<PAGE>
ADVO, Inc.
Form 10-K
September 26, 1998
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 26, 1998
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to _________
Commission file number 1-11720
ADVO, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0885252
- ------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Univac Lane, P.O. Box 755,
Windsor, CT 06095-0755
- ------------------------------------- --------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (860) 285-6100
----------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock and Rights, par value $.01 per share
-------------------------------------------------
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
NONE
----
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant at November 27, 1998 was $506,416,219. On that date, there were
22,133,572 outstanding shares of the registrant's common stock.
Documents Incorporated by Reference:
Portions of the 1998 Annual Report to Stockholders are incorporated by
reference into Parts II and IV of this Report.
Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Report.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ADVO, INC.
INDEX TO REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 26, 1998
PART I
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
1. Business................................................................ 1
2. Properties.............................................................. 5
3. Legal Proceedings....................................................... 5
4. Submission of Matters to a Vote of Security Holders..................... 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters... 6
6. Selected Financial Data................................................. 7
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 7
7a. Quantitative and Qualitative Disclosure about Market Risk............... 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...................... 8
11. Executive Compensation.................................................. 8
12. Security Ownership of Certain Beneficial Owners and Management.......... 8
13. Certain Relationships and Related Transactions.......................... 8
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 8
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
ADVO, Inc. ("ADVO" or the "Company") is a direct mail marketing firm
primarily engaged in soliciting and processing printed advertising from
retailers, manufacturers and service companies for targeted distribution by
both shared and solo mail to consumer households in the United States on a
national, regional and local basis. Founded in 1929 as a hand delivery
company, the Company entered the direct mail industry as a solo mailer in 1946
and began its shared mail program in 1980. The Company currently is the
largest commercial user of third-class mail in the United States.
ADVO competes primarily with newspapers, direct mail companies, broadcast
media, periodicals and other local distribution entities for retail
advertising expenditures. The Company believes that direct mail, which enables
advertisers to target advertisements to specific customers or geographic
areas, is the most efficient vehicle for delivering printed advertising on a
saturation or full market coverage basis, as well as an effective means of
targeted coverage.
ADVO's principal executive offices are located at One Univac Lane, Windsor,
Connecticut 06095.
PRODUCTS AND SERVICES
ADVO's direct mail marketing products and services include shared mail and
solo mail. ADVO also provides ancillary services in conjunction with its
direct mail marketing programs. In addition, during fiscal 1998, the Company
acquired a franchise-based coupon envelope mail company.
SHARED MAIL
In the Company's shared mail programs (Marriage Mail(R) and Mailbox
Values(R)), the advertisements of several advertisers are combined into a
single mail package.
Shared mail packages are assembled by the Company for distribution by ZIP
Code and, in most instances, each household within the ZIP Code will receive a
mail package. Individual customers can choose a portion of the designated
mailing area for their distributions, ranging from part of a ZIP Code to all
ZIP Codes covered by the program. This flexibility enables major customers,
such as retail store chains, to select areas serviced by their retail stores
and, at the same time, distribute different versions of their advertisements
to accommodate the needs of their individual stores. It also allows a smaller
retailer to target only those ZIP Codes or portions of ZIP Codes needed to
accommodate its customer base, thereby reducing overall advertising costs.
During fiscal 1998, the Company began offering the nationwide availability
of ADVO Targeting Zones ("ATZs") which enables advertisers to target their ads
to consumer clusters of about 3,500 households. ATZs are neighboring postal
carrier delivery routes within a ZIP Code that are clustered together based on
shared demographic characteristics and proximity to key retail shopping areas.
The Company's shared mail programs offer the features of penetration and
target marketing at a significant cost reduction when compared to mailing on
an individual or solo mail basis. This cost advantage is available because the
Company pays the total postage expense, and advertisers are generally charged
a selling price based upon, among other factors, the incremental weight of
their promotional pieces.
As a part of its shared mail programs, the Company provides the addresses of
the households receiving the mail packages, sorts, processes and transports
the advertising material for ultimate delivery through the United States
Postal Service ("USPS"). Generally, larger businesses, such as food chains and
mass merchandisers, will provide the Company with preprinted advertising
materials in predetermined quantities. In the case of manufacturers and small
retail customers, the Company may perform graphics services and 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.
1
<PAGE>
The Company believes its shared mail programs are the largest programs of
their kind.
Marriage Mail(R) is a weekly mail program with coverage, on average, of 60
million households in approximately 120 markets. This program is used by local
and national retailers. The ZIP Code configuration selected for each market is
normally determined by population density and by proximity to retail outlets.
Retailers with multiple locations and weekly frequency have a great influence
on the ZIP Codes chosen by the Company for its weekly mailings. The Company
derives most of its revenues from the Marriage Mail(R) program.
In fiscal 1997, the Company formed a new network, known as ADVO National
Network Extension ("A.N.N.E."), of regional shared mail companies to provide
its clients with extended coverage outside the markets already served by the
Company. Approximately an additional 21.5 million households can be reached on
a shared mail basis through A.N.N.E. The Company handles the clients' orders
directly and manages distribution of their advertising through A.N.N.E.'s
partners. Conversely, A.N.N.E. enables participating partners (shared mail
companies) to offer their clients extended marketplace reach using the
Company's 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
Through a specialized firm hired by the Company to manage it, the Company
rents portions of its mailing list to organizations interested in distributing
their own mailings. The Company may or may not perform the associated
distribution services for the customer.
ADVO Creative Services, Inc., based in Texas, is a wholly-owned subsidiary
of the Company which specializes in the coordination and production of custom
promotional magazines and circulars which, in most cases, are then distributed
by the Company.
On February 27, 1998, the Company acquired The Mailhouse, Inc., a franchise-
based cooperative coupon envelope mail company headquartered in Avon, MA. The
company was renamed MailCoups, Inc. ("MailCoups") and operates as a subsidiary
of ADVO. The new subsidiary, operating under the trade name of SuperCoups, is
a leader in creating and distributing attractive, cost-effective targeted
coupons in a distinctive envelope format for local neighborhood merchants via
an extended network of franchise owners. At the end of fiscal 1998, MailCoups
had approximately 300 franchise units in 26 states and directly employed 145
people.
MAILING LIST
ADVO's management believes its computerized mailing list is the largest
residential/household mailing list in the country. It contains over 116
million delivery points (constituting nearly all of the households in the
United States) and was used by the U.S. Census Bureau as a base for developing
the mailing list for its 1980 and 1990 census questionnaire mailings. 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.
2
<PAGE>
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, which
allows ADVO to qualify for the lowest possible postage rates. The USPS
provides these updates to any user for a fee, provided that the user's list is
at least 90% 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 1998,
1997, or 1996.
OPERATIONS
Customers' advertising circulars are processed by approximately 2,400
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 equipment are the
principal pieces of equipment used to process the Company's products and
services. At several of the Company's production facilities, a new
computerized mail sorter is 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.
MailCoups operates a cooperative direct mail coupon envelope advertising
business by performing printing and distribution services for the franchisees
at their one production facility.
During fiscal 1996, the Company entered into a ten year agreement with
Integrated Systems Solution 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 systems, 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."
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.
3
<PAGE>
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 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 26, 1998, the Company had a total of approximately 4,600
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 subject to cautionary factors which could
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; the possibility of consolidation throughout the
retail sector; 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 efficiencies
achieved with technology upgrades; the amount of shares the Company will
purchase in the future under its buyback program; the successful completion
and estimated costs of the Year 2000 program; fluctuations in interest rates
related to the outstanding debt; and other general economic factors.
4
<PAGE>
ITEM 2. PROPERTIES
ADVO does not own any real estate except for its corporate headquarters. The
corporate headquarters, located in Windsor, Connecticut, consist of two
buildings totaling approximately 136,000 square feet. The Company leases 20
production facilities, including the MailCoups facility, and approximately 65
sales offices (which excludes the sales offices that are located in the mail
processing facilities) throughout the United States. The Company believes its
facilities are suitable and adequate for the purposes for which they are used
and are adequately maintained.
ITEM 3. LEGAL PROCEEDINGS
ADVO is party to various lawsuits and regulatory proceedings which are
incidental to its business and which the Company believes will not have a
material adverse effect on its consolidated financial condition, liquidity or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
Robert Kamerschen....... 62 Chairman and Chief Executive Officer
Gary M. Mulloy.......... 53 President and Chief Operating Officer
Myron L. Lubin.......... 58 Executive Vice President--Marketing and Sales
Donald E. McCombs....... 42 Senior Vice President and Chief Financial Officer
Henry S. Evans.......... 45 Senior Vice President--Operations
Vince Giuliano.......... 51 Senior Vice President--Government Relations
Rick Kurz............... 58 Senior Vice President--Chief Strategic Growth Officer
Mardelle Pena........... 46 Senior Vice President--Chief Human Resources Officer
A. Brian Sanders........ 37 Senior Vice President--Chief Marketing Officer
David Stigler........... 55 Senior Vice President--Chief Legal and Public Affairs Officer and
General Counsel
Frank Talz.............. 54 Senior Vice President--Network Development
B. Kabe Woods........... 43 Senior Vice President--Chief Information Officer
Julie A. Abraham........ 40 Vice President and Controller
C. David Taugher........ 43 Vice President--Change Management
</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., R.H. Donnelley Corporation,
and IMS Health. Mr. Kamerschen is retiring as Chief Executive Officer as of
January 1, 1999.
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. Mulloy has been
elected to succeed Mr. Kamerschen in the position of Chief Executive Officer
as of January 1, 1999.
Mr. Lubin became Executive Vice President--Marketing and Sales on October
29, 1998. From December 1995 to October 1998, he was Senior Vice President--
Chief Sales Officer. Prior to that, he was Senior Vice President--President
Western Division from January 1990 to November 1995.
Mr. McCombs became Senior Vice President and Chief Financial Officer on
November 7, 1997. Prior to that, from 1989 to October 1997, he was Vice
President--Financial Planning and Measurement.
5
<PAGE>
Mr. Evans became Senior Vice President--Operations in August 1997. From 1992
to 1997 he was Senior Vice President of Operations with Anchor Glass Container
Corporation.
Mr. Giuliano has been Senior Vice President--Government Relations since
October 28, 1996. From April 1983 to October 1996 he was Vice President--
Government Relations.
Mr. Kurz became Senior Vice President--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.
Ms. Pena has been Senior Vice President--Chief Human Resources Officer since
August 1997. From May 1994 to August 1997, she was Vice President--Human
Resources. Prior to that she held various management positions at the Company
since August 1992.
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. Stigler has been Senior Vice President--Chief Legal and Public Affairs
Officer and General Counsel since January 1990. He has also served as the
Company's Secretary since August 1986.
Mr. Talz became Senior Vice President--Network Development on October 29,
1998. From April 1997 to October 1998 he was Senior Vice President--Chief
Client Services Officer. Prior to that, he was Senior Vice President of
Organizational Development from January 1996 to April 1997 and Senior Vice
President--President Central Division from September 1986 to January 1996.
Mr. Woods became Senior Vice President--Chief Information Officer on August
25, 1997. From November 1995 to August 1997, he was Director--End User
Services of Lucent Technologies and from November 1993 to November 1995 he was
Chief Information Officer of AT&T Advanced Technology Systems. In addition,
for a short time in 1995 he held the concurrent position of Chief Information
Officer of AT&T Multimedia Ventures and Technologies.
Ms. Abraham became Vice President and Controller on October 8, 1998. From
November 1997 to October 1998, she was Vice President--Financial Planning and
Investor Relations. From August 1995 to November 1997, she was Vice
President--Shared Financial Services. Prior to that, she held several other
financial management positions at the Company since April 1992.
Mr. Taugher has been Vice President--Change Management since April 15, 1997.
From 1995 to 1997, he was Vice President of Organizational Development. Prior
to that, he was an independent consultant working with various senior
management client teams conducting team building, strategic planning, and
organizational development interventions.
The Company is not aware of any family relationships between any of the
foregoing officers and any of the Company's directors. Each of the foregoing
officers holds such office until his successor shall have been duly chosen and
shall have 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 1998 Annual Report to Stockholders includes on page 39 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).
6
<PAGE>
For the fiscal years ended September 26, 1998 and 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 stockholders of
record on February 20, 1996. The announcement was a result of the Company's
initiative to explore strategic alternatives aimed at increasing stockholder
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 closing price as of November 27, 1998 of the Company's common stock,
under the symbol AD, on the New York Stock Exchange as reported in The Wall
Street Journal was $25 11/16 per share. The approximate number of holders of
record of the common stock on November 27, 1998 was 831.
During fiscal 1998, 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 1998 Annual
Report to Stockholders on page 22 under the caption "Selected Financial Data"
and is incorporated herein by reference and made a part hereof (see Exhibit
13).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is included in ADVO's 1998 Annual
Report to Stockholders on pages 23 through 27 under the caption "Financial
Report" and is incorporated herein by reference and made a part hereof (see
Exhibit 13).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in ADVO's 1998 Annual
Report to Stockholders on page 26 under the caption "Market Risk" and is
incorporated herein by reference and made a part hereof (see Exhibit 13).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ADVO's consolidated financial statements, together with the Report of
Independent Auditors thereon dated October 20, 1998, appearing on pages 28
through 40 of ADVO's 1998 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 39 of ADVO's 1998
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.
