-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, iVx/J0rXp13wz55y7nefLeGfYPNtHuUJwu8twFLjUWPtMyMnUKU6CdkDQ5549XO5 ItUHmVxUQcoFme44Ch9dOg== 0000950109-94-002305.txt : 19941216 0000950109-94-002305.hdr.sgml : 19941216 ACCESSION NUMBER: 0000950109-94-002305 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19940924 FILED AS OF DATE: 19941215 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVO INC CENTRAL INDEX KEY: 0000801622 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DIRECT MAIL ADVERTISING SERVICES [7331] IRS NUMBER: 060885252 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11720 FILM NUMBER: 94564872 BUSINESS ADDRESS: STREET 1: ONE UNIVAC LN STREET 2: P O BOX 755 CITY: WINDSOR STATE: CT ZIP: 06095 BUSINESS PHONE: 2032856100 MAIL ADDRESS: STREET 1: ONE UNIVAC LANE STREET 2: P O BOX 755 CITY: WINDSOR STATE: CT ZIP: 06095-2668 FORMER COMPANY: FORMER CONFORMED NAME: ADVO SYSTEM INC DATE OF NAME CHANGE: 19920128 10-K 1 FORM 10-K 9/24/94 ADVO, Inc. Form 10-K September 24, 1994 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 (FEE REQUIRED) For the fiscal year ended September 24, 1994 ------------------ 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: (203) 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. [X] The aggregate market value of voting stock held by non-affiliates of the registrant at November 30, 1994 was $300,232,111. On that date, there were 20,858,884 outstanding shares of the registrant's common stock. Documents Incorporated by Reference: Portions of the 1994 Annual Report to Stockholders are incorporated by reference into Parts I, II and IV of this Report. Portions of the Proxy Statement for the 1995 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ADVO, INC. INDEX TO REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 24, 1994 PART I
ITEM PAGE ---- ---- 1. Business........................................................... 1 2. Properties......................................................... 6 3. Legal Proceedings.................................................. 6 4. Submission of Matters to a Vote of Security Holders................ 6 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................... 8 6. Selected Financial Data............................................ 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 8 8. Financial Statements and Supplementary Data........................ 8 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 8 PART III 10. Directors and Executive Officers of the Registrant................. 8 11. Executive Compensation............................................. 9 12. Security Ownership of Certain Beneficial Owners and Management..... 9 13. Certain Relationships and Related Transactions..................... 9 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 9
PART I ITEM 1. BUSINESS GENERAL ADVO, Inc. ("ADVO" or the "Company") is a direct marketing firm primarily engaged in soliciting and processing printed advertising from retailers, manufacturers and service companies for targeted distribution by 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 has participated in several joint ventures in order to expand its targeting capability by offering psychographic and product usage information in addition to its geo-demographic database. In August of 1993 ADVO merged with Marketing Force, Inc., a Michigan corporation ("Marketing Force" or "MF") accounted for as a pooling of interests. MF, founded in 1981, is a in-store marketing services organization which provides marketing services to a wide range of manufacturers and marketers, using proprietary operating systems. Such services include managing and executing in-store promotions, such as in-store sampling, couponing, and product demonstration/education; customizing and executing unique brand events on a national basis; in-store merchandising including shelf resets, display building, sales/service calls, audits, product stickering and product pick-up; audits of unsaleable inventory and provision of casual data in reclamation centers and retail stores; and overall management and administration of corporate promotion/marketing programs. MF recruits, trains and supervises specialized merchandisers to perform in-store work for clients, thereby eliminating the costs of building and maintaining an in-house field force by managing all program elements and managing all administrative details such as payroll, insurance and taxes. ADVO's principal executive offices are located at One Univac Lane, Windsor, Connecticut, 06095. BUSINESS SEGMENTS Information with respect to the separate revenues, operating income and identifiable assets of the Company's direct mail segment and its in-store marketing services segment can be found in ADVO's 1994 Annual Report to Stockholders under the caption "Segment Information" on page 33 and is incorporated herein by reference and made a part hereof (see Exhibit 13). DIRECT MAIL PRODUCTS AND SERVICES ADVO's direct mail products and services include