted for
the majority of the decrease.
The Company experienced a $8.2 million decrease in cash and cash equivalents
during the first quarter of fiscal 1997 compared to a decrease $7.5 million
during the first quarter fiscal 1996. The decrease in the current year reflected
net debt repayments of approximately $4.0 million and purchases of $6.0 million
for capital expenditures relating to the continued roll out of laptop computers
for the Company's sales force and payments related to software development.
These decreases were offset by proceeds of $1.7 million from the exercise of
stock options.
FINANCING ARRANGEMENTS
- ----------------------
The Company maintains a credit agreement which provides for total credit
facilities of $250 million, consisting of $155 million in term loans and a $95
million reducing revolving line of credit. At December 28, 1996 there was
$164.2 million of debt outstanding, with $7.0 million classified as current.
The Company anticipates it will be able to meet its long-term debt obligations
through funds generated from operations. During January of 1997, the Company
reborrowed an additional $8.0 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 December 28, 1996.
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, postal and paper prices,
the realization of benefits associated with the Company's reengineering
initiative, the impact of the recent postal reclassification; and other general
economic factors.
-7-
<PAGE>
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 1997 Annual Meeting of Stockholders of ADVO, Inc. (the "Company"), held
on January 16, 1997, 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 1998.
2. The approval of an amendment to the 1986 Employee Restricted Stock Plan, as
amended.
3. The approval of an amendment to the 1988 Non-Qualified Stock Option Plan and
the 1993 Stock Option Subplan, as amended.
4. The ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending September 27, 1997.
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
Exhibit No. Exhibits
----------- --------
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 28, 1996.
- --------------------------------------------------------------------------------
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
-8-
<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 10, 1997 By: /s/ ROBERT S. HIRST
----------------- --------------------------
Robert S. Hirst
Vice President and Controller
(Principal Accounting Officer)
-9-
<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>
Three months ended
-------------------------
December 28, December 30,
1996 1995
----------- -----------
<S> <C> <C>
EARNINGS APPLICABLE TO COMMON STOCK $ 6,182 $ 6,037
======= =======
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES
Average common shares outstanding 24,221 20,771
Assumed conversion or exercise of:
Warrants -- 2,377
Stock Options 360 679
Restricted Stock 9 29
------- ------
Weighted average common and common
equivalent shares 24,590 23,856
======== ======
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ .25 $ .25
========= ======
</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 28, December 30,
1996 1995
----------- -----------
<S> <C> <C>
EARNINGS APPLICABLE TO FULLY
DILUTED SHARES $ 6,182 $ 6,037
========== =========
FULLY DILUTED SHARES
Average common shares outstanding 24,221 20,771
Assumed conversion or exercise of:
Warrants -- 2,380
Stock Options 360 691
Restricted Stock 9 33
---------- ----------
Fully diluted shares 24,590 23,875
========== ===========
EARNINGS PER SHARE ASSUMING
FULL DILUTION $.25 $.25
========== ===========
</TABLE>
<PAGE>
Exhibit 22
----------
Page 1 of 2
REPORT OF INSPECTOR OF ELECTION
FOR ADVO, INC. ANNUAL MEETING
HELD ON JANUARY 16, 1997
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 16, 1997.
Shares Voted: 22,421,906 92.35%
The following votes of common stock were cast:
For Directors
-------------
<TABLE>
<CAPTION>
Crawford Eskridge Fritz Kamerschen Lachman
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Votes
in Favor 22,125,734 22,126,570 22,117,568 22,114,828 22,118,120
Votes
Withheld 296,172 295,336 304,338 307,078 303,786
<CAPTION>
Mulloy Newman Rockwell Vogelstein
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Votes
in Favor 22,122,509 22,121,234 22,126,634 22,120,914
Votes
Withheld 299,397 300,672 295,272 300,992
</TABLE>
Proposition 2: Approval of an Amendment of
------------------------------------------
the 1986 Employee Restricted Stock Plan,
----------------------------------------
as amended
----------
<TABLE>
<CAPTION>
Common
----------
<S> <C> <C>
Votes in Favor 21,809,483 97.27%
Votes Against 582,264 2.60%
Abstain 30,159 .13%
</TABLE>
<PAGE>
Exhibit 22
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Page 2 of 2
Proposition 3: 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 20,353,478 90.78%
Votes Against 2,034,697 9.07%
Abstain 33,731 .15%
</TABLE>
Proposition 4: Ratification of the Appointment
----------------------------------------------
of Ernst & Young LLP Independent Auditors for Fiscal 1997
---------------------------------------------------------
<TABLE>
<CAPTION>
Common
----------
<S> <C> <C>
Votes in Favor 22,394,077 99.87%
Votes Against 22,029 .10%
Abstain 5,800 .03%
</TABLE>
LEE TINTO /s/
--------------------
Lee Tinto
Assistant Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO, INC'S
FORM 10Q FOR THE QUARTER ENDED DECEMBER 28, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> DEC-28-1996
<CASH> 5,117
<SECURITIES> 0
<RECEIVABLES> 69,763
<ALLOWANCES> 4,498
<INVENTORY> 5,721
<CURRENT-ASSETS> 96,636
<PP&E> 147,953
<DEPRECIATION> (81,462)
<TOTAL-ASSETS> 181,204
<CURRENT-LIABILITIES> 91,482
<BONDS> 0
0
0
<COMMON> 281
<OTHER-SE> (77,617)
<TOTAL-LIABILITY-AND-EQUITY> 181,204
<SALES> 0
<TOTAL-REVENUES> 255,131
<CGS> 0
<TOTAL-COSTS> 192,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 807
<INTEREST-EXPENSE> 3,863
<INCOME-PRETAX> 10,135
<INCOME-TAX> 3,953
<INCOME-CONTINUING> 6,182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,182
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
