SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - January 26, 1996
ADVO, INC.
(Exact name of registrant as specified in charter)
Delaware 0-14984 06-0885252
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
One Univac Lane, P.O. Box 755, Windsor, Connecticut 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (860) 285-6100
NO CHANGE
(Former name or former address, if changed since last report)<PAGE>
Item 5. Other Events
On January 17, 1996, ADVO, Inc. (the "Company") an-
nounced that its Board of Directors had declared a special
dividend distribution of $10.00 per share in cash (the "Special
Dividend") on shares of the Company's common stock, $.01 par
value (each, a "Share"), payable on March 5, 1996 (the "Payment
Date") to stockholders of record on February 20, 1996 (the
"Record Date"), subject to financing as described below. Also
on January 17, 1996, the Company announced its results from the
first quarter of fiscal year 1996.
In order to provide the funds necessary to pay the
Special Dividend and the transaction expenses incurred in con-
nection therewith and for working capital and capital expendi-
tures, the Company has accepted a commitment from The Chase
Manhattan Bank (National Association) ("Chase Manhattan") to
provide, on specified terms and subject to specified condi-
tions, up to $220 million in senior bank financing (the commit-
ment letter from Chase Manhattan together with its Annex A sum-
mary of terms and condition, the "Commitment Letter"). A copy
of such summary of terms and condition (the "Term Sheet") has
been filed as an exhibit to this Current Report on Form 8-K (the
"Form 8-K") and is incorporated herein by reference. The Commitment
Letter will terminate if the initial borrowings under the facilities
contemplated by the Commitment Letter shall not have occurred on or
prior to March 31, 1996. A portion of the credit facilities may be
syndicated to other banks and financial institutions acceptable to
Chase Manhattan and the Company (the "Other Banks"; together with
Chase Manhattan, the "Banks"). Chase Manhattan will act as
the administrative agent and arranger for the credit facili-
ties. The Commitment Letter provides that $195 million of the
credit facilities may be used to pay the Special Dividend and
related expenses. The Commitment Letter is described in
greater detail below. The Company expects that the balance of
the funds for the Special Dividend will be provided by cash on
hand. Payment of the Special Dividend is subject to the fi-
nancing as described above.
Warburg, Pincus Capital Partners, L.P. ("Warburg"),
the Company's largest stockholder, which holds approximately
2.92 million shares of ADVO's common stock and a warrant (the
"Warburg Warrant") to purchase approximately 2.66 million
shares of ADVO's common stock, has advised the Company that it
intends to exercise the Warburg Warrant in order to receive the
Special Dividend.
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The Company's Board of Directors determined that,
pursuant to the anti-dilution provisions in the Company's em-
ployee stock option plans, it would make the following equi-
table adjustments to outstanding employee stock options ("Op-
tions") to preserve but not enhance their value after payment
of the Special Dividend. Options with exercise prices above
$12 per Share will be adjusted by reducing the exercise price
by the amount of the Special Dividend on the Payment Date. The
exercise prices of Options with exercise prices at or below $12
(all of which are currently vested) will not be adjusted. How-
ever, payment for any such Options that are exercised prior to
the Record Date may be made by the withholding of Shares other-
wise to be issued to the holder of such Options on exercise to
the extent that the holder of such Options does not have Shares
which he has held for more than six months available to sur-
render to pay the exercise prices of such Options. Reload op-
tions will be granted upon such exercises prior to the Record
Date on the following terms: (i) the number of Shares subject
to the reload options shall equal the number of Shares sur-
rendered or withheld to pay the exercise price, and (ii) the
Options granted as reload options shall have an exercise price
equal to 100% of the fair market value of the Shares on the
date of grant; shall have a term equal to the portion of the
term of the related Option remaining (so that the stated expi-
ration date of the reload option shall be the same as that of
the related Option); shall be immediately exercisable; and
shall be subject to cancellation and forfeiture, acceleration
of exercisability, adjustment and the other terms specified in
the employee stock plans and in the form of reload option
agreement. In addition, the Board of Directors decided to
reduce the performance condition on the vesting of performance-
based Options by the amount of the Special Dividend. As of
December 30, 1995, the Company had approximately 2,054,000 Op-
tions outstanding with exercise prices above $12 and approxi-
mately 556,000 Options outstanding (all of which are vested)
with exercise prices at or below $12. As a result of such
adjustments the Company expects to record a one-time noncash
charge in the second quarter, the amount of which will depend
principally upon the market price of the Shares after the Special
Dividend is declared. In addition, certain other charges related
to the Special Dividend and the Company's exploration of strategic
alternatives will be taken in future periods.
The following description constitutes a summary of
the principal terms and conditions expected to be incorporated
into the definitive credit agreement (the "Credit Agreement")
contemplated by the Commitment Letter. No assurance can be
given that the Credit Agreement, if entered into by the Company
and the Banks, will contain the terms and conditions described
-2-<PAGE>
below or otherwise not be materially different from those de-
scribed below. The definitive Credit Agreement may contain
more or less restrictive provisions than are described below.
