<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 25, 2000
--------------
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to _________________
Commission file number 1-11720
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ADVO, Inc.
----------------------------------------------------
(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 April 22, 2000 there were 20,178,919 shares of common stock outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended March 25, 2000
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
March 25, 2000 and September 25, 1999. 2
Consolidated statements of operations -
Six months and three months ended
March 25, 2000 and March 27, 1999. 3
Consolidated statements of cash flows -
Six months ended March 25, 2000
and March 27, 1999. 4
Notes to consolidated financial statements. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 9
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 13
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures 15
</TABLE>
<PAGE>
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
March 25, September 25,
ASSETS 2000 1999
--------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,791 $ 9,341
Accounts receivable, net 103,757 91,883
Inventories 3,563 4,005
Prepaid expenses and other current assets 5,220 5,376
Deferred income taxes 7,887 7,656
--------- ---------
Total current assets 129,218 118,261
Property, plant and equipment 218,750 216,718
Less accumulated depreciation and amortization (119,095) (116,918)
--------- ---------
Net property, plant and equipment 99,655 99,800
Other assets 22,910 19,240
--------- ---------
TOTAL ASSETS $ 251,783 $ 237,301
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 10,000 $ 20,250
Accounts payable 35,814 42,498
Accrued compensation and benefits 24,265 23,426
Other current liabilities 42,463 33,442
--------- ---------
Total current liabilities 112,542 119,616
Long-term debt 194,500 176,816
Deferred income taxes 2,698 3,921
Other liabilities 3,046 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 29,548,881
and 29,471,024 shares, respectively) 295 295
Additional paid-in capital 178,451 177,027
Accumulated deficit (60,166) (80,491)
--------- ---------
118,580 96,831
Less common stock held in
treasury, at cost (179,583) (162,908)
--------- ---------
Total stockholders' deficiency (61,003) (66,077)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS'
DEFICIENCY $ 251,783 $ 237,301
========= =========
</TABLE>
See Accompanying Notes.
-2-
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended Three months ended
---------------------- ----------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 536,576 $ 522,137 $ 262,373 $ 253,488
Costs and expenses:
Cost of sales 385,294 380,434 190,273 186,004
Selling, general and
administrative 105,595 105,614 51,589 52,341
Provision for bad debts 4,484 2,522 2,248 1,663
--------- --------- --------- ---------
Operating income 41,203 33,567 18,263 13,480
Interest expense 8,796 7,049 4,797 3,494
Other expense / interest income, net 147 16 84 5
--------- --------- --------- ---------
Income before income taxes 32,260 26,502 13,382 9,981
Provision for income taxes 11,936 10,203 4,951 3,843
--------- --------- --------- ---------
Net income $ 20,324 $ 16,299 $ 8,431 $ 6,138
========= ========= ========= =========
Basic earnings per common share $ .99 $ .74 $ .41 $ .28
========= ========= ========= =========
Diluted earnings per common share $ .98 $ .73 $ .41 $ .28
========= ========= ========= =========
Weighted average common shares 20,497 22,022 20,369 21,972
Weighted average diluted shares 20,741 22,339 20,707 22,228
</TABLE>
See Accompanying Notes.
-3-
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
----------------------
March 25, March 27,
2000 1999
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 23,076 $ 30,335
Cash flows from investing activities:
Acquisition of property, plant and equipment (12,630) (18,611)
Proceeds from disposals of property and equipment 203 12
Acquisitions, net of cash acquired (250) (300)
-------- --------
Net cash used by investing activities (12,677) (18,899)
Cash flows from financing activities:
Revolving line of credit - net (23,291) 13,300
Proceeds on long-term borrowings 30,725 --
Payments of long-term borrowings -- (10,100)
Payment of debt issue costs (2,290) --
Proceeds from exercise of stock options 583 983
Purchase of common stock for treasury (16,676) (14,079)
Other -- 1
-------- --------
Net cash used by financing activities (10,949) (9,895)
-------- --------
Decrease (increase) in cash and cash equivalents (550) 1,541
Cash and cash equivalents at beginning of period 9,341 8,724
-------- --------
Cash and cash equivalents at end of period $ 8,791 $ 10,265
======== ========
</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
six-month period ended March 25, 2000 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
reflect the potential dilution that could occur if common stock equivalents,
such as stock options, were exercised.
