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ADVO, Inc.
Form 10-K
September 27, 1997
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended September 27, 1997
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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
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Commission file number 1-11720
ADVO, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-0885252
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Univac Lane, P.O. Box 755, Windsor, CT 06095-0755
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (860) 285-6100
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 28, 1997 was $446,458,574. On that date, there were
22,487,846 outstanding shares of the registrant's common stock.
Documents Incorporated by Reference:
Portions of the 1997 Annual Report to Stockholders are incorporated by
reference into Parts II and IV of this Report.
Portions of the Proxy Statement for the 1998 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 27, 1997
PART I
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ITEM PAGE
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1. Business.............................................................. 1
2. Properties............................................................ 5
3. Legal Proceedings..................................................... 5
4. Submission of Matters to a Vote of Security Holders................... 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters. 6
6. Selected Financial Data............................................... 6
7. Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations................................................... 7
8. Financial Statements and Supplementary Data........................... 7
9. Changes in and Disagreements with Accountants on Accounting and Finan-
cial Disclosure....................................................... 7
PART III
10. Directors and Executive Officers of the Registrant.................... 7
11. Executive Compensation................................................ 7
12. Security Ownership of Certain Beneficial Owners and Management........ 7
13. Certain Relationships and Related Transactions........................ 7
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 8
</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 both shared
and solo mail to consumer households in the United States on a national,
regional and local basis. Founded in 1929 as a hand delivery company, the
Company entered the direct mail industry as a solo mailer in 1946 and began
its shared mail program in 1980. The Company currently is the largest
commercial user of third-class mail in the United States.
ADVO competes primarily with newspapers, direct mail companies, broadcast
media, periodicals and other local distribution entities for retail
advertising expenditures. The Company believes that direct mail, which enables
advertisers to target advertisements to specific customers or geographic
areas, is the most efficient vehicle for delivering printed advertising on a
saturation or full market coverage basis, as well as an effective means of
targeted coverage.
ADVO's principal executive offices are located at One Univac Lane, Windsor,
Connecticut 06095.
In fiscal year 1995, the Company announced its plan to sell its in-store
marketing segment which provided marketing services to a wide range of
manufacturers and marketers using proprietary operating systems. The sale of
substantially all of the net assets of this segment was completed on March 1,
1996. For fiscal year 1995 and 1996 (and by restatement of prior periods), the
Company is accounting for its in-store marketing segment as a discontinued
operation in this Annual Report on Form 10-K. The discussion of the Company's
business under Items 1 and 2 hereof includes only the Company's continuing
operations.
PRODUCTS AND SERVICES
ADVO's direct marketing products and services include shared mail and solo
mail. ADVO also provides certain transportation and ancillary services in
conjunction with its direct marketing 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 choose a portion of the designated
mailing area for their distributions, ranging from part of a ZIP Code to all
ZIP Codes covered by the program. This flexibility enables major customers,
such as retail store chains, to select areas serviced by their retail stores
and, at the same time, distribute different versions of their advertisements
to accommodate the needs of their individual stores. It also allows a smaller
retailer to target only those ZIP Codes or portions of ZIP Codes needed to
accommodate its customer base, thereby reducing overall advertising costs.
The Company's shared mail programs offer the features of penetration and
target marketing at a significant cost reduction when compared to mailing on
an individual or solo mail basis. This cost advantage is available because the
Company pays the total postage expense, and advertisers are generally charged
a selling price based upon, among other factors, the incremental weight of
their promotional pieces.
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As a part of its shared mail programs, the Company provides the addresses of
the households receiving the mail packages; 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 61
million households in approximately 120 markets. This program is used by local
and national retailers. The ZIP Code configuration selected for each market is
normally determined by population density and by proximity to retail outlets.
Retailers with multiple locations and weekly frequency have a great influence
on the ZIP Codes chosen by the Company for its weekly mailings. The Company
derives most of its revenues from the Marriage Mail(R) program.
At the beginning of fiscal 1997, the Company announced that it had formed a
new network, known as A.N.N.E. (ADVO National Network Extension), of regional
shared mail companies to provide its clients with extended coverage outside
the markets already served by the Company. The Company handles the clients'
orders directly and manages distribution of their advertising through
A.N.N.E.'s network partners. Conversely, the A.N.N.E. network enables
participating partners (shared mail companies) to offer their clients extended
marketplace reach using the Company's services.
SOLO MAIL
Solo mail services include addressing and processing brochures and circulars
for an individual customer for distribution through the USPS. Each customer
bears the full cost of postage and handling for each mailing. Customers
choosing this form of direct mail are generally those who wish to maintain an
exclusive image and complete control over the timing and the target of their
mailings.
The Company processes solo mail using its own mailing list or lists supplied
by the customer. The Company charges a processing fee based on the solo mail
services rendered.
OTHER PRODUCTS AND SERVICES
The Company rents portions of its mailing list to organizations interested
in distributing their own solo mailings. The Company may or may not perform
the associated distribution services for the customer.
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.
ADVO Creative Services, Inc., based in Texas, is a wholly-owned subsidiary
of the Company which specializes in the coordination and production of custom
promotional magazines and circulars which, in most cases, are then distributed
by the Company.
MAILING LIST
ADVO's management believes its computerized mailing list is the largest
residential/household mailing list in the country. It contains over 114
million delivery points (constituting nearly all of the
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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 1980 and 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. Bimonthly, 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 would cover whether the address is still occupied, whether
the address still exists at all (i.e., demolished buildings) and any new
addresses included in the ZIP Code (i.e., new construction). The USPS also
indicates to ADVO changes in the walk sequence order of addresses so that ADVO
can qualify for the lowest possible postage rates. The USPS provides these
updates for a fee, provided that the user's list is at least 90% complete on a
ZIP Code basis. ADVO believes its list is nearly 100% accurate.
CUSTOMER BASE
Typically, the Company's customers are those businesses whose products and
services are used by the general population. These businesses (supermarkets,
fast food, drug stores, discount and department stores and consumer products
manufacturers) require continuous advertising to a mass audience. No one
customer accounted for more than 4% of the Company's sales in fiscal 1997,
1996 or 1995.
OPERATIONS
Customers' advertising circulars are processed by approximately 2,500
production employees who work at 19 mail processing facilities which are
strategically located throughout the nation. State-of-the-art inserting
machines (which combine the individual advertising pieces into the mailing
packages), addressing and labeling, and quarter-folding machines are the
principal equipment used to process the Company's products and services. At
several of the Company's production facilities, new computerized mail sorters
are being utilized and developed. In all 19 of ADVO's mail processing
facilities, the USPS accepts and verifies the Company's mail to help ensure
rapid package acceptance and distribution, which benefits both the USPS and
the Company. In most instances, the mail is then shipped by the Company to the
destination office of the USPS for final delivery.
During fiscal 1996, the Company entered into a ten year agreement with
Integrated Systems Solutions Corporation, now known as IBM Global Services, to
provide systems development and technical support to the Company. As a result
of this outsourcing, ADVO's computer center moved from Hartford to IBM Global
Services' computer center located in Southbury, 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 and carrier
routing of addresses received from customer files and demographic analyses.
COMPETITION
In general, the printed advertising market is highly competitive with
companies competing primarily on the basis of price, speed of delivery and
ability to target selected potential customers on a cost-effective basis.
ADVO's competitors for the delivery of retail and other printed advertising
are numerous, and include newspapers, regional and local mailers, direct
marketing firms, "shoppers" and "pennysavers".
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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.
SEASONALITY
ADVO's business generally follows the trends of retail advertising spending.
The Company has historically experienced higher revenues in the second half of
the calendar year.
RESEARCH AND DEVELOPMENT
Expenditures of the Company in research and development during the last
three years have not been material.
ENVIRONMENTAL MATTERS
The Company believes that it is substantially in compliance with all
regulations concerning the discharge of materials into the environment, and
such regulations have not had a material effect on the capital expenditures or
operations of the Company.
RAW MATERIALS
The Company manages approximately 45,000 tons of paper per year and another
10,000 tons through its printing network on behalf of its print vendors. ADVO
has agreements with various paper suppliers and print vendors to assure the
supply of proper paper grades at competitive prices.
EMPLOYEES
As of September 27, 1997, the Company had a total of approximately 4,700
full and part-time employees. ADVO also uses outside temporary employees,
particularly during busy seasons.
ADVO has one union contract, covering production employees in the Hartford,
Connecticut branch. The Company believes that its relations with its employees
are satisfactory.
FORWARD LOOKING STATEMENTS
Except for the historical information stated herein, the matters discussed
in this Report on Form 10-K 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. Such factors include but are not limited to
changes in customer demand; postal and paper prices; the realization of
benefits associated with the Company's reengineering initiative; possible
governmental regulation or legislation affecting aspects of the Company's
business; the risk of damage
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to the Company's data centers and telecommunication lines; the efficiencies
achieved with technology upgrades; the amount of shares the Company will
purchase in the future under its buyback program; the evaluation of the impact
of year 2000 costs; and other general economic factors.
ITEM 2. PROPERTIES
ADVO does not own any real estate except for its corporate headquarters,
which the Company purchased in fiscal year 1995. The corporate headquarters,
located in Windsor, Connecticut, consist of two buildings totaling
approximately 136,000 square feet. The Company leases 19 mail processing
facilities and approximately 65 sales offices (which excludes the sales
offices that are located in the mail processing facilities) throughout the
United States. The Company believes its facilities are suitable and adequate
for the purposes for which they are used and are adequately maintained.
ITEM 3. LEGAL PROCEEDINGS
ADVO is party to various lawsuits and regulatory proceedings which are
incidental to its business and which the Company believes will not have a
material adverse effect on its consolidated financial condition, liquidity or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
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NAME AGE POSITION WITH COMPANY
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Robert Kamerschen......... 61 Chairman and Chief Executive Officer
Gary M. Mulloy............ 52 President and Chief Operating Officer
Donald E. McCombs......... 41 Senior Vice President and Chief Financial Officer
Rick Kurz................. 57 Senior Vice President
Myron L. Lubin............ 57 Senior Vice President
A. Brian Sanders.......... 36 Senior Vice President
Robert S. Hirst........... 51 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 Micrografx, Inc., Domain, Inc. and Cognizant
Corporation.
Mr. Mulloy has been President and Chief Operating Officer since November 4,
1996 and was elected to the Board of Directors on December 3, 1996. From 1990
to October 1996 he was President and Chief Executive Officer of Pilkington
Barnes-Hind, Inc., a division of Pilkington Vision Care.
Mr. McCombs became Senior Vice President and Chief Financial Officer on
November 7, 1997. From 1989 to October 1997, he was Vice President--Financial
Planning and Measurements. He had held that position for the last eight years.
Mr. Kurz became Senior Vice President and Chief Strategic Growth Officer on
April 15, 1997. From April 1993 to March 1997, he held the position of Senior
Vice President--Chief Marketing Officer. Prior to that, he was a Managing
Partner of Marketing Corporation of America, a marketing consulting firm.
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Mr. Lubin became Senior Vice President--Chief Sales Officer on December 4,
1995. From January 1990 to November 1995, he held the position of Senior Vice
President-President Western Division.
Mr. Sanders became Senior Vice President--Chief Marketing Officer on May 19,
1997. For the five years prior to that he held several executive positions at
Pilkington Barnes-Hind, Inc., a division of Pilkington Vision Care.
Mr. Hirst became Vice President and Controller on April 16, 1990. He has
held that position for the last seven years.
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 hold such office until his successor shall have been duly chosen and
shall have been qualified, or until his earlier resignation or removal.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ADVO's 1997 Annual Report to Stockholders includes on page 37 under the
caption "Quarterly Financial Data (Unaudited)" the reported high and low
market prices of ADVO's common stock for the past two fiscal years, and such
information is incorporated herein by reference and made a part hereof (see
Exhibit 13).
For the fiscal year ended September 27, 1997, the Company declared no cash
dividends. During fiscal 1996, the Company paid a regular first quarter
dividend of $.025 per share of ADVO common stock, payable to shareholders of
record on December 27, 1995. On January 17, 1996 the Company announced the
declaration of a special one time dividend (the "Special Dividend") of $10 per
share of ADVO 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. In addition, the Board of Directors suspended the Company's
regular quarterly dividend of $.025 per share of ADVO common stock after the
declaration of the Special Dividend. The Company is currently subject to ratio
restrictions regarding future cash dividends exceeding $.025 per share as
stipulated in its renegotiated credit agreement dated September 29, 1997, with
Chase Manhattan Bank.
The Company declared quarterly cash dividends of $.025 per share to holders
of ADVO common stock during the fiscal year ended September 30, 1995 for total
cash dividends of $.10 per share.
The closing price as of November 28, 1997 of the Company's common stock,
under the symbol AD, on the New York Stock Exchange as reported in The Wall
Street Journal was $21 3/4 per share. The approximate number of holders of
record of the common stock on November 28, 1997 was 915.
During fiscal 1997, the Company engaged in no sales of its securities that
were not registered under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in ADVO's 1997 Annual
Report to Stockholders on page 20 under the caption "Selected Financial Data"
and is incorporated herein by reference and made a part hereof (see Exhibit
13).
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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 1997 Annual
Report to Stockholders on pages 21 through 25 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 21, 1997, appearing on pages 26
through 38 of ADVO's 1997 Annual Report to Stockholders, are incorporated
herein by reference and made a part hereof (see Exhibit 13).
The selected quarterly information required by this item is included under
the caption "Quarterly Financial Data (Unaudited)" on page 37 of ADVO's 1997
Annual Report to Stockholders and is incorporated herein by reference and made
a part hereof (see Exhibit 13).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, to the extent not included under the
caption "Executive Officers of the Registrant" in Part I of this Annual Report
on Form 10-K, appears on pages 3 and 4 of the Company's definitive proxy
statement dated December 18, 1997 for the annual meeting of stockholders to be
held on January 22, 1998 (the "Proxy Statement"), under the caption "Election
of Directors", and on page 6 of the Proxy Statement under the subcaption
"Section 16 Reports", and is incorporated herein by reference and made a part
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation" on pages 6 through 16 (except for those portions
appearing under the subcaptions "Report of the Compensation Committee" and
"Company Financial Performance"), and "Governance of the Company" on pages 2
and 3, of ADVO's Proxy Statement and is incorporated herein by reference and
made a part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the captions
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" on page 2 and on pages 5 and 6, respectively, of ADVO's Proxy
Statement and is incorporated herein by reference and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Related
Party Transactions" on page 16 and page 17 of ADVO's Proxy Statement and in
footnote 8 under the caption "Security Ownership of Management" on pages 5 and
6 of ADVO's Proxy Statement and is incorporated herein by reference and made a
part hereof.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See the Index to Financial Statements and
Financial Statement Schedules on page F-1.
(2) Financial Statement Schedules. See the Index to Financial Statements
and Financial Statement Schedules on page F-1.
(3) Exhibits. The following is a list of the exhibits to this Report:
<TABLE>
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EXHIBIT NO. EXHIBIT WHERE LOCATED
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3(a) Restated Certificate of Incorporation Incorporated by reference to Exhibit
of ADVO. 3(a) to the Company's Form 10 filed
on September 15, 1986 (No. 1-11720).
3(b) Restated By-laws of ADVO. Incorporated by reference to Exhibit
3(b) to the Company's Annual Report
on Form 10-K for the fiscal year
ended September 30, 1989.
4(a) Stockholder Protection Rights Incorporated by reference to Exhibit
Agreement, dated as of February 5, 4.1 of the Company's Form 8-K dated
1993, between the Company and Mellon February 5, 1993.
Securities Trust Company, as Rights
Agent, including Exhibit A and
Exhibit B.
10(a) 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(b) 1986 Employee Restricted Stock Plan Incorporated by reference to Exhibit A
of ADVO, as amended.* to the Company's definitive Proxy
Statement for the annual meeting held
on January 16, 1997.
10(c) 1988 Non-Qualified Stock Option Plan Incorporated by reference to Exhibit B
and 1993 Stock Option Subplan of to the Company's definitive Proxy
ADVO, as amended.* Statement for the annual meeting held
on January 16, 1997.
10(d) 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(e) Executive Severance Agreement, dated Incorporated by reference to Exhibit
October 17, 1995 between ADVO and 10(k) to the Company's Annual Report
Robert Kamerschen.* on Form 10-K for the fiscal year
ended September 30, 1995.
