<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 24, 2000
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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
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(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 _____
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As of July 22, 2000 there were 20,335,866 shares of common stock outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended June 24, 2000
Part I - Financial Information Page
------------------------------ ----
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
June 24, 2000 and September 25, 1999. 2
Consolidated statements of operations -
Nine months and three months ended
June 24, 2000 and June 26, 1999. 3
Consolidated statements of cash flows -
Nine months ended June 24, 2000
and June 26, 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. 15
Signatures 16
<PAGE>
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
June 24, September 25,
ASSETS 2000 1999
--------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,077 $ 9,341
Investment in deferred compensation plan 14,179 --
Accounts receivable, net 112,967 91,883
Inventories 2,762 4,005
Prepaid expenses and other current assets 4,743 5,376
Deferred income taxes 8,363 7,656
--------- ---------
Total current assets 150,091 118,261
Property, plant and equipment 223,911 216,718
Less accumulated depreciation and amortization (120,461) (116,918)
--------- ---------
Net property, plant and equipment 103,450 99,800
Other assets 25,063 19,240
--------- ---------
TOTAL ASSETS $ 278,604 $ 237,301
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 10,000 $ 20,250
Accounts payable 39,576 42,498
Accrued compensation and benefits 28,796 23,426
Deferred compensation plan 14,179 --
Other current liabilities 37,275 33,442
--------- ---------
Total current liabilities 129,826 119,616
Long-term debt 185,000 176,816
Deferred income taxes 2,484 3,921
Other liabilities 4,971 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 29,748,735
and 29,471,024 shares, respectively) 297 295
Additional paid-in capital 182,591 177,027
Accumulated deficit (45,432) (80,491)
--------- ---------
137,456 96,831
Less common stock held in
treasury, at cost (181,133) (162,908)
--------- ---------
Total stockholders' deficiency (43,677) (66,077)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS'
DEFICIENCY $ 278,604 $ 237,301
========= =========
</TABLE>
See Accompanying Notes.
- 2 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
----------------------- ----------------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 832,392 $ 784,194 $ 295,816 $ 262,058
Costs and expenses:
Cost of sales 593,094 567,365 207,800 186,931
Selling, general and
administrative 163,348 155,577 57,754 49,963
Provision for bad debts 6,591 3,911 2,107 1,389
---------- ---------- ---------- ----------
Operating income 69,359 57,341 28,155 23,775
Interest expense 13,515 10,616 4,719 3,567
Other expense / interest income, net 196 40 49 25
---------- ---------- ---------- ----------
Income before income taxes 55,648 46,685 23,387 20,183
Provision for income taxes 20,590 17,974 8,653 7,770
---------- ---------- ---------- ----------
Net income $ 35,058 $ 28,711 $ 14,734 $ 12,413
========== ========== ========== ==========
Basic earnings per common share $ 1.72 $ 1.32 $ .73 $ .58
========== ========== ========== ==========
Diluted earnings per common share $ 1.69 $ 1.30 $ .71 $ .58
========== ========== ========== ==========
Weighted average common shares 20,367 21,783 20,178 21,305
Weighted average diluted shares 20,714 22,057 20,694 21,493
</TABLE>
See Accompanying Notes.
