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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 26, 2004
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.
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(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 Targeting Centre, 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 Securities Exchange Act). Yes (X) No ( )
As of July 24, 2004 there were 30,547,446 shares of common stock outstanding.
ADVO, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
QUARTER ENDED JUNE 26, 2004
Page
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Part I - Financial Information
Item 1. Financial Statements (Unaudited).
Consolidated Balance Sheets -
June 26, 2004 and September 27, 2003. 2
Consolidated Statements of Operations -
Nine months and three months ended
June 26, 2004 and June 28, 2003. 3
Consolidated Statements of Cash Flows -
Nine months ended June 26, 2004 and June 28, 2003. 4
Notes to Consolidated Financial Statements. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk. 18
Item 4. Controls and Procedures. 18
Part II - Other Information
Item 1. Legal Proceedings. 19
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities. 20
Item 6. Exhibits and Reports on Form 8-K. 21
Signatures 22
ADVO, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share data)
June 26, September 27,
2004 2003
---------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 19,807 $ 17,012
Accounts receivable, net 138,765 122,104
Inventories 1,947 2,491
Prepaid expenses and other current assets 7,103 10,875
Deferred income taxes 14,394 12,496
---------- ----------
Total current assets 182,016 164,978
Property, plant and equipment 360,391 315,314
Less accumulated depreciation and amortization (195,810) (172,289)
---------- ----------
Net property, plant and equipment 164,581 143,025
Investment in deferred compensation plan 13,076 11,106
Goodwill 22,244 22,242
Other assets 9,956 12,130
---------- ----------
TOTAL ASSETS $ 391,873 $ 353,481
========== ==========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ - $ 36,250
Accounts payable 42,056 36,581
Accrued compensation and benefits 30,303 25,286
Other current liabilities 31,112 35,948
---------- ----------
Total current liabilities 103,471 134,065
Long-term debt 123,721 94,000
Deferred income taxes 21,975 19,765
Deferred compensation plan 14,098 11,917
Other liabilities 5,915 4,666
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value
(Authorized 5,000,000 shares, none issued) - -
Common stock, $.01 par value (Authorized
80,000,000 shares, issued 30,484,651
and 20,042,005 shares, respectively) 305 200
Additional paid-in capital 147,534 137,252
Unamortized deferred compensation (1,887) (1,628)
Accumulated deficit (18,435) (44,384)
---------- ----------
127,517 91,440
Less common stock held in treasury (5,089) (2,527)
Accumulated other comprehensive income 265 155
---------- ----------
Total stockholders' equity 122,693 89,068
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY $ 391,873 $ 353,481
========== ==========
See Accompanying Notes.
-2-
ADVO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Nine months ended Three months ended
------------------------- -------------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
---------- ---------- ---------- ----------
REVENUES $ 925,567 $ 867,929 $ 318,879 $ 289,686
Costs and expenses:
Cost of sales 676,179 640,432 231,362 213,810
Selling, general and
administrative 184,321 163,940 64,360 53,739
Provision for bad debts 5,695 3,222 2,498 512
---------- ---------- ---------- ----------
OPERATING INCOME 59,372 60,335 20,659 21,625
Interest expense (3,958) (6,070) (1,334) (1,499)
Debt issue costs associated with
debt retirement (1,401) - - -
Equity earnings in joint ventures 2,136 935 981 434
Other expense (492) (71) (178) (117)
---------- ---------- ---------- ----------
Income before income taxes 55,657 55,129 20,128 20,443
Provision for income taxes 19,653 19,671 6,862 6,837
---------- ---------- ---------- ----------
NET INCOME $ 36,004 $ 35,458 $ 13,266 $ 13,606
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 1.20 $ 1.19 $ 0.44 $ 0.46
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 1.18 $ 1.18 $ 0.43 $ 0.45
========== ========== ========== ==========
DIVIDENDS DECLARED PER SHARE $ 0.33 $ - $ 0.11 $ -
========== ========== ========== ==========
Weighted average basic shares 30,080 29,727 30,204 29,774
Weighted average diluted shares 30,609 30,040 30,719 30,189
See Accompanying Notes.
-3-
ADVO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine months ended
-------------------------
June 26, June 28,
2004 2003
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 63,969 $ 69,536
Cash flows from investing activities:
Acquisition of property, plant and equipment (48,779) (38,858)
Proceeds from disposals of property, plant and equipment 96 549
Distributions from equity affiliates 1,730 815
Acquisitions/joint ventures, net of cash acquired - 19
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (46,953) (37,475)
Cash flows from financing activities:
Revolving line of credit - net (29,000) (7,500)
Payments on long-term debt (101,250) (16,250)
Proceeds on private placement notes 125,000 -
Decrease in note payable - (1,715)
Proceeds from exercise of stock options 5,864 1,102
Treasury stock transactions (2,699) (820)
Payment of debt issue costs (2,213) -
Cash dividends paid (9,921) -
---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (14,219) (25,183)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (2) 125
---------- ----------
Increase in cash and cash equivalents 2,795 7,003
Cash and cash equivalents at beginning of period 17,012 12,281
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,807 $ 19,284
========== ==========
Noncash activities:
(Increase) decrease in fair value of
interest rate swap liabilities (1,093) 1,090
Deferred compensation plan
investment gains 1,863 1,370
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 26, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 25, 2004. 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 27, 2003.