7
<PAGE>
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 through 5 of the Company's definitive proxy
statement dated December 17, 1998 for the annual meeting of stockholders to be
held on January 21, 1999 (the "Proxy Statement"), under the caption "Election
of Directors," and on page 6 of the Proxy Statement under the subcaption
"Section 16 (a) Beneficial Ownership Reporting Compliance", and is
incorporated herein by reference and made a part hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation" on pages 7 through 18 (except for those portions
appearing under the subcaptions "Report of the Compensation Committee" and
"Company Financial Performance"), and "Governance of the Company" on pages 2
and 3, of ADVO's Proxy Statement and is incorporated herein by reference and
made a part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the captions
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management" on page 2 and on pages 5 and 6, respectively, of ADVO's Proxy
Statement and is incorporated herein by reference and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Related
Party Transactions" on page 18 of ADVO's Proxy Statement and in footnote 9
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See the Index to Financial Statements and
Financial Statement Schedules on page F-1.
(2) Financial Statement Schedules. See the Index to Financial Statements
and Financial Statement Schedules on page F-1.
(3) Exhibits. The following is a list of the exhibits to this Report:
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT WHERE LOCATED
- ------- ------- -------------
<S> <C> <C>
3(a) Restated Certificate of Incorporation Incorporated by reference to Exhibit
of ADVO. 3(a) to the Company's Form 10 filed
on September 15, 1986 (No. 1-11720.)
3(b) Restated By-laws of ADVO. Incorporated by reference to Exhibit
3(b) to the Company's 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.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT WHERE LOCATED
- ----------- ------- -------------
<S> <C> <C>
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 22, 1998.
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 22, 1998.
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) 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(h) 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(i) 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(j) Executive Severance Agreement dated Incorporated by reference to Exhibit
May 19, 1997 between ADVO and A. 10(k) to the Company's Annual Report
Brian Sanders. * on Form 10-K for the fiscal year
ended September 27, 1997.
10(k) 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.
10(l) Executive Severance Agreement dated Incorporated by reference to Exhibit
November 7, 1997 between ADVO and 10(m) to the Company's Annual Report
Donald E. McCombs. * on Form 10-K for the fiscal year
ended September 27, 1997.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT WHERE LOCATED
- ----------- ------- -------------
<S> <C> <C>
10(m) Employment Agreement dated July 31, Filed herewith.
1998 between ADVO and Gary M.
Mulloy. *
10(n) Executive Severance Agreements dated Filed herewith.
October 17, 1995 between ADVO and
the executive officers named
therein. *
10(o) Executive Severance Agreement dated Filed herewith.
October 17, 1995 between ADVO and
David Stigler.*
10(p) Executive Severance Agreement dated Filed herewith.
July 1, 1997 between ADVO and
Mardelle Pena. *
10(q) Executive Severance Agreement dated Filed herewith.
July 30, 1997 between ADVO and Henry
S. Evans. *
10(r) Executive Severance Agreement dated Filed herewith.
August 6, 1997 between ADVO and B.
Kabe Woods. *
10(s) Consulting Agreement dated December Filed herewith.
1, 1998 between ADVO and Robert
Kamerschen. *
13 1998 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>
- --------
* Management contract or compensatory plan required to be filed as an exhibit
pursuant to item 14(c) of this report.
(b) Reports on Form 8-K.
A report on Form 8-K dated September 8, 1998 was filed by the Company during
the quarter ended September 26, 1998. The Form 8-K reported under item 5
thereof the Company's announcement of a new stock repurchase program for up to
1 million shares through September 25, 1999. This new program includes the
approximate 442,000 shares remaining from its previous buyback program.
10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
December 17, 1998
Date: _______________________________ ADVO, Inc.
Julie A. Abraham /s/
By: _________________________________
JULIE A. ABRAHAM
VICE PRESIDENT AND
CONTROLLER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. EACH PERSON WHOSE
SIGNATURE APPEARS BELOW HEREBY CONSTITUTES DAVID M. STIGLER AND JULIE A.
ABRAHAM, AND EACH OF THEM SINGLY, SUCH PERSON'S TRUE AND LAWFUL ATTORNEYS,
WITH FULL POWER TO THEM AND EACH OF THEM, TO SIGN FOR SUCH PERSON AND IN SUCH
PERSON'S NAME AND CAPACITY AS INDICATED BELOW, ANY AND ALL AMENDMENTS TO THIS
REPORT, HEREBY RATIFYING AND CONFIRMING SUCH PERSON'S SIGNATURE AS IT MAY BE
SIGNED BY SAID ATTORNEYS TO ANY AND ALL AMENDMENTS.
DATE SIGNATURE TITLE
December 17, 1998 Robert Kamerschen /s/ Chairman, Chief Executive
---------------------------- Officer and Director
ROBERT KAMERSCHEN (Principal Executive
Officer)
December 17, 1998 Gary M. Mulloy /s/ President, Chief
---------------------------- Operating Officer and
GARY M. MULLOY Director
December 17, 1998 Donald E. McCombs /s/ Senior Vice President and
---------------------------- Chief Financial Officer
DONALD E. MCCOMBS (Principal Financial
Officer)
December 17, 1998 Julie A. Abraham /s/ Vice President and
---------------------------- Controller (Principal
JULIE A. ABRAHAM Accounting Officer)
December 17, 1998 Bruce Crawford /s/ Director
----------------------------
BRUCE CRAWFORD
December 17, 1998 David F. Dyer /s/ Director
----------------------------
DAVID F. DYER
December 17, 1998 Jack W. Fritz /s/ Director
----------------------------
JACK W. FRITZ
December 17, 1998 Howard H. Newman /s/ Director
----------------------------
HOWARD H. NEWMAN
December 17, 1998 John R. Rockwell /s/ Director
----------------------------
JOHN R. ROCKWELL
December 17, 1998 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 26,
1998, September 27, 1997 and September 28, 1996......................... *
Consolidated balance sheets at September 26, 1998 and September 27, 1997. *
Consolidated statements of cash flows for the years ended September 26,
1998, September 27, 1997 and September 28, 1996......................... *
Consolidated statements of changes in stockholders' equity (deficiency)
for the years ended September 26, 1998, September 27, 1997 and September
28, 1996................................................................ *
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 28 to 40 of the ADVO, Inc. 1998
Annual Report to Stockholders.
F-1
<PAGE>
ADVO, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ --------------------- ---------- ----------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND OTHER FROM END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVES PERIOD
----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended September 28,
1996:
Allowances for sales
adjustments............ $ 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
adjustments............ $ 2,836 $ -- $ 4,889(b) $ 5,143 $ 2,582
Allowances for doubtful
accounts............... 1,390 5,374 -- 4,186(a) 2,578
Restructuring reserve... 2,059 -- -- 1,711 348
Accumulated amortization
Goodwill............... 1,422 392 -- -- 1,814
Accumulated amortization
Intangibles............ 5,290 729 -- -- 6,019
------- ------ ------- ------- -------
$12,997 $6,495 $ 4,889 $11,040 $13,341
======= ====== ======= ======= =======
Year ended September 26,
1998:
Allowances for sales
adjustments............ $ 2,582 $ -- $ 2,787(b) $ 3,373 $ 1,996
Allowances for doubtful
accounts............... 2,578 4,459 -- 4,409(a) 2,628
Restructuring reserve... 348 -- -- 61 287
Accumulated amortization
Goodwill............... 1,814 564 -- -- 2,378
Accumulated amortization
Intangibles............ 6,019 710 -- -- 6,729
------- ------ ------- ------- -------
$13,341 $5,733 $ 2,787 $ 7,843 $14,018
======= ====== ======= ======= =======
</TABLE>
- --------
(a) Write off of uncollectible accounts, net of recoveries on accounts
previously written off.
(b) Reduction of revenues.
F-2
<PAGE>
EXHIBIT 10 (m)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this day of July 31, 1998, by and between ADVO, Inc., a
Delaware corporation (the "Company"), and Gary Mulloy (the "Employee").
RECITAL
-------
The Company desires to employ the Employee to perform as Chief
Executive Officer of the Company and to obtain the benefit of the Employee's
knowledge, experience, and abilities, and the Employee is willing to serve as
such officer of and be employed by the Company.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto hereby agree as follows:
1. Position and Responsibilities.
-----------------------------
1.1 During the Employment Period (as hereinafter defined), the
Company shall employ the Employee and the Employee shall serve the Company as
Chief Executive Officer. All of the Company's operating and administrative
functions will report into the Employee in that capacity. The Employee shall
devote his full business time and best efforts to the business and affairs of
the Company and the promotion of its interests, and perform all duties and
services on behalf of the Company necessary to carry out the function of such
office as determined from time to time by the Board of Directors of the Company.
During the Employment Period, and without additional compensation, the Employee
shall serve in such other office or offices (including as a director) of the
Company and its subsidiaries to which he may be elected or appointed from time
to time. The Employee shall continue as a director of the Company throughout the
Employment Period.
-1-
<PAGE>
2. Employment Period.
-----------------
2.1 The Employment Period shall be the period commencing on
January 1, 1999 and continuing until December 31, 2004.
2.2 Notwithstanding the provisions of Section 2.1 hereof, the
Company shall have the right in its sole discretion, on written notice to the
Employee, to terminate the Employee's employment with or without Cause (as
hereinafter defined), such termination to be effective as of the date on which
notice is given or as of such later date otherwise specified in the notice. In
the event of the death of the Employee prior to any other termination of his
employment hereunder or the Employment Period (i) his employment hereunder and
the Employment Period shall terminate on the date of his death (ii) except as
expressly provided in Section 5.1 hereof and the Employee's Executive Severance
Agreement dated November 4, 1996 (hereinafter "Severance Agreement"), the
Company shall not have any obligation to pay any salary or provide any benefits
under this Agreement to the heirs, estate, executors, administrators, or legal
representative of the Employee in respect of any period after the death of the
Employee.
3. Compensation.
------------
3.1 Upon the start of the Employment Period, the Corporation
shall pay to the Employee for the services to be rendered by the Employee
hereunder a base salary at the rate of Five Hundred Thousand ($500,000) Dollars
per annum, payable in equal installments no less frequently than every two
weeks. Such salary will be reviewed at least annually after the end of the
fiscal year, starting with after the end of FY99, and may be increased, but not
decreased, by the Board of Directors of the Company (or the Compensation
Committee thereof as appropriate) in its sole discretion, to be effective in the
first pay period of the ensuing January, starting with January 2000. In
addition, the Employee shall be entitled to participate during the Employment
-2-
<PAGE>
Period in the Corporate Management Incentive Plan (the "Bonus Plan") which the
Company has adopted. The Employee's target bonus under that or any successor
plan shall be 75% of his base salary (the "Target Bonus").
3.2 The Employee shall be entitled to participate in, and receive
benefits from, any insurance, medical, disability, stock purchase, or any other
employee benefit plan of the Company which may be in effect at any time during
the course of his employment by the Company and which shall be generally
available to senior executives of the Company.
3.3 The Company shall reimburse the Employee for all reasonable and
necessary business expenses incurred by him in the course of performing his
duties and services described in Section 1 hereof against the presentation by
the Employee of appropriate vouchers thereof or other evidence as may be
reasonably requested by the Company. The Employee shall be entitled to four
weeks vacation a year, or more if corporate policy permits.
3.4 As long as the Employee's physical presence in the Hartford area is
required, the Employee shall receive a housing allowance of $2,000 per month
during the Employment Period, to be paid on a pro rata basis twice monthly.
4. Other Activities During and After the Employment Period.
-------------------------------------------------------
4.1 During the Employment Period the Employee shall not
undertake, continue, or otherwise engage in any employment, occupation, or
business enterprise other than as provided in Section 1 of this Agreement except
that subject to compliance with the provisions of this Agreement, the Employee
may engage in reasonable activities with respect to personal investments of the
Employee and may serve on the Boards of Directors of a maximum of two outside
companies. The maximum may be changed only with the approval of the Board.
4.2 The Employee shall not at any time during or after the
Employment Period (regardless of the reason for the termination thereof),
directly or indirectly divulge, furnish, use,
-3-
<PAGE>
publish, or make accessible to any person or entity any Confidential Information
(as hereinafter defined) except as properly required in the conduct of the
Company's business. Any records of Confidential Information prepared by the
Employee or which come into the Employee's possession are and remain the
property of the Company, and upon termination shall be either left with or
returned to the Company. The term "Confidential Information" shall mean
information disclosed to the Employee or known, learned, created, or observed by
him as a consequence of or through his employment by the Company or any
subsidiary of the Company which is confidential, secret, or otherwise not
generally known in the relevant trade or industry, and pertains directly or
indirectly to the business activities, products, services, or processes of the
Company, any subsidiary of the Company or any of their clients, customers or
suppliers, including but not limited to information concerning mailing lists,
advertising, sales promotion, publicity, sales data, research, copy, other
printed matter, tear sheets, artwork, photographs, films, reproductions, layout,
finances, accounting, methods, processes, trade secrets, business plans, client
lists and records, potential client lists, and client billing.
