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ADVO, Inc.
Form 10-K
September 24, 1994
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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 (FEE REQUIRED)
For the fiscal year ended September 24, 1994
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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
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ADVO, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-0885252
_____________________________________ _____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Univac Lane, P.O. Box 755,
Windsor, CT 06095-0755
_____________________________________ _____________________________________
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (203) 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
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
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. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant at November 30, 1994 was $300,232,111. On that date, there were
20,858,884 outstanding shares of the registrant's common stock.
Documents Incorporated by Reference:
Portions of the 1994 Annual Report to Stockholders are incorporated by
reference into Parts I, II and IV of this Report.
Portions of the Proxy Statement for the 1995 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 24, 1994
PART I
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ITEM PAGE
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1. Business........................................................... 1
2. Properties......................................................... 6
3. Legal Proceedings.................................................. 6
4. Submission of Matters to a Vote of Security Holders................ 6
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................... 8
6. Selected Financial Data............................................ 8
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 8
8. Financial Statements and Supplementary Data........................ 8
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............................................. 9
12. Security Ownership of Certain Beneficial Owners and Management..... 9
13. Certain Relationships and Related Transactions..................... 9
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 marketing firm primarily
engaged in soliciting and processing printed advertising from retailers,
manufacturers and service companies for targeted distribution by 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
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 has participated in several joint ventures in order to
expand its targeting capability by offering psychographic and product usage
information in addition to its geo-demographic database.
In August of 1993 ADVO merged with Marketing Force, Inc., a Michigan
corporation ("Marketing Force" or "MF") accounted for as a pooling of
interests. MF, founded in 1981, is a in-store marketing services organization
which provides marketing services to a wide range of manufacturers and
marketers, using proprietary operating systems. Such services include managing
and executing in-store promotions, such as in-store sampling, couponing, and
product demonstration/education; customizing and executing unique brand events
on a national basis; in-store merchandising including shelf resets, display
building, sales/service calls, audits, product stickering and product pick-up;
audits of unsaleable inventory and provision of casual data in reclamation
centers and retail stores; and overall management and administration of
corporate promotion/marketing programs. MF recruits, trains and supervises
specialized merchandisers to perform in-store work for clients, thereby
eliminating the costs of building and maintaining an in-house field force by
managing all program elements and managing all administrative details such as
payroll, insurance and taxes.
ADVO's principal executive offices are located at One Univac Lane, Windsor,
Connecticut, 06095.
BUSINESS SEGMENTS
Information with respect to the separate revenues, operating income and
identifiable assets of the Company's direct mail segment and its in-store
marketing services segment can be found in ADVO's 1994 Annual Report to
Stockholders under the caption "Segment Information" on page 33 and is
incorporated herein by reference and made a part hereof (see Exhibit 13).
DIRECT MAIL PRODUCTS AND SERVICES
ADVO's direct mail products and services include shared mail and solo mail.
ADVO also provides certain printing, transportation and ancillary services in
conjunction with its direct mail programs.
SHARED MAIL
In the Company's shared mail programs (Marriage Mail (R) and Mailbox
Values (R)), the advertisements of several advertisers are combined in 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
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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 ZIP
Codes 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 select only those ZIP
Codes or portions of ZIP Codes needed to accommodate its customer base, thereby
reducing overall advertising costs.
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.
As a part of its shared mail programs, the Company provides the addresses of
the households receiving the mail packages and 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 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 57
million households in approximately 160 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.
SOLO MAIL
Solo mail services include addressing and processing of 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 DIRECT MAIL PRODUCTS AND SERVICES
The Company rents portions of its mailing list to organizations interested in
distributing their own solo mailings. The Company may or may not perform the
associated distribution services for the customer.
Mid Coast Press is a commercial web offset printer located in Maryland, which
produces general commercial printing as well as tabloids for local customers
participating in the Marriage Mail (R) program.
Trans-ADVO, Inc., a wholly-owned subsidiary of the Company, is a Class 1 ICC
Contract Carrier presently engaged in the transportation of time-sensitive
advertising material and general freight. Trans-ADVO, Inc., utilizes contracted
carriers to provide direct pickup and delivery services throughout the 48
contiguous states.
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ADVO Target Communications, Inc., and ADVOLink, Inc., based in Texas, are
majority owned subsidiaries of the Company which specialize in the coordination
and production of custom promotional magazines and circulars which, in most
cases, are then distributed by the Company.
The Company has been involved in several joint ventures directed at enhancing
its micromarketing services capabilities such as proprietary data bases and
custom micromarketing strategies.
MAILING LIST
ADVO's management believes its computerized mailing list is the largest
residential/household mailing list in the country. It contains over 108 million
addresses (constituting nearly all of the households in the continental United
States) and was used by the U.S. Census Bureau as a base for developing the
mailing list for its 1990 census questionnaire mailings. 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.
ADVO's list is updated on a regular basis with information supplied by the
USPS as follows. At least every three months, ADVO submits each address on its
mailing list to the USPS. The USPS then provides to ADVO any changes to the
addresses within the Zip Code. Such changes include whether the address is
still occupied, whether the addresses still exist 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 whether carrier routes and/or
Zip Codes have changed so that ADVO can maintain its address list in walk
sequence order. The USPS provides these updates 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.
IN-STORE MARKETING SERVICES
Products and services for its in-store marketing services organization are
divided into five major categories: Promotion Services, Merchandising Services,
Promotion Administration, Damage Advantage(TM) and Instant Recall(TM).
PROMOTION SERVICES
The Promotion Services group manages and executes customized in-store
promotions, such as in-store couponing, sampling, and product
demonstration/education. In-store representatives, directly employed by the
Company, give a scripted sales presentation and a purchase incentive to
consumers during peak shopping periods in all types of retail stores: grocery,
mass merchandisers, chain drug, club, and hardware/do-it-yourself.
MERCHANDISING SERVICES
Merchandising Services include shelf resets, display building, sales/service
calls, audits, product stickering, and product pick-up. The Company's
merchandising services products are Dedicated Merchandising Services(TM) and
On-Call Merchandising Services(TM). Dedicated Merchandising Services(TM)
involves the selection and funding by the Company of specialized merchandisers
to perform in-store work exclusively for one client. For its On-Call
Merchandising Services(TM), the Company has a national force of merchandising
specialists who regularly perform specific short-term in-store projects for a
wide variety of clients. On-Call(TM) programs are closely managed by expert
field-based managers who are in regular contact with both the manufacturer
field sales organization and the retailers.
PROMOTION ADMINISTRATION
The Promotion Administration segment of the Company's business includes a
variety of database management programs such as the administration of the
Grocery Manufacturers of America's "Central
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List" project and the administration of General Motors' Career Builder, which
is a deferred compensation plan for enrolled retail sales people within each of
the General Motors divisions.
The Company also has over a hundred TeleServices Operators in support of its
various programs, along with warehousing and fulfillment services.
DAMAGED GOODS AND RECALLS
Damaged Advantage(TM) was a new product developed in 1992 to help consumer
packaged goods manufacturers gain control of damaged goods payments and reduce
damaged goods volume. Damaged Advantage(TM) audits unsaleable inventory and
provides casual data in reclamation centers and retail stores.
Instant Recall(TM) was a product being launched in 1993 to provide
manufacturers with a quick and efficient way of dealing with product recalls or
the removal and disposition of discontinued product.
CLIENT BASE
Approximately 80% of the customers served by the Company throughout the
United States are smaller retail or service businesses. The remainder include
major food, drug or discount chains and manufacturing companies.
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 customer
accounted for more than 10% of the Company's sales in 1994, 1993 or 1992.
OPERATIONS
Customers' advertising circulars are processed by approximately 3,000 direct
mail production employees who work at 23 facilities which are strategically
located throughout the nation. State-of-the-art inserting machines (which
combine the individual advertising pieces into the mailing packages) and modern
quarter-folding equipment are the principal equipment used to process the
Company's products and services. In nearly all 23 of ADVO's production
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.
ADVO's computer center is located in Hartford, Connecticut. The Company's
branches are on-line to 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.
Marketing Force maintains four sales offices nationwide and a corporate
headquarters facility in Michigan, along with two warehouses used to hold
various promotional merchandise.
COMPETITION
In general, the printed advertising market is highly competitive with
companies competing primarily on 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".
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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 or similar cooperative mailing programs. These companies have
a significant presence in many of the Company's markets and represent serious
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.
Because of Marketing Force's diverse products and services, it does not have
competition from one competitor across all areas of its business, but rather
different competitors in each niche. Additionally, there are a great number of
local sampling and demonstration agencies who compete for business on a
national level.
The Marketing Force's Promotion Administration programs are primarily
confined to the automotive industry and, therefore, its competition includes
traditional automotive suppliers as well as the various divisional advertising
agencies.
Generally, competition is based on price, expertise of personnel and quality
of service. Marketing Force competes effectively due to its consistently high
quality of service, trained merchandisers, expert personnel and price.
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 the direct purchasing of approximately 40,000 tons of
paper per year and another 10,000 tons through its printing network. ADVO has
agreements with various paper suppliers and print vendors to assure the supply
of proper paper grades at competitive prices.
These purchases enable ADVO to purchase the paper necessary for its DAL and
turnkey family products at favorable prices.
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EMPLOYEES
As of September 24, 1994, the Company had a total of approximately 5,300 full
and part-time direct mail employees. ADVO also uses outside temporary employees
for its direct mail operations, particularly during busy seasons.
As of September 24, 1994, the In-store marketing services organization had a
total of approximately 250 full-time and 3,800 part-time employees.
ADVO has one union contract, covering production employees in the Hartford,
Connecticut branch. The Company believes that its relations with its employees
are satisfactory.
ITEM 2. PROPERTIES
ADVO does not own any real estate. The Company's corporate headquarters is a
71,000 square foot leased facility in Windsor, Connecticut. The lease runs
through December 1996 with options to renew. The Company also leases 23
production facilities, 3 division offices, 80 sales offices (which excludes the
sales offices that are located in the branches) throughout the United States.
The In-store marketing services organization's corporate headquarters is a
42,000 square foot leased facility in Rochester Hill, Michigan which runs
through December 1999. The terms of the branch and division office leases range
from three to ten years and the sales offices are generally leased for periods
of one to five years. 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
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NAME AGE POSITION WITH COMPANY
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Robert Kamerschen........... 58 Chairman and Chief Executive Officer
Joseph P. Durrett........... 49 President and Chief Operating Officer
Larry G. Morris............. 56 Senior Executive Vice President, Chief
Administrative and Process Development Officer
Lowell W. Robinson.......... 45 Executive Vice President and Chief Financial
Officer
Peter A. Corrao............. 40 Senior Vice President
Rick Kurz................... 54 Senior Vice President
Frederick Leick............. 50 Senior Vice President
Myron L. Lubin.............. 54 Senior Vice President
Daniel J. Steever........... 36 Vice President
Frank J. Talz............... 50 Senior Vice President
Robert S. Hirst............. 48 Vice President and Controller
</TABLE>
Mr. Kamerschen has been the Chairman of the Board since January 1989. From
November 1988 to February 1989, he was President of the Company and he has been
Chief Executive Officer and a Director since November 1988. Mr. Kamerschen is
also a Director of Playboy Enterprises, Inc., Micrografx, Inc. and Audrey Jones
Stores.
