Exhibit 99.2
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| December 30, 2006 | September 30, 2006 | |||||||
| Unaudited | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 24,790 | $ | 37,721 | ||||
Accounts receivable, net | 222,554 | 210,039 | ||||||
Inventories | 5,231 | 3,948 | ||||||
Prepaid postage | 4,646 | 7,002 | ||||||
Prepaid expenses and other current assets | 6,238 | 6,508 | ||||||
Federal income taxes receivable | — | 4,677 | ||||||
Deferred income taxes | 16,683 | 13,358 | ||||||
Total current assets | 280,142 | 283,253 | ||||||
Property, plant and equipment | 461,759 | 452,885 | ||||||
Less accumulated depreciation and amortization | (267,355 | ) | (258,276 | ) | ||||
Net property, plant and equipment | 194,404 | 194,609 | ||||||
Investment in deferred compensation plan | 17,634 | 16,462 | ||||||
Goodwill | 22,835 | 22,890 | ||||||
Other assets | 3,119 | 3,424 | ||||||
TOTAL ASSETS | $ | 518,134 | $ | 520,638 | ||||
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 2,500 | $ | — | ||||
Accounts payable | 55,626 | 55,041 | ||||||
Accrued compensation and benefits | 29,057 | 29,951 | ||||||
Customer advances | 14,450 | 25,819 | ||||||
Federal and state income taxes payable | 9,496 | 2,467 | ||||||
Accrued other expenses | 30,360 | 26,699 | ||||||
Total current liabilities | 141,489 | 139,977 | ||||||
Long-term debt | 124,103 | 123,974 | ||||||
Deferred income taxes | 13,917 | 23,109 | ||||||
Deferred compensation plan | 18,755 | 17,451 | ||||||
Other liabilities | 11,604 | 12,146 | ||||||
Total liabilities | 309,868 | 316,657 | ||||||
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 32,142,396 and 32,075,347 shares, respectively) | 321 | 321 | ||||||
Additional paid-in capital | 192,705 | 188,841 | ||||||
Accumulated earnings | 24,766 | 24,063 | ||||||
Less shares of common stock held in treasury, at cost | (8,956 | ) | (8,949 | ) | ||||
Less shares of common stock held in deferred compensation trust | (1,121 | ) | (988 | ) | ||||
Accumulated other comprehensive income | 551 | 693 | ||||||
Total stockholders’ equity | 208,266 | 203,981 | ||||||
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 518,134 | $ | 520,638 | ||||
See Accompanying Notes.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
| Three months ended | ||||||||
| December 30, 2006 | December 24, 2005 | |||||||
Revenues | $ | 384,279 | $ | 358,225 | ||||
Costs and expenses: | ||||||||
Cost of sales | 298,280 | 276,348 | ||||||
Selling, general and administrative | 81,166 | 59,563 | ||||||
Provision for bad debts | 2,701 | 1,666 | ||||||
Operating income | 2,132 | 20,648 | ||||||
Interest expense | (2,496 | ) | (1,986 | ) | ||||
Equity earnings in joint ventures | 811 | 827 | ||||||
Other income, net | 26 | 39 | ||||||
Income before income taxes | 473 | 19,528 | ||||||
Provision (benefit) for income taxes | (229 | ) | 7,557 | |||||
Net income | $ | 702 | $ | 11,971 | ||||
Basic earnings per share | $ | 0.02 | $ | 0.38 | ||||
Diluted earnings per share | $ | 0.02 | $ | 0.38 | ||||
Dividends declared per share | $ | — | $ | 0.11 | ||||
Weighted average basic shares | 31,527 | 31,249 | ||||||
Weighted average diluted shares | 31,728 | 31,422 | ||||||
See Accompanying Notes.