10(f) Executive Severance Agreements, dated Incorporated by reference to Exhibit
October 17, 1995 between ADVO and 10(m) to the Company's Annual Report
the executive officers named on Form 10-K for the fiscal year
therein.* ended September 30, 1995.
10(g) Executive Severance Agreement, dated Incorporated by reference to Exhibit
October 17, 1995 between ADVO and 10(n) to the Company's Annual Report
Robert S. Hirst.* on Form 10-K for the fiscal year
ended September 30, 1995.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT WHERE LOCATED
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10(h) Employment Agreement, dated May 29, Incorporated by reference to Exhibit
1996 between ADVO and Robert 10(k) to the Company's Annual Report
Kamerschen.* on Form 10-K for the fiscal year
ended September 28, 1996.
10(i) Employment Agreement, dated November Incorporated by reference to Exhibit
4, 1996 between ADVO and Gary M. 10(l) to the Company's Annual Report
Mulloy.* on Form 10-K for the fiscal year
ended September 28, 1996.
10(j) Executive Severance Agreement, dated Incorporated by reference to Exhibit
November 4, 1996 between ADVO and 10(m) to the Company's Annual Report
Gary M. Mulloy.* on Form 10-K for the fiscal year
ended September 28, 1996.
10(k) Executive Severance Agreement dated Filed herewith.
May 19, 1997 between ADVO and A.
Brian Sanders.*
10(l) Executive Severance Agreement dated Filed herewith.
July 21, 1997 between ADVO and
Lowell W. Robinson.*
10(m) Executive Severance Agreement dated Filed herewith.
November 7, 1997 between ADVO and
Donald E. McCombs.*
10(n) Information Technology Agreement Incorporated by reference to Exhibit
dated as of July 16, 1996 between 10(o) to the Company's Annual Report
ADVO and Integrated Systems on Form 10-K for the fiscal year
Solutions Corporation. ended September 28, 1996.
10(o) Amended and Restated Credit Agreement Incorporated by reference to Exhibit
dated September 29, 1997 between 99(b) of the Company's Form 8-K dated
ADVO and a syndicate of lenders led September 29, 1997.
by Chase Manhattan Bank as
Administrative Agent.
11 Computation of Per Share Earnings. Filed herewith.
13 1997 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.
22 Power of Attorney. See signature page.
23 Consent of Independent Auditors. Filed herewith.
27 Financial Data Schedule. Filed herewith.
</TABLE>
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* Management contract or compensatory plan required to be filed as an exhibit
pursuant to item 14(c) of this report.
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(b) Reports on Form 8-K.
No report on Form 8-K was filed by the Company with respect to the quarter
ended September 27, 1997.
A report on Form 8-K dated September 29, 1997 was filed by the Company
subsequent to year end. The Form reported under Item 5 thereof, that the
Company announced it had increased its previously announced stock repurchase
authorization from 2 million shares to 3.2 million shares. In connection with
the increased authorization, the Company purchased 1,936,098 shares of its
common stock from Warburg, Pincus Capital Partners, L. P. for $34.8 million,
at $18.00 per share. The closing price on September 29, 1997 was $18 3/8 per
share.
The Company also announced it had renegotiated its March 4, 1996 credit
agreement with a consortium of banks, led by Chase Manhattan Bank. The most
prominent features of the new agreement included an increased credit limit to
$300 million (from $250 million); a reduction in the interest rate; and an
increased limit on the Company's authorization to buyback its stock from $40
million to $100 million.
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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 18, 1997 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. EACH PERSON WHOSE
SIGNATURE APPEARS BELOW HEREBY CONSTITUTES DAVID M. STIGLER AND ROBERT S.
HIRST, AND EACH OF THEM SINGLY, SUCH PERSON'S TRUE AND LAWFUL ATTORNEYS, WITH
FULL POWER TO THEM AND EACH OF THEM, TO SIGN FOR SUCH PERSON AND IN SUCH
PERSON'S NAME AND CAPACITY AS INDICATED BELOW, ANY AND ALL AMENDMENTS TO THIS
REPORT, HEREBY RATIFYING AND CONFIRMING SUCH PERSON'S SIGNATURE AS IT MAY BE
SIGNED BY SAID ATTORNEYS TO ANY AND ALL AMENDMENTS.
DATE SIGNATURE TITLE
December 18, 1997 Robert Kamerschen /s/ Chairman, Chief Executive
---------------------------- Officer and Director
ROBERT KAMERSCHEN (Principal Executive
Officer)
December 18, 1997 Gary M. Mulloy /s/ President, Chief
---------------------------- Operating Officer and
GARY M. MULLOY Director
December 18, 1997 Donald E. McCombs /s/ Senior Vice President and
---------------------------- Chief Financial Officer
DONALD E. MCCOMBS (Principal Financial
Officer)
December 18, 1997 Robert S. Hirst /s/ Vice President and
---------------------------- Controller (Principal
ROBERT S. HIRST Accounting Officer)
December 18, 1997 Bruce Crawford /s/ Director
----------------------------
BRUCE CRAWFORD
December 18, 1997 David F. Dyer /s/ Director
----------------------------
DAVID F. DYER
December 18, 1997 James A. Eskridge /s/ Director
----------------------------
JAMES A. ESKRIDGE
December 18, 1997 Jack W. Fritz /s/ Director
----------------------------
JACK W. FRITZ
December 18, 1997 Howard H. Newman /s/ Director
----------------------------
HOWARD H. NEWMAN
December 18, 1997 John R. Rockwell /s/ Director
----------------------------
JOHN R. ROCKWELL
December 18, 1997 John L. Vogelstein /s/ Director
----------------------------
JOHN L. VOGELSTEIN
11
<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 27,
1997, September 28, 1996 and September 30, 1995......................... *
Consolidated balance sheets at September 27, 1997 and September 28, 1996. *
Consolidated statements of cash flows for the years ended September 27,
1997, September 28, 1996 and September 30, 1995......................... *
Consolidated statements of changes in stockholders' equity (deficiency)
for the years ended September 27, 1997, September 28, 1996 and September
30, 1995................................................................ *
Notes to consolidated financial statements............................... *
Consolidated Schedules
II-Valuation and Qualifying Accounts................................... F-2
</TABLE>
All other schedules have been omitted since the required information is not
present.
- --------
* Incorporated herein by reference from pages 26 to 38 of the ADVO, Inc. 1997
Annual Report to Stockholders.
F-1
<PAGE>
ADVO, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------------------- ---------- ----------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 30,
1995:
Allowances for sales ad-
justments.............. $ 3,321 $ -- $ 5,758(b) $ 6,953 $ 2,126
Allowances for doubtful
accounts............... 1,784 2,953 -- 3,445(a)(c) 1,292
Restructuring reserve... 17,109 -- -- 7,230 9,879
Accumulated amortization
Goodwill............... 703 329 -- -- 1,032
Accumulated amortization
Intangibles............ 3,987 1,015 -- 604 4,398
------- ------ -------- ------- -------
$26,904 $4,297 $ 5,758 $18,232 $18,727
======= ====== ======== ======= =======
Year ended September 28,
1996:
Allowances for sales ad-
justments.............. $ 2,126 $ -- $ 10,007(b) $ 9,297 $ 2,836
Allowances for doubtful
accounts............... 1,292 3,701 -- 3,603(a) 1,390
Restructuring reserve... 9,879 -- -- 7,820 2,059
Accumulated amortization
Goodwill............... 1,032 390 -- -- 1,422
Accumulated amortization
Intangibles............ 4,398 892 -- -- 5,290
------- ------ -------- ------- -------
$18,727 $4,983 $ 10,007 $20,720 $12,997
======= ====== ======== ======= =======
Year ended September 27,
1997:
Allowances for sales ad-
justments.............. $ 2,836 $ -- $ 4,889(b) $ 5,143 $ 2,582
Allowances for doubtful
accounts............... 1,390 5,374 -- 4,186(a) 2,578
Restructuring reserve... 2,059 -- -- 1,711 348
Accumulated amortization
Goodwill............... 1,422 392 -- -- 1,814
Accumulated amortization
Intangibles............ 5,290 729 -- -- 6,019
------- ------ -------- ------- -------
$12,997 $6,495 $ 4,889 $11,040 $13,341
======= ====== ======== ======= =======
</TABLE>
- --------
(a) Write off of uncollectible accounts, net of recoveries on accounts
previously written off.
(b) Reduction of revenues.
(c) Reclassification of allowances related to discontinued operations.
F-2
<PAGE>
Exhibit 10(k)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of May 19,
1997 by and between ADVO, Inc. (the "Company") and A. Brian Sanders (the
"Executive").
RECITALS:
--------
A. The Executive is an executive of the Company and has made and is
expected to continue to make major contributions to the short-and long-term
profitability, growth, and financial strength of the Company;
B. The Company recognizes that the possibility of a Change of Control (as
hereafter defined) exists;
C. The Company desires to assure itself of both present and future
continuity of its management and desires to establish certain severance benefits
for key executive officers of the Company, including the Executive, applicable
in the event of a Change of Control; and
D. The Company wishes to aid in assuring that such executives are not
practically disabled from discharging their duties in respect of a proposed or
actual transaction involving a Change of Control.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
---------------------
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Affiliate" means (i) each entity in which the Company, alone or
together with one or more other Affiliates of the Company, owns not less than
80% of the then outstanding voting securities or, for any entity that is not a
corporation, at least 80% of the then-outstanding capital interests of such
entity and (ii) any additional entity which is deemed by action of the Board to
be an Affiliate for the purposes of this Agreement.
(b) "Base Pay" means the Executive's annual aggregate fixed base salary
from the Company at the time in question.
(c) "Board" means the Board of Directors of the Company.
(d) "Change of Control" means the occurrence during the Term of any of
the following events:
1
<PAGE>
(i) The acquisition by an individual, entity or group (within
the meaning of Section 13 (d)(3) or 14 (d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of voting securities of the Company where such acquisition causes
such Person to own 30% or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities"); provided
however, that for purposes of this Subsection (i), the following acquisitions
shall not be deemed to result in a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company, (C) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (D)
any acquisition by any corporation pursuant to a transaction that complies with
clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that
if any Person's beneficial ownership of the Outstanding Company Voting
Securities reaches or exceeds 30% as a result of a transaction described in
clause (A) or (B) above, and such Person subsequently acquires beneficial
ownership of additional voting securities of the Company, such subsequent
acquisition shall be treated as an acquisition that causes such Person to own
30% or more of the Outstanding Company Voting Securities; or
(ii) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; and provided, further, that any partner, employee or representative of
Warburg proposed by Warburg to be elected to the Board shall be considered a
member of the Incumbent Board; or
(iii) The approval by the shareholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the acquisition of assets of
another corporation ("Business Combination") or, if consummation of such
Business Combination is subject, at the time of such approval by shareholders,
to the consent of any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly by consummation); excluding, however,
such a Business Combination pursuant to which (A) all or substantially all of
the individuals and entities who were the beneficial owners of the Outstanding
Company Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 60% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then
2
<PAGE>
outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation that as a result of
such transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in substantially the
same proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Company Voting Securities, (B) no Person
(excluding any employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 30% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (C) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(iv) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(e) "Cause" means that, prior to any Termination by the Executive for
Good Reason, the Executive shall have:
(i) committed an intentional act of fraud, embezzlement, or
theft in connection with the Executive's duties or in the course of his
employment with the Company;
(ii) committed intentional wrongful damage to property of the
Company; or
(iii) intentionally and wrongfully disclosed confidential
information of the Company; and any such act shall have been materially harmful
to the Company.
For the purposes of this Agreement, no act on the part of the Executive shall be
deemed "intentional" if it was due primarily to an error in judgment or
negligence, but shall be deemed "intentional" only if done by the Executive not
in good faith and without reasonable belief that the Executive's action or
omission was in the best interests of the Company.
(f) "Date of Termination" means the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be; provided,
however, that if the Executive is Terminated by the Company other than for Cause
or for disability pursuant to Section 2(a) (ii), the Date of Termination will be
the date on which the Executive receives the Notice of Termination from the
Company; and provided further,
3
<PAGE>
if the Executive is Terminated by reason of death or disability pursuant to
Section 2(a)(i) or 2(a)(ii), the Date of Termination will be the last day of the
month in which occurs the date of death or the disability effective date, as the
case may be.
(g) "Employee Benefits" means the perquisites, benefits and service
credit for benefits as provided under the plans and programs maintained by the
Company, including, but not limited to, plans and programs which are "employee
benefit plans" under Section 3 (3) of the Employee Retirement Income Security
Act of 1974, as amended, and any amendment or successor, to such plans or
programs (whether insured, funded or unfunded).
(h) "Good Reason" means the occurrence of any of the events listed in
Sections 2(b)(i) through 2(b)(vii), inclusive.
(i) "Incentive Pay" means an annual amount equal to the aggregate
annual bonus, in addition to Base Pay, made or to be made in regard to services
rendered in any calendar year or performance period pursuant to any bonus plan
of the Company.
(j) "Notice of Termination" means a written notice which (i) indicates
the specific provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for the
Termination under the provision so indicated, and (iii) if the effective date of
the Termination is other than the date of receipt of such notice, specifies the
effective date of Termination (which date will not be more than sixty (60) days
after the giving of such notice). The failure by the Executive to set forth in
the Notice of Termination any fact or circumstance which contributes to a
showing that the Executive is entitled to the benefits intended to be provided
by this Agreement will not constitute a waiver of any right of the Executive
hereunder or otherwise preclude the Executive from later asserting such fact or
circumstance in enforcing the Executive's rights hereunder.
(k) "Severance Period" means the period of time commencing on the date
of an occurrence of a Change of Control and continuing until the earlier of (i)
the date which is one and one-half years following the occurrence of the Change
of Control, and (ii) the Executive's death.
(l) "Subsidiary" means an entity, at least a majority of the total
voting power of the then-outstanding voting securities of which is held,
directly or indirectly, by the Company and/or one or more other Subsidiaries or,
for any entity that is not a corporation, at least a majority of the then-
outstanding capital interests of which is so held.
(m) "Term" means (A) the period commencing on the date hereof and
ending on the second anniversary of the date hereof; provided, however, that
commencing on the date one year after the date hereof, and on each annual
anniversary of such date (such date and each annual anniversary thereof shall be
hereinafter referred to
4
<PAGE>
as the "Renewal Date"), unless previously terminated, the Term shall be
automatically extended so as to terminate two years from such Renewal Date,
unless at least sixty (60) days prior to the Renewal Date the Company shall give
notice to the Executive that the Term shall not be so extended, (B) if, prior to
a Change of Control, for any reason the Executive is Terminated or Terminates,
thereupon without further action the Term shall be deemed to have expired and
this Agreement will immediately terminate and be of no further effect, and (C)
in the event of a Change of Control, the Term will, without further action, be
considered to terminate at the expiration of the Severance Period.
(n) "Terminate" and correlative terms mean the termination of the
Executive's employment with the Company and any Affiliate or Subsidiary.
(o) "Warburg" means Warburg, Pincus Capital Partners, L.P., and/or any
of its affiliates.
2. Termination Following a Change of Control: (a) If, during the
-----------------------------------------
Severance Period, the Executive is Terminated, the Executive will be entitled to
the benefits provided by Sections 3 and 4 unless such termination is by reason
of one or more of the following events:
(i) The Executive's death;
(ii) The permanent and total disability of the Executive as
defined in any long term disability plan of the Company, applicable to the
Executive, as in effect immediately prior to the Change of Control;
(iii) Cause; or
(iv) The Executive's voluntary Termination in circumstances in
which Good Reason does not exist.
(b) In the event of the occurrence of a Change of Control, the
Executive may Terminate during the Severance Period with the right to severance
compensation as provided in Sections 3 and 4 upon the occurrence of one or more
of the following events (regardless of whether any other reason, other than
Cause as hereinabove provided, for Termination exists or has occurred, including
without limitation other employment):
(i) An adverse change in the nature or scope of the
authorities, powers, functions, responsibilities, or duties attached to the
position with the Company; which the Executive held immediately prior to the
Change of Control;
(ii) A reduction in the Executive's Base Pay as in effect
immediately prior to any Change of Control, or as it may have been increased
from time to time thereafter;
5
<PAGE>
(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 of the Company or transfer of all or substantially all of its
business and/or assets, unless the successor or successors (by liquidation,
merger, consolidation, reorganization, transfer, or otherwise) to which all or a
significant portion of its business and/or assets have been transferred
(directly or by operation of law) assumed all duties and obligations of the
Company under this Agreement pursuant to Section 9;
(vi) Without limiting the generality or effect of the foregoing,
any material breach of this Agreement by the Company or any successor thereto;
or
(vii) Any action by the Company which causes the Executive's
services to be performed at a location which is more than thirty five (35) miles
from the location where the Executive was employed immediately preceding the
date of the Change of Control.
