<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 29, 1996
-------------
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 1-11720
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ADVO, Inc.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0885252
- ------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Univac Lane, P.O. Box 755, Windsor, CT 06095-0755
- ------------------------------------------ ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (860) 285-6100
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of July 27, 1996 there were 24,107,025 shares of common stock
outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended June 29, 1996
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets -
June 29, 1996 and September 30, 1995 2
Consolidated statements of operations -
Nine months and three months ended
June 29, 1996 and June 24, 1995 3
Consolidated statements of cash flows -
Nine months ended June 29, 1996
and June 24, 1995 4
Notes to consolidated financial statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 7
</TABLE>
<TABLE>
<CAPTION>
Part II - Other Information
---------------------------
<S> <C> <C>
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K. 10
Signatures 11
</TABLE>
<PAGE>
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
June 29, September 30,
ASSETS 1996 1995
-------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (1) $ 8,857 $ 23,849
Available-for-sale securities-Related Party - 30,611
Accounts receivable, net 61,269 61,089
Inventories 7,142 8,742
Prepaid expenses and other current assets 3,861 4,369
Deferred income taxes 19,569 13,049
Current assets of discontinued operations - 13,950
--------- ---------
Total current assets 100,698 155,659
Property, plant and equipment 135,543 128,861
Less accumulated depreciation and amortization (74,499) (68,385)
--------- --------
Net property, plant and equipment 61,044 60,476
Other assets 17,602 10,848
Non-current assets of discontinued operations - 7,220
--------- --------
TOTAL ASSETS $ 179,344 $234,203
========= ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 6,900 $ -
Accounts payable 32,722 24,556
Accrued compensation and benefits 19,282 25,482
Other current liabilities 31,999 38,639
Current liabilities of discontinued operations - 8,118
--------- --------
Total current liabilities 90,903 96,795
Long-term debt 173,100 -
Deferred income taxes 6,815 5,786
Other liabilities 615 1,216
--------- --------
180,530 7,002
STOCKHOLDERS' EQUITY/(DEFICIENCY)
Series A Convertible preferred stock, $.01 par
value (Authorized 5,000,000 shares, none issued) - -
Common stock, $.01 par value (Authorized
40,000,000 shares, issued 27,907,987 and
24,583,092 shares, respectively) 279 246
Additional paid-in capital 161,102 138,735
Unrealized losses on available-for-sale
securities, net of tax - (62)
Accumulated (deficit) earnings (189,012) 55,020
--------- --------
(27,631) 193,939
Less common stock held in treasury, at cost (64,458) (63,533)
--------- --------
Total stockholders' equity/(deficiency) (92,089) 130,406
--------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY/
(DEFICIENCY) $ 179,344 $234,203
========= ========
</TABLE>
(1) Includes cash and cash equivalents invested with related party of $4,028,000
at June 29, 1996 and $12,905,000 at September 30, 1995.
See Accompanying Notes.
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<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
----------------------- -------------------------
June 29, June 24, June 29, June 24,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $734,221 $744,435 $245,698 $256,730
Costs and expenses:
Cost of sales 575,562 559,120 190,246 192,935
Selling, general and
administrative 134,546 148,954 43,302 47,710
Nonrecurring charges 12,082 - - -
Provision for bad debts 2,916 2,178 496 669
Gain on sale of business lines (2,687) (2,243) - -
-------- -------- -------- --------
Operating income 11,802 36,426 11,654 15,416
Interest income-Related Party 1,083 2,170 123 663
Interest income - Other 57 50 7 13
Interest expense 5,618 - 4,264 -
Other expense 397 576 158 199
-------- -------- -------- --------
Income before income taxes 6,927 38,070 7,362 15,893
Provision for income taxes 2,674 14,867 2,971 6,207
-------- -------- -------- --------
Income from continuing operations 4,253 23,203 4,391 9,686
Discontinued Operations:
Loss from discontinued
operations, net of tax - (975) - (481)
Loss on disposal of discontinued
operations, net of tax (8,199) - - -
-------- -------- -------- --------
(Loss) income before cumulative
effect of accounting change (3,946) 22,228 4,391 9,205
Cumulative effect of change in
accounting for postemployment
benefits, net of tax - (1,545) - -
-------- -------- -------- --------
Net (loss) income $ (3,946) $ 20,683 $ 4,391 $ 9,205
======== ======== ======== ========
Earnings (loss) per share:
Continuing operations $ .17 $ 1.00 $.18 $ .41
Discontinued operations - (.04) - (.02)
Disposal of discontinued operations (.33) - - -
Cumulative effect of change
in accounting for post-
employment benefits - (.07) - -
-------- -------- -------- --------
(Loss) earnings per share (A) $ (.16) $ .89 $.18 $ .39
======== ======== ======== ========
Cash dividends declared per share $ 10.025 $ .075 $ - $ .025
Weighted average common and common equivalent shares:
Primary 24,642 23,281 25,003 23,458
Fully diluted 24,655 23,306 25,010 23,466
(A) - Both primary and fully diluted.