Certain reclassifications have been made in the fiscal 2003 financial statements
to conform to the fiscal 2004 presentation.
2. NEW ACCOUNTING POLICIES
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," which was
revised in December 2003 ("FIN No. 46-R"). This new rule requires that companies
consolidate a variable interest entity if the company is subject to a majority
of the risk of loss from the variable interest entity's activities and/or is
entitled to receive a majority of the entity's residual returns. The provisions
of FIN No. 46-R were required to be applied as of the end of the first reporting
period after March 15, 2004 for the variable interest entities in which the
company holds a variable interest that it acquired on or before January 31,
2003. The adoption of FIN No. 46-R did not have any impact to the financial
position or results of operations of the Company.
On March 31, 2004, the FASB issued an exposure draft entitled "Share-Based
Payment, an Amendment of FASB Statements No.'s 123 and 95". Among other items,
the proposed standard would require the fair value of stock options to be
recognized in the financial statements as compensation expense. The proposed
requirements in the exposure draft would be effective for the Company's 2006
fiscal year-end. The pro-forma impact of stock option expensing is calculated as
required under FASB Statement No. 123, "Accounting for Stock-Based Compensation"
and disclosed in Note 8 of these financial statements. However, the actual
impact to our financial statements upon adoption of the proposed standard could
differ from the pro-forma information included in Note 8 due to differences in
option-pricing models used, estimates and assumptions, and options to be
included in the calculation upon adoption. The Company will monitor the status
of the proposed standard and will evaluate the impact to our financial position
and results of operations when the final standard is issued.
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:
-5-
ADVO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine months ended Three months ended
------------------------- -------------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
---------- ---------- ---------- ----------
(In thousands)
Net income $ 36,004 $ 35,458 $ 13,266 $ 13,606
Other comprehensive income:
Unrealized gain on derivative instruments 113 - 515 -
Reclassification adjustment on
derivative instruments - 1,090 - -
Foreign currency translation adjustments (3) 219 (38) 128
---------- ---------- ---------- ----------
Total comprehensive income $ 36,114 $ 36,767 $ 13,743 $ 13,734
========== ========== ========== ==========
4. FINANCING ARRANGEMENTS
On December 4, 2003, the Company replaced its existing credit facilities. The
new credit facilities totaling $275 million include $125 million private
placement senior secured notes with several institutional investors and a $150
million revolving line of credit ("Revolver") with a syndicate of banks.
The senior secured notes consist of $65 million notes at a fixed interest rate
of 5.71% (Series A Notes) and $60 million notes at a variable interest rate of
LIBOR rate plus 0.92% (Series B Notes). The senior secured notes have a ten-year
life and mature in December 2013. Interest is payable semi-annually on the
Series A Notes and quarterly on the Series B Notes.
The Revolver has a four-year life and remains available until maturity in
December 2007. The Revolver bears interest, at the Company's option, equal to
the LIBOR rate or to the bank's "base rate" plus an "applicable margin" (based
on certain financial ratios). The applicable margin ranges from 0.875% to 1.50%
on the LIBOR rate and 0% to 0.50% on the base rate. Interest is payable
quarterly or upon the maturity of the LIBOR contracts, whichever is shorter.
A summary of debt is set forth in the following table:
June 26, 2004 September 27, 2003
------------- ------------------
(In thousands)
Private Placement Notes
Series A Notes $ 65,000 $ -
Fair value hedge (a) (1,279) -
Series B Notes 60,000 -
Revolver - base rate of 4.125% at June 26, 2004 - -
Term Loan
Base rate of 4.125% at September 27, 2003 - 250
LIBOR rate of 2.235% at September 27, 2003 - 101,000
Revolving Line of Credit
Base rate of 4.125% at September 27, 2003 - 8,000
LIBOR rate of 2.245% at September 27, 2003 - 21,000
---------- ----------
$ 123,721 $ 130,250
Less current portion of long-term debt - 36,250
---------- ----------
Total long-term debt $ 123,721 $ 94,000
========== ==========
(a) Represents unrealized losses for fair value hedging arrangement (see Note 5
below).
-6-
ADVO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company pays fees on the unused commitments at a rate ranging from 0.20% to
0.40% depending on the Company's debt ratio, as defined. At June 26, 2004, there
was $138.4 million available for future borrowings which reflects $11.6 million
utilized by letters of credit under separate agreements related to the Company's
workers' compensation program.
In the first quarter of fiscal 2004, the Company capitalized $2.2 million of
debt issue costs directly associated with the issuance of the new credit
facilities. These costs are included in other assets and are being amortized
either over the ten-year life of the senior secured notes or over the four-year
life of the Revolver, whichever is applicable.
