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ADVO, Inc.
Form 10-K
September 25, 1999
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended September 25, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Univac Lane, P.O. Box 755, 06095-0755
Windsor, CT -------------------------------------
- ------------------------------------- (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (860) 285-6100
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock and Rights, par value $.01 per share
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant at November 26, 1999 was $384,268,098. On that date, there were
20,631,648 outstanding shares of the registrant's common stock.
Documents Incorporated by Reference:
Portions of the 1999 Annual Report to Stockholders are incorporated by
reference into Parts II and IV of this Report.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Report.
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ADVO, Inc.
Index to Report on Form 10-K
For the Year Ended September 25, 1999
Part I
<TABLE>
<CAPTION>
Item Page
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<S> <C>
1. Business............................................................. 1
2. Properties........................................................... 5
3. Legal Proceedings.................................................... 5
4. Submission of Matters to a Vote of Security Holders.................. 5
Part II
5. Market for Registrant's Common Equity and Related Stockholder Mat-
ters................................................................. 7
6. Selected Financial Data.............................................. 7
7. Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations.................................................. 7
7A. Quantitative and Qualitative Disclosures about Market Risk........... 7
8. Financial Statements and Supplementary Data.......................... 7
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 8
Part III
10. Directors and Executive Officers of the Registrant................... 8
11. Executive Compensation............................................... 8
12. Security Ownership of Certain Beneficial Owners and Management....... 8
13. Certain Relationships and Related Transactions....................... 8
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 9
</TABLE>
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PART I
ITEM 1. Business
General
ADVO, Inc. ("ADVO" or the "Company") is a direct mail marketing firm
primarily engaged in soliciting and processing printed advertising from
retailers, manufacturers and service companies for targeted distribution by
both shared and solo mail to consumer households in the United States on a
national, regional and local basis. Founded in 1929 as a hand delivery
company, the Company entered the direct mail industry as a solo mailer in 1946
and began its shared mail program in 1980. The Company currently is the
largest commercial user of standard mail (formerly third-class mail) in the
United States.
ADVO competes primarily with newspapers, direct mail companies, broadcast
media, periodicals and other local distribution entities for retail
advertising expenditures. The Company believes that direct mail, which enables
advertisers to target advertisements to specific customers or geographic
areas, is the most efficient vehicle for delivering printed advertising on a
saturation or full market coverage basis, as well as an effective means of
targeted coverage.
ADVO's principal executive offices are located at One Univac Lane, Windsor,
Connecticut 06095.
Products and Services
ADVO's direct mail marketing products and services include shared mail and
solo mail. ADVO provides ancillary services in conjunction with its direct
mail marketing programs and also provides private carrier (hand) delivery in
certain markets. In addition, during fiscal 1998, the Company acquired a
franchise-based coupon envelope mail company.
Shared Mail
In the Company's shared mail programs (Marriage Mail(R) and Mailbox
Values(R)), the advertisements of several advertisers are combined into a
single mail package.
Shared mail packages are assembled by the Company for distribution by ZIP
Code and, in most instances, each household within the ZIP Code will receive a
mail package. Individual customers can choose a portion of the designated
mailing area for their distributions, ranging from part of a ZIP Code to all
ZIP Codes covered by the program. This flexibility enables major customers,
such as retail store chains, to select areas serviced by their retail stores
and, at the same time, distribute different versions of their advertisements
to accommodate the needs of their individual stores. It also allows a smaller
retailer to target only those ZIP Codes or portions of ZIP Codes needed to
accommodate its customer base, thereby reducing overall advertising costs.
The Company offers the nationwide availability of ADVO Targeting Zones
("ATZs") which enables advertisers to target their ads to consumer clusters of
about 3,500 households. ATZs are neighboring postal carrier delivery routes
within a ZIP Code that are clustered together based on shared demographic
characteristics and proximity to key retail shopping areas.
The Company's shared mail programs offer the features of penetration and
target marketing at a significant cost reduction when compared to mailing on
an individual or solo mail basis. This cost advantage is available because the
Company pays the total postage expense, and advertisers are generally charged
a selling price based upon, among other factors, the incremental weight of
their promotional pieces.
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As a part of its shared mail programs, the Company provides the addresses of
the households receiving the mail packages, sorts, processes and transports
the advertising material for ultimate delivery through the United States
Postal Service ("USPS"). Generally, larger businesses, such as food chains and
mass merchandisers, will provide the Company with preprinted advertising
materials in predetermined quantities. In the case of manufacturers and small
retail customers, the Company may perform graphics services and/or act as a
broker for the required printing. The Company also offers shared mail
customers numerous standard turnkey advertising products in a variety of sizes
and colors.
The Company believes its shared mail programs are the largest programs of
their kind.
Marriage Mail(R) is a weekly mail program with coverage, on average, of 60
million households in approximately 120 markets. This program is used by local
and national retailers. The ZIP Code configuration selected for each market is
normally determined by population density and by proximity to retail outlets.
Retailers with multiple locations and weekly frequency have a great influence
on the ZIP Codes chosen by the Company for its weekly mailings. The Company
derives most of its revenues from the Marriage Mail(R) program.
The Company is part of a network, known as ADVO National Network Extension
("A.N.N.E.") comprised of regional shared mail companies, which provide its
clients with extended coverage outside the markets already served by the
Company. Approximately an additional 26 million households can be reached on a
shared mail basis through A.N.N.E. The Company handles the clients' orders
directly and manages distribution of their advertising through A.N.N.E.'s
partners. Conversely, A.N.N.E. enables participating partners (shared mail
companies) to offer their clients extended marketplace reach using the
Company's household coverage.
Solo Mail
Solo mail services include addressing and processing brochures and circulars
for an individual customer for distribution through the USPS. Each customer
bears the full cost of postage and handling for each mailing. Customers
choosing this form of direct mail are generally those who wish to maintain an
exclusive image and complete control over the timing and the target of their
mailings.
The Company processes solo mail using its own mailing list or lists supplied
by the customer. The Company charges a processing fee based on the solo mail
services rendered.
Other Products and Services
The Company rents portions of its mailing list, through a specialized firm
hired by the Company, to organizations interested in distributing their own
mailings. The Company may or may not perform the associated distribution
services for the customer.
ADVO Creative Services, Inc., based in Texas, is a wholly-owned subsidiary
of the Company which specializes in the coordination and production of custom
promotional magazines and circulars which, in most cases, are then distributed
by the Company.
During fiscal 1998, the Company acquired The Mailhouse, Inc., a franchise-
based cooperative coupon envelope mail company headquartered in Avon, MA. The
company was renamed MailCoups, Inc. ("MailCoups") and operates as a subsidiary
of ADVO. The new subsidiary, operating under the trade name of Super Coups, is
a leader in creating and distributing attractive, cost-effective targeted
coupons in a distinctive envelope format for local neighborhood merchants via
an extended network of franchise owners. At the end of fiscal 1999, MailCoups
had approximately 398 franchise units in 27 states and directly employed
approximately 140 people.
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Mailing List
ADVO's management believes its computerized mailing list is the largest
residential/household mailing list in the country. It contains over 117
million delivery points (constituting nearly all of the households in the
United States) and was used by the U.S. Census Bureau as a base for developing
the mailing list for its 1980 and 1990 census questionnaire mailings. For the
upcoming 2000 census, Congress amended federal law to permit the Census Bureau
to work directly with the USPS for mailing list development. The Company's
management believes that the list is particularly valuable and that
replication in its entirety by competitors would be extremely difficult and
costly. The list enables the Company to target mailings to best serve its
customers.
Bimonthly, ADVO receives the latest release of delivery point information
from the USPS. During the off months, ADVO receives a file release, which
includes only significant changes or approximately five to ten percent of the
base file. Included in these releases is information that indicates whether
the address is still occupied, whether the address still exists at all (i.e.,
demolished buildings) and any new addresses included in the ZIP Code (i.e.,
new construction). The USPS also indicates to ADVO changes in the walk
sequence order of addresses, which allows ADVO to qualify for the lowest
possible postage rates. The USPS provides these updates to any user for a fee,
provided that the user's list is at least 90% accurate on a ZIP Code basis.
ADVO believes its list is nearly 100% accurate.
Customer Base
Typically, the Company's customers are those businesses whose products and
services are used by the general population. These businesses (supermarkets,
fast food, drug stores, discount and department stores and consumer products
manufacturers) require continuous advertising to a mass audience. No one
customer accounted for more than 4% of the Company's sales in fiscal 1998 or
1997. In fiscal 1999, due to the consolidation of two of the Company's
customers, no one customer accounted for more than 7% of the Company's sales.
Operations
Customers' advertising circulars are processed by approximately 2,100
production employees who work at 19 mail processing facilities which are
strategically located throughout the nation. Inserting machines (which combine
the individual advertising pieces into the mailing packages), addressing and
labeling, and quarter-folding equipment are the principal pieces of equipment
used to process the Company's products and services. At several of the
Company's production facilities, the Alphaliner, a new computerized mail
sorter, is being utilized. The Alphaliner offers higher speed and capacity,
enhanced productivity, computerized controls which automates order processing,
electronically integrates with other machines, and links to ADVO's order
fulfillment system. The Company has begun the process of integrating the
Alphaliner technology into many of its mail processing facilities. Conversion
of the remaining facilities will continue over the next two to three years.
In all 19 of ADVO's mail processing facilities, the USPS accepts and
verifies the Company's mail to help ensure rapid package acceptance and
distribution, which benefits both the USPS and the Company. In most instances,
the mail is then shipped by the Company to the destination office of the USPS
for final delivery.
MailCoups operates a cooperative direct mail coupon envelope advertising
business by performing printing and distribution services for the franchisees
at their one production facility.
The Company entered into an agreement with Integrated Systems Solution
Corporation, now known as IBM Global Services ("IBM"), to provide systems
development and technical support to the Company. As a result of this
outsourcing, ADVO's computer center moved from Hartford to IBM Global
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Services' computer center located in Southbury, Connecticut. The Company's
branches are on-line with this computer center which enables the day-to-day
processing functions to be performed and provides corporate headquarters with
management information. The systems include: order processing and production
control, transportation/distribution, address list maintenance, market
analysis, label printing and distribution, billing and financial systems, and
carrier routing of addresses received from customer files and demographic
analyses. The Company also has agreements with IBM to provide for a customer
support center and server farm management services.
Competition
In general, the printed advertising market is highly competitive with
companies competing primarily on the basis of price, speed of delivery and
ability to target selected potential customers on a cost-effective basis.
ADVO's competitors for the delivery of retail and other printed advertising
are numerous, and include newspapers, regional and local mailers, direct
marketing firms, "shoppers" and "pennysavers."
Newspapers represent the Company's most significant and direct competition.
Through the distribution of preprinted circulars, classified advertising and
run of press advertising ("ROP"), newspapers have been the traditional and
dominant medium for advertising by retailers for many years. Insertion rates
are highly competitive and many newspapers' financial resources are
substantial.
ADVO's principal direct marketing competitors are other companies with
residential lists and similar cooperative mailing programs. These companies
have a significant presence in many of the Company's markets and represent
competition to the Company's Marriage Mail(R) programs in those markets.
There are local mailers in practically every market of the country. In
addition to local mailers, there are many local private delivery services such
as shoppers and pennysavers which compete by selling ROP advertisements and
classified advertisements. ADVO believes that it competes effectively in its
various markets.
Seasonality
ADVO's business generally follows the trends of retail advertising spending.
The Company has historically experienced higher revenues in the second half of
the calendar year.
Research and Development
Expenditures of the Company in research and development during the last
three years have not been material.
Environmental Matters
The Company believes that it is substantially in compliance with all
regulations concerning the discharge of materials into the environment, and
such regulations have not had a material effect on the capital expenditures or
operations of the Company.
Raw Materials
The Company manages approximately 45,000 tons of paper per year through its
printing network on behalf of its print vendors. ADVO has agreements with
various paper suppliers and print vendors to assure the supply of proper paper
grades at competitive prices.
Employees
As of September 25, 1999, the Company had a total of approximately 4,300
full and part-time employees. ADVO also uses outside temporary employees,
particularly during busy seasons.
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ADVO has one union contract, covering production employees in the Hartford,
Connecticut branch. The Company believes that its relations with its employees
are satisfactory.
Forward Looking Statements
This Report on Form 10-K contains certain forward looking statements
regarding the Company's results of operations and financial position 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 would cause the
Company's actual results to differ materially from those in the forward
looking statements. Such risks and uncertainties include but are not limited
to: changes in customer demand and pricing; the possibility of consolidation
throughout the retail sector, postal and paper prices; possible governmental
regulation or legislation affecting aspects of the Company's business; the
efficiencies achieved with technology upgrades; the amount of shares the
Company will purchase in the future under its buyback program; the risks
associated with the transition into Year 2000; fluctuations in interest rates
related to the outstanding debt; and other general economic factors.
ITEM 2. Properties
ADVO does not own any real estate except for its corporate headquarters. The
corporate headquarters, located in Windsor, Connecticut, consist of two
buildings totaling approximately 136,000 square feet. The Company leases 20
production facilities, including the MailCoups facility, and approximately 65
sales offices (which excludes the sales offices that are located in the mail
processing facilities) throughout the United States. The Company believes its
facilities are suitable and adequate for the purposes for which they are used
and are adequately maintained.
ITEM 3. Legal Proceedings
ADVO is party to various lawsuits and regulatory proceedings which are
incidental to its business and which the Company believes will not have a
material adverse effect on its consolidated financial condition, liquidity or
results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Position With Company
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Gary M. Mulloy.......... 54 Chairman and Chief Executive Officer
Myron L. Lubin.......... 59 Executive Vice President--Marketing and Sales
Donald E. McCombs....... 43 Executive Vice President and Chief Financial Officer
Jack S. Dearing......... 45 Senior Vice President--Operations
Henry S. Evans.......... 46 Senior Vice President--Strategic Business Development
Vince Giuliano.......... 52 Senior Vice President--Government Relations
Helen Hodack ........... 43 Senior Vice President--Client Logistics
Mardelle Pena........... 47 Senior Vice President--Chief Human Resources Officer
A. Brian Sanders........ 38 Senior Vice President--Sales and Client Marketing
David Stigler........... 56 Senior Vice President--Chief Legal and Public Affairs
Officer and General Counsel
B. Kabe Woods........... 44 Senior Vice President--Chief Information Officer
Julie A. Abraham........ 41 Vice President and Controller
Christopher T. Hutter... 33 Vice President--Treasurer and Investor Relations
</TABLE>
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Mr. Mulloy became Chairman of the Board on June 28, 1999 and Chief Executive
Officer on January 1, 1999. From November 1996 to December 1998, he was
President and Chief Operating Officer. Mr. Mulloy was elected to the Board of
Directors on December 3, 1996. From 1990 to October 1996, he was President and
Chief Executive Officer of Pilkington Barnes-Hind, Inc., a division of
Pilkington Vision Care.
Mr. Lubin became Executive Vice President--Marketing and Sales on October
29, 1998. From December 1995 to October 1998, he was Senior Vice President--
Chief Sales Officer. Prior to that, he was Senior Vice President--Western
Division President from January 1990 to November 1995.
Mr. McCombs became Executive Vice President and Chief Financial Officer on
December 3, 1998. From November 1997 to November 1998, he was Senior Vice
President and Chief Financial Officer. Prior to that, from 1989 to October
1997, he was Vice President--Financial Planning and Measurement.
Mr. Dearing became Senior Vice President--Operations on June 14, 1999. From
February 1998 to June 1999, he was Vice President of Resource Management and
Logistics. Prior to that, he was Senior Director of Operations at Anchor Glass
Container Corporation from December 1995 to February 1998. From 1993 to 1995
he held various management positions at Corning, Inc.
Mr. Evans became Senior Vice President--Strategic Business Development on
June 14, 1999. From August 1997 to June 1999, he was Senior Vice President--
Operations. Prior to that, he was Senior Vice President of Operations with
Anchor Glass Container Corporation from 1992 to 1997.
Mr. Giuliano has been Senior Vice President--Government Relations since
October 28, 1996. From April 1983 to October 1996 he was Vice President--
Government Relations.
Ms. Hodack became Senior Vice President--Client Logistics on January 1,
1999. From December 1996 to October 1998, she was Senior Vice President of
Customer Management for Data Broadcasting Corporation, an Internet-based
provider of real-time financial information. Prior to that, she was Senior
Vice President, Logistics for Pilkington Barnes-Hind, Inc., a division of
Pilkington Vision Care from September 1993 to October 1996.