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Mr. Durrett became President, Chief Operating Officer and a Director of the
Company on September 1, 1992. From February 1990 to August 1992, he was Senior
Vice President of Sales of Kraft General Foods Inc., the food segment
subsidiary of Philip Morris Companies Inc. From August 1987 to January 1990, he
was President of Sales and Sales Operations of Kraft Inc. (acquired December 7,
1988 by Philip Morris Companies Inc.), a multinational food company.
Mr. Morris has been Senior Executive Vice President, Chief Administrative and
Process Development Officer of the Company since May 1994 and a Director since
October 1989. From August 1989 to April 1994, he was Executive Vice President,
Chief Financial and Administrative Officer.
Mr. Robinson became Executive Vice President and Chief Financial Officer of
the Company on May 5, 1994. From April 1993 to April 1994, he was an
independent consultant. From April 1991 to March 1993, he was Vice President
and Chief Financial Officer for The Travelers Managed Care and Employee
Benefits Operations. From October 1988 to March 1991, he was Vice President and
Chief Financial Officer for Citicorp's Global Insurance and Capital Investments
Divisions and from June 1986 to September 1988, he was Vice President and
Controller for Citicorp's Consumer Services Group--International.
Mr. Corrao became Senior Vice President--President National Accounts
Marketing Division on January 25, 1990. From January 1989 to January 1990, he
held the position of Senior Vice President of National Accounts Marketing.
Mr. Kurz became Senior Vice President--Chief Marketing Officer on April 19,
1993. Prior to that, he was a Managing Partner of Marketing Corporation of
America, a marketing consulting firm. He had held that position for the last
five years.
Mr. Leick became Senior Vice President--President Atlantic Division on
February 15, 1994. Prior to that, he was President, Chief Executive Officer,
and a Director of Seneca Foods Corporation whose primary business is a producer
of fruit juices and vegetables. He had held those positions for the last five
years.
Mr. Lubin became Senior Vice President--President Western Division on January
25, 1990. From February 1986 to January 1990, he held the position of Senior
Vice President, General Manager-- Western Division of the Company.
Mr. Steever became Vice President--President Marketing Force on May 4, 1994.
Prior to that he held several Regional Vice President/General Manager positions
within the Company, including regions located in Northern California, the
Northeastern United States and the Rocky Mountain area. He had held these
positions for the last five years.
Mr. Talz became Senior Vice President--President Central Division on January
25, 1990. From August 1986 to January 1990, he held the position of Senior Vice
President, General Manager--Central Division of the Company.
Mr. Hirst became Vice President and Controller on April 16, 1990. From April
1987 to April 1990, he was Chief Financial Officer of Star Expansion Company,
an international manufacturing and distribution company, producing fasteners
and hardware for numerous applications.
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 successor shall have been duly chosen and
shall have qualified, or until his earlier resignation or removal.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ADVO's 1994 Annual Report to Stockholders includes on page 35 under the
caption "Quarterly Financial Data (unaudited)" the reported high and low sales
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). For the fiscal years ended September 24, 1994 and September 25,
1993, the Company declared cash dividends of $.095 and $.06 per share to
holders of ADVO Common Stock, respectively. For the fiscal year ended September
26, 1992 the Company declared no cash dividends.
The closing price as of November 30, 1994 of the Company's Common Stock,
under the symbol AD, on the New York Stock Exchange as reported in The Wall
Street Journal was $17 7/8 per share. The approximate number of holders of
record of the common stock on November 30, 1994 was 1,004.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in ADVO's 1994 Annual
Report to Stockholders on page 21 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 1994 Annual
Report to Stockholders on pages 22 through 24 under the caption "Financial
Report" 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, 1994, appearing on pages 25
through 36 of ADVO's 1994 Annual Report to Stockholders, are incorporated
herein by reference and made a part hereof.
The selected quarterly information required by this item is included under
the caption "Quarterly Financial Data (unaudited)" on page 35 of ADVO's 1994
Annual Report to Stockholders and is incorporated herein by reference and made
a part hereof (see Exhibit 13). For financial statement schedules required by
this item, see the index at page F-1.
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 4 and 5 of the Company's definitive proxy
statement dated December 15, 1994 for the annual meeting of stockholders to be
held on January 19, 1995 (the "Proxy Statement"), under the caption "Election
of Directors", and on page 7 of the Proxy Statement under the subcaption
"Section 16 Reports", and is incorporated herein by reference and made a part
hereof.
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ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation" on pages 7 through 17 (except for those portions
appearing under the subcaptions "Report of the Compensation Committee" and
"Company Financial Performance"), and "Governance of the Company" on pages 3
and 4, 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 pages 2 and 3 and on pages 6 and 7, 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 17 and 18 of ADVO's Proxy Statement and in
footnotes 2 and 3 under the caption "Security Ownership of Certain Beneficial
Owners" on pages 2 and 3 of ADVO's Proxy Statement and is incorporated herein
by reference and made a part hereof.
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>
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EXHIBIT NO. EXHIBIT WHERE LOCATED
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2 Agreement and Plan of Merger, dated Incorporated by reference to Exhibit
as of August 6, 1993. 2 to pre-effective Amendment No. 2
to the Company's Form S-4 filed on
August 18, 1993 (No. 33-65794).
3(a) Restated Certificate of Incorporation Incorporated by reference to Exhibit
of ADVO. 5 to the Company's Registration
Statement on Form 8-A filed on
February 24, 1993 (No. 1-11720).
3(b) Restated By-laws of ADVO. Incorporated by reference to Exhibit
6 to the Company's Registration
Statement on Form 8-A filed on
February 24, 1993 (No. 1-11720).
3(c) 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.
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EXHIBIT NO. EXHIBIT WHERE LOCATED
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10(a) Stock Subscription Warrants, as held Incorporated by reference to Exhibit
by Warburg Pincus Capital Partners, 10(c) to the Company's Form 10 filed
L.P. to subscribe for the common on September 15, 1986.
stock of ADVO.
10(b) 1986 Stock Option Plan of ADVO.* Incorporated by reference to Exhibit
4.1 to the Company's Form S-8 filed
on July 16, 1987 (No.33-15856).
10(c) 1986 Employee Restricted Stock Plan Incorporated by reference to Exhibit
of ADVO, as amended.* A to the Company's definitive Proxy
statement for the annual meeting
held on January 24, 1991.
10(d) 1988 Non-Qualified Stock Option Plan Incorporated by reference to Exhibits
and 1993 Stock Option Subplan of A and B to the Company's definitive
ADVO, as amended.* Proxy statement for the annual
meeting held on January 20, 1994.
10(e) 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(f) Executive Severance Agreements dated Incorporated by reference to Exhibit
December 7, 1990, between ADVO and 10(r) to the Company's Annual Report
the executive officer named on Form 10-K for the fiscal year
therein.* ended September 29, 1990.
10(g) Executive Severance Agreements dated Incorporated by reference to Exhibit
December 7, 1990, between ADVO and 10(s) to the Company's Annual Report
the executive officer named on Form 10-K for the fiscal year
therein.* ended September 29, 1990.
10(h) Executive Severance Agreement dated Incorporated by reference to Exhibit
February 20, 1991, between ADVO and 10(a) to the Company's Quarterly
Robert Kamerschen.* Report on Form 10-Q for the quarter
ended March 30, 1991.
10(i) Executive Severance Agreement dated Incorporated by reference to Exhibit
February 20, 1991, between ADVO and 10(c) to the Company's Quarterly
Larry G. Morris.* Report on Form 10-Q for the quarter
ended March 30, 1991.
10(j) Employment Agreement dated November Incorporated by reference to Exhibit
14, 1991 between ADVO and Robert 10(t) to the Company's Annual Report
Kamerschen.* on Form 10-K for the fiscal year
ended September 28, 1991.
10(k) Employment Agreement dated August 21, Incorporated by reference to Exhibit
1991 between ADVO and Larry G. 10(u) to the Company's Annual Report
Morris.* on Form 10-K for the fiscal year
ended September 28, 1991.
10(l) ADVO Long-term Compensation Plan.* Incorporated by reference to Exhibit
10(v) to the Company's Annual Report
on Form 10-K for the fiscal year
ended September 28, 1991.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT WHERE LOCATED
- ----------- ------- -------------
<S> <C> <C>
10(m) Amendment dated August 18, 1992 on Incorporated by reference to Exhibit
Stock Subscription Warrants, as held 10(u) to the Company's Annual Report
by Warburg Pincus Capital Partners, on Form 10-K for the fiscal year
L.P. to subscribe for common stock ended September 26, 1992.
of ADVO.
10(n) Employment Agreement dated July 13, Incorporated by reference to Exhibit
1992, between ADVO and Joseph P. 10(v) to the Company's Annual Report
Durrett.* on Form 10-K for the fiscal year
ended September 26, 1992.
10(o) Executive Severance Agreement dated Filed herewith.
September 1, 1992 between ADVO and
Joseph P. Durrett.*
11 Computation of Per Share Earnings. Filed herewith.
13 1994 Annual Report to Stockholders. Furnished herewith; however, such
report, except for those portions
thereof which are expressly
incorporated by reference into this
Annual Report on Form 10-K, is for
the information of the Commission
and is not deemed "filed".
21 Subsidiaries of the Registrant. Filed herewith.
23 Consent of Independent Auditors. Filed herewith.
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.
No reports on form 8-K were filed by the Company for the quarter ended
September 24, 1994.
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.
Date December 13, 1994 ADVO, Inc.
----------------------------------
By Robert S. Hirst /s/
------------------------------------
ROBERT S. HIRST
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.
