<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 26, 1998
-----------------
or
(_) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to _________________
Commission file number 1-11720
-------
ADVO, Inc.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0885252
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Univac Lane, P.O. Box 755, Windsor, CT 06095-0755
- ------------------------------------------ ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (860) 285-6100
---------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _____
-----
As of January 23, 1999 there were 22,121,202 shares of common stock
outstanding.
<PAGE>
ADVO, Inc.
Index to Quarterly Report
on Form 10-Q
Quarter Ended December 26, 1998
<TABLE>
<CAPTION>
Part I - Financial Information Page
------------------------------ ----
<S> <C>
Item 1. Financial Statements (Unaudited).
Consolidated balance sheets -
December 26, 1998 and September 26, 1998. 2
Consolidated statements of operations -
Three months ended December 26, 1998
and December 27, 1997. 3
Consolidated statements of cash flows -
Three months ended December 26, 1998
and December 27, 1997. 4
Notes to consolidated financial statements. 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 7
Part II - Other Information
---------------------------
Item 4. Submission of Matters to a Vote of
Security Holders. 10
Item 6. Exhibits and Reports on Form 8-K. 10
Signatures 11
</TABLE>
<PAGE>
ADVO, Inc.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 26, September 26,
ASSETS 1998 1998
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,141 $ 8,724
Accounts receivable, net 78,080 80,140
Inventories 3,738 3,740
Prepaid expenses and other current assets 4,886 4,886
Deferred income taxes 14,710 13,535
--------- ---------
Total current assets 110,555 111,025
Property, plant and equipment 195,936 189,238
Less accumulated depreciation and amortization (108,353) (103,448)
--------- ---------
Net property, plant and equipment 87,583 85,790
Other assets 24,227 22,391
--------- ---------
TOTAL ASSETS $ 222,365 $ 219,206
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 17,213 $ 16,200
Accounts payable 31,299 37,586
Accrued compensation and benefits 20,594 27,473
Other current liabilities 35,046 29,790
--------- ---------
Total current liabilities 104,152 111,049
Long-term debt 170,703 167,766
Deferred income taxes 12,774 12,035
Other liabilities 3,254 3,230
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 29,275,116
and 29,237,700 shares, respectively) 293 292
Additional paid-in capital 173,956 173,433
Accumulated deficit (109,312) (119,473)
--------- ---------
64,937 54,252
Less common stock held in
treasury, at cost (133,455) (129,126)
--------- ---------
Total stockholders' deficiency (68,518) (74,874)
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS'
DEFICIENCY $ 222,365 $ 219,206
========= =========
</TABLE>
See Accompanying Notes.
- 2 -
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
--------------------------------
December 26, December 27,
1998 1997
----------- -----------
<S> <C> <C>
Revenues $268,649 $262,144
Costs and expenses:
Cost of sales 194,431 194,929
Selling, general and
administrative 53,273 49,300
Provision for bad debts 859 725
-------- --------
Operating income 20,086 17,190
Interest expense 3,555 3,561
Interest income 165 254
Other expense 175 148
-------- --------
Income before income taxes 16,521 13,735
Provision for income taxes 6,361 5,357
-------- --------
Net Income $ 10,160 $ 8,378
======== ========
Earnings per common share $ .46 $ .37
======== ========
Earnings per common share
- assuming dilution $ .45 $ .36
======== ========
Weighted average common shares 22,071 22,419
Weighted average diluted shares 22,450 23,058
</TABLE>
See Accompanying Notes.