Ms. Pena. has been Senior Vice President--Chief Human Resources Officer
since August 1997. From May 1994 to August 1997, she was Vice President--Human
Resources. Prior to that, she held various management positions at the Company
since January 1991.
Mr. Sanders became Senior Vice President--Sales and Client Marketing on
February 11, 1999. From May 1997 to February 1999 he was Senior Vice
President--Chief Marketing Officer. For the five years prior to that, he held
several executive positions at Pilkington Barnes-Hind, Inc., a division of
Pilkington Vision Care.
Mr. Stigler has been Senior Vice President--Chief Legal and Public Affairs
Officer and General Counsel since January 1990. He has also served as the
Company's Secretary since August 1986.
Mr. Woods has been Senior Vice President--Chief Information Officer since
August 1997. From November 1995 to August 1997, he was Director--End User
Services of Lucent Technologies and from November 1993 to November 1995, he
was Chief Information Officer of AT&T Advanced Technology Systems. In
addition, for a short time in 1995 he held the concurrent position of Chief
Information Officer of AT&T Multimedia Ventures and Technology.
Ms. Abraham has been Vice President and Controller since October 1998. From
November 1997 to October 1998, she was Vice President--Financial Planning and
Investor Relations. From August 1995 to November 1997, she was Vice
President--Shared Financial Services. Prior to that, she held several other
financial management positions at the Company since April 1992.
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Mr. Hutter became Vice President, Treasurer and Investor Relations on
October 28, 1999. From October 1998 to October 1999, he was Vice President,
Assistant Treasurer and Investor Relations. Prior to that, he was Director of
Financial Planning from April 1996 to October 1998. In addition, he held
several other financial management positions at the Company since June 1993.
The Company is not aware of any family relationships between any of the
foregoing officers and any of the Company's directors. Each of the foregoing
officers holds such office until his or her successor shall have been duly
chosen and shall have been qualified, or until his or her earlier resignation
or removal.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
ADVO's 1999 Annual Report to Stockholders includes on page 37 under the
caption "Quarterly Financial Data (Unaudited)" the reported high and low
market prices of ADVO's common stock for the past two fiscal years, and such
information is incorporated herein by reference and made a part hereof (see
Exhibit 13).
During the fiscal years ended September 25, 1999, September 26, 1998, and
September 27, 1997, the Company declared no cash dividends. The Company is
currently subject to debt covenants regarding future cash dividends exceeding
$.025 per share as stipulated in its credit agreement dated September 29,
1997, with Chase Manhattan Bank.
The closing price as of November 26, 1999 of the Company's common stock,
under the symbol AD, on the New York Stock Exchange as reported in The Wall
Street Journal was $20 1/8 per share. The approximate number of holders of
record of the common stock on November 26, 1999 was 755.
During fiscal 1999, the Company engaged in no sales of its securities that
were not registered under the Securities Act of 1933, as amended.
ITEM 6. Selected Financial Data
The information required by this item is included in ADVO's 1999 Annual
Report to Stockholders on page 20 under the caption "Selected Financial Data"
and is incorporated herein by reference and made a part hereof (see Exhibit
13).
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by this item is included in ADVO's 1999 Annual
Report to Stockholders on pages 21 through 26 under the caption "Financial
Report" and is incorporated herein by reference and made a part hereof (see
Exhibit 13).
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in ADVO's 1999 Annual
Report to Stockholders on pages 24 and 25 under the caption "Market Risk" and
is incorporated herein by reference and made a part hereof (see Exhibit 13).
ITEM 8. Financial Statements and Supplementary Data
ADVO's consolidated financial statements, together with the Report of
Independent Auditors thereon dated October 19, 1999, appearing on pages 27
through 38 of ADVO's 1999 Annual Report to Stockholders, are incorporated
herein by reference and made a part hereof (see Exhibit 13).
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The selected quarterly information required by this item is included under
the caption "Quarterly Financial Data (Unaudited)" on page 37 of ADVO's 1999
Annual Report to Stockholders and is incorporated herein by reference and made
a part hereof (see Exhibit 13).
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this item, to the extent not included under the
caption "Executive Officers of the Registrant" in Part I of this Annual Report
on Form 10-K, appears on pages 3 and 4 of the Company's definitive proxy
statement dated December 16, 1999 for the annual meeting of stockholders to be
held on January 20, 2000 (the "Proxy Statement"), under the caption "Election
of Directors," and on page 6 of the Proxy Statement under the subcaption
"Section 16(a) Beneficial Ownership Reporting Compliance", and is incorporated
herein by reference and made a part hereof.
ITEM 11. Executive Compensation
The information required by this item is included under the caption
"Executive Compensation" on pages 7 through 18 (except for those portions
appearing under the subcaptions "Report of the Compensation Committee" and
"Company Financial Performance"), and "Governance of the Company" on pages 2
and 3, of ADVO's Proxy Statement and is incorporated herein by reference and
made a part hereof.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included under the captions
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" on page 2 and on pages 5 and 6, respectively, of ADVO's Proxy
Statement and is incorporated herein by reference and made a part hereof.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is included under the caption "Related
Party Transactions" on pages 18 and 19 of ADVO's Proxy Statement and in
footnote 10 under the caption "Security Ownership of Management" on pages 5
and 6 of ADVO's Proxy Statement and is incorporated herein by reference and
made a part hereof.
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PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K
(a)(1) Financial Statements. See the Index to Financial Statements and
Financial Statement Schedules on page F-1.
(2) Financial Statement Schedules. See the Index to Financial Statements
and Financial Statement Schedules on page F-1.
(3) Exhibits. The following is a list of the exhibits to this Report:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Where Located
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<S> <C> <C>
3(a) Restated Certificate of Incorporation Incorporated by reference to Exhibit
of ADVO. 3(a) to the Company's Form 10 filed on
September 15, 1986 (No. 1-11720.)
3(b) Restated By-laws of ADVO. Incorporated by reference to Exhibit
3(b) to the Company's Form 8-K dated
July 21, 1999.
4(a) Stockholder Protection Rights Incorporated by reference to Exhibit
Agreement, dated as of February 5, 4.1 of the Company's Form 8-K dated
1993, between the Company and Mellon February 5, 1993.
Securities Trust Company, as Rights
Agent, including Exhibit A and Exhibit
B.
10(a) The ADVO Savings Continuation Plan, Incorporated by reference to Exhibit
effective January 1, 1988.* 10(n) to the Company's Annual Report
on Form 10-K for the fiscal year ended
September 24, 1988.
10(b) Executive Severance Agreements, dated Incorporated by reference to Exhibit
October 17, 1995 between ADVO and the 10(m) to the Company's Annual Report
executive officers named therein.* on Form 10-K for the fiscal year ended
September 30, 1995.
10(c) Information Technology Agreement dated Incorporated by reference to Exhibit
as of July 16, 1996 between ADVO and 10(o) to the Company's Annual Report
Integrated Systems Solutions on Form 10-K for the fiscal year ended
Corporation. September 28, 1996.
10(d) Executive Severance Agreement, dated Incorporated by reference to Exhibit
November 4, 1996 between ADVO and Gary 10(m) to the Company's Annual Report
M. Mulloy.* on Form 10-K for the fiscal year ended
September 28, 1996.
10(e) Executive Severance Agreement dated Incorporated by reference to Exhibit
May 19, 1997 between ADVO and A. Brian 10(k) to the Company's Annual Report
Sanders.* on Form 10-K for the fiscal year ended
September 27, 1997.
10(f) Amended and Restated Credit Agreement Incorporated by reference to Exhibit
dated September 29, 1997 between ADVO 99(b) of the Company's Form 8-K dated
and a syndicate of lenders led by September 29, 1997.
Chase Manhattan Bank as Administrative
Agent.
</TABLE>
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<TABLE>
<CAPTION>
Exhibit No. Exhibit Where Located
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<S> <C> <C>
10(g) Executive Severance Agreement dated Incorporated by reference to Exhibit
November 7, 1997 between ADVO and 10(m) to the Company's Annual Report
Donald E. McCombs.* on Form 10-K for the fiscal year ended
September 27, 1997.
10(h) Employment Agreement dated July 31, Incorporated by reference to Exhibit
1998 between ADVO and Gary M. Mulloy.* 10(m) to the Company's Annual Report
on Form 10-K for the fiscal year ended
September 26, 1998.
10(i) Executive Severance Agreements dated Incorporated by reference to Exhibit
October 17, 1995 between ADVO and the 10(n) to the Company's Annual Report
executive officers named therein.* on Form 10-K for the fiscal year ended
September 26, 1998.
10(j) Executive Severance Agreement dated Incorporated by reference to Exhibit
October 17, 1995 between ADVO and 10(o) to the Company's Annual Report
David Stigler.* on Form 10-K for the fiscal year ended
September 26, 1998.
10(k) Executive Severance Agreement dated Incorporated by reference to Exhibit
July 1, 1997 between ADVO and Mardelle 10(p) to the Company's Annual Report
Pena.* on Form 10-K for the fiscal year ended
September 26, 1998.
10(l) Executive Severance Agreement dated Incorporated by reference to Exhibit
July 30, 1997 between ADVO and Henry 10(q) to the Company's Annual Report
S. Evans.* on Form 10-K for the fiscal year ended
September 26, 1998.
10(m) Executive Severance Agreement dated Incorporated by reference to Exhibit
August 6, 1997 between ADVO and B. 10(r) to the Company's Annual Report
Kabe Woods.* on Form 10-K for the fiscal year ended
September 26, 1998.
10(n) Consulting Agreement dated December 1, Incorporated by reference to Exhibit
1998 between ADVO and Robert 10(s) to the Company's Annual Report
Kamerschen.* on Form 10-K for the fiscal year ended
September 26, 1998.
10(o) 1998 Incentive Compensation Plan.* Incorporated by reference to Exhibit A
to the Company's definitive Proxy
Statement for the annual meeting held
on January 21, 1999.
10(p) Executive Severance Agreement dated Incorporated by reference to Exhibit
January 1, 1999 between ADVO and Helen 10 to the Company's Form 10-Q for the
Hodack.* quarter ended June 26, 1999.
10(q) Executive Severance Agreement dated Filed herewith.
September 20, 1999 between ADVO and
John S. Dearing.*
10(r) Executive Severance Agreement dated Filed herewith.
September 27, 1999 between ADVO and
Christopher T. Hutter.*
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Where Located
- ----------- ------- -------------
<S> <C> <C>
13 1999 Annual Report to Stockholders. Furnished herewith; however, such re-
port, except for those portions
thereof which are expressly incorpo-
rated by reference into this Annual
Report on Form 10-K, is for the in-
formation of the Commission and is
not deemed "filed."
21 Subsidiaries of the Registrant. Filed herewith.
23 Consent of Independent Auditors. Filed herewith.
24 Power of Attorney. See signature page.
27 Financial Data Schedule. Filed herewith.
</TABLE>
- --------
* Management contract or compensatory plan required to be filed as an exhibit
pursuant to item 14(c) of this report.
(b) Reports on Form 8-K.
A report on Form 8-K dated July 21, 1999, was filed by the Company during
the quarter ended September 25, 1999. The Form 8-K reported under item 5
thereof the Board of Directors' adoption of amendments to the Company's
Restated By-laws.
A report on Form 8-K dated September 23, 1999 was filed by the Company
during the quarter ended September 25, 1999. The Form 8-K reported under item
5 thereof the Company's announcement of a new stock repurchase program for up
to 1 million shares through September 30, 2000. This program added one million
shares to the approximately 200,000 shares remaining from the prior buyback
program announced in March 1999, bringing the total remaining authorization to
1,200,000 shares.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
December 16, 1999
Date: _______________________________ ADVO, Inc.
/s/ Julie A. Abraham
By: _________________________________
Julie A. Abraham
Vice President and
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each person whose
signature appears below hereby constitutes David M. Stigler and Julie A.
Abraham, and each of them singly, such person's true and lawful attorneys,
with full power to them and each of them, to sign for such person and in such
person's name and capacity as indicated below, any and all amendments to this
report, hereby ratifying and confirming such person's signature as it may be
signed by said attorneys to any and all amendments.
Date Signature Title
December 16, 1999 /s/ Gary M. Mulloy Chairman, Chief Executive
---------------------------- Officer and Director
Gary M. Mulloy (Principal Executive
Officer)
December 16, 1999 /s/ Donald E. McCombs Executive Vice President
---------------------------- and Chief Financial
Donald E. McCombs Officer (Principal
Financial Officer)
December 16, 1999 /s/ Julie A. Abraham Vice President and
---------------------------- Controller (Principal
Julie A. Abraham Accounting Officer)
December 16, 1999 /s/ Bruce Crawford Director
----------------------------
Bruce Crawford
December 16, 1999 /s/ David F. Dyer Director
----------------------------
David F. Dyer
December 16, 1999 /s/ Jack W. Fritz Director
----------------------------
Jack W. Fritz
December 16, 1999 /s/ Howard H. Newman Director
----------------------------
Howard H. Newman
December 16, 1999 /s/ John R. Rockwell Director
----------------------------
John R. Rockwell
December 16, 1999 /s/ John L. Vogelstein Director
----------------------------
John L. Vogelstein
12
<PAGE>
ADVO, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of independent auditors........................................... *
Consolidated statements of operations for the years ended September 25,
1999, September 26, 1998 and September 27, 1997......................... *
Consolidated balance sheets at September 25, 1999 and September 26,
1998.................................................................... *
Consolidated statements of cash flows for the years ended September 25,
1999, September 26, 1998 and September 27, 1997......................... *
Consolidated statements of changes in stockholders' deficiency for the
years ended September 25, 1999, September 26, 1998, and September 27,
1997.................................................................... *
Notes to consolidated financial statements............................... *
Consolidated Schedules
II-Valuation and Qualifying Accounts................................... F-2
</TABLE>
All other schedules have been omitted since the required information is not
present.
- --------
* Incorporated herein by reference from pages 27 to 38 of the ADVO, Inc. 1999
Annual Report to Stockholders.
F-1
<PAGE>
ADVO, Inc.
Schedule II -- Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ------------ --------------------- ---------- ----------
Additions
---------------------
Balance at Charged to Charged to Deductions Balance at
beginning of costs and other from end of
Description period expenses accounts reserves period
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 27,
1997:
Allowances for sales
adjustments............ $ 2,836 $ -- $ 4,889(b) $ 5,143 $ 2,582
Allowances for doubtful
accounts............... 1,390 5,374 -- 4,186(a) 2,578
Restructuring reserve... 2,059 -- -- 1,711 348
Accumulated amortization
Goodwill............... 1,422 392 -- -- 1,814
Accumulated amortization
Intangibles............ 5,290 729 -- -- 6,019
------- ------ ------- ------- -------
$12,997 $6,495 $ 4,889 $11,040 $13,341
======= ====== ======= ======= =======
Year ended September 26,
1998:
Allowances for sales
adjustments............ $ 2,582 $ -- $ 2,787(b) $ 3,373 $ 1,996
Allowances for doubtful
accounts............... 2,578 4,459 -- 4,409(a) 2,628
Restructuring reserve... 348 -- -- 61 287
Accumulated amortization
Goodwill............... 1,814 564 -- -- 2,378
Accumulated amortization
Intangibles............ 6,019 710 -- -- 6,729
------- ------ ------- ------- -------
$13,341 $5,733 $ 2,787 $ 7,843 $14,018
======= ====== ======= ======= =======
Year ended September 25,
1999:
Allowances for sales
adjustments............ $ 1,996 $ -- $ 5,606(b) $ 5,610 $ 1,992
Allowances for doubtful
accounts............... 2,628 5,088 -- 5,603(a) 2,113
Restructuring reserve... 287 -- -- 168 119
Accumulated amortization
Goodwill............... 2,378 784 -- -- 3,162
Accumulated amortization
Intangibles............ 6,729 726 -- -- 7,455
------- ------ ------- ------- -------
$14,018 $6,598 $ 5,606 $11,381 $14,841
======= ====== ======= ======= =======
</TABLE>
- --------
(a) Write off of uncollectible accounts, net of recoveries on accounts
previously written off.
(b) Reduction of revenues.
F-2
<PAGE>
Exhibit 10(q)
-------------
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of
September 20, 1999 by and between ADVO, Inc. (the "Company") and John S. Dearing
(the "Executive").