4.3 During the Employment Period, and the period of one year
thereafter, the Employee shall not directly or indirectly engage in any business
(whether as a consultant, officer, director, owner, employee, agent, partner, or
other participant) with or for, be financially interested (whether as a lender,
guarantor, or other participant), represent or otherwise render assistance to
any person or entity who or which competes or intends to compete, or who or
which is affiliated (by reason of common control, ownership, or otherwise) with
any other person or entity who or which competes or intends to compete, directly
or indirectly with the business then conducted by the Company; provided,
however, that the foregoing shall not be deemed to prevent the Employee from
investing in securities if such class of securities in which the investment is
so made is listed on a national securities exchange or is issued by a company
-4-
<PAGE>
registered under Section 12(g) of the Securities Exchange Act of 1934 or subject
to the obligations of Section 15(d) of that Act, so long as such investment
holdings do not, in the aggregate, constitute more than 1% of the voting stock
of any company's securities.
4.4 The Employee will not, during the Employment Period and
one year thereafter, hire or offer to hire or entice away or in any other manner
persuade or attempt to persuade, either in the Employee's individual capacity or
as agent for another, any officers, employees, or agents of the Company or any
subsidiary to discontinue their relationship with the Company of any subsidiary,
nor divert or attempt to divert from the company or any subsidiary any business
whatsoever by influencing or attempting to influence any customer or supplier of
the Company or any subsidiary.
4.5 The Employee acknowledges that he has been employed for
his special talents and that his leaving the employ of the Company would
seriously hamper the business of the Company. The Employee agrees that the
Company shall be entitled to injunctive relief, in addition to all remedies
permitted by law, to enforce the provisions of this Section 4. The Employee
further acknowledges that his training, experience, and technical skills are of
such breadth that they can be employed to advantage in other areas which are not
competitive with the present business or the Company and consequently the
foregoing obligation will not unreasonably impair his ability to engage in
business activity after the termination of his present employment.
4.6 As used in Section 4, the Period "one year after the
Employment Period" (or words to that effect) shall commence when Employee goes
off the Company's payroll, for whatever reason.
5. Severance Pay.
-------------
-5-
<PAGE>
5.1 In the event that (a) the Company terminates the
Employment Period for any reason other than for Cause (as hereinafter defined),
or (b) the Employee terminates his employment as a result of any of the
following reasons (a "Section 5.1 Termination"): (i) the Company assigned to the
Employee duties inconsistent with this present position that materially diminish
the scope of Employee's duties or change his reporting relationship; (ii) the
Company reduces the Employee's bonus by a proportion greater than the average
proportionate reduction in bonus awarded to the Company's other executive
officers other than by operation of the Bonus Plan; or (iii) the Company
breaches any of its material obligations under this Agreement, then for two
years after the termination date, the Company shall continue to pay an amount of
severance (the "Severance Compensation") to the Employee at the rate and in the
manner provided in Section 3.1 hereof, including an amount equal to the Target
Bonus, and shall continue to allow the Employee to participate in the insurance,
medical and disability plans (to the extent permitted by such plans) in which
the Employee shall have been participating at the date of termination. The auto
and housing allowances shall cease upon the date of termination. As long as the
Severance Compensation is being paid, the Employee's granted, but unvested stock
rights, shall continue to vest on their regularly scheduled dates. The
obligation of the Company to pay Severance Compensation and allow such
participation in such plans shall be the only obligations of the Company to the
Employee in the event of a termination pursuant to clauses (a) or (b) above.
Notwithstanding the foregoing, the Company shall not in any case have any
obligation to pay such Severance Compensation or allow such participation in the
event of any material breach by the Employee of his obligations under this
Agreement or in the event the Employee is eligible to receive compensation
pursuant to Section 6 hereof. The Company shall not be relieved of its
obligation to pay Severance Compensation pursuant to this Section 5.1 by the
reason of the death of the Employee during the period in which Severance
Compensation is being paid.
-6-
<PAGE>
5.2 For purposes of this Agreement, the term "Cause" shall mean: (i)
failure by the Employee to comply with any of the material terms of this
Agreement; (ii) willful engagement by the Employee in his capacity as an
executive officer of the Company or any subsidiary, in gross misconduct
injurious to the Company or any subsidiary; (iii) neglect or refusal by the
Employee to attend to the material duties assigned to him by the Board of
Directors of the Company, (iv) intentional misappropriation of property of the
Company or any subsidiary to the Employee's own use; (v) the commission by the
Employee of an act of fraud or embezzlement; (vi) conviction of the Employee for
a crime (excluding minor traffic offenses); or (vii) the failure of the Employee
because of illness or other incapacity to render any services or perform any
duties required pursuant to Section 1 hereof for any period of ninety (90)
consecutive days during the Employment Period or for shorter periods aggregating
more than six (6) months during the Employment Period provided, however, if the
Employee should leave the Company under the circumstances described in (vii), he
will be entitled to such benefits as provided in the then-current long- and
short-term disability plans.
6. Change of Control.
-----------------
6.1 The terms of the Severance Agreement shall govern the
Company's treatment of the Employee if there should be a Change of Control (as
defined therein).
7. Restricted Shares and Stock Options.
-----------------------------------
7.1 As of June 23, 1998, Employee has been granted options for
100,000 shares of the Company's stock, from the Company's 1988 Stock Option Plan
(the "Plan"). The strike price for these options will be the closing price of
the Company's stock on the New York Stock Exchange on June 23, 1998. These
options will be subject to the terms of the Plan and shall vest as follows: One
fourth on January 1, 2000; one fourth on January 1, 2001; one fourth on January
1, 2002; and one fourth on January 1, 2003.
-7-
<PAGE>
7.2 Upon shareholder approval of an appropriate plan, which
approval is contemplated being sought at the Company's January 1999 Annual
Meeting of Shareholders, Employee will be granted 25,000 shares of performance
restricted stock of the Company. Such stock shall vest, subject to its
performance requirements, one-third annually each on January 1, 2000, 2001, and
2002. If, for any reason, such a performance restricted stock plan is not
established, the Employee will be given an equivalent value amount of stock
rights in some other form, subject to similar vesting requirements. In the event
of Change of Control of the Company, the Employee shall immediately become fully
vested in his Restricted Shares and Stock Options pursuant to the term of those
plans.
8. Other Consideration. Employee shall receive a car allowance
-------------------
of $600 per month.
9. Assignments. This Agreement shall inure to the benefit of and
-----------
be binding upon the Company, its successors and assigns, and upon the Employee
and his heirs, estate, executors, administrators, and legal representatives. No
rights or obligations under this Agreement shall be assignable by the Employee,
except those which survive his death or disability which may be assigned upon
that occurrence.
10. No Third Party Beneficiaries. This Agreement does not create,
----------------------------
and shall not be construed as creating, any rights enforceable by any person not
a party to this Agreement, except with respect to salary or other payments or
benefits required to be paid after the death of the Employee pursuant to Section
5.1 and the Severance Agreement.
11. Headings. The headings of the sections hereof are inserted for
--------
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
12. Interpretation. In case any one or more of the provisions
--------------
contained in this Agreement shall, for any reason, be held to be invalid,
illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provisions of this
-8-
<PAGE>
Agreement, and this Agreement shall be construed as if such invalid, illegal, or
unenforceable provision had never been contained herein. If, moreover, any one
or more of the provisions contained in this Agreement shall for any reason be
held to be excessively broad as to duration, geographical scope, activity or
subject, it shall be construed by limiting and reducing it, so as to be
enforceable to the extent compatible with the applicable law as it shall then
appear.
13. Notices. All notices under this Agreement shall be in writing and
-------
shall be deemed to have been given at the time when mailed by registered or
certified mail, addressed to the address below stated of the party to which
notice is given, or to such changed address as such party may have fixed by
notice.
To the Company: ADVO, Inc.
One Univac Lane
Windsor, CT 06095
Attention: General Counsel
To the Employee: Mr. Gary Mulloy
One Univac Lane
Windsor, CT 06095
provided, however, that any notice of change of address shall be effective only
upon receipt.
14. Waivers. If either party should waive any breach of any provision
-------
of this Agreement, he or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
15. Complete Agreement; Amendments; Counterparts. The foregoing is the
--------------------------------------------
entire agreement of the parties with respect to the subject matter hereof and
may not be amended, supplemented, canceled, or discharged except by written
instrument executed by both parties hereto. This Agreement specifically
supersedes and replaces the agreement between the parties dated November 4,
1996, except that Agreement shall remain in full force and effect until the
commencement of the Employment Period. This agreement may be executed in
counterparts,
-9-
<PAGE>
each of which shall be an original copy and which together shall constitute one
and the same instrument.
16. Governing Law. This Agreement is to be governed by and construed in
-------------
accordance with the laws of the State of Connecticut, without giving effect to
principles of conflicts of law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ADVO, INC.
By: ROBERT KAMERSCHEN /s/
------------------------
Robert Kamerschen
GARY MULLOY /s/
------------------------
Gary Mulloy
-10-
<PAGE>
EXHIBIT 10 (n)
Following is a copy of the Executive Severance Agreement, dated as of October
17, 1995, by and between ADVO, Inc. and each of the following executive
officers:
Vince Giuliano
Julie A. Abraham
<PAGE>
EXHIBIT 10 (n)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"),is, made as of October
17, 1995, by and between ADVO, Inc. (the "Company") and ___________________ (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 tern 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 30% 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 any 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, than 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 purposes of this Agreement, no act on the part of the Executive shall be
deemed "intentional" if it was due primarily to an error in judgment or
negligence, but shall be deemed "intentional" only if done by the Executive not
in good faith and without reasonable belief that the Executive's action or
omission was in the best interests of the Company.
(f) "Date of Termination" means the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be; provided,
however, that if the Executive is Terminated by the Company other than for Cause
or for disability pursuant to Section 2(a)(ii), the Date of Termination will be
the date on which the Executive receives the Notice of Termination from the
Company; and provided further, if
3
<PAGE>
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 be not more than sixty (60) days
after the giving of such notice). The failure by the Executive to set forth in
the Notice of Termination any fact or circumstance which contributes to a
showing that the Executive is entitled to the benefits intended to be provided
by this Agreement will not constitute a waiver of any right of the Executive
hereunder or .otherwise preclude the Executive from later asserting such fact or
circumstance in enforcing the Executive's rights hereunder.
(k) "Severance Period" means the period of time commencing on the date
of an occurrence of a Change of Control and continuing until the earlier of (i)
the date which is one year following the occurrence of the Change of Control and
(ii) the Executive's death.
(l) "Subsidiary" means an entity, at least a majority of the total
voting power of the then-outstanding voting securities of which is held,
directly or indirectly, by the Company and/or one or more other Subsidiaries or,
for any entity that is not a corporation, at least a majority of the then-
outstanding capital interests of which is so held.
(m) "Term" means (A) the period commencing on the date hereof and
ending on the second anniversary of the date hereof; provided, however, that
commencing on the date one year after the date hereof, and on each annual
anniversary of such date (such date and each annual anniversary thereof shall be
hereinafter referred to
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 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
6
<PAGE>
highest rate in effect at any time within the 90-day period preceding the date
of the first occurrence of a Change of Control, and (B) an amount equal to the
greatest amount of Incentive Pay received by the Executive during any calendar
year or portion thereof from and including the third calendar year prior to the
first occurrence of a Change of Control; and
(ii) For the period of one year from the Date of Termination,
the Executive shall be eligible for participation in and shall receive all
benefits under such benefit plans, practices, policies and programs of the
Company that provide medical, prescription dental, or life insurance coverage,
with the costs of such participation to be paid by the Company to the same
extent as prior to the Executive's Termination. In the event that such continued
participation is not allowed under the terms and provisions of such plans or
programs, then in lieu thereof, the Company shall acquire individual 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 counterclaim in respect of
any claim, debt, or obligation against any payment to or benefit for the
Executive provided for in this Agreement.
(c) Without limiting the rights of the Executive at law or in equity,
if the Company fails to make any payment or provide any benefit required to be
made or provided under this Agreement (including under this Section 3 or Section
6) on a timely basis, the Company will pay interest on the amount or value
thereof at an annualized rate of interest equal to the so-called composite
"prime rate" as quoted from time to time during the relevant period in the
Northeast Edition of The Wall Street Journal. Such interest will be payable as
-----------------------
it accrues on demand. Any change in such prime rate will be effective on and as
of the date of such change.
(d) Notwithstanding any other provision hereof, the parties,
respective rights and obligations under this Section 3 and under Sections 4 and
6 will survive any termination or expiration of this Agreement following a
Change of Control or any Termination following a Change of Control for any
reason whatsoever.
4. Excise and Other Taxes. The Executive shall bear -all expense of, and
----------------------
be solely responsible for, all federal, state, local or foreign taxes due with
respect to any payment received hereunder, including, without limitation, any
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the Code); provided, 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 28OG 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 W 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 time to retain counsel of the
Executive's choice, at the expense of the Company, to advise
8
<PAGE>
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 an 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 writing signed by the Executive and the Company. No waiver by either party
hereto at
10
<PAGE>
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
_________________________
[ Executive ]
11
<PAGE>
EXHIBIT 10 (o)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of
October 17, 1995, by and between ADVO, Inc. (the "Company") and David M. Stigler
(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 any 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, than 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 purposes of this Agreement, no act on the part of the Executive shall be
deemed "intentional" if it was due primarily to an error in judgment or
negligence, but shall be deemed "intentional" only if done by the Executive not
in good faith and without reasonable belief that the Executive's action or
omission was in the best interests of the Company.