</TABLE>
See Accompanying Notes.
- 3 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
-----------------------
June 29, June 24,
1996 1995
-------- --------
<S> <C> <C>
Net cash provided by continuing operating activities $ 12,682 $ 10,805
Cash flows from continuing investing activities:
Investment in business ventures/acquisitions - (61)
Acquisition of property, plant and equipment (11,112) (17,189)
Proceeds from disposals of property
and equipment 12 11
Proceeds from sale of business lines 742 9,000
Sales and maturities of available-for-sale 80,482 41,362
securities
Purchases of available-for-sale securities (49,604) (42,210)
-------- --------
Net cash provided (used) by continuing
investing activities 20,520 (9,087)
Cash flows from continuing financing activities:
Proceeds from long-term borrowings 205,000 -
Payments on long-term borrowings (25,000) -
Payment of debt issue costs (5,458) -
Proceeds from exercise of warrants 7,173 -
Tax effect - vesting of restricted
stock/options exercised 3,510 506
Proceeds from exercise of stock options 2,431 803
Purchase of common stock for treasury (925) (3,575)
Cash dividends paid (240,613) (1,559)
Other 40 -
-------- --------
Net cash used by continuing financing activities (53,842) (3,825)
Net effect of discontinued operations 5,648 (6,609)
-------- --------
Decrease in cash and cash equivalents (14,992) (8,716)
Cash and cash equivalents at beginning of period 23,849 39,748
-------- --------
Cash and cash equivalents at end of period $ 8,857 $ 31,032
========= ========
</TABLE>
Excluded from the consolidated statements of cash flows was the effect of a
certain noncash activity in which the Company received a note for $3.5 million
in conjunction with the sale of a business line during the first quarter of
fiscal 1996 (see note 2).
See Accompanying Notes.
- 4 -
<PAGE>
ADVO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
June 29, 1996 are not necessarily indicative of the results that may be expected
for the fiscal year ending September 28, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto included in ADVO,
Inc.'s (the "Company") annual report on Form 10-K for the fiscal year ended
September 30, 1995. Certain reclassifications have been made in the fiscal 1995
financial statements to conform with the fiscal 1996 presentation.
In fiscal year 1995, the Company announced its plan to sell its in-store
marketing segment. The sale of substantially all of the net assets of this
segment was completed on March 1, 1996 (See note 3). The Company's results of
operations have been presented for the three and nine month periods ended June
29, 1996 and June 24, 1995, to separately reflect continuing and discontinued
operations in the consolidated statements of operations and cash flows. The
consolidated balance sheet as of September 30, 1995 has been reclassified to
reflect the assets and liabilities of the discontinued operation under separate
captions. In addition, the results of operations in the management's discussion
and analysis section exclude the revenues, cost of sales, selling, and general
and administrative costs of the discontinued segment.
2. Gain on sale of business lines
MidCoast Press, the Company's commercial web offset printer, was sold during the
first quarter ended December 30, 1995. The Company recognized a before tax gain
of $2.7 million ($1.7 million after tax or $.07 per share during the first
quarter of fiscal 1996) and received a note for $3.5 million in conjunction with
the sale.
During the first quarter ended December 24, 1994 of the previous fiscal year,
the Company sold its 50% ownership in InfoBase Services to Acxiom Corporation
and recognized a before tax gain on this transaction of $2.2 million ($1.4
million after tax or $.06 per share during the first quarter of fiscal 1995).