<TABLE>
<CAPTION>
Six months ended Three months ended
---------------------- ----------------------
March 25, March 27, March 25, March 27,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 20,324 $ 16,299 $ 8,431 $ 6,138
Weighted average common shares 20,497 22,022 20,369 21,972
Effect of dilutive securities:
Stock options 217 301 303 245
Restricted stock 27 16 35 11
--------- --------- --------- ---------
Dilutive potential common shares 244 317 338 256
Weighted average diluted shares 20,741 22,339 20,707 22,228
========= ========= ========= =========
Basic earnings per common share $ .99 $ .74 $ .41 $ .28
========= ========= ========= =========
Diluted earnings per common share $ .98 $ .73 $ .41 $ .28
========= ========= ========= =========
</TABLE>
-5-
<PAGE>
ADVO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. Financing Arrangements
In December 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>
LIBOR Base Rate Total
As of March 25, 2000 Interest Interest Outstanding
(In thousands) 7.88% 9.75% Facilities
=====================================================================================
<S> <C> <C> <C>
Term loan $135,000 $ - $135,000
Revolving line of credit - 69,500 69,500
-------------------------------------
$135,000 $69,500 $204,500
======== =======
Less: current portion of long-term debt 10,000
--------
$194,500
========
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. On January 31, 2000,
the notional amount was reduced to $60 million. The rate is fixed at
approximately 5.7%.
During the second quarter of fiscal 2000, the Company entered into two separate
thirty-month interest rate swap transaction agreements totaling $40 million to
increase the overall notional amount to $100 million. These new agreements are
effective in July, 2000 and have a rate fixed at approximately 7.2%.
Additionally, the Company has entered into two additional interest rate swap
transaction agreements that become effective in fiscal 2001. These agreements
will replace the current agreements upon expiration and hedge notional amounts
of $60 million with the rate fixed at approximately 7.3%.
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 and
second 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 March 25, 2000, $88.9
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 83,250
--------
Total maturities $204,500
========
</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 March 25, 2000
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 March 25, 2000 and
September 25, 1999, unamortized costs totaled $5.6 million and $3.8 million,
respectively.
-7-
<PAGE>
ADVO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The Company has outstanding letters of credit of approximately $6.6 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.
-8-
<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 Revenues for the second quarter of fiscal 2000 were $262.4 million
representing an $8.9 million increase over the same quarter of fiscal 1999. The
3.5% revenue growth was primarily attributed to increased volume and the growth
associated with the Company's preprint customers. The volume gains for the
second quarter of fiscal 2000 were comprised of a 1.5% increase in average
pieces per package, to 8.37, and a 1.1% increase in total shared mail packages
delivered to 780.2 million packages when compared to the second quarter of
fiscal 1999. All three components of shared mail revenue increased for the
second quarter of fiscal 2000, shared mail packages and pieces per package as
mentioned above, along with shared mail revenue per piece which increased 0.7%
to $37.16.
For the year-to-date period ended March 25, 2000, the Company's revenues grew
$14.4 million or 2.8% over the same prior year period. Pricing gains primarily
drove the increase in revenues. The increase was demonstrated by the 1.8%
increase in revenue per thousand pieces to $38.19 for the six month period ended
March 25, 2000 from $37.51 for the same period of the prior year. (In order to
conform to current year's presentation, the revenue per thousand pieces
statistic has been restated in the prior year period to include revenues
associated with the ADVO Targeting Zone platform (ATZ) platform). The volume
declines that the Company experienced during the first quarter of fiscal 2000
were offset by the volume gains detailed above for the second quarter of fiscal
2000. As a result, average pieces per package of 8.52 for the six months ended
March 25, 2000 were essentially flat to 8.54 average pieces per package for the
comparable prior year period.
The revenue growth for the first six months of fiscal 2000 also included
increased revenues from MailCoups, the Company's targeted coupon distributor
which utilizes an envelope format, 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 revenue decreased 0.9
percentage points to 72.5% for the three months ended March 25, 2000, and
decreased 1.1 percentage points to 71.8% for the six month year-to-date period
when compared to the same periods in the prior year. These decreases are
primarily the result of continued improvements and efficiencies in the branch
operations of the Company and the flow-through of the pricing gains mentioned
above.
In absolute terms, cost of sales for the three and six months ended March 25,
2000 increased $4.3 million and $4.9 million, respectively, over the comparable
periods of the prior year. The increase for second quarter of fiscal 2000 was
mainly attributable to higher postage expense due to the growth in total shared
mail packages mailed and the mailing of heavier preprint pieces. On a year-to-
date basis, the increased postage costs in the second quarter were partially
offset by lower postage costs in the first quarter of fiscal 2000 creating
essentially flat postage expense compared to the same period in the prior year.