(c) Any Termination will be communicated by Notice of Termination
hereto given in accordance with Section 10 of this Agreement.
3. Severance Compensation: (a) If, following the occurrence of a Change
----------------------
of Control, the Executive is Terminated by the Company during the Severance
Period other than in the circumstances set forth in Section 2 (a) (i), 2 (a)
(ii), or 2 (a) (iii), or if the Executive Terminates for Good Reason:
(i) The Company will pay to the Executive in a lump sum in cash
within five (5) business days after the later of the date on which the Company
receives the determination of the Accounting Firm required in Section 4 hereof
or the Date of Termination the aggregate of the amount (the "Severance Payment")
equal to one and one-half times the sum of (A) the Executive's Base Pay at the
highest rate in effect at any time within the 90-day period preceding the date
the Notice of Termination was given or,
6
<PAGE>
if higher, at the highest rate in effect at any time within the 90-day period
preceding the date of the first occurrence of a Change of Control, and (B) an
amount equal to the greatest amount of Incentive Pay received by the Executive
during any calendar year or portion thereof from and including the third
calendar year prior to the first occurrence of a Change of Control; and
(ii) For the period of one and one-half years from the Date of
Termination, the Executive shall be eligible for participation in and shall
receive all benefits under such benefit plans, practices, policies and programs
of the Company that provide medical, prescription dental, or life insurance
coverage, with the costs of such participation to be paid by the Company to the
same extent as prior to the Executive's Termination. In the event that such
continued participation is not allowed under the terms and provisions of such
plans or programs, then in lieu thereof, the Company shall acquire individual
insurance policies providing comparable coverage for the Executive; provided
that if any such individual coverage is unavailable, the Company shall pay to
the Executive an amount equal to the contributions that would have been made by
the Company for such coverage on the Executive's behalf if the Executive had
remained in the employ of the Company for the period referred to in the
preceding sentence.
(b) There will be no right of set-off or counter-claim in respect of
any claim, debt, or obligation against any payment to or benefit for the
Executive provided for in this Agreement.
(c) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment or provide any benefit required to be
made or provided under this Agreement (including under this Section 3 or Section
6) on a timely basis, the Company will pay interest on the amount or value
thereof at an annualized rate of interest equal to the so-called composite
"prime rate" as quoted from time to time during the relevant period in the
Northeast Edition of The Wall Street Journal. Such interest will be payable as
-----------------------
it accrues on demand. Any change in such prime rate will be effective on and as
of the date of such change.
(d) Notwithstanding any other provision hereof, the parties, respective
rights and obligations under this Section 3 and under Sections 4 and 6 will
survive any termination or expiration of this Agreement following a Change of
Control or any Termination following a Change of Control for any reason
whatsoever.
4. Excise and Other Taxes. The Executive shall bear all expense of, and
----------------------
be solely responsible for, all federal, state, local or foreign taxes due with
respect to any payment received hereunder, including, without limitation, any
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the Code); provided, however, that all payments under this Agreement
shall be reduced to the extent necessary so that no portion thereof shall be
subject to the excise tax imposed by Section 4999 of the Code but only if, by
reason of such reduction, the net after-tax benefit received by the Executive
shall exceed the net after-tax benefit received by the Executive if no such
7
<PAGE>
reduction was made. For purposes of this Section 4, "net after-tax benefit"
shall mean (i) the total of all payments and the value of all benefits which the
Executive receives or is then entitled to receive from the Company that would
constitute "parachute payments" within the meaning of Section 280G of the Code,
less (ii) the amount of all federal, state and local income taxes payable with
respect to the foregoing calculated at the maximum marginal income tax rate for
each year in which the foregoing shall be paid to the Executive (based on the
rate in effect for such year as set forth in the Code as in effect at the time
of the first payment of the foregoing), less (iii) the amount of excise taxes
imposed with respect to the payments and benefits described in (i) above by
Section 4999 of the Code. The foregoing determination will be made by a
nationally recognized accounting firm (the "Accounting Firm") selected by the
Executive and reasonably acceptable to the Company (which may be, but will not
be required to be, the Company's independent auditors). The Executive will
direct the Accounting Firm to submit its determination and detailed supporting
calculations to both the Company and the Executive within fifteen (15) days
after the Date of Termination. If the Accounting Firm determines that such
reduction is required by this Section 4, the Company shall pay such reduced
amount to the Executive in accordance with Section 3 (a). If the Accounting
Firm determines that no reduction is necessary under this Section 4, it will, at
the same time as it makes such determination, furnish the Company and the
Executive an opinion that the Executive will not be liable for any excise tax
under Section 4999 of the Code. The Company and the Executive will each provide
the Accounting Firm access to and copies of any books, records, and documents in
the possession of the Company or the Executive, as the case may be, reasonably
requested by the Accounting Firm, and otherwise cooperate with the Accounting
Firm in connection with the preparation and issuance of the determinations and
calculations contemplated by this Section 4. The fees and expenses of the
Accounting Firm for its services in connection with the determinations and
calculations contemplated by this Section 4 will be borne by the Company.
5. No Mitigation Obligation: The Company hereby acknowledges that it
------------------------
will be difficult, and may be impossible, for the Executive to find reasonably
comparable employment following the Date of Termination. The payment of the
severance compensation by the Company to the Executive in accordance with the
terms of this Agreement will be liquidated damages, and the Executive will not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor will any profits, income,
earnings, or other benefits from any source whatsoever create any mitigation,
offset, reduction, or any other obligation on the part of the Executive
hereunder or otherwise.
6. Legal Fees and Expenses: If the Company has failed to comply with any
-----------------------
of its obligations under this Agreement or in the event that the Company or any
other person takes or threatens to take any action to declare this Agreement
void or unenforceable, or institutes any litigation or other action or
proceeding designed to deny, or to recover from, the Executive the benefits
provided or intended to be provided to the Executive hereunder, the Company
irrevocably authorizes the Executive from time to
8
<PAGE>
time to retain counsel of the Executive's choice, at the expense of the Company,
to advise and represent the Executive in connection with any such
interpretation, enforcement, or defense, including without limitation the
initiation or defense of any litigation or other legal action, whether by or
against the Company or any member of the Board, officer, stockholder, or other
person or entity affiliated with the Company, in any jurisdiction. The Company
will pay and be solely financially responsible for any and all attorneys' and
related fees and expenses incurred by the Executive in connection with such
litigation.
7. Employment Rights: Nothing expressed or implied in this Agreement
-----------------
will create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company, or any Affiliate or
Subsidiary prior to or following any Change of Control.
8. Withholding of Taxes: The Company may withhold from any amounts
--------------------
payable under this Agreement all federal, state, city, or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
9. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization, or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including,
without limitation, any persons acquiring directly or indirectly all or
substantially all of the business and/or assets of the Company, whether by
purchase, merger, consolidation, reorganization, or otherwise (and such
successor will thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable, or delegable by
the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, and/or legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer, or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 9 (a) and 9 (b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable, or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by will or by the laws
of descent and distribution and, in the event of any attempted assignment or
transfer contrary to this Section 9 (c), the Company will have no liability to
pay any amount so attempted to be assigned, transferred, or delegated.
9
<PAGE>
10. Notices: For all purposes of this Agreement, all communications,
-------
including, without limitation, notices, consents, requests, or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or two business
days after having been mailed by United States registered or certified mail,
return receipt requested, postage prepaid, or one business day after having been
sent by a nationally recognized overnight courier service addressed to the
Company (to the attention of the General Counsel of the Company) at its
principal Executive office and to the Executive at the Executive's principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of changes of address
will be effective only upon receipt.
11. Governing Law: The validity, interpretation, construction, and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Connecticut, without giving effect to
the principles of conflict of laws of such State, to the extent not preempted by
applicable federal law.
12. Validity: If any provision of this Agreement or the application of
--------
any provision hereof to any person or circumstances is held invalid,
unenforceable, or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not be
affected, and the provision so held to be invalid, unenforceable, or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid, or legal.
13. Non-Exclusivity of Rights: Nothing in this Agreement will prevent or
-------------------------
limit the Executive's present or future participation in any benefit, bonus,
incentive, or other plan or program provided by the Company or any Affiliate or
Subsidiary for which the Executive may qualify, nor will this Agreement in any
manner limit or otherwise affect such rights as the Executive may have under any
stock option or other agreements with the Company or any Affiliate or
Subsidiary. Amounts or benefits which are vested or which the Executive is
otherwise entitled to receive under any plan or program of the Company at or
subsequent to the Date of Termination will be payable in accordance with such
plan or program, except as otherwise expressly provided in this Agreement;
provided, however, that any amounts received by the Executive pursuant to this
Agreement shall be in lieu of any benefits which the Executive is entitled to
receive or may become entitled to receive under any reduction-in-force or
severance pay plan or practice which the Company now has in effect or may
hereafter put into effect, any other benefits to which the Executive may be
entitled under any individual agreement of employment with the Company which
would provide a benefit to the Executive upon the occurrence of a Change of
Control of the Company, and any severance benefits required under federal or
state law to be paid to the Executive.
14. Miscellaneous: (a) No provision of this Agreement may be modified,
-------------
waived, or discharged unless such waiver, modification, or discharge is agreed
to in
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writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
References to Sections are to references to Sections of this Agreement.
(b) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.
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 ROBERT KAMERSCHEN /s/
----------------------
Robert Kamerschen
A. BRIAN SANDERS /s/
----------------------
A. Brian Sanders
11
<PAGE>
Exhibit 10(l)
FORM OF AGREEMENT
Revised July 21, 1997
- ---------------------
April 29, 1997
Lowell W. Robinson
Hartford, CT 06103
Dear Lowell:
This letter will confirm our discussion regarding your termination from your
position of Executive Vice President and Chief Financial Officer of ADVO.
Moreover, this letter will further serve as our Agreement on the terms and
conditions of the severance arrangement ADVO, Inc. will provide you.
1. You are leaving your position with ADVO, Inc. as of May 31, 1997. During
the next 5 weeks, you will be working closely with myself and Gary Mulloy
to ensure a smooth transition in all of your areas.
2. Effective end of business May 31, 1997, you will be placed on inactive wage
continuation pay status for a period of one year, through May 31, 1998.
While on inactive pay status, you will be paid on each regular pay date
throughout this period at your current rate of pay. If you were
participating in the Company's medical, dental, group universal life,
dependent life, 401(k) (Sales Savings) or Employee Stock Purchase plans on
your termination date, you may continue such participation 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 the Company's short-term and long-term disability benefits
plans, workers' compensation, vacation accrual, auto allowance, or bonus
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.
The Executive Long-Term Disability Supplement will be continued at ADVO's
expense through the end of the calendar year 1997. At that time, a
representative from Paul Revere will contact you to discuss continuing
coverage at your own expense. Currently, the annual premium for calendar
year 1997 is $4,569.41.
You will be reimbursed for any penalty incurred because of any early
termination of your lease at the Gold Street address.
<PAGE>
3. Your fiscal 1997 bonus will be paid in November, prorated for your active
service through May 31, 1997, dependent on company performance. Per your
April 28, 1994 agreement, you will receive your full target bonus for the
one year of salary continuation starting on June 1, 1997 and ending on May
31, 1998. You will not be eligible for any other bonus consideration.
4. All company property (i.e., keys, credit cards, etc.) must be returned to
Mardelle Pena no later than May 31, 1997, unless other arrangements are
mutually agreed upon prior to that time. You will be entitled to the use of
your phone card through the end of your wage continuation or upon
reemployement, whichever occurs first. Also, per your request, the fair
market value for the fax machine is $250.00. Please make a check payable to
ADVO, Inc. in that amount and forward it to Rosemary Begley.
5. If you obtain other employment during your period of inactive pay status,
you must notify me of such other employment, and you will then be removed
from inactive pay status on the first day you start work at your new job.
At that time, you will be given as a lump sum, less applicable withholding,
the amount due to you thereunder through May 31, 1998.
6. As long as you are on the inactive wage continuation status described
above, 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 for more
information about stock-related matters.
7. ADVO, Inc. will provide you full executive outplacement services through
Beam Pines. Their telephone number for their New York office is 212-476-
4100 ext. 264, and your contact will be Howard Pines. You will have the
option of either using their office facilities and support staff or
utilizing an office in an executive suite arrangement, within New York
City, including administrative support at ADVO's expense. This will need to
be coordinated through Mardelle Pena. This outplacement assistance, which
is something for which you would not be eligible under ADVO's policy, is in
consideration for your signing this Agreement. While you are in
outplacement, you will cooperate with the Company on any transitional
issues.
8. After your wage continuation status ends, 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. 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 at the expiration of the COBRA
continuation period. You will have up to 31 days to convert your group
basic and universal life insurance to an individual policy basis. You will
receive the written COBRA notice from the Corporate Benefits Department and
may inquire to them about details regarding these privileges, 860-285-6307.
10. In consideration for the outplacement described in paragraph 7 and
additional wage continuation beyond policy discussed in paragraph 2, which
you would otherwise not have been entitled to, you affirm that your leaving
ADVO is not caused by any act of
2
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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 limited
to, any claim for wrongful discharge, breach of contract or other common
law claims, or under any Federal, State or local statute or regulation
including, but not 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.
11. Also in consideration for the outplacement assistance discussed in
paragraph 7 and additional wage continuation beyond policy discussed in
paragraph 2, you promise not to disparage or otherwise reflect negatively
upon the Company, its personnel or its business practices. You also promise
to keep the terms of this agreement completely confidential. References
that continue to reinforce the reasons put forth in the organizational
announcement will be handled by me personally.
12. This Agreement supersedes all other Agreements or understandings, written
or oral, that you may have with ADVO, Inc. on the subject matter discussed
above, except that the Non-Compete Agreement between you and ADVO shall
remain in full force and effect pursuant to its terms. This Agreement shall
be binding upon ADVO's successor or assignee, if the control of ADVO should
change during its term.
13. 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 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.
14. 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.
If you have any questions concerning this matter, please discuss them with me as
soon as possible.
3
<PAGE>
Please signify your acceptance of this Agreement by signing and returning a copy
to me. You acknowledge that you have had a reasonable time to consider this
Agreement. If it is acceptable to you, please sign it below and return it to me
within 22 days. You will have seven (7) days thereafter to revoke this
Agreement, after which 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 the outplacement services described in paragraph 7, or the wage
continuation in excess of policy.
Sincerely,
ROBERT KAMERSCHEN /s/
- ---------------------
Robert Kamerschen
Accepted and agreed to this _______ day of _____________, 1997.
- -----------------------
Lowell W. Robinson
4
<PAGE>
Exhibit 10(m)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of
November 7, 1997 by and between ADVO, Inc. (the "Company") and Donald McCombs
(the "Executive").
RECITALS:
- --------
A. The Executive is an executive of the Company and has made and is
expected to continue to make major contributions to the short- and long-term
profitability, growth, and financial strength of the Company;
B. The Company recognizes that the possibility of a Change of Control (as
hereafter defined) exists;
C. The Company desires to assure itself of both present and future
continuity of its management and desires to establish certain severance benefits
for key executive officers of the Company, including the Executive, applicable
in the event of a Change of Control; and
D. The Company wishes to aid in assuring that such executives are not
practically disabled from discharging their duties in respect of a proposed or
actual transaction involving a Change of Control.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms: In addition to terms defined elsewhere herein,
---------------------
the following terms have the following meanings when used in this Agreement with
initial capital letters:
(a) "Affiliate" means (i) each entity in which the Company, alone or
together with one or more other Affiliates of the Company, owns not less than
80% of the then outstanding voting securities or, for any entity that is not a
corporation, at least 80% of the then-outstanding capital interests of such
entity and (ii) any additional entity which is deemed by action of the Board to
be an Affiliate for the purposes of this Agreement.
(b) "Base Pay" means the Executive's annual aggregate fixed base
salary from the Company at the time in question.
(c) "Board" means the Board of Directors of the Company.