shared mail and solo mail. ADVO also provides certain printing, transportation and ancillary services in conjunction with its direct mail programs. SHARED MAIL In the Company's shared mail programs (Marriage Mail (R) and Mailbox Values (R)), the advertisements of several advertisers are combined in a single mail package. Shared mail packages are assembled by the Company for distribution by ZIP Code and, in most instances, each household within the ZIP Code will receive a mail package. Individual customers can 1 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 ZIP Codes 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 select only those ZIP Codes or portions of ZIP Codes needed to accommodate its customer base, thereby reducing overall advertising costs. The Company's shared mail programs offer the features of penetration and target marketing at a significant cost reduction when compared to mailing on an individual or solo mail basis. This cost advantage is available because the Company pays the total postage expense, and advertisers are generally charged a selling price based upon, among other factors, the incremental weight of their promotional pieces. As a part of its shared mail programs, the Company provides the addresses of the households receiving the mail packages and sorts, processes and transports the advertising material for ultimate delivery through the United States Postal Service ("USPS"). Generally, larger businesses, such as food chains and mass merchandisers, will provide the Company with preprinted advertising materials in predetermined quantities. In the case of manufacturers and small retail customers, the Company may perform graphics services and act as a broker for the required printing. The Company also offers shared mail customers numerous standard turnkey advertising products in a variety of sizes and colors. The Company believes its shared mail programs are the largest programs of their kind. Marriage Mail (R) is a weekly mail program with coverage, on average, of 57 million households in approximately 160 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. SOLO MAIL Solo mail services include addressing and processing of 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 DIRECT MAIL PRODUCTS AND SERVICES The Company rents portions of its mailing list to organizations interested in distributing their own solo mailings. The Company may or may not perform the associated distribution services for the customer. Mid Coast Press is a commercial web offset printer located in Maryland, which produces general commercial printing as well as tabloids for local customers participating in the Marriage Mail (R) program. Trans-ADVO, Inc., a wholly-owned subsidiary of the Company, is a Class 1 ICC Contract Carrier presently engaged in the transportation of time-sensitive advertising material and general freight. Trans-ADVO, Inc., utilizes contracted carriers to provide direct pickup and delivery services throughout the 48 contiguous states. 2 ADVO Target Communications, Inc., and ADVOLink, Inc., based in Texas, are majority owned subsidiaries of the Company which specialize in the coordination and production of custom promotional magazines and circulars which, in most cases, are then distributed by the Company. The Company has been involved in several joint ventures directed at enhancing its micromarketing services capabilities such as proprietary data bases and custom micromarketing strategies. MAILING LIST ADVO's management believes its computerized mailing list is the largest residential/household mailing list in the country. It contains over 108 million addresses (constituting nearly all of the households in the continental United States) and was used by the U.S. Census Bureau as a base for developing the mailing list for its 1990 census questionnaire mailings. The Company's management believes that the list is particularly valuable and that replication in its entirety by competitors would be extremely difficult and costly. The list enables the Company to target mailings to best serve its customers. ADVO's list is updated on a regular basis with information supplied by the USPS as follows. At least every three months, 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 include whether the address is still occupied, whether the addresses still exist 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 whether carrier routes and/or Zip Codes have changed so that ADVO can maintain its address list in walk sequence order. The USPS provides these updates for a fee, provided that the user's list is at least 90% accurate on a ZIP Code basis. ADVO believes its list is nearly 100% accurate. IN-STORE MARKETING SERVICES Products and services for its in-store marketing services organization are divided into five major categories: Promotion Services, Merchandising Services, Promotion Administration, Damage Advantage(TM) and Instant Recall(TM). PROMOTION SERVICES The Promotion Services group manages and executes customized