<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 25, 1999
-----------------
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 22, 2000 there were 20,526,532 shares of common stock
outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended December 25, 1999
Part I - Financial Information Page
------------------------------ ----
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
December 25, 1999 and September 25, 1999. 2
Consolidated statements of operations -
Three months ended December 25, 1999
and December 26, 1998. 3
Consolidated statements of cash flows -
Three months ended December 25, 1999
and December 26, 1998. 4
Notes to consolidated financial statements. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 8
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 12
Part II - Other Information
---------------------------
Item 4. Submission of Matters to a Vote of
Security Holders. 13
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures 14
<PAGE>
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 25, September 25,
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,017 $ 9,341
Accounts receivable, net 110,899 91,883
Inventories 3,728 4,005
Prepaid expenses and other current assets 5,950 5,376
Deferred income taxes 7,277 7,656
---------- ---------
Total current assets 129,871 118,261
Property, plant and equipment 216,745 216,718
Less accumulated depreciation and amortization (119,569) (116,918)
--------- ---------
Net property, plant and equipment 97,176 99,800
Other assets 22,163 19,240
--------- ---------
TOTAL ASSETS $ 249,210 $ 237,301
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 10,000 $ 20,250
Accounts payable 29,255 42,498
Accrued compensation and benefits 21,353 23,426
Other current liabilities 47,041 33,442
--------- ---------
Total current liabilities 107,649 119,616
Long-term debt 194,000 176,816
Deferred income taxes 2,933 3,921
Other liabilities 3,048 3,025
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 29,480,463
and 29,471,024 shares, respectively) 295 295
Additional paid-in capital 177,420 177,027
Accumulated deficit (68,596) (80,491)
--------- ---------
109,119 96,831
Less common stock held in
treasury, at cost (167,539) (162,908)
--------- ---------
Total stockholders' deficiency (58,420) (66,077)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS'
DEFICIENCY $ 249,210 $ 237,301
========= =========
</TABLE>
See Accompanying Notes.
-2-
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
--------------------------------------
December 25, December 26,
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues $ 274,203 $ 268,649
Costs and expenses:
Cost of sales 195,021 194,431
Selling, general and administrative 54,006 53,273
Provision for bad debts 2,236 859
----------- ------------
Operating income 22,940 20,086
Interest expense 3,999 3,555
Other expense, net 63 10
----------- ------------
Income before income taxes 18,878 16,521
Provision for income taxes 6,985 6,361
----------- ------------
Net Income $ 11,893 $ 10,160
=========== ============
Basic earnings per common share $ .58 $ .46
=========== ============
Diluted earnings per common share $ .57 $ .45
=========== ============
Weighted average common shares 20,625 22,071
Weighted average diluted shares 20,774 22,450
</TABLE>
See Accompanying Notes.
-3-
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
-----------------------------------
December 25, December 26,
1999 1998
------------- ------------
<S> <C> <C>
Net cash provided (used) by operating activities $ (3,647) $ 8,233
Cash flows from investing activities:
Acquisition of property, plant and equipment (3,977) (7,315)
Proceeds from disposals of property & equipment 189 3
Acquisitions - (300)
------------- ------------
Net cash used by investing activities (3,788) (7,612)
Cash flows from financing activities:
Revolving line of credit - net (23,791) 8,000
Proceeds on long-term borrowings 30,725 -
Payments of long-term borrowings - (4,050)
Payment of debt issue costs (2,290) -
Proceeds from exercise of stock options 98 176
Purchase of common stock for treasury (4,631) (4,330)
------------ ------------
Net cash provided (used) by financing activities 111 (204)
------------ ------------
Increase (decrease) in cash and cash equivalents (7,324) 417
Cash and cash equivalents at beginning of period 9,341 8,724
------------ ------------
Cash and cash equivalents at end of period $ 2,017 $ 9,141
============ ============
</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 considered
necessary for a fair presentation have been included. Operating results for the
three month period ended December 25, 1999 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 2000. 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 25, 1999. Certain reclassifications have been made in the
fiscal 1999 financial statements to conform with the fiscal 2000 presentation.
2. Earnings per common share
Basic 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. Diluted earnings per common share
reflects the potential dilution that could occur if common stock equivalents,
such as stock options, were exercised.