1
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(d) "Change of Control" means the occurrence during the Term of any
of the following events:
(i) The acquisition by an individual, entity or group (within
the meaning of Section 13 (d)(3) or 14 (d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of voting securities of the Company where such acquisition causes
such Person to own 30% or more of the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities"); provided
however, that for purposes of this Subsection (i), the following acquisitions
shall not be deemed to result in a Change of Control: (A) any acquisition
directly from the Company, (B) any acquisition by the Company, (C) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (D)
any acquisition by any corporation pursuant to a transaction that complies with
clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that
if any Person's beneficial ownership of the Outstanding Company Voting
Securities reaches or exceeds 30% as a result of a transaction described in
clause (A) or (B) above, and such Person subsequently acquires beneficial
ownership of additional voting securities of the Company, such subsequent
acquisition shall be treated as an acquisition that causes such Person to own
30% or more of the Outstanding Company Voting Securities; or
(ii) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; and provided, further, that any partner, employee or representative of
Warburg proposed by Warburg to be elected to the Board shall be considered a
member of the Incumbent Board; or
(iii) The approval by the shareholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the acquisition of assets of
another corporation ("Business Combination") or, if consummation of such
Business Combination is subject, at the time of such approval by shareholders,
to the consent of any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly by consummation); excluding, however,
such a Business Combination pursuant to which (A) all or substantially all of
the individuals and entities who were the beneficial owners of the Outstanding
Company Voting Securities immediately prior to such Business
2
<PAGE>
Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation that as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Voting
Securities, (B) no Person (excluding any employee benefit plan (or related
trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 30% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination and (C) at least a
majority of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(iv) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(e) "Cause" means that, prior to any Termination by the Executive for
Good Reason, the Executive shall have:
(i) committed an intentional act of fraud, embezzlement, or
theft in connection with the Executive's duties or in the course of his
employment with the Company;
(ii) committed intentional wrongful damage to property of the
Company; or
(iii) intentionally and wrongfully disclosed confidential
information of the Company; and any such act shall have been materially harmful
to the Company.
For the purposes of this Agreement, no act on the part of the Executive shall
be deemed "intentional" if it was due primarily to an error in judgment or
negligence, but shall be deemed "intentional" only if done by the Executive not
in good faith and without reasonable belief that the Executive's action or
omission was in the best interests of the Company.
(f) "Date of Termination" means the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be; provided,
however, that if the Executive is Terminated by the Company other than for Cause
or for disability
3
<PAGE>
pursuant to Section 2(a) (ii), the Date of Termination will be the date on which
the Executive receives the Notice of Termination from the Company; and provided
further, if the Executive is Terminated by reason of death or disability
pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination will be the
last day of the month in which occurs the date of death or the disability
effective date, as the case may be.
(g) "Employee Benefits" means the perquisites, benefits and service
credit for benefits as provided under the plans and programs maintained by the
Company, including, but not limited to, plans and programs which are "employee
benefit plans" under Section 3 (3) of the Employee Retirement Income Security
Act of 1974, as amended, and any amendment or successor, to such plans or
programs (whether insured, funded or unfunded).
(h) "Good Reason" means the occurrence of any of the events listed in
Sections 2(b)(i) through 2(b)(vii), inclusive.
(i) "Incentive Pay" means an annual amount equal to the aggregate
annual bonus, in addition to Base Pay, made or to be made in regard to services
rendered in any calendar year or performance period pursuant to any bonus plan
of the Company.
(j) "Notice of Termination" means a written notice which (i)
indicates the specific provision in this Agreement relied upon, (ii) sets forth
in reasonable detail the facts and circumstances claimed to provide a basis for
the Termination under the provision so indicated, and (iii) if the effective
date of the Termination is other than the date of receipt of such notice,
specifies the effective date of Termination (which date will not be more than
sixty (60) days after the giving of such notice). The failure by the Executive
to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing that the Executive is entitled to the benefits intended
to be provided by this Agreement will not constitute a waiver of any right of
the Executive hereunder or otherwise preclude the Executive from later asserting
such fact or circumstance in enforcing the Executive's rights hereunder.
(k) "Severance Period" means the period of time commencing on the
date of an occurrence of a Change of Control and continuing until the earlier of
(i) the date which is one and one-half years following the occurrence of the
Change of Control, and (ii) the Executive's death.
(l) "Subsidiary" means an entity, at least a majority of the total
voting power of the then-outstanding voting securities of which is held,
directly or indirectly, by the Company and/or one or more other Subsidiaries or,
for any entity that is not a corporation, at least a majority of the then-
outstanding capital interests of which is so held.
(m) "Term" means (A) the period commencing on the date hereof and
ending on the second anniversary of the date hereof; provided, however, that
4
<PAGE>
commencing on the date one year after the date hereof, and on each annual
anniversary of such date (such date and each annual anniversary thereof shall be
hereinafter referred to as the "Renewal Date"), unless previously terminated,
the Term shall be automatically extended so as to terminate two years from such
Renewal Date, unless at least sixty (60) days prior to the Renewal Date the
Company shall give notice to the Executive that the Term shall not be so
extended, (B) if, prior to a Change of Control, for any reason the Executive is
Terminated or Terminates, thereupon without further action the Term shall be
deemed to have expired and this Agreement will immediately terminate and be of
no further effect, and (C) in the event of a Change of Control, the Term will,
without further action, be considered to terminate at the expiration of the
Severance Period.
(n) "Terminate" and correlative terms mean the termination of the
Executive's employment with the Company and any Affiliate or Subsidiary.
(o) "Warburg" means Warburg, Pincus Capital Partners, L.P., and/or
any of its affiliates.
2. Termination Following a Change of Control: (a) If, during the
-----------------------------------------
Severance Period, the Executive is Terminated, the Executive will be entitled to
the benefits provided by Sections 3 and 4 unless such termination is by reason
of one or more of the following events:
(i) The Executive's death;
(ii) The permanent and total disability of the Executive as
defined in any long term disability plan of the Company, applicable to the
Executive, as in effect immediately prior to the Change of Control;
(iii) Cause; or
(iv) The Executive's voluntary Termination in circumstances in
which Good Reason does not exist .
(b) In the event of the occurrence of a Change of Control, the
Executive may Terminate during the Severance Period with the right to severance
compensation as provided in Sections 3 and 4 upon the occurrence of one or more
of the following events (regardless of whether any other reason, other than
Cause as herein above 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;
5
<PAGE>
(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 of the Company or transfer of all or substantially all of its
business and/or assets, unless the successor or successors (by liquidation,
merger, consolidation, reorganization, transfer, or otherwise) to which all or a
significant portion of its business and/or assets have been transferred
(directly or by operation of law) assumed all duties and obligations of the
Company under this Agreement pursuant to Section 9;
(vi) Without limiting the generality or effect of the foregoing,
any material breach of this Agreement by the Company or any successor thereto;
or
(vii) Any action by the Company which causes the Executive's
services to be performed at a location which is more than thirty five (35) miles
from the location where the Executive was employed immediately preceding the
date of the Change of Control.
(c) Any Termination will be communicated by Notice of Termination
hereto given in accordance with Section 10 of this Agreement.
3. Severance Compensation: (a) If, following the occurrence of a Change
----------------------
of Control, the Executive is Terminated by the Company during the Severance
Period other than in the circumstances set forth in Section 2 (a) (i), 2 (a)
(ii), or 2 (a) (iii), or if the Executive Terminates for Good Reason:
(i) The Company will pay to the Executive in a lump sum in cash
within five (5) business days after the later of the date on which the Company
receives
6
<PAGE>
the determination of the Accounting Firm required in Section 4 hereof or the
Date of Termination the aggregate of the amount (the "Severance Payment") equal
to one and one-half times the sum of (A) the Executive's Base Pay at the highest
rate in effect at any time within the 90-day period preceding the date the
Notice of Termination was given or, if higher, at the highest rate in effect at
any time within the 90-day period preceding the date of the first occurrence of
a Change of Control, and (B) an amount equal to the greatest amount of Incentive
Pay received by the Executive during any calendar year or portion thereof from
and including the third calendar year prior to the first occurrence of a Change
of Control; and
(ii) For the period of one and one-half years from the Date of
Termination, the Executive shall be eligible for participation in and shall
receive all benefits under such benefit plans, practices, policies and programs
of the Company that provide medical, prescription dental, or life insurance
coverage, with the costs of such participation to be paid by the Company to the
same extent as prior to the Executive's Termination. In the event that such
continued participation is not allowed under the terms and provisions of such
plans or programs, then in lieu thereof, the Company shall acquire individual
insurance policies providing comparable coverage for the Executive; provided
that if any such individual coverage is unavailable, the Company shall pay to
the Executive an amount equal to the contributions that would have been made by
the Company for such coverage on the Executive's behalf if the Executive had
remained in the employ of the Company for the period referred to in the
preceding sentence.
(b) There will be no right of set-off or counter-claim in respect of
any claim, debt, or obligation against any payment to or benefit for the
Executive provided for in this Agreement.
(c) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment or provide any benefit required to be
made or provided under this Agreement (including under this Section 3 or Section
6) on a timely basis, the Company will pay interest on the amount or value
thereof at an annualized rate of interest equal to the so-called composite
"prime rate" as quoted from time to time during the relevant period in the
Northeast Edition of The Wall Street Journal. Such interest will be payable as
-----------------------
it accrues on demand. Any change in such prime rate will be effective on and as
of the date of such change.
(d) Notwithstanding any other provision hereof, the parties,
respective rights and obligations under this Section 3 and under Sections 4 and
6 will survive any termination or expiration of this Agreement following a
Change of Control or any Termination following a Change of Control for any
reason whatsoever.
4. Excise and Other Taxes. The Executive shall bear all expense of, and
----------------------
be solely responsible for, all federal, state, local or foreign taxes due with
respect to any payment received hereunder, including, without limitation, any
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the Code); provided,
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<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 the value of all benefits which the Executive receives or is then entitled
to receive from the Company that would constitute "parachute payments" within
the meaning of Section 280G of the Code, less (ii) the amount of all federal,
state and local income taxes payable with respect to the foregoing calculated at
the maximum marginal income tax rate for each year in which the foregoing shall
be paid to the Executive (based on the rate in effect for such year as set forth
in the Code as in effect at the time of the first payment of the foregoing),
less (iii) the amount of excise taxes imposed with respect to the payments and
benefits described in (i) above by Section 4999 of the Code. The foregoing
determination will be made by a nationally recognized accounting firm (the
"Accounting Firm") selected by the Executive and reasonably acceptable to the
Company (which may be, but will not be required to be, the Company's independent
auditors). The Executive will direct the Accounting Firm to submit its
determination and detailed supporting calculations to both the Company and the
Executive within fifteen (15) days after the Date of Termination. If the
Accounting Firm determines that such reduction is required by this Section 4,
the Company shall pay such reduced amount to the Executive in accordance with
Section 3 (a). If the Accounting Firm determines that no reduction is necessary
under this Section 4, it will, at the same time as it makes such determination,
furnish the Company and the Executive an opinion that the Executive will not be
liable for any excise tax under Section 4999 of the Code. The Company and the
Executive will each provide the Accounting Firm access to and copies of any
books, records, and documents in the possession of the Company or the Executive,
as the case may be, reasonably requested by the Accounting Firm, and otherwise
cooperate with the Accounting Firm in connection with the preparation and
issuance of the determinations and calculations contemplated by this Section 4.
The fees and expenses of the Accounting Firm for its services in connection with
the determinations and calculations contemplated by this Section 4 will be borne
by the Company.
5. No Mitigation Obligation: The Company hereby acknowledges that it
------------------------
will be difficult, and may be impossible, for the Executive to find reasonably
comparable employment following the Date of Termination. The payment of the
severance compensation by the Company to the Executive in accordance with the
terms of this Agreement will be liquidated damages, and the Executive will not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor will any profits, income,
earnings, or other benefits from any source whatsoever create any mitigation,
offset, reduction, or any other obligation on the part of the Executive
hereunder or otherwise.
6. Legal Fees and Expenses: If the Company has failed to comply with
any of its obligations under this Agreement or in the event that the Company or
any other
8
<PAGE>
person takes or threatens to take any action to declare this Agreement void or
unenforceable, or institutes any litigation or other action or proceeding
designed to deny, or to recover from, the Executive the benefits provided or
intended to be provided to the Executive hereunder, the Company irrevocably
authorizes the Executive from time to time to retain counsel of the Executive's
choice, at the expense of the Company, to advise and represent the Executive in
connection with any such interpretation, enforcement, or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any member of the Board, officer,
stockholder, or other person or entity affiliated with the Company, in any
jurisdiction. The Company will pay and be solely financially responsible for any
and all attorneys' and related fees and expenses incurred by the Executive in
connection with such litigation.
7. Employment Rights: Nothing expressed or implied in this Agreement
-----------------
will create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company, or any Affiliate or
Subsidiary prior to or following any Change of Control.
8. Withholding of Taxes: The Company may withhold from any amounts
--------------------
payable under this Agreement all federal, state, city, or other taxes as the
Company is required to withhold pursuant to any law or government regulation or
ruling.
9. Successors and Binding Agreement: (a) The Company will require any
--------------------------------
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization, or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement will be binding upon and inure
to the benefit of the Company and any successor to the Company, including,
without limitation, any persons acquiring directly or indirectly all or
substantially all of the business and/or assets of the Company, whether by
purchase, merger, consolidation, reorganization, or otherwise (and such
successor will thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable, or delegable by
the Company.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, and/or legatees.
(c) This Agreement is personal in nature and neither of the parties
hereto will, without the consent of the other, assign, transfer, or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Sections 9 (a) and 9 (b). Without limiting the generality or effect
of the foregoing, the Executive's right to receive payments hereunder will not
be assignable, transferable, or delegable, whether by pledge, creation of a
security interest, or otherwise, other than by a transfer by will or by the laws
of descent and distribution and, in the event of any attempted assignment or
transfer
9
<PAGE>
contrary to this Section 9 (c), the Company will have no liability to pay any
amount so attempted to be assigned, transferred, or delegated.
10. Notices: For all purposes of this Agreement, all communications,
-------
including, without limitation, notices, consents, requests, or approvals,
required or permitted to be given hereunder will be in writing and will be
deemed to have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or two business
days after having been mailed by United States registered or certified mail,
return receipt requested, postage prepaid, or one business day after having been
sent by a nationally recognized overnight courier service addressed to the
Company (to the attention of the General Counsel of the Company) at its
principal Executive office and to the Executive at the Executive's principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of changes of address
will be effective only upon receipt.
11. Governing Law: The validity, interpretation, construction, and
-------------
performance of this Agreement will be governed by and construed in accordance
with the substantive laws of the State of Connecticut, without giving effect to
the principles of conflict of laws of such State, to the extent not preempted by
applicable federal law.
12. Validity: If any provision of this Agreement or the application of
--------
any provision hereof to any person or circumstances is held invalid,
unenforceable, or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances will not be
affected, and the provision so held to be invalid, unenforceable, or otherwise
illegal will be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid, or legal.
13. Non-Exclusivity of Rights: Nothing in this Agreement will prevent or
-------------------------
limit the Executive's present or future participation in any benefit, bonus,
incentive, or other plan or program provided by the Company or any Affiliate or
Subsidiary for which the Executive may qualify, nor will this Agreement in any
manner limit or otherwise affect such rights as the Executive may have under any
stock option or other agreements with the Company or any Affiliate or
Subsidiary. Amounts or benefits which are vested or which the Executive is
otherwise entitled to receive under any plan or program of the Company at or
subsequent to the Date of Termination will be payable in accordance with such
plan or program, except as otherwise expressly provided in this Agreement;
provided, however, that any amounts received by the Executive pursuant to this
Agreement shall be in lieu of any benefits which the Executive is entitled to
receive or may become entitled to receive under any reduction-in-force or
severance pay plan or practice which the Company now has in effect or may
hereafter put into effect, any other benefits to which the Executive may be
entitled under any individual agreement of employment with the Company which
would provide a benefit to the Executive upon the occurrence of a Change of
Control of the Company, and any severance benefits required under federal or
state law to be paid to the Executive.
10
<PAGE>
14. Miscellaneous: (a) No provision of this Agreement may be modified,
-------------
waived, or discharged unless such waiver, modification, or discharge is agreed
to in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. No agreements or representations, oral
or otherwise, express or implied with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
References to Sections are to references to Sections of this Agreement.
(b) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.