This summary and the summary above of the senior bank financing
arrangements are qualified in their entirety by reference to
the text of the Term Sheet. The Company expects to enter into
a definitive Credit Agreement with Chase Manhattan and the
Other Banks immediately prior to the payment of the Special
Dividend. When and if a definitive agreement relating to the
new credit facilities is executed, a copy of its text will be
filed as an exhibit to a new Current Report on Form 8-K.
The Commitment Letter contemplates three facilities
(collectively, the "Facilities"):
1. a six-year reducing revolving credit facility in the
amount of $65 million, with a final maturity of March
31, 2002 ("Facility A");
2. a six-year term loan in the amount of $65 million,
with a final maturity of March 31, 2002 ("Facility
B"); and
3. an eight-year term loan in the amount of $90 million,
with a final maturity of March 31, 2004 ("Facility
C").
The proceeds of Facility A may be used by the Company to fund a
portion of the Special Dividend, to provide for ongoing working
capital and capital expenditures, and to pay expenses related
to the Special Dividend. The proceeds of Facilities B and C
may be used by the Company to fund a portion of the Special
Dividend and to pay the expenses related to it.
Facility A provides for revolving credit loans be
made to the Company at any time until the final maturity of
Facility A, up to $6.5 million, according to the following
availability schedule:
September 30, 1997 90%
September 30, 1998 80%
September 30, 1999 65%
September 30, 2000 50%
September 30, 2001 35%
March 31, 2002 0%
The final maturity of Facility A is March 31, 2002. The bor-
rowings under the facility must be repaid in full by such time.
-3-<PAGE>
Facility B provides for a term loan in the aggregate
principal amount of up to $65 million. It is anticipated that
the loan to be made pursuant to Facility B will be incurred by
the Company at the closing of the Credit Agreement. The Com-
pany will make quarterly amortization installments on the fa-
cility, beginning with the first installment on September 30,
1996, with the installments ranging from $1.3 million to $4.8
million. The final maturity of Facility B is March 31, 2002.
The borrowings under the facility must be repaid in full by
such time.
Facility C provides for a term loan in the aggregate
principal amount of up to $90 million. It is anticipated that
the loan to be made pursuant to Facility C will be incurred by
the Company at the closing of the Credit Agreement. Prior to
June 30, 2002, the borrowings under this facility will not am-
ortize. Beginning with the first installment on June 30, 2002,
the Company will make equal quarterly amortization installments
of $11.25 million. The final maturity of Facility C is March
31, 2004. The borrowings under the facility must be repaid in
full by such time.
It is expected that the Facilities will be guaranteed
by all of the Company's subsidiaries, excluding Marketing
Force, Inc., which the Company announced on September 26, 1995
its intention to sell and which sale would be treated as a dis-
continued operation for financial reporting purposes.
In addition to the scheduled installments due on Fa-
cilities B and C and the reducing availability of borrowings
under Facility A, the Commitment Letter provides that the Com-
pany must make the following mandatory repayments and reduc-
tions on the Facilities: (i) an amount equal to the amount of
all net cash proceeds from the disposition of assets of the
Company and its subsidiaries out of the ordinary course of
business and other than from the contemplated sale of Marketing
Force, Inc., (ii) an amount equal to the amount of insurance
recoveries not promptly applied toward repair or replacement of
the damaged properties, (iii) an amount equal to 80% of the
Company's net equity proceeds until the Total Leverage Ratio
(as defined in the Commitment Letter) is less than 4.0 to 1.0,
excluding the proceeds from the exercise of existing warrants
and/or any existing or future Options, and (iv) an amount equal
to 60% of Excess Cash Flow (as defined in the Commitment Let-
ter) beginning with fiscal year 1996. These mandatory repay-
ments and reductions shall be applied on a pro rata basis
across the maturities of outstanding loans under the Facilities
B and C on a pro rata basis among the Facilities A, B and C.
The portion of mandatory repayments and reductions applied to
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Facility B shall be equal to the sum of outstanding
indebtedness under Facilities A and B divided by the sum of
total outstanding indebtedness under Facilities A, B and C.
The portion of such payments to be applied to Facility C shall
be equal to the outstanding indebtedness under Facility C
divided by the sum of total outstanding indebtedness under
Facilities A, B and C. To the extent that the borrowings under
Facility B have been repaid, such payments shall be applied to
the borrowings under Facility A.
The Company will have the right to prepay the borrow-
ings under the Facilities in whole and in part. Any outstand-
ing indebtedness under Facility A may be prepaid at any time.
Any outstanding indebtedness under Facilities B and C also may
be prepaid at any time, with such prepayments being applied pro
rata between Facilities B and C and, as to each such facility,
on a pro rata basis across maturities. However, the amount of
indebtedness under Facilities B and C that is prepaid may not
be reborrowed.