RECITALS:
- --------
A. The Executive is an executive of the Company and has made and is
expected to continue to make major contributions to the short- and long-term
profitability, growth, and financial strength of the Company;
B. The Company recognizes that the possibility of a Change of Control (as
hereafter defined) exists;
C. The Company desires to assure itself of both present and future
continuity of its management and desires to establish certain severance benefits
for key executive officers of the Company, including the Executive, applicable
in the event of a Change of Control; and
D. The Company wishes to aid in assuring that such executives are not
practically disabled from discharging their duties in respect of a proposed or
actual transaction involving a Change of Control.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Affiliate" means (i) each entity in which the Company, alone or
together with one or more other Affiliates of the Company, owns not less
than 80% of the then outstanding voting securities or, for any entity that
is not a corporation, at least 80% of the then-outstanding capital
interests of such entity and (ii) any additional entity which is deemed by
action of the Board to be an Affiliate for the purposes of this Agreement.
(b) "Base Pay" means the Executive's annual aggregate fixed base salary
from the Company at the time in question.
(c) "Board" means the Board of Directors of the Company.
(d) "Change of Control" means the occurrence during the Term of any of
the following events:
1
<PAGE>
(i) Any Person (other than the Company, any trustee or other fiduciary holding
securities under any employee benefit plan of the Company, or any company owned,
directly or indirectly, by the stockholders of the Company immediately prior to
the occurrence with respect to which the evaluation is being made in
substantially the same proportions as their ownership of the common stock of the
Company) acquires securities of the Company and immediately thereafter is the
Beneficial Owner (except that a Person shall be deemed to be the Beneficial
Owner of all shares that any such Person has the right to acquire pursuant to
any agreement or arrangement or upon exercise of conversion rights, warrants or
options or otherwise, without regard to the sixty day period referred to in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the Company's
then outstanding securities (except that an acquisition of securities directly
from the Company shall not be deemed an acquisition for purposes of this clause
(i));
(ii) During any period of two consecutive years, individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director designated by a person who has entered into an agreement with the
Company to effect a transaction described in clause (i), (iii) or (iv) of this
paragraph) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
two-year period or whose election or nomination for election was previously so
approved by excluding for this purpose any such new director whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms as used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of an individual, corporation,
partnership, group, associate or other entity or Person other than the Board,
cease for any reason to constitute at least a majority of the Board;
(iii) The consummation of a merger or consolidation of the Company with any
other entity, other than (i) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving or resulting entity) more than 50% of
the combined voting power of the surviving or resulting entity outstanding
immediately after such merger or consolidation or (ii) a merger or consolidation
in which no premium is intended to be paid to any shareholder participating in
the merger or consolidation;
(iv) The stockholders of the Company approve a plan or agreement for the sale or
disposition of all or substantially all of the consolidated assets of the
Company (other than such a sale or disposition immediately after which such
assets will be owned directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of the common stock of
the Company immediately prior to such sale or disposition) in which case the
Board shall determine the effective date of the Change in Control resulting
therefrom; or
2
<PAGE>
(v) any other event occurs which the Board determines, in its discretion, would
materially alter the structure or its ownership.
(e) "Cause" means that, prior to any Termination by the Executive for Good
Reason, the Executive shall have:
(i) committed an intentional act of fraud, embezzlement, or theft in
connection with the Executive's duties or in the course of his employment
with the Company;
(ii) committed intentional wrongful damage to property of the Company;
or
(iii) intentionally and wrongfully disclosed confidential information
of the Company; and any such act shall have been materially harmful to the
Company.
For the purposes of this Agreement, no act on the part of the Executive shall
be deemed "intentional" if it was due primarily to an error in judgment or
negligence, but shall be deemed "intentional" only if done by the Executive not
in good faith and without reasonable belief that the Executive's action or
omission was in the best interests of the Company.
(f) "Date of Termination" means the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be; provided,
however, that if the Executive is Terminated by the Company other than for Cause
or for disability pursuant to Section 2(a) (ii), the Date of Termination will be
the date on which the Executive receives the Notice of Termination from the
Company; and provided further, if the Executive is Terminated by reason of death
or disability pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination
will be the last day of the month in which occurs the date of death or the
disability effective date, as the case may be.
(g) "Employee Benefits" means the perquisites, benefits and service credit
for benefits as provided under the plans and programs maintained by the Company,
including, but not limited to, plans and programs which are "employee benefit
plans" under Section 3 (3) of the Employee Retirement Income Security Act of
1974, as amended, and any amendment or successor, to such plans or programs
(whether insured, funded or unfunded).
(h) "Good Reason" means the occurrence of any of the events listed in
Sections 2(b)(i) through 2(b)(vii), inclusive.
3
<PAGE>
(i) "Incentive Pay" means an annual amount equal to the aggregate annual
bonus, in addition to Base Pay, made or to be made in regard to services
rendered in any calendar year or performance period pursuant to any bonus plan
of the Company.
(j) "Notice of Termination" means a written notice which (i) indicates the
specific provision in this Agreement relied upon, (ii) sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for the
Termination under the provision so indicated, and (iii) if the effective date of
the Termination is other than the date of receipt of such notice, specifies the
effective date of Termination (which date will not be more than sixty (60) days
after the giving of such notice). The failure by the Executive to set forth in
the Notice of Termination any fact or circumstance which contributes to a
showing that the Executive is entitled to the benefits intended to be provided
by this Agreement will not constitute a waiver of any right of the Executive
hereunder or otherwise preclude the Executive from later asserting such fact or
circumstance in enforcing the Executive's rights hereunder.
(k) "Severance Period" means the period of time commencing on the date of
an occurrence of a Change of Control and continuing until the earlier of (i) the
date which is one and one-half years following the occurrence of the Change of
Control, and (ii) the Executive's death.
(l) "Subsidiary" means an entity, at least a majority of the total voting
power of the then-outstanding voting securities of which is held, directly or
indirectly, by the Company and/or one or more other Subsidiaries or, for any
entity that is not a corporation, at least a majority of the then-outstanding
capital interests of which is so held.
(m) "Term" means (A) the period commencing on the date hereof and ending on
the second anniversary of the date hereof; provided, however, that commencing on
the date one year after the date hereof, and on each annual anniversary of such
date (such date and each annual anniversary thereof shall be hereinafter
referred to as the "Renewal Date"), unless previously terminated, the Term shall
be automatically extended so as to terminate two years from such Renewal Date,
unless at least sixty (60) days prior to the Renewal Date the Company shall give
notice to the Executive that the Term shall not be so extended, (B) if, prior to
a Change of Control, for any reason the Executive is Terminated or Terminates,
thereupon without further action the Term shall be deemed to have expired and
this Agreement will immediately terminate and be of no further effect, and (C)
in the event of a Change of Control, the Term will, without further action, be
considered to terminate at the expiration of the Severance Period.
(n) "Terminate" and correlative terms mean the termination of the
Executive's employment with the Company and any Affiliate or Subsidiary.
(o) "Warburg" means Warburg, Pincus Capital Partners, L.P., and/or any of
its affiliates.
4
<PAGE>
2. Termination Following a Change of Control: (a) If, during the Severance
-----------------------------------------
Period, the Executive is Terminated, the Executive will be entitled to the
benefits provided by Sections 3 and 4 unless such termination is by reason of
one or more of the following events:
(i) The Executive's death;
(ii) The permanent and total disability of the Executive as defined in
any long term disability plan of the Company, applicable to the Executive,
as in effect immediately prior to the Change of Control;
(iii) Cause; or
(iv) The Executive's voluntary Termination in circumstances in which
Good Reason does not exist.
(b) In the event of the occurrence of a Change of Control, the Executive
may Terminate during the Severance Period with the right to severance
compensation as provided in Sections 3 and 4 upon the occurrence of one or more
of the following events (regardless of whether any other reason, other than
Cause as hereinabove provided, for Termination exists or has occurred, including
without limitation other employment):
(i) An adverse change in the nature or scope of the authorities,
powers, functions, responsibilities, or duties attached to the position
with the Company; which the Executive held immediately prior to the Change
of Control;
(ii) A reduction in the Executive's Base Pay as in effect immediately
prior to any Change of Control, or as it may have been increased from time
to time thereafter;
(iii) Any failure by the Company to continue in effect any plan or
arrangement providing Incentive Pay in which the Executive is participating
at the time of a Change of Control (or any other plans or arrangements
providing substantially similar benefits) or the taking of any action by
the Company, any Affiliate or Subsidiary which would adversely affect the
Executive's participation in any such plan or arrangement or reduce the
Executive's benefits under any such plan or arrangement in a manner
inconsistent with the practices of the Company prior to the Change of
Control;
(iv) Any failure by the Company to continue in effect any Employee
Benefits in which the Executive is participating at the time of a Change of
Control (or any other plans or arrangements providing the Executive with
substantially similar benefits) or the taking of any action by the Company,
an Affiliate or Subsidiary which would adversely affect the Executive's
participation in or materially reduce the
5
<PAGE>
Executive's benefits under any Employee Benefits or deprive the Executive
of any material fringe benefit enjoyed by the Executive at the time of a
Change of Control;
(v) The liquidation, dissolution, merger, consolidation, or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer, or otherwise)
to which all or a significant portion of its business and/or assets have
been transferred (directly or by operation of law) assumed all duties and
obligations of the Company under this Agreement pursuant to Section 9;
(vi) Without limiting the generality or effect of the foregoing, any
material breach of this Agreement by the Company or any successor thereto;
or
(vii) Any action by the Company which causes the Executive's services
to be performed at a location which is more than thirty five (35) miles
from the location where the Executive was employed immediately preceding
the date of the Change of Control.
(c) Any Termination will be communicated by Notice of Termination hereto
given in accordance with Section 10 of this Agreement.
3. Severance Compensation: (a) If, following the occurrence of a Change of
----------------------
Control, the Executive is Terminated by the Company during the Severance Period
other than in the circumstances set forth in Section 2 (a) (i), 2 (a) (ii), or 2
(a) (iii), or if the Executive Terminates for Good Reason:
(i) The Company will pay to the Executive in a lump sum in cash within
five (5) business days after the later of the date on which the Company
receives the determination of the Accounting Firm required in Section 4
hereof or the Date of Termination the aggregate of the amount (the
"Severance Payment") equal to one and one-half times the sum of (A) the
Executive's Base Pay at the highest rate in effect at any time within the
90-day period preceding the date the Notice of Termination was given or, if
higher, at the highest rate in effect at any time within the 90-day period
preceding the date of the first occurrence of a Change of Control, and (B)
an amount equal to the greatest amount of Incentive Pay received by the
Executive during any calendar year or portion thereof from and including
the third calendar year prior to the first occurrence of a Change of
Control; and
(ii) For the period of one and one-half years from the Date of
Termination, the Executive shall be eligible for participation in and shall
receive all benefits under such benefit plans, practices, policies and
programs of the Company that provide medical, prescription dental, or life
insurance coverage, with the costs of such participation to be paid by the
Company to the same extent as prior to the Executive's Termination. In the
event that such continued participation is not allowed under the terms and
provisions of such plans or programs, then in lieu thereof, the Company
shall
6
<PAGE>
acquire individual insurance policies providing comparable coverage for the
Executive; provided that if any such individual coverage is unavailable,
the Company shall pay to the Executive an amount equal to the contributions
that would have been made by the Company for such coverage on the
Executive's behalf if the Executive had remained in the employ of the
Company for the period referred to in the preceding sentence.
(b) There will be no right of set-off or counter-claim in respect of
any claim, debt, or obligation against any payment to or benefit for the
Executive provided for in this Agreement.
(c) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment or provide any benefit required to
be made or provided under this Agreement (including under this Section 3 or
Section 6) on a timely basis, the Company will pay interest on the amount
or value thereof at an annualized rate of interest equal to the so-called
composite "prime rate" as quoted from time to time during the relevant
period in the Northeast Edition of The Wall Street Journal. Such interest
will be payable as it accrues on demand. Any change in such prime rate will
be effective on and as of the date of such change.
(d) Notwithstanding any other provision hereof, the parties, respective
rights and obligations under this Section 3 and under Sections 4 and 6 will
survive any termination or expiration of this Agreement following a Change
of Control or any Termination following a Change of Control for any reason
whatsoever.
4. Excise and Other Taxes. The Executive shall bear all expense of, and be
----------------------
solely responsible for, all federal, state, local or foreign taxes due with
respect to any payment received hereunder, including, without limitation, any
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the Code); provided, however, that all payments under this Agreement
shall be reduced to the extent necessary so that no portion thereof shall be
subject to the excise tax imposed by Section 4999 of the Code but only if, by
reason of such reduction, the net after-tax benefit received by the Executive
shall exceed the net after-tax benefit received by the Executive if no such
reduction was made. For purposes of this Section 4, "net after-tax benefit"
shall mean (i) the total of all payments and the value of all benefits which the
Executive receives or is then entitled to receive from the Company that would
constitute "parachute payments" within the meaning of Section 280G of the Code,
less (ii) the amount of all federal, state and local income taxes payable with
respect to the foregoing calculated at the maximum marginal income tax rate for
each year in which the foregoing shall be paid to the Executive (based on the
rate in effect for such year as set forth in the Code as in effect at the time
of the first payment of the foregoing), less (iii) the amount of excise taxes
imposed with respect to the payments and benefits described in (i) above by
Section 4999 of the Code. The foregoing determination will be made by a
nationally recognized accounting firm (the "Accounting Firm") selected by the
Executive and reasonably acceptable to the Company (which may be, but will not
be required to be, the Company's independent auditors). The Executive will
direct the Accounting Firm to submit its
7
<PAGE>
determination and detailed supporting calculations to both the Company and the
Executive within fifteen (15) days after the Date of Termination. If the
Accounting Firm determines that such reduction is required by this Section 4,
the Company shall pay such reduced amount to the Executive in accordance with
Section 3 (a). If the Accounting Firm determines that no reduction is necessary
under this Section 4, it will, at the same time as it makes such determination,
furnish the Company and the Executive an opinion that the Executive will not be
liable for any excise tax under Section 4999 of the Code. The Company and the
Executive will each provide the Accounting Firm access to and copies of any
books, records, and documents in the possession of the Company or the Executive,
as the case may be, reasonably requested by the Accounting Firm, and otherwise
cooperate with the Accounting Firm in connection with the preparation and
issuance of the determinations and calculations contemplated by this Section 4.
The fees and expenses of the Accounting Firm for its services in connection with
the determinations and calculations contemplated by this Section 4 will be borne
by the Company.
5. No Mitigation Obligation: The Company hereby acknowledges that it will
------------------------
be difficult, and may be impossible, for the Executive to find reasonably
comparable employment following the Date of Termination. The payment of the
severance compensation by the Company to the Executive in accordance with the
terms of this Agreement will be liquidated damages, and the Executive will not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor will any profits, income,
earnings, or other benefits from any source whatsoever create any mitigation,
offset, reduction, or any other obligation on the part of the Executive
hereunder or otherwise.
6. Legal Fees and Expenses: If the Company has failed to comply with any of
-----------------------
its obligations under this Agreement or in the event that the Company or any
other person takes or threatens to take any action to declare this Agreement
void or unenforceable, or institutes any litigation or other action or
proceeding designed to deny, or to recover from, the Executive the benefits
provided or intended to be provided to the Executive hereunder, the Company
irrevocably authorizes the Executive from time to time to retain counsel of the
Executive's choice, at the expense of the Company, to advise and represent the
Executive in connection with any such interpretation, enforcement, or defense,
including without limitation the initiation or defense of any litigation or
other legal action, whether by or against the Company or any member of the
Board, officer, stockholder, or other person or entity affiliated with the
Company, in any jurisdiction. The Company will pay and be solely financially
responsible for any and all attorneys' and related fees and expenses incurred by
the Executive in connection with such litigation.
7. Employment Rights: Nothing expressed or implied in this Agreement will
-----------------
create any right or duty on the part of the Company or the Executive to have the
Executive remain in the employment of the Company, or any Affiliate or
Subsidiary prior to or following any Change of Control.
8
<PAGE>
8. Withholding of Taxes: The Company may withhold from any amounts payable
--------------------
under this Agreement all federal, state, city, or other taxes as the Company is
required to withhold pursuant to any law or government regulation or ruling.
9. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization, or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including,
without limitation, any persons acquiring directly or indirectly all or
substantially all of the business and/or assets of the Company, whether by
purchase, merger, consolidation, reorganization, or otherwise (and such
successor will thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable, or delegable by
the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, and/or legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer, or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 9 (a) and 9 (b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable, or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by will or by the laws
of descent and distribution and, in the event of any attempted assignment or
transfer contrary to this Section 9 (c), the Company will have no liability to
pay any amount so attempted to be assigned, transferred, or delegated.