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 : ROBERT KAMERSCHEN /s/
----------------------
Robert Kamerschen
DONALD MCCOMBS /s/
------------------
Donald McCombs
11
<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 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
EARNINGS APPLICABLE TO COMMON STOCK.. $26,798 $ 3,108 $24,951
======= ======= =======
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES
Average common shares outstanding.... 24,320 22,803 20,663
Assumed conversion or exercise of:
Warrants........................... -- 844 2,272
Stock options...................... 357 462 310
Restricted stock................... 11 17 41
------- ------- -------
Weighted average common and common
equivalent shares................... 24,688 24,126 23,286
======= ======= =======
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARES................... $ 1.09 $ .13 $ 1.07
======= ======= =======
</TABLE>
<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 27, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
EARNINGS APPLICABLE TO FULLY DILUTED
SHARES.............................. $26,798 $ 3,108 $24,951
======= ======= =======
FULLY DILUTED SHARES
Average common shares outstanding.... 24,320 22,803 20,663
Assumed conversion or exercise of:
Warrants........................... -- 844 2,354
Stock options...................... 568 462 606
Restricted stock................... 13 38 74
------- ------- -------
Fully diluted shares................. 24,901 24,147 23,697
======= ======= =======
EARNINGS PER SHARE ASSUMING FULL
DILUTION............................ $ 1.08 $ .13 $ 1.05
======= ======= =======
</TABLE>
<PAGE>
ADVO, INC.
[Financial Contents]
- -------------------------------------------------------------------------------
Selected Financial Data 20
Financial Report 21
Consolidated Statements of Operations 26
Consolidated Balance Sheets 27
Consolidated Statements of Cash Flows 28
Consolidated Statements of Changes in
Stockholders' Equity (Deficiency) 29
Notes to Consolidated Financial Statements 30
Report of Independent Auditors 38
Financial Responsibility 38
<PAGE>
Exhibit 13
ADVO, INC.
Selected Financial Data
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
September 27, September 28, September 30, September 24, September 25,
(In millions, except per share data) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Revenues $1,016.5 $986.2 $1,011.9 $920.3 $856.6
Operating income 58.5 24.8(1) 46.3 39.7 2.3(2)
Income from continuing operations 26.8 11.3 30.9 24.6 2.8
Net income 26.8 3.1 25.0 25.2 5.4
Earnings per share from continuing operations 1.09 .47 1.33 1.03 .11
Net earnings per share 1.09 .13 1.07(3) 1.05 .21
Cash dividends declared per share -- 10.025(4) .10 .095 .06
Weighted average common and
common equivalent shares 24.7 24.1 23.3 23.9 25.4
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
September 27, September 28, September 30, September 24, September 25,
(In millions, except per share data) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and marketable securities $ 26.0 $ 13.3 $ 54.5 $ 71.1 $ 71.4
Total assets 208.6 185.1 234.2 225.7 226.5
Long-term debt 140.7 161.1 -- -- --
Stockholders' equity (deficiency) (59.9) (85.2) 130.4 108.0 118.3
Book value per share (2.46) (3.54) 6.26 5.17 5.32
</TABLE>
(1) Reflects nonrecurring charges of $12.1 million. (See Note 12 to the
consolidated financial statements).
(2) Reflects a one-time restructuring charge to operations of $25.8 million.
(See Note 13 to the consolidated financial statements).
(3) Reflects a charge for cumulative effect of accounting change of $1.5
million, net of tax, or $.07 per share. (See Note 9 to the consolidated
financial statements).
(4) Reflects a special $10 per share dividend declared in January of 1996. (See
Note 7 to the consolidated financial statements).
Page 20
<PAGE>
ADVO, INC.
Financial Report
This section should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto.
Basis of Presentation
In fiscal year 1995 the Company announced its plan to sell Marketing Force, its
in-store marketing segment. The sale of substantially all of the net assets of
this segment was completed in fiscal 1996. (See Note 3 to the consolidated
financial statements). The Company's results of operations have been presented
for the periods ended September 28, 1996 and September 30, 1995 to separately
reflect continuing and discontinued operations in the consolidated statements of
operations and cash flows. In addition, the results of operations discussed in
this Financial Report exclude the revenues, cost of sales, selling, and general
and administrative costs of the discontinued segment.
Financial Overview
Fiscal 1997 was an exceptional year for ADVO, Inc. ("ADVO" or the "Company").
The Company's record fiscal 1997 results are highlighted by a 59% increase in
operating income, a 40% increase in earnings per share from continuing
operations (both excluding nonrecurring charges) and a robust 9% increase in
pieces per packages, when compared to fiscal 1996. These achievements reflect
significant gains in unit volumes, improved sales force productivity and lower
cost of sales associated with favorable postage and paper prices.
The strong operating results in fiscal 1997 indicate the solid progress the
Company has made to overcome the confluence of internal and external factors it
was confronted with during fiscal 1996. The factors which influenced the strong
performance included:
. Strong unit volume gains reflected by the Company's sales realignment and the
change in sales compensation design, driving sales force productivity
improvement.
. The implementation of the Enhanced Carrier-Route subclass for third class
mail, which commenced during the last quarter of fiscal 1996. This subclass
favorably impacted the Company's postage expense during fiscal 1997 by
recognizing the price sensitivity and lower postal processing costs for
efficient mailers like ADVO. In conjunction with this, lower paper prices
also favorably impacted the Company's cost of sales.
. The first full year under the new `Clientizing' infrastructure, the Company's
reengineering initiative. During fiscal 1996 the Company was reorganized
along process lines creating a better aligned and more effective structure.
The continued cost stabilization and savings from this initiative was
reflected in the Company's strong financial performance in fiscal 1997.
In addition, the Company was able to pay down its credit agreement by $17.6
million. At the same time, supported by strong cash flow management, the Company
funded technology investments and initiated a stock buyback program. The credit
agreement entered into by the Company during fiscal 1996, with a syndicate of
lenders, financed the declaration of a $10 per share dividend (the "Special
Dividend") and the related transaction and recapitalization expenses which ended
the Company's `strategic alternatives' process. This credit agreement was
renegotiated subsequent to year end on September 29, 1997. The material features
of this amended agreement were an increase in available commitments from $250
million to $300 million, a decrease in interest rates, and an increased limit on
the Company's authorization to purchase its stock from $40 million to $100
million.
Subsequent to year end an additional buyback program was announced by the
Company. The two programs combined increased the Company's total share buyback
commitment to 3.2 million shares. In connection with the announcement of the
second buyback program, the Company purchased approximately 1.9 million shares
on September 29, 1997 from Warburg Pincus Capital Partners, L.P. (See Note 7 to
the consolidated financial statements).
The following table adjusts fiscal 1996 results for the Special Dividend
related nonrecurring charges (see Note 12 to the consolidated financial
statements) in order to present a normalized review of the Company's earnings.
Operating Results:
Comparative Analysis
<TABLE>
<CAPTION>
Reported Adjustment Adjusted
Year ended Year ended Year ended Year ended
September 27, September 28, Nonrecurring September 28, September 30,
(In millions, except per share data) 1997 1996 Charges 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $1,016.5 $986.2 $986.2 $1,011.9
Gross profit 259.1 224.7 224.7 247.7
Operating income 58.5 24.8 $12.1 36.9 46.3
Income from continuing operations 26.8 11.3 7.4 18.7 30.9
Earnings per share from continuing operations 1.09 .47 .31 .78 1.33
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 21
<PAGE>
ADVO, INC.
Fiscal 1997 Compared to Fiscal 1996
Continuing Operations
Revenues Fiscal 1997 revenues increased $30.3 million to a record $1,016.5
million over the comparable revenues of fiscal 1996. Volume gains were the
largest contributor to the 3.1% increase in revenues. The volume growth was
driven by the 8.8% increase in average shared mail pieces per package from 7.84
pieces in fiscal 1996 to 8.53 pieces in fiscal 1997. Offsetting these volume
gains to a degree was the strategically driven decision to discontinue the
second in-home date programs in specified markets and the closing of
unprofitable markets. Total shared mail packages for fiscal 1997 were 3,111
million, down 2.7%, and revenue per thousand pieces decreased 3.2% as compared
to fiscal 1996. The decline in revenue per thousand pieces was the result of
shifts in product mix, volume related declines in price and, earlier in the
year, a decrease in product weights associated with the Company's preprint
customers.
Operating Expenses Cost of sales decreased $4.1 million from fiscal 1996. As a
percentage of revenues, cost of sales decreased 2.7% from 77.2% in fiscal 1996
to 74.5% in fiscal 1997. The decrease in cost of sales for the fiscal year
ending 1997 was equally attributable to both lower print and paper costs and
lower postage costs. Print and paper costs were lower in fiscal 1997 when
compared to fiscal 1996 as a result of reduced paper prices and the decline in
turnkey volume. Postage costs were favorably impacted by the postage
reclassification implemented by the United States Postal Service in July 1996
and to a lesser extent by the decline in preprint product weights. These postage
savings were offset to a degree by additional overweight postage costs incurred
with the volume gains, as demonstrated by the growth in shared mail pieces
distributed to 26.5 billion pieces, a 6.0% increase from the prior year.
During fiscal 1997, selling expense, including the provision for bad debts,
increased $8.4 million over the prior fiscal period. Increases in commission
expense, sales support costs, and additional bad debt expense resulting from the
revenue growth were the major elements in the higher selling expense. As a
percentage of revenues, selling expense increased from 13.3% in fiscal 1996 to
13.7% in fiscal 1997.
General and administrative costs increased $4.4 million or 7.7% in fiscal
1997 over fiscal 1996. As a percentage of revenues, general and administrative
costs were 6.0% for fiscal 1997 versus 5.7% for fiscal 1996. Continued cost
savings associated with the Company's reengineering effort were offset by
increases in severance and incentive wages, as well as investments in
technological improvements.
Operating Income As a result of the aforementioned, the Company reported a
58.7% increase in operating income from $36.9 million (excluding nonrecurring
charges) in fiscal 1996 to $58.5 million in fiscal 1997. Operating income as a
percentage of revenue increased to 5.8% in fiscal 1997 versus 3.7% in the prior
year (excluding nonrecurring charges).
Interest Expense Interest expense relating to the Company's credit facilities
totaled $14.8 million for fiscal 1997. In the prior year, at the onset of the
facilities, interest expense totaled $9.7 million.
Interest Income and Other Expense Interest income results primarily from the
investment of excess cash and amounted to $.7 million in fiscal 1997 versus $1.3
million in fiscal 1996. The decrease was a result of the liquidation of
available-for-sale securities during fiscal 1996. Other expense increased
slightly to $.7 million in fiscal 1997.
Income Taxes The effective tax rate was approximately 39% for the Company's
continuing operations in both fiscal 1997 and fiscal 1996.
Earnings per Share Earnings per share from continuing operations increased from
$.47 in fiscal 1996 to $1.09 in fiscal 1997. Adjusting for the nonrecurring
charges in fiscal 1996, earnings per share from continuing operations would have
been $.78 in fiscal 1996 versus $1.09 in fiscal 1997. This 39.7% increase was a
result of the Company's improved operating results.
Fiscal 1996 Compared to Fiscal 1995
Continuing Operations
Revenues Revenues from continuing operations for fiscal 1996 of $986.2 million
decreased 2.5% or $25.7 million over fiscal 1995. The revenue decline during the
year was caused by decreases in volume and price, as well as shifts in product
weight and mix, which were a direct result of higher postage and paper costs
that resulted in increased mailing costs to our clients. The price deterioration
was primarily caused by a decrease in shared mail product weights, which was the
result of a continued reduction in advertising pages mailed by the Company's
larger preprint customers. Pieces per package for the year decreased to 7.84 in
fiscal 1996 from 7.88 in fiscal 1995. Packages mailed were 3,196.9 million
during fiscal 1996 versus 3,240.1 million during the prior year. The decrease
was primarily due to the discontinuance of our second in home date in Chicago
and Texas.
Operating Expenses Cost of sales as a percentage of revenue increased from
75.5% in fiscal 1995 to 77.2% in fiscal 1996.
Page 22
<PAGE>
ADVO, INC.
The increase was due to the volume declines in pieces per package and piece
weight declines which affected postage absorption and hence increased cost of
sales as a percentage of revenue. These volume and piece weight declines were
primarily caused by client reactions to the pass through of higher paper and
postage costs. Cost of sales, in absolute terms, decreased $2.7 million. This
decline was attributable to lower postage expense due to fewer mailings made by
the Company as evidenced by the reduction in pieces per package and shared mail
package distribution and also the implementation of lower postal rates which
commenced on July 1, 1996. These declines were somewhat offset by higher postal
rates which occurred during the first quarter of fiscal year 1996 when compared
with the same quarter of fiscal 1995. As a result of the lower volume, print and
paper expenditures decreased $1.6 million which also contributed to the decline
in cost of sales.
Selling expense, including the provision for bad debts, increased 1.6% over
fiscal 1995 to $131.1 million in fiscal 1996. Selling expense as a percentage of
revenue increased to 13.3% in the current year from 12.7% in the prior year. The
increase in selling expense resulted from the transition to the Company's new
sales margin based compensation system and the Company's realignment of the
regional general manager function into a role with more of an emphasis on sales.
As a percentage of revenues, general and administrative costs were 5.7% for
year ended 1996 versus 7.2% for year ended 1995. General and administrative
costs decreased $15.8 million or 21.8% in fiscal 1996 over fiscal 1995. The
significant reduction in general and administrative expenses were the direct
result of the Company's ongoing reengineering program to streamline and improve
efficiencies in its processes, operations, and systems; the realignment of its
administrative functions; and strict cost controls implemented during the fiscal
year 1996. As a result of the reengineering effort, at September 28, 1996
headcount had been reduced by 440 associates in all areas of the Company since
June of 1995, which was the start of the reengineering program.
Operating Income As a result of the aforementioned, the Company reported a $9.4
million decrease in operating income (excluding nonrecurring charges) to $36.9
million when comparing fiscal 1996 to fiscal 1995.
Gain on Sale of Business Lines During the first quarter of fiscal 1996, the
Company recognized a pretax gain of $2.7 million ($1.7 million after tax or $.07
per share) on the sale of its MidCoast Press operation, a commercial web offset
printer. In the first quarter of fiscal 1995, the Company recognized a $2.2
million pretax gain ($1.4 million after tax, or $.06 per share) on the sale of
its 50 percent ownership in InfoBase Services, a data base joint venture.
Interest Income Interest income results primarily from the investment of excess
cash. Interest income was $1.3 million in fiscal 1996 versus $2.8 million in
fiscal 1995. The $1.5 million decrease was due to the liquidation of the
available-for-sale securities in connection with payment of the Special
Dividend.
Interest Expense The Company obtained credit facilities totaling $250 million
during the second quarter of fiscal 1996 in connection with the payment of the
Special Dividend. Interest expense and commitment fees related to the debt
totaled $9.7 million ($5.9 million after tax or $.24 per share) for the year
ended September 28, 1996.
Income Taxes The effective tax rate was approximately 39% for the Company's
continuing operations in both fiscal 1996 and fiscal 1995.
Earnings per Share Earnings per share from continuing operations decreased to
$.47 in fiscal 1996 from $1.33 in fiscal 1995. Earnings per share for fiscal
1996 was negatively impacted by the transactions associated with the Special
Dividend and the interest expense. Adjusting for both the nonrecurring charges
and interest expense, earnings per share from continuing operations would have
been $1.02 in fiscal 1996 versus $1.33 in fiscal 1995.
Financial Position
Working Capital The Company's working capital ratio at September 27, 1997 was
approximately 1.00 versus 1.04 in the prior year. Increases in current assets of
$11.9 million were more than offset by increases in current liabilities of $15.5
million and resulted in the decline of working capital. The driving forces
behind the change in current assets were an improvement in cash and cash
equivalents generated mainly from the Company's operating results, and an
increase in accounts receivable as a result of the revenue growth and the timing
of customer payments. The main sources of change in current liabilities were
trade payable increases primarily due to the timing of vendor payments and
increases in accrued compensation and benefits related to the associate
incentive plan reflecting the Company's improved results.
Property, Plant and Equipment Investments in property, plant and equipment for
the year ended September 27, 1997 totaled approximately $28.6 million, which was
approximately $10.9 million greater than prior year additions. During the
current fiscal year the Company continued to implement its plan to upgrade and
enhance technology throughout all Company
Page 23
<PAGE>
ADVO, INC.
processes. Machinery and equipment purchases reflected the transition to new
computerized mail sorters that are expected to achieve efficiencies in targeting
specific groups, and the replacement of other existing production equipment at
the Company's production facilities. The Company also continued to roll out
personal computers and peripherals to the sales force to allow for a greater
focus on customer service. Computer hardware was also upgraded in other areas of
the Company to meet the needs of financial and operational software currently
being developed by the Company. The developed software is expected to improve
operating efficiency and reduce overhead.
