FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended DECEMBER 28, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-11720
ADVO, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0885252
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Univac Lane, P.O. Box 755, Windsor, CT 06095-0755
------------------------------------------ ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (860) 285-6100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
As of January 25, 2003 there were 19,872,818 shares of common stock outstanding.
ADVO, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
QUARTER ENDED DECEMBER 28, 2002
Page
----
Part I - Financial Information
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
December 28, 2002 and September 28, 2002. 2
Consolidated statements of operations -
Three months ended December 28, 2002 and December 29, 2001. 3
Consolidated statements of cash flows -
Three months ended December 28, 2002 and December 29, 2001. 4
Notes to consolidated financial statements. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 7
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. 12
Item 4. Controls and Procedures. 12
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds 13
Item 4. Submission of Matters to a Vote of
Security Holders. 13
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures 15
Certification 16
ADVO, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
December 28, September 28,
2002 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 21,186 $ 12,281
Accounts receivable, net 116,264 120,600
Inventories 2,560 2,415
Prepaid expenses and other current assets 6,994 7,140
Deferred income taxes 13,164 13,189
--------- ---------
Total current assets 160,168 155,625
Property, plant and equipment 288,363 276,301
Less accumulated depreciation and amortization (154,620) (147,913)
--------- ---------
Net property, plant and equipment 133,743 128,388
Investment in deferred compensation plan 11,087 10,311
Goodwill 22,173 22,124
Other assets 14,825 13,661
--------- ---------
TOTAL ASSETS $ 341,996 $ 330,109
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 25,000 $ 22,500
Notes payable - short term 74 1,715
Accounts payable 28,053 32,923
Accrued compensation and benefits 27,374 24,798
Other current liabilities 42,408 37,127
--------- ---------
Total current liabilities 122,909 119,063
Long-term debt 140,000 146,750
Deferred income taxes 14,513 12,770
Deferred compensation plan 11,087 10,311
Other liabilities 4,847 4,885
STOCKHOLDERS' EQUITY
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 30,620,608
and 30,594,410 shares, respectively) 306 306
Additional paid-in capital 205,958 205,164
Unamortized deferred compensation (1,035) (873)
Accumulated earnings 72,254 61,329
--------- ---------
277,483 265,926
Less common stock held in
treasury, at cost (228,814) (228,473)
Accumulated other comprehensive loss (29) (1,123)
--------- ---------
Total stockholders' equity 48,640 36,330
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 341,996 $ 330,109
========= =========
See Accompanying Notes.
-2-
ADVO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three months ended
------------------
December 28, December 29,
2002 2001
--------- ---------
REVENUES $ 291,178 $ 286,936
Costs and expenses:
Cost of sales 214,354 207,466
Selling, general and
administrative 55,100 54,354
Provision for bad debts 1,751 2,125
--------- ---------
OPERATING INCOME 19,973 22,991
Interest expense 2,898 3,515
Other (income) expense, net (265) 295
--------- ---------
Income before income taxes 17,340 19,181
Provision for income taxes 6,416 7,097
--------- ---------
NET INCOME $ 10,924 $ 12,084
========= =========
BASIC EARNINGS PER SHARE $ .55 $ .61
========= =========
DILUTED EARNINGS PER SHARE $ .55 $ .60
========= =========
Weighted average common shares 19,788 19,928
Weighted average diluted shares 19,964 20,287
See Accompanying Notes.
-3-
ADVO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three months ended
------------------
December 28, December 29,
2002 2001
---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 27,576 $ 11,414
Cash flows from investing activities:
Acquisition of property, plant and equipment (13,216) (5,205)
Proceeds from disposals of property, plant and equipment 186 38
Distributions from equity affiliates 329 --
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (12,701) (5,167)
Cash flows from financing activities:
Revolving line of credit - net (500) (5,000)
Payments on long-term debt (3,750) --
Decrease in note payable - net (1,641) (2,391)
Proceeds from exercise of stock options 259 661
Purchase of common stock for treasury (341) (7,885)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (5,973) (14,615)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 3 --
Increase (decrease) in cash and cash equivalents 8,905 (8,368)
Cash and cash equivalents at beginning of period 12,281 17,728
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,186 $ 9,360
======== ========
Noncash activities:
Decrease in fair value of
interest rate swap liabilities 1,090 666
Change in noncash portion of deferred
compensation plan 630 932
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 three-month period ended December 28, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 27, 2003. 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 28, 2002.
