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 30, 2001
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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.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (860) 285-6100
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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 28, 2001 there were 20,331,423 shares of common stock outstanding.
ADVO, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
QUARTER ENDED JUNE 30, 2001
Part I - Financial Information Page
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Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
June 30, 2001 and September 30, 2000. 2
Consolidated statements of operations -
Nine months and three months ended
June 30, 2001 and June 24, 2000. 3
Consolidated statements of cash flows -
Nine months ended June 30, 2001
and June 24, 2000. 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 11
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K. 12
Signatures 13
ADVO, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
June 30, September 30,
2001 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 16,645 $ 6,003
Accounts receivable, net 111,848 114,093
Other current assets 9,093 7,515
Investment in deferred compensation plan 13,381 14,546
Deferred income taxes 9,700 10,457
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Total current assets 160,667 152,614
Property, plant and equipment 244,526 233,682
Less accumulated depreciation and amortization (126,207) (120,449)
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Net property, plant and equipment 118,319 113,233
Other assets 32,392 23,330
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TOTAL ASSETS $ 311,378 $ 289,177
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,500 $ 10,000
Notes payable - short term 2,390 --
Accounts payable 31,516 43,674
Accrued compensation and benefits 21,818 27,230
Deferred compensation plan 13,381 14,546
Other current liabilities 40,892 43,649
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Total current liabilities 117,497 139,099
Long-term debt 183,500 180,000
Notes payable - long term 1,715 --
Deferred income taxes 6,858 5,800
Other liabilities 4,863 4,850
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 30,285,748
and 29,908,609 shares, respectively) 303 299
Additional paid-in capital 195,877 185,949
Accumulated earnings (deficit) 4,894 (31,671)
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201,074 154,577
Less common stock held in
treasury, at cost (200,102) (195,149)
Accumulated other comprehensive income (loss) (4,027) --
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Total stockholders' deficiency (3,055) (40,572)
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TOTAL LIABILITIES & STOCKHOLDERS'
DEFICIENCY $ 311,378 $ 289,177
========= =========
See Accompanying Notes.
-2-
ADVO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Nine months ended Three months ended
------------------- ------------------
June 30, June 24, June 30, June 24,
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES $851,083 $832,392 $281,759 $295,816
Costs and expenses:
Cost of sales 615,918 593,094 202,572 207,800
Selling, general and
administrative 158,824 163,348 53,660 57,754
Provision for bad debts 4,471 6,591 1,454 2,107
-------- -------- -------- --------
OPERATING INCOME 71,870 69,359 24,073 28,155
Interest expense 13,426 13,515 4,249 4,719
Other expense, net 406 196 185 49
-------- -------- -------- --------
Income before income taxes 58,038 55,648 19,639 23,387
Provision for income taxes 21,474 20,590 7,266 8,653
-------- -------- -------- --------
NET INCOME $ 36,564 $ 35,058 $ 12,373 $ 14,734
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 1.81 $ 1.72 $ .61 $ .73
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 1.77 $ 1.69 $ .60 $ .71
======== ======== ======== ========
Weighted average common shares 20,151 20,367 20,242 20,178
Weighted average diluted shares 20,629 20,714 20,585 20,694
See Accompanying Notes.
-3-
ADVO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine months ended
------------------
June 30, June 24,
2001 2000
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 42,948 $ 42,762
Cash flows from investing activities:
Acquisition of property, plant and equipment (22,958) (24,661)
Proceeds from disposals of property, plant and equipment 71 226
Acquisitions/joint ventures, net of cash acquired (14,303) (1,250)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (37,190) (25,685)
Cash flows from financing activities:
Revolving line of credit - net 1,000 (32,791)
Proceeds from long-term debt -- 30,725
Increase in note payable 4,105 --
Payment of debt issue costs -- (2,290)
Proceeds from exercise of stock options 4,733 3,274
Purchase of common stock for treasury (4,954) (18,259)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 4,884 (19,341)
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Increase (decrease) in cash and cash equivalents 10,642 (2,264)
Cash and cash equivalents at beginning of period 6,003 9,341
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,645 $ 7,077
======== ========
Noncash activities:
Increase in liabilities - fair value of interest rate
swap agreements $ 4,027 $ --
Increase in assets - note receivable in sale of business 415 --
See Accompanying Notes.