The Company's current capital plan calls for fiscal 1998 expenditures to be
slightly less than fiscal 1997 expenditures. Cash provided by operating
activities was sufficient to cover fiscal 1997 capital additions and continues
to be the expected source of financing for the planned fiscal 1998 capital
investments.
Stockholders' Deficiency Stockholders' deficiency decreased $25.3 million from
the prior year to a net deficiency of $59.9 million. The decrease was
essentially related to the Company's fiscal 1997 net income of $26.8 million and
$2.9 million of employee stock plan activity and related tax benefits relating
to the vesting of restricted stock and exercise of stock options. Slightly
offsetting these increases was $4.7 million of common stock purchases for
treasury primarily related to the buyback program announced by the Company in
April 1997. Subsequent to year end, on September 29, 1997, the Company purchased
1.9 million shares at a total purchase price of $34.8 million from Warburg
Pincus Capital Partners L.P., the Company's largest shareholder at September 27,
1997. The Company financed this transaction through available credit commitments
under its renegotiated credit agreement. After this transaction there are
approximately one million shares approved for purchase under the buyback
program.
Liquidity Cash flow is generated from operating activities and is the Company's
primary resource for funding working capital, capital investments and other
operating requirements. The Company also has available commitments under its
renegotiated credit agreement, which may be used to fund operating activities.
Cash provided by operating activities increased over the prior year by $22.6
million. The year over year increase was largely related to the $15.5 million
growth in operating results, as compared to an $18.1 million decrease in
operating results in the prior year. Year over year changes in accounts
receivable and accounts payable due to the timing of cash receipts and cash
disbursements, respectively, the increases in accrued incentive compensation as
a result of the improved operating results and the variance in paper inventory
as a result of the Company's change in its inventory purchasing strategy were
also major components affecting the cash provided by operating activities.
Overall cash and cash equivalents increased $12.7 million over fiscal 1996.
Cash flows from operating activities were offset in part by cash expenditures
primarily related to property and equipment purchases of $28.6 million and debt
repayments of $17.6 million. In the prior fiscal year the payment of the Special
Dividend and the related debt transactions were the primary reasons for the
overall $10.5 million decrease in cash and cash equivalents.
During fiscal 1996, the Company entered into a ten-year agreement with
Integrated System Solutions Corporation, now known as IBM Global Services, to
provide systems development and technical support to the Company. The contract
allows for cancellation after the completion of the third year, subject to
termination charges ranging between $3.1 million and $.5 million depending on
the year in which the cancellation becomes effective. During fiscal 1997 the
Company incurred $15.9 million in fees related to the contract, half of which
related to software development. Future commitments for the noncancellable
portion of the agreement, excluding termination fees and the cost of living
adjustments are $14.9 million and $10.7 million for fiscal years 1998 and 1999,
respectively. The Company anticipates funding these fees through continuing
operations.
Financing Arrangements On September 29, 1997, the Company renegotiated the
terms of its credit agreement dated March 4, 1996. The more significant
amendments made to the agreement (the "Amended Agreement") were an increase in
available commitments from $250 million to $300 million, a decrease in interest
rates and an increase in the authorized amount of the Company's capital stock
that it may purchase from $40 million to $100 million.
The Amended Agreement provides for credit facilities consisting of a $135
million term loan and a $165 million reducing revolving line of credit, both
maturing at various dates through September 2003. Available commitments under
the Amended Agreement, including fiscal 1998 additional net borrowings of $37
million through November 1997 totaled approximately $102 million.
The debt bears interest at either the London Interbank Offered Rate ("LIBOR")
or at the bank's "base rate", whichever the Company chooses for each tranche due
at various maturity dates, plus an "applicable margin" (based on certain
financial ratios). The "applicable margin" under the Amended Agreement ranges
from .50% to 1.50% on the LIBOR rate and 0% to
Page 24
<PAGE>
ADVO, INC.
.25% on the base rate versus the applicable margin under the March 4, 1996
agreement of 1.50% to 3.00% and .25% to 1.75%, respectively. Interest is payable
quarterly or upon the maturity of the LIBOR contracts, whichever period is
shorter.
The Company is required to maintain certain financial ratios under the
Amended Agreement. In addition, the Amended Agreement also places restrictions
on disposal of assets, mergers and acquisitions, dividend payments, investments
and additional debt.
In connection with the Amended Agreement, the Company is required to maintain
Interest Rate Protection Agreements to protect itself against three month LIBOR
rates exceeding 8.0% per annum as to a notional principal amount equal to the
lesser of $100 million or 50% of the aggregate principal amount of the loans
made on the effective date, for a period of at least two years. During the prior
year, the Company entered into two separate two year Interest Rate Collar
Agreements to hedge notional amounts totaling $150 million. The cap rates range
from 7.39% to 8.0% with the floor rate ranging from 5.0% to 5.5%. These
agreements entitle the Company to pay no more or less than the specified limits
plus applicable margin, as defined. The Company believes the interest rate
collar agreements limit substantial risk should interest rates fluctuate. The
interest rate collar agreements had no effect on interest expense in either
fiscal 1997 or 1996.
During fiscal 1997, the Company repaid $17.6 million of the fiscal 1996 long
term debt balance with funds generated from continuing operations. As defined by
the March 4, 1996 agreement, $11.0 million of the 1997 repayments related to a
fiscal 1996 "Excess Cash Flow" calculation. No excess cash flow payment is
required for fiscal 1997 or under the Amended Agreement. The total fiscal 1998
maturities of long-term debt of $10.1 million, as well as future scheduled
repayments, are expected to be paid through funds generated from ongoing
operations.
Year 2000 Compliance The Company recently put in place a team of individuals
dedicated to analyzing the issues associated with the year 2000 compliance. The
costs and effects on financial results of year 2000 compliance are unknown by
the Company at this time.
Forward Looking Statements Except for the historical information stated herein,
the matters discussed in this Financial Report 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. Such factors include but are not
limited to changes in customer demand; postal and paper prices; the realization
of benefits associated with the Company's reengineering initiative; possible
governmental regulation or legislation affecting aspects of the Company's
business; the risk of damage to the Company's data centers and telecommunication
lines; the efficiencies achieved with technology upgrades; the amount of shares
the Company will purchase in the future under its buyback program; the
evaluation of the impact of year 2000 costs; and other general economic factors.
Page 25
<PAGE>
ADVO, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 27, September 28, September 30,
(In thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $1,016,492 $986,162 $1,011,904
Costs and expenses:
Cost of sales 757,413 761,506 764,198
Selling, general and administrative 195,196 184,084 198,496
Nonrecurring charges -- 12,082 --
Provision for bad debts 5,374 3,701 2,953
- --------------------------------------------------------------------------------------------------------------------------
Operating income 58,509 24,789 46,257
Gain on sale of business lines -- 2,687 2,243
Interest income (1) 687 1,285 2,817
Interest expense 14,820 9,669 --
Other expense 660 556 772
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 43,716 18,536 50,545
Provision for income taxes 16,918 7,229 19,596
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 26,798 11,307 30,949
Discontinued operations:
Loss from discontinued operations, net of tax -- -- (3,522)
Loss on disposal of discontinued operations, net of tax -- (8,199) (931)
- --------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 26,798 3,108 26,496
Cumulative effect of change in accounting for postemployment
benefits, net of tax -- -- (1,545)
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 26,798 $ 3,108 $ 24,951
- --------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Earnings from continuing operations $ 1.09 $ .47 $ 1.33
Discontinued operations:
Loss from discontinued operations, net of tax -- -- (.15)
Loss on disposal of discontinued operations, net of tax -- (.34) (.04)
Cumulative effect of change in accounting for postemployment
benefits, net of tax -- -- (.07)
- --------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ 1.09 $ .13 $ 1.07
Dividends declared per share $ -- $ 10.025 $ .10
Weighted average common and common equivalent shares 24,688 24,126 23,286
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes interest income from related party of $458,000, $1,219,000 and
$2,757,000 in fiscal 1997,1996 and 1995, respectively.
See accompanying Notes to Consolidated Financial Statements
Page 26
<PAGE>
ADVO, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 27, September 28,
(In thousands, except share data) 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (1) $ 25,963 $ 13,303
Accounts receivable, less allowances of $5,160 in 1997 and $4,226 in 1996 66,664 62,668
Inventories 4,149 7,518
Prepaid expenses and other current assets 4,759 4,512
Deferred income taxes 14,248 15,839
- --------------------------------------------------------------------------------------------------------------------------
Total Current Assets 115,783 103,840
Property, plant and equipment-net 76,092 64,175
Other assets 16,678 17,111
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $ 208,553 $ 185,126
Liabilities and Stockholders' Deficiency
Current liabilities:
Current portion of long-term debt $ 10,125 $ 7,225
Accounts payable 44,644 37,868
Accrued compensation and benefits 29,245 22,892
Customer advances 3,409 5,960
Federal and state income taxes payable 7,080 5,877
Accrued other expenses 21,080 20,257
- --------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 115,583 100,079
Long-term debt 140,666 161,125
Deferred income taxes 9,589 6,618
Other liabilities 2,636 2,509
Stockholders' deficiency:
Series A Convertible Preferred Stock, $.01 par value
(Authorized 5,000,000 shares, none issued) -- --
Common Stock, $.01 par value (Authorized 40,000,000 shares,
Issued 28,428,952 in 1997 and 27,900,756 in 1996) 284 279
Additional paid-in capital 163,317 160,704
Accumulated deficit (155,113) (181,914)
Less shares of common stock held in treasury at cost,
4,077,371 in 1997 and 3,804,363 in 1996 (68,409) (64,274)
- --------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Deficiency (59,921) (85,205)
- --------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 208,553 $ 185,126
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes cash and cash equivalents invested with related party of
$11,613,000 at September 27, 1997 and $5,362,000 at September 28, 1996.
See accompanying Notes to Consolidated Financial Statements
page 27
<PAGE>
ADVO, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 27, September 28, September 30,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Net income $ 26,798 $ 3,108 $ 24,951
Less: Loss from discontinued operations -- (8,199) (4,453)
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing operations (includes accounting change) 26,798 11,307 29,404
Adjustments to reconcile net income to
net cash flows from continuing operating activities:
Cumulative effect of change in accounting
for postemployment benefits -- -- 1,545
Cashless option exercises and option repricing -- 8,747 --
Depreciation 16,150 12,967 11,641
Amortization 2,096 2,203 2,690
Deferred income taxes 4,562 (2,275) 4,232
Provision for bad debts 5,374 3,701 2,953
Gain on sale of business lines -- (2,687) (2,243)
Other 528 1 361
Change in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (9,370) (5,280) (16,188)
Inventories 3,369 470 (3,533)
Prepaid expenses and other current assets (247) 539 131
Other assets (1,367) 332 458
Accounts payable 6,776 13,401 (157)
Accrued compensation and benefits 6,353 (2,815) (2,232)
Customer advances (2,551) (4,350) (2,890)
Federal and state income taxes payable 1,732 4,486 904
Other liabilities 950 (2,155) (12,367)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities 61,153 38,592 14,709
Cash flows from continuing investing activities:
Proceeds from sale of business lines -- 742 9,000
Acquisitions, net of cash acquired -- -- (2,448)
Expenditures for property, plant and equipment (28,615) (17,679) (20,315)
Proceeds from disposals of property and equipment 18 10 11
Available-for-sale securities - purchases -- (49,604) (55,899)
Available-for-sale securities - sales and maturities -- 80,482 56,355
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by continuing investing activities (28,597) 13,951 (13,296)
Cash flows from continuing financing activities:
Proceeds from long-term borrowings - term loans -- 155,000 --
Payments on long-term borrowings - term loans (17,559) (1,650) --
Revolving line of credit - net -- 15,000 --
Payment of debt issue costs -- (5,458) --
Proceeds from exercise of warrants -- 7,200 --
Proceeds from exercise of stock options 2,323 2,473 1,811
Purchases of common stock for treasury (4,660) (741) (4,260)
Cash dividends paid -- (240,561) (2,078)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing financing activities (19,896) (68,737) (4,527)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by discontinued operations -- 5,648 (12,785)
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 12,660 (10,546) (15,899)
Cash and cash equivalents at beginning of year 13,303 23,849 39,748
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 25,963 $ 13,303 $ 23,849
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
page 28
<PAGE>
ADVO, INC.
Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Unrealized
gains (losses)
Additional on available- Accumulated Total
(In thousands, except Common stock Treasury stock paid-in for-sale earnings equity
per share data) Shares Amount Shares Amount capital securities (deficit) (deficiency)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance --
September 24, 1994 24,393 $244 (3,521) $(59,273) $134,881 $ 0 $32,146 $107,998
Purchase of common
stock for treasury (238) (4,260) (4,260)
Grants of restricted stock 11
Exercise of stock options 179 2 1,809 1,811
Tax effect --
employee stock plans 699 699
Amortization of deferred
compensation (1) 1,346 1,346
Cash dividends declared
($.10 per share) (2,077) (2,077)
Unrealized losses on
available-for-sale
securities (62) (62)
Net Income 24,951 24,951
- -----------------------------------------------------------------------------------------------------------------------------------
Balance --
September 30, 1995 24,583 $246 (3,759) $(63,533) $138,735 $(62) $55,020 $130,406
Purchase of common
stock for treasury (45) (741) (741)
Cancellation of restricted stock (5)
Exercise of stock options
and warrants 3,323 33 18,387 18,420
Tax effect--
employee stock plans 2,973 2,973
Amortization of deferred
compensation (1) 609 609
Cash dividends declared
($10.025 per share) (240,042) (240,042)
Unrealized gains on
available-for-sale
securities 62 62
Net Income 3,108 3,108
- -----------------------------------------------------------------------------------------------------------------------------------
Balance --
September 28, 1996 27,901 $279 (3,804) $(64,274) $160,704 $ 0 $(181,914) $(85,205)
Purchase of common
stock for treasury (304) (4,660) (4,660)
Grants of restricted stock 31 30 506 (506)
Exercise of stock options 497 5 1 19 2,299 2,323
Tax effect --
employee stock plans 529 529
Amortization of deferred
compensation and other (1) 291 3 294
Net Income 26,798 26,798
- -----------------------------------------------------------------------------------------------------------------------------------
Balance --
September 27, 1997 28,429 $284 (4,077) $(68,409) $163,317 $ 0 $(155,113) $(59,921)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Unamortized deferred compensation at September 27, 1997, September 28, 1996
and September 30, 1995 was $780,000, $140,000 and $836,000, respectively.
See accompanying Notes to Consolidated Financial Statements
page 29
<PAGE>
ADVO, INC.
Notes to Consolidated Financial Statements
Note 1 Summary of Accounting Policies
Organization ADVO, Inc. ("ADVO"or the "Company") is a direct marketing firm
primarily engaged in soliciting and processing printed advertising from
retailers, manufacturers and service companies for targeted distribution by both
shared and solo mail to consumer households in the United States on a national,
regional and local basis. Founded in 1929 as a hand delivery company, ADVO
entered the direct mail industry as a solo mailer in 1946 and began its shared
mail program in 1980. The Company currently is the largest commercial user of
third-class mail in the United States.
ADVO's direct mail products and services include shared mail and solo mail.
ADVO also provides certain transportation and ancillary services in conjunction
with its direct mail programs. The Company's predominant source of revenue is
from its shared mail programs. In these programs, the advertisements of several
advertisers are combined in a single mail package. This offers the features of
penetration and targeted marketing at a significant cost reduction when compared
to mailing on an individual or solo mail basis. The Company's client base
consists of national and local grocers, fast food chains, drug stores and local
retailers.
Principles of Consolidation The consolidated financial statements include the
accounts of ADVO and its subsidiaries. All significant intercompany transactions
and balances among ADVO and its subsidiaries have been eliminated. Certain
reclassifications have been made in the fiscal 1996 and 1995 financial
statements to conform with the fiscal 1997 presentation. ADVO's fiscal closing
date is the last Saturday in September. The fiscal year includes operations for
a 52-week period in 1997 and 1996 and a 53-week period in 1995.
Cash and Cash Equivalents Cash and cash equivalents include highly liquid
investment instruments with original maturities of three months or less when
purchased. These investments are valued at cost, which approximates market.