DATE SIGNATURE TITLE
---- --------- -----
December 13, 1994 Robert Kamerschen /s/ Chairman, Chief Executive
---------------------------- Officer and Director
ROBERT KAMERSCHEN (Principal Executive
Officer)
December 13, 1994 Joseph P. Durrett /s/ President, Chief
---------------------------- Operating Officer and
JOSEPH P. DURRETT Director
December 13, 1994 Larry G. Morris /s/ Senior Executive Vice
---------------------------- President, Chief
LARRY G. MORRIS Administrative and
Process Development
Officer
December 13, 1994 Lowell W. Robinson /s/ Executive Vice President
---------------------------- and Chief Financial
LOWELL W. ROBINSON Officer (Principal
Financial Officer)
December 13, 1994 Robert S. Hirst /s/ Vice President and
---------------------------- Controller (Principal
ROBERT S. HIRST Accounting Officer)
December 13, 1994 Jack W. Fritz /s/ Director
----------------------------
JACK W. FRITZ
December 13, 1994 Lawrence Lachman /s/ Director
----------------------------
LAWRENCE LACHMAN
December 13, 1994 Howard H. Newman /s/ Director
----------------------------
HOWARD H. NEWMAN
December 13, 1994 John R. Rockwell /s/ Director
----------------------------
JOHN R. ROCKWELL
December 13, 1994 Richard H. Stowe /s/ Director
----------------------------
RICHARD H. STOWE
December 13, 1994 John L. Vogelstein /s/ 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 24,
1994, September 25, 1993 and September 26, 1992......................... *
Consolidated balance sheets at September 24, 1994 and September 25, 1993. *
Consolidated statements of cash flows for the years ended September 24,
1994, September 25, 1993 and September 26, 1992......................... *
Consolidated statements of changes in stockholders' equity for the years
ended September 24, 1994, September 25, 1993 and September 26, 1992..... *
Notes to consolidated financial statements............................... *
Consolidated Schedules
I --Marketable Securities......................................... F-2
V --Property, Plant and Equipment................................. F-3
VI --Accumulated Depreciation, Depletion and Amortization of
Property, Plant and Equipment................................ F-4
VIII --Valuation and Qualifying Accounts............................. F-5
IX --Short-Term Borrowings......................................... F-6
</TABLE>
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or notes thereto.
- --------
* Incorporated herein by reference from pages 25 to 36 of the ADVO, Inc. 1994
Annual Report to Stockholders.
F-1
<PAGE>
ADVO, INC.
SCHEDULE I--MARKETABLE SECURITIES
YEAR ENDED SEPTEMBER 24, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------ ------------------ ---------- ------------------ ----------------------
AMOUNTS AT WHICH
EACH PORTFOLIO OF
EQUITY SECURITY ISSUES
NUMBER OF AND EACH OTHER
SHARES OR UNITS-- MARKET VALUE OF SECURITY ISSUE
NAME OF ISSUER AND PRINCIPAL AMOUNT COST OF EACH ISSUE AT CARRIED IN THE
TITLE OF EACH ISSUER OF BONDS AND NOTES EACH ISSUE BALANCE SHEET DATE BALANCE SHEET
- ------------------------ ------------------ ---------- ------------------ ----------------------
<S> <C> <C> <C> <C>
Marketable Securities
U.S. Government
Obligations.......... $14,600 $14,463 $14,438 $14,519
Municipal Bonds....... 15,765 16,885 16,307 16,422
Corporate Securities.. 452 451 437 451
------- ------- -------
$31,799 $31,182 $31,392
======= ======= =======
</TABLE>
F-2
<PAGE>
ADVO, INC.
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------- ---------- --------- ----------- ------------- ----------
BALANCE AT BALANCE AT
BEGINNING ADDITIONS OTHER CHANGES END
DESCRIPTION OF PERIOD AT COST RETIREMENTS ADD (DEDUCT) OF PERIOD
- ----------------------------- ---------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 26,
1992:
Machinery & equipment...... $ 68,969 $10,809 $1,379 $ 20(a) $ 78,419
Leasehold improvements..... 12,743 1,132 -- 7(a) 13,882
-------- ------- ------ ------ --------
$ 81,712 $11,941 $1,379 $ 27 $ 92,301
======== ======= ====== ====== ========
Year ended September 25,
1993:
Machinery & equipment...... $ 78,419 $13,074 $1,413 $1,458(a) $ 91,538
Leasehold improvements..... 13,882 1,115 353 10(a) 14,654
-------- ------- ------ ------ --------
$ 92,301 $14,189 $1,766 $1,468 $106,192
======== ======= ====== ====== ========
Year ended September 24,
1994:
Machinery & equipment...... $ 91,538 $12,156 $1,553 $ -- $102,141
Leasehold improvements..... 14,654 1,148 495 -- 15,307
-------- ------- ------ ------ --------
$106,192 $13,304 $2,048 $ -- $117,448
======== ======= ====== ====== ========
</TABLE>
- --------
(a) Represents amounts of companies acquired.
F-3
<PAGE>
ADVO, INC.
SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------- ---------- ---------- ----------- ------------ ----------
ADDITIONS
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND CHANGES END
DESCRIPTION OF PERIOD EXPENSES RETIREMENTS ADD (DEDUCT) OF PERIOD
- ----------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Year ended September 26, 1992:
Machinery & equipment...... $29,294 $ 6,728 $ 879 $(151) $34,992
Leasehold improvements..... 6,997 1,298 -- -- 8,295
------- ------- ------ ----- -------
$36,291 $ 8,026 $ 879 $(151) $43,287
======= ======= ====== ===== =======
Year ended September 25, 1993:
Machinery & equipment...... $34,992 $ 7,783 $ 896 -- $41,879
Leasehold improvements..... 8,295 1,456 241 -- 9,510
------- ------- ------ ----- -------
$43,287 $ 9,239 $1,137 -- $51,389
======= ======= ====== ===== =======
Year ended September 24, 1994:
Machinery & equipment...... $41,879 $ 9,443 $ 984 -- $50,338
Leasehold improvements..... 9,510 1,535 444 -- 10,601
------- ------- ------ ----- -------
$51,389 $10,978 $1,428 -- $60,939
======= ======= ====== ===== =======
</TABLE>
The estimated useful lives of the principal classes of assets are as follows:
machinery and equipment--5 to 15 years; leasehold improvements--shorter of
useful life or life of lease.
F-4
<PAGE>
ADVO, INC.
SCHEDULE VIII--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 COSTS AND OTHER FROM END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
- ------------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 26, 1992:
Allowances for sales
adjustments................ $ 1,557 $ -- $9,356(c) $ 8,565 $ 2,348
Allowances for doubtful
accounts................... 1,151 3,086 36(b) 3,204(a) 1,069
Accumulated amortization--
Goodwill................... 158 144 -- -- 302
Accumulated amortization--
Intangibles................ 248 988 -- -- 1,236
------- ------- ------ ------- -------
$ 3,114 $ 4,218 $9,392 $11,769 $ 4,955
======= ======= ====== ======= =======
Year ended September 25, 1993:
Allowances for sales
adjustments................ $ 2,348 $ -- $6,277(c) $ 5,738 $ 2,887
Allowances for doubtful
accounts................... 1,069 2,879 -- 2,363(a) 1,585
Restructuring reserve....... -- 25,750 -- -- 25,750
Accumulated amortization--
Goodwill................... 302 340 -- -- 642
Accumulated amortization--
Intangibles................ 1,236 1,554 -- -- 2,790
------- ------- ------ ------- -------
$ 4,955 $30,523 $6,277 $ 8,101 $33,654
======= ======= ====== ======= =======
Year ended September 24, 1994:
Allowances for sales
adjustments................ $ 2,887 $ -- $6,992(c) $ 6,558 $ 3,321
Allowances for doubtful
accounts................... 1,585 3,402 -- 3,203(a) 1,784
Restructuring reserve....... 25,750 -- -- 8,641 17,109
Accumulated amortization--
Goodwill................... 642 331 -- 270 703
Accumulated amortization--
Intangibles................ 2,790 1,477 -- 280 3,987
------- ------- ------ ------- -------
$33,654 $ 5,210 $6,992 $18,952 $26,904
======= ======= ====== ======= =======
</TABLE>
- --------
(a) Write off of uncollectible accounts, net of recoveries on accounts
previously written off.
(b) Accounts of companies acquired.
(c) Reduction of revenues.
F-5
<PAGE>
ADVO, INC.
SCHEDULE IX--SHORT-TERM BORROWINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------- ---------- -------- ----------- ----------- -----------
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST
CATEGORY OF AGGREGATE END OF INTEREST DURING THE DURING THE RATE DURING
SHORT-TERM BORROWINGS PERIOD RATE PERIOD PERIOD THE PERIOD
- ------------------------------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended September 26, 1992:
Notes payable to bank (a).... $1,475 6.90% $4,625 $1,813(b) 7.54%(c)
Year ended September 25, 1993:
Notes payable to bank (a).... $ -- 6.00% $5,625 $2,573(b) 6.00%(c)
Year ended September 24, 1994:
Notes payable to bank (d).... $ -- -- $5,850 $ 64(e) 3.69%(f)
</TABLE>
- --------
(a) Notes payable to bank represented borrowings under lines of credit
borrowing arrangements which had no termination date but were reviewed
semi-annually for renewal.
(b) The average amount outstanding during the period was computed by dividing
the total of month-end outstanding principal balances by 12.
(c) The weighted average interest rate during the period was computed by
dividing the actual interest expense by average short-term debt
outstanding.
(d) Represents borrowings under the Company's revolving credit agreement with a
bank expiring December 31, 1995.
(e) The average amount outstanding during the period was based on the average
daily outstanding balance.
(f) The weighted average interest rate only for the number of days the
borrowing was outstanding.
F-6
<PAGE>
Exhibit 10(o)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of
September 1, 1992, by and between ADVO, Inc. (the "Company") and Joseph Durrett
(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.
<PAGE>
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 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 or (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:
(i) a reorganization, merger or consolidation of the Company in which
the Company is not the surviving or resulting corporation or pursuant to
which the common stock would be converted into cash, securities or other
property (other than a merger or other business combination involving the
Company, in which the holders of the common stock of the Company immediately
prior to the merger have the same proportionate ownership of the common
stock of the surviving corporation immediately after the merger),
(ii) the approval by the stockholders of the Company of any plan or
proposal for the dissolution or liquidation of the Company, or
(iii) a sale, lease, exchange or other transfer (in one transaction or
a
2
<PAGE>
series of related transactions) of all, or substantially all of the
Company's consolidated assets.
For purposes of this Section 1(d):
(iv) "Exempt Reorganization" means a Reorganization in which either
(x) the election or appointment of the individuals who immediately after the
effective time of the Reorganization constitute the directors of the
Continuing Corporation was approved by a vote of at least two-thirds of the
individuals constituting the directors of the Company immediately prior to
such effective time (each such individual in office immediately prior to the
effective time, a "Prior Director") or (y) a majority of the directors of
the Continuing Corporation immediately after such effective time were Prior
Directors.
(v) "Reorganization" means:
(1) a reorganization, merger or consolidation of the Company in
which the Company is not the surviving or resulting corporation or
pursuant to which the common stock would be converted into securities or
other property, or
(2) a reorganization of the Company into a holding company
structure, including such a reorganization involving a business
combination with another corporation or entity, or
(3) a sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the
Company's consolidated assets or a dissolution or liquidation of the
Company, in each case pursuant to which the holders of the common stock
receive securities of another entity.
(vi) "Continuing Corporation" means the entity surviving a
Reorganization.
(vii) "Prior Director" shall be deemed to include any individual
proposed by Warburg, Pincus Capital Partners, L.P. ("Warburg") as a
substitute for a Prior Director and elected a director of the Continuing
Corporation.