At the Company's option, interest will accrue on the
borrowings under the facilities at one of the following two
rates:
(1) at an annual rate equal to the London Interbank Of-
fered Rate ("LIBOR") for the corresponding deposits
of U.S. Dollars plus the Applicable Interest Margin
(as defined in the Commitment Letter and as described
below) of one, two, three, or six month interest pe-
riods or, subject to the approval of each Bank, a
nine month interest period, as selected by the Com-
pany (the "LIBOR Option"). Under this option, inter-
est would be paid at the end of each interest period
or quarterly, whichever is earlier, and calculated on
the basis of the actual number of days elapsed in a
year of 360 days, and LIBOR would be adjusted for
statutory maximum Regulation D reserve requirements;
or
(2) a rate equal to the Base Rate (as defined in the
Commitment Letter and as described below) plus the
Applicable Interest Margin (the "Base Rate Option"),
with interest being calculated on the basis of actual
days elapsed in a year of 365/366 days, or (when the
Federal Funds Rate is applicable) 360 days, payable
quarterly in arrears. The Base Rate is defined as
the higher of the Federal Funds Rate plus 0.5% or the
prime rate of Chase Manhattan.
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For amounts borrowed under Facility A and Facility B,
the Applicable Interest Margin will vary depending on the Com-
pany's Total Leverage Ratio. Under the LIBOR Option, the Ap-
plicable Interest Margins vary from 1.50% to 2.50%, with the
margin increasing as the Total Leverage Ratio increases. Under
the Base Rate Option, the Applicable Interest Margin will vary
from 0.25% to 1.25%, with the margin increasing as the Total
Leverage Ratio increases. For amounts borrowed under Facility
C, the Applicable Interest Margin will be 3.00% under the LIBOR
Option and 1.75% under the Base Rate Option.
If any covenant default occurs and remains in effect
for 10 days, interest on all outstanding amounts under the Fa-
cilities will accrue at a rate equal to the greater of: (i) 2%
in excess of the otherwise applicable LIBOR rate, plus the Ap-
plicable Interest Margin or (ii) 2% in excess of the otherwise
applicable Base Rate, plus the Applicable Interest Margin, and
will be payable upon demand. If any principal or interest pay-
able under the Credit Agreement is not paid when due (or in the
case of interest within three business days of when it is due),
interest on all outstanding amounts under the Credit Agreement
will accrue at a rate equal to the greater of: (i) 5% in excess
of the otherwise applicable LIBOR Rate, plus the Applicable
Interest Margin or (ii) 5% in excess of the otherwise appli-
cable Base Rate, plus the Applicable Interest Margin, and will
be payable on demand.
Chase Manhattan's commitment to provide Facilities
may be terminated in the event of certain customary events,
including: (a) if the terms of the proposed transaction are
materially changed, (b) if the information provided to Chase
Manhattan by or on behalf of the Company proves to have been
materially inaccurate or materially incomplete, (c) if any ad-
verse change occurs that Chase Manhattan deems materially ad-
verse in respect of the condition (financial or otherwise),
business, operations, assets (including licenses), nature of
assets, liabilities or prospects of Company and its subsidiar-
ies or the principal shareholders of the Company, (d) the fail-
ure to pay any of the fees payable to Chase Manhattan in con-
nection with the Facilities, (e) if any condition to Chase
Manhattan's obligations cannot be satisfied, or (f) any mate-
rial adverse change in the loan syndication or the capital mar-
ket conditions generally.
It is expected that the obligation of the Banks to
advance funds will be subject to various conditions precedent,
including but not limited to: (a) EBITDA (as defined in the
Commitment Letter) exceeding $55 million for the trailing four
quarter period ending December 31, 1995; (b) the Total Debt (as
defined in the Commitment Letter) at closing not exceeding $195
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million; (c) satisfactory certificates from the Company to the
Banks regarding the accuracy of the financial statements and
the EBITDA calculations; (d) no material adverse change in re-
spect of the condition (financial or otherwise), business,
operations, nature of assets, liabilities or prospects of the
Company and its subsidiaries since December 31, 1995; (e) Chase
Manhattan's review of and satisfaction with the results of a
Phase I audit for environmental matters; (f) certificates from
the Company's chief financial officer regarding the Company's
solvency and compliance with the covenants at closing; (g) no
additional indebtedness of the Company or its subsidiaries
other than the Facilities contemplated hereby, the indebtedness
to be mutually agreed upon by Chase Manhattan and the Company,
and Permitted Additional Indebtedness (as defined in the Com-
mitment Letter); (h) Chase Manhattan's review of and
satisfaction with the Special Dividend and related
transactions; (i) the Banks' review of and satisfaction with
any material litigation with respect to the Company and the
Special Dividend and related transactions; and (j) the Banks'
receipt of satisfactory legal opinions from the counsel to the
Company covering such matters as are appropriate for
transactions of this type.
The definitive documentation relating to the Facili-
ties must be satisfactory to the Banks and the Company and is
expected to contain such conditions precedents,
representations, warranties, affirmative and negative
covenants, funding and yield protection provisions, events of
default (including a change of control and ownership default if
either the majority of the board seats are occupied by members
who were not nominated by previous board members or the board
seats are obtained in a hostile manner or any person other than
Warburg shall own more than 30% of the outstanding stock) and
other provisions as are described in the Commitment Letter and
as may be generally consistent with the current practices for
facilities of this type.