10. Notices: For all purposes of this Agreement, all communications,
-------
including, without limitation, notices, consents, requests, or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or two business
days after having been mailed by United States registered or certified mail,
return receipt requested, postage prepaid, or one business day after having been
sent by a nationally recognized overnight courier service addressed to the
Company (to the attention of the General Counsel of the Company) at its
principal Executive office and to the Executive at the Executive's principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of changes of address
will be effective only upon receipt.
9
<PAGE>
11. Governing Law: The validity, interpretation, construction, and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Connecticut, without giving effect to
the principles of conflict of laws of such State, to the extent not preempted by
applicable federal law.
12. Validity: If any provision of this Agreement or the application of any
--------
provision hereof to any person or circumstances is held invalid, unenforceable,
or otherwise illegal, the remainder of this Agreement and the application of
such provision to any other person or circumstances will not be affected, and
the provision so held to be invalid, unenforceable, or otherwise illegal will be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid, or legal.
13. Non-Exclusivity of Rights: Nothing in this Agreement will prevent or
-------------------------
limit the Executive's present or future participation in any benefit, bonus,
incentive, or other plan or program provided by the Company or any Affiliate or
Subsidiary for which the Executive may qualify, nor will this Agreement in any
manner limit or otherwise affect such rights as the Executive may have under any
stock option or other agreements with the Company or any Affiliate or
Subsidiary. Amounts or benefits which are vested or which the Executive is
otherwise entitled to receive under any plan or program of the Company at or
subsequent to the Date of Termination will be payable in accordance with such
plan or program, except as otherwise expressly provided in this Agreement;
provided, however, that any amounts received by the Executive pursuant to this
Agreement shall be in lieu of any benefits which the Executive is entitled to
receive or may become entitled to receive under any reduction-in-force or
severance pay plan or practice which the Company now has in effect or may
hereafter put into effect, any other benefits to which the Executive may be
entitled under any individual agreement of employment with the Company which
would provide a benefit to the Executive upon the occurrence of a Change of
Control of the Company, and any severance benefits required under federal or
state law to be paid to the Executive.
14. Miscellaneous: (a) No provision of this Agreement may be modified,
-------------
waived, or discharged unless such waiver, modification, or discharge is agreed
to in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
References to Sections are to references to Sections of this Agreement.
(b) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.
10
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
ADVO, Inc.
By: /s/ GARY M. MULLOY
------------------
Gary M. Mulloy
By: /s/ JOHN S. DEARING
-------------------
John S. Dearing
11
<PAGE>
Exhibit 10(r)
-------------
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of
September 27, 1999 by and between ADVO, Inc. (the "Company") and Christopher T.
Hutter (the "Executive").
RECITALS:
- --------
A. The Executive is an executive of the Company and has made and is
expected to continue to make major contributions to the short- and long-term
profitability, growth, and financial strength of the Company;
B. The Company recognizes that the possibility of a Change of Control (as
hereafter defined) exists;
C. The Company desires to assure itself of both present and future
continuity of its management and desires to establish certain severance benefits
for key executive officers of the Company, including the Executive, applicable
in the event of a Change of Control; and
D. The Company wishes to aid in assuring that such executives are not
practically disabled from discharging their duties in respect of a proposed or
actual transaction involving a Change of Control.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
---------------------
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Affiliate" means (i) each entity in which the Company, alone or
together with one or more other Affiliates of the Company, owns not less than
80% of the then outstanding voting securities or, for any entity that is not a
corporation, at least 80% of the then-outstanding capital interests of such
entity and (ii) any additional entity which is deemed by action of the Board to
be an Affiliate for the purposes of this Agreement.
(b) "Base Pay" means the Executive's annual aggregate fixed base salary
from the Company at the time in question.
(c) "Board" means the Board of Directors of the Company.
(d) "Change of Control" means the occurrence during the Term of any of the
following events:
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<PAGE>
(i) Any Person (other than the Company, any trustee or other fiduciary holding
securities under any employee benefit plan of the Company, or any company owned,
directly or indirectly, by the stockholders of the Company immediately prior to
the occurrence with respect to which the evaluation is being made in
substantially the same proportions as their ownership of the common stock of the
Company) acquires securities of the Company and immediately thereafter is the
Beneficial Owner (except that a Person shall be deemed to be the Beneficial
Owner of all shares that any such Person has the right to acquire pursuant to
any agreement or arrangement or upon exercise of conversion rights, warrants or
options or otherwise, without regard to the sixty day period referred to in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the Company's
then outstanding securities (except that an acquisition of securities directly
from the Company shall not be deemed an acquisition for purposes of this clause
(i));
(ii) During any period of two consecutive years, individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director designated by a person who has entered into an agreement with the
Company to effect a transaction described in clause (i), (iii) or (iv) of this
paragraph) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
two-year period or whose election or nomination for election was previously so
approved by excluding for this purpose any such new director whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms as used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of an individual, corporation,
partnership, group, associate or other entity or Person other than the Board,
cease for any reason to constitute at least a majority of the Board;
(iii)The consummation of a merger or consolidation of the Company with any
other entity, other than (i) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving or resulting entity) more than 50% of
the combined voting power of the surviving or resulting entity outstanding
immediately after such merger or consolidation or (ii) a merger or consolidation
in which no premium is intended to be paid to any shareholder participating in
the merger or consolidation;
(iv) The stockholders of the Company approve a plan or agreement for the sale or
disposition of all or substantially all of the consolidated assets of the
Company (other than such a sale or disposition immediately after which such
assets will be owned directly or indirectly by the stockholders of the Company
in substantially the same proportions as their ownership of the common stock of
the Company immediately prior to such sale or disposition) in which case the
Board shall determine the effective date of the Change in Control resulting
therefrom; or
2
<PAGE>
(v) any other event occurs which the Board determines, in its discretion, would
materially alter the structure or its ownership.
(e) "Cause" means that, prior to any Termination by the Executive for Good
Reason, the Executive shall have:
(i) committed an intentional act of fraud, embezzlement, or theft in
connection with the Executive's duties or in the course of his employment
with the Company;
(ii) committed intentional wrongful damage to property of the Company;
or
(iii) intentionally and wrongfully disclosed confidential information
of the Company; and any such act shall have been materially harmful to the
Company.
For the purposes of this Agreement, no act on the part of the Executive shall
be deemed "intentional" if it was due primarily to an error in judgment or
negligence, but shall be deemed "intentional" only if done by the Executive not
in good faith and without reasonable belief that the Executive's action or
omission was in the best interests of the Company.
(f) "Date of Termination" means the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be; provided,
however, that if the Executive is Terminated by the Company other than for Cause
or for disability pursuant to Section 2(a) (ii), the Date of Termination will be
the date on which the Executive receives the Notice of Termination from the
Company; and provided further, if the Executive is Terminated by reason of death
or disability pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination
will be the last day of the month in which occurs the date of death or the
disability effective date, as the case may be.
(g) "Employee Benefits" means the perquisites, benefits and service credit
for benefits as provided under the plans and programs maintained by the Company,
including, but not limited to, plans and programs which are "employee benefit
plans" under Section 3 (3) of the Employee Retirement Income Security Act of
1974, as amended, and any amendment or successor, to such plans or programs
(whether insured, funded or unfunded).
(h) "Good Reason" means the occurrence of any of the events listed in
Sections 2(b)(i) through 2(b)(vii), inclusive.
3
<PAGE>
(i) "Incentive Pay" means an annual amount equal to the aggregate annual
bonus, in addition to Base Pay, made or to be made in regard to services
rendered in any calendar year or performance period pursuant to any bonus plan
of the Company.
(j) "Notice of Termination" means a written notice which (i) indicates the
specific provision in this Agreement relied upon, (ii) sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for the
Termination under the provision so indicated, and (iii) if the effective date of
the Termination is other than the date of receipt of such notice, specifies the
effective date of Termination (which date will not be more than sixty (60) days
after the giving of such notice). The failure by the Executive to set forth in
the Notice of Termination any fact or circumstance which contributes to a
showing that the Executive is entitled to the benefits intended to be provided
by this Agreement will not constitute a waiver of any right of the Executive
hereunder or otherwise preclude the Executive from later asserting such fact or
circumstance in enforcing the Executive's rights hereunder.
(k) "Severance Period" means the period of time commencing on the date of
an occurrence of a Change of Control and continuing until the earlier of (i) the
date which is one year following the occurrence of the Change of Control, and
(ii) the Executive's death.
(l) "Subsidiary" means an entity, at least a majority of the total voting
power of the then-outstanding voting securities of which is held, directly or
indirectly, by the Company and/or one or more other Subsidiaries or, for any
entity that is not a corporation, at least a majority of the then-outstanding
capital interests of which is so held.
(m) "Term" means (A) the period commencing on the date hereof and ending
on the second anniversary of the date hereof; provided, however, that commencing
on the date one year after the date hereof, and on each annual anniversary of
such date (such date and each annual anniversary thereof shall be hereinafter
referred to as the "Renewal Date"), unless previously terminated, the Term shall
be automatically extended so as to terminate two years from such Renewal Date,
unless at least sixty (60) days prior to the Renewal Date the Company shall give
notice to the Executive that the Term shall not be so extended, (B) if, prior to
a Change of Control, for any reason the Executive is Terminated or Terminates,
thereupon without further action the Term shall be deemed to have expired and
this Agreement will immediately terminate and be of no further effect, and (C)
in the event of a Change of Control, the Term will, without further action, be
considered to terminate at the expiration of the Severance Period.
(n) "Terminate" and correlative terms mean the termination of the
Executive's employment with the Company and any Affiliate or Subsidiary.
4
<PAGE>
2. Termination Following a Change of Control: (a) If, during the Severance
-----------------------------------------
Period, the Executive is Terminated, the Executive will be entitled to the
benefits provided by Sections 3 and 4 unless such termination is by reason of
one or more of the following events:
(i) The Executive's death;
(ii) The permanent and total disability of the Executive as defined in
any long term disability plan of the Company, applicable to the Executive,
as in effect immediately prior to the Change of Control;
(iii) Cause; or
(iv) The Executive's voluntary Termination in circumstances in which
Good Reason does not exist.
(b) In the event of the occurrence of a Change of Control, the Executive
may Terminate during the Severance Period with the right to severance
compensation as provided in Sections 3 and 4 upon the occurrence of one or more
of the following events (regardless of whether any other reason, other than
Cause as hereinabove provided, for Termination exists or has occurred, including
without limitation other employment):
(i) An adverse change in the nature or scope of the authorities,
powers, functions, responsibilities, or duties attached to the position
with the Company; which the Executive held immediately prior to the Change
of Control;
(ii) A reduction in the Executive's Base Pay as in effect immediately
prior to any Change of Control, or as it may have been increased from time
to time thereafter;
(iii) Any failure by the Company to continue in effect any plan or
arrangement providing Incentive Pay in which the Executive is participating
at the time of a Change of Control (or any other plans or arrangements
providing substantially similar benefits) or the taking of any action by
the Company, any Affiliate or Subsidiary which would adversely affect the
Executive's participation in any such plan or arrangement or reduce the
Executive's benefits under any such plan or arrangement in a manner
inconsistent with the practices of the Company prior to the Change of
Control;
(iv) Any failure by the Company to continue in effect any Employee
Benefits in which the Executive is participating at the time of a Change of
Control (or any other plans or arrangements providing the Executive with
substantially similar benefits) or the taking of any action by the Company,
an Affiliate or Subsidiary which would adversely affect the Executive's
participation in or materially reduce the
5
<PAGE>
Executive's benefits under any Employee Benefits or deprive the Executive
of any material fringe benefit enjoyed by the Executive at the time of a
Change of Control;
(v) The liquidation, dissolution, merger, consolidation, or
reorganization of the Company or transfer of all or substantially all of
its business and/or assets, unless the successor or successors (by
liquidation, merger, consolidation, reorganization, transfer, or otherwise)
to which all or a significant portion of its business and/or assets have
been transferred (directly or by operation of law) assumed all duties and
obligations of the Company under this Agreement pursuant to Section 9;
(vi) Without limiting the generality or effect of the foregoing, any
material breach of this Agreement by the Company or any successor thereto;
or
(c) Any Termination will be communicated by Notice of Termination hereto
given in accordance with Section 10 of this Agreement.
3. Severance Compensation: (a) If, following the occurrence of a Change of
----------------------
Control, the Executive is Terminated by the Company during the Severance Period
other than in the circumstances set forth in Section 2 (a) (i), 2 (a) (ii), or 2
(a) (iii), or if the Executive Terminates for Good Reason:
(i) The Company will pay to the Executive in a lump sum in cash within
five (5) business days after the later of the date on which the Company
receives the determination of the Accounting Firm required in Section 4
hereof or the Date of Termination the aggregate of the amount (the
"Severance Payment") equal to one times the sum of (A) the Executive's Base
Pay at the highest rate in effect at any time within the 90-day period
preceding the date the Notice of Termination was given or, if higher, at
the highest rate in effect at any time within the 90-day period preceding
the date of the first occurrence of a Change of Control, and (B) an amount
equal to the greatest amount of Incentive Pay received by the Executive
during any calendar year or portion thereof from and including the third
calendar year prior to the first occurrence of a Change of Control; and
(ii) For the period of one year from the Date of Termination, the
Executive shall be eligible for participation in and shall receive all
benefits under such benefit plans, practices, policies and programs of the
Company that provide medical, prescription dental, or life insurance
coverage, with the costs of such participation to be paid by the Company to
the same extent as prior to the Executive's Termination. In the event that
such continued participation is not allowed under the terms and provisions
of such plans or programs, then in lieu thereof, the Company shall acquire
individual
6
<PAGE>
insurance policies providing comparable coverage for the Executive;
provided that if any such individual coverage is unavailable, the Company
shall pay to the Executive an amount equal to the contributions that would
have been made by the Company for such coverage on the Executive's behalf
if the Executive had remained in the employ of the Company for the period
referred to in the preceding sentence.
(b) There will be no right of set-off or counter-claim in respect of any
claim, debt, or obligation against any payment to or benefit for the Executive
provided for in this Agreement.
(c) Without limiting the rights of the Executive at law or in equity, if
the Company fails to make any payment or provide any benefit required to be made
or provided under this Agreement (including under this Section 3 or Section 6)
on a timely basis, the Company will pay interest on the amount or value thereof
at an annualized rate of interest equal to the so-called composite "prime rate"
as quoted from time to time during the relevant period in the Northeast Edition
of The Wall Street Journal. Such interest will be payable as it accrues on
-----------------------
demand. Any change in such prime rate will be effective on and as of the date of
such change.
(d) Notwithstanding any other provision hereof, the parties, respective
rights and obligations under this Section 3 and under Sections 4 and 6 will
survive any termination or expiration of this Agreement following a Change of
Control or any Termination following a Change of Control for any reason
whatsoever.
4. Excise and Other Taxes. The Executive shall bear all expense of, and be
----------------------
solely responsible for, all federal, state, local or foreign taxes due with
respect to any payment received hereunder, including, without limitation, any
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the Code); provided, however, that all payments under this Agreement
shall be reduced to the extent necessary so that no portion thereof shall be
subject to the excise tax imposed by Section 4999 of the Code but only if, by
reason of such reduction, the net after-tax benefit received by the Executive
shall exceed the net after-tax benefit received by the Executive if no such
reduction was made. For purposes of this Section 4, "net after-tax benefit"
shall mean (i) the total of all payments and the value of all benefits which the
Executive receives or is then entitled to receive from the Company that would
constitute "parachute payments" within the meaning of Section 280G of the Code,
less (ii) the amount of all federal, state and local income taxes payable with
respect to the foregoing calculated at the maximum marginal income tax rate for
each year in which the foregoing shall be paid to the Executive (based on the
rate in effect for such year as set forth in the Code as in effect at the time
of the first payment of the foregoing), less (iii) the amount of excise taxes
imposed with respect to the payments and benefits described in (i) above by
Section 4999 of the Code. The foregoing determination will be made by a
nationally recognized accounting firm (the "Accounting Firm") selected by the
Executive and reasonably acceptable to the Company (which may be, but will not
be required to be, the Company's independent auditors). The Executive will
direct the Accounting Firm to submit its
7
<PAGE>
determination and detailed supporting calculations to both the Company and the
Executive within fifteen (15) days after the Date of Termination. If the
Accounting Firm determines that such reduction is required by this Section 4,
the Company shall pay such reduced amount to the Executive in accordance with
Section 3 (a). If the Accounting Firm determines that no reduction is necessary
under this Section 4, it will, at the same time as it makes such determination,
furnish the Company and the Executive an opinion that the Executive will not be
liable for any excise tax under Section 4999 of the Code. The Company and the
Executive will each provide the Accounting Firm access to and copies of any
books, records, and documents in the possession of the Company or the Executive,
as the case may be, reasonably requested by the Accounting Firm, and otherwise
cooperate with the Accounting Firm in connection with the preparation and
issuance of the determinations and calculations contemplated by this Section 4.