-3-
<PAGE>
ADVO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
--------------------------
December 26, December 27,
1998 1997
------------ ------------
<S> <C> <C>
Net cash provided (used) by
operating activities $ 8,233 $ (140)
Cash flows from investing activities:
Acquisition of property, plant and equipment (7,315) (6,887)
Proceeds from disposals of property & equipment 3 -
Acquisitions (300) -
------- --------
Net cash used by investing activities (7,612) (6,887)
Cash flows from financing activities:
Revolving line of credit - net 8,000 37,000
Payments of long-term borrowings (4,050) (4,931)
Payment of debt issue costs - (1,349)
Proceeds from exercise of stock options 176 482
Purchase of common stock for treasury (4,330) (37,974)
------- --------
Net cash used by financing activities (204) ( 6,772)
------- --------
Increase (decrease) in cash and cash equivalents 417 (13,799)
Cash and cash equivalents at beginning of period 8,724 25,963
------- --------
Cash and cash equivalents at end of period $ 9,141 $ 12,164
======= ========
</TABLE>
See Accompanying Notes
-4-
<PAGE>
ADVO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended December 26,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 25, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in ADVO's
annual report on Form 10-K for the fiscal year ended September 26, 1998.
Certain reclassifications have been made in the fiscal 1998 financial statements
to conform with the fiscal 1999 presentation.
2. EARNINGS PER SHARE
Earnings per common share excludes common stock equivalents, such as stock
options, and is computed by dividing earnings 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.
<TABLE>
<CAPTION>
Three months ended
------------------------------
December 26, December 27,
1998 1997
------------ -----------
<S> <C> <C>
Net income $ 10,160 $ 8,378
=========== ==========
Weighted average common shares 22,071 22,419
Effect of dilutive securities:
Stock options 357 621
Restricted stock 22 18
----------- ----------
Dilutive potential common shares 379 639
Weighted average diluted shares 22,450 23,058
=========== ==========
Earnings per common share $ .46 $ .37
=========== ==========
Earnings per common share - assuming
dilution $ .45 $ .36
=========== ==========
</TABLE>
-5-
<PAGE>
ADVO, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" establishes standards for the way that
business enterprises report information about operating segments in financial
statements, as well as information about products and services, geographic areas
and major customers. The Company operates principally under one segment, direct
mail marketing, and, therefore, no additional disclosure is required.
-6-
<PAGE>
ADVO, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This section should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto.
RESULTS OF OPERATIONS
- ---------------------
Revenues for the first quarter of fiscal 1999 were $268.6 million, representing
a 2.5% increase over the same period of the prior year. This year over year
increase in revenues was related to the 0.9% increase in pieces per package from
8.78 for the quarter ended December 27, 1997 to 8.86 for the quarter ended
December 26, 1998, and the 0.6% increase in revenue per thousand pieces to
$37.79 for the same period. Offsetting these gains to a degree was the 0.9%
decline in shared mail packages delivered for the first quarter of fiscal 1999
versus the first quarter of fiscal 1998 due to the Company's management of
mailings in selected markets. The acquisition of MailCoups, the Company's
targeted coupon distributor, which occurred in March 1998, as well as, the
Company's A.N.N.E. (ADVO National Network Extension) brokered distribution
program and targeting revenues associated with the Company's ATZ (ADVO Targeting
Zones) distribution platform significantly contributed to the revenue growth
during the quarter.
Cost of sales as a percentage of revenues declined 2.0 percentage points to
72.4% and decreased $0.5 million in absolute terms for the first quarter of
fiscal 1999 as compared to the same period of the prior year. This decrease is
attributable to reduction in postage expense due to shifts in product mix and
the package decline mentioned above, lower print costs due to decreases in
turnkey volume and lower paper prices, and favorable operating efficiencies in
the Company's branch operations. These decreases were offset by higher
distribution and delivery costs incurred as a result of the revenues associated
with MailCoups and A.N.N.E.
Selling, general and administrative costs (including the provision for bad
debts) for the first quarter of fiscal 1999 increased $4.1 million over the
quarter ended December 27, 1997 to $54.1 million for the quarter ended December
26, 1998. Selling costs remained relatively flat with the prior year. General
and administrative costs increased primarily due to Year 2000 remediation costs
and increases in compensation-related costs.
As a result of the aforementioned, operating income for the first quarter of
fiscal 1999 increased $2.9 million to $20.1 million in absolute terms and 0.9
percentage points to 7.5% as a percentage of revenues, as compared to the same
period of the prior year.