Each Bank may assign up to 100% of its loans and com-
mitments (on a non pro-rata basis) under the Facilities or sell
participations therein provided that: (i) each such assignment
shall be in a minimum amount of $5 million; and (ii) no pur-
chaser of a participation shall have the right to exercise or
to cause the selling Bank to exercise voting rights in respect
of the Facilities (except as to certain basic issues). Each
Bank may grant 100% assignments to affiliates and to any Fed-
eral Reserve Bank.
In addition to the customary covenants, it is ex-
pected that the Credit Agreement will include covenants that
limit or restrict the Company's ability to incur additional
liens or other indebtedness, to change its business, to dispose
-7-<PAGE>
of assets, to engage in mergers and acquisitions, and to engage
in investments and in transactions with affiliates. The cov-
enants in the Credit Agreement also are expected to permit the
payment of dividends to the Company's stockholders (other than
the Special Dividend and related transactions) at the per share
levels of $.025 per quarter until March 31, 1997, and, after
March 31, 1997, to permit the payment of dividends out of 40%
of Excess Cash Flow to the extent that the Company's Total
Leverage Ratio is less than 3.75 to 1.0 and the Company would
be in pro forma compliance with all covenants. It is expected
that the covenants in the Credit Agreement also will provide
that the Company has purchased or entered into and remains
similarly hedged on a prospective basis with interest rate
hedging arrangements satisfactory to the Majority Banks (as
defined in the Commitment Letter) for 50% or $100 million,
whichever is less, of the outstanding loans under the
Facilities and that the Company provide financial and other
information on a regular basis to the Banks. In addition, the
Company will have to satisfy certain financial covenants
involving EBITDA that become more restrictive over time,
including meeting specified senior debt leverage ratios, total
debt leverage ratios, interest expense coverage ratios and
other coverage ratios.
The Company has agreed to pay a commitment fee of
0.50% per annum on the unused portion of commitments under Fa-
cility A if the Total Leverage Ratio is greater than or equal
to 3.5 to 1.0; otherwise the commitment fee will be 0.375%.
The Company also has agreed to pay certain other fees to Chase
Manhattan in connection with the Facilities, and to pay certain
expenses of, and provide customary indemnities to, Chase
Manhattan, its affiliates and the Other Banks under the
Facilities.
Item 7. Financial Statements and Exhibits
(c) Exhibits
(99) Additional Exhibits
(i) Press release, dated January 17, 1996, announcing the
declaration of the Special Dividend.
(ii) Annex A Summary of Terms and Condition to the Commitment
Letter of The Chase Manhattan Bank (National Association),
dated January 17, 1996.
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SIGNATURE
Pursuant to the requirements of the Securities Ex-
change Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned hereunto duly
authorized.
ADVO, INC.
(Registrant)
Date: January 26, 1996 By:/s/ Robert Kamerschen
Robert Kamerschen
Chairman and Chief
Executive Officer
-9-<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit Page
(99)(i) Press release, dated January 17, 1996,
announcing the declaration of the
Special Dividend.
(ii) Annex A Summary of Terms and Condition to the
Commitment Letter of The Chase Manhattan Bank
(National Association), dated January 17, 1996.
-10-<PAGE>
Exhibit 99(i)
[NEWS FROM ADVO, INC. LETTERHEAD]
ADVO DECLARES SPECIAL CASH DIVIDEND OF $10 PER SHARE
Windsor, CT - January 17, 1996 - ADVO, Inc. (NYSE:AD)
announced today that its Board of Directors has declared a
special cash dividend of $10 per share of common stock. The
special dividend is expected to be paid on March 5, 1996, to
shareholders of record on February 20, 1996.
In order to provide the funds necessary to pay the
special dividend, and to pay the transaction expenses incurred
in connection therewith and for working capital, ADVO has
received a commitment from the Chase Manhattan Bank (National
Association) to provide up to $220 million in senior credit
facilities. The Company expects to enter into a definitive
loan agreement with Chase Manhattan and other lenders immedi-
ately prior to the payment of the special dividend. The com-
mitment provides that $195 million of the credit may be used to
pay the special dividend and related expenses. The Company
expects that the balance of the funds for the special dividend
will be provided by cash on hand. Payment of the special divi-
dend is subject to availability of financing as described
above.
In September 1995, ADVO announced that its Board of
Directors had engaged Goldman, Sachs & Co. to assist in explor-
ing strategic alternatives aimed at enhancing shareholder
value. Subsequent to that announcement, the Company received
and considered preliminary proposals and indications of inter-
est from various financial buyers relating to a possible combi-
nation with or acquisition of the Company. However, none of
these discussions led to a definitive offer for a transaction
involving the Company at an acceptable price.
Robert Kamerschen, Chairman and Chief Executive
Officer of ADVO, stated: "This plan will enable all of the
Company's shareholders to realize in cash a significant portion
of the current value of their shares, while at the same time
allowing them to retain their ownership interest in the Company
and participate in its future growth."
Mr. Kamerschen also said, "In light of the size of
the special dividend, the Board of Directors has decided to
suspend ADVO's regular quarterly dividend at the current $.025
per quarter per share of common stock until the 1997 Annual
Shareholders Meeting, at which time the Board of Directors will
again consider the Company's dividend policy."