in-store promotions, such as in-store couponing, sampling, and product demonstration/education. In-store representatives, directly employed by the Company, give a scripted sales presentation and a purchase incentive to consumers during peak shopping periods in all types of retail stores: grocery, mass merchandisers, chain drug, club, and hardware/do-it-yourself. MERCHANDISING SERVICES Merchandising Services include shelf resets, display building, sales/service calls, audits, product stickering, and product pick-up. The Company's merchandising services products are Dedicated Merchandising Services(TM) and On-Call Merchandising Services(TM). Dedicated Merchandising Services(TM) involves the selection and funding by the Company of specialized merchandisers to perform in-store work exclusively for one client. For its On-Call Merchandising Services(TM), the Company has a national force of merchandising specialists who regularly perform specific short-term in-store projects for a wide variety of clients. On-Call(TM) programs are closely managed by expert field-based managers who are in regular contact with both the manufacturer field sales organization and the retailers. PROMOTION ADMINISTRATION The Promotion Administration segment of the Company's business includes a variety of database management programs such as the administration of the Grocery Manufacturers of America's "Central 3 List" project and the administration of General Motors' Career Builder, which is a deferred compensation plan for enrolled retail sales people within each of the General Motors divisions. The Company also has over a hundred TeleServices Operators in support of its various programs, along with warehousing and fulfillment services. DAMAGED GOODS AND RECALLS Damaged Advantage(TM) was a new product developed in 1992 to help consumer packaged goods manufacturers gain control of damaged goods payments and reduce damaged goods volume. Damaged Advantage(TM) audits unsaleable inventory and provides casual data in reclamation centers and retail stores. Instant Recall(TM) was a product being launched in 1993 to provide manufacturers with a quick and efficient way of dealing with product recalls or the removal and disposition of discontinued product. CLIENT BASE Approximately 80% of the customers served by the Company throughout the United States are smaller retail or service businesses. The remainder include major food, drug or discount chains and manufacturing companies. 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 customer accounted for more than 10% of the Company's sales in 1994, 1993 or 1992. OPERATIONS Customers' advertising circulars are processed by approximately 3,000 direct mail production employees who work at 23 facilities which are strategically located throughout the nation. State-of-the-art inserting machines (which combine the individual advertising pieces into the mailing packages) and modern quarter-folding equipment are the principal equipment used to process the Company's products and services. In nearly all 23 of ADVO's production 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. ADVO's computer center is located in Hartford, 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. Marketing Force maintains four sales offices nationwide and a corporate headquarters facility in Michigan, along with two warehouses used to hold various promotional merchandise. COMPETITION In general, the printed advertising market is highly competitive with companies competing primarily on 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". 4 Newspapers represent the Company's most significant and direct competition. Through the distribution of preprinted circulars, classified advertising and run of press advertising ("ROP"), newspapers have been the traditional and dominant medium for advertising by retailers for many years. Insertion rates are highly competitive and many newspapers' financial resources are substantial. ADVO's principal direct marketing competitors are other companies with residential lists or similar cooperative mailing programs. These companies have a significant presence in many of the Company's markets and represent serious competition to the Company's Marriage Mail (R) programs in those markets. There are local mailers in practically every market of the country. In addition to local mailers, there are many local private delivery services such as "shoppers" and "pennysavers" which compete by selling ROP advertisements and classified advertisements. ADVO believes that it competes effectively in its various markets. Because of Marketing Force's diverse products and services, it does not have competition from one competitor across all areas of its business, but rather different competitors in each niche. Additionally, there are a great number of local sampling and demonstration agencies who compete for business on a national level. The Marketing Force's Promotion Administration programs are primarily confined to the automotive industry and, therefore, its competition includes traditional automotive suppliers as well as the various divisional advertising agencies. Generally, competition is based on price, expertise of personnel and quality of service. Marketing Force competes effectively due to its consistently high quality of service, trained merchandisers, expert personnel and price. 