3. Discontinued operations
On March 1, 1996 the Company completed the sale of substantially all of the net
operating assets of its in-store marketing segment. The net assets were sold at
book value in exchange for $5.0 million in cash and a long-term note receivable
for $10.8 million. The long-term note was subsequently reserved in full and
additional operating losses were incurred through the date of sale, resulting in
total losses associated with the discontinued operation of approximately $8.2
million, net of tax, or $.33 per share for the nine months ended June 29, 1996.
4. Long-term debt
During the second fiscal quarter ended March 30, 1996, the Company entered into
a credit agreement (the "Agreement") with a syndicate of lenders led by Chase
Manhattan Bank (National Association) as Administrative Agent. The credit was
obtained to finance a special dividend payable March 5, 1996 (the "Special
Dividend") and related recapitalization costs (See notes 5 & 6). Proceeds from
borrowings were used to fund the Special Dividend. Any unutilized credits may be
used to fund ongoing working capital and capital expenditure requirements.
The Agreement provides for total credit facilities of $250.0 million, consisting
of $155.0 million in term loans, maturing at various dates through March 31,
2004, and a $95.0 million reducing revolving line of credit, maturing at various
dates through March 31, 2002. The commitment levels on the revolving line range
from a high of $95.0 million for the period March 4, 1996 through September 30,
1997 to a low of $33.3 million for the period September 30, 2001 through March
31, 2002. Mandatory repayments of debt in defined amounts are required in the
event of certain triggering events including the sale of assets and the
achievement of certain financial ratios.
-5-
<PAGE>
The debt bears interest at either the London Interbank Offered Rate ("LIBOR") or
at the bank's "base rate", whichever the Company chooses for each tranche due at
various maturity dates, plus an "applicable margin" (based on certain financial
ratios) ranging from 1.50% to 3.00% on the LIBOR rate and .25% to 1.75% on the
base rate. Interest is payable quarterly or upon the maturity of the LIBOR
contracts, whichever period is shorter. The interest rate at June 29, 1996 was
7.50% on the revolving line of credit and $65.0 million in term loans and 8.50%
on the remaining balance.
The Company is required to maintain certain financial ratios under the
Agreement. In addition, the Agreement also places restrictions on disposals of
assets, mergers and acquisitions, dividend payments, investments and additional
debt. The Company was in compliance with all applicable covenants as of June
29, 1996.
In connection with the Agreement, the Company is required to maintain Interest
Rate Protection Agreements to protect itself against three month LIBOR rates
exceeding 9% per annum as to a notional principal amount equal to $100 million.
During the third quarter of 1996, the Company entered into two separate two year
Interest Rate Collar Agreements to hedge notional amounts totaling $150 million.
The cap rate ranges from 7.39% to 8.0% with the floor rate ranging from 5.0% to
5.5%, and the floating rate option at three month LIBOR.
The Company pays fees on the unused commitments at a rate of 3/8 of 1% or 1/2
of 1% depending on the Company's total leverage ratio as defined. As of June
29, 1996, $70.0 million of the revolver was unused.
Total maturities of long-term debt over the next five fiscal years and
thereafter at June 29, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996 $ -
1997 6,900
1998 8,975
1999 10,250
2000 15,875
Thereafter 138,000
--------
Total maturities $180,000
========
</TABLE>
The Company capitalized debt issue costs directly associated with the issuance
of the Agreement totaling $5.5 million. These costs are included in other
assets and are being amortized over the term of the debt agreement.
5. Stockholders' Equity/(Deficiency)
On January 17, 1996 the Company announced the declaration of a Special Dividend
of $10 per share of common stock to shareholders of record on February 20, 1996.
The announcement was a result of the Company's initiative to explore strategic
alternatives aimed at increasing shareholder value, which began at the end of
fiscal 1995. Total shares outstanding as of the record date were approximately
24.0 million resulting in dividends of approximately $240 million, which were
paid on March 5, 1996.
On February 15, 1996 Warburg Pincus Capital Partners, L.P. ("Warburg"), the
Company's largest shareholder, exercised warrants to purchase approximately 2.7
million shares of common stock at an exercise price of $2.70 per share.