-4-
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 30, 2001 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 29, 2001. 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 30, 2000. Certain reclassifications have been made in the
fiscal 2000 financial statements to conform with the fiscal 2001 presentation.
2. SUMMARY OF ACCOUNTING POLICIES
Derivatives and hedging activities
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and
138, requires companies to recognize all derivatives on the balance sheet at
fair value. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value are either offset against the change in fair value of
assets, liabilities, or firm commitments through earnings, or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
Company's interest rate swap agreements are considered `effective' under SFAS
No. 133 and, as a result, changes in the fair value of the agreements are
recorded in current assets or liabilities with the offset amount recorded to
accumulated other comprehensive income (loss) in stockholders' deficiency.
The Company's existing interest rate swap agreements (derivatives) convert a
portion of its floating rate debt to a fixed rate basis through December 2002,
thus limiting substantial risk should interest rates fluctuate. In accordance
with its credit agreement, $100 million of the Company's outstanding variable
rate debt was designated as hedged relating to the interest rate swap
agreements. The Company adopted SFAS No 133, as amended, on October 1, 2000 and
recorded an unrealized loss of $1.2 million in accumulated other comprehensive
income (loss), offsetting the fair value of the swap agreements recorded in
other current liabilities.
Goodwill Amortization
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No's
141 and 142, "Business Combinations" and "Goodwill and Other Intangibles". SFAS
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill is
subject to at least an annual assessment for impairment applying a fair-value
based test. Additionally, intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives.
The Company is required to adopt SFAS 142 by fiscal 2003, with early adoption
permitted in fiscal 2002. The Company is in the process of determining the
impact of these pronouncements on its financial position and results of
operations. Currently goodwill amortization is approximately $0.4 million per
quarter.
COMPREHENSIVE INCOME
Comprehensive income for a period encompasses net income and all other changes
in a company's equity other than from transactions with the company's owners.
Comprehensive income was $12.7 million for the quarter ended June 30, 2001 which
consisted of net income of $12.4 million and the change in the unrealized gain
on the fair value of derivative instruments of $0.3 million. For the year to
date period ended June 30, 2001, comprehensive income was $33.8 million, which
consisted of net income of $36.6 million and the change in the unrealized loss
on the fair value of derivative instruments of $2.8 million
-5-
ADVO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Accumulated other comprehensive income (loss) at June 30, 2001 consisted of the
following:
Unrealized loss from derivative instruments at adoption
of SFAS No. 133 $(1.2) million
Change in the fair value of derivative instruments for
the year to date period ended June 30, 2001 (2.8) million
--------------
Total accumulated other comprehensive income (loss) $(4.0) million
==============
3. ACQUISITIONS
During the first quarter of fiscal 2001 the Company announced the acquisition of
Mail Marketing Systems, Inc., ("MMSI") a privately held direct mail advertising
company for $7.3 million, net of $1.7 million cash acquired. The purchase price
was comprised of a $5.0 million cash payment and $4.0 million financed by the
owner of MMSI. In addition, during the second quarter of fiscal 2001 the
Company paid an additional $1.0 million to MMSI for contingent consideration in
connection with the acquisition. During the third quarter the Company acquired
the New Jersey Shoppers Guide for approximately $4.9 million. These
acquisitions have been accounted for under the purchase method of accounting
and, accordingly, the results of operations of the acquired companies have been
included in the consolidated statements of operations from their acquisition
date. The acquired assets were recorded at their estimated fair values. The
acquisitions did not have a material pro forma effect on operations for periods
prior to the acquisitions.
5. EARNINGS PER SHARE
Basic earnings per 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 share reflect the
potential dilution that could occur if common stock equivalents, such as stock
options, were exercised.
Nine months ended Three months ended
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June 30, June 24, June 30, June 24,
2001 2000 2001 2000
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Net income $36,564 $35,058 $12,373 $14,734
Weighted average common shares 20,151 20,367 20,242 20,178
Effect of dilutive securities:
Stock options 443 310 310 459
Restricted stock 35 37 33 57
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Dilutive potential common shares 478 347 343 516
Weighted average diluted shares 20,629 20,714 20,585 20,694
======= ======= ======= =======
Basic earnings per share $ 1.81 $ 1.72 $ .61 $ .73
======= ======= ======= =======
Diluted earnings per share $ 1.77 $ 1.69 $ .60 $ .71
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-6-
ADVO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6. NON-RECURRING CHARGES
On April 19, 2001, the Company announced that Beth Bronner had resigned as
President and Chief Operating Officer to explore other opportunities. As a
result of a pre-existing contractual agreement, the Company recorded a pre-tax
charge of approximately $1.9 million during the third quarter of fiscal 2001 in
selling, general and administrative costs.