2
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
| Three months ended | ||||||||
| December 30, 2006 | December 24, 2005 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 702 | $ | 11,971 | ||||
Adjustments to reconcile net income to net cash flows (used) provided by operating activities: | ||||||||
Depreciation | 11,368 | 9,580 | ||||||
Stock-based compensation | 2,082 | 1,510 | ||||||
Amortization of debt issue costs | 138 | 138 | ||||||
Deferred income taxes | (12,527 | ) | (2,659 | ) | ||||
Provision for bad debts | 2,701 | 1,666 | ||||||
Equity earnings from joint ventures | (811 | ) | (827 | ) | ||||
Other | 19 | (20 | ) | |||||
Change in operating assets and liabilities, net of effects of acquisitions: | ||||||||
Accounts receivable | (15,037 | ) | (14,175 | ) | ||||
Inventories | (1,284 | ) | (382 | ) | ||||
Prepaid postage | 2,356 | 5,820 | ||||||
Prepaid expenses and other current assets | 231 | (2,017 | ) | |||||
Investment in deferred compensation plan | (216 | ) | (189 | ) | ||||
Other assets | 141 | 223 | ||||||
Accounts payable | 378 | (23,590 | ) | |||||
Accrued compensation and benefits | (884 | ) | 733 | |||||
Deferred compensation plan | 216 | 189 | ||||||
Customer advances | (11,366 | ) | 472 | |||||
Federal and state income taxes payable | 11,687 | 9,923 | ||||||
Other liabilities | 3,292 | 1,871 | ||||||
Distributions from equity joint ventures | 874 | 428 | ||||||
Net cash (used) provided by operating activities | (5,940 | ) | 665 | |||||
Cash flows from investing activities: | ||||||||
Expenditures for property, plant and equipment | (11,192 | ) | (10,129 | ) | ||||
Proceeds from disposals of property, plant and equipment | 6 | 22 | ||||||
Net cash used by investing activities | (11,186 | ) | (10,107 | ) | ||||
Cash flows from financing activities: | ||||||||
Revolving line of credit—net | 2,500 | 4,500 | ||||||
Proceeds from exercise of stock options | 1,701 | 21 | ||||||
Tax benefit from stock transactions | 99 | — | ||||||
Treasury stock transactions related to stock awards | (7 | ) | — | |||||
Cash dividends paid | (17 | ) | (3,443 | ) | ||||
Net cash provided by financing activities | 4,276 | 1,078 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (81 | ) | 9 | |||||
Change in cash and cash equivalents | (12,931 | ) | (8,355 | ) | ||||
Cash and cash equivalents at beginning of period | 37,721 | 46,238 | ||||||
Cash and cash equivalents at end of period | $ | 24,790 | $ | 37,883 | ||||
Noncash activities: | ||||||||
Decrease (increase) in the fair market value of interest rate swaps | 153 | (219 | ) | |||||
Deferred compensation plan investment gains | 1,089 | 656 | ||||||
See Accompanying Notes.
3
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 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending September 29, 2007. For further information, refer to the consolidated financial statements and footnotes thereto included in ADVO’s annual report on Form 10-K for the fiscal year ended September 30, 2006.
2. 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 30, 2006 | December 24, 2005 | ||||||
| (In thousands) | |||||||
Net income | $ | 702 | $ | 11,971 | |||
Other comprehensive income: | |||||||
Unrealized gain on derivative instruments | 14 | 154 | |||||
Foreign currency translation adjustment | (156 | ) | 11 | ||||
Total comprehensive income | $ | 560 | $ | 12,136 | |||
3. 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 30, 2006 | December 24, 2005 | |||||
| (In thousands, except per share data) | ||||||
Net income | $ | 702 | $ | 11,971 | ||
Weighted average basic shares | 31,527 | 31,249 | ||||
Effect of dilutive securities: | ||||||
Stock options | 98 | 80 | ||||
Restricted stock | 103 | 93 | ||||
Dilutive potential basic shares | 201 | 173 | ||||
Weighted average diluted shares | 31,728 | 31,422 | ||||
Basic earnings per share | $ | 0.02 | $ | 0.38 | ||
Diluted earnings per share | $ | 0.02 | $ | 0.38 | ||
4
4. Billing Adjustments Allowance
At the end of fiscal 2006, the Company recorded an allowance for billing adjustments totaling $5.1 million primarily due to order entry issues experienced as a result of the Service Delivery Redesign (“SDR”) implementation. The Company continues to encounter transitional issues with entering and processing customer orders and believes this allowance is necessary for potential billing adjustments that have not yet been processed. At December 30, 2006, based on the available information, management’s estimate of the billing adjustment allowance was $4.0 million.