Interest expense for the three months ended December 26, 1998 remained
consistent with the prior year. The effects of lower interest rates offset the
impact of the increase in the outstanding debt balance.
The effective income tax rate for the three months ended December 26, 1998 and
December 27, 1997 was approximately 39%.
Earnings per share - assuming dilution increased 25.0% over the prior year
period from $.36 to $.45 for the quarter ended December 26, 1998. This
increase was reflective of the Company's improved earnings.
Weighted average common and diluted shares decreased for the first quarter of
fiscal 1999 as compared to the same quarter in fiscal 1998, primarily due to the
Company's common stock buyback program.
-7-
<PAGE>
FINANCIAL CONDITION
- -------------------
Working capital increased $6.4 million from September 26, 1998. The increase in
working capital from the end of the prior fiscal year was primarily related to
the $6.9 million decrease in current liabilities. The reduction in current
liabilities was the result of the decrease in accounts payable associated with
the changes in the timing of vendor payments to take advantage of payment term
discounts and the decrease in accrued compensation and benefits was due to the
fiscal 1998 incentive compensation payout which occurred in fiscal 1999. Both
these decreases were partially offset by an increase in taxes payable associated
with the Company's improved year to date earnings. The working capital ratio
increased from approximately 1.00 at September 26, 1998 to 1.06 at December 26,
1998.
Stockholders' deficiency decreased $6.4 million to a net deficiency of $68.5
million at December 26, 1998 from $74.9 million at September 26, 1998. The
decrease in the net deficiency was primarily the result of the Company's net
income of $10.2 million for the three months ended December 26, 1998, offset by
treasury stock purchases of $4.3 million. The treasury stock purchases
consisted of $3.7 million made on the open market associated with the Company's
buyback program announced at the end of fiscal 1998 and $0.6 million pursuant to
elections by employees to satisfy withholding requirements under the Company's
restricted stock and stock option plans.
PROPERTY, PLANT & EQUIPMENT
- ---------------------------
Property, plant and equipment investments of $7.3 million for the quarter ended
December 26, 1998 consisted mainly of capital expenditures for software
development along with the purchase of computerized mail sorters and leasehold
improvements for the Company's production facilities. Of the total capital
expenditures for the quarter ended December 26, 1998, approximately $1.1 million
related to the development of the 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; since inception in fiscal 1998,
the Company has capitalized $3.3 million.
LIQUIDITY
- ---------
The Company's main source of liquidity continues to be funds generated from
operating activities. In addition, the Company has available unused credit
commitments of $85.5 million which may be used to fund working capital.
The net cash provided by operating activities for the three months ended
December 26, 1998 was $8.2 million versus $0.1 million net cash used for
operating activities for the same period of the prior year. The year over year
increase was the result of improved operating results and changes in accounts
receivable, accounts payable and accrued compensation and benefits.
The overall increase in cash and cash equivalents of $0.4 million for the
quarter ended December 26, 1998 was comprised of net cash provided by operating
activities of $8.2 million offset by investing activities of $7.6 million and
net financing activities of $0.2 million. Investing activities consisted
primarily of the capital expenditures detailed above. Financing activities
included treasury stock purchases of $4.3 million offset by net borrowings under
the credit facility of $3.9 million. In the prior year period, financing
activities included treasury stock purchases of $38.0 million due primarily to
the 1.9 million shares of the Company's common stock purchased from Warburg,
Pincus Capital Partners, L.P., offset by net borrowings under the credit
facilities of $32.1 million.
FINANCING ARRANGEMENTS
- ----------------------
The Company maintains a credit agreement which provides for total credit
facilities of $300 million, consisting of a $135 million term loan and a $165
million reducing revolving line of credit. At December 26, 1998 there was $187.9
million of debt outstanding, with $17.2 million classified as current. The
-8-
<PAGE>
Company anticipates it will be able to meet its long-term debt obligations
through funds generated from operations. During January 1999, the Company had
net borrowings of $10 million under the revolving line of credit. This borrowing
practice is consistent with the prior year due to the seasonality of the
business.