The special dividend is anticipated to be taxable as
a dividend for federal income tax purposes to the extent of the
Company's current and accumulated earnings and profits through
fiscal 1996, which the Company anticipates to be between $2-$4
per share. The remainder of the special dividend will reduce
the tax basis of the shares, and, to the extent of the excess
over the tax basis, will represent a taxable gain. The Company
will disclose its current and accumulated earnings and profits
per share through fiscal 1996 to shareholders receiving the
special dividend when such information becomes <PAGE>
available. Shareholders should consult their own tax advisors
with respect to the tax treatment of the special dividend.
Warburg, Pincus Capital Partners, L.P., the Company's
largest shareholder, which holds approximately 2.92 million
shares of ADVO's common stock and a warrant to purchase
approximately 2.66 million shares of ADVO's common stock, has
advised the Company that it intends to exercise its warrant in
order to receive the special dividend.
In connection with the special dividend, as contem-
plated by the Company's benefit plans, the Board of Directors
is also making equitable adjustments to outstanding employee
stock options. Giving effect to these adjustments and the
exercise of the Warburg warrants, the Company estimates that
shares outstanding will be in the range of 23,850,000 shares.
As a result of adjustments to the employee stock
options as described above, the Company expects to record a
one-time noncash charge in the second quarter. The amount of
the charge will depend principally upon the market price of the
stock after the dividend is declared. In addition, certain
other charges related to the special dividend and the Company's
exploration of strategic alternatives will be taken in future
periods, principally in the second quarter.
Simultaneously, with the announcement of the special
dividend, the Company also reported its first quarter results
pursuant to a separate release. Revenues from continuing
operations were up $256.5 million, up 3% over prior year.
Earnings per share, excluding results from its discontinued
Marketing Force segment, were $0.29, a 22% decline from the
comparable period in fiscal 1995. The estimated loss on dis-
posal from discontinued operations was $1.0 million or $0.04
per share during the quarters.
ADVO is the nation's largest full-service direct mar-
keting services company with annual revenues in excess of $1
billion. ADVO specializes in shared and solo direct mail ser-
vices, to provide customized Microtargeting -TM- solutions for
its clients' needs. The Company's Mailbox Values (Registered
Trademark) branded shared mail program is distributed
nationally to over 61 million households weekly. ADVO also
offers limited transportation services. It has 20 production
facilities and 70 sales offices nationwide. ADVO's corporate
headquarters are located at One Univac Lane, Windsor, CT 06095.
Contact:
Donald McCombs David Stigler Lowell Robinson
Vice President Sr. Vice President Executive Vice
Investor Relations Legal and Public Affairs President
ADVO, Inc. ADVO, Inc. Chief Financial
(860) 285-6391 (860) 285-6120 Officer
ADVO, Inc.
(860) 285-6101
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Exhibit 99(ii)
ANNEX A
SUMMARY OF TERMS AND CONDITION
("TERM SHEET")
BORROWER: ADVO, Inc. ("ADVO" or the "Company")
AGENT AND
ARRANGER: The Chase Manhattan Bank, N.A. and Chase Securi-
ties, Inc. (collectively "Chase")
TOTAL FACILITY AMOUNT: $220,000,000
FACILITY TYPE: Facility A:
$65,000,000 Reducing Revolving Credit
Facility B:
$65,000,000 Term Loan
Facility C:
$90,000,000 Term Loan, (collectively the
"Facilities")
LENDERS: A syndicate of banks and/or other financial
institutions acceptable to the Agent and the
Borrower.
USE OF PROCEEDS: Facility A:
To fund a one-time dividend to shareholders and
the related transactions relating to the treat-
ment of option holders in connection with such
dividend (collectively referred to as the "Re-
capitalization"), to fund ongoing working capi-
tal and capital expenditures, and to fund ex-
penses related to the transaction.
Facility B&C:
To fund the Recapitalization and to fund ex-
penses related to the transaction.
FINAL MATURITY: Facility A: March 31, 2002
Facility B: March 31, 2002
Facility C: March 31, 2004
______________________________________________________________
[Chase Logo] 1<PAGE>
AMORTIZATION OF
THE FACILITIES: (i) Facility A Availability Schedule:
September 30, 1997 90%
September 30, 1998 80%
September 30, 1999 65%
September 30, 2000 50%
September 30, 2001 35%
March 31, 2002 0%
(ii) Facility B shall amortize as follows:
9/30/96 $1,650,000
12/31/96 $1,300,000
3/31/97 $1,975,000
6/30/97 $1,975,000
9/30/97 $1,975,000
12/31/97 $1,700,000
3/31/98 $2,650,000
6/30/98 $2,650,000
9/30/98 $2,650,000
12/31/98 $1,800,000
3/31/99 $2,900,000
6/30/99 $2,900,000
9/30/99 $2,900,000
12/31/99 $2,250,000
3/31/2000 $3,575,000
6/30/2000 $3,575,000
9/30/2000 $3,575,000
12/31/2000 $2,600,000
3/31/2001 $3,900,000
6/30/2001 $3,900,000
9/30/2001 $3,900,000
12/31/2001 $3,900,000
3/31/2002 $4,800,000
(iii) Facility C shall amortize in equal quar-
terly installments beginning June 30, 2002
by the following annual amounts.