6. Nonrecurring Charges
In connection with the Special Dividend (see note 5), the Company also made
equitable adjustments to outstanding employee stock options. As a result of the
adjustments, the Company recorded noncash compensation expense totaling $8.8
million during the second quarter of fiscal 1996. Also included as nonrecurring
charges are $3.3 million in legal and various other fees associated with the
Special Dividend and the Company's exploration of strategic alternatives.
-6-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This section should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto. Except for the historical
information stated herein, the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of Operations contain forward
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended. Such forward looking statements are accompanied by
cautionary factors which would cause the Company's actual results to differ
materially from those in the forward looking statements. The cautionary factors
presented should not be construed as exhaustive.
Results of Operations
- ---------------------
Revenues for the third quarter of fiscal 1996 decreased $11.0 million or 4.3%
from the third quarter results of the prior year. Both price and volume
decreases contributed to the revenue decline during the third quarter. The
decrease in volume was reflective of the decline in pieces per package which
dropped 3.4% to 7.77 pieces for the three months ended June 29, 1996. Price
decreases were mainly attributable to the decline in shared mail product weights
predominantly associated with the Company's larger preprint customers. Fiscal
1996 year to date revenues decreased slightly by 1.4% or $10.2 million to $734.2
million when compared to the same period of the prior year. Price increases due
to the pass through of higher paper costs and the postal rate increase effective
January 1, 1995 were more than offset by the volume declines and the previously
mentioned product weight reductions. Pieces per package for the nine month
period decreased from 7.99 to 7.71 pieces in mailings of 2,403.9 million
packages versus 2,372.0 million packages over the comparable nine month period
of the prior year.
Cost of sales as a percentage of revenues increased for both the quarter and the
nine months ended June 29, 1996. Third quarter cost of sales as a percentage of
revenue increased 2.2% to 77.4% and for year to date, the percentage increase
was 3.3% to 78.4%. Both the three and nine month period increases were due to
under utilized postage costs from both the pieces per package and piece weight
declines mentioned above. In absolute terms, cost of sales decreased $2.7
million for the three months ended June 29, 1996 due to the decline in postage
expense also associated with the decrease in product weights and the 3.4%
decrease in pieces per package. On a year to date basis, cost of sales
increased $16.4 million, or 2.9%, in absolute terms, over the comparable period
of fiscal 1995. This increase was mainly attributable to increased distribution
and print costs associated with the package volume and paper cost increases when
compared to the same period of a year earlier.
As a percentage of revenue, selling expense, including the provision for bad
debts, was consistent at 13.2% for both the three and nine month period ended
June 29, 1996. During the same periods of the prior year, selling expense as a
percentage of revenue was 12.7% and 12.9%, respectively, for the quarter and
year to date. In absolute terms, selling expense remained relatively constant
at $32.5 million for third quarter of fiscal 1996 versus $32.6 million for the
comparable period of fiscal 1995. Year to date fiscal 1996 selling expense of
$96.6 million increased $.7 million from $95.9 million when compared same
period in fiscal 1995.
General and administrative costs, as a percentage of revenue, were 4.6% for the
quarter ended June 29, 1996 versus 6.1% for the prior quarter ended June 24,
1995. For the nine month period, general and administrative costs decreased
from 7.4% in fiscal 1995 to 5.5% in fiscal 1996. In absolute terms, general and
administrative expenses also decreased for both the three and nine month periods
ended June 29, 1996. For the third quarter, costs decreased $4.4 million or
28.1% and for the nine months ended, costs decreased $14.4 million or 26.0% when
compared to the same periods of fiscal 1995. The significant decline in general
and administrative costs reflects the Company's ongoing efforts to streamline
and re-engineer its processes, including the elimination of approximately 480
employees since June of 1995, as well as the continuing cost control focus
dictated by the Company's management.
In connection with the declaration of the Special Dividend, the Company recorded
$12.1 million in nonrecurring charges during the second quarter of fiscal 1996.
The Company made equitable adjustments to outstanding employee stock options as
a result of the Special Dividend. These adjustments mandated the Company record
noncash compensation expense of $8.8 million. Also included as nonrecurring
charges were $3.3 million in legal and
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<PAGE>
various other fees associated with the Special Dividend and the Company's
exploration of its strategic alternatives related to enhancing shareholder value
as announced by the Company in September 1995. These nonrecurring charges
totaled $7.4 million on an after tax basis, or $.30 per share, for the nine
months ended June 29, 1996.