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, Plant and Equipment Property, plant and equipment are recorded at cost
and include amounts associated with the development of software for internal
use. Depreciation and amortization are computed generally by the straight-line
method over the estimated useful lives of the respective assets (ranging from 2
to 35 years) or over the terms of the related leases for the leasehold
improvements.
Intangible Assets The excess of cost over net assets acquired (goodwill) and
other intangible assets related to acquisitions are being amortized over their
expected useful lives which range from 3 to 20 years. The Company continually
monitors its goodwill and its other intangibles to determine whether any
impairment of these assets has occurred. In making such determination, the
Company evaluates the performance, on an undiscounted basis, of the underlying
assets which gave rise to such amount.
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.
Stock Based Compensation The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion
No. 25") and related interpretations in accounting for its employee stock plans.
Earnings Per Share Earnings per share are 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. Primary and fully diluted earnings per
share are not significantly different.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. While management believes that the estimates and related
assumptions used in the preparation of these financial statements are
appropriate, actual results could differ from those estimates.
Note 2 Acquisitions
In fiscal 1995, the Company acquired the Door Store, a local alternate delivery
company, for approximately $2.4 million. This acquisition has been accounted for
under the purchase method of accounting and, accordingly, the results of
operations of the acquired company have been included in the consolidated
statements of operations from its acquisition date. The acquired assets have
been recorded at their estimated fair values. This acquisition 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 in connection with acquisitions by the Company amounted to $4.5 million
and $4.9 million, net of accumulated amortization and is reflected in other
assets at September 27, 1997 and September 28, 1996, respectively. Also included
in other assets at September 27,
page.30
<PAGE>
ADVO, INC.
1997 and September 28, 1996 is $2.8 million and $3.6 million, respectively, of
other intangible assets, net of accumulated amortization, which were acquired in
the acquisitions. As of September 27, 1997 and September 28, 1996, accumulated
amortization of goodwill and other intangibles was $7.8 million and $6.7
million, respectively.
Note 3 Discontinued Operations
In September 1995, the Company initiated a plan to sell its in-store marketing
segment. Through the date of the preparation of the fiscal 1995 financial
statements, the Company was in the process of negotiating the sale. At that
time, management estimated its loss on disposal to be $1.4 million ($.9 million
net of tax) consisting of a provision for anticipated operating losses during
the phase out period and other costs directly related to the sale.
On March 1, 1996 the Company completed the sale of substantially all of the
net operating assets of this 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 operating results of the segment through the date of disposal were
worse than anticipated, which caused losses in excess of the estimates provided
in fiscal 1995. The additional losses affected the ultimate terms of the
transaction, including the terms of the related note, and caused substantial
doubt as to whether the note could be paid by the buyer. Accordingly, the
Company ultimately determined that the sales price should not reflect the note
and immediately wrote it off. This write off, together with the additional
operating losses, were reflected in the fiscal 1996 loss on disposal of
discontinued operations, net of tax. The Company did not provide any debt or
contract performance guarantees on behalf of the business sold.
The results of the discontinued operations reflected in the consolidated
statements of operations are as follows:
<TABLE>
<CAPTION>
Year ended Year ended
September 28, September 30,
(In thousands) 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 19,283 $ 57,668
- ------------------------------------------------------------------------------
Loss before
income taxes -- $ (5,361)
Income tax
benefit -- (1,839)
- ------------------------------------------------------------------------------
Loss from discontinued
operations, net of tax -- $ (3,522)
- ------------------------------------------------------------------------------
Losses to disposal date $(13,827) $ (1,432)
Income tax benefit (5,628) (501)
- ------------------------------------------------------------------------------
Loss on disposal
of discontinued
operations, net of tax $ (8,199) $ (931)
- ------------------------------------------------------------------------------
</TABLE>
Note 4 Property, Plant and Equipment
Balances of major classes of property, plant and equipment and accumulated
depreciation and amortization are as follows:
<TABLE>
<CAPTION>
September 27, September 28,
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Land, buildings and building
improvements $ 8,083 $ 7,623
Leasehold improvements 11,867 12,014
Machinery and equipment 71,844 66,857
Furniture and fixtures 17,719 17,206
Computer hardware 33,145 25,370
Computer software and
software development 24,333 12,959
- ------------------------------------------------------------------------------
Total $166,991 $ 142,029
Less accumulated depreciation
and amortization 90,899 77,854
- ------------------------------------------------------------------------------
Property, plant and equipment-net $ 76,092 $ 64,175
- ------------------------------------------------------------------------------
</TABLE>
Note 5 Accrued Compensation and Benefits
The composition of accrued compensation and benefits is as follows:
<TABLE>
<CAPTION>
September 27, September 28,
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Employee compensation $18,316 $13,048
Workers' compensation 5,638 4,924
Employee withholdings and
other benefits 5,291 4,920
- ------------------------------------------------------------------------------
Total $29,245 $22,892
- ------------------------------------------------------------------------------
</TABLE>
Note 6 Financing Arrangements
On September 29, 1997, the Company renegotiated the terms of its credit
agreement dated March 4, 1996. The more significant amendments made to the
agreement (the "Amended Agreement") were an increase in available commitments
from $250 million to $300 million, a decrease in interest rates and an increase
in the authorized amount of the Company's capital stock that the Company may
purchase from $40 million to $100 million. The Company paid a $1.3 million
arrangement fee in connection with the Amended Agreement. Also on September 29,
1997, the Company borrowed an additional $34.8 million to fund the purchase of
1,936,098 shares of its common stock from Warburg, Pincus Capital Partners, L.P.
(see Note 7).
The Amended Agreement provides for credit facilities consisting of a $135
million term loan and a $165 million reducing revolving line of credit, both
maturing at various dates through September 2003. The commitment levels on the
revolving line range from a high of $165 million, from inception through
December 1999, to a low of $22.5 million, for the period June
page.31
<PAGE>
ADVO, INC.
2003 through September 2003. Mandatory repayments of debt in defined amounts are
required in the event of certain triggering events including the sale of assets.
The Company and its subsidiaries have pledged all of their assets as collateral
for the credit agreement.
The total outstanding credit facilities at September 27, 1997 and September
28, 1996 reflect the March 4, 1996 credit agreement. The current portion of long
term debt at September 27, 1997 reflects the repayment schedule of the Amended
Agreement.
The outstanding facilities balance consists of the following:
<TABLE>
<CAPTION>
September 27, September 28,
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit $ 15,000 $ 15,000
Term loan - A 52,165 63,600
Term loan - B 83,626 89,750
- ------------------------------------------------------------------------------
150,791 168,350
Less: Current portion of
long-term debt 10,125 7,225
- ------------------------------------------------------------------------------
$ 140,666 $ 161,125
- ------------------------------------------------------------------------------
</TABLE>
The debt bears interest at either the London Interbank Offered Rate ("LIBOR") or
at the bank's "base rate", whichever the Company chooses for each tranche due at
various maturity dates, plus an "applicable margin" (based on certain financial
ratios). The "applicable margin" under the Amended Agreement ranges from .50% to
1.50% on the LIBOR rate and 0% to .25% on the base rate versus the applicable
margin under the March 4, 1996 agreement of 1.50% to 3.00% and .25% to 1.75%,
respectively. Interest is payable quarterly or upon the maturity of the LIBOR
contracts, whichever period is shorter. The interest rate at September 27, 1997
and September 28, 1996 was 7.21% and 7.57%, respectively, on the revolving line
of credit and on Term loan - A; and for Term loan - B, 8.71% and 8.57%,
respectively.
The Company is required to maintain certain financial ratios under the
Amended Agreement. In addition, the Amended Agreement also places restrictions
on disposal of assets, mergers and acquisitions, dividend payments, investments
and additional debt.
In connection with the Amended Agreement, the Company is required to maintain
Interest Rate Protection Agreements to protect itself against three month LIBOR
rates exceeding 8.0% per annum as to a notional principal amount equal to the
lessor of $100 million or 50% of the aggregate principal amount of the loans
made on the effective date, for a period of at least two years. During the prior
year, the Company entered into two separate two year Interest Rate Collar
Agreements to hedge notional amounts totaling $150 million. The cap rates range
from 7.39% to 8.0% with the floor rate ranging from 5.0% to 5.5%. These
agreements entitle the Company to pay no more or less than the specified limits
plus applicable margin, as defined. The Company believes the interest rate
collar agreements limit substantial risk should interest rates fluctuate. The
interest rate collar agreements had no effect on interest expense in either
fiscal 1997 or 1996.
The Company pays fees on the unused commitments under the Amended Agreement
at a rate ranging from .175% to .375% depending on the Company's total debt
ratio, as defined. Commitment fees under the March 4, 1996 agreement were .375%
or .50% depending on the total debt ratio, as defined. As of September 27, 1997
and September 28, 1996, $70 million of the revolver was available for future
borrowings.
Total maturities of long-term debt over the next five fiscal years and
thereafter at September 27, 1997 reflect the Amended Agreement and are as
follows:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
<S> <C>
1998 $ 10,125
1999 16,200
2000 20,250
2001 22,950
2002 27,002
Thereafter 54,264
- -------------------------------------------------------------------------------
Total maturities $150,791
- -------------------------------------------------------------------------------
</TABLE>
The revolving line of credit has been classified as long-term since management
has the intent and ability to maintain the September 27, 1997 outstanding
balance throughout fiscal 1998.
The Company capitalized debt issue costs directly associated with the
issuance of the March 4, 1996 Agreement totaling $5.5 million. These costs are
included in other assets and are being amortized over the term of the debt
agreement. At September 27, 1997 and September 28, 1996 unamortized costs
totaled $4.4 million and $5.1 million, respectively.
The Company has outstanding letters of credit totaling approximately $6.6
million under separate agreements primarily related to its workers' compensation
program.
Carrying amounts of the financing arrangements approximate fair value.
Note 7 Stockholders' Equity (Deficiency)
- -------------------------------------------------------------------------------
On August 27, 1986, 2,301,780 warrants to purchase shares of ADVO common stock
were issued to Warburg, Pincus Capital Partners, L.P. ("Warburg"), Welsh,
Carson, Anderson & Stowe IV (WCAS IV) and WCAS Venture Partners (WCAS VP)
(together, the "Investors") for $1,000,000. On February 15, 1996, Warburg, who
was the Company's largest shareholder
page.32
<PAGE>
ADVO, INC.
at September 27, 1997, exercised the last outstanding warrants and purchased
2,666,667 shares of common stock at an exercise price of $2.70 per share.
The Company has a Shareholder Protection Rights Plan (the "Rights Plan") to
protect shareholders from potential unfair hostile takeovers. Pursuant to the
Rights Plan, common shareholders have one Right for each share of common stock
held. The Rights become exercisable only in the event that any person acquires
or commences a tender offer to acquire 20% or more of the Company's common
stock, as defined.
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 million resulting in dividends of approximately $240 million,
which were paid on March 5, 1996. The Company also recorded noncash compensation
expense totaling $8.8 million relating to the Special Dividend. (See Note 12.)
On April 30, 1997, the Company announced a stock buyback program to purchase
up to 2 million shares of the Company's common stock. As of September 27, 1997,
the Company had purchased 208,600 shares for $3.4 million in connection with the
buyback program. On September 29, 1997, the Company increased its stock buyback
program authorization to 3.2 million shares. In connection with the increased
authorization, the Company purchased 1,936,098 shares of its common stock from
Warburg for $34.8 million.
At September 27, 1997 there were 2,260,438 shares of common stock reserved
for issuance upon the exercise of stock options.
Note 8 Gain on Sale of Business Lines
- -------------------------------------------------------------------------------
MidCoast Press, the Company's commercial web offset printer, was sold during the
first quarter of fiscal 1996 for $4.2 million, of which $3.5 million was in the
form of a non-recourse note. The note was structured to require interim interest
payments with a balloon payment to be paid in full on December 31, 2002. The
note will be paid off earlier if specific criteria are met regarding the cash
flows of the divested company. The note bears interest at the rate of 7% per
annum. The Company recognized a before tax gain of $2.7 million ($1.7 million
after tax or $.07 per share) in conjunction with the sale.
During the first quarter of fiscal 1995, the Company sold its 50% ownership
in InfoBase Services and recognized a before tax gain on this transaction of
$2.2 million ($1.4 million after tax or $.06 per share).
Note 9 Postemployment Benefits
- -------------------------------------------------------------------------------
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" ("SFAS No. 112") in
accounting for short-term disability benefits and severance and related medical
benefits during the Company's first quarter of fiscal 1995. Under SFAS No. 112,
the Company accrues these benefits when it becomes probable that such benefits
will be paid and when sufficient information exists to make reasonable estimates
of the amounts to be paid. The Company previously recognized the cost of
providing these benefits on a cash basis. The cumulative effect of this change
in accounting for postemployment benefits resulted in a one-time after tax
charge of $1.5 million or $.07 per share.
Note 10 Savings Plans
- -------------------------------------------------------------------------------
The Company has a savings plan for salaried employees which qualifies as a
profit sharing plan under the Internal Revenue Code of 1986, as amended, and
other non-qualified savings plans. All plans feature both employee and employer
matching contributions. The expense for matching contributions was $3.4 million,
$3.7 million and $3.8 million for fiscal 1997, 1996 and 1995, respectively.
Note 11 Stock Compensation Plans
- -------------------------------------------------------------------------------
As of September 27, 1997 the Company has five stock based compensation plans,
three are fixed stock option plans (the 1986 Stock Option Plan, the 1988 Stock
Option Plan and the 1995 Non-Employee Directors' Stock Option Plan) and two are
nonvested stock plans (the 1986 Employee Restricted Stock Plan and the 1990
Non-Employee Directors' Restricted Stock Plan). The Company applies APB Opinion
No. 25 in accounting for its plans. Since all options are granted with an
exercise price equal to the fair market value on the date of the grant, no
compensation cost has been recognized for the fixed option stock grants. The
market value of shares at the date of the nonvested stock award in excess of
cash consideration received is charged to operations over the stock award's
restriction period. The compensation costs associated with the nonvested stock
plans are disclosed below.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123 "Accounting for Stock-Based Compensation"("SFAS No. 123"), and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of the statement. The fair value of the
fixed stock options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1996, respectively:
page.33
<PAGE>
ADVO, INC.
dividend yield of zero percent for both years; volatility factor of expected
market price of the Company's common stock of .32 and .36; risk-free interest
rates ranging from 4.8 to 7.3 percent and 5.4 to 6.3 percent; and the expected
life of an option ranging from 1.5 years to 7 years for both years. The weighted
average fair value of options granted in 1997 and 1996 was $4.61 for both years.
<TABLE>
<CAPTION>
September 27, September 28,
(In thousands, except per share amounts) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net income $25,386 $ 2,802
Pro forma net earnings per share $ 1.04 $ .12
- -------------------------------------------------------------------------------
</TABLE>
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the fixed stock options vesting period
ranging from 1 to 4 years. The pro forma information during the initial phase-in
period, as required by SFAS No. 123, was based on fixed stock options granted
during fiscal 1996 and fiscal 1997. Therefore, the pro forma information may not
be indicative of the effects of compensation cost on pro forma net income and
net earnings per share in future years since the options vest over several years
and new grants are possible.
Fixed Stock Option Plans The 1986 Stock Option Plan and the 1988 Stock Option
Plan provide for the granting of non-qualified options for the purchase of up to
5,425,000 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.
The Company amended these 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.
In connection with the Special Dividend (see Note 7), the Company made
equitable adjustments to outstanding options. As a result, 2.1 million options
were repriced. The repriced options have retained their original vesting
schedules and expiration dates.
The 1995 Non-Employee Directors' Stock Option Plan provides for the granting
of non-qualified options for the purchase of shares of common stock. 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.
At September 27, 1997 and September 28, 1996 there were 588,769 and 413,709
options available for future grant under the fixed stock option plans,
respectively.