March 31, 2003 $45,000,000
March 31, 2004 $45,000,000
_______________________________________________________________
[Chase Logo] 2 <PAGE>
GUARANTORS: Guarantees of all Subsidiaries (excluding
Marketing Force, Inc.)
CLOSING DATE: No later than March 31, 1996
MANDATORY
REPAYMENTS AND
REDUCTIONS: Shall mean an amount equal to: (i) 100% of the
net proceeds from the sale of assets (other than
in the ordinary course of business and the
contemplated sale of Marketing Force, Inc.),
(ii) insurance recoveries not promptly applied
toward repair or replacement of the damaged
properties, (iii) 80% of net equity proceeds
until the Total Leverage Ratio is less than 4.0
to 1.0 (the exercise of existing warrants and/or
any existing or future management stock options
will be excluded), and (iv) 60% of Excess Cash
Flow beginning with fiscal year 1996. Mandatory
Repayments and Reductions shall be applied on a
pro-rata basis across the maturities of
outstanding B and C loans on a pro-rata basis
among Facilities A, B, and C. The portion of
Mandatory Repayments and Reductions applied to
Facility B will be the sum of outstandings of
Facilities A and B to the sum of total
outstandings under Facilities A, B, and C. The
portion of Mandatory Repayments and Reductions
applied to Facility C will be the outstandings
under Facility C to the sum of total
outstandings under Facilities A, B, and C. To
the extent that Facility B has been repaid, Man-
datory Repayments and Reductions will be applied
to Facility A.
VOLUNTARY
PREPAYMENTS: Upon prior notice allowed in whole in part.
Outstandings under Facility A may be prepaid at
any time. Outstandings under Facilities B and C
may be prepaid at any time with such prepayments
being applied pro-rata between such Facilities
and, as to each such Facility, pro-rata basis
across maturities; Facility B and C amounts that
are prepaid may not be reborrowed.
INTEREST: At the Borrower's option Base Rate and LIBOR
loans will be made available as follows:
LIBOR OPTION
Interest shall be determined for periods
("Interest Periods") of one, two, three, and six
month maturities and (subject to the approval of
each Bank) nine month maturities being offered
(as selected by the
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[Chase Logo] 3 <PAGE>
Borrower), and shall be at an annual rate equal
to the London Interbank Offered Rate ("LIBOR")
for the corresponding deposits of U.S. Dollars
plus the Applicable Interest Margin. LIBOR will
be determined by the Reference Banks at the
start of each Interest Period. Interest will be
paid at the end of each Interest Period or
quarterly, whichever is earlier, and will be
calculated on the basis of the actual number of
days elapsed in a year of 360 days. LIBOR will
be adjusted for statutory maximum Regulation D
reserve requirements.
BASE RATE OPTION
Interest shall be at the Base Rate of Chase plus
the Applicable Interest Margin. Interest will
be calculated on the basis of actual days
elapsed in a year of 365/366 days, or (when the
Federal Funds Rate is applicable) 360 days, pay-
able quarterly in arrears. The Base Rate is
defined as the higher of the Federal Funds Rate,
as published by the Federal Reserve Bank of New
York, plus 1/2 of 1% or the Prime Rate of Chase,
as announced from time to time at its head
office.
APPLICABLE INTEREST: FACILITY A AND FACILITY B:
When the ratio of Total Debt to four quarters
trailing EBITDA (Total Leverage Ratio) is:
LIBOR+ BASE+
Greater than 4.50x 2.50% 1.25%
Less than or equal to 4.50x 2.25% 1.00%
or greater than 4.00x
Less than or equal to 4.00 2.00% 0.75%
or greater than 3.50
Less than or equal to 3.50 1.75% 0.50%
or greater than 3.00x
Less than or equal to 3.00x 1.50% 0.25%
FACILITY C LIBOR+ BASE+
At all times 3.00% 1.75%
COMMITMENT FEE: 1/2 of 1% per annum on the unused amount of the
commitments under Facility A shall be payable to
the Agent, for the account of the Banks, from
the Closing Date when the Total Leverage Ratio
is equal to or greater than 3.5 to 1.0; other-
wise 3/8 of 1%. Accrued commitment fees will be
payable quarterly in arrears (calculated on the
basis of the number of days elapsed in a year of
360 days).
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POST DEFAULT RATE: If any covenant default occurs and remains in
effect for 10 days, interest on all outstanding
amounts under the Credit Agreement will accrue
at a rate equal to the greater of: i) 2% in ex-
cess of the otherwise applicable LIBOR rate,
plus the Applicable Interest Margin or ii) 2% in
excess of the otherwise applicable Base Rate,
plus the Applicable Interest Margin, and will be
payable upon demand. If any principal or inter-
est payable under the Credit Agreement is not
paid when due (or in the case of interest within
three business days of when it is due), interest
on all outstanding amounts under the Credit
Agreement will accrue at a rate equal to the
greater of: i) 5% in excess of the otherwise
applicable LIBOR Rate, plus the Applicable In
terest Margin or ii) 5% in excess of the other
wise applicable Base Rate, plus the Applicable
Interest Margin, and will be payable on demand.