During the quarter ended December 30, 1995 the Company recognized a $2.7 million
pretax gain on the sale of its MidCoast Press operation, a commercial web offset
printer. In the first quarter of the previous fiscal year the Company
recognized a $2.2 million pretax gain on the sale of its 50% ownership in
InfoBase Services, a data base joint venture with the Acxiom Corporation.
As a result of the aforementioned, the Company reported operating income of
$11.7 for the third quarter of fiscal 1996, a $3.8 million decrease from the
prior year's third quarter. Year to date operating income decreased $24.6
million to $11.8 million. Excluding the nonrecurring charges, operating income
was $23.9 million for the nine month period in fiscal 1996.
The Company obtained credit facilities totaling $250.0 million during the second
quarter of fiscal 1996. Interest expense and commitment fees related to the
debt totaled $4.3 million and $5.6 million for the three and nine month periods
ended June 29, 1996, respectively.
The effective income tax rate for the nine months ended June 29, 1996 and June
24, 1995 was approximately 39%. For the third quarter of fiscal 1996 and fiscal
1995, the effective income tax rate was approximately 40% and 39%, respectively.
Earnings per share from continuing operations for the three months ended June
29, 1996 was $.18 compared to $.41 for the third quarter of fiscal 1995. On a
year to date basis, earnings per share was significantly impacted by the $12.1
million in nonrecurring charges incurred by the Company. Earnings per share
from continuing operations for the fiscal 1996 nine month period was $.17
versus $1.00 for the comparable period of fiscal 1995. The weighted average
shares, including common stock equivalents, related to fiscal 1995 for the three
and nine months were both approximately 23 million shares. Weighted average
common shares for the three and nine months ended June 29, 1996 were both
approximately 25 million shares. The increase in weighted average common shares
was due primarily to the option repricing related to the Special Dividend during
the second quarter of fiscal 1996.
Financial Condition
- -------------------
Working Capital decreased $49.1 million to $9.8 million at June 29, 1996 from
$58.9 at September 30, 1995. The decrease in working capital was mainly
attributable to the liquidation of the available-for-sale securities in
connection with the payment of the Special Dividend by the Company on March 5,
1996. The working capital ratio at June 29, 1996 was 1.11 compared to 1.61 at
September 30, 1995.
On March 4, 1996, the Company entered into a credit agreement (the "Agreement")
with a syndicate of lenders led by Chase Manhattan Bank (National Association)
as Administrative Agent. The credit was obtained to finance the $10 per share
Special Dividend and the related costs incurred by the Company to explore
strategic alternatives aimed at increasing shareholder value. As a result, the
Company incurred debt totaling $195.0 million and capitalized debt issue costs
totaling $5.5 million. At June 29, 1996, there was $180.0 million of debt
outstanding, with $6.9 million of the balance classified as current. During July
of 1996 the Company had subsequently reborrowed an additional $10 million on the
revolving line of credit and has since repaid $5 million of the additional
borrowing.
Total stockholders' equity decreased approximately $222.5 million from September
30, 1995 to a net deficiency of $92.1 million at June 29, 1996. The decrease
was primarily the result of the $10 per share Special Dividend paid by the
Company totaling approximately $240 million. Also contributing to the decrease
was the year to date net loss of $3.9 million. Offsetting these decreases were
$8.8 million of non-cash compensation expense due to the repricing of the stock
options and mandatory exercise caused by the Special Dividend, $7.2 million from
the exercise by Warburg Pincus Capital Partners, L.P. of their warrant to obtain
2.7 million shares of ADVO common stock, $2.4 million from employee option
exercises, and $3.5 million from the tax benefit related to employee restricted
stock vestings and option exercises.
