<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 27, 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 January 24, 1998 there were 22,441,378 shares of common stock
outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended December 27, 1997
Part I - Financial Information
------------------------------
Page
----
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
December 27, 1997 and September 27, 1997. 2
Consolidated statements of operations -
Three months ended December 27, 1997
and December 28, 1996. 3
Consolidated statements of cash
flows - Three months ended December 27, 1997
and December 28, 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 4. Submission of Matters to a Vote of
Security Holders. 9
Item 6. Exhibits and Reports on Form 8-K. 9
Signatures 10
<PAGE>
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 27, September 27,
1997 1997
-------------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents (1) $ 12,164 $ 25,963
Accounts receivable, net 72,130 66,664
Inventories 3,309 4,149
Prepaid expenses and other current assets 2,823 4,759
Deferred income taxes 14,795 14,248
--------- ---------
Total current assets 105,221 115,783
Property, plant and equipment 173,715 166,991
Less accumulated depreciation and amortization (95,733) (90,899)
--------- ---------
Net property, plant and equipment 77,982 76,092
Other assets 16,406 16,678
--------- ---------
TOTAL ASSETS $ 199,609 $ 208,553
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 11,644 $ 10,125
Accounts payable 36,378 44,644
Accrued compensation and benefits 20,012 29,245
Other current liabilities 36,787 31,569
--------- ---------
Total current liabilities 104,821 115,583
Long-term debt 171,216 140,666
Deferred income taxes 9,287 9,589
Other liabilities 2,678 2,636
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 28,537,924
and 28,428,952 shares, respectively) 285 284
Additional paid-in capital 164,372 163,317
Accumulated deficit (146,734) (155,113)
--------- ---------
17,923 8,488
Less common stock held in
treasury, at cost (106,316) (68,409)
--------- ---------
Total stockholders' deficiency (88,393) (59,921)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS'
DEFICIENCY $ 199,609 $ 208,553
========= =========
</TABLE>
(1) Includes cash and cash equivalents invested with related party of $4,738,000
at December 27, 1997 and $11,613,000 at September 27, 1997.
See Accompanying Notes.
- 2 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
-----------------------------
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Revenues $ 262,144 $ 255,131
Costs and expenses:
Cost of sales 194,929 192,338
Selling, general and
administrative 49,300 47,983
Provision for bad debts 725 807
--------- ---------
Operating income 17,190 14,003
Interest expense 3,561 3,863
Interest income (A) 254 147
Other expense 148 152
--------- ---------
Income before income taxes 13,735 10,135
Provision for income taxes 5,357 3,953
--------- ---------
Net Income $ 8,378 $ 6,182
========= =========
Earnings per common share (B) $ .37 $ .26
========= =========
Earnings per common share
- assuming dilution (B) $ .36 $ .25
========= =========
Weighted average common shares 22,419 24,221
Weighted average diluted shares 23,058 24,590
</TABLE>
(A) Includes interest income from a related party of $106,000 and $127,000 for
the three months ended December 27, 1997 and December 28, 1996, respectively.
(B) The Company adopted Statement of Financial Accounting Standards No, 128,
"Earnings Per Share" ("EPS") during the first quarter of fiscal 1998. As such,
prior year EPS amounts have been restated to conform to the provisions of the
new statement.
See Accompanying Notes.
-3-
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
-----------------------------
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Net cash (used) provided by operating activities $ (140) $ 362
Cash flows from investing activities:
Acquisition of property, plant and equipment (6,887) (6,011)
--------- ---------
Net cash used by investing activities (6,887) (6,011)
Cash flows from financing activities:
Revolving line of credit - net 37,000 8,000
Payments of long-term borrowings (4,931) (12,117)
Payment of debt issue costs (1,349) -
Proceeds from exercise of stock options 481 1,721
Purchase of common stock for treasury (37,974) (144)
Other 1 3
--------- ---------
Net cash used by financing activities (6,772) (2,537)
--------- ---------
Decrease in cash and cash equivalents (13,799) (8,186)
Cash and cash equivalents at beginning of period 25,963 13,303
--------- ---------
Cash and cash equivalents at end of period $ 12,164 $ 5,117
========= =========
</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 27,
1997 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 26, 1998. 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 27, 1997.
Certain reclassifications have been made in the fiscal 1997 financial statements
to conform with the fiscal 1998 presentation.