CONDITIONS PRECEDENT: 1. EBITDA will be greater than $55,000,000 for
the trailing four quarter period ending
12/31/95.
2. The Total Debt at Closing Date, shall not
exceed $195,000,000.
3. A certificate satisfactory to the Banks
from ADVO stating that the financial state-
ments provided accurately reflect the fi-
nancial condition and performance of ADVO
and its Subsidiaries for fiscal year 1995
in accordance with GAAP consistently ap-
plied, (and EBITDA is accurately calculated
for fiscal year 1995) on an actual basis;
and satisfactory certificates from ADVO for
the Borrower and its Subsidiaries calculat-
ing EBITDA for the four quarter period end-
ing 12/31/95 and for the fiscal year ending
9/30/95.
4. No material adverse change in respect of
the condition (financial or otherwise),
business, operations, nature of assets,
liabilities or prospects of ADVO and its
subsidiaries and since December 31, 1995.
5. The Agent's review of and satisfaction with
the results of a Phase I audit for environ-
mental matters.
6. A solvency certificate from the Company's
Chief Financial Officer.
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[Chase Logo] 5<PAGE>
7. A satisfactory certificate from ADVO's
Chief Financial Officer detailing to the
Banks' satisfaction compliance with all
covenants which can be calculated and/or
measured at closing.
8. No additional indebtedness of ADVO or any
of its Subsidiaries other than (i) the Fa-
cilities contemplated hereby, (ii) the in-
debtedness to be mutually agreed upon by
Chase and the Company, and (iii) Permitted
Additional Indebtedness.
9. The Agent's review of and satisfaction with
the Recapitalization.
10. The Banks' review of and satisfaction with
any material litigation with respect to the
Company or the transactions contemplated
hereby.
11. The Banks' receipt of satisfactory legal
opinions from counsel to the Company cover-
ing such matters as are appropriate for
transactions of this type.
DOCUMENTATION: All documentation (including, without limita-
tion, all documentation relating to security or
subordination) to be satisfactory to the Banks
and the Company and to include such conditions
precedent, representations, warranties, affirma-
tive and negative covenants, funding and yield
protection provisions (including, without limi-
tation, the adjustment of LIBOR for Regulation D
and other reserves and compensation for the cost
of compliance with capital adequacy and similar
requirements) events of default and other provi-
sions as are described herein, as may be gener-
ally consistent with the current practice for
facilities of this type. Each Bank may, subject
to certain limitations, assign all or a portion
of its loans and commitments under the Credit
Facilities, or sell participations therein, to
another person or persons on a pro rata or non-
pro rata basis, provided that no purchaser of a
participation shall have the right to exercise
or cause the selling Bank to exercise voting
rights in respect of the Facilities (except as
to certain basic issues).
ASSIGNMENTS AND
PARTICIPATIONS: Each Lender may assign up to 100% of its loans
and commitments (on a non pro-rata basis) under
the Facilities or sell participations therein
provided that: (i) each such assignment shall
be in a minimum amount of $5,000,000; and (ii)
no purchaser of a participation shall have the
right to exercise or to cause the selling Lender
to exercise voting rights
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[Chase Logo] 6<PAGE>
in respect of the Facilities (except as to
certain basic issues). Each Bank may grant 100%
assignments to affiliates and to any Federal
Reserve Bank.
COVENANTS WILL INCLUDE
(WITHOUT LIMITATION): 1. The Company will provide financial and
other information, including quarterly
statements certified by the chief financial
officer of ADVO, monthly income statements,
and audited annual financial statements
from an accounting firm of recognized na-
tional stature, and any other public infor-
mation (including 10-K and 10-Q statements)
as mutually agreed. The Company will hold
a Bank Meeting once each fiscal year at
which time they will present projections
for the upcoming year.
2. Limitation on additional liens and other
Indebtedness.
3. Restrictions on change of business.
4. Restrictions on disposal of assets.
5. Restrictions on mergers and acquisitions.
6. Restrictions on dividends and other distri-
butions, except for those associated with
the Recapitalization. Dividends to share-
holders will be permitted at per share
levels paid during fiscal year 1995. After
3/31/97, to the extent that the Total
Leverage Ratio is less than 3.75 to 1.0 and
the Company is in proforma compliance with
all covenants, dividends can be paid or
stock can be repurchased out of the 40% of
Excess Cash Flow.
7. Restrictions on investments.
8. Restrictions on transactions with
Affiliates.