- 8 -
<PAGE>
Liquidity
- ---------
The company's main source of liquidity continues to be funds from operating
activities. In addition, the Company has available credit commitments, which
may be used to fund working capital. The net cash provided by continuing
operating activities for the nine months ended June 29, 1996 increased
approximately $1.9 million over the same period of the prior fiscal year. The
overall increase from fiscal 1996 versus fiscal 1995 was mainly attributable to
increased collection efforts resulting in better performance of trade
receivables and customer advance balances. These items were offset by decreases
in the Company's income from continuing operations, which resulted in lower
current federal and state income taxes payable, along with lower incentive and
sales compensation accruals.
Total cash and cash equivalents, including available-for-sale securities,
decreased $45.6 million from $54.5 million at September 30, 1995 to $8.9 million
at June 29, 1996. This decrease was mainly due to the liquidation of the
available-for-sale securities. The proceeds generated from the liquidation
along with cash on hand were utilized to partially fund the payment of the $240
million Special Dividend in March 1996. Proceeds of $195 million from
borrowings in connection with the new credit agreement were the main source of
funds for the dividend payment. Also contributing to the change in cash and cash
equivalents were $11.1 in capital expenditures, which were primarily related to
the purchase of lap top computers for the Company's sales force and the software
development of new financial and operational systems. In addition, the items
causing the change in stockholders' equity discussed in the financial condition
section above also effected the change in cash and cash equivalents.
Forward Looking Statements
- --------------------------
In March 1996, the United States Postal Service (the "USPS") approved a postal
rate reclassification reform to be implemented on July 1, 1996. The reform
calls for a new Enhanced Carrier Route subclass for third-class mail, which may
result in lower postal costs for efficient mailers like ADVO. The Company's
management advises that any savings which may be realized from this
reclassification are subject to any other future actions by the USPS which may
not be known by the Company at this time, as well as other changes in the
conditions of the business environment within which the Company operates.
- 9 -
<PAGE>
Part II - Other Information
Item 5. Other Information
-----------------
Subsequent to the quarter ended June 29, 1996, the Company announced
the election of James Eskridge to its Board of Directors on July 31,
1996. Mr. Eskridge is replacing Richard H. Stowe, who retired from the
Board. Total Board membership is now seven.
Robert Kamerschen, Chairman of the Board and Chief Executive Officer of
the Company , said Mr. Eskridge will bring the Company invaluable
experience and expertise in the areas of general management and retail.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Index
Sequential
Exhibit No. Exhibits Page Number
----------- -------- -----------
10 Executive Severance Agreement dated
May 1, 1996 between ADVO, Inc. and
Joseph P. Durrett.
11 Statement re computation of per share
(loss) earnings.
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
A report on Form 8-K dated May 2, 1996 was filed by the Company during
the quarter ended June 29, 1996. The Form reported under Item 5
thereof, that Joseph P. Durrett, the Company's President and Chief
Operating Officer, was leaving the Company to pursue other interests.
It also reported that Robert "Kam" Kamerschen, the Company's Chairman
and Chief Executive Officer since 1988, had his contract extended by
the Board of Directors for five years.
- --------------------------------------------------------------------------------
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
- 10 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVO, Inc.
Date: August 9, 1996 By: /s/ ROBERT S. HIRST
-------------- -----------------------------
Robert S. Hirst
Vice President and Controller
(Principal Accounting Officer)
- 11 -
<PAGE>
May 1, 1996
Mr. Joseph P. Durrett
293 Talcott Notch Road
Farmington, CT 06032
Dear Joe:
This letter will confirm our discussion regarding the terms and conditions of
your leaving the position of President and Chief Operating Officer of ADVO, Inc.
1. Your termination date from your position with ADVO is May 3, 1996.
2. Effective at the end of business on May 3, 1996, you will be placed on
inactive wage continuation pay status for a period of 52 weeks. While on
inactive pay status, you will be paid on each regular pay date throughout
this period at your current rate of pay. You will be available for
consulting on transitional matters on a reasonable basis. Your participation
in the Company's medical, dental, group universal life, dependent life,
executive disability or 401(k) may continue up to the date your wage
continuation ends (provided you make any required associate contributions).
You will continue to be covered by the Company's basic group life insurance
plan. Matching employer Social Security contributions will be made on your
behalf throughout this period as well. You will not be eligible for Workers'
Compensation, vacation accrual, or auto allowance beyond your termination
date. Any earned vacation pay you have not taken will be paid in a lump sum
and added to your last wage continuation payment. You will also resign your
seat on the ADVO Board of Directors as of May 3, 1996.