(f) "Date of Termination" means the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be; provided,
however, that if the Executive is Terminated by the Company other than for Cause
or for disability pursuant to Section 2(a)(ii), the Date of Termination will be
the date on which the Executive receives the Notice of Termination from the
Company; and provided further, if
3
<PAGE>
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 be not more than sixty (60) days
after the giving of such notice). The failure by the Executive to set forth in
the Notice of Termination any fact or circumstance which contributes to a
showing that the Executive is entitled to the benefits intended to be provided
by this Agreement will not constitute a waiver of any right of the Executive
hereunder or otherwise preclude the Executive from later asserting such fact or
circumstance in enforcing the Executive's rights hereunder.
(k) "Severance Period" means the period of time commencing on the date of
an occurrence of a Change of Control and continuing until the earlier of (i) the
date which is one and one/half years following the occurrence of the Change of
Control, and (ii) the Executive's death.
(l) "Subsidiary" means an entity, at least a majority of the total voting
power of the then-outstanding voting securities of which is held, directly or
indirectly, by the Company and/or one or more other Subsidiaries or, for any
entity that is not a corporation, at least a majority of the then-outstanding
capital interests of which is so held.
(m) "Term" means (A) the period commencing on the date hereof and ending on
the second anniversary of the date hereof; provided, however, that commencing on
the date one year after the date hereof, and on each annual anniversary of such
date (such date and each annual anniversary thereof shall be hereinafter
referred to as the "Renewal
4
<PAGE>
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 a 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 1-1/2 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
6
<PAGE>
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
7
<PAGE>
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, 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 orobligations 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
10
<PAGE>
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
DAVID M. STIGLER /s/
--------------------
David M. Stigler
11
<PAGE>
EXHIBIT 10 (p)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of
July 1, 1997 by and between ADVO, Inc. (the "Company") and Mardelle W. Pena
(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
10
<PAGE>
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 /s/ ROBERT KAMERSCHEN
---------------------
Robert Kamerschen
/s/ MARDELLE W. PENA
--------------------
Mardelle W. Pena
11
<PAGE>
EXHIBIT 10 (q)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of
July 30, 1997 by and between ADVO, Inc. (the "Company") and Henry S. Evans (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
10
<PAGE>
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 /s/ ROBERT KAMERSCHEN
---------------------
Robert Kamerschen
/s/ HENRY S. EVANS
------------------
Henry S. Evans
11
<PAGE>
EXHIBIT 10 (r)
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of
August 6, 1997 by and between ADVO, Inc. (the "Company") and B. Kabe Woods (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
10
<PAGE>
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 /s/ ROBERT KAMERSCHEN
----------------------
Robert Kamerschen
/s/ B. KABE WOODS
----------------------
B. Kabe Woods
11
<PAGE>
EXHIBIT 10 (s)
CONSULTING AGREEMENT
--------------------
AGREEMENT made this 1st day of December, 1998, by and between ADVO, Inc. a
Delaware corporation (the "Company"), and Robert J. Kamerschen (the
"Consultant").
RECITAL
-------
The Company and the Consultant (together, the "Parties") desire to
supersede and replace an employment agreement between the Company and the
Consultant dated May 29, 1996, (the "Contract") by creating this new agreement
(the "Agreement") to define the future relationship between the Parties.
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto hereby agree as follows:
1. Positions and Responsibilities.
------------------------------
1.1 During the Agreement Period (as hereinafter defined), the Company
shall retain the Consultant in the capacity as internal consultant to the
Company. The role of 'internal consultant' shall mean the provision of advice,
counsel and assistance on a senior level to the Company on a reasonable basis,
as requested by the Company. Specifically, in addition to any other consulting,
during this Agreement Period the Consultant will fully cooperate with, and be
reasonably available to consult in any manner reasonably requested relative to,
including but not limited to, the full transition of his successor(s) as Chief
Executive Officer and Chairman of the Board of Directors of the Company, and the
Company's postal strategy. During the Agreement Period, and without additional
compensation, the Consultant shall serve in such office or offices (including as
a Director and Board Committee member) of the Company and its subsidiaries to
which he may be elected or appointed from time to time. The Consultant shall
report on his services on a regular basis to the Company.
1.2 The Consultant is currently Chairman of the Board of the Company.
He shall continue to serve as such solely at the discretion of the Board of
Directors, and nothing in the Agreement shall be taken to affect or guarantee
such tenure.
2. Agreement Period.
----------------
2.1 The Agreement Period shall be the period commencing as of January
1, 1999 and continuing until December 31, 2008.
<PAGE>
2.2 In the event of the death of the Consultant prior to any other
termination of this relationship hereunder or of the Agreement Period (i) his
employment hereunder and the Agreement Period shall terminate on the date of his
death (ii) except as expressly provided in Section 5.3 hereof, the Company shall
not have any obligation to pay any salary or provide any benefits under this
Agreement to the heirs, estate, executors, administrators or legal
representative of the Employee in respect of any period after the death of the
Employee.
3. Compensation.
------------
3.1 The Company shall pay to the Consultant for the services to be
rendered by the Consultant hereunder and as consideration for the termination of
the Contract, annual compensation in the amount of Three Hundred Fifty Thousand
Dollars ($350,000), payable in equal installments no less frequently than every
two weeks. Such compensation shall not be increased or decreased during the
Agreement Period. The Consultant shall not be entitled to participate in any
Incentive Compensation Plan (the "Compensation Plan") or its successors which
the Company has adopted. The Consultant shall not be entitled to any grants of
stock options, restricted stock, stock appreciation rights or any similar
benefit being given to senior executives of the Company, except as noted in
Section 3.6.
3.2 The Consultant shall be entitled to participate in, and receive
benefits from, any insurance, medical, disability, stock purchase or any other
employee benefit plan of the Company which may be in effect at any time during
the Agreement Period and which shall be generally available to senior executives
of the Company.
3.3 The Company shall reimburse the Consultant for all reasonable and
necessary business expenses incurred by him in the course of performing his
duties and services described in Section 1 hereof against the presentation by
the Consultant of appropriate vouchers therefore or other evidence as may be
reasonably requested by the Company.
3.4 As long as the Consultant maintains an office at the Company's
headquarters, but at the latest until January 1, 2000, the Consultant shall
receive a housing allowance of $3,346.19 per month as long as this Agreement is
in effect, which amount shall increase annually effective January 1 of each year
by the same percentage as the United States City Average Consumer Price Index
for all Urban Consumers for All Items increased in the previous year. Upon
termination of the Consultant's housing allowance, his auto allowance from the
Company shall also cease.
3.5 Starting January 1, 2000, the Consultant shall be given $75,000
annually, before withholding, to be used for the Consultant to have an
appropriate operating budget from which to secure an office and related
services, including secretarial services, from which to work. This will remain
in effect for two years, until December 31, 2001. If the Consultant vacates his
office at the Company's headquarters prior to January 1, 2000, he will be given
prorated office-related compensation for the part of the year 1999 in which he
is out
2
<PAGE>
of his Company office. The Consultant shall vacate his Company office no later
than January 1, 2000. If the Consultant obtains full-time employment prior to
December 31, 2001, this allowance will be terminated immediately, on a pro rata
basis.
3.6 Effective no later than January 21, 1999, and to the degree
practicable as of today's date, the Consultant shall receive a grant of 150,000
stock options of the Company, subject to the terms and conditions of the
appropriate plans. Those options shall vest one-quarter annually, starting from
the first anniversary of the grant date.
4. Other Activities During and After the Agreement Period.
------------------------------------------------------
4.1 The Consultant shall not at any time during or after the
Agreement Period (regardless of the reason for the termination thereof),
directly or indirectly divulge, furnish, use, publish or make accessible to any
person or entity any Confidential Information (as hereinafter defined) except as
properly required in the conduct of the Company's business. Any records of
Confidential Information prepared by the Consultant or which comes into the
Consultant's possession are and remain the property of the Company and upon
termination shall be either left with or returned to the Company. The term
"Confidential Information" shall mean information disclosed to the Consultant or
known, learned, created or observed by him as a consequence of or through his
employment by the Company or any subsidiary of the Company which is
confidential, secret or otherwise not generally known in the relevant trade or
industry, and pertains directly or indirectly to the business activities,
products, services or processes of the Company, any subsidiary of the Company or
any of their clients, customers or suppliers, including but not limited to
information concerning mailing lists, advertising, sales promotion, publicity,
sales data, research, copy, other printed matter, tear sheets, artwork,
photographs, films, reproductions, layout, finances, accounting, methods,
processes, trade secrets, business plans, client lists and records, potential
client lists, and client billing.
4.2 During the Agreement Period, and the period of one year
thereafter, the Consultant shall not directly or indirectly engage in any
business (whether as a consultant, officer, director, owner, employee, agent,
partner or other participant) with or for, be financially interested in (whether
as a lender, guarantor or otherwise), represent or otherwise render assistance
to: any person or entity who or which competes or intends to compete, or who or
which is affiliated (by reason of common control, ownership or otherwise) with
the business then conducted by the Company provided, however, that the foregoing
shall not be deemed to prevent the Employee from investing in securities if such
class of securities in which the investment is so made is listed on a national
securities exchange or is issued by a company registered under Section 12(g) of
the Securities Exchange Act of 1934 or subject to the obligations of Section
15(d) of that Act, so long as such investment holdings do not, in the aggregate,
constitute more than 1% of the voting stock of any company's securities. This
paragraph does not include the Consultant's current board memberships.
4.3 The Consultant will not, during the Agreement Period and one year
thereafter, hire or offer to hire or entice away or in any other manner persuade
or attempt to persuade, either in the Consultant's individual capacity or as
agent for another, any officers,
3
<PAGE>
employees, or agents of the Company or any subsidiary to discontinue their
relationship with the Company or any subsidiary, nor divert or attempt to divert
from the company or any subsidiary any business whatsoever by influencing or
attempting to influence any customer or supplier of the Company or any
subsidiary.
4.4 The Consultant acknowledges that he has been employed for his
special talents and that his termination of this relationship with the Company
would seriously hamper the business of the Company. The Consultant agrees that
the Company shall be entitled to injunctive relief, in addition to all remedies
permitted by law, to enforce the provisions of this Section 4. The Consultant
further acknowledges that his training, experience and technical skills are of
such breadth that they can be employed to advantage in other areas which are not
competitive with the present business of the Company and consequently the
foregoing obligation will not unreasonably impair his ability to engage in
business activity after the termination of this Agreement.
4.5 Other than the obligations contained in this Section 4, and his
duties under Section 1.1, nothing in this Agreement shall preclude the
Consultant from engaging in any activity.
5. Termination.
-----------
5.1 This Agreement can be terminated by the Company prior to the end
of the Agreement Period only for Cause.
5.2 For purposes of this Agreement, the term "Cause' shall mean: (i)
willful failure by the Consultant to comply with any of the material terms of
this Agreement; (ii) willful engagement by the Consultant in his capacity as a
consultant to the Company or any subsidiary, in gross misconduct injurious to
the Company or any subsidiary; (iii) intentional misappropriation of substantial
property of the Company or any subsidiary to the Employee's own use; (iv) the
commission by the Employee of an act of fraud or embezzlement from the Company,
or (v) conviction of the Employee for a crime (excluding minor traffic offenses)
the public knowledge of which would bring harm to the Company because of the
Consultant's relationship to the Company.
5.3 If the Consultant should die prior to the end of the Agreement
Period, his widow shall be paid at the annual rate of $175,000 until the earlier
of the end of the Agreement Period or her death. She shall not be entitled to
any other rights or benefits under this Agreement, but she shall be entitled to
all relevant rights then currently available pursuant to COBRA, stock plans,
etc.
6. Change of Control.
-----------------
6.1 The Consultant hereby fully renounces any and all rights that
might have become available to him under his Executive Severance Agreement, and
agrees that said agreement is hereafter null and void.
4
<PAGE>
6.2 The Company agrees that this Agreement shall be fully binding on
any successor and assign of the Company, for the full Agreement Period. If that
is for some reason not possible, the Company shall create a fund adequate to
fully cover the Company's financial obligations under this Agreement.
7. Restricted Shares and Options. In the event of Change of Control of
-----------------------------
the Company (as defined by the Plans), or the demise of the Consultant, the
Consultant or his estate shall immediately become fully vested in his Restricted
Shares and Stock Options pursuant to the term of those Plans.
8. Assignments. This Agreement shall inure to the benefit of and be
-----------
binding upon the Consultant and his heirs, estate, executors, administrators and
legal representatives. No rights or obligations under this Agreement shall be
assignable by the Consultant, except those which survive his death or disability
which may be assigned upon that occurrence.
9. No Third Party Beneficiaries. This Agreement does not create, and
----------------------------
shall not be construed as creating, any rights enforceable by any person to a
party to this Agreement, except with respect to salary or other payments or
benefits required to be paid after the death of the Consultant pursuant to
Section 5.3.
10. Headings. The headings of the sections hereof are inserted for
--------
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
11. Interpretation. In case any one or more of the provisions contained
--------------
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein. If, moreover, any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, it shall be construed
by limiting and reducing it, so as to be enforceable to the extent compatible
with the applicable law as it shall then appear.
12. Notices. All notices under this Agreement shall be in writing and
-------
shall be deemed to have been given at the time when mailed by registered or
certified mail, addressed to the address below stated of the party to which
notice is given, or to such changed address as such party may have fixed by
notice:
To the Company: ADVO, Inc.