As a result of the debt refinancing the Company wrote off $1.4 million of
unamortized debt issue costs associated with the previous credit facilities
during the first quarter of fiscal 2004. The Company concluded that the
replacement of the term loan with private placement notes met the criteria of an
extinguishment of debt per EITF 96-19, "Debtor's Accounting for a Modification
or Exchange of Debt Instruments." Consequently, all unamortized debt issue costs
associated with the term loan were written off. In addition, the Company
followed the guidance per EITF 98-14, "Debtor's Accounting for Changes in the
Line-of-Credit or Revolving-Debt Arrangements," to calculate the amount of
unamortized debt issue costs associated with the replacement of the revolving
line of credit and wrote off a portion of those costs. In accordance with EITF
98-14, the remaining unamortized debt issue costs of $0.6 million will be
amortized over the life of the new Revolver. At June 26, 2004 and September 27,
2003, unamortized costs totaled $2.5 million and $2.1 million, respectively.
Under the terms of the senior secured notes and Revolver, the Company is
required to maintain certain financial ratios. In addition, the credit
facilities also place restrictions on disposals of assets, mergers and
acquisitions, dividend payments, investments and additional debt.
5. DERIVATIVES AND HEDGING ACTIVITIES
During the first quarter of fiscal year 2004, the Company entered into various
interest rate swap agreements to allow the Company to take advantage of low,
near-term interest rates and to mitigate risk from exposure to forward upward
movements in interest rates. The Company does not enter into derivative
financial instruments for trading or speculative purposes. The Company
documented all relationships between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking various hedge
transactions in accordance with Statement of Financial Accounting Standards
("Statement") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company has determined that the current interest rate swap
agreements qualify for treatment under the short-cut method of assessing
effectiveness and are considered highly effective, as defined by Statement No.
133 since all of the terms of the derivative instruments match those of the
hedged item.
The following table presents the notional amount of interest rate swaps by
class:
(In thousands)
FINANCIAL INSTRUMENT HEDGE TYPE NOTIONAL AMOUNT START DATE MATURITY DATE
- -------------------- ---------- --------------- ---------- -------------
Fixed to floating Fair Value $ 25,000 12/23/03 12/04/13
Floating to fixed Cash Flow 8,000 12/04/04 12/04/08
Floating to fixed Cash Flow 8,000 12/04/05 12/04/09
Floating to fixed Cash Flow 9,000 12/04/06 12/04/10
-7-
ADVO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Statement No. 133 requires companies to recognize all derivatives on the balance
sheet at fair value. Changes in the fair value of the interest rate swap
agreements that are designated as fair value hedges are recognized in earnings
as an offset to the changes in the fair value of the exposures being hedged. As
a result, the fair value of the interest rate swap (fixed to floating), a
payable of $1.3 million at June 26, 2004, decreased the carrying amount of debt
and increased the interest rate swap liability.
The changes in the fair value of the interest rate swap agreements that are
designated as cash flow hedges are deferred in accumulated other comprehensive
income and are recognized in earnings as the hedged transactions occur. The fair
value of the cash flow hedges was a receivable of $0.2 million and was recorded
net of taxes, a gain of $0.1 million, in accumulated other comprehensive income
at June 26, 2004.
6. STOCKHOLDERS' EQUITY
On October 16, 2003, the Company announced a three-for-two stock split of its
common stock effected in the form of a stock dividend. As a result of the split,
stockholders received one additional share of common stock for every two shares
held. The stock dividend was paid on November 7, 2003 to common shareholders of
record as of October 24, 2003. The stock split was recorded by increasing common
stock by $0.1 million and decreasing accumulated earnings by $0.1 million on the
Consolidated Balance Sheets (issuance of 10 million shares at $0.01 par value).
There was no effect to the Company's overall equity position as a result of the
stock split. All share and per share data have been restated to give retroactive
effect to the split.
Also on October 16, 2003, the Company established a regular quarterly cash
dividend. The initial quarterly dividend was aligned with the stock split and
was paid at a rate of $0.11 per share, on a post-split basis. The Company paid
quarterly cash dividends of $3.3 million and $9.9 million, respectively, for the
three and nine months ended June 26, 2004. The Company expects to continue to
pay cash dividends on a quarterly basis.
At the Company's Annual Meeting held on January 23, 2004, the Company's
stockholders approved the amendment of the Company's Certificate of
Incorporation to increase the number of authorized shares of common stock, $0.01
par value per share, from 40 million to 80 million shares.
-8-
ADVO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. EARNINGS PER SHARE
Basic earnings per share excludes the effect of common stock equivalents, such
as stock options, and is computed by dividing net income 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
-------------------- --------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands, except per share data)
Net income $ 36,004 $ 35,458 $ 13,266 $ 13,606
Weighted average basic shares 30,080 29,727 30,204 29,774
Effect of dilutive securities:
Stock options 480 279 467 375
Restricted stock 49 34 48 40
-------- -------- -------- --------
Dilutive potential basic shares 529 313 515 415
Weighted average diluted shares 30,609 30,040 30,719 30,189
======== ======== ======== ========
Basic earnings per share $ 1.20 $ 1.19 $ 0.44 $ 0.46
======== ======== ======== ========
Diluted earnings per share $ 1.18 $ 1.18 $ 0.43 $ 0.45
======== ======== ======== ========
-9-
ADVO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. STOCK - BASED COMPENSATION
The Company maintains several stock-based compensation plans relating to stock
options. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25 ("APB
Opinion No. 25") "Accounting for Stock Issued to Employees," and related
Interpretations. Aside from the amortization of restricted stock awards, no
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans have an exercise price equal to the market
value of the underlying common stock on the date of grant.