The remainder of the cost of sales increase for the three and six months ended
March 25, 2000 was the result of higher distribution and delivery costs incurred
as a result of the increased revenues associated with MailCoups and A.N.N.E.,
and costs associated with the outsourcing of the managed server operations.
Offsetting the increase in cost of sales for both the three and six months of
March 25, 2000, to a degree, were lower print costs associated with lower
turnkey volumes.
-9-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Selling expense, including the provision for bad debts, increased $0.9 million
and $2.0 million, respectively, for the quarter and six months ended March 25,
2000 over the same periods in the prior year. Selling expense increased
primarily as a result of higher bad debt expense due to the Chapter 11 filing of
three clients.
General and administrative costs decreased $1.1 million and $0.1 million,
respectively, for the three and six months ended March 25, 2000 when compared to
the same periods of the prior year. For both the three and six month periods the
decrease was due to the absence of Year 2000 remediation costs which were
incurred in the prior year and a one time severance charge recorded in the
second quarter of the prior year. Higher outsourcing /service and media fees
offset these decreases for both the current quarter and six-month year-to-date
periods. In addition, the overall decrease in general and administrative costs
for the six month period was offset by the expensing of a long-term consulting
agreement with the Company's former Chairman and Chief Executive Officer.
OPERATING INCOME For the second quarter of fiscal 2000, the Company reported
operating income of $18.3 million representing a $4.8 million or 35.5% increase
over the second quarter of fiscal 1999. For the first half of fiscal 2000,
operating income was $41.2 million, representing a $7.6 million or 22.7%
increase over the first half of fiscal 1999. As a percent of revenue, operating
income increased 1.6 percentage points to 7.0% for the second quarter and 1.3
percentage points to 7.7% for the first six months of fiscal 2000, when compared
to the same periods of the prior fiscal year.
INTEREST EXPENSE Interest expense increased $1.3 million and $1.7 million,
respectively, for the three and six months ended March 25, 2000. The increase
was the result of higher interest rates under the renegotiated credit agreement,
higher market rates of interest and an increase in the average outstanding debt
balance.
INCOME TAXES The effective income tax rate was 37% for the three and six months
ended March 25, 2000 and 38.5% for the same periods of fiscal 1999. 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 46.4% to $.41
for the second quarter of fiscal 2000 and increased 34.2% to $.98 for the six
months ended March 25, 2000. This increase was the result of the Company's
improved earnings.
The decrease in weighted average common and diluted shares for the three and six
months ended March 25, 2000 versus the same periods in the prior year was
primarily due to the shares repurchased under the Company's stock buyback
program.
FINANCIAL CONDITION
- -------------------
Working capital increased $18.0 million from September 25, 1999 to March 25,
2000. The change in working capital resulted mainly from an increase in current
assets of $10.9 million and a decrease in current liabilities of $7.1 million.
The change in current assets was primarily attributable to an increase in
accounts receivable resulting from higher revenues and the extension of payment
terms by the Company's larger clients. The Company has implemented process
improvements and increased its collection resources, thereby resulting in a
lower accounts receivable balance at the end of the second quarter in comparison
to the balance at the end of the first quarter of fiscal 2000. The Company's
days' sales outstanding ratio was 30.5 at March 25, 2000 versus 35.4 at December
25, 1999.
-10-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 to the decrease in the current portion of long-term debt as
a result of the Company's renegotiated debt agreement. The increase in accrued
other expenses partially offset the decrease in current liabilities due to a
liability associated with the expensing of a consulting agreement and an
increase in accrued interest due to the timing of interest payments and higher
interest rates resulting from the Company's renegotiated debt agreement.
Stockholders' deficiency was $61.0 million at March 25, 2000 reflecting a $5.1
million decrease from September 25, 1999. The $5.1 million decrease was the
result of net income of $20.3 million reported by the Company and $1.4 million
of stock/option related transactions by associates offset by $16.7 million of
treasury stock purchases. The $16.7 million purchases of treasury stock were
comprised of $16.2 million open market purchases under the Company's buyback
program and $0.5 million pursuant to elections by employees to satisfy
withholding requirements under the Company's stock plans.
PROPERTY, PLANT AND EQUIPMENT
- -----------------------------
Property, plant and equipment investments were $12.6 million for the six-month
period ended March 25, 2000. These capital expenditures consisted mainly of
software development, the purchase of computerized mail sorters for the
Company's production facilities and the purchase of furniture and leasehold
improvements for the Company's facilities. The Company expects its capital
expenditures for the entire year to be approximately $38 million.
LIQUIDITY
- ---------
The Company's main source of liquidity continues to be funds generated from
operating activities. In addition, the Company has available unused credit
commitments of $88.9 million that may be used to fund operating activities.