2. Earnings per share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("EPS"). Statement No. 128
replaced the previously reported primary and fully diluted earnings per share
with earnings per common share (basic) and earnings per common share - assuming
dilution (diluted). Earnings per common share 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. Earnings per common
share - assuming dilution reflects the potential dilution that could occur if
common stock equivalents, such as stock options, were exercised. All earnings
per share amounts for all periods have been restated to conform to the Statement
No. 128 requirement.
<TABLE>
<CAPTION>
Three months ended
--------------------------------
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Net income $ 8,378 $ 6,182
========= =========
Weighted average common shares 22,419 24,221
Effect of dilutive securities:
Stock options 621 360
Restricted stock 18 9
--------- ---------
Dilutive potential common shares 639 369
Weighted average diluted shares 23,058 24,590
========= =========
Earnings per common share $ .37 $ .26
========= =========
Earnings per common share - assuming
dilution $ .36 $ .25
========= =========
</TABLE>
-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.
RESULTS OF OPERATIONS
- ---------------------
Revenues for the first quarter of fiscal 1998 were $262.1 million or $7.0
million over fiscal 1997's first quarter results. The 2.7% increase in revenues
was derived from increases in product weights and price gains in product mix ,
as well as, overall volume increases. The volume gains were illustrated by the
growth in average pieces per package which increased 3.7% to 8.78 during the
first quarter of fiscal 1998 over the comparable period of the prior year.
Offsetting this increase was the 2.6% decline in the number of shared mail
packages delivered from 765.3 million during the first quarter of fiscal 1997 to
745.3 million during the first quarter of the current fiscal year. This decline
was the result of the Company's strategic decision to end its `second in-home-
date' program in the Detroit market and the Company's judicious management of
mailings during the holiday weeks.
Cost of sales as a percentage of revenues was 74.4% for the first quarter of
fiscal 1998 versus 75.4% for the first quarter of fiscal 1997. The decrease in
cost of sales as a percentage of revenue was the result of cost improvements in
operations and the impact of the aforementioned strategic management of the
holiday programs. In absolute terms, cost of sales increased 1.3% or $2.6
million over the comparable period of a year earlier. The increase was mainly
attributable to higher postage costs associated with the growth in pieces per
package mentioned above, coupled with a 1.0% increase in total shared mail
pieces delivered to 6,540.5 million.
As a percentage of revenue, selling, general and administrative costs, including
the provisions for bad debts, remained constant at 19.1% of revenue the first
three months of fiscal 1998 and fiscal 1997. In absolute terms, selling,
general and administrative costs increased $1.2 million. Selling expense
decreased during the first quarter of fiscal 1998 as a result of the Company's
commitment to rigorous cost controls. Offsetting the decrease in selling
expense was the increase in general and administrative costs which can be
attributed to amortization costs associated with the new financial systems,
software development and other technological enhancements, as well as
compensation related charges. These increases were also somewhat offset by
rigorous cost controls.
As a result of the aforementioned, the Company reported a 22.8% increase in
operating income to $17.2 million for the first three months of fiscal 1998 when
compared to the same period of fiscal 1997.
Interest expense relating to the credit facilities totaled $3.6 million during
the first quarter of fiscal 1998 compared to $3.9 million during the first
quarter of fiscal 1997. The decrease in interest expense was the result of the
lower interest rates under the renegotiated credit agreement.
The effective income tax rate for the three months ended December 27, 1997 and
December 28, 1996 was approximately 39%.
Earnings per share - assuming dilution was $.36 for the first quarter of fiscal
1998 which represents a 44% increase from the comparable period of the prior
year resulting from the Company's improved earnings. The Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("EPS") during the first quarter of fiscal 1998. As such, prior year EPS
amounts have been restated to conform to the provisions of the new statement.
-6-
<PAGE>
Weighted average common and diluted shares decreased during the first quarter of
fiscal 1998 primarily due to the Company's purchase of approximately 1.9 million
shares of its common stock from Warburg, Pincus Capital Partners, L.P
("Warburg") on September 29, 1997.