Certain reclassifications have been made in the fiscal 2002 financial statements
to conform with the fiscal 2003 presentation.
2. SUMMARY OF ACCOUNTING POLICIES
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("Statement") No. 143, "Accounting for Asset
Retirement Obligations". Statement No. 143 establishes accounting standards for
the recognition and measurement of legal obligations associated with the
retirement of tangible long-lived assets and requires the recognition of a
liability for an asset retirement obligation in the period in which it is
incurred. The Company adopted Statement No. 143 at the beginning of fiscal 2003
and such adoption had no effect on the Company's financial position and results
of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
for the disposal of a segment of a business. The Company adopted Statement No.
144 at the beginning of fiscal 2003 and such adoption had no effect on the
Company's financial position and results of operations.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which supercedes Emerging Issues
Task Force Issue ("EITF") No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Associated with a Restructuring)". Statement No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred as opposed to when management is committed to an
exit plan. Such liabilities should be recorded based on their fair value, as
defined. This statement is effective for exit or disposal activities initiated
after December 31, 2002. The Company recorded a severance charge in the first
quarter of fiscal 2003 and recognized the liability when incurred. The
accounting treatment for this charge is identical under current guidance (EITF
No. 94-3) and Statement No. 146.
In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others" which requires companies to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN No. 45 provides specific guidance identifying the
characteristics of contracts that are subject to its guidance in its entirety
from those only subject to the initial recognition and measurement provisions.
The recognition and measurement provisions of FIN No. 45 are effective on a
prospective basis for guarantees issued or modified after December 31, 2002.
-5-
ADVO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The disclosure requirements of FIN No. 45 are effective for interim and annual
period financial statements ending after December 15, 2002. For the first
quarter ended December 28, 2002, the Company's contingent consideration from the
acquisition of ADVO Canada is subject to the disclosure requirements of FIN No.
45. If certain earning targets are met by ADVO Canada, the Company will be
required to pay an additional payment up to a maximum of $0.7 million over the
next three years.
3. 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.
The Company's comprehensive income was as follows:
Three months ended
------------------
December 28, December 29,
2002 2001
------- -------
(In thousands)
Net income $10,924 $12,084
Other comprehensive income:
Unrealized gain on derivative instruments 1,090 666
Foreign currency translation adjustment 5 --
------- -------
Total comprehensive income $12,019 $12,750
======= =======
4. 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.
Three months ended
------------------
December 28, December 29,
2002 2001
------- -------
(In thousands, except per share data)
Net income $10,924 $12,084
======= =======
Weighted average common shares 19,788 19,928
Effect of dilutive securities:
Stock options 153 317
Restricted stock 23 42
------- -------
Dilutive potential common shares 176 359
------- -------
Weighted average diluted shares 19,964 20,287
======= =======
Basic earnings per share $ .55 $ .61
======= =======
Diluted earnings per share $ .55 $ .60
======= =======
-6-
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 1.5%, or $4.2 million, to $291.2 million for the
first fiscal quarter of 2003. The revenue growth was the result of pricing gains
and $2.1 million of revenues associated with the acquisition of ADVO Canada,
which was purchased in June 2002, somewhat offset by volume declines. The
pricing gains, demonstrated in the 1.7% increase in shared mail revenue per
piece, result primarily from the postal rate increase effective in the last
quarter of fiscal 2002. The volume declines were related to the shortened
Christmas selling season, offset to a degree by the Company's strategic
initiatives (additional mailing dates, rural expansion programs and partnerships
with newspapers). The volume decline is depicted in the 1.0% decrease in shared
mail pieces delivered in the first quarter of fiscal 2003 when compared to same
quarter in fiscal 2002.