In addition, subject to the foregoing, a Change of Control shall be deemed
to
3
<PAGE>
have occurred if (A) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than
Warburg and its affiliates, shall become the beneficial owner (within the
meaning of Rule 13d-3) under such Act) of 30% or more of the Company's
common stock or (B) at any time Eligible Directors shall cease for any
reason to constitute a majority of the entire Board of Directors of the
Company. An "Eligible Director" shall mean (i) any individual who was a
director at September 27, 1990 (a "1990 Director), (ii) any individual
proposed by Warburg and elected as a director in place of a 1990 Director,
or (iii) any director elected by, or nominated for election by the Company's
stockholders by, the vote of at least two-thirds of the directors who at the
time of such vote were Eligible Directors.
(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
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.
The determination of whether a Termination of the Executive's employment
is for "Cause" shall be made by the Chief Executive Officer 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,
4
<PAGE>
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.
(h) "Good Reason" means the occurrence of any of the events listed in
Sections 2(b)(i) through 2(b)(vii), inclusive.
(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 provisions 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 be not
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 TWO years following the occurrence of the Change of
Control, and (ii) the Executive's death.
5
<PAGE>
(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, and 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.
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
6
<PAGE>
(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 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
7
<PAGE>
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) a location other than the location where the Executive
was employed immediately preceding the date of the Change of Control, or (B)
any office or location greater 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, the following 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 the
sum of two times (A) Base Pay at the rate in effect at the time within the 90-
-------------
day period preceding the date of 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 year
from and including the third year prior to the first occurrence of a Change of
Control; and
8
<PAGE>
(ii) For the remainder of the Severance Period, 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 insurance polices
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 duration of the Severance
Period.
(b) There will be no right of set-off or counterclaim 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,
9
<PAGE>
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 benefits which the Executive receives or is then entitled to receive from
the Company that would constitute a "parachute payment" within the meaning of
Section 28OG of the Code, less (ii) the amount of federal 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, but will not be
required to be, the Company's independent auditors). The Executive will direct
the Accounting Firm to submit its 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)(i). If the Accounting
Firm determines that no reduction is necessary under this Section 4, it will, at
the same time as it make such determination, furnish the Company and the
Executive an option 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.
10
<PAGE>
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 the extent hereafter
provided, 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 other member of the Board, officer, stockholder, or
other person or entity affiliated with the Company, in any jurisdiction. In the
event that the Executive prevails, in whole or in part, in connection with any
such litigation, 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. Withholding of Taxes: Except as otherwise provided in this Agreement, the
--------------------
11
<PAGE>
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. Successor 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 purpose 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 purposed of this Agreement, all communications, including
-------
12
<PAGE>
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 pre-paid, 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.
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;
13
<PAGE>
provided, however, that any amounts received by this Executive pursuant to this
Agreement shall be in lieu of any benefits which the Executive is entitled to
receive or may be 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: 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, expressed 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.
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/ROBERT KAMERSCHEN
-------------------------
Robert Kamerschen
Robert Kamerschen
-------------------------
(NAME)
14
<PAGE>
EXHIBIT 11
PAGE 1 OF 2
ADVO, INC.
COMPUTATION OF PRIMARY PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 26,
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
EARNINGS APPLICABLE TO COMMON STOCK.. $25,171 $ 5,351 $22,493
======= ======= =======
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES (A)
Average common shares outstanding.... 21,104 20,631 17,921
Assumed conversion or exercise of:
Warrants........................... 2,236 2,303 2,726
Stock options...................... 496 1,097 1,098
Series A Preferred Stock........... -- 1,229 3,304
Restricted stock................... 50 129 217
------- ------- -------
Weighted average common and common
equivalent shares................... 23,886 25,389 25,266
======= ======= =======
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE.................... $ 1.05 $ .21 $ .89
======= ======= =======
</TABLE>
- --------
(A) Fiscal 1992 restated for 5-for-4 stock split distributed March 5, 1993 and
for 2,115,956 common shares issued in connection with the merger of ADVO,
Inc. and Marketing Force, Inc., on August 19, 1993 accounted for as a
pooling of interests. The shares are being treated as if issued as of the
beginning of each period presented.
<PAGE>
EXHIBIT 11
PAGE 2 OF 2
ADVO, INC.
COMPUTATION OF FULLY DILUTED PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 26,
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
EARNINGS APPLICABLE TO FULLY DILUTED
SHARES.............................. $25,171 $ 5,351 $22,493
======= ======= =======
FULLY DILUTED SHARES (A)
Average common shares outstanding.... 21,104 20,631 17,921
Assumed conversion or exercise of:
Warrants........................... 2,242 2,303 2,789
Stock options...................... 512 1,097 1,167
Series A Preferred Stock........... -- 1,229 3,304
Restricted stock................... 66 152 236
------- ------- -------
Fully diluted shares................. 23,924 25,412 25,417
======= ======= =======
EARNINGS PER SHARE ASSUMING FULL
DILUTION............................ $ 1.05 $ .21 $ .88
======= ======= =======
</TABLE>
- --------
(A) Fiscal 1992 restated for 5-for-4 stock split distributed March 5, 1993 and
for 2,115,956 common shares issued in connection with the merger of ADVO,
Inc. and Marketing Force, Inc., on August 19, 1993 accounted for as a
pooling of interests. The shares are being treated as if issued as of the
beginning of each period presented.
<PAGE>
Exhibit 13
ADVO, Inc. Consolidated Financial Statements
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
September 24, September 25, September 26, September 28, September 29,
(In millions, except per share data) 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Revenues $975.5 $910.8 $828.6 $727.9 $677.1
Operating income (1) 40.6 6.8 32.2 26.1 22.1
Net income 25.2 5.4 22.5 19.2 16.0
Earnings per share (2):
Primary 1.05 .21 .89 .78 .68
Fully diluted 1.05 .21 .88 .77 .68
Cash dividends declared per share .095 .06 -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average common and
common equivalent shares (2) 23.9 25.4 25.4 24.9 23.6
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
September 24, September 25, September 26, September 28, September 29,
(In millions, except per share data) 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and marketable securities $ 71.1 $ 71.4 $ 65.7 $ 52.6 $ 41.6
Total assets 225.7 226.5 201.1 163.7 140.1
Long-term debt -- -- .2 .4 .3
Preferred stock (3) -- -- 13.1 12.7 12.1
Stockholders' equity 108.0 118.3 112.7 91.3 68.7
Book value per share (2) 5.17 5.32 5.08 4.19 3.25
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
On August 19, 1993 a merger (the "Merger") was consummated between ADVO, Inc.
and Marketing Force, Inc. (see Note 2 to the consolidated financial statements).
The Merger was accounted for under the pooling of interests method and,
accordingly, selected financial data for the fiscal years presented above
reflect the combined selected financial results, financial position and share
data of the two corporations as if the Merger had been consummated as of the
beginning of each of the periods presented.
(1) Reflects a one-time restructuring charge to operations of $25.8 million
in fiscal 1993 (See Note 8 to the consolidated financial statements).
(2) Prior years restated for 5-for-4 stock split effected in the form of a
dividend on March 5, 1993.
(3) All outstanding preferred shares were converted to ADVO Common Stock in
February 1993.
21
<PAGE>
ADVO, Inc. Financial Report
FINANCIAL REPORT
FINANCIAL OVERVIEW
Fiscal 1994 was highlighted by the Company's significant revenue growth, and a
25% increase in operating income when compared with fiscal 1993 results
(adjusted for the restructure charge taken in FY93). Achievements made in unit
volumes and price/mix gains flowed through to ADVO's bottom line in addition to
the successful implementation of the Company's cost control initiatives.
Despite 1994's revenue and earnings performance, the Company faces two
critical issues in the near term, the scheduled postal rate increase for January
1995 and the continued economic uncertainty and consolidation throughout the
retail sector. Despite these issues, ADVO's management is confident that it will
be able to continue its fiscal 1994 successes in fiscal 1995 and beyond.
FISCAL 1994 COMPARED TO FISCAL 1993
Revenues Fiscal 1994 revenues increased 7.1% or $64.7 million to $975.5
million. Direct mail revenues accounted for almost all of the growth,
experiencing a $63.7 million gain to $920.3 million. Both pricing and volume
growth contributed to the increase with volume gains being the more significant
contributor. Overall, shared mail distribution increased 7.4% to 24.2 billion
pieces mailed and shared mail packages distributed grew to 3.1 billion from 3.0
billion in fiscal 1993. The key barometer of shared mail pieces per package
increased to 7.69 in fiscal 1994 from 7.61 in fiscal 1993. In-store marketing
revenues increased approximately $1.0 million due primarily to volume growth in
its merchandising and promotion services.
Operating Expenses Cost of sales as a percentage of revenues decreased to
74.5% in fiscal 1994 from 75.1% in fiscal 1993. This improvement was mainly due
to improved postage utilization as reflected in fiscal 1994's shared mail pieces
per package growth and operational efficiencies. In absolute terms, cost of
sales increased $42.4 million or 6.2% over the prior year. The majority of the
increase was attributable to a 5% increase in shared mail delivery costs and a
12% increase in print costs. These increases were a result of the Company's
fiscal 1994 shared mail package and turnkey product piece growth over fiscal
1993's volumes.
Selling expense, including the provision for bad debts, remained flat as a
percentage of revenues at 12.5% in both fiscal 1994 and fiscal 1993. Overall,
selling expense increased $8.5 million in fiscal 1994 over the prior year mainly
as a function of increased commission costs resulting from the revenue growth
over fiscal 1993.
As a percentage of revenue, general and administrative costs remained
constant at 8.8% both in fiscal 1994 and fiscal 1993. General and administrative
costs increased $5.8 million or 7.3% in fiscal 1994 over fiscal 1993. The
increase was primarily related to increases in promotional costs, system
development expenditures and wages.
During fiscal 1993 the Company recorded a $25.8 million charge to
operations in connection with a plan of restructuring (see Note 8 to the
consolidated financial statements). As of September 24, 1994 the Company has
utilized $8.6 million of this reserve for the reorganization and upgrade of
the Company's management team, the shutdown and consolidation of its
Indianapolis production facility into pre-existing facilities, the downsizing
of its former Atlantic Division office and the abandonment of certain
non-core Micromarketing projects that had not proven profitable. The benefits
realized during fiscal 1994 consisted of reduced overhead costs and the
improved strategic alignment and profitability of the Company's Atlantic
Division. The benefits of some of these actions will not be fully realized
until the Company's 1995 fiscal year and beyond. The remainder of the reserve
will be utilized over future periods during which benefits will be realized
through more efficient and low-cost operations and enhanced revenue growth
through improved management ability and structure. The Company's management
believes that all benefits anticipated to be realized by its plan of
restructure remain intact as of the close of its 1994 fiscal year.