The fees and expenses of the Accounting Firm for its services in connection with
the determinations and calculations contemplated by this Section 4 will be borne
by the Company.
5. No Mitigation Obligation: The Company hereby acknowledges that it will
------------------------
be difficult, and may be impossible, for the Executive to find reasonably
comparable employment following the Date of Termination. The payment of the
severance compensation by the Company to the Executive in accordance with the
terms of this Agreement will be liquidated damages, and the Executive will not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor will any profits, income,
earnings, or other benefits from any source whatsoever create any mitigation,
offset, reduction, or any other obligation on the part of the Executive
hereunder or otherwise.
6. Legal Fees and Expenses: If the Company has failed to comply with any of
-----------------------
its obligations under this Agreement or in the event that the Company or any
other person takes or threatens to take any action to declare this Agreement
void or unenforceable, or institutes any litigation or other action or
proceeding designed to deny, or to recover from, the Executive the benefits
provided or intended to be provided to the Executive hereunder, the Company
irrevocably authorizes the Executive from time to time to retain counsel of the
Executive's choice, at the expense of the Company, to advise and represent the
Executive in connection with any such interpretation, enforcement, or defense,
including without limitation the initiation or defense of any litigation or
other legal action, whether by or against the Company or any member of the
Board, officer, stockholder, or other person or entity affiliated with the
Company, in any jurisdiction. The Company will pay and be solely financially
responsible for any and all attorneys' and related fees and expenses incurred by
the Executive in connection with such litigation.
7. Employment Rights: Nothing expressed or implied in this Agreement will
-----------------
create any right or duty on the part of the Company or the Executive to have the
Executive remain in the employment of the Company, or any Affiliate or
Subsidiary prior to or following any Change of Control.
8
<PAGE>
8. Withholding of Taxes: The Company may withhold from any amounts payable
--------------------
under this Agreement all federal, state, city, or other taxes as the Company is
required to withhold pursuant to any law or government regulation or ruling.
9. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization, or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including,
without limitation, any persons acquiring directly or indirectly all or
substantially all of the business and/or assets of the Company, whether by
purchase, merger, consolidation, reorganization, or otherwise (and such
successor will thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable, or delegable by
the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, and/or legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer, or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided in Sections 9 (a) and 9 (b). Without limiting the
generality or effect of the foregoing, the Executive's right to receive
payments hereunder will not be assignable, transferable, or delegable,
whether by pledge, creation of a security interest, or otherwise, other
than by a transfer by will or by the laws of descent and distribution and,
in the event of any attempted assignment or transfer contrary to this
Section 9 (c), the Company will have no liability to pay any amount so
attempted to be assigned, transferred, or delegated.
10. Notices: For all purposes of this Agreement, all communications,
-------
including, without limitation, notices, consents, requests, or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or two business
days after having been mailed by United States registered or certified mail,
return receipt requested, postage prepaid, or one business day after having been
sent by a nationally recognized overnight courier service addressed to the
Company (to the attention of the General Counsel of the Company) at its
principal Executive office and to the Executive at the Executive's principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of changes of address
will be effective only upon receipt.
9
<PAGE>
11. Governing Law: The validity, interpretation, construction, and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Connecticut, without giving effect to
the principles of conflict of laws of such State, to the extent not preempted by
applicable federal law.
12. Validity: If any provision of this Agreement or the application of any
--------
provision hereof to any person or circumstances is held invalid, unenforceable,
or otherwise illegal, the remainder of this Agreement and the application of
such provision to any other person or circumstances will not be affected, and
the provision so held to be invalid, unenforceable, or otherwise illegal will be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid, or legal.
13. Non-Exclusivity of Rights: Nothing in this Agreement will prevent or
-------------------------
limit the Executive's present or future participation in any benefit, bonus,
incentive, or other plan or program provided by the Company or any Affiliate or
Subsidiary for which the Executive may qualify, nor will this Agreement in any
manner limit or otherwise affect such rights as the Executive may have under any
stock option or other agreements with the Company or any Affiliate or
Subsidiary. Amounts or benefits which are vested or which the Executive is
otherwise entitled to receive under any plan or program of the Company at or
subsequent to the Date of Termination will be payable in accordance with such
plan or program, except as otherwise expressly provided in this Agreement;
provided, however, that any amounts received by the Executive pursuant to this
Agreement shall be in lieu of any benefits which the Executive is entitled to
receive or may become entitled to receive under any reduction-in-force or
severance pay plan or practice which the Company now has in effect or may
hereafter put into effect, any other benefits to which the Executive may be
entitled under any individual agreement of employment with the Company which
would provide a benefit to the Executive upon the occurrence of a Change of
Control of the Company, and any severance benefits required under federal or
state law to be paid to the Executive.
14. Miscellaneous: (a) No provision of this Agreement may be modified,
-------------
waived, or discharged unless such waiver, modification, or discharge is agreed
to in writing signed by the Executive and the Company. No waiver by either
party hereto at any time of any breach by the other party hereto or compliance
with any condition or provision of this Agreement to be performed by such other
party will be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. References to Sections are to references to
Sections of this Agreement.
(b) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.
10
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
ADVO, Inc.
By: /s/ GARY M. MULLOY
---------------------------
Gary M. Mulloy
By: /s/ CHRISTOPHER T. HUTTER
---------------------------
Christopher T. Hutter
11
<PAGE>
EXHIBIT 13
FINANCIAL SECTION
Contents:
Selected Financial Data 20
Financial Report 21
Consolidated Statements of Operations 27
Consolidated Balance Sheets 28
Consolidated Statements of Cash Flows 29
Consolidated Statements of Changes in Stockholders' Deficiency 30
Notes to Consolidated Financial Statements 31
Report of Independent Auditors 38
Report of Financial Responsibility 38
Corporate Information 39
19
<PAGE>
ADVO, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
September 25, September 26, September 27, September 28, September 30,
(In millions, except per share data) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Revenues $1,040.2 $1,046.5 $1,016.5 $ 986.2 $1,011.9
Operating income 77.3 72.1 58.5 24.8 (1) 46.3
Income from continuing operations 39.0 35.6 26.8 11.3 30.9
Net income 39.0 35.6 26.8 3.1 25.0
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share from
continuing operations --
assuming dilution 1.79 1.55 1.09 .47 1.33
Earnings per common share --
assuming dilution 1.79 1.55 1.09 .13 1.07(2)
Dividends declared per share -- -- -- 10.025 (3) .10
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average diluted shares 21.8 23.1 24.7 24.1 23.3
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 25, September 26, September 27, September 28, September 30,
(In millions) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and
marketable securities $ 9.3 $ 8.7 $ 26.0 $ 13.3 $ 54.5
Total assets 237.3 219.2 208.6 185.1 234.2
Long-term debt 176.8 167.8 140.7 161.1 --
Stockholders' equity (deficiency) (66.1) (74.9) (59.9) (85.2) 130.4
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
September 25, September 26, September 27, September 28, September 30,
(In millions) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other Financial Data
EBITDA (4) $ 102.9 $ 95.7 $ 76.1 $ 51.7 $ 60.6
Net cash provided by
operating activities 58.0 49.0 61.2 38.6 14.7
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects nonrecurring charges of $12.1 million, in connection with the
fiscal 1996 Special Dividend due to equitable adjustments made by the
Company to outstanding unexercised employee stock options.
(2) Reflects a charge for the cumulative effect of accounting change for
postemployment benefits of $1.5 million, net of tax, or $.07 per share.
(3) Reflects a special $10 per share dividend declared in January 1996.
(4) Represents income from operations before interest, taxes, depreciation and
amortization, and nonrecurring charges in fiscal 1996 ("EBITDA"). Although
EBITDA is not a measure of liquidity or performance calculated in
accordance with generally accepted accounting principles ("GAAP"), the
Company believes that EBITDA is an indicator and measurement of its debt
service ability.
20
<PAGE>
FINANCIAL REPORT
This section should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto.
FINANCIAL OVERVIEW
Fiscal 1999 was another year of achievement for ADVO, Inc. ("ADVO" or the
"Company") highlighted by record operating income, net income and earnings per
share--assuming dilution. The table below demonstrates three consecutive years
of solid performance by the Company.
(In millions,
except per share data) Fiscal 1999 Fiscal 1998 Fiscal 1997
- -------------------------------------------------------------------------
Revenues $1,040.2 $1,046.5 $1,016.5
Operating Income 77.3 72.1 58.5
Net Income 39.0 35.6 26.8
Earnings per
common share --
assuming dilution 1.79 1.55 1.09
- -------------------------------------------------------------------------
Although fiscal 1999 revenue performance was slightly below the prior year, the
Company's continued focus on improving productivity and strict cost controls
resulted in another year of increased profitability. During fiscal 1999,
operating income rose 7.1%, net income increased 9.4% and earnings per common
share--assuming dilution increased 15.5% over fiscal 1998 results. Another
indicator of profitability was the Company's operating income as a percentage of
revenue. For fiscal 1999 this percentage was 7.4%, representing an increase of
0.5 percentage points over fiscal 1998 emphasizing the Company's continued
commitment to margin expansion.
Other fiscal 1999 highlights include, strong revenue performance by the
Company's A.N.N.E. (ADVO National Network Extension) brokered distribution
program, increased targeting revenues associated with the Company's ATZ (ADVO
Targeting Zones) distribution platform and revenues from MailCoups, the
Company's targeted coupon distributor, which was acquired in March of 1998.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES Revenues for fiscal 1999 decreased 0.6% or $6.3 million over fiscal
1998 revenues. The decline in revenues during the year was a combination of the
following factors; decrease in volume, shifts in product mix and weight, and
pricing gains. The reduced volume was the result of consolidations in the retail
sector and the strategic elimination of mailings in selected markets. These
declines were reflected in the 3.2% decrease in average shared mail pieces per
package, from 8.69 in fiscal 1998 to 8.41 in fiscal 1999 and the 0.3% decrease
in shared mail packages delivered to 3,044.3 million in fiscal 1999. Also
contributing to the revenue decline was the shift in product mix away from
heavier weight and higher priced shared mail products to lower priced but higher
margin products. Pricing improvements, as evidenced by the 1.7% increase during
the year in revenue per thousand pieces, from $36.67 in fiscal 1998 to $37.28 in
fiscal 1999, offset these volume declines to a degree.
Fiscal 1999 revenues were also favorably and significantly impacted by the
growth from the Company's A.N.N.E. brokered distribution program, increased
targeting revenues associated with the Company's ATZ distribution platform and
the acquisition of MailCoups, the Company's targeted coupon distributor, which
occurred in March 1998.
OPERATING EXPENSES Cost of sales decreased $15.0 million from fiscal 1998 and
as a percentage of revenues, cost of sales decreased 1.0 percentage point from
73.5% in fiscal 1998 to 72.5% in fiscal 1999. The decrease in cost of sales
year-over-year was due to lower postage expense as a result of the decrease in
the number of shared mail packages distributed, the shift in product mix away
from heavier weight products, and the flow through of the pricing gains
mentioned above. Also contributing to the decrease was the decline in print
expense associated with lower turnkey product revenues as well as, lower paper
prices. Favorable operating efficiencies and reduced labor costs in the
Company's branch operations have also contributed to the decrease in cost of
sales. In contrast, increased distribution and delivery costs associated with
MailCoups and A.N.N.E. have partially offset the various decreases detailed
above in cost of sales.
During fiscal 1999, selling, general and administrative expenses (including the
provision for bad debts) increased $3.6 million over the prior fiscal year. As a
percentage of revenue, selling, general and administrative expenses were 20.1%
in fiscal 1999 and 19.6% in fiscal 1998. The increase represents a $4.5 million
increase in general and administrative costs offset by a $0.9 million decrease
in selling expense. Lower commission expense as a result of the lower revenues
was offset to a degree by higher bad debt expense resulting in an overall
decrease to selling expense. The general and administrative expense increase in
fiscal 1999 was primarily due to Year 2000 remediation costs and amortization
costs
21
<PAGE>
ADVO, INC.
associated with new systems, software development and other technological
enhancements. In the current fiscal year, severance charges were virtually
offset by lower incentive compensation in general and administrative expenses.
OPERATING INCOME As a result of the above, the Company reported operating income
of $77.3 million for the fiscal year ended 1999, a $5.1 million, or 7.1%
increase over the fiscal year ended 1998. As a percentage of revenue, operating
income increased 0.5 percentage points to 7.4% in the current fiscal year when
compared to 6.9% in the prior fiscal year.
INTEREST EXPENSE Interest expense for the fiscal year ended 1999 of $14.3
million remained relatively consistent with interest expense of $14.0 million in
the prior year. The effects of lower interest rates in the current year offset
the impact of the increase in the average outstanding debt balance.
INCOME TAXES The Company's effective tax rate for fiscal 1999 was 38% versus 39%
in fiscal 1998. The decrease of 1 percentage point was due to the realization of
both federal and state income tax credits. It is anticipated that the future
availability of state income tax credits will continue to favorably impact the
Company's effective rate through fiscal 2000.
EARNINGS PER COMMON SHARE Earnings per common share -- assuming dilution for the
fiscal year ended 1999 was $1.79, representing a 15.5% increase over the prior
fiscal year. The increase was due to the growth in net income and to the
approximate 1.2 million share decrease in weighted average diluted shares. This
decrease was primarily a result of the shares purchased by the Company under its
stock repurchase program.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES Fiscal 1998 revenues increased $30.0 million over fiscal 1997 to
$1,046.5 million. The 3.0% revenue growth was driven by an increase in revenue
per thousand pieces, the growth in average pieces per package, the volume growth
associated with the Company's A.N.N.E. brokered distribution program, as well as
the Company's acquisition of MailCoups. The increase in revenue per thousand
pieces of 0.7% was attributable to increases in product weights associated with
the Company's preprint customers, shifts in product mix and a general price
increase initiated early in fiscal 1998. Average pieces per package increased
1.9% to 8.69 in fiscal 1998 from 8.53 in fiscal 1997. Total shared mail packages
declined 1.8% to 3.1 billion when compared to the previous fiscal year as a
result of the Company's strategic decision to discontinue its "second-in-home
date" program in the Detroit market.
OPERATING EXPENSES Cost of sales as a percentage of revenue decreased from 74.5%
in fiscal 1997 to 73.5% in fiscal 1998. The decrease in cost of sales as a
percentage of revenue was the result of efficiencies and cost containment in the
Company's branch operations, lower postage expense and the flow through of the
price increase mentioned above. Cost of sales, in absolute terms, increased
$11.8 million over the prior fiscal year. This increase was attributable to
higher brokered print expense, as well as higher distribution and delivery costs
incurred as a result of the volume growth in A.N.N.E. and the Company's
acquisition of MailCoups. These increases were somewhat offset by lower postage
expense as a result of the strategic reduction in shared mail packages.
Selling, general and administrative costs, including the provision for bad
debts, as a percentage of revenue, decreased from 19.7% for the fiscal year
ended 1997 to 19.6% for the fiscal year ended 1998. Fiscal 1998 selling, general
and administrative costs were $205.1 million representing a $4.6 million
increase over the prior fiscal year. The increase was comprised of a $9.0
million increase in general and administrative expenses offset by a $3.5 million
decrease in selling expense and $0.9 million attributable to lower bad debt
expense. Fewer sales associates and lower advertising and promotional
expenditures, as well as strict cost controls contributed to the decrease in
selling expense in fiscal year 1998. The general and administrative cost
increase of $9.0 million year-over-year was primarily the result of depreciation
related to new systems, software development and other technological
enhancements, as well as remediation costs associated with the Year 2000
program. Higher compensation related expenses also contributed to the increase
in general and administrative expenses. Offsetting these increases, to a degree,
were the Company's overall cost control initiatives.