Key statistics for the first quarter of fiscal 2003 included a 3.8% increase in
shared mail packages delivered, from 799.7 packages in the first quarter of
fiscal 2002 to 829.9 million packages in the first quarter of fiscal 2003. This
increase in shared mail packages delivered was largely attributable to the
growth in the Company's strategic initiatives. Conversely, the growth in shared
mail packages delivered contributed to the 4.6% decline in average pieces per
package. Pieces per package were 7.70 pieces for the first quarter of fiscal
2003 versus 8.07 pieces for the first quarter of fiscal 2002.
OPERATING EXPENSES Cost of sales as a percentage of revenues increased 1.3
percentage points to 73.6% for the first quarter ending December 28, 2002. This
increase was primarily due to underweight postage costs incurred as a result of
the decline in average pieces per package associated with the shared mail
package growth.
For the first quarter of fiscal 2003, cost of sales increased $6.9 million, in
absolute terms, when compared to the same period in fiscal 2002. This increase
was largely caused by a 4.4% increase in distribution costs, which consist
primarily of postage costs, as a result of the shared mail package growth.
Offsetting this increase was a 2.6% decrease in print costs due mainly to lower
paper prices. In addition, variable operation costs at the Company's facilities
were favorable 2.8% in the first quarter of fiscal 2003 versus the same quarter
fiscal 2002.
Selling, general and administrative costs ("SG&A costs"), including the
provision for bad debts, remained relatively consistent at $56.9 million and
$56.5 million, respectively, for the first quarters of fiscal 2003 and 2002.
SG&A costs for the first quarter of fiscal 2003 included $2.1 million of
consulting expense for a project focused on developing programs to increase the
Company's rate of delivery against its revenue growth potential. SG&A costs for
the current quarter also included $0.8 million of severance expense related to
the departure of the Company's former Chief Financial Officer ("CFO"). The
consulting and CFO severance expense were almost completely offset by stringent
cost controls.
OPERATING INCOME The activity detailed above resulted in the Company reporting
operating income of $20.0 million for the first quarter of fiscal 2003, a
decrease of $3.0 million from the first quarter of fiscal 2002.
-7-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST EXPENSE Interest expense was $2.9 million for the quarter ended
December 28, 2002 versus $3.5 million for the quarter ended December 29, 2001.
This decrease of $0.6 million was due to lower market rates of interest, a
decrease in the average outstanding debt balance and the maturity of the
Company's interest swap agreements at the beginning of December 2002.
OTHER INCOME/EXPENSE For the first quarter of fiscal 2003, other income of $0.3
million was primarily the result of equity earnings from a newspaper partnership
which the Company accounts for under the equity method. In the prior year's
first quarter, other expense of $0.3 million included equity losses associated
with the start up of the newspaper partnership.
INCOME TAXES The effective income tax rate for the three months ended December
28, 2002 and December 29, 2001 was 37% for both periods.
EARNINGS PER SHARE The Company reported diluted earnings per share of $0.55 for
the first quarter of fiscal 2003 versus $0.60 for the same period of the prior
year. This decrease was principally caused by the Company's decreased earnings.
FINANCIAL CONDITION
Working capital was $37.3 million at December 28, 2002, an increase of $0.7
million from September 28, 2002. The working capital increase consisted of an
increase in current assets of $4.5 million, partially offset by a $3.8 million
increase in current liabilities. The net increase in current assets was the
result of increases in cash and cash equivalents and a decrease in accounts
receivable due to the continued focus on collection efforts. The components of
the change in current liabilities were increases to accrued compensation and
benefits, taxes payable due to the timing of tax payments and scheduled debt
payments, all of which were offset in part by a decrease in accounts payable due
to the timing of vendor payments.
Stockholders' equity at December 28, 2002 increased $12.3 million to $48.6
million from $36.3 million at September 28, 2002. Primarily contributing to this
increase was net income of $10.9 million in the first quarter of fiscal 2003.
Other increases to stockholders' equity included a positive change of $1.1
million in the fair value of derivative instruments and employee related stock
activity of $0.6 million. Offsetting the increase were treasury stock purchases
of $0.3 million, consisting of $0.2 million made on the open market associated
with the Company's buyback program and $0.1 million pursuant to elections by
employees to satisfy tax withholding requirements under the Company's restricted
stock and stock option plans.
PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment investments of $13.2 million for the quarter ended
December 28, 2002 consisted primarily of capital expenditures for the
development of new software for the Company's order fulfillment system and
service delivery redesign project. Additional capital expenditures were for
renovations at certain of the Company's facilities and for Alphaliners, which
are computerized mail sorters. The Company expects its capital expenditures for
the entire year to be approximately $40.0 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 $112.5 million at December 28, 2002, which may be used to fund
working capital requirements.
-8-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overall cash and cash equivalents increased $8.9 million for the quarter ended
December 28, 2002 and were comprised of net cash provided by operating
activities of $27.6 million offset by net investing activities of $12.7 million
and net financing activities of $6.0 million.
The net cash provided by operating activities for the three months ended
December 28, 2002 was $27.6 million versus $11.4 million for the same period of
the prior year. The year over year increase was the result of improved
collections in accounts receivable and the timing of vendor payments.
Investing activities for the three months ended December 28, 2002 were
predominately related to the capital expenditures detailed above. The $8.0
million year-over-year increase in capital expenditures is primarily
attributable the Company's spending increase associated with the new order
fulfillment system and service redesign project, which is scheduled to be
implemented during fiscal 2004.
Net cash used by financing activities for the three months ended December 28,
2002 primarily included net revolver/term loan payments of $4.3 million under
the Company's credit agreement and the final payment of a $1.6 million note
resulting from the acquisition of Mail Marketing Systems Inc. ("MMSI"). In the
prior year's first quarter, financing activities included $5.0 million of net
revolver payments, $2.4 million repaid to MMSI and $7.9 million of treasury
stock purchases, $7.3 million of which were made on the open market pursuant to
the Company's buyback program.
Contractual and commercial commitments The Company's contractual obligations are
as follows:
(In millions) Long term debt Operating leases
-------------- ----------------
Less than one year $ 25.0 $ 16.6
One to three years 140.0 29.9
Four to five years -- 12.7
After five years -- 19.3
-------- -------
Total $ 165.0 $ 78.5
======== =======
The Company's long-term debt obligations are discussed below in the "Financing
Arrangements" section. The Company leases property in its normal business
operations under noncancellable operating leases. Certain of these leases
contain renewal options and certain leases also provide for cost escalation
payments.
The Company has various agreements with International Business Machines
Corporation ("IBM") Global Services to provide systems development, technical
support, a customer support center and server farm management services to the
Company. The noncancellable portion of these contracts have lapsed, allowing the
Company, the right to cancel these contracts subject to termination charges
ranging from $7.8 million in fiscal 2003 to $1.7 million in fiscal 2006
depending on the year in which the cancellation becomes effective.
The Company has agreements with various paper suppliers to assure the continuity
of supply as well as supply of proper paper grades. Approximately 70% of the
Company's expected paper requirements are covered by these agreements. The
Company has negotiated prices that are tied to a published paper price index.
These arrangements expire at various dates through October 31, 2005.
The Company has outstanding letters of credit of approximately $7.5 million
under separate agreements primarily relating to its worker's compensation
program, expiring in April 2003.
-9-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company anticipates it will be able to meet its commitments detailed above
through funds generated from operations or from unused credit under its
revolving line of credit.
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 December 28, 2002 there was $165.0 million
of debt outstanding, with $25.0 million classified as current due to scheduled
principal payments. The Company anticipates it will be able to meet its debt
obligations through funds generated from operations. During January 2003, the
Company had net borrowings of $5.0 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.
CRITICAL ACCOUNTING POLICIES
Critical accounting polices are defined as those that are most important to the
portrayal of a company's financial condition and results of operations and which
require complex or subjective judgments or estimates. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from those
estimates under different assumptions and conditions. The Company has determined
its critical accounting polices to include the allowance for doubtful accounts
and the valuation of goodwill and intangible assets.
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company reviews the collectibility of its receivables on an ongoing basis taking
into account a combination of factors. On a monthly basis, the Company conducts
meetings to identify and review potential problems, such as a bankruptcy filing
or deterioration in the customer's financial condition, to ensure the Company is
adequately accrued for potential loss. The Company also calculates a trended
write-off of bad debts over a rolling twelve-month period and takes into account
aging categories and historical trends. If a customer's situation changes, such
as bankruptcy or creditworthiness, or there is a change in the current economic
climate, the Company may modify its estimate of the allowance for doubtful
accounts.