<TABLE>
<CAPTION>
Three months ended
-------------------------------------
December 25, December 26,
1999 1998
------------- -------------
<S> <C> <C>
Net income $ 11,893 $ 10,160
========== ==========
Weighted average common shares 20,625 22,071
Effect of dilutive securities:
Stock options 130 357
Restricted stock 19 22
---------- ----------
Dilutive potential common shares 149 379
Weighted average diluted shares 20,774 22,450
========== ==========
Basic earnings per common share $ .58 $ .46
========== ==========
Diluted earnings per common share $ .57 $ .45
========== ==========
</TABLE>
-5-
<PAGE>
ADVO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. Financing Arrangements
On December 9, 1999, the Company renegotiated the terms of its credit agreement
dated September 29, 1997. The amendments made to the renegotiated agreement (the
"Amended Agreement") include the increase in the availability of the credit
facility to $300 million, the ability to raise additional funding in the future
through incremental senior bank debt, as well as subordinated debt, the ability
to repurchase up to $115 million of its own stock and a $100 million acquisition
basket. The debt covenants were also modified to provide additional flexibility.
The Amended Agreement has credit facilities consisting of a $135 million term
loan and a $165 million revolving line of credit. The term loan's amortization
begins in March 2002 and ends at maturity in December 2005. The entire amount of
the revolving line of credit remains available until the credit agreement
matures in December 2005. Mandatory repayments of debt in defined amounts are
required in the event of certain transactions including the sale of certain
assets. The Company and its subsidiaries have pledged all of their assets as
collateral under the credit agreement.
The debt bears interest at either the LIBOR or at the bank"s "base rate,"
whichever the Company chooses for each tranche due at various maturity dates,
plus an "applicable margin" (based on certain financial ratios). The applicable
margin under the Amended Agreement ranges from 1.125% to 2.00% on the LIBOR rate
and 0.125% to 1.00% on the base rate versus the applicable margin under the
previous agreement of .50% to 1.50% and 0% to .25%, respectively. Interest is
payable quarterly or upon the maturity of the LIBOR contracts, whichever period
is shorter.
The outstanding facilities' balance and related interest rates inclusive of
applicable margins is as follows:
<TABLE>
<CAPTION>
LIBOR Base Rate Total
As of December 25, 1999 Interest Interest Outstanding
(In thousands) 9.25% Facilities
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Term loan $ - $ 135,000 $ 135,000
Revolving line of credit - 69,000 69,000
--------- --------- ----------
$ - $ 204,000 $ 204,000
========= =========
Less: current portion of long-term debt 10,000
----------
$ 194,000
==========
</TABLE>
<TABLE>
<CAPTION>
LIBOR Base Rate Total
As of September 25, 1999 Interest Interest Outstanding
(In thousands) 6.25% 8.25% Facilities
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Term loan $ 100,000 $ 4,275 $ 104,275
Revolving line of credit 82,791 10,000 92,791
--------- ---------- ----------
$ 182,791 $ 14,275 197,066
========= ==========
Less: current portion of long-term debt 20,250
----------
$ 176,816
==========
</TABLE>
-6-
<PAGE>
ADVO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The Company is required to maintain certain financial ratios under the
facilities. In addition, the facilities also place certain restrictions on
disposals of assets, mergers and acquisitions, dividend payments, investments
and additional borrowings.
In connection with the facilities, the Company is required to maintain Interest
Rate Protection Agreements to protect itself against three-month LIBOR rates
exceeding 8.0% per annum for a period of at least three years as to a notional
principal amount of at least $100 million. Additional amounts are required in
the event additional funding is raised in the future. During fiscal 1998, the
Company entered into two separate three-year interest rate swap transaction
agreements to hedge notional amounts totaling $100 million. Effective January
31, 2000, the notional amount is reduced to $60 million. The rate is fixed at
approximately 5.7%. The Company believes the interest rate swap transaction
agreements limit substantial risk should interest rates fluctuate. The interest
rate swap agreements had an immaterial effect on interest expense during the
first quarter of fiscal 2000 and in fiscal 1999.
The Company pays fees on the unused commitments under the Amended Agreement at a
rate ranging from .30% to .50% depending on the Company's total debt ratio, as
defined. Commitment fees under the previous agreement were .175% to .375%
depending on the total debt ratio, as defined. As of December 25, 1999, $89.5
million of the revolver was available for future borrowings.