OPERATING INCOME As a result of the above, the Company reported a $13.6 million
increase in operating income to $72.1 million in fiscal 1998 compared to $58.5
million in fiscal 1997, representing a 23.3% increase over the prior year. As a
percentage of revenue, operating income increased from 5.8% in fiscal year 1997
to 6.9% in fiscal year 1998.
22
<PAGE>
INTEREST EXPENSE Interest expense relating to the credit facilities totaled
$14.0 million for fiscal 1998 and $14.8 million for fiscal 1997. The decrease in
interest expense was the result of lower interest rates under the credit
agreement, even though the Company's overall debt balance was higher throughout
the current year when compared to the prior year.
INCOME TAXES The Company's effective tax rate was approximately 39% in both
fiscal 1998 and 1997.
EARNINGS PER COMMON SHARE Earnings per common share -- assuming dilution
increased 42.2% to $1.55 per share in fiscal 1998 from $1.09 per share in fiscal
1997 primarily related to the Company's improved operating results.
Weighted average common and diluted shares decreased from the prior period
primarily due to the Company's stock buyback program, including the purchase of
approximately 1.9 million shares of its common stock from Warburg, Pincus
Capital Partners, L.P. ("Warburg") during the first quarter of fiscal 1998.
FINANCIAL POSITION
WORKING CAPITAL The working capital ratio remained relatively flat at 0.99 at
September 25, 1999 versus 1.00 at September 26, 1998, however, the components of
the ratio increased. Current assets increased $7.2 million and current
liabilities increased $8.6 million from the end of fiscal 1998. The change in
current assets was primarily due to the increase in accounts receivable as a
result of the timing of customer payments coupled with the Company's
implementation of a new accounts receivable system. These increases in current
assets were offset by decreases in deferred income tax assets. The change in
current liabilities was a result of increases in accounts payable due to the
timing of vendor payments, increases in federal and state taxes payable due to
the Company's improved annual earnings and the increase in the current portion
of long-term debt reflective of scheduled debt repayments. These increases in
current liabilities were partially offset by the decline in accrued compensation
and benefits due to lower incentive compensation.
PROPERTY, PLANT & EQUIPMENT Expenditures for property, plant and equipment
totaled $38.3 million for the year ended September 25, 1999, which was
approximately $9.0 million greater than expenditures in the prior fiscal year.
The majority of the additions included; purchases of Alphaliners which are
computerized mail sorters for some of the Company's production facilities,
development of financial and operational software, expansion and renovations at
certain of the Company's facilities, and deployment of computer hardware in
connection with the Company's fleet management of desktops and laptops.
Of the total year-to-date fiscal 1999 capital expenditures, approximately $1.3
million related to the development of the human resource and payroll system,
which was accelerated to be Year 2000 compliant. The project was completed
during the second quarter of fiscal 1999. Total capitalized project costs were
approximately $3.5 million since inception in fiscal 1998.
The Company's current capital plan calls for fiscal 2000 expenditures to be
$38.0 million. Cash provided by operating activities was sufficient to cover
fiscal 1999 capital additions and continues to be the expected source of
financing for the planned fiscal 2000 capital expenditures.
STOCKHOLDERS' DEFICIENCY Stockholders' deficiency at September 25, 1999 was
$66.1 million, representing a $8.8 million decrease from the end of the prior
fiscal year. The change in stockholders' deficiency was the result of $33.8
million of common stock purchased by the Company, offset by net income of $39.0
million, employee stock plan activity and related tax benefits of $2.7 million
and amortization of deferred compensation of $0.9 million.
During fiscal 1999, the Company's $33.8 million of treasury stock purchases were
comprised of $32.6 million in purchases made on the open market in connection
with the Company's buyback programs and $1.2 million in elections made by
employees to satisfy tax withholding requirements under the Company's stock
plans.
During the current and previous fiscal years the Company had announced several
stock buyback programs providing for the purchase of up to 5.7 million shares.
The Company believes these programs will allow the Company to take advantage of
the attractive buying opportunity from its undervalued stock price. During
fiscal 1999, the Company purchased 1.6 million shares of its stock for $32.6
million on the open market at an average price of $20.04 per share. During
fiscal 1998, the Company purchased 2.7 million shares for $55.2 million under
the buyback program that included $20.4 million of open market purchases and
$34.8 million from Warburg, who was the Company's largest shareholder at
September 27, 1997.
As of September 25, 1999, the Company had 1.2 million shares remaining to be
purchased under the current buyback program.
23
<PAGE>
ADVO, INC.
LIQUIDITY Cash flows generated from operating activities is the Company's
primary source for funding working capital, capital investments and other
operating requirements. The Company also has available commitments under its
credit agreement, which may be used to fund operating activities.
Cash provided by operating activities increased $9.1 million over the prior year
to $58.0 million. The year-over-year increase was primarily attributable to the
Company's improved operating results and the increase in accounts payable due to
the timing of vendor payments partially offset by a decrease in accrued
compensation and benefits due to lower incentive wages.
Cash provided by operating activities during fiscal 1998 decreased $12.2 million
over fiscal 1997. The growth in operating income was more than offset by the
year-over-year increase in accounts receivable as a result of revenue growth and
the timing of customer payments. Also contributing were the decrease in accounts
payable due to the decision to take advantage of vendor discounts and the
decline in accrued compensation and benefits specifically related to changes in
the payment structure of the sales force.
The Company's overall cash and cash equivalents increased $0.6 million at
September 25, 1999 from September 26, 1998. Investing activities of $38.5
million and financing activities of $18.9 million offset cash provided from
operating activities of $58.0 million. Investing activities for the fiscal year
primarily represented expenditures for property, plant and equipment of $38.3
million. Financing activities of $18.9 million for the current fiscal year were
comprised of treasury stock purchases of $33.8 million offset by net borrowings
under the revolving credit agreement of $13.1 million and proceeds from stock
option exercises of $1.8 million.
FINANCING ARRANGEMENTS The Company has credit facilities consisting of a $135
million term loan and a $165 million reducing revolving line of credit, maturing
at various dates through September 2003 (the "Agreement"). Available commitments
under the Agreement total $62.2 million as of September 25, 1999. Subsequent to
year end, the Company had additional net borrowings of $11 million through
fiscal month end November 1999.
The debt bears interest at either the London Interbank Offered Rate ("LIBOR") or
at the bank's "base rate", whichever the Company chooses for each tranche due at
various maturity dates, plus an "applicable margin" (based on certain financial
ratios). The applicable margin ranges from .50% to 1.50% on the LIBOR rate and
0% to .25% on the base rate. Interest is payable quarterly or upon the maturity
of the LIBOR contracts, whichever period is shorter.
The Company is required to maintain certain financial ratios under the
Agreement. In addition, the Agreement also places restrictions on disposals of
assets, mergers and acquisitions, dividend payments, investments and additional
debt.
In connection with the Agreement, the Company is required to maintain Interest
Rate Protection Agreements to protect itself against three month LIBOR rates
exceeding 8.0% per annum as to a notional principal amount equal to the lesser
of $100 million or 50% of the aggregate principal amount of the loans made on
the effective date for a period of at least two years. During fiscal 1998, the
Company entered into two separate three year interest rate swap transaction
agreements to hedge notional amounts totaling $100 million. Effective January
31, 2000, the notional amount will be reduced to $60 million. The rate is fixed
at approximately 5.7%. The Company believes the interest rate swap transaction
agreements limit substantial risk should interest rates fluctuate. The interest
rate swap agreements had an immaterial effect on interest expense in fiscal 1999
and 1998.
The Company expects to pay the total fiscal 2000 maturities of $20.3 million in
long term debt, as well as future scheduled repayments through funds generated
from ongoing operations.
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 $100
million, which is currently over 50% of its outstanding debt balance. (See
Financing Arrangements.)
The Company believes that the interest rate swap agreements limit substantial
risk if interest rates should fluctuate. If interest rates should change by 2%
in 2000 from those rates in effect at September 25, 1999, assuming no change in
the outstanding debt balance and considering the effects of the Company's
interest rate swap agreements, interest expense would increase/decrease by
approximately $2.0 million. These amounts are determined by considering the
hypothetical interest rates on the Company's borrowing cost and interest rate
swap agreements and do not take into account signifi-
24
<PAGE>
cant fluctuation in interest rates. The sensitivity analysis also assumes no
changes in the Company's financial structure.
YEAR 2000 READINESS The Company has addressed the effect of the Year 2000 issue
on computer and production systems. In general terms, the Year 2000 issue arose
because many systems, application software, facilities and equipment were
constructed/written with two, rather than four, digits to identify the
appropriate year. On or before January 1, 2000 these systems may incorrectly
process critical data or stop processing altogether. Because the Company is
dependent on properly functioning computer systems and other equipment that may
contain date-sensitive embedded technology, a failure of such systems and
equipment to be Year 2000 compliant could have a material adverse effect on the
Company and, if not remediated, potential risks could include business
interruption or shutdown, financial loss and legal liability.
STATE OF READINESS
At the beginning of 1998 the Company established a Year 2000 program management
office comprised of dedicated project managers and key resources from various
strategic process areas within the Company. The team coordinated and identified
systems, applications, processes and software programs that would be required to
be modified or replaced in order for the Company's computer and production
systems to function properly with respect to dates in the Year 2000 and
thereafter.
After the initial assessment, the team identified three areas of compliance
which are affected by the Year 2000 issue: information technology ("IT")
systems, non-IT systems (such as production facilities and machinery containing
embedded systems) and third parties (i.e., vendors, customers and business
partners, and other parties that provide services to the Company).
ADVO contracted with IBM Global Services, the Company's outsource partner, to
perform IT systems remediation. Analysis of IT systems included mainframe and
client server applications, the computer desktop (personal computers and desktop
software) and the technical architecture and infrastructure (network, servers,
e-mail, etc.). All mainframe and client server applications have been
remediated, tested and returned to production. In addition, the Company has
upgraded its computer desktops and technical infrastructure by updating or
replacing non-compliant components. The Company successfully completed its plan
to ensure that all systems were compliant by July 1999.
The Year 2000 issue also affects certain aspects of the Company's facilities and
production equipment containing embedded technology. The Company completed the
non-IT assessment and testing on September 30, 1999.
As part of the third party relationship assessment, ADVO sent surveys to
material third party providers to ensure their products, services and interfaces
are Year 2000 compliant. Based on the responses received to date, ADVO is not
aware of any issues that could jeopardize compliance. The Company has developed
contingency plans to mitigate exposure resulting from non-compliance of third
parties, such as considering the substitution of vendors in the event that a
vendor has misrepresented their compliance status.
COSTS
The Company's total cost of testing and modifying the required systems for the
Year 2000 issue was $10.3 million from inception in fiscal 1998 through
completion and was expensed as incurred. Of these costs, $3.5 million were
incurred during fiscal 1998 and $6.8 million during fiscal 1999. These costs
were budgeted and were funded through the shifting of existing resources in 1999
and by cash provided from operating activities. The Company expects to incur
minimal additional expenditures through the rollover into January 2000. Costs
associated with replacements of systems were capitalized under the Company's
normal capitalization policy. (See discussion under Property, Plant &
Equipment).
RISKS AND CONTINGENCY PLANS
ADVO's greatest risk for material impact lies in the potential disruption of its
service delivery process through the United States Postal Service ("USPS").
Although the USPS has expressed to ADVO its intention to be Year 2000 compliant,
the failure of the USPS to achieve Year 2000 compliance could have a significant
adverse affect on the operation of the Company's business, financial position,
results of operations and cash flows. Because the number of scenarios is
extensive, it is not possible to assess them all; however, the severity of the
impact could vary widely. It should be noted that because approximately 85% of
ADVO's mail bypasses almost all of the USPS' systems and is delivered directly
by ADVO to the USPS' local post offices for carrier distribution, the
25
<PAGE>
ADVO, INC.
Company may have somewhat mitigated its risk. In addition, in order to mitigate
any material effects, the Company is continually monitoring the USPS' Year 2000
progress through bimonthly status meetings and review of its high-level
contingency plans.
In addition, the Company relies on print vendors for the printing of certain
direct mail products. The Company has sent out letters requiring certification
from all print vendors ensuring they are Year 2000 compliant. The failure of all
of the Company's print vendors to be Year 2000 compliant could have a material
adverse effect on the Company. The Company has identified alternate suppliers of
similar print services through the contingency planning process.
The Company has developed formal contingency plans for those compliance
shortfalls that could have an adverse effect on the Company's business,
financial condition and results of operation. Contingency plan examples include,
but are not limited to, shifting of production work to other branches in case of
regional outages, identification of alternative suppliers, increasing production
supplies, such as paper, and the identification of a team of associates to
perform rollover testing and react to unforeseen events on January 1, 2000. For
the remainder of 1999, these plans will continue to be refined as the Company
moves toward the transition date of January 1, 2000.
ADVO has taken all reasonable actions and developed contingency plans to avoid
significant business interruption. However, due to the inherent complexity of
the Year 2000 issue the Company cannot guarantee that all Year 2000 issues will
be foreseen and corrected or that a material problem will not result in the
interruption of certain normal business activities. Further, there is also
uncertainty associated with third parties' failure to remediate their own Year
2000 issues in a timely manner.
The Company currently believes that with the timely modifications made to
existing software, conversions to new software and the completion of the project
as scheduled, the Year 2000 issue will not pose significant operational problems
for its computer and production systems and will not have a material impact on
the Company's consolidated financial position or results of operations.
FORWARD LOOKING STATEMENTS This Financial Report contains certain forward
looking statements regarding the Company's results of operations and financial
position 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
would cause the Company's actual results to differ materially from those in the
forward looking statements. Such risks and uncertainties include but are not
limited to: changes in customer demand and pricing; the possibility of
consolidation throughout the retail sector; postal and paper prices; possible
governmental regulation or legislation affecting aspects of the Company's
business; the efficiencies achieved with technology upgrades; the amount of
shares the Company will repurchase in the future under its buyback program; the
risks associated with the transition into the Year 2000; fluctuations in
interest rates related to the outstanding debt and other general economic
factors.