One Univac Lane
Windsor, CT 06095
Attention: General Counsel
5
<PAGE>
To the Consultant: Mr. Robert Kamerschen
204 Parade Hill Road
New Canaan, CT 06840
provided, however, that any notice of change of address shall be effective only
upon receipt.
13. Waivers. If either party should waive any breach of any provision of
-------
this Agreement, he or it shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
14. Complete Agreement; Amendments. The foregoing is the entire agreement
------------------------------
of the parties with respect to the subject matter hereof and may not be amended,
supplemented, canceled or discharged except by written instrument executed by
both Parties hereto. Upon the commencement of the Agreement Period, this
Agreement specifically supersedes and replaces the Contract between the Parties
dated May 29, 1996, as well as the Executive Severance Agreement between the
Parties.
15. Governing Law. This Agreement is to be governed by and construed in
-------------
accordance with the laws of the State of Connecticut, without giving effect to
principles of conflicts of law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ADVO, INC.
By: GARY MULLOY /s/
----------------------
Gary Mulloy, President
ROBERT KAMERSCHEN /s/
---------------------
Robert Kamerschen
6
<PAGE>
EXHIBIT 13
Financial Contents
Selected Financial Data 22
Financial Report 23
Consolidated Statements of Operations 28
Consolidated Balance Sheets 29
Consolidated Statements of Cash Flows 30
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) 31
Notes to Consolidated Financial Statements 32
Report of Independent Auditors 40
Report of Financial Responsibility 40
Corporate Information 41
ADVO, INC. 21
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
September 26, September 27, September 28, September 30, September 24,
(In millions, except per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Revenues $ 1,046.5 $ 1,016.5 $ 986.2 $ 1,011.9 $ 920.3
Operating income 72.1 58.5 24.8(2) 46.3 39.7
Income from continuing operations 35.6 26.8 11.3 30.9 24.6
Net income 35.6 26.8 3.1 25.0 25.2
Earnings per common share from continuing
operations--assuming dilution (1) 1.55 1.09 .47 1.33 1.03
Earnings per common share--
assuming dilution (1) 1.55 1.09 .13 1.07(3) 1.05
Dividends declared per share -- -- 10.025(4) .10 .095
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average diluted shares 23.1 24.7 24.1 23.3 23.9
===========================================================================================================================
<CAPTION>
September 26, September 27, September 28, September 30, September 24,
(In millions) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and marketable securities $ 8.7 $ 26.0 $ 13.3 $ 54.5 $ 71.1
Total assets 219.2 208.6 185.1 234.2 225.7
Long-term debt 167.8 140.7 161.1 -- --
Stockholders' equity (deficiency) (74.9) (59.9) (85.2) 130.4 108.0
===========================================================================================================================
<CAPTION>
Year ended Year ended Year ended Year ended Year ended
September 26, September 27, September 28, September 30, September 24,
(In millions) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other Financial Data
EBITDA (5) $ 95.7 $ 76.1 $ 51.7 $ 60.6 $ 53.0
===========================================================================================================================
</TABLE>
(1) Earnings per common share from continuing operations and earnings per common
share -- assuming dilution have been restated for fiscal years 1997-1994 in
accordance with SFAS No. 128. (See Note 8 to the consolidated financial
statements).
(2) Reflects nonrecurring charges of $12.1 million. (See Note 12 to the
consolidated financial statements).
(3) Reflects a charge for the cumulative effect of an accounting change for
postemployment benefits of $1.5 million, net of tax, or $.07 per share.
(4) Reflects a special $10 per share dividend declared in January of 1996. (See
Note 7 to the consolidated financial statements).
(5) Represents income from continuing operations before interest, taxes,
depreciation and amortization, and nonrecurring charges in fiscal 1996
("EBITDA"). Although EBITDA is not a measure of liquidity or performance
calculated in accordance with generally accepted accounting principles
("GAAP"), the Company believes that EBITDA is an indicator and measurement
of its debt service ability.
22 ADVO, INC.
<PAGE>
Financial Report
This section should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto.
Financial Overview
ADVO, Inc. ("ADVO" or the "Company") concluded another year of growth. Fiscal
1998 was highlighted by record revenues, operating income and diluted earnings
per common share. Revenues increased 3%, operating income rose 23% and diluted
earnings per common share reached $1.55, reflecting growth of 42% over fiscal
1997. Underlying fiscal 1998 results were the growth in average pieces per
package and revenue per thousand pieces, which represent key statistics of the
Company, strict fixed cost controls, improved branch operating efficiencies and
a strong performance from the Company's A.N.N.E. (ADVO National Network
Extension) brokered distribution program.
Other fiscal 1998 highlights included the acquisition of The Mailhouse, Inc.,
a cooperative coupon envelope mail company which creates and distributes
cost-effective targeted coupons in a distinctive envelope format for local
neighborhood merchants via an extended network of franchise owners. Such company
was renamed MailCoups, Inc. ("MailCoups") and operates as a subsidiary of ADVO.
This acquisition also contributed positively to ADVO's fiscal 1998 results.
The Company continued to purchase its common stock under the buyback program
announced on September 29, 1997. Initially, the Company purchased 1.9 million
shares from Warburg, Pincus Capital Partners, L.P. ("Warburg") (see Note 7 to
the consolidated financial statements) and an additional 0.8 million shares
throughout fiscal 1998 on the open market. At the end of the current fiscal
year, the Company announced a new stock buyback program for the purchase of up
to 1.0 million shares throughout fiscal 1999. This new program includes 0.4
million shares remaining from the Company's previous buyback program.
Fiscal 1998 Compared to Fiscal 1997
Revenues. Fiscal 1998 revenues increased $30.0 million over fiscal 1997 to
$1,046.5 million. The 3.0% revenue growth was driven by an increase in revenue
per thousand pieces, the growth in average pieces per package, the volume growth
associated with the Company's A.N.N.E. brokered distribution program, as well as
the acquisition of MailCoups. The increase in revenue per thousand pieces of
0.7% was attributable to increases in product weights associated with the
Company's preprint customers, shifts in product mix and a general price increase
initiated early in fiscal 1998. Average pieces per package increased 1.9% to
8.69 in fiscal 1998 from 8.53 in fiscal 1997. Total shared mail packages
declined 1.8% to 3.1 billion when compared to the previous fiscal year as a
result of the Company's strategic decision to discontinue its "second-in-home
date" program in the Detroit market.
Operating Expenses. Cost of sales as a percentage of revenue decreased from
74.5% in fiscal 1997 to 73.5% in fiscal 1998. The decrease in cost of sales as a
percentage of revenue was the result of efficiencies and cost containment in the
Company's branch operations, lower postage expense and the flow through of the
price increase mentioned above. Cost of sales, in absolute terms, increased
$11.8 million over the prior fiscal year. This increase was attributable to
higher brokered print expense, as well as higher distribution and delivery costs
incurred as a result of the volume growth in A.N.N.E. and the acquisition of
MailCoups. These increases were somewhat offset by lower postage expense as a
result of the strategic reduction in shared mail packages.
Selling, general and administrative costs, including the provision for bad
debts, as a percentage of revenue, decreased from 19.7% for the year ended 1997
to 19.6% for the year ended 1998. Fiscal 1998 selling, general and
administrative costs were $205.1 million, representing a $4.6 million increase
over the prior year. The increase was comprised of a $9.0 million increase in
general and administrative expenses offset by a $3.5 million decrease in selling
expense and $.9 million attributable to lower bad debt expense. Fewer sales
associates and lower advertising and promotional expenditures, as well as strict
cost controls contributed to the decrease in selling expense in the current
fiscal year. The general and administrative cost increase of $9.0 million
year-over-year was primarily the result of depreciation related to new systems,
software development and other technological enhancements, as well as
remediation costs associated with the Year 2000 program. Higher compensation
related expenses also contributed to the increase in general and administrative
expenses. Offsetting these increases, to a degree, were the Company's overall
cost control initiatives.
Operating Income. As a result of the aforementioned, the Company reported a
$13.6 million increase in operating income to $72.1 million in fiscal 1998
compared to $58.5 million in fiscal 1997, representing a 23.3% increase over the
prior year. As a percentage of revenue, operating income increased from 5.8% in
the fiscal year ended 1997 to 6.9% in the current fiscal year.
Interest Expense. Interest expense relating to the credit facilities totaled
$14.0 million for fiscal 1998 and $14.8 million for fiscal 1997. The decrease in
interest expense was the result of lower interest rates under a renegotiated
credit agreement, even though the Company's overall debt balance was higher
throughout the current year when compared to the prior year.
Income Taxes. The Company's effective tax rate was approximately 39% in both
fiscal 1998 and 1997.
Earnings Per Common Share. Earnings per common share -- assuming dilution
increased 42.2% to $1.55 per share in fiscal 1998 from $1.09 per common share in
fiscal 1997 primarily related to the Company's improved operating results. The
Company adopted Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("EPS") during the first quarter of fiscal 1998. As such, prior year
EPS amounts have been restated to conform to the provisions of the new
statement.
ADVO, INC. 23
<PAGE>
Financial Report
Weighted average common and diluted shares decreased from the prior period
primarily due to the Company's stock buyback program, including the purchase of
approximately 1.9 million shares of its common stock from Warburg during the
first quarter of fiscal 1998.
Fiscal 1997 Compared to Fiscal 1996
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 period ended September 28, 1996 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, general and administrative costs
of the discontinued segment.
Continuing Operations
Revenues. Fiscal 1997 revenues increased $30.3 million to $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 3.1 billion, 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 ended
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 Common Share. Earnings per common share from continuing operations
- -- assuming dilution increased from $.47 in fiscal 1996 to $1.09 in fiscal 1997.
Adjusting for the nonrecurring charges in fiscal 1996, earnings per common share
from continuing operations -- assuming dilution 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.
Financial Position
Working Capital. The Company's working capital ratio remained consistent with
the prior year at approximately 1.0. Decreases in current assets of $4.8 million
were offset by decreases in current liabilities of $4.5 million. The decrease in
current assets was caused mainly by a decline in cash and cash equivalents of
approximately $17.2 million, offset in part by an increase in accounts
receivable of $13.5 million. The change in cash and cash equivalents is
attributable to capital spending for equipment, acquisitions, and treasury stock
purchases under the Company's
24 ADVO, INC.
<PAGE>
Financial Report
buyback program, offset to a degree by cash provided by operating activities and
net borrowings under the Company's credit agreement. The increase in accounts
receivable is a result of revenue growth and the timing of customer payments.
Revenue growth alone for the last month of the year increased substantially over
the prior year and therefore accounted for a large part of the increase in
accounts receivable. The change in current liabilities is related to decreases
in accounts payable associated with changes in the timing of vendor payments to
take advantage of payment term discounts, decreases in accrued compensation and
benefits associated with a change in the payment structure to the sales force,
and reductions in federal and state taxes payable due to the timing of estimated
tax payments. These decreases were offset in part by an increase in the current
portion of long-term debt reflective of scheduled debt repayments.
Property, Plant and Equipment. Acquisitions of property, plant and equipment
totaled $29.3 million for fiscal year 1998. A majority of these purchases were
aimed at improving operating performance and efficiencies throughout the
Company. The Company continued to transition to new computerized mail sorters,
which are more efficient and effective in their targeting capabilities. The
Company also continued to upgrade computer hardware throughout the Company to
support the requirements of the financial and operational software currently
being developed, as well as allow for the implementation of a wide area network.
Some of these projects are designed to address the Company's system needs, while
simultaneously addressing Year 2000 issues. Of the total fiscal 1998 property,
plant and equipment expenditures, approximately $2.2 million relates to the
development of a human resource/payroll system, which was accelerated in order
to be Year 2000 compliant. The total cost of this system is estimated to be
approximately $4.0 million.
The Company's fiscal 1999 capital plan estimates expenditures to be
approximately $38.0 million. Cash provided by operating activities is the
expected source of financing for these capital expenditures, as it was in fiscal
1998.
Stockholders' Deficiency. Stockholders' deficiency increased $15.0 million to
$74.9 million at September 26, 1998 from $59.9 million at September 27, 1997.
The increase in the net deficiency was primarily attributable to the $60.8
million of common stock purchased by the Company, offset by net income of $35.6
million, $8.9 million of employee stock plan activity and related tax benefits,
and $1.3 million from the amortization of deferred compensation.
The treasury stock purchases of $60.8 million during fiscal 1998 are
comprised of $55.2 million related to buyback programs and $5.6 million pursuant
to elections by employees to satisfy withholding requirements under the
Company's restricted stock and stock option plans.
Purchases of common stock for treasury of $55.2 million under the Company's
buyback programs include $20.4 million of open market purchases and $34.8
million purchased from Warburg. During the first quarter of fiscal 1998, the
Company increased its previously announced stock repurchase program to allow for
the purchase of approximately 1.9 million shares of common stock for treasury
from Warburg, the Company's largest shareholder at September 27, 1997, for $34.8
million. The Company financed this transaction through available credit
commitments under its renegotiated credit agreement.
On September 8, 1998, the Company announced a new stock buyback program for
up to 1.0 million shares through fiscal 1999. This new program includes
approximately 0.4 million shares remaining from the Company's previous buyback
program. As of September 26, 1998 there are approximately 0.8 million shares
available for purchase under the buyback program.
Liquidity. Cash flows generated from operating activities are the Company's
primary source of liquidity to fund working capital and investing activities.
The Company also has available commitments under its credit agreement which may
be used to fund operating activities.