Operating Income As a result of the aforementioned and the 1993 restructuring
reserve, the Company reported a $33.8 million increase in operating income to
$40.6 million versus $6.8 million in fiscal 1993. Direct mail operating income
for fiscal 1994 was $39.7 million compared with $2.3 million in the prior year,
inclusive of the $25.8 million restructuring charge. In-store marketing services
experienced a decrease in operating income in fiscal 1994, primarily related to
infrastructure and system development costs.
Interest Income and Other Expense Interest income results primarily from
the investment of excess cash and amounted to $1.9 million in fiscal 1994
versus $2.0 million in fiscal 1993. Other expense increased $0.6 million in
fiscal 1994 to $1.3 million primarily due to increased non-income related
taxes and fees.
Income Taxes The Company's effective tax rate for fiscal 1994 was 39% while
the rate in fiscal 1993 was 34%. The fiscal 1993 effective rate was favorably
impacted by the recognition of tax benefits associated with certain amortizable
assets. Since these benefits were substantially utilized in fiscal 1993 and
prior periods the Company's effective tax rate, starting with fiscal 1994, will
more closely reflect the statutory tax rates. During
22
<PAGE>
ADVO, Inc. Financial Report
the first quarter of fiscal 1994, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". The effect of this
accounting change was not material to either the Company's results of operations
or financial position.
Earnings per Share Earnings per share increased to $1.05 in fiscal 1994
versus $0.21 in fiscal 1993 ($0.88 adjusted for fiscal 1993's restructuring
charge) on a fully diluted basis. The increase was due to the increase in net
income and in part to the approximate 1.5 million share decrease in the weighted
average common and common equivalent shares outstanding. This decrease was
primarily a result of the Company's stock repurchase program undertaken in
October 1993 to repurchase 2.1 million shares of ADVO common stock.
FISCAL 1993 COMPARED TO FISCAL 1992
Revenues Fiscal 1993 revenues increased $82.2 million or 9.9%. Direct mail
revenues accounted for $69.0 million of the increase and the in-store marketing
group contributed $13.2 million. The growth in the direct mail revenues was
mainly attributed to volume growth reflected in the 1.9% increase in shared mail
pieces per package to 7.61 and the 7.6% increase in packages mailed to 3.0
billion when compared to fiscal 1992. These volume increases were primarily
related to increased frequency of mailings, market expansions and the
acquisition of CBA Shared Mail Systems, Inc. on October 14, 1992. The volume
gains were offset to a slight degree by pricing decreases experienced in some of
the Company's national product lines when compared with fiscal 1992. The in-
store marketing services increase was attributed to increased volume within
existing product lines over the prior year's results.
Operating Expenses Cost of sales increased $67.1 million or 10.9% over
fiscal 1992. The increase was primarily related to the $36.7 million increase
in postage and related distribution costs resulting from the growth in shared
mail piece and package volume. Printing and other production costs also
increased as a result of the increase in distribution volume. The in-store
marketing cost of sales increased $9.7 million when comparing fiscal 1993 to
fiscal 1992 also primarily related to volume growth experienced within its
existing product lines. As percentage of revenue cost of sales increased to
75.1% in fiscal 1993 from 74.5% in fiscal 1992. This was mainly reflective of
the increased package volume and associated distribution costs.
Selling expense, including the provision for bad debts, increased 10.2%
or $10.6 million when comparing fiscal 1993 with fiscal 1992. The increase
was primarily associated with increased commissions and sales support costs
resulting from the growth in revenues. As a percentage of revenues selling
expense remained constant at 12.5% in fiscal 1993 when compared with fiscal
1992.
General and administrative costs in fiscal 1993 increased $4.2 million or
5.6% over fiscal 1992. The Direct Mail group experienced an increase of $1.5
million while the in-store services group costs increased $2.7 million. The
increases were mainly reflective of increased employee costs and the development
of management information systems. As a percentage of revenues, general and
administrative costs were 8.8% in fiscal 1993 versus 9.1% in fiscal 1992.
The Company recorded a restructuring charge in the fourth quarter of
fiscal 1993 of $25.8 million (see Note 8 to the consolidated financial
statements). The charge provides for the shutdown and relocation of certain
production facilities to more geographically advantageous locations, the
restructuring and reorganization of the Company's current management team and
for the discontinuation of certain Micromarketing initiatives that have not
proven profitable. Of the $25.8 million, $7.7 million would have been charged
to operations through depreciation, amortization and lease payments in the
absence of a restructuring plan.
Operating Income As a result of the aforementioned, the Company reported a
$25.4 million decrease in operating income to $6.8 million when comparing
fiscal 1993 to fiscal 1992. Direct mail operating income for fiscal 1993 was
$2.3 million, inclusive of the one-time $25.8 million restructuring charge,
compared to $28.6 million in fiscal 1992. In-store marketing services
operating income increased $0.9 million in fiscal 1993 to $4.5 million versus
$3.6 million in 1992.
Interest Income and Other Expense Interest income results primarily from
the investment of excess cash and amounted to $2.0 million in fiscal 1993
versus $2.4 million in fiscal 1992. The decline in interest income was mainly
reflective of the general decline in interest rates.
Income Taxes The effective income tax rate for fiscal 1993 was 34% versus
32.9% in fiscal 1992. The increase in the effective rate was due to the
increase in the statutory Federal Tax rate and the expiration of Federal Tax
benefits available in prior years.
Earnings per Share Earnings per share declined to $0.21 in fiscal 1993 from
$.88 in fiscal 1992 on a fully diluted basis. The decline was principally due
to the $25.8 million restructuring charge recorded in fiscal 1993 or $.67 per
share.
23
<PAGE>
ADVO, Inc. Financial Report
FINANCIAL POSITION
Working Capital Working capital decreased to $46.7 million at September 24,
1994 from $60.2 million at September 25, 1993. The decrease in working capital
was primarily related to the Company's purchase of its common stock for treasury
under a repurchase program announced by the Company in October 1993. The
repurchase program resulted in the acquisition of 2.1 million shares for $36.6
million. The Company also acquired $7.6 million of its common stock for treasury
pursuant to elections made by employees to satisfy tax withholding requirements
under the Company's restricted stock and stock option plans.
As a result of the above, the Company experienced a decrease in its working
capital ratio to 1.45 at September 24, 1994 versus 1.66 at September 25, 1993.
Property and Equipment Capital additions in fiscal 1994 totaled $13.3 million
compared to $14.2 million in fiscal 1993. The expenditures were primarily for
modernization and replacement of existing equipment and for the expansion of
certain of the Company's facilities. Cash provided from operating activities has
been sufficient to cover the financing of these capital expenditures.
For fiscal 1995, capital additions are expected to approximate those
expended in fiscal 1994. These expenditures, principally for new equipment, are
intended to improve operating efficiency. The book value of disposals aggregated
$.6 million both in fiscal 1994 and 1993.
Stockholders' Equity Stockholders' equity decreased $10.3 million in fiscal
1994 to $108.0 million at September 24, 1994 compared to $118.3 million at
September 25, 1993. The decrease was primarily reflective of the increase in
treasury stock. Offsetting the treasury stock purchases to a degree were the
Company's fiscal 1994 net income of $25.2 million and the $8.2 million tax
benefit realized on the exercise of employee stock options and the vesting of
restricted stock.
In fiscal 1993, stockholders' equity increased $5.6 million from $112.7
million at September 26, 1992. The increase was mainly attributable to the
Company's fiscal 1993 net income of $5.4 million.
Book value per common share at September 24, 1994 was $5.17 compared with
$5.32 at September 25, 1993.
Liquidity The Company's main source of liquidity continues to be funds from
operating activities. Cash provided by operating activities was $50.5 million
during fiscal 1994 compared with $33.0 million in fiscal 1993. Cash and cash
equivalents decreased $11.3 million in fiscal 1994, principally reflecting the
$44.2 million used to purchase stock for treasury, when compared with a decrease
of $14.7 million in fiscal 1993. Cash used for the purchase of the Company's
common stock for treasury was made pursuant to the Company's stock repurchase
plan and elections made by employees to satisfy withholding tax requirements on
the exercise of stock options and vesting of restricted stock. Cash provided by
operating activities in fiscal 1994 was also offset by $13.3 million used for
capital additions and $11.5 million used to invest in marketable securities.
Cash used in financing activities also included $1.5 million used to pay the
Company's quarterly dividend to holders of ADVO common stock.
During fiscal 1993, the Company recorded a $25.8 million charge to operations
for restructuring. Funds provided by operating activities have been sufficient
to cover the fiscal 1994 cash requirements of the restructuring plan and the
Company's management believes that cash generated by operations will be
sufficient to provide for all future expenditures related to the restructuring
plan.
The Company has in place a credit facility with a bank providing up to $25
million of borrowing availability pursuant to a Revolving Credit Agreement which
expires December 31, 1995. Borrowings under the agreement may take the form of
either a domestic loan, a certificate of deposit loan, a money market loan or a
Eurodollar loan, as defined in the agreement. The Company pays a commitment fee
of one quarter of one percent per annum on the average daily balance of the
unused portion of the commitment. The terms of the agreement include certain
covenants which provide restrictions relating to the maintenance of minimum
levels of working capital and net worth and include requirements to maintain
certain financial ratios. At September 24, 1994, there are no borrowings under
the Revolving Credit Agreement. The Company also has outstanding letters of
credit of $6.7 million at September 24, 1994 primarily related to its workers'
compensation program.
On February 16, 1994 the Company announced an increase in its quarterly
dividend from $.02 per share to $.025 per share or $.10 annually from $.08.
The increase in the dividend began with the quarter ended March 26, 1994 or
the Company's second fiscal quarter.
24
<PAGE>
ADVO, Inc. Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 24, September 25, September 26,
(In thousands, except per share data) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $975,493 $910,794 $828,592
Costs and expenses:
Cost of sales 726,721 684,350 617,230
Selling, general and administrative 204,787 191,012 176,044
Restructuring charge -- 25,750 --
Provision for bad debts 3,402 2,879 3,086
- -----------------------------------------------------------------------------------------------------------------------
Operating income 40,583 6,803 32,232
Interest income (1) 1,947 1,986 2,377
Other expense 1,266 682 1,082
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 41,264 8,107 33,527
Provision for income taxes 16,093 2,756 11,034
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 25,171 $ 5,351 $ 22,493
- -----------------------------------------------------------------------------------------------------------------------
Earnings per share:
Primary $ 1.05 $ .21 $ .89
Fully diluted $ 1.05 $ .21 $ .88
Dividends declared per share $ .095 $ .06 $ --
Weighted average common and common equivalent shares:
Primary 23,886 25,389 25,266
Fully diluted 23,924 25,412 25,417
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest income from related party of $1,885,000, $1,932,000
and $2,317,000 in fiscal 1994, 1993 and 1992, respectively.