Total maturities of long-term debt that are due over five fiscal years,
beginning in March 2002 and maturing in December 2005, are as follows (in
thousands):
<TABLE>
<S> <C>
2002 $ 11,250
2003 22,500
2004 36,250
2005 51,250
2006 82,750
-----------
Total maturities $ 204,000
===========
</TABLE>
The majority of the revolving line of credit has been classified as long-term
since management has the intent and ability to maintain the December 25, 1999
outstanding balance throughout fiscal 2000.
In the first quarter of fiscal 2000, the Company capitalized $2.3 million of
debt issue costs in connection with the Amended Agreement. In addition, the
Company capitalized $6.8 million of debt issue costs directly associated with
issuance of debt in prior years. These costs are included in other assets and
are being amortized over the term of the debt agreement. At December 25, 1999
and September 25, 1999, unamortized costs totaled $5.9 million and $3.8 million,
respectively.
The Company has outstanding letters of credit of approximately $6.5 million
under separate agreements primarily related to its workers" compensation
program.
Carrying amounts of the financing arrangements approximate fair value.
4. Consulting Agreement
The Company recorded a special charge of $2.2 million during the first quarter
of fiscal 2000 related to the expensing of a long-term consulting agreement with
the Company's former Chairman and Chief Executive Officer who is no longer
providing services to the Company.
-7-
<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 2000, the Company recorded an increase
in revenues of $5.6 million, or 2.1%, over fiscal 1999's first quarter results.
This increase was primarily driven by pricing gains resulting in the 3.0%
increase in revenue per thousand pieces to $39.25 for the first quarter of
fiscal 2000 from $38.11 for the comparable prior year period. In order to
conform to current year's presentation the revenue per thousand pieces
statistic, which includes revenues associated with the ADVO Targeting Zone (ATZ)
platform, has been restated for the prior year period. Also contributing to the
increase in revenues were favorable changes in product mix and weights.
Offseting the revenue increases were volume declines of 2.0% in average pieces
per package for the first quarter of the current fiscal year versus the same
quarter of the prior fiscal year.
Also contributing to the revenue growth in the first quarter of fiscal year 2000
were increased revenues from MailCoups, the Company's targeted coupon
distributor, the Company's A.N.N.E. (ADVO National Network Extension) brokered
distribution program and revenues associated with the Company's solo mailing
program.
OPERATING EXPENSES Cost of sales as a percentage of revenues declined 1.3
percentage points, from 72.4% during the first quarter of fiscal 1999 to 71.1%
during the first quarter of fiscal 2000. This decrease was primarily the result
of operational efficiencies at the Company's production facilities and the flow-
through of the pricing gains mentioned above.
In absolute terms, cost of sales increased $0.6 million for the quarter ended
December 25, 1999 over the comparable period in the prior year. The increase was
due to higher distribution and delivery costs incurred as a result of the
revenues associated with MailCoups, A.N.N.E. and solo mailings and also
additional costs associated with the outsourcing of the managed server
operations. These costs were partially offset by lower postage expense as a
result of efficient postage utilization and the 0.1% decrease in packages mailed
during the current first quarter versus the prior first quarter. Print expense
was also favorable due to lower print costs associated with decreases in turnkey
volumes.
As a percentage of revenue, selling, general and administrative costs (including
the provision for bad debts), remained relatively constant quarter over quarter,
20.5% for the first quarter of fiscal 2000 and 20.1% for the first quarter of
fiscal 1999. In absolute terms, selling, general and administrative costs
(including the provision for bad debts) for the first quarter of fiscal 2000
were $56.2 million increasing $2.1 million over the first quarter of fiscal
1999. Selling costs increased $1.2 million primarily related to higher bad debt
expense due to the Chapter 11 filing of two clients. Overall general and
administrative expenses for the first quarter of fiscal 2000 increased $0.9
million versus the same period of the prior year. General and administrative
costs for the current quarter included a special charge of $2.2 million related
to the expensing of a long-term consulting agreement with the Company's former
Chairman and Chief Executive Officer. The expensing of the consulting agreement
along with higher professional and services fees for the first quarter of fiscal
2000 were partially offset by the absence of Year 2000 remediation costs which
were incurred in the first quarter of fiscal 1999.
-8-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OPERATING INCOME The above activity resulted in the Company reporting an
increase of $2.9 million, or 14.2%, in operating income for the first quarter of
fiscal 2000 when compared to the same period of the prior year. Excluding the
special charge related to the consulting agreement, operating income would have
been $25.1 million, an increase of $5.1 million or 25.2% over the prior year.