Cash flows generated from operating activities decreased by $12.2 million
from the prior year. The growth in operating income was more than offset by the
year-over-year increase in accounts receivable as a result of revenue growth and
timing of customer payments. Also contributing were the decrease in accounts
payable due to the decision to take advantage of vendor discounts and the
decline in accrued compensation and benefits specifically related to changes in
the payment structure of the sales force. Cash provided by operating activities
during fiscal 1997 increased by $22.6 million over fiscal 1996. The major
factors affecting the increase were; the year-over-year change in accounts
receivable and accounts payable due to the timing of customer receipts and
payments, and the increase in accrued compensation related to the associate
incentive program as a result of improved operating results.
Overall cash and cash equivalents decreased $17.2 million from the prior
year. This decrease was mainly attributable to cash used in investing and
financing activities, offset in part by cash generated from operating
activities. The Company's investments included $29.3 million for property, plant
and equipment purchases and $10.7 million related to the acquisition of
MailCoups. Financing activities of the Company included $60.8 million in
treasury stock purchases, which were financed in part by increased net
borrowings of $33.2 million under the credit agreement.
Financing Arrangements. On September 29, 1997, the Company renegotiated the
terms of its credit agreement dated March 4, 1996. The 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
ADVO, INC. 25
<PAGE>
Financial Report
reducing revolving line of credit, maturing at various dates through September
2003. Available commitments under the Amended Agreement totaled $93.5 million as
of September 26, 1998. Subsequent to year end, the Company had additional net
borrowings of $12 million through fiscal month end November 1998.
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). Under the current agreement the "applicable margin" ranges
from .50% to 1.50% on the LIBOR rate and 0% to .25% on the base rate. Under the
previous agreement in effect during fiscal 1997, the applicable margin ranged
from 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 fiscal
1998, the Company entered into two separate three-year interest rate swap
transaction agreements to hedge notional amounts totaling $100 million. The rate
is fixed at approximately 5.7%. The Company believes the interest rate swap
transaction agreements limit substantial risk should interest rates fluctuate.
The interest rate swap agreements had no material effect on interest expense
during fiscal 1998. During fiscal 1996, the Company entered into two separate
two-year Interest Rate Collar Agreements to hedge notional amounts totaling $150
million. The cap rates ranged from 7.39% to 8.0% with the floor rate ranging
from 5.0% to 5.5%. The interest rate collar agreements had no effect on interest
expense in either fiscal 1998 or 1997.
The total fiscal 1999 maturities of long-term debt of $16.2 million, as well
as future scheduled repayments, are expected to be paid through funds generated
from ongoing operations.
Market Risk. The Company's interest expense is sensitive to changes in the
general level of interest rates. In this regard, changes in interest rates
affect the interest paid on its debt. To mitigate the impact of interest rate
fluctuations, the Company maintains interest rate swap agreements on notional
amounts totaling $100 million, which is currently over 50% of its outstanding
debt balance. (See Financing Arrangements.)
The Company believes that the interest rate swap agreements limit substantial
risk if interest rates should fluctuate. If interest rates should change by 2%
in 1999 from those rates in effect at September 26, 1998, assuming no change in
the outstanding debt balance and considering the effects of the Company's
interest rate swap agreements, the effect on interest expense would be
immaterial. These amounts are determined by considering the hypothetical
interest rates on the Company's borrowing cost and interest rate swap
agreements. This analysis does not consider the effects of actions management
would take if interest rates were to fluctuate by such a significant degree. The
sensitivity analysis also assumes no changes in the Company's financial
structure.
Year 2000 Readiness. The Company has been addressing the effect of the Year
2000 issue on computer and production systems. The Year 2000 issue arose because
many systems, application software, facilities and equipment were constructed/
written with two, rather than four, digits to identify the appropriate year. On
or before January 1, 2000, these systems may incorrectly process critical data
or stop processing altogether.
State of Readiness
At the beginning of 1998, the Company established a Year 2000 program management
office comprised of dedicated project managers and key resources from various
strategic process areas within the Company. The team's objective has been to
coordinate and identify systems, applications, processes and software programs
that will be required to be modified or replaced in order for the Company's
computer and production systems to function properly with respect to dates in
the Year 2000 and thereafter.
After the initial assessment, the team identified three areas of compliance
which are affected by the Year 2000 issue; information technology ("IT")
systems, non-IT systems (such as production facilities and machinery containing
embedded systems) and third parties (i.e., vendors, customers and business
partners, and other parties that provide services to the Company). The team
identified five phases to resolve the Year 2000 issue for the three compliance
areas mentioned above: 1) identification of systems, both IT and non-IT, and
third parties, 2) assessment and analysis, 3) modification or replacement, 4)
testing, and 5) implementation.
Phase 1 was completed by February 1998 and the Company is concurrently
working on Phases 2,3,4 and 5 for specific sub-categories within the three
compliance areas listed above. The Company is currently proceeding on schedule
in its overall Year 2000 program and is approximately 40% complete as of
November 30, 1998. The remainder of the project has been targeted for staggered
completion ending no later than September 1999. The Company will continue to
utilize both internal and external resources to complete the Year 2000
modifications and/or replacements.
The Company's analysis of IT systems included mainframe and client server
applications, the computer desktop (personal computers and desktop software) and
the technical architecture and infrastructure (i.e., network, servers, e-mail).
All mainframe and client server applications have been assessed and plans have
been put in place for the required conversion of those computer programs.
Several converted programs have been tested and placed into operation. In
addition, the Company is making a concerted effort to update its computer
desktops and technical infrastructure by updating non-compliant components.
26 ADVO, INC.
<PAGE>
Financial Report
The Company is proceeding in accordance with its plans to ensure all IT
systems are compliant and expects to have sub-categories completed by various
dates through September 1999.
The Year 2000 issue also affects certain aspects of the Company's facilities
and production equipment containing embedded technology. While the Company has
largely completed its assessment of these non-IT systems, remediation and
testing are scheduled to be completed by various dates through September 1999.
As part of the third party relationship assessment, the Company is sending
out questionnaires and surveying third parties who were identified in Phase 1 to
ensure their products, services and interfaces are in compliance or expected to
be in compliance no later than September 1999. The Company is actively pursuing
responses from the remainder of those third parties which have not responded or
whose responses were deemed unsatisfactory. The Company is developing
contingency plans to mitigate exposure resulting from non-compliance of third
parties, such as considering the substitution of vendors in the event that a
vendor provides an unacceptable response.
Costs
The Company's total cost of modifying the required systems for Year 2000
compliance is currently estimated from inception in fiscal 1998 through
completion in September 1999 to be approximately $12 million and will be
expensed as incurred. Of these costs, $3.2 million were incurred during fiscal
1998. These costs have been budgeted and will be funded through the shifting of
existing resources through 1999 and by cash provided from operating activities.
The process of evaluating the Company's systems, especially those which contain
embedded technology, and third party relationships is an ongoing process and,
therefore, estimated costs may increase as the project progresses. Costs
associated with replacements of systems will be capitalized under the Company's
normal capitalization policy. (See discussion under Property, Plant and
Equipment).
Risks and Contingency Plans
The Company's greatest risk for material impact lies in the potential disruption
of its service delivery process through the United States Postal Service
("USPS"). Although the USPS has expressed to the Company its intention to be
Year 2000 compliant, the failure of the USPS to achieve Year 2000 compliance
could have an adverse effect on the operation of the Company's business,
financial position, results of operations, and cash flows. Because the number of
scenarios is extensive, it is not possible to assess them all; however, the
severity of the impact could vary widely. It should be noted that approximately
85% of ADVO's mail bypasses almost all of the USPS' systems and is delivered
directly by ADVO to the USPS' local post offices for carrier distribution.
Therefore, the Company has somewhat mitigated its risk. In addition, in order to
further mitigate any material effects, the Company is continually monitoring the
USPS' Year 2000 progress through monthly status meetings, and eventually will
include the testing of common interfaces.
The Company also relies on print vendors for the printing of certain direct
mail products. The Company has sent out letters requiring certification from all
print vendors ensuring they are Year 2000 compliant. The failure of all of the
Company's print vendors could have a material adverse effect on the Company.
Unlike the USPS, the Company will identify alternate sources of suppliers for
similar print services through the contingency planning process.
Currently, the Company is developing formal contingency plans for
non-compliance that could have an adverse effect on the Company's business,
financial position and results of operation. These plans will continue to be
refined as the Company completes the evaluation, modification and/or replacement
of its IT and non-IT systems and as it receives and evaluates information from
third parties.
The Company currently believes that with timely modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer and production systems and
will not have a material impact on the Company's consolidated financial position
or results of operations. The project is estimated to be completed no later than
September 1999. At this point, the Company intends to have its internal
application systems, technical infrastructure, building control systems and
production equipment and third party relationships/interfaces fully Year 2000
compliant.
The implementation, modifications and/or replacements, effectiveness,
estimated costs and the date on which the Company believes it will complete the
Year 2000 compliance efforts are based on management's best estimates at the
present time. These estimates were derived utilizing numerous assumptions of
future events including continued availability of certain resources, third party
remediation plans, and other factors. However, due to the inherent complexity of
the issues, possible unidentified risks and changing environment there can be no
guarantee that these estimates will be accurate or achieved and therefore,
actual costs and results could materially differ from those estimated.
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 subject to cautionary
factors which could 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; the possibility of consolidation
throughout the retail sector; 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 efficiencies achieved with technology upgrades; the amount of
shares the Company will repurchase in the future under its buyback program; the
successful completion and estimated costs of the Year 2000 program; fluctuations
in interest rates related to the outstanding debt and other general economic
factors.
ADVO, INC. 27
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 26, September 27, September 28,
(In thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $1,046,511 $1,016,492 $ 986,162
Costs and expenses:
Cost of sales 769,256 757,413 761,506
Selling, general and administrative 200,662 195,196 184,084
Nonrecurring charges -- -- 12,082
Provision for bad debts 4,459 5,374 3,701
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 72,134 58,509 24,789
Gain on sale of business line -- -- 2,687
Interest income (1) 949 687 1,285
Interest expense 14,043 14,820 9,669
Other expense 613 660 556
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 58,427 43,716 18,536
Provision for income taxes 22,787 16,918 7,229
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 35,640 26,798 11,307
- ---------------------------------------------------------------------------------------------------------------------------
Loss on disposal of discontinued operations, net of tax -- -- (8,199)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 35,640 $ 26,798 $ 3,108
===========================================================================================================================
Earnings per common share (2):
Earnings from continuing operations $ 1.59 $ 1.10 $ .50
Loss on disposal of discontinued operations, net of tax -- -- (.36)
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per common share $ 1.59 $ 1.10 $ .14
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per common share--assuming dilution (2):
Earnings from continuing operations $ 1.55 $ 1.09 $ .47
Loss on disposal of discontinued operations, net of tax -- -- (.34)
- ---------------------------------------------------------------------------------------------------------------------------
Earnings per common share--assuming dilution $ 1.55 $ 1.09 $ .13
- ---------------------------------------------------------------------------------------------------------------------------
Dividends declared per share $ -- $ -- $ 10.025
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares 22,427 24,320 22,803
Weighted average diluted shares 23,056 24,688 24,126
===========================================================================================================================
</TABLE>
(1) Includes interest income from related party of $458,000 and $1,219,000 in
fiscal 1997 and 1996, respectively.
(2) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("EPS") during the first quarter of fiscal 1998. As
such, prior year EPS amounts have been restated to conform to the provisions
of the new statement.
See accompanying Notes to Consolidated Financial Statements
28 ADVO, INC.
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 26, September 27,
(In thousands, except share data) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (1) $ 8,724 $ 25,963
Accounts receivable, less allowances of $4,624 in 1998 and $5,160 in 1997 80,140 66,664
Inventories 3,740 4,149
Prepaid expenses and other current assets 4,886 4,759
Deferred income taxes 13,535 14,248
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Assets 111,025 115,783
Property, plant and equipment--net 85,790 76,092
Other assets 22,391 16,678
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $ 219,206 $ 208,553
===========================================================================================================================
Liabilities and Stockholders' Deficiency
Current liabilities:
Current portion of long-term debt $ 16,200 $ 10,125
Accounts payable 37,586 44,644
Accrued compensation and benefits 27,473 29,245
Customer advances 3,892 3,409
Federal and state income taxes payable 5,270 7,080
Accrued other expenses 20,628 21,080
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 111,049 115,583
Long-term debt 167,766 140,666
Deferred income taxes 12,035 9,589
Other liabilities 3,230 2,636
Stockholders' deficiency:
Series A Convertible Preferred Stock, $.01 par value
(Authorized 5,000,000 shares, none issued) -- --
Common Stock, $.01 par value (Authorized 40,000,000 shares,
Issued 29,237,700 in 1998 and 28,428,952 in 1997) 292 284
Additional paid-in capital 173,433 163,317
Accumulated deficit (119,473) (155,113)
Less shares of common stock held in treasury at cost,
7,001,271 in 1998 and 4,077,371 in 1997 (129,126) (68,409)
- ---------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Deficiency (74,874) (59,921)
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 219,206 $ 208,553
===========================================================================================================================
</TABLE>
(1) Includes cash and cash equivalents invested with related party of
$11,613,000 at September 27, 1997.