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 the direct purchasing of approximately 40,000 tons of paper per year and another 10,000 tons through its printing network. ADVO has agreements with various paper suppliers and print vendors to assure the supply of proper paper grades at competitive prices. These purchases enable ADVO to purchase the paper necessary for its DAL and turnkey family products at favorable prices. 5 EMPLOYEES As of September 24, 1994, the Company had a total of approximately 5,300 full and part-time direct mail employees. ADVO also uses outside temporary employees for its direct mail operations, particularly during busy seasons. As of September 24, 1994, the In-store marketing services organization had a total of approximately 250 full-time and 3,800 part-time employees. ADVO has one union contract, covering production employees in the Hartford, Connecticut branch. The Company believes that its relations with its employees are satisfactory. ITEM 2. PROPERTIES ADVO does not own any real estate. The Company's corporate headquarters is a 71,000 square foot leased facility in Windsor, Connecticut. The lease runs through December 1996 with options to renew. The Company also leases 23 production facilities, 3 division offices, 80 sales offices (which excludes the sales offices that are located in the branches) throughout the United States. The In-store marketing services organization's corporate headquarters is a 42,000 square foot leased facility in Rochester Hill, Michigan which runs through December 1999. The terms of the branch and division office leases range from three to ten years and the sales offices are generally leased for periods of one to five years. 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
NAME AGE POSITION WITH COMPANY ---- --- --------------------- Robert Kamerschen........... 58 Chairman and Chief Executive Officer Joseph P. Durrett........... 49 President and Chief Operating Officer Larry G. Morris............. 56 Senior Executive Vice President, Chief Administrative and Process Development Officer Lowell W. Robinson.......... 45 Executive Vice President and Chief Financial Officer Peter A. Corrao............. 40 Senior Vice President Rick Kurz................... 54 Senior Vice President Frederick Leick............. 50 Senior Vice President Myron L. Lubin.............. 54 Senior Vice President Daniel J. Steever........... 36 Vice President Frank J. Talz............... 50 Senior Vice President Robert S. Hirst............. 48 Vice President and Controller
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 Playboy Enterprises, Inc., Micrografx, Inc. and Audrey Jones Stores. 6 Mr. Durrett became President, Chief Operating Officer and a Director of the Company on September 1, 1992. From February 1990 to August 1992, he was Senior Vice President of Sales of Kraft General Foods Inc., the food segment subsidiary of Philip Morris Companies Inc. From August 1987 to January 1990, he was President of Sales and Sales Operations of Kraft Inc. (acquired December 7, 1988 by Philip Morris Companies Inc.), a multinational food company. Mr. Morris has been Senior Executive Vice President, Chief Administrative and Process Development Officer of the Company since May 1994 and a Director since October 1989. From August 1989 to April 1994, he was Executive Vice President, Chief Financial and Administrative Officer. Mr. Robinson became Executive Vice President and Chief Financial Officer of the Company on May 5, 1994. From April 1993 to April 1994, he was an independent consultant. From April 1991 to March 1993, he was Vice President and Chief Financial Officer for The Travelers Managed Care and Employee Benefits Operations. From October 1988 to March 1991, he was Vice President and Chief Financial Officer for Citicorp's Global Insurance and Capital Investments Divisions and from June 1986 to September 1988, he was Vice President and Controller for Citicorp's Consumer Services Group--International. Mr. Corrao became Senior Vice President--President National Accounts Marketing Division on January 25, 1990. From January 1989 to January 1990, he held the position of Senior Vice President of National Accounts Marketing. Mr. Kurz became Senior Vice President--Chief Marketing Officer on April 19, 1993. Prior to that, he was a Managing Partner of Marketing Corporation of America, a marketing consulting firm. He had held that position for the last five years. Mr. Leick became Senior Vice President--President Atlantic Division on February 15, 1994. Prior to that, he was President, Chief Executive Officer, and a Director of Seneca Foods Corporation whose primary business is a