3. Pursuant to your July 13, 1992 Employment Agreement with ADVO (the
"Employment Agreement"), you will be paid a target bonus at the time you
leave the inactive payroll or November 15, 1996, whichever comes first. You
will have no other bonus entitlement.
4. Per the Employment Agreement, you have the right to request the amounts
described above in one lump sum, which you must do before May 13, 1996. The
terms of the Employment Agreement will apply in this case.
<PAGE>
Mr. Joseph P. Durrett
May 1, 1996
Page Two
5. You will be given full outplacement assistance at Beam Pines, Inc. Your
contact within that company will be Mike Keosky (203/678-2686) and Tom Van
Berkem will be your ADVO contact for that purpose.
6. All company property (i.e., keys, security access card, etc.) must be
returned to me. You will maintain use of your lap top computer, as well as
your home ADVO computer system, while you are on inactive status, after
which it needs to be returned to my office.
7. If you obtain other employment during your period of wage continuation and
inactive pay status, you must notify me of such other employment. You will
then be removed from inactive pay status on the day on which you begin such
employment. Your benefits will terminate and all remaining severance will be
given to you in a lump sum, less applicable withholding.
8. ADVO will not contest, on the basis of termination, any application which
you make for unemployment compensation at the appropriate agency as long as
all other aspects of the application are accurate.
9. As long as you are on the inactive wage continuation status described, all
stock options shall continue to vest on their normal schedule. When you
leave inactive wage continuation status, all vesting shall cease. You will
have three months after that date in which to exercise any outstanding
options. You can contact David Stigler directly at (203) 285-6120 for more
information about stock-related matters.
10. Within 14 days of the end of your wage continuation period, you will receive
notification of your right under COBRA legislation to elect continuation of
group coverage under the Company's medical and/or dental plans.
Additionally, you may have the option to convert your group medical coverage
to an individual policy basis. You will receive the written COBRA notice
from the Corporate Benefits Department (203/285-6307), and may inquire to
them about details regarding these privileges.
11. In consideration for the outplacement described in Paragraph No. 5 and the
continued vesting described in Paragraph No. 9, which you would otherwise
not have been entitled to, you affirm that your leaving ADVO is not caused
by any act of discrimination by ADVO, its employees, officers or directors,
past or present. You agree not to make any claims of any kind against ADVO
before any agency, court or other forum, and you agree to release ADVO from
any claim, known or unknown, arising in any way from any actions taken by
ADVO up to the date of the signing of this Agreement including, but not
<PAGE>
Mr. Joseph P. Durrett
May 1, 1996
Page Three
limited to, Title VII of the Civil Rights Act of 1964 as Amended, 42 U.S.C.
2000E et seq.; the Employee Retirement Income Security Act of 1974
("ERISA"), 29 U.S.C. 1001 et. seq.; the Age Discrimination in Employment
Act, as amended; and the Civil Rights Act of 1991; and any claims for
attorney's fees, expenses, or costs of litigation.
12. Additionally, as consideration for the outplacement as described above in
Paragraph 5, you promise not to disparage or otherwise reflect negatively
upon the Company, its personnel or its business practices. You further
agree to keep the terms of this agreement completely confidential.
13. This agreement supersedes all other Agreements or understandings, written
or oral, that you may have had with ADVO, Inc. on the subject matter
discussed above, except the ongoing obligations contained in the Employment
Agreement, which will continue in full force and effect.
14. You agree that if you should knowingly violate the terms of this Agreement,
or attempt to repudiate the release, you will reimburse the Company for all
related costs, including attorney's fees.
15. You acknowledge that you have read this Agreement carefully and fully
understand its terms. You have been advised to seek counsel and have had an
opportunity to do so, and you are executing this Agreement voluntarily and
knowingly. You also acknowledge that you have had a reasonable time to
consider this Agreement. You fully understand that signing this Agreement
waives all legal claims against ADVO based on any actions taken by ADVO up
to the date of the signing of this Agreement.