9. The ratio of Senior Debt to four quarter
trailing EBITDA ("Senior Leverage Ratio")
will not exceed:
On and after the Closing Date 4.25
On and after September 30, 1997 4.00
On and after September 30, 1998 3.50
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[Chase Logo] 7<PAGE>
10. The ratio of Total Debt to four quarter
trailing EBITDA ("Total Leverage Ratio")
will not exceed:
On and after the Closing Date 5.00
On and after September 30, 1998 5.00
On and after September 30, 1999 4.50
11. The ratio of EBITDA to Interest Expense
will exceed:
On and after the Closing Date 1.85x
On and after September 30, 1997 2.00x
On and after September 30, 1998 2.25x
On and after September 30, 1999 2.50x
12. The ratio of EBITDA to the sum of (i)
Interest Expense, (ii) trailing four
quarter principal amortization payments,
(iii) capital expenditures, (iv) cash taxes
paid or accrued for the period, and (v)
cash dividends paid as permitted, will ex-
ceed 1.00x through 9/30/97 and 1.05x,
thereafter. The first test of this cov-
enant will occur on the quarter ended
3/31/97.
13. The Company will have purchased or entered
into interest rate hedging arrangements
satisfactory to the Majority Banks, for 50%
or $100,000,000, whichever is less, of the
outstanding loans under the Facilities.
The Company will thereafter remain simi-
larly hedged on a prospective basis.
EVENTS OF DEFAULT: Will include (without limitation) payment, mis-
representation, covenant, bankruptcy, ERISA,
judgment, change of control and ownership, envi-
ronmental, and cross-defaults.
A change of control and ownership default would
occur if either (i) a majority of the board
seats are occupied by members who were not nomi-
nated by previous board members or the board
seats are obtained in a hostile manner or (ii)
any person other than Warburg Pincus shall own
more than 30% of outstanding stock.
LEGAL COUNSEL: Milbank, Tweed, Hadley & McCloy
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[Chase Logo] 8 <PAGE>
DEFINITIONS: "EBITDA" is defined for any period as consoli-
dated net income of ADVO after eliminating ex-
traordinary gains and losses, unusual items, and
the results of Marketing Force, Inc. plus
(i) provision for taxes, (ii) depreciation and
amortization, (iii) interest expense, (iv) other
non-cash charges (v) one-time charges related to
the treatment of option holders in connection
with the Recapitalization, (vi) non-capitalized
transaction expenses related to the Recapi-
talization and (vii) amounts paid upfront in
respect of Interest Rate Protection Agreements,
all to the extent deducted from the computation
of net income for a four quarter trailing
period.
"TOTAL DEBT SERVICE" equals the sum of (i) Inte-
rest Expense, plus (ii) scheduled principal pay-
ments (excluding Voluntary and Mandatory Prepay-
ments).
"EXCESS CASH FLOW" is defined as EBITDA less the
sum of (i) Total Debt Service, (ii) capital ex-
penditures, (iii) income taxes, (iv) changes in
working capital, (v) dividends paid or owing and
(vi) voluntary prepayments to the extent that
such repayments result in a permanent reduction
of the Facilities.
"INTEREST EXPENSE" means the sum for the Bor-
rower and its subsidiaries, all interest expense in
respect of Total Debt for any period of four
consecutive quarters whether paid in cash or
accrued as a liability (excluding capitalized
financing fees), plus the net amount payable (or
minus the net amount receivable) under Interest
Rate Protection Agreements during such period.
Amounts paid upfront in respect of Interest Rate
Protection Agreements will be amortized over the
life of the agreement in equal installments for
the purposes of this definition. Until 12 com
plete consecutive months are reported, Interest
Expense will be annualized for the purpose of
covenant calculations.
"MAJORITY BANKS" is defined as Banks holding 51%
of the Facility A Term Loan Commitments, Banks
holding 51% of the Facility B Revolving Credit
loans/Revolving Credit commitments, and Bank
holding 51% of the Facility C Terms Term Loan
Commitments.
"PERMITTED ADDITIONAL DEBT" means Subordinated
Debt up to an aggregate amount of $150,000,000
so long as (i) to the extent
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[Chase Logo] 9<PAGE>
that debt is issued prior to 9/30/96, the
Company is on budget for the quarter ended
March 31, 1996 or the most recent quarterly
period prior to the issuance (ii) no Event of
Default or breach of any covenant is in
existence or would be created by the incurrance
of such debt, and (iii) the Total Debt Ratio
does not exceed 4.75 to 1.00 at incurrance of
Permitted Additional Debt.
"SENIOR DEBT" means capitalized lease obliga-
tions, non-competes, and any GAAP Indebtedness
(other than current trade accounts payable and
current accrued expenses including income taxes
payable and pension liabilities), including out-
standings under the Facilities and Permitted
Additional Debt, if any, to the extent that any
of the above-mentioned items do not constitute
Subordinated Debt.
"SUBORDINATED DEBT" means Indebtedness (i) for
which the Borrower is directly and primarily
liable, (ii) that is subordinated to the obliga-
tions of the Borrower to pay principal of and
interest on terms (including interest, amortiza-
tion, covenant and events of default), in form
and substance reasonably satisfactory to the
Majority Lenders.
"TOTAL DEBT" equals capitalized lease obliga-
tions, non-competes, and any other GAAP Indebt
edness, including Subordinated Debt, (other than
current trade accounts payable and current ac-
crued expenses including income taxes payable,
pension liabilities, and customer advances),
including outstandings under the Facilities and
Permitted Additional Debt, if any.
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[Chase Logo] 10