- 3 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
-------------------
June 24, June 26,
2000 1999
-------- --------
<S> <C> <C>
Net cash provided by operating activities $ 40,415 $ 34,524
Cash flows from investing activities:
Acquisition of property, plant and equipment (22,314) (26,135)
Proceeds from disposals of property and equipment 226 26
Acquisitions, net of cash acquired (1,250) (300)
-------- --------
Net cash used by investing activities (23,338) (26,409)
Cash flows from financing activities:
Revolving line of credit - net (32,791) 29,300
Proceeds on long-term borrowings 30,725 --
Payments of long-term borrowings -- (14,150)
Payment of debt issue costs (2,290) --
Proceeds from exercise of stock options 3,274 1,443
Purchase of common stock for treasury (18,259) (25,574)
-------- --------
Net cash used by financing activities (19,341) (8,981)
-------- --------
Decrease in cash and cash equivalents (2,264) (866)
Cash and cash equivalents at beginning of period 9,341 8,724
-------- --------
Cash and cash equivalents at end of period $ 7,077 $ 7,858
======== ========
</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
nine-month period ended June 24, 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>
Nine months ended Three months ended
------------------- --------------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 35,058 $ 28,711 $ 14,734 $ 12,413
Weighted average common shares 20,367 21,783 20,178 21,305
Effect of dilutive securities:
Stock options 310 258 459 173
Restricted stock 37 16 57 15
-------- -------- -------- --------
Dilutive potential common shares 347 274 516 188
Weighted average diluted shares 20,714 22,057 20,694 21,493
======== ======== ======== ========
Basic earnings per common share $ 1.72 $ 1.32 $ .73 $ .58
======== ======== ======== ========
Diluted earnings per common share $ 1.69 $ 1.30 $ .71 $ .58
======== ======== ======== ========
</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 are as follows:
LIBOR Base Rate Total
As of June 24, 2000 Interest Interest Outstanding
(In thousands) 7.88% 10.25% Facilities
--------------------------------------------------------------------------------
Term loan $135,000 $ - $135,000
Revolving line of credit - 60,000 60,000
--------------------------------
$135,000 $60,000 $195,000
======== =======
Less: current portion of long-term debt 10,000
--------
$185,000
========
LIBOR Base Rate Total
As of September 25, 1999 Interest Interest Outstanding
(In thousands) 6.25% 8.25% Facilities
--------------------------------------------------------------------------------
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
========
-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 increase. The interest rate swap
agreements had an immaterial effect on interest expense during the first nine
months 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 June 24, 2000, $98.4
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):
2002 $ 11,250
2003 22,500
2004 36,250
2005 51,250
2006 73,750
--------
Total maturities $195,000
========
The majority of the revolving line of credit has been classified as long-term
since management has the intent and ability to maintain the June 24, 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 previously 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
June 24, 2000 and September 25, 1999, unamortized costs totaled $5.4 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 pretax 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. This charge is included in
selling, general and administrative costs.
5. Realignment Charge
During the third quarter of fiscal 2000, 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 recorded a $4.2 million pretax severance charge that
is included in selling, general and administrative costs.
6. Rabbi Trust
The Company entered into a rabbi trust on June 1, 2000 to protect the assets of
its non-qualified deferred compensation plan ("Plan"). The Plan allows
participants to defer amounts in excess of the dollar limitation regulated by
the federal government to 401(k) plans. Each participant's account in the Plan
is comprised of the participant's contribution, the Company's matching
contribution and the Plan's earnings. In accordance with EITF No. 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Are Held in a
Rabbi Trust and Invested", the accounts of the rabbi trust are reported in the
Company's financial statements. As such, the Company's consolidated balance
sheet at June 24, 2000 reflects the investment in the rabbi trust and the
offsetting deferred compensation obligation due to the Company's employees.
These amounts are included in current assets and current liabilities.
The deferred compensation plan investments are considered trading securities and
as such are reported at fair value with the realized and unrealized holding
gains and losses related to these investments, as well as the offsetting
compensation expense, recorded in operating income. Such amounts were not
significant for the quarter ended June 24, 2000.
-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 increased $33.8 million or 12.9% during the third quarter
of fiscal 2000 and increased $48.2 million or 6.1% for the nine months ended
June 24, 2000 when compared to the same periods of the prior year. The revenue
growth for both the three and nine month periods were mainly attributable to the
increased volume of the Company's shared mail products. These volume gains were
demonstrated in the growth of average pieces per package which increased 4.6% to
8.75 for the third quarter of fiscal 2000 and 1.3% to 8.60 for the current nine
month year to date period. In addition, total shared mail packages increased
2.0% and 1.0%, respectively, for the three and nine month periods ended June 24,
2000 when compared to the same periods of the prior year. These volume gains
were assisted by a strong Easter mailing season which, in particular, favorably
affected early third quarter revenues.
Also contributing to the revenue gain was the increase over the prior year in
shared mail revenue per thousand pieces of 3.8% to $39.25 and 2.5% to $38.56 for
the third quarter and nine months of fiscal 2000, respectively. (In order to
conform to current year's presentation, the revenue per thousand pieces
statistic has been restated in the prior year to include revenues associated
with the ADVO Targeting Zone (ATZ) platform). In addition, increases in product
weights mailed for the Company's preprint customers also contributed in part to
the revenue growth.
Increased revenues from MailCoups, the Company's targeted coupon distributor
that utilizes an envelope format and the Company's A.N.N.E. (ADVO National
Network Extension) brokered distribution program continued to contribute to the
revenue growth during the third quarter, as in the previous quarters of fiscal
2000.