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
ADVO, Inc. Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 24, September 25,
(In thousands, except share data) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (1) $ 39,748 $ 51,080
Marketable securities - related party 31,392 20,368
Accounts receivable, less allowances of $5,105 in 1994 and $4,472 in 1993 55,340 56,516
Inventories 5,138 6,622
Prepaid expenses and other current assets 4,863 5,238
Deferred income taxes 14,619 11,667
- -----------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 151,100 151,491
Property and equipment:
Machinery and equipment 102,141 91,538
Leasehold improvements 15,307 14,654
- -----------------------------------------------------------------------------------------------------------------------------------
117,448 106,192
Accumulated depreciation and amortization (60,939) (51,389)
- -----------------------------------------------------------------------------------------------------------------------------------
Net property and equipment 56,509 54,803
Non-current deferred income taxes -- 348
Other assets 18,100 19,883
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $225,709 $226,525
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 28,540 $ 24,879
Accrued compensation and benefits 28,121 24,175
Customer advances 16,516 15,079
Federal and state income taxes payable 4,159 5,450
Restructure reserve - short-term 8,371 9,356
Accrued other expenses 18,646 12,380
- -----------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 104,353 91,319
Deferred liabilities 573 554
Deferred income taxes 4,047 --
Restructure reserve - long-term 8,738 16,394
Stockholders' equity:
Series A Convertible Preferred Stock,
$.01 par value (Authorized 5,000,000 shares, none issued) -- --
Common Stock, $.01 par value (Authorized 40,000,000 shares,
Issued 24,393,108 in 1994 and 23,234,958 in 1993) 244 232
Additional paid-in capital 134,881 124,299
Retained earnings 32,146 8,972
Less shares of common stock held in treasury at cost,
3,521,186 in 1994 and 1,016,143 in 1993 (59,273) (15,245)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 107,998 118,258
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $225,709 $226,525
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes cash and cash equivalents invested with related party of
$10,891,000 at September 24, 1994 and $32,449,000 at September 25, 1993.
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
ADVO, Inc. Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 24, September 25, September 26,
(In thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 25,171 $ 5,351 $ 22,493
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 12,786 11,133 9,158
Amortization of deferred compensation 1,662 2,350 2,643
Deferred income taxes 1,443 (10,898) (1,680)
Provisions for bad debts 3,402 2,879 3,086
Restructuring charge -- 25,750 --
Pro forma adjustment for income taxes -- 1,696 1,393
Other 1,022 276 214
Change in assets and liabilities, net of effects of acquisitions:
Accounts receivable (2,226) (2,958) (16,725)
Inventories 1,484 (1,070) 425
Other current assets 377 (966) (766)
Other assets (498) (2,079) (124)
Accounts payable 3,661 (240) 10,551
Accrued compensation and benefits 3,946 628 3,338
Customer advances 1,437 1,271 4,912
Federal and state income taxes payable (1,291) (380) 1,293
Other current liabilities 5,743 396 (517)
Restructuring charge (7,617) -- --
Deferred liabilities 19 (132) (99)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 50,521 33,007 39,595
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (546) (7,576) (6,200)
Expenditures for property and equipment (13,304) (14,189) (11,941)
Proceeds from disposals of property and equipment 85 74 125
Marketable securities -- purchases (47,388) (73,743) --
Marketable securities -- sales and maturities 35,873 53,626 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (25,280) (41,808) (18,016)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in bank overdraft -- (615) 7
Proceeds (payments) of short-term debt -- (1,475) (3,150)
Principal payments on long-term debt -- (384) (520)
Transactions related to subchapter S corporation -- (2,614) 146
Tax effect - vesting of restricted stock/options exercised 8,244 1,150 2,154
Proceeds from exercise of stock options and warrants 832 486 3,233
Purchases of common stock for treasury (44,173) (1,603) (10,345)
Cash dividends paid (1,476) (803) --
Other -- (10) 1
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (36,573) (5,868) (8,474)
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (11,332) (14,669) 13,105
Cash and cash equivalents at beginning of year 51,080 65,749 52,644
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 39,748 $ 51,080 $ 65,749
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Income tax payments $ 7,810 $ 11,705 $ 8,168
Interest paid -- 195 223
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
27
<PAGE>
ADVO, Inc. Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Convertible Additional Retained
Preferred stock Common stock Treasury stock paid-in earnings Total
(In thousands, except share data) Shares Amount Shares Amount Shares Amount capital (deficit) equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance --
September 28, 1991 2,301,780 $12,680 15,636,051 $156 (429,622) $ (3,312) $101,106 $(19,347) $ 91,283
Purchase of common
stock for treasury (520,584) (10,345) (10,345)
Cancellation of
restricted stock (45,168)
Grant of restricted stock 119,500 1 1
Exercise of stock options 206,717 2 1,500 15 1,416 1,433
Conversion of preferred stock (69,241) (302) 80,111 1 301
Exercise of warrants 530,973 5 1,795 1,800
Tax effect --
employee stock plans 2,154 2,154
Amortization of deferred
compensation (1) 2,643 2,643
Accretion of preferred stock 693 (693)
Cash distribution to satisfy
subchapter S tax liability (1,003) (1,003)
Capital contribution to
subchapter S corporation 250 250
Redemption of subchapter S
common stock (25) (380) (405)
Sale of subchapter S
common stock 1,000 1,000
Pro forma provision for
income taxes 1,393 1,393
Net Income 22,493 22,493
- ------------------------------------------------------------------------------------------------------------------------------------
Balance --
September 26, 1992 2,232,539 13,071 16,528,184 165 (948,706) (13,642) 110,640 2,463 112,697
Purchase of common
stock for treasury (67,437) (1,603) (1,603)
Cancellation of
restricted stock (11,709)
Grant of restricted stock 54,000
Exercise of stock options 60,772 1 485 486
Conversion of preferred stock (2,232,539) (9,700) 2,594,212 26 9,674
Tax effect --
employee stock plans 1,150 1,150
Amortization of deferred
compensation (1) 2,350 2,350
Accretion of preferred stock (3,371) 3,371
Cash dividends declared
($.06 per share) (1,245) (1,245)
Stock split 4,009,499 40 (40)
Cash settlement for fractional
shares on stock split (10) (10)
Cash distributions to satisfy
subchapter S tax liability (2,614) (2,614)
Pro forma provision for
income taxes 1,696 1,696
Net Income 5,351 5,351
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued on following page.)
28
<PAGE>
ADVO, Inc. Consolidated Financial Statements
<TABLE>
<CAPTION>
Series A Convertible Additional Retained
Preferred stock Common stock Treasury stock paid-in earnings Total
(In thousands, except share data) Shares Amount Shares Amount Shares Amount capital (deficit) equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance --
September 25, 1993 0 $0 23,234,958 $ 232 (1,016,143) $(15,245) $ 124,299 $ 8,972 $118,258
Purchase of common
stock for treasury (2,514,043) (44,173) (44,173)
Grant of restricted stock 44,000 1 9,000 145 (145) 1
Exercise of stock options 1,114,150 11 821 832
Tax effect --
employee stock plans 8,244 8,244
Amortization of deferred
compensation (1) 1,662 1,662
Cash dividends declared
($.095 per share) (1,997) (1,997)
Net Income 25,171 25,171
Balance --
September 24, 1994 0 $0 24,393,108 $244 (3,521,186) $(59,273) $ 134,881 $ 32,146 $107,998
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Unamortized deferred compensation at September 24, 1994, September 25, 1993
and September 26, 1992 was $1,991,000, $2,726,000 and $4,264,000,
respectively.
See accompanying Notes to Consolidated Financial Statements.
29
<PAGE>
ADVO, Inc. Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Accounting Policies
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 are eliminated. Certain
reclassifications have been made in the fiscal 1993 and 1992 financial
statements to conform with the fiscal 1994 presentation. ADVO's fiscal closing
date is the last Saturday in September.
Cash Equivalents Cash equivalents include highly liquid investment
instruments with original maturities of three months or less. These investments
are valued at cost, which approximates market.
Marketable Securities Marketable securities, consisting principally of U.S.
Treasury securities and municipal bonds, are carried at cost, which approximates
market at September 24, 1994 and September 25, 1993. The cost of securities sold
is determined by the specific identification method.
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.
Property and Equipment Property and equipment are recorded at cost.
Depreciation and amortization are computed generally by the straight-line method
over the estimated useful lives of the respective assets or over the terms of
the related leases.
Intangible Assets The excess of cost over net assets acquired and other
intangible assets related to acquisitions are being amortized over their
expected useful lives which range from 3 to 20 years.
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. In-store marketing services
revenue is recognized as hours are worked.
Earnings per Common Share Earnings per common share is computed based on the
weighted average number of common and common equivalent shares outstanding
during the year. Common share equivalents consist of the average number of
shares issuable upon the exercise of warrants and options, and the assumed
conversion of preferred stock.
Note 2 Acquisitions
On August 19, 1993 a plan of merger was consummated between the Company and
Marketing Force, Inc., ("MF" or "Marketing Force") a privately held specialty
marketing company located in Michigan through the exchange of 2,115,956 shares
of ADVO Common Stock for all of the outstanding stock of MF. The merger was
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements were restated to include the accounts and
operations of MF for all periods presented. MF's fiscal year end and reported
financial results were adjusted to conform to the financial presentation of the
Company.
There were no significant intercompany transactions or differences in
accounting policies between the Company and MF. Prior to the merger, MF had
elected to be taxed as an S corporation for U.S. Federal and State purposes. As
an S corporation, MF's shareholders were required to pay individual income taxes
based on MF's taxable income. Income taxes on income for the periods MF was a
subchapter S corporation have been provided on a pro forma basis at an effective
rate of 41%. The 41% effective rate is ADVO's estimate of the federal and state
tax rates that would have been applied to MF had it been merged with ADVO for
the periods presented.
During the three year period ended September 24, 1994, the Company has also
made certain acquisitions aimed at expanding its direct mail operations. These
acquisitions have been accounted for under the purchase method of accounting
and, accordingly, the results of operations of the acquired companies have been
included in the consolidated statements of operations from their acquisition
dates. The acquired assets have been recorded at their estimated fair values.
These acquisitions did not have a material pro forma effect on operations for
periods prior to the acquisition.
The excess of the purchase price over the estimated fair values of net
assets acquired of $4.3 million is reflected in other assets. Also included in
other assets is $7.6 million of other intangible assets, net of accumulated
amortization, which were acquired in the acquisitions. As of September 24, 1994
and September 25, 1993, accumulated amortization of goodwill and other
intangibles was $4.7 million and $3.4 million, respectively.