FINANCIAL CONDITION
- -------------------
The working capital ratio remained constant at approximately 1.00 at December
27, 1997 and September 27, 1997, however the components of the ratio, current
assets and current liabilities, both decreased approximately $11.0 million from
the end of fiscal 1997 to the first quarter of fiscal 1998. The decrease in
current assets was primarily the result of the decline in cash and cash
equivalents due to scheduled debt repayments and treasury stock purchases under
the Company's buyback program, offset by increases in accounts receivable due to
the timing of customer payments and revenue growth. Current liabilities
declined as a result of decreases in accounts payable due to the timing of
vendor payments, and decreases in accrued compensation and benefits due to the
payout of incentive wages related to fiscal 1997, both offset by increases in
taxes payable associated with the Company's improved year to date earnings.
Total stockholders' deficiency increased $28.5 million to a net deficiency of
$88.4 million at December 27, 1997. The increase in the net deficiency was the
result of $38.0 million of common stock purchased by the Company primarily under
its buyback program. On September 29, 1997, the Company increased its
previously announced stock repurchase authorization from 2 million to 3.2
million shares. In connection with the increased authorization, the Company
purchased approximately 1.9 million shares of its common stock from Warburg for
$34.8 million, at $18.00 per share. The Company also purchased an additional .1
million shares of common stock for treasury for $2.8 million, at an average
price of approximately $21.00 per share, on the open market during the first
quarter of fiscal 1998. These purchases offset the Company's net income of $8.4
million for the first quarter of fiscal 1998.
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
$102 million which may be used to fund working capital. The net cash used by
operating activities for the three months ended December 27, 1997 was $0.1
million versus net cash provided by operating activities of $0.4 million for the
same period of the prior fiscal year. The year over year decrease was primarily
related to changes in accrued compensation and benefits offset by changes in
accounts receivables.
Cash and cash equivalents decreased $13.8 million to $12.2 million for the
quarter ended December 27, 1997. This decrease reflects treasury stock purchases
of $38.0 million primarily related to the Company's buyback program offset by
net borrowings of $32.1 million. The treasury stock transaction from Warburg
was funded through the Company's credit facilities. In addition, capital
expenditures of $6.9 million for computerized mail sorters for the Company's
production facilities and costs mainly associated with the development of the
new financial systems also contributed to the decrease in cash and cash
equivalents.
-7-
<PAGE>
FINANCING ARRANGEMENTS
- ----------------------
The Company maintains a credit agreement which provides for total credit
facilities of $300 million, consisting of a $135 million term loan and a $165
million reducing revolving line of credit. At December 27, 1997 there was
$182.9 million of debt outstanding, with $11.6 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 1998, the Company
reborrowed an additional $13 million under the revolving line of credit. This
borrowing practice is consistent with the prior year due to the seasonality of
the business.
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.
YEAR 2000 COMPLIANCE
- --------------------
Based on a recent assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will function properly with respect to dates in the Year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems.
The project is estimated to be completed not later than September 1999, which is
prior to any anticipated impact on its operating systems.
FORWARD LOOKING STATEMENTS
- --------------------------
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. Such factors include but are not limited to possible governmental
regulation or legislation affecting aspects of the Company's business, changes
in customer demand, postal and paper prices, the efficiencies achieved with
technology upgrades, the amount of shares the Company will purchase in the
future under its buyback program, the evaluation of the impact of Year 2000
costs, and other general economic factors.
-8-
<PAGE>
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 1998 Annual Meeting of Stockholders of ADVO, Inc. (the "Company"), held
on January 22, 1998, the following matters were submitted to a vote of the
stockholders.
1. The election of eight Directors to serve until the Annual Meeting of
Stockholders in 1999.
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 26, 1998.
Each of the four proposals was approved by the stockholders in its entirety.
For a list of the directors elected and the votes cast for and against each of
the proposals, reference is made on Exhibit No. 22, Report of Inspector of
Election for ADVO, Inc.'s Annual Meeting, attached hereto.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Index
Exhibit No. Exhibits
----------- --------
22 Report of Inspector of Election for
ADVO, Inc.'s Annual Meeting.
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
A report on Form 8-K dated September 29, 1997 was filed by the Company. The Form
reported under Item 5 thereof, that the Company announced it had increased its
previously announced stock repurchase authorization from 2 million shares to 3.2
million shares. In connection with the increased authorization, the Company
purchased 1,936,098 shares of its common stock from Warburg, Pincus Capital
Partners L. P. for $34.8 million, at $18.00 per share. The closing price on
September 29, 1997 was $18 3/8 per share.
The Company also announced it had renegotiated the March 4, 1996 credit
agreement with a consortium of banks, led by Chase Manhattan Bank. The most
prominent features of the new agreement included an increased credit limit to
$300 million (from $250 million); reduction in the interest rate; and an
increased limit on the Company's authorization to buyback its stock from $40
million to $100 million.