Valuation of goodwill and intangible assets
Goodwill represents the excess purchase price over the fair value of net assets
acquired in connection with purchase business combinations. The Company is
required to test goodwill annually for impairment. Impairment exists when the
carrying amount of goodwill exceeds its fair market value. The Company's
goodwill impairment test was performed by comparing the net present value of
projected cash flows to the carrying value of goodwill. The Company utilized
discount rates determined by management to be similar with the level of risk in
the current business model. The Company performed the annual impairment testing
during the first quarter of fiscal 2003 and determined that no impairment of
goodwill exists. If the assumptions the Company made regarding estimated cash
flows, such as future operating performance and other factors used to determine
the fair value, are less favorable than expected, the Company may be required to
record an impairment charge.
-10-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("Statement") No. 143, "Accounting for Asset
Retirement Obligations". Statement No. 143 establishes accounting standards for
the recognition and measurement of legal obligations associated with the
retirement of tangible long-lived assets and requires the recognition of a
liability for an asset retirement obligation in the period in which it is
incurred. The Company adopted Statement No. 143 at the beginning of fiscal 2003
and such adoption had no effect on the Company's financial position and results
of operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
the disposal of a business segment. The Company adopted Statement No. 144 at the
beginning of fiscal 2003 and such adoption had no effect on the Company's
financial position and results of operations.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which supersedes Emerging Issues
Task Force Issue ("EITF") No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Associated with a Restructuring)". Statement No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred as opposed to when management is committed to an
exit plan. Such liabilities should be recorded based on their fair value, as
defined. This statement is effective for exit or disposal activities initiated
after December 31, 2002. The Company recorded a severance charge in the first
quarter of fiscal 2003 and recognized the liability when incurred. The
accounting treatment for this charge is identical under current guidance (EITF
No. 94-3) and Statement No. 146.
In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others" which requires companies to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN No. 45 provides specific guidance identifying the
characteristics of contracts that are subject to its guidance in its entirety
from those only subject to the initial recognition and measurement provisions.
The recognition and measurement provisions of FIN No. 45 are effective on a
prospective basis for guarantees issued or modified after December 31, 2002.
The disclosure requirements of FIN No. 45 are effective for interim and annual
period financial statements ending after December 15, 2002. For the first
quarter ended December 28, 2002, the Company's contingent consideration from the
acquisition of ADVO Canada is subject to the disclosure requirements of FIN No.
45. If certain earning targets are met by ADVO Canada, the Company will be
required to pay an additional payment up to a maximum of $0.7 million over the
next three years.
In December 2002, the FASB issued Statement of Financial Standards No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS No.
148) to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation.
SFAS No. 148 also amends the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation", to require more prominent and
additional disclosure in both annual and interim financial statements on the
method of accounting for stock-based compensation. The interim disclosure
provisions are effective for financial reports for interim periods beginning
after December 15, 2002. The Company plans to adopt the disclosure provisions of
SFAS No. 148 in the second quarter of fiscal 2003.
-11-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 had historically
maintained interest rate swap agreements on notional amounts totaling $100
million. However, the interest rate swap agreements expired on December 9, 2002
resulting in the Company actively analyzing its interest rate swap strategies.
If interest rates should change by 2 percentage points for the remainder of the
2003 fiscal year from those rates in effect at December 28, 2002, interest
expense would increase/decrease by approximately $2.5 million. These amounts are
determined by considering the hypothetical interest rates on the Company's
borrowing cost. The sensitivity analysis also assumes no changes in the
Company's financial structure.
FORWARD LOOKING STATEMENTS
Except for the historical information stated herein, the matters discussed in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. Such forward looking
statements are based on current information and expectations and are subject to
risks and uncertainties which could cause the Company's actual results to differ
materially from those in the forward looking statements. The Company's business
is promotional in nature, and ADVO serves its clients on a "just in time" basis.