As required under Statement No. 123, "Accounting for Stock-Based Compensation,"
and Statement No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," the pro forma effects of stock-based compensation on net income and
net earnings per share have been estimated at the date of grant using the
Black-Scholes option-pricing model, as follows:
Nine months ended Three months ended
--------------------- ---------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands, except per share data)
Net income, as reported $ 36,004 $ 35,458 $ 13,266 $ 13,606
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related
tax effects (2,777) (3,026) (901) (1,176)
-------- -------- -------- --------
Pro forma net income $ 33,227 $ 32,432 $ 12,365 $ 12,430
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 1.20 $ 1.19 $ 0.44 $ 0.46
Basic - pro forma $ 1.10 $ 1.09 $ 0.41 $ 0.42
Diluted - as reported $ 1.18 $ 1.18 $ 0.43 $ 0.45
Diluted - pro forma $ 1.10 $ 1.08 $ 0.41 $ 0.39
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the stock options' vesting period, ranging
from one to four years. The pro forma effect on net income and related earnings
per share may not be representative of the future years' impact since the terms
and conditions of new grants may vary from the current terms.
During the first quarter of fiscal 2004, the Company granted 26,000
performance-based restricted stock units to its now former Chief Executive
Officer ("CEO"). The units vest in installments of one-third each year from the
date of grant subject to the Company achieving certain performance criteria. As
disclosed in the CEO's separation agreement, these units will continue to vest
over the two-year separation period. The former CEO is not entitled to receive
the units associated with the third year vesting since his separation agreement
ends in June 2006. The performance criteria is based on pre-established
thresholds. The units vest cumulatively, in that, if the threshold is not met in
a given year, but is achieved in the subsequent fiscal year, the cumulative
units will be awarded in that subsequent year in which the threshold is met.
-10-
ADVO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Since on the grant date neither the fair market value on the day the units vest
nor the number of units that could ultimately be earned are known, the
restricted stock units have been deemed to be a variable award. In accordance
with variable stock compensation accounting, the estimated compensation expense,
as measured quarterly, may fluctuate based on the fair market value of the stock
price and the probability of achieving the performance criteria. No compensation
expense was recorded for the three and nine months ended June 26, 2004 since
achievement of the performance criteria is not considered probable. For each
subsequent quarter, the Company will re-evaluate the probability of achieving
the performance criteria and record compensation expense accordingly.
9. NEW PRODUCTION FACILITY
During fiscal 2003, the Company entered into a lease agreement for a new
Hartford, Connecticut area production facility with lease payments to begin
after the construction of the facility, expected to be completed during the
fourth quarter of fiscal 2004. The lease agreement included the right to
purchase the property, which the Company exercised in 2003. The Company
subsequently decided to terminate the lease agreement in its entirety and is
constructing the new facility and recording the construction costs to
construction in progress ("CIP") included in property, plant and equipment. As
of June 26, 2004, CIP related to the construction of the facility was $19.2
million. In addition, the Company capitalized $1.6 million of land acquisition
costs. Total construction costs are estimated to be approximately $27.0 million.
10. COMMITMENTS AND CONTINGENCIES
State Audit
The Company has received a state sales and use tax assessment for $4.7 million
covering the period of January 1995 through October 1998. The Company appealed
the assessment and the decision of the administrative law judge is pending. The
Company believes that the assessment and the state's underlying position are
neither supportable by the law nor consistent with previously provided
interpretative guidance from the State Comptroller's office. The Company
believes the assessment will be overturned based on the applicable laws and
regulations. The Company is also concurrently pursuing a refund of the tax
assessment that would effectively eliminate the liability. In the event the
assessment stands and the refund is denied, the Company will pursue its rights
in court. The Company has no provision for this tax exposure because the Company
has concluded it is not probable or reasonably estimable at this time. Although
the final results of the audits for the subsequent periods and the outcome of
resulting legal action cannot be reasonably estimated, this tax dispute applies
to all open years up to and including the current period. If the decision of the
administrative law judge is upheld, the potential exposure for open years may be
significantly higher than the aforementioned assessment.
Kmart Corporation
In January 2002, Kmart Corporation filed for Chapter 11 bankruptcy protection
and requested the Bankruptcy Court (the "Court") designate the Company and
several other companies to be classified under critical vendor status. The Court
approved this designation and the Company received $1.1 million due from Kmart.
In February 2004, the U.S. Court of Appeals for the 7th Circuit affirmed a U.S.
District Court ruling that Kmart incorrectly paid critical vendors, including
the Company. As a result of the ruling, Kmart has filed lawsuits against each
critical vendor seeking reimbursement of these payments. The Company believes
that it has meritorious defenses to the lawsuit. The range of the potential
liability is $0 to $1.1 million with no amount within this range representing a
better estimate than any other amount at this time. The Company has not
-11-
provided any amount for the exposure because the Company does not believe it is
probable and reasonably estimable at this time.