30
<PAGE>
ADVO, Inc. Notes to Consolidated Financial Statements
Note 3 Accrued Compensation and Benefits
The composition of accrued compensation and benefits is as follows:
<TABLE>
<CAPTION>
September 24, September 25,
(In thousands) 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C>
Compensation $18,839 $14,764
Workers' compensation 5,798 5,225
Employee withholdings and
other benefits 3,484 4,186
- ------------------------------------------------------------------------------
Total $28,121 $24,175
- ------------------------------------------------------------------------------
</TABLE>
Note 4 Financing Arrangements
ADVO has in place a credit facility with a bank providing up to $25 million of
combined borrowing availability pursuant to a Revolving Credit Agreement which
expires December 31, 1995. Borrowing under the agreement may take the form of
either a domestic loan, a certificate of deposit loan, a money market loan, or
a Eurodollar loan, as defined in the agreement. The interest rate for such
borrowing will be at least equal to the bank's base rate for the particular type
of loan and will vary from that rate depending upon the borrowing period. The
Company pays a commitment fee of one quarter of one percent per annum on the
average daily balance of the unused portion of the commitment. The terms of the
agreement include certain covenants which provide restrictions relating to the
maintenance of minimum levels of working capital and net worth, and includes
requirements to maintain certain financial ratios. At September 24, 1994, there
are no borrowings under the Revolving Credit Agreement. The Company has
outstanding letters of credit of approximately $6.7 million under agreements
primarily related to its workers' compensation program.
Note 5 Stockholders' Equity
The Series A Convertible Preferred Stock (the "Preferred Stock") was held by
Warburg, Pincus Capital Partners, L.P. ("Warburg"), Welsh, Carson, Anderson &
Stowe IV (WCAS IV) and WCAS Venture Partners (WCAS VP) (together, the
"Investors"). On February 11, 1993 the holders of ADVO preferred stock converted
all such shares to 2,594,212 shares (3,242,765 shares after the 5-for-4 stock
split) of Company Common Stock. Accretion of the Preferred Stock dividend
amounted to $693,000 in fiscal 1992. Upon conversion of the Preferred Stock to
ADVO common stock in fiscal 1993 the entire accredited dividend was reversed in
the amount of $3,371,000. The Preferred Stock had five votes per share, and the
holders had the right to elect a majority of the Board of Directors as long as
at least half of the Preferred Stock was outstanding.
On August 27, 1986, 2,301,780 warrants to purchase shares of ADVO common
stock were issued to the Investors for $1,000,000 and are exercisable at any
time through August 27, 1996. In the event the Company issues common stock or
equivalents at a price below either current market price or the exercise price
of the warrants, the number of shares issuable in exchange for the warrants and
the warrant exercise price are subject to adjustment. At September 24, 1994, the
exercise price is $2.71 per share and the number of common shares issuable upon
exercise of the warrants is 2,656,827.
On August 18, 1992 WCAS IV and WCAS VP exercised all of their warrants to
purchase 530,973 shares (633,716 shares after the 5-for-4 stock split) of ADVO
common stock at an exercise price of $3.39 per share. These shares were all
distributed to the individual partners of those partnerships in conjunction with
the warrant exercise. WCAS IV and WCAS VP converted 69,241 preferred shares into
80,111 shares of ADVO common stock. These shares were then purchased for
treasury by ADVO pursuant to an election made by the holders of ADVO stock
subscription warrants to pay the warrant exercise price with that common stock.
On March 5, 1993 a 5-for-4 stock split was effected in the form of a 25%
stock dividend for the holders of Company Common Stock which resulted in the
issuance of 4,009,499 shares of Common Stock. Share data have been restated for
all periods presented to reflect the stock split.
During fiscal 1993, the Company implemented 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. At September 24, 1994 there are
5,007,981 shares of common stock reserved for issuance upon the exercise of
stock options and the exercise of warrants.
31
<PAGE>
ADVO, Inc. Notes to Consolidated Financial Statements
Note 6 Benefit 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
a non-qualified savings plan for the commissioned sales staff. Both plans
permit contributions by employees of up to 10% of their compensation. The
Company matches up to 6% of employees' compensation, depending upon the level
of employee contribution. The expense for matching contributions was
$3,590,000, $3,025,000 and $2,044,000 for fiscal 1994, 1993 and 1992,
respectively.
During fiscal 1994 the Company made certain amendments to its employee
stock options plans with respect to options granted under the plans to make
available reload options. The reload option feature allows for the exercise
of options in "stock-for-stock" transactions enabling the employee to retain
any further appreciation in the market value 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 Company's Compensation Committee or
Board of Directors. Reload options may be authorized with respect to options
that are themselves granted as reload options.
The 1986 Stock Option Plan provides for the granting of non-qualified
options for the purchase of up to 625,000 shares of common stock to key
employees. The terms of the options may not exceed ten years, and the option
prices 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. Certain grants also stipulate that the
market price of the Company's common stock must reach certain levels before the
options become exercisable in addition to the 25% per year time vesting
provisions. These options will become exercisable for 90 days at six years from
the grant date if the market price provision is not met. At September 24, 1994
there were 103,393 options exercisable and 13,988 options available for future
grant under this plan. At September 25, 1993 there were 197,213 options
exercisable and 1,897 options available for future grant under this plan.
<TABLE>
<CAPTION>
Option price
Shares per share
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at September 28, 1991 387,796 $ 3.60-17.35
Granted 12,500 14.35-15.40
Cancelled (6,510) 4.10
Exercised (96,865) 4.10-8.70
- --------------------------------------------------------------------------------
Outstanding at September 26, 1992 296,921 3.60-17.35
Exercised (37,991) 3.60-8.10
- --------------------------------------------------------------------------------
Outstanding at September 25, 1993 258,930 4.20-17.35
Granted 64,761 17.63-18.75
Cancelled (25,411) 4.60-18.63
Exercised (122,725) 4.20-14.35
- --------------------------------------------------------------------------------
Outstanding at
September 24, 1994 175,555 $4.20-18.75
- --------------------------------------------------------------------------------
</TABLE>
The 1988 Stock Option Plan provides for the granting of non-qualified options
for the purchase of up to 3,300,000 shares of common stock to key employees. The
terms of the options may not exceed ten years, and the option prices shall not
be less than the fair market value of the common stock on the date of the grant.
Each option granted is exercisable at a specified rate each year, generally 25%,
as determined by the Board of Directors at the date of grant. Certain grants
also stipulate that the market price of the Company's common stock must reach
certain levels before the options become exercisable in addition to the 25% per
year time vesting provisions. These options will become exercisable for 90 days
at six years from the grant date if the market price provision is not met. At
September 24, 1994 there are 662,161 options exercisable and 181,185 options
available for future grant under this plan. At September 25, 1993 there were
1,755,357 options exercisable and 174,770 options available for future grant
under this plan.
<TABLE>
<CAPTION>
Option price
Shares per share
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at September 28, 1991 2,259,266 $ 3.30-17.35
Granted 128,125 14.35-19.10
Cancelled (68,750) 4.20-13.80
Exercised (163,406) 4.20-13.80
- --------------------------------------------------------------------------------
Outstanding at September 26, 1992 2,155,235 3.30-19.10
Granted 209,875 17.13-22.00
Cancelled (6,250) 19.25
Exercised (30,985) 4.80-13.80
- --------------------------------------------------------------------------------
Outstanding at September 25, 1993 2,327,875 3.30-22.00
Granted 1,228,099 15.75-18.63
Cancelled (49,999) 4.80-21.30
Exercised (1,330,376) 3.30-16.30
- --------------------------------------------------------------------------------
Outstanding at
September 24, 1994 2,175,599 $ 3.30-22.00
- --------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
ADVO, Inc. Notes to Consolidated Financial Statements
The 1986 Employee Restricted Stock Plan provides for the granting of up to
2,437,500 shares of common stock to executives who, with certain exceptions, are
subject to specified periods of continuous employment (generally vesting one-
third per year over three years). The market value of shares at the date of
award in excess of cash consideration received is being amortized as
compensation expense over the restriction period. These shares are votable by
the holders, and the vesting period is determined by the Board of Directors at
the date of the grant. The charge to operations in connection with the
restricted stock was $1,554,000, $2,286,000, and $2,569,000 for the years ended
September 24, 1994, September 25, 1993 and September 26, 1992, respectively.
Unamortized deferred compensation is $1,908,000 at September 24, 1994. There are
52,254 shares available for future grant under this plan at September 24, 1994.
<TABLE>
<CAPTION>
Shares
- --------------------------------------------------------------------------------
<S> <C>
Outstanding at September 28, 1991 2,206,040
Granted 149,375
Cancelled (56,460)
- --------------------------------------------------------------------------------
Outstanding at September 26, 1992 2,298,955
Granted 55,000
Cancelled (12,709)
- --------------------------------------------------------------------------------
Outstanding at September 25, 1993 2,341,246
Granted 44,000
- --------------------------------------------------------------------------------
Outstanding at
September 24, 1994 2,385,246
- --------------------------------------------------------------------------------
</TABLE>
The 1990 Non-employee Directors' Restricted Stock Plan provides for an aggregate
maximum of up to 125,000 shares of common stock to be issued under stock awards.
During fiscal 1994, 9,000 shares were granted, 3,000 vested immediately and
6,000 shares are vesting in installments over a period of two years. The market
value of shares at the date of award is being charged to operations over the
restriction period with $108,000, $64,000 and $74,000 charged for the fiscal
years ended September 24, 1994, September 25, 1993 and September 26, 1992.
Unamortized deferred directors' compensation is $83,000 at September 24, 1994.
There are 88,500 shares available for future grant under this plan at September
24, 1994.
Note 7 Segment Information
During fiscal 1993 the Company consummated a merger with an in-store marketing
service company (see Note 2) which is being accounted for under the pooling of
interests method. Information with regard to revenues, operating income,
identifiable assets, capital expenditures and depreciation and amortization
expense between the Company's direct mail and in-store marketing segments is as
follows:
<TABLE>
<CAPTION>
September 24, September 25, September 26,
(In thousands) 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Direct Mail $920,325 $856,626 $787,648
In-store marketing 55,168 54,168 40,944
- --------------------------------------------------------------------------------
Total $975,493 $910,794 $828,592
- --------------------------------------------------------------------------------
Operating Income (1)
Direct Mail $ 39,650 $ 2,298 $ 28,630
In-store marketing 933 4,505 3,602
- --------------------------------------------------------------------------------
Total $ 40,583 $ 6,803 $ 32,232
- --------------------------------------------------------------------------------
Identifiable Assets
Direct Mail $207,659 $208,885 $189,758
In-store marketing 18,050 17,640 11,312
- --------------------------------------------------------------------------------
Total $225,709 $226,525 $201,070
- --------------------------------------------------------------------------------
Capital Expenditures
Direct Mail $ 10,357 $ 12,525 $ 11,178
In-store marketing 2,947 1,664 763
- --------------------------------------------------------------------------------
Total $ 13,304 $ 14,189 $ 11,941
- --------------------------------------------------------------------------------
Depreciation and
Amortization
Direct Mail $ 11,955 $ 10,589 $ 8,722
In-store marketing 831 544 436
- --------------------------------------------------------------------------------
Total $ 12,786 $ 11,133 $ 9,158
- --------------------------------------------------------------------------------
</TABLE>
(1) Reflects one-time restructuring charge of $25.8 million in fiscal 1993.