OPERATING EXPENSES Cost of sales as a percentage of revenue was 70.2% and
71.3%, respectively, for the three and nine month periods ended June 24, 2000,
reflecting decreases of 1.1 percentage points for both periods when compared to
the same period in the prior year. These decreases were primarily the result of
continued branch operating efficiencies and the flow-through of the increased
revenue per piece mentioned above.
Cost of sales increased $20.9 million for the third quarter and $25.7 million
for the first nine months of fiscal 2000 over the comparable periods of the
prior year. The majority of the increase was attributable to higher postage
expense driven by the increase in volume and the heavier weight pieces. The
remainder of the cost of sales increase for the three and nine months ended June
24, 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.
Selling expense, including the provision for bad debts, increased $2.7 million
for the third quarter of fiscal 2000 and $4.8 million for the nine month year to
date period over the same periods in the prior year. The increase was related to
higher commission expense resulting from the revenue growth in the current
reporting periods over prior year reporting periods, and higher bad debt expense
due to the Chapter 11 filing of three clients.
For the quarter ended June 24, 2000, general and administrative costs increased
$5.8 million over the same period in the prior year. The increase was primarily
due to the $4.2 million charge incurred by the Company related to the
realignment of the sales and marketing areas. Excluding the $4.2 million
charge, general & administrative costs would have increased only $1.6 million,
or 2.8 %. The remainder of the increase for the third quarter was mainly due to
higher incentive wages.
-9-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the nine-month year to date period, general and administrative costs
increased $5.7 million to $63.0 million when compared to the same period of the
prior year. The year to date increase was comprised of several items: the items
discussed above detailing the third quarter increase in general and
administrative costs, higher outsourcing/service and media fees and the
expensing of a long-term consulting agreement with the Company's former Chairman
and Chief Executive Officer. In addition, offsetting the increases for both the
three and nine month periods, was the absence of Year 2000 remediation costs
that were incurred in the prior year.
OPERATING INCOME The Company reported operating income of $28.2 million and
$69.4 million for the third quarter and nine months ended June 24, 2000,
representing an 18.4% and 21.0% increase, respectively, over the same periods in
the prior year. Operating income as percentage of revenue increased from 9.1% to
9.5% for the three months ended June 24, 2000 and increased from 7.3% to 8.3%
for the first nine months of fiscal 2000 over the same periods of the prior
year.
Excluding the $4.2 million realignment charge, operating income would have
increased $8.6 million or 36.3% and, as a percentage of revenue, increased 1.9
percentage points to 11.0% for the current quarter of fiscal 2000 when compared
to the same quarter in the prior year. For the nine months of fiscal 2000
operating income would have increased $18.5 million or 32.2% and, as a
percentage of revenue, increased 1.8 percentage points to 9.1% over the
comparable period of prior year excluding both the $4.2 million realignment
charge recorded in the third quarter and the $2.2 million charge relating to the
expensing of the former Chairman's consulting contract during the first quarter
of fiscal 2000.
INTEREST EXPENSE Interest expense increased $1.2 million and $2.9 million,
respectively, for the three and nine months ended June 24, 2000. The increase
was the result of higher interest rates under the renegotiated credit agreement
and higher market rates of interest.
INCOME TAXES The effective income tax rate was 37% for the three and nine
months ended June 24, 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 For the three months ended June 24, 2000, the
Company reported diluted earnings per share of $.71, representing a 22.4%
increase from the comparable period of the prior year. Excluding the $4.2
million realignment charge, diluted earnings per share would have increased $.26
or 44.8% to $.84 for the third quarter of fiscal 2000. Diluted earnings per
share excluding both the $4.2 million realignment charge and the $2.2 million
charge relating to the expensing of the former Chairman's consulting contract
would have been $1.89 for the nine month year-to-date period, representing an
increase of 45.4% over the comparable period in the prior year.
The decrease in weighted average common and diluted shares for the three and
nine months ended June 24, 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
-------------------
The working capital ratio was 1.16 at June 24, 2000 versus .99 at September 25,
1999. Overall, working capital increased $21.6 million from September 25, 1999
to June 24, 2000. Contributing to the increase in working capital were
increases in current assets of $31.8 million and offset by increases in current
liabilities of $10.2 million.
-10-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The change in current assets was primarily attributable to the increase in
accounts receivable resulting from the 12.9% growth in revenue for the third
quarter and the extension of payment terms by the Company's larger clients. The
Company has implemented process improvements and increased its collection
resources in this area. Also contributing to the increase in current assets was
the recording of the Company's investment in the deferred compensation plan
detailed below.