26
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 25, September 26, September 27,
(In thousands, except per share data) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $1,040,208 $1,046,511 $1,016,492
Costs and expenses:
Cost of sales 754,221 769,256 757,413
Selling, general and administrative 203,238 200,662 195,196
Provision for bad debts 5,489 4,459 5,374
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 77,260 72,134 58,509
Interest income 586 949 687
Interest expense 14,289 14,043 14,820
Other expense 682 613 660
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 62,875 58,427 43,716
Provision for income taxes 23,893 22,787 16,918
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 38,982 $ 35,640 $ 26,798
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Earnings per common share $ 1.81 $ 1.59 $ 1.10
Earnings per common share -- assuming dilution $ 1.79 $ 1.55 $ 1.09
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares 21,580 22,427 24,320
Weighted average diluted shares 21,826 23,056 24,688
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
27
<PAGE>
ADVO, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 25, September 26,
(In thousands, except share data) 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,341 $ 8,724
Accounts receivable, less allowances of $4,105 in 1999 and $4,624 in 1998 91,883 80,140
Inventories 4,005 3,740
Prepaid expenses and other current assets 5,376 4,886
Deferred income taxes 7,656 13,535
- -----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 118,261 111,025
Property, plant and equipment -- net 99,800 85,790
Other assets 19,240 22,391
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $237,301 $219,206
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficiency
Current liabilities:
Current portion of long-term debt $ 20,250 $ 16,200
Accounts payable 42,498 37,586
Accrued compensation and benefits 23,426 27,473
Customer advances 3,840 3,892
Federal and state income taxes payable 9,485 5,270
Accrued other expenses 20,117 20,628
-----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 119,616 111,049
Long-term debt 176,816 167,766
Deferred income taxes 3,921 12,035
Other liabilities 3,025 3,230
Stockholders' deficiency:
Series A Convertible Preferred Stock, $.01 par value
(Authorized 5,000,000 shares, none issued) -- --
Common Stock, $.01 par value (Authorized 40,000,000 shares,
Issued 29,471,024 in 1999 and 29,237,700 in 1998) 295 292
Additional paid-in capital 177,027 173,433
Accumulated deficit (80,491) (119,473)
Less shares of common stock held in treasury at cost,
8,674,840 in 1999 and 7,001,271 in 1998 (162,908) (129,126)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Deficiency (66,077) (74,874)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $237,301 $219,206
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
28
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 25, September 26, September 27,
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 38,982 $ 35,640 $ 26,798
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation 23,261 21,031 16,150
Amortization 3,342 3,524 2,096
Deferred income taxes (2,235) 3,159 4,562
Provision for bad debts 5,489 4,459 5,374
Other 825 708 528
Change in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (17,240) (16,130) (9,370)
Inventories (265) 898 3,369
Prepaid expenses and other current assets (490) 461 (247)
Other assets 1,680 1,050 (1,367)
Accounts payable 4,894 (7,973) 6,776
Accrued compensation and benefits (4,525) (2,087) 6,353
Customer advances (52) 483 (2,551)
Federal and state income taxes payable 5,163 4,262 1,732
Other liabilities (817) (531) 950
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 58,012 48,954 61,153
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (300) (10,720) --
Expenditures for property, plant and equipment (38,300) (29,271) (28,615)
Proceeds from disposals of property and equipment 115 22 18
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (38,485) (39,969) (28,597)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on term loans (18,200) (12,525) (17,559)
Revolving line of credit -- net 31,300 45,700 --
Payment of debt issue costs -- (1,349) --
Proceeds from exercise of stock options 1,772 2,757 2,323
Purchases of common stock for treasury (33,782) (60,807) (4,660)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (18,910) (26,224) (19,896)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 617 (17,239) 12,660
Cash and cash equivalents at beginning of year 8,724 25,963 13,303
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,341 $ 8,724 $ 25,963
- -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
29
<PAGE>
ADVO, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
Additional
Common stock Treasury stock paid-in Accumulated Total
(In thousands) Shares Amount Shares Amount capital deficit deficiency
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- September 28, 1996 27,901 $279 (3,804) $ (64,274) $160,704 $(181,914) $(85,205)
Purchase of common stock for treasury (304) (4,660) (4,660)
Grants of restricted stock 31 30 506 (506) --
Exercise of stock options 497 5 1 19 2,299 2,323
Tax effect -- employee stock plans 529 529
Amortization of deferred
compensation and other (1) 291 3 294
Net Income 26,798 26,798
- ------------------------------------------------------------------------------------------------------------------------------------
Balance -- September 27, 1997 28,429 $284 (4,077) $ (68,409) $163,317 $(155,113) $(59,921)
Purchase of common stock for treasury (2,928) (60,807) (60,807)
Cancellation of restricted stock (4) --
Grants of restricted stock 72 1 4 90 (4) 87
Exercise of stock options 741 7 2,750 2,757
Tax effect -- employee stock plans 6,074 6,074
Amortization of deferred
compensation (1) 1,296 1,296
Net Income 35,640 35,640
- -----------------------------------------------------------------------------------------------------------------------------------
Balance -- September 26, 1998 29,238 $292 (7,001) $(129,126) $173,433 $(119,473) $(74,874)
Purchase of common
stock for treasury (1,674) (33,782) (33,782)
Cancellation of restricted stock (5) --
Grants of restricted stock 38 --
Exercise of stock options 200 3 1,769 1,772
Tax effect -- employee stock plans 948 948
Amortization of deferred
compensation (1) 877 877
Net Income 38,982 38,982
- -----------------------------------------------------------------------------------------------------------------------------------
Balance -- September 25, 1999 29,471 $295 (8,675) $(162,908) $177,027 $ (80,491) $(66,077)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Unamortized deferred compensation at September 25, 1999, September 26,
1998, and September 27, 1997 was $1,530,000, $940,000, and $780,000,
respectively.
See accompanying Notes to Consolidated Financial Statements
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION: ADVO, Inc. ("ADVO" or the "Company") is a direct marketing firm
primarily engaged in soliciting and processing printed advertising from
retailers, manufacturers and service companies for targeted distribution by both
shared and solo mail to consumer households in the United States on a national,
regional and local basis. Founded in 1929 as a hand delivery company, ADVO
entered the direct mail industry as a solo mailer in 1946 and began its shared
mail program in 1980. The Company currently is the largest commercial user of
standard mail (formerly third-class mail) in the United States.
ADVO's direct mail products and services include shared mail and solo mail.
ADVO also provides ancillary services in conjunction with its direct mail
programs. The Company's predominant source of revenue is from its shared mail
programs. In these programs, the advertisements of several advertisers are
combined in a single mail package. This offers the features of penetration and
targeted marketing at a significant cost reduction when compared to mailing on
an individual or solo mail basis. The Company's client base consists of
national and local grocers, fast food chains, drug stores and local retailers.
Statement of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information" establishes standards for the
way that business enterprises report information about operating segments in
financial statements, as well as information about products and services,
geographic areas and major customers. The Company operates principally under one
segment, direct mail marketing, and, therefore, no additional disclosure is
required.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of ADVO and its subsidiaries. All significant intercompany transactions
and balances among ADVO and its subsidiaries have been eliminated. Certain
reclassifications have been made in the fiscal 1998 and 1997 financial
statements to conform with the fiscal 1999 presentation. ADVO's fiscal year
closing date is the last Saturday in September.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include highly liquid
investment instruments with original maturities of three months or less when
purchased. These investments are valued at cost, which approximates fair value.
INVENTORIES: Inventories, which consist of raw materials, finished goods and
spare parts, are valued at the lower of cost (first-in, first-out method) or
market.
LONG-LIVED ASSETS: Property, plant and equipment are recorded at cost and
include amounts associated with the development of software for internal use.
Depreciation and amortization are computed generally by the straight-line method
over the estimated useful lives of the respective assets (ranging from 3 to 35
years) or over the terms of the related leases for leasehold improvements.
The excess of cost over net assets acquired (goodwill) and other intangible
assets related to acquisitions are being amortized over their expected useful
lives which range from 3 to 20 years.
The Company continually monitors its long-lived assets for impairment. In
determining whether any impairment losses have occurred, the Company evaluates
the expected cash flows, on an undiscounted basis, of the underlying assets.
REVENUES: Revenues are recognized when services are rendered and are presented
in the financial statements net of sales allowances and adjustments. The
Company's services are considered rendered when all printing, sorting, labeling
and ancillary services have been provided and the mailing material has been
received by the United States Postal Service.
INTEREST RATE SWAPS: The Company enters into interest rate swap agreements to
modify the interest characteristics of a portion of its outstanding debt. These
agreements involve the exchange of amounts based on the London Interbank Offered
Rate ("LIBOR") for amounts based on a fixed interest rate over the life of the
agreement, without an exchange of the notional amount upon which the payments
are based. The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment of interest expense. The related amount
payable from counter parties is included in accrued other expenses. The fair
value of these agreements is not recognized in the financial statements.
STOCK BASED COMPENSATION: The Company follows Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its employee stock plans. Accordingly, no
compensation cost is recognized for stock-based compensation unless the quoted
market price of the stock at the grant date is in excess of the amount the
employee must pay to acquire the stock.
31
<PAGE>
ADVO, INC.
EARNINGS PER COMMON SHARE: Earnings per common share exclude 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.
Earnings per common share -- assuming dilution reflects the potential dilution
that could occur if common stock equivalents, such as stock options, were
exercised.
USE OF 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 and
accompanying notes. While management believes that the estimates and related
assumptions used in the preparation of these financial statements are
appropriate, actual results could differ from those estimates.
NOTE 2 ACQUISITIONS
During fiscal 1998, the Company acquired The Mailhouse, Inc., a cooperative
coupon envelope mail company for approximately $10.7 million. This acquisition
has been accounted for under the purchase method of accounting and, accordingly,
the results of operations of the acquired company have been included in the
consolidated statements of operations from its acquisition date. The acquired
assets have been recorded at their estimated fair values. The acquisition did
not have a material pro forma effect on operations for periods prior to the
acquisition.
The excess of the purchase price of all acquisitions over the estimated fair
values of all net assets acquired of $11.0 million and $10.8 million, net of
accumulated amortization, is reflected in other assets at September 25, 1999 and
September 26, 1998, respectively. Also included in other assets at September 25,
1999 and September 26, 1998 is $1.7 million and $2.4 million, respectively, of
other intangible assets, net of accumulated amortization, which were acquired in
the acquisitions. As of September 25, 1999 and September 26, 1998, accumulated
amortization of goodwill and other intangibles was $10.6 million and $9.1
million, respectively.
NOTE 3 PROPERTY, PLANT AND EQUIPMENT
Balances of major classes of property, plant and equipment and accumulated
depreciation and amortization are as follows:
September 25, September 26,
(In thousands) 1999 1998
- ------------------------------------------------------------------
Land, buildings and building
improvements $ 9,357 $ 8,733
Leasehold improvements 19,794 13,209
Machinery and equipment 94,363 81,018
Furniture and fixtures 17,306 15,984
Computer hardware 28,540 31,878
Computer software and
software development costs 47,358 38,416
- ------------------------------------------------------------------
Total $216,718 $189,238
Less accumulated depreciation
and amortization 116,918 103,448
- ------------------------------------------------------------------
Property, plant and
equipment-net $ 99,800 $ 85,790
==================================================================
NOTE 4 ACCRUED COMPENSATION AND BENEFITS
The composition of accrued compensation and benefits is as follows:
September 25, September 26,
(In thousands) 1999 1998
- ------------------------------------------------------------------
Employee compensation $ 11,028 $14,874
Workers' compensation 6,555 6,263
Employee withholdings and
other benefits 5,843 6,336
- ------------------------------------------------------------------
Total $ 23,426 $ 27,473
==================================================================
NOTE 5 FINANCING ARRANGEMENTS
The Company has credit facilities consisting of a $135 million term loan and a
$165 million reducing revolving line of credit, maturing at various dates
through September 2003. The commitment levels on the revolving line range from
a high of $165 million through December 1999 to a low of $22.5 million for the
period June 2003 through September 2003. Mandatory repayments of debt in defined
amounts are required in the event of certain transactions including the sale of
certain assets. The Company and its subsidiaries have pledged all of their
assets as collateral under the credit agreement.
The debt bears interest at either the LIBOR or at the bank's "base rate,"
whichever the Company chooses for each tranche due at various maturity dates,
plus an "applicable margin" (based on certain financial ratios). The applicable
margin for fiscal 1999 and 1998 ranged from .50% to 1.50% of the LIBOR rate and
0% to .25% on the base rate. Interest is payable quarterly or upon the maturity
of the LIBOR contracts, whichever period is shorter.
32
<PAGE>
The outstanding facilities' balance and related interest rates inclusive of
applicable margins are as follows :
LIBOR Base Rate Total
September 25, 1999 Interest Interest Outstanding
(In thousands) 6.25% 8.25% Facilities
- ---------------------------------------------------------------
Term loan $100,000 $ 4,275 $104,275
Revolving line of credit 82,791 10,000 92,791
- ---------------------------------------------------------------
$182,791 $ 14,275 197,066
Less: Current portion
of long-term debt 20,250
- ---------------------------------------------------------------
$176,816
- ---------------------------------------------------------------
LIBOR Base Rate Total
September 26, 1998 Interest Interest Outstanding
(In thousands) 6.32% 8.50% Facilities
- ---------------------------------------------------------------
Term loan $120,000 $ 2,475 $122,475
Revolving line of credit 50,791 10,700 61,491
- ---------------------------------------------------------------
$170,791 $ 13,175 183,966
Less: Current portion
of long-term debt 16,200
- ---------------------------------------------------------------
$167,766
===============================================================
The Company is required to maintain certain financial ratios under the
facilities. In addition, the facilities also place restrictions on disposals of
assets, mergers and acquisitions, dividend payments, investments and additional
borrowings.
In connection with the facilities, the Company is required to maintain Interest
Rate Protection Agreements to protect itself against three-month LIBOR rates
exceeding 8.0% per annum as to a notional principal amount equal to the lessor
of $100 million or 50% of the aggregate principal amount of the loans made on
the effective date for a period of at least two years. During fiscal 1998, the
Company entered into two separate three-year interest rate swap transaction
agreements to hedge notional amounts totaling $100 million. Effective January
31, 2000, the notional amount will be reduced to $60 million. The rate is fixed
at approximately 5.7%. The Company believes the interest rate swap transaction
agreements limit substantial risk should interest rates fluctuate. The interest
rate swap agreements had an immaterial effect on interest expense in fiscal 1999
and 1998.
The Company pays fees on the unused commitments under the facilities at a rate
ranging from .175% to .375% depending on the Company's total leverage ratio, as
defined. As of September 25, 1999, $62.2 million of the revolver was available
for future borrowings.
Total maturities of long-term debt which are due over the next four fiscal years
at September 25, 1999 are as follows :
(In thousands)
- -----------------------------
2000 $ 20,250
2001 22,950
2002 27,000
2003 126,866
- -----------------------------
Total maturities $197,066
=============================
The revolving line of credit has been classified as long-term since management
has the intent and ability to maintain the September 25, 1999 outstanding
balance throughout fiscal 2000.
The Company capitalized $6.8 million of debt issue costs directly associated
with the issuance of the debt in fiscal 1998 and 1996. These costs are included
in other assets and are being amortized over the term of the debt agreement. At
September 25, 1999 and September 26, 1998, unamortized costs totaled $3.8
million and $4.8 million, respectively.
The Company has outstanding letters of credit of approximately $6.5 million
under separate agreements primarily related to its workers' compensation
program.
Carrying amounts of the financing arrangements approximate fair value.
NOTE 6 STOCKHOLDERS' DEFICIENCY
The Company has a Shareholder Protection Rights Plan (the "Rights Plan") to
protect shareholders from potential unfair hostile takeovers. Pursuant to the
Rights Plan, common shareholders have one Right for each share of common stock
held. The Rights become exercisable only in the event that any person acquires
or commences a tender offer to acquire 20% or more of the Company's common
stock, as defined.
During fiscal 1999, 1998 and 1997, the Company announced stock buyback programs
totaling 5.7 million shares. During the year ended September 25, 1999, Sep-
tember 26, 1998 and September 27, 1997, the Company purchased, in connection
with the buyback programs, 1.6 million shares for $32.6 million, 2.7 million
shares for $55.2 million and 0.2 million for $3.4 million, respectively.
Included in the fiscal 1998 buyback amount was 1.9 million shares of common
stock that the Company purchased from Warburg, Pincus Capital Partners, L.P.
("Warburg") for $34.8 million. Warburg ceased being a
33
<PAGE>
ADVO, INC.
related party to the Company at the beginning of fiscal 1998 upon the
consummation of this transaction. As of September 25, 1999, there were 1.2
million shares remaining to be purchased. Stock repurchases under these programs
exclude shares reacquired in connection with taxes due from associates on
certain exercises under the Company's stock option plans.
At September 25, 1999 there were 3.4 million shares of common stock reserved for
issuance upon the exercise of stock options.
NOTE 7 EARNINGS PER COMMON SHARE
The following table sets forth the computation of earnings per common share and
earnings per common share -- assuming dilution:
Year ended Year ended Year ended
(In thousands, September 25, September 26, September 27,
except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------
Net Income $38,982 $35,640 $26,798
Weighted average
common shares 21,580 22,427 24,320
Effect of dilutive
securities:
Stock options 229 598 357
Restricted stock 17 31 11
- ---------------------------------------------------------------------------
Dilutive potential
common shares 246 629 368
Weighted average
diluted shares 21,826 23,056 24,688
- ---------------------------------------------------------------------------
Earnings per
common share $ 1.81 $ 1.59 $ 1.10
- ---------------------------------------------------------------------------
Earnings per
common share --
assuming dilution $ 1.79 $ 1.55 $ 1.09
===========================================================================
Outstanding stock options to purchase common stock with an exercise price
greater than the average market price of common stock were not included in the
calculation of earnings per common share -- assuming dilution.
NOTE 8 SAVINGS PLANS
The Company has a savings plan for salaried employees which qualifies as a
profit sharing plan under the Internal Revenue Code of 1986, as amended, and
other non-qualified savings plans. In January 1999, hourly employees and sales
associates were eligible to participate in the qualified savings plan. All plans
feature both employee and employer matching contributions. The expense for
matching contributions was $4.9 million, $3.7 million, and $3.4 million for
fiscal 1999, 1998, and 1997, respectively.
NOTE 9 STOCK COMPENSATION PLANS
The Company maintains several stock based compensation plans relating to stock
options and restricted stock awards.
Pro forma information regarding net income and earnings per share, as required
by SFAS No. 123 "Accounting for Stock-Based Compensation", has been determined
as if the Company had accounted for its employee stock options under the fair
value method. The fair value of the stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1999, 1998, and 1997:
September 25, September 26, September 27,
1999 1998 1997
- -----------------------------------------------------------------------------
Risk free rate of interest 5.5% 5.8% 5.5%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 42% 36% 32%
Expected life of
option (years) 5.2 4.4 4.3
- -----------------------------------------------------------------------------
The weighted average fair value of options granted was $11.40 in 1999, $8.47 in
1998, and $4.61 in 1997.