producer of fruit juices and vegetables. He had held those positions for the last five years. Mr. Lubin became Senior Vice President--President Western Division on January 25, 1990. From February 1986 to January 1990, he held the position of Senior Vice President, General Manager-- Western Division of the Company. Mr. Steever became Vice President--President Marketing Force on May 4, 1994. Prior to that he held several Regional Vice President/General Manager positions within the Company, including regions located in Northern California, the Northeastern United States and the Rocky Mountain area. He had held these positions for the last five years. Mr. Talz became Senior Vice President--President Central Division on January 25, 1990. From August 1986 to January 1990, he held the position of Senior Vice President, General Manager--Central Division of the Company. Mr. Hirst became Vice President and Controller on April 16, 1990. From April 1987 to April 1990, he was Chief Financial Officer of Star Expansion Company, an international manufacturing and distribution company, producing fasteners and hardware for numerous applications. 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 qualified, or until his earlier resignation or removal. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ADVO's 1994 Annual Report to Stockholders includes on page 35 under the caption "Quarterly Financial Data (unaudited)" the reported high and low sales prices of ADVO's Common Stock for the past two fiscal years, and such information is incorporated herein by reference and made a part hereof (see Exhibit 13). For the fiscal years ended September 24, 1994 and September 25, 1993, the Company declared cash dividends of $.095 and $.06 per share to holders of ADVO Common Stock, respectively. For the fiscal year ended September 26, 1992 the Company declared no cash dividends. The closing price as of November 30, 1994 of the Company's Common Stock, under the symbol AD, on the New York Stock Exchange as reported in The Wall Street Journal was $17 7/8 per share. The approximate number of holders of record of the common stock on November 30, 1994 was 1,004. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included in ADVO's 1994 Annual Report to Stockholders on page 21 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 1994 Annual Report to Stockholders on pages 22 through 24 under the caption "Financial Report" and is incorporated herein by reference and made a part hereof (see Exhibit 13). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ADVO's consolidated financial statements, together with the Report of Independent Auditors thereon dated October 19, 1994, appearing on pages 25 through 36 of ADVO's 1994 Annual Report to Stockholders, are incorporated herein by reference and made a part hereof. The selected quarterly information required by this item is included under the caption "Quarterly Financial Data (unaudited)" on page 35 of ADVO's 1994 Annual Report to Stockholders and is incorporated herein by reference and made a part hereof (see Exhibit 13). For financial statement schedules required by this item, see the index at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item, to the extent not included under the caption "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K, appears on pages 4 and 5 of the Company's definitive proxy statement dated December 15, 1994 for the annual meeting of stockholders to be held on January 19, 1995 (the "Proxy Statement"), under the caption "Election of Directors", and on page 7 of the Proxy Statement under the subcaption "Section 16 Reports", and is incorporated herein by reference and made a part hereof. 8 ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under the caption "Executive Compensation" on pages 7 through 17 (except for those portions appearing under the subcaptions "Report of the Compensation Committee" and "Company Financial Performance"), and "Governance of the Company" on pages 3 and 4, 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 pages 2 and 3 and on pages 6 and 7, 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 pages 17 and 18 of ADVO's Proxy Statement and in footnotes 2 and 3 under the caption "Security Ownership of Certain Beneficial Owners" on pages 2 and 3 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:
EXHIBIT NO. EXHIBIT WHERE LOCATED - ----------- ------- ------------- 2 Agreement and Plan of Merger, dated Incorporated by reference to Exhibit as of August 6, 1993. 2 to pre-effective Amendment No. 2 to the Company's Form S-4 filed on August 18, 1993 (No. 33-65794). 3(a) Restated Certificate of Incorporation Incorporated by reference to Exhibit of ADVO. 5 to the Company's Registration Statement on Form 8-A filed on February 24, 1993 (No. 1-11720). 3(b) Restated By-laws of ADVO. Incorporated by reference to Exhibit 6 to the Company's Registration Statement on Form 8-A filed on February 24, 1993 (No. 1-11720). 3(c) 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.