During the third quarter of fiscal 2000, the Company recorded a $4.2 million
pretax severance charge as the result of the realignment of the sales and
marketing functions and supporting areas to better match their resources against
the Company's strategic growth opportunities. This charge was recorded in
selling, general and administrative costs.
The Company recorded a special pre-tax charge in selling, general and
administrative costs of $2.2 million during the first quarter of the previous
year related to the expensing of a long-term consulting agreement with the
Company's former Chairman and Chief Executive Officer who was no longer
providing services to the Company.
-7-
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 third quarter of fiscal 2001, revenues of $281.8 million
decreased 4.8% from the comparable period of the prior fiscal year. The decline
in revenues was primarily volume related due to shortfalls against revenue
opportunities in the Company's medium sized local and regional client segment.
Additionally, the timing of a seasonally weak fiscal week at the end of June
fell into this year's third quarter, in the previous year it was part of the
fourth quarter. These declines were illustrated in the decease in average
pieces per package to 8.00 pieces for the third quarter of fiscal 2001 from
8.75 pieces for the same quarter of the prior year. Pieces per package were
impacted by June's unfavorable fiscal week timing as well as the dilutive effect
of the Company's second in-home date mailings. Shared mail packages delivered
increased 2.4% for the third quarter of fiscal 2001 over the comparable prior
year period, a result of increases in mailings, as well as, the impact of the
second in-home date deliveries.
Offsetting the revenue decrease was pricing gains resulting in a 1.9% growth in
revenue per thousand pieces to $39.99 for the three months ended June 30, 2001.
The increase in revenue per thousand pieces was, in part, the result of the
postal rate increase effective in January 2001. Also offsetting the revenue
decline in the third quarter of fiscal 2001 was the revenue associated with the
Company's acquisitions of Mail Marketing Systems, Inc. ("MMSI") during the first
quarter of fiscal 2001 and the New Jersey Shoppers Guide ("New Jersey Shopper")
at the beginning of the third quarter.
Year-to-date revenues through June 30, 2001 increased $18.7 million, or 2.2%,
over the same prior year period. Pricing gains were partially offset by volume
declines in shared mail products. Revenue per thousand pieces was $39.54 for
the nine months ended June 30, 2001, representing a 2.5% increase over the same
period in the prior year. Average pieces per package were 8.15 pieces,
decreasing 5.2% from the prior year period due to the reasons detailed above.
Conversely, the Company's second-in-home date deliveries, along with increased
mailings, contributed to the 4.3% increase in shared mail packages delivered to
2,401.3 million packages for the first nine months of fiscal 2001 from
2,301.7 million packages in the prior year.
Also contributing substantially to the growth in year-to-date revenues were
increased revenues from MailCoups, the Company's targeted coupon distributor and
the growth in the Company's A.N.N.E. (ADVO National Network Extension) brokered
distribution program. In addition, year-to-date revenues also included the
effect of the revenues associated with the Company's acquisitions of MMSI and
the New Jersey Shopper.
OPERATING EXPENSES Cost of sales as a percentage of revenue increased 1.6
percentage points to 71.9% for the three months ended June 30, 2001 when
compared to the same period in the prior year due to underweight postage as a
result of the average pieces per package decline. In absolute terms, cost of
sales decreased $5.2 million for the three months ended June 30, 2001 due to
lower postage, distribution and print costs as a result of the decline in shared
mail volume.
For the year-to-date period ended June 30, 2001, cost of sales as a percentage
of revenue increased 1.1 percentage points to 72.4% when compared to the same
period in the prior year. In absolute terms, cost of sales increased
$22.8 million for the first nine months of fiscal 2001 over the same period in
fiscal 2000. The increase was mainly attributable to higher postage costs as a
result of the postal rate increase, higher printing and paper costs and
increased delivery costs incurred as a result of increased revenues associated
with A.N.N.E. and MailCoups. In addition, the increase was affected by the
distribution costs related to the operations of MMSI and the New Jersey Shopper.
The growth in the number of shared mail packages delivered also contributed to
the increase in cost of sales. Partially offsetting these increases to a degree
were continued improvements and efficiencies in the branch operations of the
Company.