Under the terms of the credit agreement, the Company is required to maintain
certain financial ratios. In addition, the credit agreement also places
restrictions on disposals of assets, mergers and acquisitions, dividend
payments, investments and additional debt.
YEAR 2000 UPDATE
- ----------------
As discussed in the Financial Report contained in the Company's Annual Report on
Form 10-K for the year ended September 26, 1998, under the caption ,"Year 2000
Readiness", the Company outlined its program to become Year 2000 compliant by
discussing the following matters: state of readiness, costs and risk and
contingency plans. During the first quarter of fiscal 1999, the Company
continued on track with its program to become Year 2000 compliant. Below is a
summary of the matters which have changed since the disclosures made at year
end.
State of Readiness
The Company continues to work on the various identified phases concurrently.
The Company is currently proceeding on schedule in its overall Year 2000 program
and is approximately 50% complete as of January 31, 1999. The estimated
completion date of the project remains no later than September 1999.
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 and $2.6 million during the first quarter of fiscal 1999.
Risks and Contingency Plans
The Company continues to develop formal contingency plans for non-compliance and
continues to refine these plans as the Company completes the evaluation,
modification and/or replacement of its Information Technology ("IT") and non-
IT systems and as it receives and evaluates information from third parties.
FORWARD LOOKING STATEMENTS
- --------------------------
Except for the historical information stated herein, the matters discussed in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. Such forward looking
statements are 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: possible governmental
regulation or legislation affecting aspects of the Company's business, changes
in customer demand, the possibility of consolidation throughout the retail
sector, postal and paper prices, 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.
-9-
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the 1999 Annual Meeting of Stockholders of ADVO, Inc. (the "Company"), held
on January 21, 1999, the following matters were submitted to a vote of the
stockholders.
1. The election of eight Directors to serve until the Annual Meeting of
Stockholders in 2000.
2. The approval and adoption of the 1998 Incentive Compensation Plan.
3. The ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending September 25, 1999.
Each of the three proposals was approved by the stockholders in its entirety.
For a list of the directors elected and the votes cast for and against each of
the proposals, reference is made to Exhibit No. 22, Report of Inspector of
Election for ADVO, Inc.'s Annual Meeting, attached hereto.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Index
Exhibit No. Exhibits
----------- --------
10 Executive Severance Agreement dated
December 7, 1998 between ADVO, Inc.
and David Taugher. *
22 Report of Inspector of Election for
ADVO, Inc.'s Annual Meeting.
27 Financial Data Schedule.
* Management contract or compensatory plan required to be filed as an
exhibit.
(b) Reports on Form 8-K
-------------------
No report on Form 8-K was filed by the Company with respect to the
quarter ended December 26, 1998.
- --------------------------------------------------------------------------------
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVO, Inc.
Date: February 8, 1999 By: /s/ JULIE A. ABRAHAM
---------------- ---------------------------
Julie A. Abraham
Vice President and Controller
(Principal Accounting Officer)
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<PAGE>
EXHIBIT 10
EXECUTIVE SEVERANCE AGREEMENT
-----------------------------
This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of
December 7, 1998, by and between ADVO, Inc. (the"Company") and David Taugher
- ---------------- -------------
(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:
(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
<PAGE>
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 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
<PAGE>
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 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.
<PAGE>
(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.
(1) "Subsidiary" means an entity, at least a majority of the total
voting power of the then-outstanding voting securities of which is held,
directly or indirectly, by the Company and/or one or more other Subsidiaries or,
for any entity that is not a corporation, at least a majority of the then-
outstanding capital interests of which is so held.
(m) "Term" means (A) the period commencing on the date hereof and
ending on the second anniversary of the date hereof; provided, however, that
commencing on the date one year after the date hereof, and on each annual
anniversary of such date (such date and each annual anniversary thereof shall be
hereinafter referred to as the "Renewal Date"), unless previously terminated,
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.