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EXHIBIT NO. EXHIBIT WHERE LOCATED - ----------- ------- ------------- 10(a) Stock Subscription Warrants, as held Incorporated by reference to Exhibit by Warburg Pincus Capital Partners, 10(c) to the Company's Form 10 filed L.P. to subscribe for the common on September 15, 1986. stock of ADVO. 10(b) 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(c) 1986 Employee Restricted Stock Plan Incorporated by reference to Exhibit of ADVO, as amended.* A to the Company's definitive Proxy statement for the annual meeting held on January 24, 1991. 10(d) 1988 Non-Qualified Stock Option Plan Incorporated by reference to Exhibits and 1993 Stock Option Subplan of A and B to the Company's definitive ADVO, as amended.* Proxy statement for the annual meeting held on January 20, 1994. 10(e) 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(f) Executive Severance Agreements dated Incorporated by reference to Exhibit December 7, 1990, between ADVO and 10(r) to the Company's Annual Report the executive officer named on Form 10-K for the fiscal year therein.* ended September 29, 1990. 10(g) Executive Severance Agreements dated Incorporated by reference to Exhibit December 7, 1990, between ADVO and 10(s) to the Company's Annual Report the executive officer named on Form 10-K for the fiscal year therein.* ended September 29, 1990. 10(h) Executive Severance Agreement dated Incorporated by reference to Exhibit February 20, 1991, between ADVO and 10(a) to the Company's Quarterly Robert Kamerschen.* Report on Form 10-Q for the quarter ended March 30, 1991. 10(i) Executive Severance Agreement dated Incorporated by reference to Exhibit February 20, 1991, between ADVO and 10(c) to the Company's Quarterly Larry G. Morris.* Report on Form 10-Q for the quarter ended March 30, 1991. 10(j) Employment Agreement dated November Incorporated by reference to Exhibit 14, 1991 between ADVO and Robert 10(t) to the Company's Annual Report Kamerschen.* on Form 10-K for the fiscal year ended September 28, 1991. 10(k) Employment Agreement dated August 21, Incorporated by reference to Exhibit 1991 between ADVO and Larry G. 10(u) to the Company's Annual Report Morris.* on Form 10-K for the fiscal year ended September 28, 1991. 10(l) ADVO Long-term Compensation Plan.* Incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 1991.
10
EXHIBIT NO. EXHIBIT WHERE LOCATED - ----------- ------- ------------- 10(m) Amendment dated August 18, 1992 on Incorporated by reference to Exhibit Stock Subscription Warrants, as held 10(u) to the Company's Annual Report by Warburg Pincus Capital Partners, on Form 10-K for the fiscal year L.P. to subscribe for common stock ended September 26, 1992. of ADVO. 10(n) Employment Agreement dated July 13, Incorporated by reference to Exhibit 1992, between ADVO and Joseph P. 10(v) to the Company's Annual Report Durrett.* on Form 10-K for the fiscal year ended September 26, 1992. 10(o) Executive Severance Agreement dated Filed herewith. September 1, 1992 between ADVO and Joseph P. Durrett.* 11 Computation of Per Share Earnings. Filed herewith. 13 1994 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. 23 Consent of Independent Auditors. Filed herewith. 27 Financial Data Schedule. Filed herewith.
- -------- * 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. No reports on form 8-K were filed by the Company for the quarter ended September 24, 1994. 11 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Date December 13, 1994 ADVO, Inc. ---------------------------------- By Robert S. Hirst /s/ ------------------------------------ ROBERT S. HIRST VICE PRESIDENT AND CONTROLLER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. DATE SIGNATURE TITLE ---- --------- ----- December 13, 1994 Robert Kamerschen /s/ Chairman, Chief Executive ---------------------------- Officer and Director ROBERT KAMERSCHEN (Principal Executive Officer) December 13, 1994 Joseph P. Durrett /s/ President, Chief ---------------------------- Operating Officer and JOSEPH P. DURRETT Director December 13, 1994 Larry G. Morris /s/ Senior Executive Vice ---------------------------- President, Chief LARRY G. MORRIS Administrative and Process Development Officer December 13, 1994 Lowell W. Robinson /s/ Executive Vice President ---------------------------- and Chief