Operating income as a percentage of revenue improved to 8.4%, representing an
increase of 0.9 percentage points versus the comparable period of the prior
year. Excluding the special charge, operating income as a percentage of revenue
would have been 9.2%.
INTEREST EXPENSE Interest expense totaled $4.0 million for the first quarter of
fiscal 2000, compared to $3.6 million for the first quarter of fiscal 1999. The
increase was due in part to the increase in the average outstanding debt balance
throughout the quarter.
INCOME TAXES The effective income tax rate was 37% for the three months ended
December 25, 1999 and 38.5% for the three months ended December 26, 1998. The
decrease in the effective rate was due to the realization of both federal and
state income tax credits.
EARNINGS PER COMMON SHARE Diluted earnings per share increased 26.7% over the
prior year period from $.45 to $.57 for the quarter ended December 25, 1999.
This increase was caused by the Company's improved earnings. Excluding the
special charge, diluted earnings per share would have been $0.64, representing
an 42.2% increase over the prior year period.
Weighted average common and diluted shares decreased for the first quarter of
fiscal 2000 as compared to the same quarter in fiscal 1999, primarily due to the
Company's common stock buyback program.
FINANCIAL CONDITION
- -------------------
Working capital increased $23.6 million from September 25, 1999 to December 25,
1999. Contributing to the change in working capital were increases in current
assets of $11.6 and decreases in current liabilities of $12.0 million. The
increase in current assets was primarily attributable to the increase in
accounts receivable which was driven by the Company's larger clients extending
their payment terms during the final weeks in December. Accounts receivable
receipts were lower during the last three weeks of the first quarter when
compared to the same period in the prior year. Partially offsetting the increase
in accounts receivable was the decrease in cash and cash equivalents due to
treasury stock purchases under the Company's buyback program and the payment of
debt issue costs associated with the renegotiated credit agreement.
The decrease in current liabilities associated with the working capital change
was primarily attributable to decreases in accounts payable due to timing of
vendor payments and the decrease in current portion of long-term debt as a
result of the Company's renegotiated debt agreement. Offsetting these decreases
were increases in accrued other expenses due to the liability recorded in
association with the expensing of the consulting agreement and increases in
taxes payable associated with the Company's improved year to date earnings.
Stockholders' deficiency decreased $7.7 million to a net deficiency of $58.4
million at December 25, 1999 from $66.1 million at September 25, 1999. The
decrease in the net deficiency was primarily the result of the Company's net
income of $11.9 million for first quarter of fiscal 2000, offset by treasury
stock purchases of $4.6 million. The treasury stock purchases consisted of $4.5
million made on the open market associated with the Company's buyback program
and $0.1 million pursuant to elections by employees to satisfy withholding
requirements under the Company's restricted stock and stock option plans.
-9-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
PROPERTY, PLANT & EQUIPMENT
- ---------------------------
Property, plant and equipment investments of $4.0 million for the quarter ended
December 25, 1999 consisted mainly of capital expenditures for software
development along with the purchase of furniture and leasehold improvements for
the Company's production facilities and corporate offices. The Company expects
its capital expenditures for the remainder of the year to be approximately $34.0
million.
LIQUIDITY
- ---------
The Company continues to rely on funds generated from operating activities as
its primary operational resource. In addition, the Company has available unused
credit commitments of $89.5 million that may be used to fund operating
activities.
The net cash used by operating activities for the first quarter of 2000 was $3.6
million versus the net cash provided by operating activities of $8.2 million for
the same period of the prior year. The year over year decrease was mainly
attributable to the increases in accounts receivable detailed above and
decreases in accounts payable due to the timing of vendor payments, offset by
improved operating results.
Overall, cash and cash equivalents decreased $7.3 million to $2.0 million at
December 25, 1999. The decrease was comprised of cash used by operating and
investing activities of $3.6 million and $3.8 million, respectively, and $0.1
million increase in financing activities.
Financing activities included treasury stock purchases of $4.6 million and $2.3
million of debt issue costs paid in connection with the renegotiated debt,
offset by net borrowings of $6.9 million. The Company's net borrowings for the
first quarter of fiscal 2000 reflect the reclassification between the term loan
and revolving line of credit that took place during the quarter as a result of
the renegotiated credit agreement.