11. NON-RECURRING CHARGES
In the third quarter of fiscal 2004, the Company recorded a pre-tax charge of
approximately $3.9 million, or $0.08 per share, in selling, general and
administrative costs for the departure of the Company's CEO. This charge
primarily includes wages, benefits and incentive compensation that will be paid
over the two-year term of the separation agreement.
-12-
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 $29.2 million or 10.1% during the third quarter and
$57.6 million or 6.6% for the nine months ended June 26, 2004 when compared to
the same periods of fiscal 2003. The growth in revenues was primarily volume
related and the result of a 12.1% and 10.1% increase in shared mail pieces
distributed for the third quarter and nine months ended June 26, 2004. The
volume gains were achieved through increased business in existing markets and
increased frequency of mailings in response to client demand. Total shared mail
packages delivered increased 4.5% and 3.7%, respectively, for the third quarter
and nine months ended June 26, 2004 when compared to the same prior year
periods. Another key performance indicator, average pieces per package,
supported the revenue improvement by growing 7.3% to 8.43 pieces for the third
quarter and 6.1% to 8.33 pieces for the nine months ended June 26, 2004 over the
same three and nine-month periods of fiscal 2003.
The Company's shared mail revenue per thousand pieces statistic decreased 0.7%
for the three months ended June 26, 2004 when compared to the same prior year
period due to lower priced products. For the first nine months of fiscal 2004,
shared mail revenue per thousand pieces decreased 2.5% due to shifts in product
mix and lower priced and lighter weight products. The grocery strike in Southern
California, which ended during the second quarter, negatively impacted the
year-to-date fiscal 2004 revenue by approximately $7.9 million.
OPERATING EXPENSES Cost of sales as a percentage of revenue decreased 1.3
percentage points to 72.6% for the third quarter and decreased 0.7 percentage
points to 73.1% for the nine-month period when compared to the same periods in
the prior year. These decreases were reflective of the growth in average pieces
per package and the resultant efficiencies in postage utilization.
Cost of sales increased $17.6 million for the three months ended June 26, 2004
and $35.7 million for the first nine months of fiscal 2004 to $231.4 million and
$676.2 million, respectively. The increase for the three and nine-month periods
ended June 26, 2004 were mainly related to higher distribution costs.
Distribution costs, primarily consisting of postage costs, increased 7.6% for
the three-month period and 5.0% for the nine-month period ended June 26, 2004.
These increases are attributable to the volume growth in shared mail pieces and
packages distributed over the same periods of a year earlier. The growth of
certain shared mail products also contributed to the 18.6% and 14.8% increase in
print costs for the three and nine months ended June 26, 2004.
Selling, general and administrative costs ("SG&A costs"), including the
provision for bad debt, increased $12.6 million for the third quarter and $22.9
million for the nine-month period ended June 26, 2004 when compared to the same
periods in the prior year. As a percentage of revenues, SG&A costs increased 2.2
percentage points for the third quarter and increased 1.3 percentage points for
the nine months ended June 26, 2004 versus the comparable periods in fiscal
2003.
For the three and nine months ended June 26, 2004, SG&A costs included a
non-recurring $3.9 million severance charge for the departure of the Company's
former Chief Executive Officer ("CEO"). It also included a $3.5 million and $7.8
million increase, respectively, for the three and nine-month periods in selling
capabilities, commission expenses and related benefits arising from the revenue
growth. SG&A costs for the three and nine month periods also included increases
in bad debt expense of $2.0 million and $2.5 million, respectively, primarily
due to specific receivables. Both the three and nine-month periods included a
$2.0 million and $4.3 million increase, respectively, in employee benefit costs
due to rising medical and insurance costs. Specific to the third quarter
increase in SG&A costs, was higher incentive compensation wages compared to the
same prior year period. For the nine months ended June 26, 2004, SG&A costs
included a $2.0 million increase
-13-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
in depreciation expense primarily as a result of certain phases of the service
delivery redesign project being placed into service and $1.1 million of
severance related to the departure of two senior executives during the second
quarter of fiscal 2004.
OPERATING INCOME For the third quarter of fiscal 2004, the Company reported
operating income of $20.7 million versus $21.6 million for the third quarter of
fiscal 2003. For the nine months ended June 26, 2004, operating income was $59.4
million versus $60.3 million for the nine months ended June 28, 2003. The
Company's revenue growth for the three and nine months ended June 26, 2004 were
offset by increases in both cost of sales and SG&A costs which are detailed
above.
INTEREST EXPENSE Interest expense decreased $0.2 million and $2.1 million,
respectively, for the three and nine months ended June 26, 2004. The decrease
was the result of lower market rates of interest and a decrease in the average
outstanding debt balance. The interest expense decrease for the nine-month
period was also impacted by the expiration during the first quarter of fiscal
2003 of the Company's interest rate swap agreements that were associated with
the previous credit facility.
On December 4, 2003, the Company replaced its existing credit facilities, term
loan and revolving line of credit, with private placement notes and a new bank
revolver. The Company concluded that the replacement of the term loan with
private placement notes met the criteria of an extinguishment of debt per EITF
96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments."