The increase in current liabilities associated with the working capital change
was attributable to the following: increases in accrued other expenses due to a
liability associated with the expensing of the former Chairman's consulting
agreement; increases in accrued interest due to the timing of interest payments
and higher interest rates resulting from the Company's renegotiated debt
agreement; increases in accrued compensation and benefits as a result of the
realignment charge and higher incentive wages resulting from the Company's
improved operating results; and the recording of the deferred compensation plan
obligation detailed below. Offsetting these changes were decreases in accounts
payable due to timing of vendor payments and decreases in the current portion of
long-term debt as a result of the Company's renegotiated debt agreement.
The Company entered into a rabbi trust on June 1, 2000 to protect the assets of
its non-qualified deferred compensation plan ("Plan"). The Plan allows
participants to defer amounts in excess of the dollar limitation regulated by
the federal government to 401(k) plans. Each participant's account in the Plan
is comprised of the participant's contribution, the Company's matching
contribution and the Plan's earnings. In accordance with EITF No. 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Are Held in a
Rabbi Trust and Invested", the accounts of the rabbi trust are reported in the
Company's financial statements. As such, the Company's consolidated balance
sheet at June 24, 2000 reflects the investment in the rabbi trust and the
offsetting deferred compensation obligation due to the Company's employees.
These amounts are included in current assets and current liabilities.
Total stockholders' deficiency decreased $22.4 million to a net deficiency of
$43.7 million at June 24, 2000. The decrease in the net deficiency was
primarily the result of the Company's net income of $35.1 offset by $18.3
million of treasury stock purchases. The $18.3 million purchases of treasury
stock consisted of $17.2 million made on the open market under the Company's
buyback program and $1.1 million pursuant to elections by employees to satisfy
withholding requirements under the Company's stock plans. Also contributing to
the decrease in stockholder's deficiency was $5.6 million of stock/option
related transactions made by associates under the Company's stock plans.
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment investments of $22.3 million for the nine month
period ended June 24, 2000 included the purchase of computerized mail sorters
for the Company's production facilities, the purchase of furniture and leasehold
improvements for the Company's facilities, acquisitions of computer hardware,
and costs associated with the development of new software. 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 $98.4 million that may be used to fund operating activities.
-11-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company experienced a $5.9 million increase in net cash provided by
operating activities for the nine months ended June 24, 2000. The year over
year increase was primarily due to the Company's improved operating results.
Changes in accrued other expenses and accrued compensation and benefits detailed
above also affected the increase in net cash provided by operating activities.
Offsetting these changes were increases in accounts receivables.
Overall cash and cash equivalents decreased $2.3 million during the nine months
ended June 24, 2000. This decrease was the result of cash outlays of $42.7
million associated with investing and financing activities, offset by net cash
provided by operating activities of $40.4 million. Investing activities for the
nine months primarily included expenditures for property, plant and equipment of
$22.3 million detailed above and $1.0 million for the acquisition of a
controlling interest in Netserts.com, an advertising magazine dedicated to
driving on-line traffic to Internet sites.
Net cash used for financing activities of $19.3 million included $18.3 million
for treasury stock purchases, $2.3 million of debt issue costs paid in
connection with the renegotiated debt and net repayments of $2.1 million under
the Company's renegotiated credit agreement. These uses of cash were offset by
$3.2 million of proceeds from option exercises under the Company's stock option
plans. The Company's net borrowings as of June 24, 2000 reflect the
reclassification between the term loan and revolving line of credit that took
place as a result of the renegotiated credit agreement.
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
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<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 nine
months 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 June 24, 2000, $98.4
million of the revolver was available for future borrowings.
At June 24, 2000 there was $195.0 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 July 2000, the
Company had net borrowings of $13 million under the revolving line of credit.
Under the terms of the credit agreement, the Company is required to maintain
certain financial ratios. In addition, the credit agreement also places
restrictions on disposals of assets, mergers and acquisitions, dividend
payments, investments and additional 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 increase. If interest rates should change by 2% for the remainder
of the 2000 fiscal year from those rates in effect at June 24, 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 $0.7 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.
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<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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.
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<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 June 24, 2000.
--------------------------------------------------------------------------------
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVO, Inc.
Date: August 7, 2000 By: /s/ JULIE A. ABRAHAM
--------------- -------------------------------------
Julie A. Abraham
Vice President and Controller
(Principal Accounting Officer)
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