16. In the event that any provision of this Agreement is held to be void and
unenforceable by a Court of competent jurisdiction, the remaining
provisions of this Agreement shall nevertheless be binding upon the parties
with the same effect as though the void or unenforceable part had been
deleted. This Agreement shall be governed by and construed under the laws
of the State of Connecticut and shall not be modified, in whole or in part,
except by agreement in writing signed by ADVO and you.
17. I, Robert Kamerschen, will at the next regular ADVO Board Meeting,
recommend to the Board that they accelerate the vesting of your September
and December, 1996, restricted stock vestings to the date of that Board
Meeting.
18. During your job search, you will be entitled to use your ADVO long distance
credit card for job search purposes.
19. For the first 90 days following May 3, 1996, Jodi Mickey will be available
for administrative support.
If you have any questions concerning this matter, please discuss them with me as
soon as possible.
<PAGE>
Mr. Joseph P. Durrett
May 1, 1996
Page Four
Please signify your acceptance of this Agreement by signing and returning a copy
to me no sooner than May 24, 1996 and no later than June 5, 1996. You will have
seven days thereafter within which you can repudiate this Agreement, whereafter
it will be final. We will proceed to implement this Agreement as if you will
sign it, but if you fail to do so you will not be entitled to outplacement as
described in Paragraph No. 5.
Sincerely,
Robert Kamerschen
Accepted and agreed to this day of , 1996.
----------- ------------------
- ---------------------------
Joseph P. Durrett
<PAGE>
Exhibit 11
----------
Page 1 of 2
ADVO, Inc.
COMPUTATION OF PRIMARY PER SHARE (LOSS) EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
--------------------- ---------------------
June 29, June 24, June 29, June 24,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(LOSS) EARNINGS APPLICABLE TO COMMON STOCK $(3,946) $20,683 $ 4,391 $ 9,205
======== ======= ======= =======
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES
Average common shares outstanding 22,379 20,651 23,999 20,669
Assumed conversion or exercise of:
Warrants 1,151 2,273 - 2,307
Stock Options 1,091 317 993 434
Restricted Stock 21 40 11 48
------ ------ ------ ------
Weighted average common and common
equivalent shares 24,642 23,281 25,003 23,458
====== ====== ====== ======
(LOSS) EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $ (.16) $ .89 $ .18 $ .39
======= ====== ====== ======
</TABLE>
<PAGE>
Exhibit 11
----------
Page 2 of 2
ADVO, Inc.
COMPUTATION OF FULLY DILUTED PER SHARE (LOSS)EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
------------------- ------------------
June 29, June 24, June 29, June 24,
1996 1995 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
(LOSS) EARNINGS APPLICABLE TO FULLY
DILUTED SHARES $(3,946) $20,683 $ 4,391 $ 9,205
======= ======= ======= =======
FULLY DILUTED SHARES
Average common shares outstanding 22,379 20,651 23,999 20,669
Assumed conversion or exercise of:
Warrants 1,151 2,273 - 2,307
Stock Options 1,091 317 993 434
Restricted Stock 34 65 18 56
------- ------- ------- -------
Fully diluted shares (1) 24,655 23,306 25,010 23,466
======== ======== ======== =======
(LOSS)EARNINGS PER SHARE ASSUMING
FULL DILUTION $ (.16) $ .89 $ .18 $ .39
======== ======== ======== =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO.
INC.'S FORM 10-Q FOR THE QUARTER ENDED JUNE 29, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-29-1996
<CASH> 8,857
<SECURITIES> 0
<RECEIVABLES> 65,295
<ALLOWANCES> 4,026
<INVENTORY> 7,142
<CURRENT-ASSETS> 100,698
<PP&E> 135,543
<DEPRECIATION> 74,499
<TOTAL-ASSETS> 179,344
<CURRENT-LIABILITIES> 90,903
<BONDS> 0
0
0
<COMMON> 279
<OTHER-SE> (92,368)
<TOTAL-LIABILITY-AND-EQUITY> 179,344
<SALES> 0
<TOTAL-REVENUES> 734,221
<CGS> 0
<TOTAL-COSTS> 575,562
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,916
<INTEREST-EXPENSE> 5,618
<INCOME-PRETAX> 6,927
<INCOME-TAX> 2,674
<INCOME-CONTINUING> 4,253
<DISCONTINUED> (8,199)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,946)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