Consequently, all unamortized debt issue costs associated with the term loan
were written off. In addition, the Company followed the guidance per EITF 98-14,
"Debtor's Accounting for Changes in the Line-of-Credit or Revolving-Debt
Arrangements," to calculate the amount of unamortized debt issue costs
associated with the replacement of the revolving line of credit. In total, the
Company wrote off $1.4 million of unamortized debt issue costs associated with
the previous credit facilities.
EQUITY EARNINGS IN JOINT VENTURES Performance of the Company's joint ventures
for the third quarter and first nine months of fiscal 2004 doubled over the same
prior year periods increasing equity earnings by $0.5 million and $1.2 million,
respectively.
INCOME TAXES The effective income tax rate for the third quarter of fiscal 2004
was 34.1% versus 33.4% in prior years' quarter. For the year-to-date period, the
effective income tax rate was 35.3% versus 35.7% for the same prior year period.
The decrease in the income tax rate for the first and second quarters of 36.0%
to 34.1% for the third quarter was due to the results of tax audits completed in
the current quarter. The reduction in the effective income tax rate in the prior
year periods resulted from federal and state tax credits due to R&D credits.
EARNINGS PER SHARE Diluted earnings per share was $0.43 for the third quarter of
fiscal 2004 decreasing 4.4% from prior year's third quarter. Diluted earnings
per share remained constant at $1.18 for the first nine months of fiscal 2004
and 2003.
FINANCIAL CONDITION
Working capital increased $47.6 million to $78.5 million at June 26, 2004 from
$30.9 million at September 27, 2003. Factoring into the working capital change
was an increase of $17.0 million in current assets and a $30.6 million decrease
in current liabilities. Highlighting the change in current assets was an
increase in the accounts receivable balance, indicative of the 13% revenue
growth in the month of June, offset by a decrease in other current assets due to
the timing of insurance payments. The decrease in current liabilities primarily
relates to the
-14-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company's debt refinancing that resulted in a $36.3 million decrease in the
current portion of long-term debt as a consequence of the type of debt
instruments under the new agreement. Other contributing factors to the change in
current liabilities were a decrease in other current liabilities due to tax
benefits resulting from employee option exercises and the timing of tax payments
offset by an increase in accrued compensation and benefits due to the severance
charge for the departure of the former CEO and higher incentive compensation due
to improved earnings.
At June 26, 2004, total stockholders' equity was $122.7 million representing a
$33.6 million increase from the September 27, 2003 balance of $89.1 million.
Driving the increase was net income of $36.0 million, employee stock plan
activity and the related tax benefits of $9.0 million, and restricted stock
amortization of $1.4 million. The increases to stockholders' equity were offset
by the Company's quarterly cash dividend payments which totaled $9.9 million and
treasury stock transactions of $2.7 million pursuant to elections by employees
to satisfy tax withholding requirements under the Company's stock option plans.
On October 16, 2003, the Company announced a three-for-two stock split of its
common stock effected in the form of a stock dividend. As a result of the split,
stockholders received one additional share of common stock for every two shares
held. The stock dividend was paid on November 7, 2003 to common shareholders of
record as of October 24, 2003. The stock split was recorded by increasing common
stock by $0.1 million and decreasing accumulated earnings by $0.1 million on the
Consolidated Balance Sheets (issuance of 10 million shares at $0.01 par value).
There was no effect to the Company's overall equity position as a result of the
stock split. All share and per share data have been restated to give retroactive
effect to the split.
LIQUIDITY
The Company's main source of liquidity continues to be funds generated from
operating activities. At June 26, 2004, the Company had available unused credit
commitments of $138.4 million that may be used to fund working capital
requirements.
Cash and cash equivalents increased $2.8 million for the nine-month period ended
June 26, 2004. Net cash provided by operating activities of $64.0 million was
offset by net cash used by investing and financing activities of $47.0 million
and $14.2 million, respectively.
Net cash provided by operations for the nine-month period ended June 26, 2004
was $64.0 million versus $69.5 million for the same period of the prior year.
The year-over-year decrease is attributable to the change in accounts
receivable, other current assets, other current liabilities and accrued
compensation and benefits, all of which were previously discussed in the
"Financial Condition" section, along with the change in accounts payable due to
the timing of vendor payments and the change in customer advances.
The Company's investing activities are primarily directed toward expenditures
for property, plant and equipment. Capital expenditures were $48.8 million and
$38.9 million for the nine-month period ended June 26, 2004 and June 28, 2003,
respectively. The development of software for the Company's order fulfillment
and service delivery redesign project, scheduled to be implemented in phases
during fiscal 2004 and through the beginning of fiscal 2005, continues to be a
major component of the increase in capital expenditures year-over-year. Other
components include land and construction costs associated with the relocation of
the Company's existing Hartford, Connecticut production facility to a new
location. Additional capital dollars were directed toward the deployment of
Alphaliner computerized mail sorters and computer software and hardware. The
Company expects its capital expenditures for the entire year to be $74.0
million, which includes $27.0 million for the new production facility.