<PAGE>
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;
(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, an
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;
<PAGE>
(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 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.
<PAGE>
(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
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 (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
<PAGE>
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 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
<PAGE>
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.
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.
<PAGE>
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 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
By: /s/ DAVID TAUGHER
------------------
David Taugher
<PAGE>
Exhibit 22
-----------
Page 1 of 2
REPORT OF INSPECTOR OF ELECTION
FOR ADVO, INC.'S ANNUAL MEETING
HELD ON JANUARY 21, 1999
I, John J. Boryczki, Assistant Vice President and Relationship Manager of
ChaseMellon Shareholder Services, L.L.C. Transfer Agent and Registrar of the
Company, and David M. Stigler, Senior Vice President and General Counsel of
ADVO, Inc. having been duly appointed as Inspectors of Election for the Annual
Meeting of Shareholders of ADVO, Inc. held on Thursday, January 21, 1999, at the
Sheraton Hotel at Bradley International Airport, Windsor Locks, CT, report as
follows:
1. There were present, in person or by proxy, 19,915,620 shares of common stock
or 89.85% at the Annual Meeting.
2. The following votes of common stock were cast as follows:
PROPOSAL #1: ELECTION OF DIRECTORS
DIRECTOR NAME FOR WITHHELD
Bruce Crawford 19,726,790 99.05% 188,830 0.95%
David Dyer 19,726,790 99.05% 188,830 0.95%
Jack W. Fritz 19,682,019 98.83% 233,601 1.17%
Robert Kamerschen 19,678,965 98.81% 236,655 1.19%
Gary M. Mulloy 19,682,940 98.83% 232,680 1.17%
Howard H. Newman 19,683,090 98.83% 232,530 1.17%
John R. Rockwell 19,726,890 99.05% 188,730 0.95%
John L. Vogelstein 15,700,326 78.83% 4,215,294 21.17%
PROPOSAL #2: APPROVAL AND ADOPTION OF THE ADVO, INC. 1998 INCENTIVE COMPENSATION
PLAN
FOR 17,175,934 77.49%
AGAINST 2,632,065 11.87%
ABSTAIN 107,621 0.49%
<PAGE>
Exhibit 22
-----------
Page 2 of 2
PROPOSAL # 3: RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
COMPANY'S INDEPENDENT AUDITORS FOR FISCAL 1999
FOR 19,761,806 89.16%
AGAINST 66,053 0.30%
ABSTAIN 87,761 0.40%
NO OTHER MATTERS WERE SUBMITTED FOR A VOTE AT THIS MEETING.
/S/ JOHN J. BORYCZKI
- --------------------------------
JOHN J. BORYCZKI
ASSISTANT VICE PRESIDENT & RELATIONSHIP MANAGER
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO INC'S
FORM 10Q FOR THE QUARTER ENDED DECEMBER 26, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-25-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> DEC-26-1998
<CASH> 9,141
<SECURITIES> 0
<RECEIVABLES> 83,090
<ALLOWANCES> 5,010
<INVENTORY> 3,738
<CURRENT-ASSETS> 110,555
<PP&E> 195,936
<DEPRECIATION> 108,353
<TOTAL-ASSETS> 222,365
<CURRENT-LIABILITIES> 104,152
<BONDS> 170,703
0
0
<COMMON> 293
<OTHER-SE> (68,811)
<TOTAL-LIABILITY-AND-EQUITY> 222,365
<SALES> 0
<TOTAL-REVENUES> 268,649
<CGS> 0
<TOTAL-COSTS> 194,431
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 859
<INTEREST-EXPENSE> 3,555
<INCOME-PRETAX> 16,521
<INCOME-TAX> 6,361
<INCOME-CONTINUING> 10,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,160
<EPS-PRIMARY> .46<F1>
<EPS-DILUTED> .45<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>