Note 8 Restructuring
During the fourth quarter of the fiscal year ended September 25, 1993, ADVO
recorded a one-time restructuring charge to operations of $25.8 million. The
charge consisted of three elements; the shutdown/relocation of several regional
facilities aimed at repositioning their location in a more geographically
strategic area; the reorganization of certain management groups to enhance the
Company's cost containment initiatives as well as restructure the current
management team; and the discontinuation of several Micromarketing initiatives
that have proven unprofitable.
During fiscal 1994 the Company recorded reductions of $8.6 million to the
reserve in accordance with its plan of restructure. The $8.6 million included
costs for the shutdown and consolidation of its Indianapolis production facility
into other regions; the downsizing of its former Atlantic Division office;
severance and related costs for upgrades to the Company's sales management team
and the abandonment of certain nonprofitable Micromarketing programs. As of
33
<PAGE>
ADVO, Inc. Notes to Consolidated Financial Statements
September 24, 1994 the Company had terminated approximately 77 people and
recorded $1.4 million in severance pay and related benefits to the restructure
reserve. The Company's management continues to believe that cost efficiencies
and future benefits originally anticipated in its plan of restructure will be
realized. The Company expects to utilize the remaining reserve over future
periods with benefits being realized over the same periods through more
efficient and low cost operations and enhanced revenue growth through improved
management ability and structure.
Note 9 Income Taxes
In the first quarter of fiscal 1994, the Company changed its method of
accounting for income taxes from the deferred method to the liability method
required by FASB Statement No. 109, "Accounting for Income Taxes". As permitted
by Statement 109, the Company has elected not to restate prior years. The effect
of the change was not material to the Company's results of operations or
financial position. The components of the provision for income taxes by taxing
jurisdiction were:
<TABLE>
<CAPTION>
Liability Deferred Method
Method
Year ended Year ended Year ended
September 24, September 25, September 26,
(In thousands) 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $12,146 $10,957 $10,046
Deferred 842 (8,759) (1,330)
- --------------------------------------------------------------------------------
Total Federal 12,988 2,198 8,716
- --------------------------------------------------------------------------------
State:
Current 2,504 2,697 2,668
Deferred 601 (2,139) (350)
- --------------------------------------------------------------------------------
Total State 3,105 558 2,318
Total Provision $16,093 $ 2,756 $11,034
- --------------------------------------------------------------------------------
</TABLE>
The Company's effective income tax rate differed from the Federal statutory
rate as follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 24, September 25, September 26,
1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 34.0% 34.0%
State income taxes,
net of federal
benefit 4.9 4.5 4.6
Tax benefits related
to Section 338 basis
adjustment -- (12.3) (5.8)
Targeted jobs tax
credit (.2) (.9) (.4)
Other (.7) 8.7 .5
- --------------------------------------------------------------------------------
Effective income
tax rate 39.0% 34.0% 32.9%
- --------------------------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities as
required by FASB Statement No. 109 are as follows:
<TABLE>
<CAPTION>
Year ended
September 24,
(In thousands) 1994
- --------------------------------------------------------------------------------
<S> <C>
Deferred Tax Assets:
Reserve for restructure 7,119
Reserve for deferred compensation 2,247
Reserve for employee benefits 3,838
Other 4,941
- --------------------------------------------------------------------------------
Total deferred tax assets 18,145
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
Tax over book depreciation and amortization (7,573)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (7,573)
- --------------------------------------------------------------------------------
Net Federal and State Deferred assets 10,572
- --------------------------------------------------------------------------------
</TABLE>
Deferred income taxes (benefits) in fiscal 1993 and 1992 represent the tax
effects of transactions which are reported in different periods for tax and
financial reporting purposes. Changes in deferred federal and state income taxes
include the effects of:
<TABLE>
<CAPTION>
Year ended Year ended
September 25, September 26,
(In thousands) 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C>
Depreciation and
amortization $ 139 $ (223)
Amortization
of deferred
compensation (657) (774)
Reserve for
restructuring (9,979) --
Various accrued
expenses (401) (683)
- --------------------------------------------------------------------------------
$(10,898) $(1,680)
- --------------------------------------------------------------------------------
</TABLE>
Note 10 Commitments and Contingencies
ADVO leases property and equipment under noncancellable operating lease
agreements which expire at various dates through 2004. The leases generally
provide that the Company pay the taxes, insurance and maintenance expenses
related to the leased assets. Rental commitments at September 24, 1994 under
long term noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
(In thousands)
- ----------------------------------------------------------
<S> <C>
Fiscal year:
1995 $17,966
1996 14,950
1997 9,417
1998 7,033
1999 5,486
Thereafter 13,418
- ----------------------------------------------------------
Total minimum lease payments $68,270
- ----------------------------------------------------------
</TABLE>
34
<PAGE>
Certain of these leases contain renewal options and certain leases also provide
for cost escalation payments. Rental expense for the years ended September 24,
1994, September 25, 1993 and September 26, 1992 was approximately $24,947,000,
$24,487,000, and $23,246,000, respectively.
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 of the Company.
Outstanding commitments for capital expenditures at September 24, 1994
totaled $8.5 million.
Note 11 Related Party Transactions
The Company invests in money market mutual funds and marketable securities
through an investment advisor, Warburg, Pincus Counsellors, Inc.
("Counsellors"). The general partner of Warburg, Pincus Capital Partners, L.P.
("Warburg") who is the Company's largest shareholder, owns a majority interest
in Counsellors. Income earned on investments managed by Counsellors was
$1,885,000, $1,932,000 and $2,317,000 in fiscal 1994, 1993 and 1992,
respectively. At September 24, 1994 and September 25, 1993, $42,283,000 and
$52,817,000, respectively, were being managed by Counsellors. Two Directors of
the Company are officers of Warburg and another Director is a Director of the
various Counsellors managed mutual funds.
Note 12 Recent Accounting Pronouncements
During November 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Post Employment Benefits". The standard, which requires the accrual method of
accounting for post-employment benefits will be adopted by the Company in its
1995 fiscal year. The Company expects the cumulative effect of this accounting
change to be approximately $1.5 million after tax or $.06 per share. The Company
estimates that the ongoing annual expense of this accounting change on future
periods will not be material to the Company's financial statements.
In May of 1993 the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Debt and
Equity Securities". The standard expands the use of fair value accounting for
debt and equity securities. The Company will also adopt this standard in fiscal
1995. The Company expects that there will not be a material impact to the
Company's consolidated financial position or results of operations as a result
of the adoption this statement.
Note 13 Subsequent Events
On October 31, 1994 the Company announced the sale of its 50% ownership in
Infobase Services to Acxiom Corporation, the other joint venture partner. The
Company will recognize a before tax gain on this transaction of approximately
$2.2 million in its first fiscal quarter of 1995.
Note 14 Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
(In millions, except per share data)
Fiscal year ended First Second Third Fourth
September 24, 1994 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $246.8 $229.7 $256.1 $242.9
Gross profit 62.2 55.4 69.0 62.2
Operating income 11.3 3.7 14.6 10.9
Net income 7.3 2.4 8.9 6.6
Earnings per share (1) .29 .10 .38 .28
Common stock price
High 17 1/2 20 18 1/2 18 3/4
Low 14 1/4 16 3/4 15 7/8 15
- --------------------------------------------------------------------------------
<CAPTION>
Fiscal year ended First Second Third Fourth
September 25, 1993 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $228.0 $212.8 $235.4 $234.6
Gross profit 57.9 50.5 60.8 57.2
Operating income (loss) 9.5 3.0 12.1 (17.8)
Net income (loss) 6.5 2.1 8.4 (11.6)
Earnings (loss)
per share (1) .26 .08 .33 (.53)
Common stock price
High 22 1/8 24 3/4 24 1/4 21 3/4
Low 18 1/2 20 3/8 20 16
- --------------------------------------------------------------------------------
</TABLE>
(1) Both primary and fully diluted.
35
<PAGE>
ADVO, Inc. Consolidated Financial Statements
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 24, 1994 and September 25, 1993, and the related consolidated
statements of operations, cash flows and changes in stockholders' equity for
each of the three years in the period ended September 24, 1994. 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 24, 1994 and September 25, 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 24, 1994 in conformity with generally accepted accounting principles.
Hartford, Connecticut
October 19, 1994
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.
Robert Kamerschen
Chairman and Chief Executive Officer
Lowell W. Robinson
Executive Vice President and
Chief Financial Officer
Robert S. Hirst
Vice President and Controller
October 19, 1994
36
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ADVO, INC.
AS OF SEPTEMBER 24, 1994
<TABLE>
<CAPTION>
PERCENT OF VOTING
STATE OF SECURITIES OWNED AS
INCORPORATION NAME OF SUBSIDIARY OF SEPTEMBER 24, 1994
------------- ------------------ ---------------------
<C> <S> <C>
Delaware Trans-ADVO, Inc. 100
Delaware ADVO Target Communications 100
Delaware ADVO Investment Company, Inc. 100
Delaware ADVOLink, Inc. 55
Delaware Value Fair, Inc. 100
Delaware MBV, Inc. 100
Delaware Marketing Force, Inc. 100(1)
</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, 1994, included in the
1994 Annual Report to Stockholders of ADVO.
Our audits also included the consolidated financial statement schedules of
ADVO listed in item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the consolidated financial statement schedules referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Post-Effective Amendment No. 3 to the ADVO Form S-8 No. 33-40402)
pertaining to the 1986 Employee Restricted Stock Plan, as amended, (Form S-8
No. 33-15856) pertaining to the 1986 Stock Option Plan, and (Post-Effective
Amendment No. 4 to the ADVO Form S-8 No. 33-52747) pertaining to the 1988 Non-
Qualified Stock Option Plan, as amended, of ADVO and in the related
Prospectuses of our report dated October 19, 1994, 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 schedules included in this Annual Report (Form-10K) of ADVO.
Ernst & Young LLP
Hartford, Connecticut
December 12, 1994
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-24-1994
<PERIOD-START> SEP-26-1993
<PERIOD-END> SEP-24-1994
<CASH> 39,748
<SECURITIES> 31,392
<RECEIVABLES> 60,445
<ALLOWANCES> 5,105
<INVENTORY> 5,138
<CURRENT-ASSETS> 151,100
<PP&E> 117,448
<DEPRECIATION> 60,939
<TOTAL-ASSETS> 225,709
<CURRENT-LIABILITIES> 104,353
<BONDS> 0
<COMMON> 244
0
0
<OTHER-SE> 107,754
<TOTAL-LIABILITY-AND-EQUITY> 107,998
<SALES> 0
<TOTAL-REVENUES> 975,493
<CGS> 0
<TOTAL-COSTS> 726,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,402
<INTEREST-EXPENSE> 1,947
<INCOME-PRETAX> 41,264
<INCOME-TAX> 16,093
<INCOME-CONTINUING> 40,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,171
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