-15-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the nine-month period ended June 26, 2004, net cash used by financing
activities centered on transactions associated with the Company's debt. The debt
activity included the reclassification between the term loan and private
placement notes resulting from the Company's refinancing during the first
quarter, net repayments on the revolving line of credit taking into account the
refinancing activity, and the payment of $2.2 million of debt issue costs
associated with the debt refinancing. Other financing activity included the
payment of quarterly cash dividends totaling $9.9 million, proceeds of $5.9
million related to stock option exercise activities and $2.7 million of treasury
stock transactions pursuant to elections by employees to satisfy tax withholding
requirements.
As detailed in Note 10 to the Consolidated Financial Statements, the Company has
received a state sales and use tax assessment for $4.7 million. The Company
believes the assessment will be overturned based on applicable laws and
regulations. The Company is also concurrently pursuing a refund of the tax
assessment that would effectively eliminate the liability. In the event the
assessment stands and the refund is denied, the Company will pursue its rights
in court. In order to pursue these remedies, the Company may be required to pay
the tax assessment. The Company will fund the payment with cash generated from
operating activities or from its available unused credit commitments and does
not expect this funding to have an adverse impact to the Company's liquidity.
CONTRACTUAL AND COMMERCIAL COMMITMENTS
As a result of the debt refinancing, the Company's contractual obligations as of
June 26, 2004 were $125.0 million of senior secured notes which mature in ten
years.
During fiscal 2003, the Company entered into a lease agreement for a new
Hartford, Connecticut production facility with lease payments to begin after the
construction of the facility, expected to be completed in the fourth quarter of
fiscal 2004. The lease agreement included the right to purchase the property,
which the Company exercised in 2003. The Company subsequently decided to
terminate the lease agreement in its entirety and is constructing the new
facility and recording the construction costs to construction in progress
("CIP") included in property, plant and equipment. As of June 26, 2004, CIP
related to the construction of the facility was $19.2 million. In addition, the
Company capitalized $1.6 million of land acquisition costs. Total construction
costs are estimated to be approximately $27.0 million.
FINANCING ARRANGEMENTS
On December 4, 2003, the Company replaced its existing credit facilities. The
new credit agreements totaling $275 million include $125 million private
placement senior secured notes with several institutional investors and a $150
million revolving line of credit ("Revolver") with a syndicate of banks.
The senior secured notes consist of $65 million notes at a fixed interest rate
of 5.71% (Series A Notes) and $60 million notes at a variable interest rate of
LIBOR rate plus 0.92% (Series B Notes). The senior secured notes have a ten-year
life and mature in December 2013. Interest is payable semi-annually on the
Series A and quarterly on the Series B Notes.
The Revolver has a four-year life and remains available until maturity in
December 2007. The Revolver bears interest, at the Company's option, equal to
the LIBOR rate or to the bank's "base rate" plus an "applicable margin" (based
on certain financial ratios). The applicable margin ranges from 0.875% to 1.50%
on the LIBOR rate and 0% to 0.50% on the base rate. Interest is payable
quarterly or upon the maturity of the LIBOR contracts,
-16-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
whichever is shorter.
At June 26, 2004, the senior secured notes accounted for the entire outstanding
debt balance of $125.0 million. There was no outstanding balance on the
revolving line of credit. The Company anticipates it will be able to meet its
debt obligations through funds generated from operations. During July 2004, the
Company had net borrowings of $10.0 million under the revolving line of credit.
The Company pays fees on the unused commitments at a rate ranging from 0.20% to
0.40% depending on the Company's debt ratio, as defined. At June 26, 2004, there
was $138.4 million available for future borrowings which reflects $11.6 million
utilized by letters of credit under separate agreements related to the Company's
workers' compensation program.
In the first quarter of fiscal 2004, the Company capitalized $2.2 million of
debt issue costs directly associated with the issuance of the new debt. These
costs are included in other assets and are being amortized either over the
ten-year life of the senior secured notes or over the four-year life of the
Revolver, whichever is applicable.
Under the terms of the senior secured notes and Revolver, the Company is
required to maintain certain financial ratios. In addition, the credit
facilities also place restrictions on disposals of assets, mergers and
acquisitions, dividend payments, investments and additional debt.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies 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 policies 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, historical trends and specific accounts. 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 paid over the fair value of net
assets acquired in connection with the purchase of a business. 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 2004 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.
-17-
ADVO, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," which was
revised in December 2003 ("FIN No. 46-R"). This new rule requires that companies
consolidate a variable interest entity if the company is subject to a majority
of the risk of loss from the variable interest entity's activities and/or is
entitled to receive a majority of the entity's residual returns. The provisions
of FIN No. 46-R were required to be applied as of the end of the first reporting
period after March 15, 2004 for the variable interest entities in which the
company holds a variable interest that it acquired on or before January 31,
2003. The adoption of FIN No. 46-R did not have any impact on the financial
position or results of operations of the Company.