The net cash provided by operating activities for the six months ended March 25,
2000 was $23.1 million versus $30.3 million for the six months ended March 27,
1999. The year over year decrease was primarily due to the increase in accounts
receivable detailed above offset by the Company's improved operating results.
Changes in accounts payable due to the timing of vendor payments and changes in
accrued other expenses detailed above also affected the decrease in net cash
provided by operating activities.
Cash and cash equivalents decreased $0.6 million to $8.8 million at March 25,
2000. Contributing to the decrease were $12.7 million of investing activities
primarily related to capital expenditures and $11.0 million of financing
activities, offset by cash provided by operating activities of $23.1 million.
Cash used for financing activities included $16.7 million for treasury stock
purchases and $2.3 million of debt issue costs paid in connection with the
renegotiated debt. These uses of cash were offset by net borrowings of $7.4
million under the Company's renegotiated credit agreement. The Company's net
borrowings as of March 25, 2000 reflect the reclassification between the term
loan and revolving line of credit that took place as a result of the
renegotiated credit agreement.
-11-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
FINANCING ARRANGEMENTS
- ----------------------
In December 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.
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. On January 31, 2000,
the notional amount was reduced to $60 million. The rate is fixed at
approximately 5.7%.
During the second quarter of fiscal 2000, the Company entered into two separate
thirty-month interest rate swap transaction agreements totaling $40 million to
increase the overall notional amount to $100 million. These new agreements are
effective in July, 2000 and have a rate fixed at approximately 7.2%.
Additionally, the Company has entered into two additional interest rate swap
transaction agreements that become effective in fiscal 2001. These agreements
will replace the current agreements upon expiration and hedge notional amounts
of $60 million with the rate fixed at approximately 7.3%.
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 and
second 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 March 25, 2000, $88.9
million of the revolver was available for future borrowings.
At March 25, 2000 there was $204.5 million of debt outstanding, with $10.0
million classified as current. The Company anticipates meeting its long-term
debt obligations through funds generated from operations. During April 2000, the
Company had net borrowings of $17 million under the revolving line of credit.
-12-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
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.
QUANTITATIVE AND QUALITATIVE 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 has entered into
two new agreements effective in July, 2000 to increase the notional amounts to
$100 million. Per the terms of the renegotiated credit agreement, this
protection must be at least $100 million through December 9, 2002
The Company believes that the interest rate swap agreements currently in place
and those that will be effective in July, 2000 limit substantial risk if
interest rates should fluctuate. If interest rates should change by 2% for the
remainder of the 2000 fiscal year from those rates in effect at March 25, 2000,
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 $1.3 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.
SUBSEQUENT EVENT
- ----------------
Subsequent to the end of the second quarter, the Company announced the
realignment of the sales and marketing functions and supporting areas to better
match their resources against the Company's strategic growth opportunities. As a
result of these changes, the Company will be recording a one-time charge of
approximately $.10 per share in the third quarter of fiscal 2000.
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, fluctuations in interest rates related to the outstanding debt
and other general economic factors.
-13-
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Index
Exhibit No. Exhibits
----------- --------
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
No report on Form 8-K was filed by the Company with respect to the quarter
ended March 25, 2000.
- --------------------------------------------------------------------------------
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVO, Inc.
Date: May 4, 2000 By:/s/ JULIE A. ABRAHAM
----------- ------------------------------
Julie A. Abraham
Vice President and Controller
(Principal Accounting Officer)
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO, INC'S
FORM 10-Q FOR THE SIX MONTH PERIOD ENDED MARCH 25, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> SEP-26-1999
<PERIOD-END> MAR-25-2000
<CASH> 8,791
<SECURITIES> 0
<RECEIVABLES> 108,309
<ALLOWANCES> 4,552
<INVENTORY> 3,563
<CURRENT-ASSETS> 129,218
<PP&E> 218,750
<DEPRECIATION> 119,095
<TOTAL-ASSETS> 251,783
<CURRENT-LIABILITIES> 112,542
<BONDS> 194,500
0
0
<COMMON> 295
<OTHER-SE> (61,298)
<TOTAL-LIABILITY-AND-EQUITY> 251,783
<SALES> 0
<TOTAL-REVENUES> 536,576
<CGS> 0
<TOTAL-COSTS> 385,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,484
<INTEREST-EXPENSE> 8,796
<INCOME-PRETAX> 32,260
<INCOME-TAX> 11,936
<INCOME-CONTINUING> 20,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,324
<EPS-BASIC> .99<F1>
<EPS-DILUTED> .98<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>