-8-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three and nine months ended June 30, 2001, selling, general and
administrative costs, including the provisions for bad debts, decreased
$4.7 million and $6.6 million, respectively, when compared to the same periods
in the prior year. As a percentage of revenue, selling, general and
administrative costs also decreased 0.6 and 1.2 percentage points, respectively,
for the three and nine months ended June 30, 2001 when compared to the same
periods in the prior year. The change in selling, general and administrative
costs were due to several items. For the third quarter and year-to-date periods
of fiscal 2001, selling general and administrative costs included a $1.9 million
charge as a result of a pre-existing contractual agreement with the Company's
former President and Chief Operating Officer due to her resignation. For the
third quarter of fiscal 2000, selling general and administrative costs included
a $4.2 million charge related to the realignment of the sales and marketing
areas. In addition, the year-to-date period in the prior year included a
$2.2 million charge related to the expensing of a long-term consulting agreement
with the Company's former Chairman and Chief Executive Officer. Also
contributing to the favorable variance in selling, general and administrative
costs for both the quarter and nine month periods were reductions in spending
due to increased fixed cost controls and lower incentive wages in the current
year when compared to the prior year.
OPERATING INCOME For the third quarter of fiscal 2001, the Company reported
operating income of $24.1 million versus $28.2 million in the third quarter of
fiscal 2000. For the first nine months of fiscal 2001, operating income was
$71.9 million, representing a $2.5 million or 3.6% increase over the first nine
months of fiscal 2000. As a percent of revenue, operating income was 8.5% for
the third quarter and 8.4% for the first nine months of fiscal 2001, when
compared to 9.5% and 8.3%, respectively, for the same periods of the prior
fiscal year.
INTEREST EXPENSE Interest expense decreased $0.5 million and $0.1 million for
the three month period and the nine month period ended June 30, 2001,
respectively.
INCOME TAXES The effective income tax rate was 37% for both the three and
nine months ended June 30, 2001 and June 24, 2000.
EARNINGS PER SHARE Diluted earnings per share was $.60 for the third quarter
of fiscal 2001 versus $.71 for the same period of the prior year. On a year-to-
date basis, diluted earnings per share was $1.77 for the current year,
representing a 4.7% increase from $1.69 diluted earnings per share reported in
the prior year.
FINANCIAL CONDITION
-------------------
The working capital ratio was 1.37 at June 30, 2001 versus 1.10 at September 30,
2000. Overall, working capital increased $29.7 million from September 30, 2000.
The increase in working capital from the end of the prior fiscal year was
primarily related to the $21.6 million decrease in current liabilities which was
mostly comprised of the following: a decrease in accounts payable due to the
seasonal timing of vendor payments; a decrease in accrued compensation and
benefits due to the fiscal 2000 incentive compensation payout which occurred in
fiscal 2001; and a decrease in the current portion of long-term debt due to
scheduled principal payments within the next year. In addition, the $8.1
million increase in current assets also contributed to the increase in working
capital. The current assets increase was due to an increase in cash and cash
equivalents offset by a decrease in accounts receivable.
Stockholders' deficiency decreased $37.5 million to a net deficiency of
$3.1 million at June 30, 2001. The decrease in net deficiency was primarily the
result of the Company's net income of $36.6 million and $9.9 million of
stock/option related transactions by associates, offset by treasury stock
purchases of $5.0 million. The treasury stock purchases consisted of
$2.5 million made on the open market associated with the Company's buyback
program and $2.5 million pursuant to elections by employees to satisfy
withholding requirements under the Company's restricted stock and stock option
plans. In addition, the Company recorded an unrealized loss of $4.0 million to
accumulated other comprehensive income (loss) related to the adoption of SFAS
No. 133 and the change in fair value of the derivative instruments during fiscal
2001.
-9-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS Nos. 137 and 138, requires companies to recognize all
derivatives on the balance sheet at fair value. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value are either
offset against the change in fair value of assets, liabilities, or firm
commitments through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The Company's interest rate swap
agreements are considered `effective' under SFAS No. 133 and, as a result
changes in the fair value of the agreements are recorded in current assets or
liabilities with the offset amount recorded to accumulated other comprehensive
income (loss) in stockholders' deficiency.