5. Commitments and Contingencies
In the prior year, the Company had entered into an installment payment plan agreement with a customer in the Company’s telecommunications/satellite retail advertising category whereby this customer would pay its past due balance over approximately 2 years. The Company has continuously monitored the status of its receivable from this customer. During the first quarter, the customer’s business situation changed, and at the end of December the customer stopped paying causing the Company to record an additional $1.4 million allowance increasing the allowance recorded in the prior year. As of December 30, 2006, the Company has fully reserved for this customer receivable.
6. Valassis Merger and Litigation
ADVO entered into a Merger Agreement, dated as of July 5, 2006, with Valassis Communications, Inc. (“Valassis’) and its wholly-owned subsidiary, Michigan Acquisition Corporation (“Merger Sub’), pursuant to which Valassis agreed to acquire ADVO in a merger at a price of $37.00 per share in cash (“Merger Agreement”). The full text of the Merger Agreement was filed as Exhibit 2.1 to the Company’s July 10, 2006 Current Report on Form 8-K.
On August 30, 2006, Valassis filed a complaint against the Company in the Court of Chancery for New Castle County, Delaware (“Delaware Chancery Court”) seeking to rescind the Merger Agreement. On September 8, 2006, the Company filed an answer and counterclaims in response to the complaint filed by Valassis in the Delaware Chancery Court. The trial began on December 11, 2006.
On December 18, 2006, prior to the conclusion of the trial, the Company entered into an amendment to the Merger Agreement (the “Amended Agreement”) with Valassis, in which, among other things, Valassis agreed to pay $33.00 per share in cash for each of the Company’s outstanding shares, plus interest if the closing does not occur on or before February 28, 2007 or the second business day after the Company’s shareholders approve the merger, whichever is later, and substantially all of the conditions to closing were eliminated.
The Amended Agreement was filed as Exhibit 2.1 to the Company’s December 18, 2006 Current Report on Form 8-K. In connection with the Amended Agreement, the parties entered into a stipulation dismissing the Delaware action with prejudice, which was filed with the Delaware Chancery Court on December 19, 2006.
The Company has announced that a special meeting of ADVO shareholders will be held on February 22, 2007 to consider the adoption of the Amended Agreement.
In September 2006, three Securities Class Action lawsuits (Robert Kelleher v. ADVO, Inc., et al., Jorge Coronel v. ADVO, Inc., et al., Richard L. Field v. ADVO, Inc., et al.) were filed against the Company and certain of its officers in the United States District Court for the District of Connecticut by certain shareholders seeking to certify a class of all persons who purchased ADVO stock between July 6, 2006 and August 30, 2006. These
5
complaints generally allege the Company violated federal securities law by making a series of materially false and misleading statements concerning the Company’s business and financial results in connection with the proposed merger with Valassis and, as a result, the price of the Company’s stock was allegedly inflated.
The plaintiffs in theKellehersecurities class action filed on November 13, 2006 a Motion for Consolidation, Appointment as Lead Plaintiff and approval of Section of Lead and Liaison Counsel. In accordance with discussions among counsel for all parties, the parties in the Securities Class Actions have agreed to a Stipulated Order providing for a date on which a Consolidated Class Action Complaint will be filed and a date within which a responsive pleading to that complaint and related briefings will be due. On December 12, 2006, theKelleherplaintiffs filed a Motion to Partially Lift Discovery Stay, in response to which defendants filed opposition on January 16, 2007. The Court has not ruled on either of theKelleherplaintiffs’ motions or the Stipulated Order for proceedings in the Securities Class Actions. Under the circumstances, it is not possible for us to predict the likelihood of a favorable or unfavorable resolution of the Securities Class Actions.
The Company, its directors and certain of its officers, were sued in a derivative action (“Derivative Action”) filed in September 2006, raising essentially the same factual allegations as the Securities Class Actions. The Derivative Action was dismissed by Notice of Voluntary Dismissal without prejudice on January 24, 2007.
In the first quarter of fiscal 2007, the Company incurred $19.2 million of legal and other professional fees related to the Valassis merger and litigation.
6