As a result, fluctuations in the amount, timing, pages and weight, and kinds of
advertising pieces can vary significantly from week to week, depending on its
customers' promotional needs, inventories, and other factors. In any particular
quarter these transactional fluctuations are difficult to predict, and can
materially affect the Company's revenue and profit results. In addition, the
Company's business contains additional risks and uncertainties which include but
are not limited to: general changes in customer demand and pricing, the
possibility of consolidation throughout the retail sector, the impact of
economic and political conditions on retail advertising spending and our
distribution system, postal and paper prices, possible governmental regulation
or legislation affecting aspects of the Company's business, the efficiencies
achieved with technology upgrades, the number 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.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this Quarterly Report on Form 10-Q, the
Company evaluated, under the supervision and with the participation of
management, the principal executive officer and principal financial officer, the
design and operation of its disclosure controls and procedures to determine
whether they are effective in ensuring that the disclosure of required
information is made timely in accordance with the Exchange Act and the rules and
forms of the Securities and Exchange Commission.
The principal executive officer and principal financial officer have concluded,
based on their review, that the Company's disclosure controls and procedures, as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure
that information required to be disclosed by the Company in reports it files
under the Exchange Act are recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission rules and
forms. No significant changes were made to the Company's internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
-12-
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As described in a report on Form 8-K dated November 25, 2002, the Company
amended its Stockholder Protection Rights Plan to extend its expiration date to
February 11, 2013 and to update the plan to reflect current market prices and
benchmarks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 2003 Annual Meeting of Stockholders of ADVO, Inc., held on January 16,
2003, the following matters were submitted to a vote of the stockholders.
1. The election of seven Directors to serve until the Annual Meeting of
Stockholders in 2004.
2. The ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending September 27, 2003.
Each of the two proposals was approved by the stockholders in its entirety. For
a list of the directors elected and the votes cast for and against each of the
proposals, reference is made to Exhibit No. 22, Report of Inspectors of Election
for ADVO, Inc.'s Annual Meeting, attached hereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit No. Exhibits Included Within:
----------- -------------------------
10 Agreement dated November 14, 2002
between ADVO and Julie Abraham.*
22 Report of Inspectors of Election for
ADVO, Inc.'s Annual Meeting.
99(a) Certification of Periodic Report Pursuant
to Section 906 of the Sarbanes-Oxley Act
of 2002 - Gary M. Mulloy.
99(b) Certification of Periodic Report Pursuant
to Section 906 of the Sarbanes-Oxley Act
of 2002 - Donald E. McCombs.
* Management contract or compensatory plan required
to be filed as an exhibit.
-13-
(b) Reports on Form 8-K
A report on Form 8-K dated November 12, 2002 was filed by the Company during the
quarter ended December 28, 2002 and reported under Item 5 thereof, the Company's
announcement that Julie Abraham, Senior Vice President and Chief Financial
Officer ("CFO") had decided to leave ADVO for personal reasons. While the
Company recruits for a new CFO, Donald E. McCombs, Executive Vice President -
President Operations Group, would fill the role, a position he previously held.
A report on Form 8-K dated November 25, 2002 was filed by the Company during the
quarter ended December 28, 2002 and reported under Item 5 thereof, the Company's
announcement that the Board of Directors had approved an amendment to extend the
expiration date of its Stockholder Protection Rights Plan to February 11, 2013,
as well as update the plan to reflect current market prices and benchmarks.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVO, Inc.
Date: February 10, 2003 By: /s/ JOHN D. SPERIDAKOS
---------------------------------
John D. Speridakos
Vice President and Controller
Principal Accounting Officer
-15-
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Gary M. Mulloy, Chairman and Chief Executive Officer of ADVO, Inc., certify
that:
1) I have reviewed this quarterly report on Form 10-Q of ADVO, Inc (the
"registrant");
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of this registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date") ; and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ GARY M. MULLOY
------------------------------------
Gary M. Mulloy
Chairman and Chief Executive Officer
Date: February 10, 2003
-16-
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Donald E. McCombs, Executive Vice President - President, Operations Group and
Acting Chief Financial Officer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of ADVO, Inc (the
"registrant");
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of this registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date") ; and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ DONALD E. MCCOMBS
------------------------------------
Donald E. McCombs
Executive Vice President - President,
Operations Group and Acting Chief
Financial Officer
Date: February 10, 2003
-17-