The Company's existing interest rate swap agreements (derivatives) convert a
portion of its floating rate debt to a fixed rate basis through December 2002,
thus limiting substantial risk should interest rates fluctuate. In accordance
with its credit agreement, $100 million of the Company's outstanding variable
rate debt was designated as hedged relating to the interest rate swap agreement.
The Company adopted SFAS No 133, as amended, on October 1, 2000 and recorded an
unrealized loss of $1.2 million in accumulated other comprehensive income
(loss), offsetting the fair value of the swap agreements recorded in other
current liabilities.
PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment investments were $23.0 million for the nine-month
period ended June 30, 2001. These capital expenditures consisted mainly of
software development for the client management, order fulfillment and order
management systems, the purchase of computerized mail sorters (Alphaliners) for
the Company's production facilities, renovations at certain of the Company's
facilities and deployment of computer hardware. The Company expects its capital
expenditures for the entire year to be approximately between $35.0 million and
$38.0 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 $102.4 million that may be used to fund operating activities.
The net cash provided by operating activities for the nine months ended June 30,
2001 and June 24, 2000 remained relatively constant at $42.9 million and
$42.8 million, respectively. Cash and cash equivalents increased $10.6 million
to $16.6 million at June 30, 2001. Contributing to the increase was
$43.0 million of cash provided by operating activities and $4.9 million of
financing activities offset by investing activities of $37.2 million.
Investing activities primarily consisted of $23.0 million for the capital
expenditures detailed above and $14.3 million, net of cash acquired, for
acquisitions and joint ventures made during the first nine months of fiscal
2001. During the first quarter of fiscal 2001, the Company announced the
acquisition of MMSI, a privately held direct mail advertising company for
$7.3 million, net of cash acquired. In addition, during the second quarter of
fiscal 2001 the Company paid an additional $1.0 million to MMSI for contingent
consideration in connection with the acquisition. During the third quarter the
Company acquired the New Jersey Shoppers Guide for approximately $4.9 million.
-10-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash provided by financing activities included net borrowings of
$1.0 million under the Company's renegotiated credit agreement, $4.1 million of
a note payable incurred with the acquisition of MMSI and $4.7 million of
proceeds from option exercises under the Company's stock option plan offset by
treasury stock purchases of $5.0 million. In the previous year, treasury stock
purchases were $18.3 million for the nine months ended June 24, 2000.
FINANCING ARRANGEMENTS
----------------------
The Company maintains a credit agreement which provides for total credit
facilities of $300 million, consisting of a $135 million term loan and a
$165 million revolving line of credit. At June 30, 2001 there was $191.0 million
of debt outstanding, with $7.5 million classified as current which represents
the Company's scheduled principal payments due in March and June of 2002. The
Company anticipates it will be able to meet its long-term debt obligations
through funds generated from operations. During July 2001 the Company borrowed
an additional $10.0 million under the revolving line of credit.
Under the terms of the credit agreement, the Company is required to maintain
certain financial ratios. In addition, the credit agreement also places
restrictions on disposals of assets, mergers and acquisitions, dividend
payments, investments and additional debt.
NEW ACCOUNTING PRONOUNCEMENTS
----------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No's 141 and 142, "Business Combinations" and "Goodwill and Other Intangibles".
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FASB 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill is
subject to at least an annual assessment for impairment applying a fair-value
based test. Additionally, intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives.
The Company is required to adopt SFAS 142 by fiscal 2003, with early adoption
permitted in fiscal 2002. The Company is in the process of determining the
impact of these pronouncements on its financial position and results of
operations. Currently goodwill amortization is approximately $0.4 million per
quarter.
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 which is currently over 50% of its outstanding debt
balance.
The Company believes that the interest rate swap agreements limit substantial
risk if interest rates should fluctuate. If interest rates should change by
2 percentage points for the remainder of the 2001 fiscal year from those rates
in effect at June 30, 2001, 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 $0.5 million.
-11-
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: changes in customer demand and
pricing; the possibility of consolidation throughout the retail sector; the
impact of economic conditions on retail advertising spending; postal and paper
prices; possible governmental regulation or legislation affecting aspects of the
Company's business; 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit Index
Exhibit No. Exhibits
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(b) Reports on Form 8-K
-------------------
No report on Form 8-K was filed by the Company with respect to the quarter
ended June 30, 2001.
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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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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 13, 2001 By: /s/ JULIE ABRAHAM
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Julie Abraham
Senior Vice President
of Finance and Controller
(Principal Accounting Officer)
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