FINANCING ARRANGEMENTS
- ----------------------
On December 9, 1999, the Company renegotiated the terms of its credit agreement
dated September 29, 1997. The amendments made to the renegotiated agreement (the
"Amended Agreement") include the increase in the availability of the credit
facility to $300 million, the ability to raise additional funding in the future
through incremental senior bank debt, as well as subordinated debt, the ability
to repurchase up to $115 million of its own stock and a $100 million acquisition
basket. The debt covenants were also modified to provide additional flexibility.
The Amended Agreement has credit facilities consisting of a $135 million term
loan and a $165 million revolving line of credit. The term loan's amortization
begins in March 2002 and ends at maturity in December 2005. The entire amount of
the revolving line of credit remains available until the credit agreement
matures in December 2005. Mandatory repayments of debt in defined amounts are
required in the event of certain transactions including the sale of certain
assets. The Company and its subsidiaries have pledged all of their assets as
collateral under the credit agreement.
The debt bears interest at either the LIBOR or at the bank"s "base rate,"
whichever the Company chooses for each tranche due at various maturity dates,
plus an "applicable margin" (based on certain financial ratios). The
-10-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
applicable margin under the Amended Agreement ranges from 1.125% to 2.00% on the
LIBOR rate and 0.125% to 1.00% on the base rate versus the applicable margin
under the previous agreement of .50% to 1.50% and 0% to .25%, respectively.
Interest is payable quarterly or upon the maturity of the LIBOR contracts,
whichever period is shorter.
In connection with the facilities, the Company is required to maintain Interest
Rate Protection Agreements to protect itself against three-month LIBOR rates
exceeding 8.0% per annum for a period of at least three years as to a notional
principal amount of at least $100 million. Additional amounts are required in
the event additional funding is raised in the future. During fiscal 1998, the
Company entered into two separate three-year interest rate swap transaction
agreements to hedge notional amounts totaling $100 million. Effective January
31, 2000, the notional amount is reduced to $60 million. The rate is fixed at
approximately 5.7%. The Company believes the interest rate swap transaction
agreements limit substantial risk should interest rates fluctuate. The interest
rate swap agreements had an immaterial effect on interest expense during the
first quarter of fiscal 2000 and in fiscal 1999.
The Company pays fees on the unused commitments under the Amended Agreement at a
rate ranging from .30% to .50% depending on the Company's total debt ratio, as
defined. Commitment fees under the previous agreement were .175% to .375%
depending on the total debt ratio, as defined. As of December 25, 1999, $89.5
million of the revolver was available for future borrowings.
At December 25, 1999 there was $204.0 million of debt outstanding, with $10.0
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 2000, the Company had net borrowings of $15 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 borrowings.
YEAR 2000 UPDATE
- ----------------
In the Financial Report contained in the Company's Annual Report on Form 10-K
for the year ended September 25, 1999, under the caption ,"Year 2000 Readiness",
the Company outlined its program to become Year 2000 compliant by discussing the
following matters: state of readiness, costs and risk and contingency plans.
The Company successfully made the transition to the Year 2000 subsequent to the
first quarter ended December 25, 1999. As of the date of this report the
Company's IT and non-IT systems are Year 2000 compliant and continue to function
normally. In addition, the Company has not experienced any problems with third
party products, services and interfaces.
Although the Company believes that the transition into the Year 2000 has been
complete and successful, there can be no assurance that the ADVO will not be
materially adversely affected in the future by Year 2000 issues. The Company
will continue to monitor the status of all its systems and third party
relationships over the year for any potential delayed or suppressed Year 2000
issues.
-11-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Costs
The Company's total cost of testing and modifying the required systems for the
Year 2000 issue was $10.6 million from inception in fiscal 1998 through
completion and was expensed as incurred. During the first quarter ended December
25, 1999, the Company incurred $0.3 million of Year 2000 expenses. However, if
future Year 2000 problems occur, total costs may increase. The Company is not
presently anticipating significant additional costs.
QUANTITATIVE AND QUALATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------
The Company's interest expense is sensitive to changes in interest rates. In
this regard, changes in interest rates affect the interest paid on its debt. To
mitigate the impact of interest rate fluctuations, the Company has historically
maintained interest rate swap agreements on notional amounts totaling $100
million. In conjunction with the requirements of the renegotiated credit
agreement, as well as the reduction in the notional amount of interest rate swap
agreements to $60 million as of January 31, 2000, the Company is currently
evaluating hedging instruments to put in place for the next three years. Per the
terms of the renegotiated credit agreement, this protection must be at least
$100 million and have a three-year term.