On March 31, 2004, the FASB issued an exposure draft entitled "Share-Based
Payment, an Amendment of FASB Statements No.'s 123 and 95". Among other items,
the proposed standard would require the fair value of stock options to be
recognized in the financial statements as compensation expense. The proposed
requirements in the exposure draft would be effective for the Company's 2006
fiscal year-end. The pro-forma impact of stock option expensing is calculated as
required under FASB Statement No. 123, "Accounting for Stock-Based Compensation"
and disclosed in Note 8 of these financial statements. However, the actual
impact to our financial statements upon adoption of the proposed standard could
differ from the pro-forma information included in Note 8 due to differences in
option-pricing models used, estimates and assumptions, and options to be
included in the calculation upon adoption. The Company will monitor the status
of the proposed standard and will evaluate the impact to our financial position
and results of operations when the final standard is issued.
ITEM 3. 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 maintains
interest rate swap agreements on notional amounts totaling $50 million.
If interest rates should change by 2 percentage points for the remainder of the
2004 fiscal year from those rates in effect at June 26, 2004, interest expense
would increase/decrease by approximately $0.8 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.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, the
Company evaluated under the supervision and with the participation of
management, the principal executive officer and the principal financial officer,
the design and operation of its disclosure controls and procedures to determine
if they are effective in ensuring that the disclosure of required information is
made timely and in accordance with the Securities Exchange Act and the rules and
regulations 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 Securities Exchange Act Rules 13a-14(c) and 15d-14(c), were, as of
the end of the period covered by this Quarterly Report on Form 10-Q, effective
to ensure that information required to be disclosed by the Company in reports it
files under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms. No change to the Company's internal control over financial
reporting occurred
-18-
during the period covered by this Quarterly Report that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
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 27A
of the Securities Exchange Act of 1933 and 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. 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.
WEBSITE ACCESS TO COMPANY REPORTS AND OTHER INFORMATION
We make available free of charge through our website, www.advo.com, our Annual
Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K as soon as reasonably practicable after such material is electronically
filed with the Securities and Exchange Commission. Our Internet website and the
information contained therein or incorporated therein are not intended to be
incorporated into this Quarterly Report on Form 10-Q.
We have adopted a Code of Business Ethics and Conduct that applies to all
employees as well as our Board of Directors. The Code of Business Ethics and
Conduct, as well as the Charters for the committees of our Board of Directors,
the Audit Committee, Qualified Legal Compliance Committee, Corporate Governance
Committee, Compensation and Nomination Committee and the Company's Corporate
Governance Guidelines, are posted on our website, www.advo.com. Copies of these
documents will be provided free of charge upon written request directed to
Corporate Secretary, ADVO, Inc., One Targeting Centre, Windsor, CT, 06095.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 to the Consolidated Financial Statements within Part I, Item 1.
-19-
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Below is a summary of stock purchases made by the Company or on behalf of the
Company for the quarter ended June 26, 2004.
s
Issuer Purchases of Equity Securities
------------------------------------------------------------------------------
Total Number of
Shares Purchased as Maximum Number of
Total Number Average Part of Publicly Shares that May Yet Be
Of Shares Price Paid Announced Purchased Under the
Purchased per Share Program (1) Program (1)
------------ ---------- ------------------- ---------------------
April 2004
Employee transactions (2) 14,617 $ 32.39 N/A N/A
Deferred compensation plan (3) 180 $ 31.60 N/A N/A
May 2004
Employee transactions (2) 5,184 $ 31.61 N/A N/A
Deferred compensation plan (3) 220 $ 31.08 N/A N/A
June 2004
Employee transactions (2) - - N/A N/A
Deferred compensation plan (3) 170 $ 31.83 N/A N/A
---------
Total shares purchased 20,191
=========
(1) In September 2003, the Company announced a stock buyback program allowing
the repurchase of 1,500,000 post-split shares. Under the authorization, the
Company can purchase shares on the open market. The stock buyback program
does not have an expiration date. The Company purchased no shares under the
program for the three months ended June 26, 2004. The maximum number of
shares that may yet be purchased under the program is 1,500,000 shares.
(2) Includes shares attested to in satisfaction of the exercise price and/or
tax withholding obligations by holders of employee stock options who
exercised options and shares withheld to satisfy tax withholding
obligations upon release of restricted shares.
(3) The Company has a non-qualified deferred compensation plan ("plan") that
provides participants the option to invest in several investment
opportunities one of which is the ADVO Stock Fund. These shares of ADVO
stock are purchased by the plan's trustee on the open market.
-20-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit No. Exhibits Included Within
- ----------- ------------------------
10 Employment Agreement dated June 15, 2004
between ADVO, Inc. and Bobbie Gaunt.
31(a) Certification of the Interim Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
31(b) Certification of the Acting Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
32 Certifications of the Interim Chief Executive Officer
and Acting Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated June 16, 2004,
to report under Item 5, that Gary M. Mulloy, Chairman and Chief
Executive Officer, left the Company and that the Board of Directors
appointed director, Bobbie Gaunt, as Interim Chief Executive Officer.
The Company also reported under Item 6, Gary M. Mulloy's resignation
from the Board of Directors. Gary M. Mulloy's separation agreement is
included as an exhibit on this Form 8-K.
The Company furnished a current report on Form 8-K dated July 15,
2004 which reported the Company's earnings press release for the
third quarter ended June 26, 2004.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
-21-
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 9, 2004 By: /s/ JOHN D. SPERIDAKOS
------------------------------
John D. Speridakos
Vice President and Controller
(Principal Accounting Officer)
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