- --------------------------------------------------------------------------------
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 9, 1998 By: /s/ ROBERT S. HIRST
---------------- --------------------------
Robert S. Hirst
Vice President and Controller
(Principal Accounting Officer)
-10-
<PAGE>
Exhibit 22
----------
Page 1 of 2
REPORT OF INSPECTOR OF ELECTION
FOR ADVO, INC.'S ANNUAL MEETING
HELD ON JANUARY 22, 1998
I, John J. Boryczki, Assistant Vice President of ChaseMellon Shareholder
Services, L.L.C. Transfer Agent and Registrar of the Company, and David M.
Stigler, Senior Vice President and General Counsel of ADVO, Inc. having been
duly appointed as Inspectors of Election for the Annual Meeting of Shareholders
of ADVO, Inc. held on Thursday, January 22, 1998, at the Sheraton Hotel at
Bradley International Airport, Windsor Locks, CT, report as follows:
1. There were present, in person or by proxy, 19,746,557 shares of common stock
or 87.77% at the Annual Meeting.
2. The following votes of common stock were cast as follows:
PROPOSAL #1: ELECTION OF DIRECTORS
DIRECTOR NAME FOR WITHHELD
Bruce Crawford 19,698,291 99.76% 48,266 .24%
David Dyer 19,698,391 99.76% 48,166 .24%
Jack W. Fritz 19,694,423 99.74% 52,134 .26%
Robert Kamerschen 19,671,735 99.62% 74,822 .38%
Gary M. Mulloy 19,674,241 99.63% 72,316 .37%
Howard H. Newman 19,676,088 99.64% 70,469 .36%
John R. Rockwell 19,698,788 99.76% 47,769 .24%
John L. Vogelstein 19,675,688 99.64% 70,869 .36%
PROPOSAL #2: AMENDMENT TO THE 1986 EMPLOYEE RESTRICTED STOCK PLAN
FOR 15,279,366 77.38%
AGAINST 2,315,724 11.73%
ABSTAIN 86,212 .44%
BROKER NO-VOTE 2,065,255 10.45%
<PAGE>
Exhibit 22
----------
Page 2 of 2
PROPOSAL #3: AMENDMENT OF THE 1988 NON-QUALIFIED STOCK OPTION PLAN AND THE 1993
STOCK OPTION SUBPLAN
FOR 11,358,168 57.52%
AGAINST 6,235,002 31.58%
ABSTAIN 88,131 .45%
BROKER NO-VOTE 2,065,256 10.45%
PROPOSAL # 4: RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
COMPANY'S INDEPENDENT AUDITORS FOR FISCAL 1998
FOR 19,718,923 99.86%
AGAINST 21,711 .11%
ABSTAIN 5,923 .03%
No other matters were submitted for a vote at this Meeting.
IN TESTIMONY WHEREOF, I have hereunto set my hand this 23rd day of January,
1998.
JOHN J. BORYCZKI /s/
- ----------------------------
John J. Boryczki
Assistant Vice President
ChaseMellon Shareholder Services, L.L.C.
<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 27, 1997 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-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> DEC-27-1997
<CASH> 12,164
<SECURITIES> 0
<RECEIVABLES> 76,994
<ALLOWANCES> 4,864
<INVENTORY> 3,309
<CURRENT-ASSETS> 105,221
<PP&E> 173,715
<DEPRECIATION> 95,733
<TOTAL-ASSETS> 199,609
<CURRENT-LIABILITIES> 104,821
<BONDS> 171,216
0
0
<COMMON> 285
<OTHER-SE> (88,678)
<TOTAL-LIABILITY-AND-EQUITY> 199,609
<SALES> 0
<TOTAL-REVENUES> 262,144
<CGS> 0
<TOTAL-COSTS> 194,929
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 725
<INTEREST-EXPENSE> 3,561
<INCOME-PRETAX> 13,735
<INCOME-TAX> 5,357
<INCOME-CONTINUING> 8,378
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,378
<EPS-PRIMARY> .37 <F1>
<EPS-DILUTED> .36 <F2>
<FN>
<F1> The EPS-Primary tag represents basic EPS under SFAS 128.
<F2> The EPS-Diluted tag represents diluted EPS under SFAS 128.
</FN>
</TABLE>