The following tables summarize information about all of the Company's fixed
stock option plans:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
- ------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at September 24, 1994 2,351,154 $ 14.703
Granted 632,096 18.071
Cancelled (65,707) 18.189
Exercised (212,335) 11.395
- ------------------------------------------------------------------------------
Outstanding at September 30, 1995 2,705,208 15.672
Granted 2,871,129 9.869
Cancelled (2,296,127) 18.122
Exercised (939,560) 7.514
- ------------------------------------------------------------------------------
Outstanding at September 28, 1996 2,340,650 9.425
Granted 1,222,227 13.665
Cancelled (269,637) 9.619
Exercised (1,032,802) 9.078
- ------------------------------------------------------------------------------
Outstanding at September 27, 1997 2,260,438 $11.853
- ------------------------------------------------------------------------------
</TABLE>
Options Outstanding
<TABLE>
<CAPTION>
Weighted-Average
Outstanding as of Remaining Weighted-Average
Range of Exercise Prices September 27, 1997 Contractual Life Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 5.000 - $ 7.625 84,202 5.5 $ 6.937
8.000 - 8.625 486,536 4.7 8.285
9.100 - 12.250 575,279 6.6 11.735
12.625 - 12.875 545,809 2.3 12.847
13.500 - 14.125 456,800 9.3 14.094
16.437 - 19.250 111,812 8.1 17.677
- --------------------------------------------------------------------------------
2,260,438 5.7 $11.853
- --------------------------------------------------------------------------------
</TABLE>
page.34
<PAGE>
ADVO, INC.
Options Exercisable
<TABLE>
<CAPTION>
Exercisable as of Weighted-Average
Range of Exercise Prices September 27, 1997 Exercise Price
- ------------------------------------------------------------------------------
<S> <C> <C>
$ 5.000 - $ 7.625 56,352 $ 6.984
8.000 - 8.625 69,217 8.355
9.100 - 12.250 127,422 11.075
12.625 - 12.875 -- --
13.500 - 14.125 800 14.125
16.437 - 19.250 3,575 17.944
- ------------------------------------------------------------------------------
257,366 $ 9.553
- ------------------------------------------------------------------------------
</TABLE>
Nonvested Stock Plans The 1986 Employee Restricted Stock Plan and 1990
Non-Employee Directors' Restricted Stock Plan provide for the granting of up to
2,592,500 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) and to directors. These shares are votable
by the holders, and the vesting period is determined by the Board of Directors
at the date of grant. The compensation cost charged against income over the
restriction period was $.3 million, $.6 million, and $1.3 million for the years
ended September 27, 1997, September 28, 1996 and September 30, 1995,
respectively. Unamortized deferred compensation was $.8 million at September 27,
1997. There were 143,588 and 144,255 shares available for future grant under
these plans at September 27, 1997 and September 28, 1996, respectively. The
weighted average grant price of shares granted during fiscal 1997 and fiscal
1995 was $18.431 and $18.238, respectively. There were no shares granted during
fiscal 1996.
Certain participants in the 1986 Employee Restricted Stock Plan were given
the opportunity to reinvest the Special Dividend applicable to restricted shares
in the Company's common stock. Any such reinvestment will be distributed when
the restricted shares vest.
Information with respect to the Company's nonvested stock plans is summarized
below:
<TABLE>
<CAPTION>
Shares
- ------------------------------------------------------------------------------
<S> <C>
Outstanding at September 24, 1994 2,412,746
Granted 10,500
- ------------------------------------------------------------------------------
Outstanding at September 30, 1995 2,423,246
Cancelled (5,001)
- ------------------------------------------------------------------------------
Outstanding at September 28, 1996 2,418,245
Granted 31,000
Cancelled (333)
- ------------------------------------------------------------------------------
Outstanding at September 27, 1997 2,448,912
- ------------------------------------------------------------------------------
</TABLE>
During fiscal 1997, 30,000 nonvested shares were awarded to an employee. These
shares take on the same characteristics as the shares in the 1986 Employee
Restricted Stock Plan.
Note 12 Nonrecurring Charges
In connection with the Special Dividend (see Note 7), the Company made equitable
adjustments to outstanding unexercised employee stock options. Generally, the
equitable adjustments were reductions in the exercise price of the outstanding
unexercised employee stock options equal to the $10 per share Special Dividend
payment. No modifications were made to any other terms of the options. This
repricing changed the intrinsic value of the outstanding options and resulted in
the Company recording $8.8 million of noncash compensation expense. Also
included as nonrecurring charges were $3.3 million in legal and various other
fees incurred as a result of the Company's exploration of strategic alternatives
to enhance shareholder value which resulted in the payment of the Special
Dividend.
Note 13 Restructure Reserve
In fiscal 1993, the Company recorded a $25.8 million charge for a plan of
restructuring. The plan included the shutdown/relocation of certain operating
facilities aimed at repositioning their location in more geographically
strategic areas, the reorganization and centralization of the Company's
operations and the discontinuance of certain unprofitable Micromarketing
initiatives.
At September 27, 1997 the Company had remaining liabilities relating to its
plan of restructuring of $0.4 million, principally relating to obligations
existing under operating leases of exited business operations. These operating
leases provide for obligations extending through the year 2000. All significant
elements of the Company's plan of restructure were completed by the end of its
fiscal 1997 year.
For fiscal 1997, 1996, and 1995, respectively, $1.6 million, $7.3 million and
$3.6 million were charged to the reserve for cash payments related to severance
costs and other termination based arrangements for exited activities and the
centralization of operations. For fiscal 1997, 1996, and 1995, $0.1 million,
$0.6 million and $3.6 million, respectively, were charged for cash payments
related to facility closure and downsizing costs and $0.1 million in fiscal 1995
was charged to the reserve for the write off of assets associated with exited
activities. For the three year period ending September 27, 1997, a total of 480
employees were terminated from all functions of the organization (representing
approximately 20% of the salaried workforce) under the restructuring plan.
page.35
<PAGE>
ADVO, INC.
Note 14 Income Taxes
The components of the provision for income taxes on continuing operations are as
follows:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 27, September 28, September 30,
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $10,660 $5,494 $ 12,910
Deferred 3,844 505 3,429
- ------------------------------------------------------------------------------
Total Federal 14,504 5,999 16,339
State:
Current 1,696 742 2,454
Deferred 718 488 803
- ------------------------------------------------------------------------------
Total State 2,414 1,230 3,257
- ------------------------------------------------------------------------------
Total Provision $16,918 $7,229 $19,596
- ------------------------------------------------------------------------------
</TABLE>
The Company's effective income tax rate for continuing operations differed from
the Federal statutory rate for the following reasons:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 27, September 28, September 30,
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 3.6 4.3 4.1
Targeted jobs tax credit -- -- (.2)
Other .1 (.3) (.1)
- -------------------------------------------------------------------------------
Effective income tax rate 38.7% 39.0% 38.8%
- -------------------------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
September 27, September 28,
(In thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Reserve for deferred compensation $ 5,455 $ 5,762
Reserve for employee benefits 4,123 3,610
Loss due to discontinued operations -- 2,948
Other 5,567 4,262
- -------------------------------------------------------------------------------
Total deferred tax assets 15,145 16,582
- -------------------------------------------------------------------------------
Deferred Tax Liabilities:
Tax over book depreciation
and amortization (10,486) (7,361)
- -------------------------------------------------------------------------------
Net federal and state deferred assets $ 4,659 $ 9,221
- -------------------------------------------------------------------------------
</TABLE>
Note 15 Commitments and Contingencies
ADVO leases property and equipment under noncancellable operating lease
agreements which expire at various dates through 2007. The leases generally
provide that the Company pay the taxes, insurance and maintenance expenses
related to the leased assets. Rental commitments at September 27, 1997 under
long term noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
<S> <C>
Fiscal year:
1998 $12,710
1999 10,394
2000 7,657
2001 6,300
2002 5,109
Thereafter 9,183
- -------------------------------------------------------------------------------
Total minimum lease payments $51,353
- -------------------------------------------------------------------------------
</TABLE>
Certain of these leases contain renewal options and certain leases also provide
for cost escalation payments. Rental expense for the years ended September 27,
1997, September 28, 1996 and September 30, 1995 was approximately $17.1 million,
$20.6 million and $22.8 million, respectively.
During fiscal 1996, the Company entered into a ten-year agreement with
Integrated System Solutions Corporation, now known as IBM Global Services, to
provide systems development and technical support to the Company. The contract
allows for cancellation after the completion of the third year, subject to
termination charges ranging between $3.1 million and $.5 million depending on
the year in which the cancellation becomes effective. Total base charges under
the term of the agreement since inception through the year 2006 would be $106.0
million. The agreement also provides for the Company to pay a cost of living
adjustment due to inflation increases beginning in fiscal 1997. Cost of living
adjustments for fiscal 1997 totaled approximately $.3 million. Future
commitments for the noncancellable portion of the agreement, excluding
termination fees and the cost of living adjustments are $14.9 million and $10.7
million for fiscal years 1998 and 1999, 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, results of operations and liquidity of the
Company.
Outstanding commitments for capital expenditures at September 27, 1997
totaled $9.6 million.
Note 16 Related Party Transactions
The Company invests in money market mutual funds through an investment advisor,
Warburg, Pincus Counsellors, Inc. ("Counsellors"). The general partner of
Warburg, Pincus Capital Partners, L.P.("Warburg"), the Company's largest
shareholder at September 27, 1997, owns a majority interest in Counsellors.
Income earned on investments managed by Counsellors was $.5 million, $1.2
million and $2.8 million in
page.36
<PAGE>
ADVO, INC.
fiscal 1997, 1996 and 1995, respectively. At September 27, 1997 and September
28, 1996, $11.6 million and $5.4 million, respectively, was 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.
In addition, the Company purchased 1.9 million shares of its common stock
from Warburg subsequent to year end. (See Note 7).
Note 17 Supplemental Cash Flow Information
Cash paid for income taxes was $11.0 million, $3.2 million and $11.8 million in
fiscal 1997, 1996 and 1995, respectively. Cash paid for interest expense in
fiscal 1997 and 1996 was $14.4 and $7.2 million, respectively. No interest
expense payments were made in fiscal year 1995.
Excluded from continuing investing activities 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 in fiscal 1996. (See Note 8.)
Note 18 Recent Accounting Pronouncements
In February of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share". The Statement
establishes standards for computing and presenting earnings per share ("EPS").
The statement simplifies the standards for computing EPS previously found in APB
Opinion No. 15, "Earnings Per Share", and makes them comparable to international
EPS standards. The statement requires the presentation of basic and diluted EPS.
Basic EPS excludes common stock equivalents, such as stock options, and is
computed by dividing net earnings by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if common stock equivalents, such as stock options, were
exercised. The Company will adopt this statement in the first quarter of fiscal
1998 and expects that there will not be a material dilution to the Company's
earnings per share as a result of the adoption.
In June of 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This
statement establishes standards for the reporting of comprehensive income and
its components in a full set of general-purpose financial statements. The
financial statements are required to include certain components of net income,
as well as, other transactions affecting stockholders' equity. This statement is
effective for fiscal years beginning after December 15, 1997 and will be adopted
by the Company in fiscal 1999.
In June of 1997, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This Statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and interim financial stockholders' reports. The
Statement requires the Company to report information by operating segment or in
general on the basis which it uses internally for evaluating performance. The
effective date of the Statement is for periods beginning after December 15,
1997. The Company will adopt this Statement in fiscal 1999.
Note 19 Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
(In millions, except per share data)
Fiscal year ended First Second Third Fourth
September 27, 1997 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $255.1 $242.5 $258.2 $260.7
Gross profit 62.8 58.2 69.3 68.8
Operating income 14.0 8.0 19.1 17.4
Net income 6.2 2.6 9.4 8.6
Earnings per share .25 .11 .38 .35
Common stock price
High 14 1/4 14 5/8 16 13/16 19 7/16
Low 11 11 5/8 11 3/8 15 5/8
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended First Second Third Fourth
September 28, 1996 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $256.5 $232.0 $245.7 $252.0
Gross profit 56.6 46.7 55.5 65.9
Operating income (loss) (1) 8.3 (10.8) 11.7 15.6
Net income (loss) 6.0 (14.4) 4.4 7.1
Earnings (loss) per share .25 (.64) .18 .29
Common stock price (2)
High 27 1/2 26 1/8 11 3/4 11 5/8
Low 22 3/4 9 1/4 9 1/8 9 1/8
- ------------------------------------------------------------------------------
</TABLE>
(1) Operating income for the second quarter of fiscal 1996 includes
nonrecurring charges of $12.1 million. (See Note 12.)
(2) The decrease in the market price during the second quarter of fiscal 1996
was reflective of the Special Dividend. (See Note 7.)
page.37
<PAGE>
ADVO, INC.
Report of Independent Auditors
To the Board of Directors and Stockholders of ADVO, Inc.
We have audited the accompanying consolidated balance sheets of ADVO, Inc. at
September 27, 1997 and September 28, 1996, and the related consolidated
statements of operations, cash flows, and changes in stockholders' equity
(deficiency) for each of the three years in the period ended September 27, 1997.
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 27, 1997 and September 28, 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 27, 1997 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Hartford, Connecticut
October 21, 1997
Financial Responsibility
To the Stockholders of ADVO, Inc.
The management of ADVO, Inc. is responsible for the integrity and objectivity of
the consolidated financial statements and other financial information presented
in this report. These statements have been prepared in accordance with generally
accepted accounting principles and necessarily include amounts based on
judgements and estimates by management.
ADVO maintains internal accounting control policies and related procedures
designed to provide reasonable assurance that assets are safeguarded, that
transactions are executed in accordance with management's authorization and
properly recorded, and that accounting records may be relied upon for the
preparation of reliable published annual and interim financial statements and
other financial information. The design, monitoring, and revision of internal
accounting control systems involve, among other things, management's judgement
with respect to the relative cost and expected benefits of specific control
measures. The Company also maintains an internal auditing function which
evaluates and reports on the adequacy and effectiveness of internal accounting
controls and policies and procedures.
The Company's consolidated financial statements have been audited by
independent auditors who have expressed their opinion with respect to the
fairness of these statements.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with ADVO's management, internal auditors and
independent auditors to review matters relating to the quality of financial
reporting and internal accounting controls. Both the internal auditors and the
independent auditors have unrestricted access to the Committee.
/s/ Robert Kamerschen
Robert Kamerschen
Chairman and Chief Executive Officer
and acting Chief Financial Officer
/s/ Robert S. Hirst
Robert S. Hirst
Vice President and Controller
October 21, 1997
page.38
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ADVO, INC.
AS OF SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
PERCENT OF VOTING
STATE OF SECURITIES OWNED AS
INCORPORATION NAME OF SUBSIDIARY OF SEPTEMBER 27, 1997
- ------------- ------------------- ---------------------
<S> <C> <C>
Delaware Trans-ADVO, Inc. 100
Delaware ADVO Investment Company, Inc. 100
Delaware ADVO Creative Services, Inc. 100
Delaware Value Fair, Inc. 100
Delaware MBV, Inc. 100
Delaware Stighen, Inc. (formerly Marketing Force, Inc.) 100(1)
</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 21, 1997, included in the
1997 Annual Report to Stockholders of ADVO.
Our audits also included the financial statement schedule of ADVO listed in Item
14(a). This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-38237) pertaining to the ADVO, Inc.'s President's Club Stock
Award Plan, (Form S-8 No. 333-11323) pertaining to the ADVO, Inc. 401(k) Plan,
(Form S-3 No. 333-03777) pertaining to Dividend Reinvestment, (Post-Effective
Amendment No. 4 to the ADVO Form S-8 No. 333-24131) 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. 5 to the ADVO
Form S-8 No. 33-58483) pertaining to the 1988 Non-Qualified Stock Option Plan,
as amended, of ADVO and in the related Prospectuses of our report dated October
21, 1997, with respect to the consolidated financial statements incorporated
herein by reference, and our report included in the preceding paragraph with
respect to the financial statement schedule included in this Annual Report (Form
10-K) of ADVO.
Ernst & Young LLP /s/
Hartford, Connecticut
December 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO, INC'S.
FORM 10K FOR THE YEAR ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 25,963
<SECURITIES> 0
<RECEIVABLES> 71,824
<ALLOWANCES> 5,160
<INVENTORY> 4,149
<CURRENT-ASSETS> 115,783
<PP&E> 166,991
<DEPRECIATION> 90,899
<TOTAL-ASSETS> 208,553
<CURRENT-LIABILITIES> 115,583
<BONDS> 140,666
0
0
<COMMON> 284
<OTHER-SE> (60,205)
<TOTAL-LIABILITY-AND-EQUITY> 208,553
<SALES> 0
<TOTAL-REVENUES> 1,016,492
<CGS> 0
<TOTAL-COSTS> 757,413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,374
<INTEREST-EXPENSE> 14,820
<INCOME-PRETAX> 43,716
<INCOME-TAX> 16,918
<INCOME-CONTINUING> 26,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,798
<EPS-PRIMARY> $1.09
<EPS-DILUTED> $1.08
</TABLE>