The Company believes that the interest rate swap agreements currently in place
limit substantial risk if interest rates should fluctuate. If interest rates
should change by 2% for the remaining of the 2000 fiscal year from those rates
in effect at December 25, 1999, assuming no change in the outstanding debt
balance and considering the effects of the Company's interest rate swap
agreements, interest expense would increase\decrease by approximately $1.6
million. These amounts are determined by considering the hypothetical interest
rates on the Company's borrowing cost and interest rate swap agreements and do
not take into account significant fluctuation in interest rates. The sensitivity
analysis also assumes no changes in the Company's financial structure.
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 based on current information and expectations and are subject to
risks and uncertainties which could cause the Company's actual results to differ
materially from those in the forward looking statements. Such risks and
uncertainties include but are not limited to: possible governmental regulation
or legislation affecting aspects of the Company's business, changes in customer
demand and pricing, the possibility of consolidation throughout the retail
sector, 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 continuing success of the Company's Year 2000 program and
its transition into and through the Year 2000, fluctuations in interest rates
related to the outstanding debt and other general economic factors.
-12-
<PAGE>
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 2000 Annual Meeting of Stockholders of ADVO, Inc. (the "Company"), held
on January 20, 2000, the following matters were submitted to a vote of the
stockholders.
1. The election of six Directors to serve until the Annual Meeting of
Stockholders in 2001.
2. The ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending September 30, 2000.
Each of the two 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 to 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 December 9, 1999 was filed by the Company during
the quarter ended December 25, 1999. The Form 8-K reported under item 5 thereof
the Company's renegotiated credit agreement.
________________________________________________________________________________
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
-13-
<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 7, 2000 By: /s/ JULIE A. ABRAHAM
---------------- ----------------------------------
Julie A. Abraham
Vice President and Controller
(Principal Accounting Officer)
-14-
<PAGE>
Exhibit 22
----------
REPORT OF INSPECTOR OF ELECTION
FOR ADVO, INC.'S ANNUAL MEETING
HELD ON JANUARY 20, 2000
I, John J. Boryczki, Assistant Vice President and Relationship Manager 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 20, 2000, at the
Sheraton Hotel at Bradley International Airport, Windsor Locks, CT, report as
follows:
1. There were present, in person or by proxy, 18,663,902 shares of common stock
or 89.87% at the Annual Meeting.
2. The following votes of common stock were cast as follows:
PROPOSAL #1: ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR NAME FOR WITHHELD
<S> <C> <C>
Bruce Crawford 18,605,524 58,378
David F. Dyer 18,606,594 57,308
Gary M. Mulloy 18,605,131 58,771
Howard H. Newman 18,326,694 337,208
John R. Rockwell 18,605,524 58,378
John L. Vogelstein 18,186,852 477,050
</TABLE>
Proposal # 2: RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
COMPANY'S INDEPENDENT AUDITORS FOR FISCAL 2000
FOR 18,639,838 99.87%
AGAINST 15,858 0.08%
ABSTAIN 8,206 0.04%
No other matters were submitted for a vote at this Meeting.
Inspector of Elections, Inspector of Elections,
/s/ JOHN J. BORYCZKI /s/ DAVID M. STIGLER
- -------------------------------- --------------------
John J. Boryczki David M. Stigler
Assistant Vice President ADVO, Inc.
Senior Vice President and General Counsel
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO, INC.'S
FORM 10-Q FOR THE THREE MONTH PERIOD ENDED DECEMBER 25, 1999 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-30-2000
<PERIOD-START> SEP-26-1999
<PERIOD-END> DEC-25-1999
<CASH> 2,017
<SECURITIES> 0
<RECEIVABLES> 115,591
<ALLOWANCES> 4,692
<INVENTORY> 3,728
<CURRENT-ASSETS> 129,871
<PP&E> 216,745
<DEPRECIATION> 119,569
<TOTAL-ASSETS> 249,210
<CURRENT-LIABILITIES> 107,649
<BONDS> 194,000
0
0
<COMMON> 295
<OTHER-SE> (58,715)
<TOTAL-LIABILITY-AND-EQUITY> 249,210
<SALES> 0
<TOTAL-REVENUES> 274,203
<CGS> 0
<TOTAL-COSTS> 195,021
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,236
<INTEREST-EXPENSE> 3,999
<INCOME-PRETAX> 18,878
<INCOME-TAX> 6,985
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,893
<EPS-BASIC> 0.58<F1>
<EPS-DILUTED> 0.57<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>