See accompanying Notes to Consolidated Financial Statements
ADVO, INC. 29
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended Year ended Year ended
September 26, September 27, September 28,
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from continuing operating activities:
Net income $ 35,640 $ 26,798 $ 3,108
Less: Loss from discontinued operations -- -- (8,199)
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 35,640 26,798 11,307
Adjustments to reconcile net income to
net cash flows from continuing operating activities:
Cashless option exercises and option repricing -- -- 8,747
Depreciation 21,031 16,150 12,967
Amortization 3,524 2,096 2,203
Deferred income taxes 3,159 4,562 (2,275)
Provision for bad debts 4,459 5,374 3,701
Gain on sale of business lines -- -- (2,687)
Other 708 528 1
Change in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (16,130) (9,370) (5,280)
Inventories 898 3,369 470
Prepaid expenses and other current assets 461 (247) 539
Other assets 1,050 (1,367) 332
Accounts payable (7,973) 6,776 13,401
Accrued compensation and benefits (2,087) 6,353 (2,815)
Customer advances 483 (2,551) (4,350)
Federal and state income taxes payable 4,262 1,732 4,486
Other liabilities (531) 950 (2,155)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities 48,954 61,153 38,592
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from continuing investing activities:
Proceeds from sale of business lines -- -- 742
Acquisitions, net of cash acquired (10,720) -- --
Expenditures for property, plant and equipment (29,271) (28,615) (17,679)
Proceeds from disposals of property and equipment 22 18 10
Available-for-sale securities--purchases -- -- (49,604)
Available-for-sale securities--sales and maturities -- -- 80,482
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by continuing investing activities (39,969) (28,597) 13,951
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from continuing financing activities:
Proceeds from long-term borrowings--term loans -- -- 155,000
Payments on long-term borrowings--term loans (12,525) (17,559) (1,650)
Revolving line of credit--net 45,700 -- 15,000
Payment of debt issue costs (1,349) -- (5,458)
Proceeds from exercise of warrants -- -- 7,200
Proceeds from exercise of stock options 2,757 2,323 2,473
Purchases of common stock for treasury (60,807) (4,660) (741)
Cash dividends paid -- -- (240,561)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by continuing financing activities (26,224) (19,896) (68,737)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations -- -- 5,648
- ---------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (17,239) 12,660 (10,546)
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 25,963 13,303 23,849
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,724 $ 25,963 $ 13,303
===========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
30 ADVO, INC.
<PAGE>
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 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)
Purchase of common
stock for treasury (2,928) (60,807) (60,807)
Cancellation of restricted stock (4) --
Grants of restricted stock 72 1 4 90 (4) 87
Exercise of stock options 741 7 2,750 2,757
Tax effect--
employee stock plans 6,074 6,074
Amortization of deferred
compensation (1) 1,296 1,296
Net Income 35,640 35,640
- ---------------------------------------------------------------------------------------------------------------------------
Balance--
September 26, 1998 29,238 $292 (7,001) $(129,126) $173,433 $ 0 $ (119,473) $ (74,874)
===========================================================================================================================
</TABLE>
(1) Unamortized deferred compensation at September 26, 1998, September 27, 1997,
and September 28, 1996 was $940,000, $780,000, and $140,000, respectively.
See accompanying Notes to Consolidated Financial Statements
ADVO, INC. 31
<PAGE>
Notes to Consolidated Financial Statements
Note 1 Summary of Accounting Policies
Organization. ADVO, Inc. ("ADVO" or the "Company") is a direct mail marketing
firm primarily engaged in soliciting and processing printed advertising from
retailers, manufacturers and service companies for targeted distribution by both
shared and solo mail to consumer households in the United States on a national,
regional and local basis. Founded in 1929 as a hand delivery company, 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 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 1997 and 1996 financial
statements to conform with the fiscal 1998 presentation. ADVO's fiscal closing
date is the last Saturday in September.
Cash and Cash Equivalents. Cash and cash equivalents include highly liquid
investment instruments with original maturities of three months or less when
purchased. These investments are valued at cost, which approximates 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
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.
Interest Rate Swaps. The Company enters into interest rate swap agreements to
modify the interest characteristics of a portion of its outstanding debt. These
agreements involve the exchange of amounts based on the London Interbank Offered
Rate ("LIBOR") for amounts based on a fixed interest rate over the life of the
agreement, without an exchange of the notional amount upon which the payments
are based. The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment of interest expense. The related amount
payable or receivable from counter parties is included in accrued other
expenses. The fair value of these agreements is not recognized in the financial
statements.
Stock Based Compensation. The Company 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. In 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" ("EPS"). Statement No. 128 replaced the previously reported primary and
fully diluted earnings per share with earnings per common share (basic) and
earnings per common share -- assuming dilution (diluted). Earnings per common
share exclude common stock equivalents, such as stock options, and is computed
by dividing net income by the weighted average number of common shares
outstanding for the period. Earnings per common share -- assuming dilution
reflects the potential dilution that could occur if common stock equivalents,
such as stock options, were exercised. As required, the Statement was adopted in
fiscal 1998 and, where appropriate, proper periods have been restated to conform
to the related provisions.
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.
32 ADVO, INC.
<PAGE>
Notes to Consolidated Financial Statements
Note 2 Acquisitions
On February 27, 1998 the Company acquired The Mailhouse, Inc., a cooperative
coupon envelope mail company for approximately $10.7 million. This acquisition
has been accounted for under the purchase method of accounting and, accordingly,
the results of operations of the acquired company have been included in the
consolidated statements of operations from its acquisition date. The acquired
assets have been recorded at their estimated fair values. This acquisition did
not have a material pro forma effect on operations for periods prior to the
acquisition.
The excess of the purchase price of all acquisitions over the estimated fair
values of all net assets acquired of $10.8 million and $4.5 million, net of
accumulated amortization, is reflected in other assets at September 26, 1998 and
September 27, 1997, respectively. Also included in other assets at September 26,
1998 and September 27, 1997 is $2.4 million and $2.8 million, respectively, of
other intangible assets, net of accumulated amortization, which were acquired in
the acquisitions. As of September 26, 1998 and September 27, 1997, accumulated
amortization of goodwill and other intangibles was $9.1 million and $7.8
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 sale 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 fiscal 1996
consolidated statement of operations include revenues of $19.3 million, losses
to disposal date of $13.8 million and a related income tax benefit of $5.6
million.
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 26, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land, buildings and building
improvements $ 8,733 $ 8,083
Leasehold improvements 13,209 11,867
Machinery and equipment 81,018 71,844
Furniture and fixtures 15,984 17,719
Computer hardware 31,878 33,145
Computer software and
software development costs 38,416 24,333
- -------------------------------------------------------------------------------
Total $189,238 $166,991
Less accumulated depreciation
and amortization 103,448 90,899
- -------------------------------------------------------------------------------
Property, plant and equipment-net $ 85,790 $ 76,092
- -------------------------------------------------------------------------------
</TABLE>
Note 5 Accrued Compensation and Benefits
The composition of accrued compensation and benefits is as follows:
<TABLE>
<CAPTION>
September 26, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Employee compensation $14,874 $18,316
Workers' compensation 6,263 5,638
Employee withholdings and
other benefits 6,336 5,291
- -------------------------------------------------------------------------------
Total $27,473 $29,245
- --------------------------------------------------------------------------------
</TABLE>
Note 6 Financing Arrangements
The Company has credit facilities consisting of a $135 million term loan and a
$165 million reducing revolving line of credit, maturing at various dates
through September 2003. The commitment levels on the revolving line range from a
high of $165 million from inception through December 1999 to a low of $22.5
million for the period June 2003 through September 2003. Mandatory repayments of
debt in defined amounts are required in the event of certain events including
the sale of certain assets. The Company and its subsidiaries have pledged all of
their assets as collateral under the credit agreement.
The debt bears interest at either the LIBOR or at the bank's "base rate,"
whichever the Company chooses for each tranche due at various maturity dates,
plus an "applicable margin" (based on certain financial ratios). Under the
current agreement the
ADVO, INC. 33
<PAGE>
Notes to Consolidated Financial Statements
"applicable margin" ranges from .50% to 1.50% of the LIBOR rate and 0% to
.25% on the base rate. Under a previous agreement in effect during fiscal 1997,
the applicable margin ranged from 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 outstanding facilities' balance and related interest rates inclusive of
applicable margins are as follows :
<TABLE>
<CAPTION>
LIBOR Base Rate Total
September 26, 1998 Interest Interest Outstanding
(In thousands) 6.32% 8.50% Facilities
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Term loan $120,000 $ 2,475 $122,475
Revolving line of credit 50,791 10,700 61,491
- --------------------------------------------------------------------------------
$170,791 $ 13,175 183,966
Less: Current portion
of long-term debt 16,200
- --------------------------------------------------------------------------------
$167,766
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIBOR Base Rate Total
September 27, 1997 Interest Interest Outstanding
(In thousands) 7.21% 8.71% Facilities
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Term loans $ 52,165 $ 83,626 $135,791
Revolving line of credit 15,000 15,000
- --------------------------------------------------------------------------------
$ 67,165 $ 83,626 150,791
Less: Current portion
of long-term debt 10,125
- --------------------------------------------------------------------------------
$140,666
- --------------------------------------------------------------------------------
</TABLE>
The Company is required to maintain certain financial ratios under the
facilities. In addition, the facilities also place restrictions on disposal of
assets, mergers and acquisitions, dividend payments, investments and additional
debt.
In connection with the facilities, the Company is required to maintain
Interest Rate Protection Agreements to protect itself against three-month LIBOR
rates exceeding 8.0% per annum as to a notional principal amount equal to the
lesser of $100 million or 50% of the aggregate principal amount of the loans
made on the effective date for a period of at least two years. During fiscal
1998, the Company entered into two separate three-year interest rate swap
transaction agreements to hedge notional amounts totaling $100 million. The rate
is fixed at approximately 5.7%. The Company believes the interest rate swap
transaction agreements limit substantial risk should interest rates fluctuate.
The interest rate swap agreements had no material effect on interest expense in
fiscal 1998. During fiscal 1996, the Company entered into two separate two-year
Interest Rate Collar Agreements to hedge notional amounts totaling $150 million.
The cap rates ranged from 7.39% to 8.0% with the floor rate ranging from 5.0% to
5.5%. The interest rate collar agreements had no effect on interest expense in
either fiscal 1998 or 1997.
The Company pays fees on the unused commitments under the facilities at a
rate ranging from .175% to .375% depending on the Company's total leverage
ratio, as defined. As of September 26, 1998, $93.5 million of the revolver was
available for future borrowings.
Total maturities of long-term debt which are due over the next five fiscal
years at September 26, 1998 are as follows :
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 16,200
2000 20,250
2001 22,950
2002 27,002
2003 97,564
- --------------------------------------------------------------------------------
Total maturities $183,966
- --------------------------------------------------------------------------------
</TABLE>
The revolving line of credit has been classified as long-term since management
has the intent and ability to maintain the September 26, 1998 outstanding
balance throughout fiscal 1999.
The Company capitalized debt issue costs directly associated with the
issuance of the debt of $5.5 million under a previous agreement in fiscal 1996
and $1.3 million for fiscal 1998 under the renegotiated agreement. These costs
are included in other assets and are being amortized over the term of the debt
agreement. At September 26, 1998 and September 27, 1997, unamortized costs
totaled $4.8 million and $4.4 million, respectively.
The Company has outstanding letters of credit of approximately $6.3 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 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.
34 ADVO, INC.
<PAGE>
Notes to Consolidated Financial Statements
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.)
In fiscal 1997 the Company announced a stock buyback program to purchase up
to 2.0 million shares of the Company's common stock. During fiscal 1998 the
Company increased its stock buyback program authorization to 3.8 million shares
under two separate announcements. In connection with the increased
authorization, the Company purchased 1.9 million shares of its common stock from
Warburg for $34.8 million. In fiscal 1998 and 1997, the Company purchased 2.7
million shares for $55.2 million and 0.2 million shares for $3.4 million,
respectively, in connection with the buyback programs. As of September 26, 1998,
there were 0.8 million shares remaining to be purchased.
At September 26, 1998 there are 1.8 million shares of common stock reserved
for issuance upon the exercise of stock options.
Note 8 Earnings Per Common Share
The following table sets forth the computation of earnings per common share and
earnings per common share -- assuming dilution:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
(In thousands, September 26, September 27, September 28,
except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $35,640 $26,798 $ 3,108
Weighted average
common shares 22,427 24,320 22,803
Effect of dilutive securities:
Stock options 598 357 462
Warrants -- -- 844
Restricted stock 31 11 17
- ----------------------------------------------------------------------------
Dilutive potential
common shares 629 368 1,323
Weighted average
diluted shares 23,056 24,688 24,126
- ----------------------------------------------------------------------------
Earnings per
common share $ 1.59 $ 1.10 $ .14
- ----------------------------------------------------------------------------
Earnings per
common share --
assuming dilution $ 1.55 $ 1.09 $ .13
- ----------------------------------------------------------------------------
</TABLE>
Note 9 Gain on Sale of Business Line
Midcoast Press, the Company's commercial web offset printer, was sold during
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 pre-tax gain of $2.7 million ($1.7 million after tax or
$.07 per share) in conjunction with the sale in fiscal 1996.
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 $3.7 million,
$3.4 million, and $3.7 million for fiscal 1998, 1997, and 1996, respectively.