Year ended Year ended Year ended
(In thousands, September 25, September 26, September 27,
except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------
Pro forma net income $35,929 $33,326 $25,386
Pro forma
earnings per
common share
-- assuming dilution $ 1.65 $ 1.46 $ 1.04
=============================================================================
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 1 to 4 years. The pro forma effect on net income and related earnings per
share for fiscal 1997 through 1999 may not be representative of future years'
impact since options granted before the initial phase-in period are excluded
from the pro forma calculations. In addition, the terms and conditions of new
grants may vary from the current terms.
STOCK OPTIONS During fiscal 1999, the stockholders approved the 1998 Incentive
Compensation Plan (the "1998 Plan") at the Company's Annual Meeting. The 1998
Plan allows a Committee appointed by the Board of Directors to grant both cash
and equity awards including stock options, stock appreciation rights, restricted
stock, restricted stock units and other stock-based awards as deemed appropriate
to Directors and employees of the Company.
34
<PAGE>
The 1998 Plan supersedes the following plans; the 1986 Stock Option Plan, the
1988 Non-Qualified Stock Option Plan and 1993 Stock Option Subplan, and the 1986
Employee Restricted Stock Plan, together the "Preexisting Plans". All
outstanding options and restricted stock under the Preexisting Plans were
transferred to the 1998 Plan at the time of approval.
Under the 1998 Plan the shares of stock reserved and available for future grant
at the time of approval included; 1.0 million original shares approved by the
stockholders, shares remaining available from the Preexisting Plans, and shares
of stock which will become available under the Preexisting Plans such as
cancelled shares, expired shares or shares withheld in payment of the exercise
price or taxes. As of September 25, 1999 there were 1.2 million shares available
for future grant under the 1998 Plan.
The 1998 Plan provides for granting of both incentive and non-qualified stock
options. Currently, the Company has only granted non-qualified stock options
which are generally exercisable 25% each year, cumulatively, beginning one year
from date of grant. The terms of the options may not exceed ten years, and the
option price shall not be less than the fair market value of the common stock on
the date of grant.
The 1998 Plan contains a reload feature which allows for the exercise of options
in "stock-for-stock" transactions. The number of reload options awarded upon the
exercise of existing options is equal to the number of shares traded in to pay
the exercise price of the options and to satisfy tax withholding requirements.
The expiration date of a reload option would be the same as that of the original
option unless otherwise determined by the Committee. Reload options may be
authorized with respect to options that are themselves granted as reload
options.
The Non-Employee Directors' Stock Option plan provides for the granting of non-
qualified options for the purchases of shares of common stock. The terms of the
options may not exceed ten years, and the option price shall not be less than
the fair market value of the common stock on the date of grant. Options
generally are exercisable 25% each year, cumulatively, beginning one year from
date of grant.
Information with respect to the Company's stock option plans is summarized
below:
Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at
September 28, 1996 2,340,650 $ 9.425
Granted 1,222,227 13.665
Cancelled (269,637) 9.619
Exercised (1,032,802) 9.078
- --------------------------------------------------------------------------------
Outstanding at
September 27, 1997 2,260,438 11.853
Granted 960,247 23.077
Cancelled (251,599) 12.217
Exercised (1,127,958) 11.594
- --------------------------------------------------------------------------------
Outstanding at
September 26, 1998 1,841,128 17.816
Granted 813,613 25.110
Cancelled (241,380) 20.511
Exercised (249,872) 11.415
- --------------------------------------------------------------------------------
Outstanding at
September 25, 1999 2,163,489 $20.997
- --------------------------------------------------------------------------------
Options Outstanding
- --------------------------------------------------------------------------------
Weighted
Outstanding Average
as of Remaining Weighted
September 25, Contractual Average
Range of Exercise Prices 1999 Life Exercise Price
- --------------------------------------------------------------------------------
$6.375 -$12.250 321,541 5.4 $11.188
12.875 - 18.625 355,969 7.2 15.796
19.250 - 21.500 423,532 8.4 21.217
22.500 - 24.875 240,561 4.7 22.895
25.750 - 25.938 557,946 9.1 25.936
26.000 - 29.875 263,940 7.7 27.438
- --------------------------------------------------------------------------------
2,163,489 7.4 $20.997
- --------------------------------------------------------------------------------
Options Exercisable
- --------------------------------------------------------------------------------
Exercisable
as of Weighted
September 25, Average
Range of Exercise Prices 1999 Exercise Price
- --------------------------------------------------------------------------------
$6.375 -$12.250 212,595 $10.753
12.875 - 18.625 136,198 15.948
19.250 - 21.500 84,860 21.426
22.500 - 24.875 164,782 22.653
25.750 - 25.938 - -
26.000 - 29.875 64,015 29.576
- --------------------------------------------------------------------------------
662,450 $17.967
================================================================================
RESTRICTED STOCK The Company's 1986 Employee Restricted Stock Plan was merged
into the 1998 Plan. In addition, the Company also maintains the 1990 Non-
Employee Directors' Restricted Stock Plan ("1990
35
<PAGE>
Non-Employee Plan") which provides for the granting of 125,000 shares of common
stock to non-employee directors. These grants of restricted stock generally vest
one-third per year over three years.
The Company issued restricted stock grants of 38,000 shares in fiscal 1999,
72,000 shares in fiscal 1998 and 31,000 shares in fiscal 1997. The weighted
average grant price of the restricted shares granted during fiscal 1999, 1998
and 1997 was $24.816, $21.049 and $18.431, respectively. The Company cancelled
5,000 restricted shares in fiscal 1999, 4,000 restricted shares in fiscal 1998
and 333 restricted shares in fiscal 1997.
The market value of shares at the date of the restricted stock award in excess
of cash consideration received is charged to operations over the stock award's
restriction period. The compensation cost charged against income over the
restriction period was $0.9 million, $1.3 million and $0.3 million for the years
ended September 25, 1999, September 26, 1998 and September 27, 1997,
respectively. Unamortized deferred compensation was $1.5 million and $0.9
million at September 25, 1999 and September 26, 1998, respectively. There are
83,500 shares available for future grant under the 1990 Non-Employee Plan.
During fiscal 1999, 25,000 restricted stock units were awarded to an employee
from the 1998 Plan. These units provide the employee the right to receive stock
at the end of a specified deferral period.
During fiscal 1997, 30,000 restricted stock shares were awarded to an employee.
These shares take on the same characteristics as the shares in the 1998 Plan.
NOTE 10 INCOME TAXES
The components of the provision for income taxes are as follows:
Year ended Year ended Year ended
September 25, September 26, September 27,
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Federal:
Current $ 22,651 $ 17,527 $10,660
Deferred (benefit) (1,852) 2,792 3,844
- --------------------------------------------------------------------------------
Total Federal 20,799 20,319 14,504
- --------------------------------------------------------------------------------
State:
Current 3,477 2,101 1,696
Deferred (benefit) (383) 367 718
- --------------------------------------------------------------------------------
Total State 3,094 2,468 2,414
- --------------------------------------------------------------------------------
Total Provision $ 23,893 $ 22,787 $16,918
================================================================================
The Company's effective income tax rate for operations differed from the
Federal statutory rate due to the following:
Year ended Year ended Year ended
September 25, September 26, September 27,
1999 1998 1997
- --------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 3.2 2.7 3.6
Other (0.2) 1.3 0.1
- --------------------------------------------------------------------------------
Effective income
tax rate 38.0% 39.0% 38.7%
================================================================================
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
September 25, September 26,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
Deferred income tax assets:
Deferred compensation $ 7,008 $ 6,138
Employee benefits 4,525 4,612
Other 4,512 3,782
- --------------------------------------------------------------------------------
Total deferred income
tax assets 16,045 14,532
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment (11,160) (13,032)
Prepaid assets (1,150) --
- --------------------------------------------------------------------------------
Net federal and state
deferred income tax assets $ 3,735 $ 1,500
================================================================================
NOTE 11 COMMITMENTS AND CONTINGENCIES
ADVO leases property and equipment under noncancellable operating lease
agreements which expire at various dates through 2009. The leases generally
provide that the Company pay the taxes, insurance and maintenance expenses
related to the leased assets. Rental commitments at September 25, 1999 under
long term noncancellable operating leases are as follows:
(In thousands)
- ----------------------------------------
Fiscal year:
2000 $13,476
2001 10,745
2002 8,762
2003 6,711
2004 4,957
Thereafter 10,623
- ----------------------------------------
Total minimum lease payments $55,274
========================================
Certain of these leases contain renewal options and certain leases also provide
for cost escalation payments. Rental expense for the years ended September 25,
1999, September 26, 1998 and September 27, 1997 was approximately $18.3 million,
$16.7 million and $17.1 million, respectively.
36
<PAGE>
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 contracts allow for cancellation after the completion of the second
or third year, subject to termination charges ranging from $3.4 million to $0.3
million depending on the year in which the cancellation becomes effective. The
annual service charges for the noncancellable portion of the agreements total
$5.7 million and $5.0 million, respectively, for fiscal 2000 and 2001. The
agreements also provide for the Company to pay cost of living adjustments due to
inflation. Cost of living adjustments for fiscal 1999, 1998 and 1997 totaled
approximately $0.7 million, $0.6 million and $0.3 million, respectively. In
addition, the Company may receive additional credits or charges if the Company
does not meet or exceeds certain baseline utilization assumptions and service
level standards.
ADVO is party to various legal proceedings and claims related to its normal
business operations, including several suits in which it is a defendant. In the
opinion of management, the Company has substantial and meritorious defenses for
these claims and proceedings in which it is a defendant, and believes these
matters will be ultimately resolved without material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
NOTE 12 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes was $21.4 million, $16.0 million and $11.0 million in
fiscal 1999, 1998 and 1997, respectively. Cash paid for interest expense in
fiscal 1999, 1998, and 1997 was $13.0 million, $13.6 million, and $14.4 million,
respectively.
NOTE 13 RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes the accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires recognition of all derivatives as either assets
or liabilities measured at the fair value. Depending on the intended use of the
derivative, changes in fair value will be reported in the period of change as
either a component of earnings or a component of stockholders' equity. The
adoption of the opinion is required for the Company's fiscal year 2001. The
Company believes the impact of the adoption will not have a material effect on
its financial statements.
NOTE 14 QUARTERLY FINANCIAL DATA (UNAUDITED)
(In millions, except per share data)
Fiscal year ended First Second Third Fourth
September 25, 1999 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------
Revenues $ 268.6 $ 253.5 $ 262.1 $ 256.0
Gross profit 74.2 67.5 75.1 69.2
Operating income 20.1 13.5 23.8 19.9
Net income 10.2 6.1 12.4 10.3
Earnings per
common share .46 .28 .58 .49
Earnings per common
share--assuming
dilution .45 .28 .58 .49
Common stock price
High 27 15/16 27 1/2 23 21
Low 19 1/16 16 9/16 14 15/16 17 3/4
- ----------------------------------------------------------------
Fiscal year ended First Second Third Fourth
September 26, 1998 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------
Revenues $ 262.1 $ 253.2 $ 269.0 $ 262.2
Gross profit 67.2 63.9 74.9 71.2
Operating income 17.2 12.5 23.2 19.2
Net income 8.4 5.4 12.1 9.7
Earnings per
common share .37 .24 .54 .43
Earnings per common
share--assuming
dilution .36 .24 .52 .42
Common stock price
High 23 5/8 26 13/16 30 15/16 33 5/8
Low 17 3/4 19 24 11/16 22 1/4
==================================================================
37
<PAGE>
ADVO, INC.
Report of Independent Auditors
To the Board of Directors and Stockholders of ADVO, Inc.
We have audited the accompanying consolidated balance sheets of ADVO, Inc. at
September 25, 1999 and September 26, 1998, and the related consolidated
statements of operations, cash flows, and changes in stockholders' deficiency
for each of the three years in the period ended September 25, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ADVO, Inc. at
September 25, 1999 and September 26, 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 25, 1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Hartford, Connecticut
October 19, 1999
Report of Financial Responsibility
To the Stockholders of ADVO, Inc.
The management of ADVO, Inc. is responsible for the integrity and objectivity of
the consolidated financial statements and other financial information presented
in this report. These statements have been prepared in accordance with generally
accepted accounting principles and necessarily include amounts based on
judgements and estimates by management.
ADVO maintains internal accounting control policies and related procedures
designed to provide reasonable assurance that assets are safeguarded, that
transactions are executed in accordance with management's authorization and
properly recorded, and that accounting records may be relied upon for the
preparation of reliable published annual and interim financial statements and
other financial information. The design, monitoring, and revision of internal
accounting control systems involve, among other things, management's judgement
with respect to the relative cost and expected benefits of specific control
measures. The Company also maintains an internal auditing function which
evaluates and reports on the adequacy and effectiveness of internal accounting
controls and policies and procedures.
The Company's consolidated financial statements have been audited by independent
auditors who have expressed their opinion with respect to the fairness of these
statements.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with ADVO's management, internal auditors and
independent auditors to review matters relating to the quality of financial
reporting and internal accounting controls. Both the internal auditors and the
independent auditors have unrestricted access to the Committee.
/s/ Gary M. Mulloy
Gary M. Mulloy
Chairman and Chief Executive Officer
/s/ Donald E. McCombs
Donald E. McCombs
Executive Vice President and Chief Financial Officer
/s/ Julie A. Abraham
Julie A. Abraham
Vice President & Controller
October 19, 1999
38
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ADVO, INC.
As of September 25, 1999
<TABLE>
<CAPTION>
PERCENT OF VOTING
STATE OF SECURITIES OWNED AS
INCORPORATION NAME OF SUBSIDIARY OF SEPTEMBER 25, 1999
- ------------- ------------------ ---------------------
<S> <C> <C>
Delaware ADVO Investment Company, Inc. 100
Delaware ADVO Creative Services, Inc. 100
Delaware Value Fair, Inc. 100
Delaware MBV, Inc. 100
Delaware Stighen, Inc. (formerly Marketing Force, Inc.) 100(1)
Delaware MailCoups, Inc. 100
Delaware St. Tessier (formerly Trans ADVO) 100
</TABLE>
- --------
(1)Owned by ADVO Investment Company, Inc.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-
K) of ADVO, Inc. ("ADVO") of our report dated October 19, 1999, included in
the 1999 Annual Report to Stockholders of ADVO.
Our audits also included the financial statement schedule of ADVO listed in
Item 14(a). This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 333-71679) pertaining to the 1998 Incentive
Compensation Plan, (Form S-8 No. 333-81365) pertaining to the MailCoups, Inc.
401(k) Savings Plan, (Form S-8 No. 333-38237) pertaining to the ADVO, Inc.'s
President's Club Stock Award Plan, (Form S-8 No. 333-11323) pertaining to the
ADVO, Inc. 401(k) Plan and in the related Prospectuses of our report dated
October 19, 1999, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of ADVO.
/s/ Ernst & Young LLP
Hartford, Connecticut
December 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO, INC.'S
FORM 10-K FOR THE YEAR ENDED SEPTEMBER 25, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-25-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> SEP-25-1999
<CASH> 9,341
<SECURITIES> 0
<RECEIVABLES> 95,988
<ALLOWANCES> 4,105
<INVENTORY> 4,005
<CURRENT-ASSETS> 118,261
<PP&E> 216,718
<DEPRECIATION> 116,918
<TOTAL-ASSETS> 237,301
<CURRENT-LIABILITIES> 119,616
<BONDS> 176,816
0
0
<COMMON> 295
<OTHER-SE> (66,372)
<TOTAL-LIABILITY-AND-EQUITY> 237,301
<SALES> 0
<TOTAL-REVENUES> 1,040,208
<CGS> 0
<TOTAL-COSTS> 754,221
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,489
<INTEREST-EXPENSE> 14,289
<INCOME-PRETAX> 62,875
<INCOME-TAX> 23,893
<INCOME-CONTINUING> 38,982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,982
<EPS-BASIC> $1.81<F1>
<EPS-DILUTED> $1.79<F2>
<FN>
<F1>THE EPS-PRIMARY TAG REPRESENTS BASIC EPS UNDER SFAS 128.
<F2>THE EPS-DILUTED TAG REPRESENTS DILUTED EPS UNDER SFAS 128.
</FN>
</TABLE>