Note 11 Stock Compensation Plans
As of September 26, 1998 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"). All the plans are
detailed below. 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", 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 1998, 1997, and 1996:
ADVO, INC. 35
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
September 26, September 27, September 28,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free rate of interest 5.8% 5.5% 5.8%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 36% 32% 36%
Expected life of
option (years) 4.4 4.3 4.9
- --------------------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted was $8.47 in 1998 and $4.61
for both 1997 and 1996.
<TABLE>
<CAPTION>
Year ended Year ended Year ended
(In thousands, except September 26, September 27, September 28,
per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 33,326 $ 25,386 $ 2,802
Pro forma
earnings per share
--assuming dilution $ 1.46 $ 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, 1997 and 1998. 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 Plan. 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
5,825,000 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. The Company's common stock
reached this level during the first quarter of fiscal 1998.
These plans contain a reload option feature which 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 in fiscal 1996 (see Note 7), the
Company made equitable adjustments to outstanding options. As a result, 2.1
million options were repriced. The repriced options 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 26, 1998 and September 27, 1997 there were 0.7 million and 0.6
million options available for future grant under the fixed stock option plans,
respectively.
Information with respect to the Company's fixed stock option plans is
summarized below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 960,247 23.077
Cancelled (251,599) 12.217
Exercised (1,127,958) 11.594
- --------------------------------------------------------------------------------
Outstanding at September 26, 1998 1,841,128 $ 17.816
- --------------------------------------------------------------------------------
</TABLE>
Options Outstanding
<TABLE>
<CAPTION>
Weighted Average
Outstanding as of Remaining Weighted Average
Range of Exercise Prices September 26, 1998 Contractual Life Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 6.375 - $ 8.625 180,723 4.4 $ 7.978
9.100 - 12.250 343,262 6.4 11.891
12.625 - 18.500 421,726 8.1 15.164
18.625 - 21.500 444,100 9.1 21.253
22.500 - 24.875 240,352 5.5 22.833
27.063 - 29.875 210,965 7.8 28.232
- --------------------------------------------------------------------------------
1,841,128 7.3 $ 17.816
- --------------------------------------------------------------------------------
</TABLE>
Options Exercisable
<TABLE>
<CAPTION>
Exercisable as of Weighted Average
Range of Exercise Prices September 26, 1998 Exercise Price
- --------------------------------------------------------------------------------
<S> <C> <C>
$ 6.375 - $ 8.625 115,596 $ 8.022
9.100 - 12.250 116,512 11.723
12.625 - 18.500 81,801 15.779
18.625 - 21.500 9,500 18.724
22.500 - 24.875 -- --
27.063 - 29.875 -- --
- --------------------------------------------------------------------------------
323,409 $11.632
- --------------------------------------------------------------------------------
</TABLE>
36 ADVO, INC.
<PAGE>
Notes to Consolidated Financial Statements
Nonvested Stock Plans. The 1986 Employee Restricted Stock Plan and 1990
Non-Employee Directors' Restricted Stock Plan provide for the granting of up to
2,692,500 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 the grant. The compensation cost charged against income over the
restriction period was $1.3 million, $.3 million, and $.6 million for the years
ended September 26, 1998, September 27, 1997 and September 28, 1996,
respectively. Unamortized deferred compensation was $.9 million at September 26,
1998. There are 0.2 million shares available for future grant under these plans
at September 26, 1998. The weighted average grant price of shares granted during
fiscal 1998 and fiscal 1997 was $21.049 and $18.431, 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 was distributed when the
restricted shares vested.
Information with respect to the Company's nonvested stock plans are
summarized below:
<TABLE>
<CAPTION>
Shares
<S> <C>
- --------------------------------------------------------------------------------
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
Granted 72,000
Cancelled (4,000)
- --------------------------------------------------------------------------------
Outstanding at September 26, 1998 2,516,912
- --------------------------------------------------------------------------------
</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 fiscal 1996 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. All significant elements of the Company's plan of restructure were
completed by the end of its fiscal 1997 year.
For fiscal 1997 and 1996, $1.6 million, and $7.3 million, respectively, was
charged to the restructuring accrual for cash payments related to severance
costs and other termination based arrangements for exited activities and the
centralization of operations. For fiscal 1997 and 1996, $.1 million and $.6
million, respectively, was charged for cash payments related to facility closure
and downsizing costs. For the three year period ended 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.
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 26, September 27, September 28,
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $17,527 $10,660 $ 5,494
Deferred 2,792 3,844 505
- --------------------------------------------------------------------------------
Total Federal 20,319 14,504 5,999
- --------------------------------------------------------------------------------
State:
Current 2,101 1,696 742
Deferred 367 718 488
- --------------------------------------------------------------------------------
Total State 2,468 2,414 1,230
- --------------------------------------------------------------------------------
Total Provision $22,787 $16,918 $ 7,229
- --------------------------------------------------------------------------------
</TABLE>
ADVO, INC. 37
<PAGE>
Notes to Consolidated Financial Statements
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 26, September 27, September 28,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 2.7 3.6 4.3
Other 1.3 .1 (.3)
- --------------------------------------------------------------------------------
Effective income tax rate 39.0% 38.7% 39.0%
- --------------------------------------------------------------------------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
September 26, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $ 6,138 $ 5,455
Employee benefits 4,612 4,123
Other 3,782 5,567
- --------------------------------------------------------------------------------
Total deferred tax assets 14,532 15,145
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment (13,032) (10,486)
- --------------------------------------------------------------------------------
Net federal and state deferred assets $ 1,500 $ 4,659
- --------------------------------------------------------------------------------
</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 26, 1998 under
long term noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
Fiscal year:
<S> <C>
1999 $12,221
2000 9,476
2001 7,529
2002 5,787
2003 4,265
Thereafter 5,517
- -------------------------------------------------------------------------------
Total minimum lease payments $44,795
- -------------------------------------------------------------------------------
</TABLE>
Certain of these leases contain renewal options and certain leases also provide
for cost escalation payments. Rental expense for the years ended September 26,
1998, September 27, 1997 and September 28, 1996 was approximately $16.7 million,
$17.1 million and $20.6 million, respectively.
During fiscal 1996, the Company entered into a ten-year agreement with
Integrated System Solutions Corporation (d/b/a ISSC) now known as International
Business Machines Corporation ("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 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 1998
and 1997 totaled approximately $.6 million and $.3 million, respectively. Future
commitments for the noncancellable portion of the agreement, excluding
termination fees and the cost of living adjustments total $10.7 million for
fiscal year 1999. In addition, the Company may receive additional credits or
charges if the Company does not meet or exceeds certain baseline utilization
assumptions.
During fiscal 1998, the Company entered into a five-year agreement with IBM
to provide a customer service support center for the Company. The contract
allows for cancellation after the completion of the third year, subject to
termination charges of $.6 million in year four and $.4 million in year five.
The annual service charges for the noncancellable portion of the agreement total
$3.6 million, $3.6 million, and $1.8 million, respectively, for fiscal years
1999, 2000, and 2001. The agreement also provides for the Company to pay a cost
of living adjustment due to inflation beginning in fiscal year 1999. In
addition, the Company may receive additional credits or charges if the Company
does not meet or exceeds certain baseline utilization assumptions as well as, if
IBM does not meet or exceeds certain service level standards.
ADVO is party to various legal proceedings and claims related to its normal
business operations, including several suits in which it is a defendant. In the
opinion of management, the Company has substantial and meritorious defenses for
these claims and proceedings in which it is a defendant, and believes these
matters will be ultimately resolved without material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.
Note 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 who was the Company's largest shareholder, and considered a related
party at September 27, 1997, owns a majority interest in Counsellors.
38 ADVO, INC.
<PAGE>
Notes to Consolidated Financial Statements
Warburg ceased being a related party upon the Company's purchase of 1.9 million
shares of its common stock from Warburg. Income earned on investments managed by
Counsellors was $.5 million and $1.2 million in fiscal 1997 and 1996,
respectively. At September 27, 1997, $11.6 million 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.
Note 17 Supplemental Cash Flow Information
Cash paid for income taxes was $16.0 million, $11.0 million and $3.2 million in
fiscal 1998, 1997 and 1996, respectively. Cash paid for interest expense in
fiscal 1998, 1997 and 1996 was $13.6 million, $14.4 million and $7.2 million,
respectively.
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 9.)
Note 18 Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS 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 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.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes the accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires recognition of all derivatives as either assets
or liabilities measured at the fair value. Depending on the intended use of the
derivative, changes in fair value will be reported in the period of change as
either a component of earnings or a component of other comprehensive income. The
Company has not quantified the impact of adoption on its financial statements.
The Company will adopt this statement in the first quarter of fiscal 2000.
Note 19 Quarterly Financial Data (Unaudited)
(In millions, except per share data)
<TABLE>
<CAPTION>
Fiscal year ended First Second Third Fourth
September 26, 1998 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 262.1 $ 253.2 $ 269.0 $ 262.2
Gross profit 67.2 63.9 74.9 71.2
Operating income 17.2 12.5 23.2 19.2
Net income 8.4 5.4 12.1 9.7
Earnings per common share .37 .24 .54 .43
Earnings per common share
--assuming dilution .36 .24 .52 .42
Common stock price
High 23 5/8 26 13/16 30 15/16 33 5/8
Low 17 3/4 19 24 11/16 22 1/4
- --------------------------------------------------------------------------------
Fiscal year ended First Second Third Fourth
September 27, 1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
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 common share (1) .26 .11 .39 .35
Earnings per common share
--assuming dilution (1) .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>
(1) Reflects restated earnings per share in accordance with SFAS No. 128.
(See Note 8.)
ADVO, INC. 39
<PAGE>
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 26, 1998 and September 27, 1997, 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 26, 1998.
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 26, 1998 and September 27, 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 26, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Hartford, Connecticut
October 20, 1998
Report of Financial Responsibility
To the Stockholders of ADVO, Inc.
The management of ADVO, Inc. is responsible for the integrity and objectivity of
the consolidated financial statements and other financial information presented
in this report. These statements have been prepared in accordance with generally
accepted accounting principles and necessarily include amounts based on
judgements and estimates by management.
ADVO maintains internal accounting control policies and related procedures
designed to provide reasonable assurance that assets are safeguarded, that
transactions are executed in accordance with management's authorization and
properly recorded, and that accounting records may be relied upon for the
preparation of reliable published annual and interim financial statements and
other financial information. The design, monitoring, and revision of internal
accounting control systems involve, among other things, management's judgement
with respect to the relative cost and expected benefits of specific control
measures. The Company also maintains an internal auditing function which
evaluates and reports on the adequacy and effectiveness of internal accounting
controls and policies and procedures.
The Company's consolidated financial statements have been audited by
independent auditors who have expressed their opinion with respect to the
fairness of these statements.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with ADVO's management, internal auditors and
independent auditors to review matters relating to the quality of financial
reporting and internal accounting controls. Both the internal auditors and the
independent auditors have unrestricted access to the Committee.
/s/ Robert Kamerschen
Robert Kamerschen
Chairman and Chief Executive Officer
/s/ Donald E. McCombs
Donald E. McCombs
Senior Vice President and Chief Financial Officer
/s/ Julie A. Abraham
Julie A. Abraham
Vice President and Controller
October 20, 1998
40 ADVO, INC.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ADVO, INC.
AS OF SEPTEMBER 26, 1998
<TABLE>
<CAPTION>
PERCENT OF VOTING
STATE OF SECURITIES OWNED AS
INCORPORATION NAME OF SUBSIDIARY OF SEPTEMBER 26, 1998
- ------------- ------------------ ---------------------
<S> <C> <C>
Delaware ADVO Investment Company, Inc. 100
Delaware ADVO Creative Services, Inc. 100
Delaware Value Fair, Inc. 100
Delaware MBV, Inc. 100
Delaware Stighen, Inc. (formerly Marketing Force, Inc.) 100(1)
Delaware MailCoups, Inc. 100
</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 20, 1998, included in
the 1998 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 the Dividend Reinvestment,
(Post-Effective Amendment No. 5 to the ADVO Form S-8 No. 333-49987) 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 20, 1998, 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 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO, INC'S
FORM 10-K FOR THE YEAR ENDED SEPTEMBER 26, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> SEP-26-1998
<CASH> 8,724
<SECURITIES> 0
<RECEIVABLES> 84,764
<ALLOWANCES> 4,624
<INVENTORY> 3,740
<CURRENT-ASSETS> 111,025
<PP&E> 189,238
<DEPRECIATION> 103,448
<TOTAL-ASSETS> 219,206
<CURRENT-LIABILITIES> 111,049
<BONDS> 167,766
0
0
<COMMON> 292
<OTHER-SE> (75,166)
<TOTAL-LIABILITY-AND-EQUITY> 219,206
<SALES> 0
<TOTAL-REVENUES> 1,046,511
<CGS> 0
<TOTAL-COSTS> 769,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,459
<INTEREST-EXPENSE> 14,043
<INCOME-PRETAX> 58,427
<INCOME-TAX> 22,787
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,640
<EPS-PRIMARY> $1.59<F1>
<EPS-DILUTED> $1.55<F2>
<FN>
<F1>THE EPS - PRIMARY TAG REPRESENTS BASIC EPS UNDER SFAS 128.
<F2>THE EPS-DILUTED TAG REPRESENTS DILUTED EPS UNDER SFAS 128.
</FN>
</TABLE>