Financial LOWELL W. ROBINSON Officer (Principal Financial Officer) December 13, 1994 Robert S. Hirst /s/ Vice President and ---------------------------- Controller (Principal ROBERT S. HIRST Accounting Officer) December 13, 1994 Jack W. Fritz /s/ Director ---------------------------- JACK W. FRITZ December 13, 1994 Lawrence Lachman /s/ Director ---------------------------- LAWRENCE LACHMAN December 13, 1994 Howard H. Newman /s/ Director ---------------------------- HOWARD H. NEWMAN December 13, 1994 John R. Rockwell /s/ Director ---------------------------- JOHN R. ROCKWELL December 13, 1994 Richard H. Stowe /s/ Director ---------------------------- RICHARD H. STOWE December 13, 1994 John L. Vogelstein /s/ Director ---------------------------- JOHN L. VOGELSTEIN 12 ADVO, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE ---- Report of independent auditors........................................... * Consolidated statements of operations for the years ended September 24, 1994, September 25, 1993 and September 26, 1992......................... * Consolidated balance sheets at September 24, 1994 and September 25, 1993. * Consolidated statements of cash flows for the years ended September 24, 1994, September 25, 1993 and September 26, 1992......................... * Consolidated statements of changes in stockholders' equity for the years ended September 24, 1994, September 25, 1993 and September 26, 1992..... * Notes to consolidated financial statements............................... * Consolidated Schedules I --Marketable Securities......................................... F-2 V --Property, Plant and Equipment................................. F-3 VI --Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment................................ F-4 VIII --Valuation and Qualifying Accounts............................. F-5 IX --Short-Term Borrowings......................................... F-6
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto. - -------- * Incorporated herein by reference from pages 25 to 36 of the ADVO, Inc. 1994 Annual Report to Stockholders. F-1 ADVO, INC. SCHEDULE I--MARKETABLE SECURITIES YEAR ENDED SEPTEMBER 24, 1994 (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------ ------------------ ---------- ------------------ ---------------------- AMOUNTS AT WHICH EACH PORTFOLIO OF EQUITY SECURITY ISSUES NUMBER OF AND EACH OTHER SHARES OR UNITS-- MARKET VALUE OF SECURITY ISSUE NAME OF ISSUER AND PRINCIPAL AMOUNT COST OF EACH ISSUE AT CARRIED IN THE TITLE OF EACH ISSUER OF BONDS AND NOTES EACH ISSUE BALANCE SHEET DATE BALANCE SHEET - ------------------------ ------------------ ---------- ------------------ ---------------------- Marketable Securities U.S. Government Obligations.......... $14,600 $14,463 $14,438 $14,519 Municipal Bonds....... 15,765 16,885 16,307 16,422 Corporate Securities.. 452 451 437 451 ------- ------- ------- $31,799 $31,182 $31,392 ======= ======= =======
F-2 ADVO, INC. SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ----------------------------- ---------- --------- ----------- ------------- ---------- BALANCE AT BALANCE AT BEGINNING ADDITIONS OTHER CHANGES END DESCRIPTION OF PERIOD AT COST RETIREMENTS ADD (DEDUCT) OF PERIOD - ----------------------------- ---------- --------- ----------- ------------- ---------- Year ended September 26, 1992: Machinery & equipment...... $ 68,969 $10,809 $1,379 $ 20(a) $ 78,419 Leasehold improvements..... 12,743 1,132 -- 7(a) 13,882 -------- ------- ------ ------ -------- $ 81,712 $11,941 $1,379 $ 27 $ 92,301 ======== ======= ====== ====== ======== Year ended September 25, 1993: Machinery & equipment...... $ 78,419 $13,074 $1,413 $1,458(a) $ 91,538 Leasehold improvements..... 13,882 1,115 353 10(a) 14,654 -------- ------- ------ ------ -------- $ 92,301 $14,189 $1,766 $1,468 $106,192 ======== ======= ====== ====== ======== Year ended September 24, 1994: Machinery & equipment...... $ 91,538 $12,156 $1,553 $ -- $102,141 Leasehold improvements..... 14,654 1,148 495 -- 15,307 -------- ------- ------ ------ -------- $106,192 $13,304 $2,048 $ -- $117,448 ======== ======= ====== ====== ========
- -------- (a) Represents amounts of companies acquired. F-3 ADVO, INC. SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ----------------------------- ---------- ---------- ----------- ------------ ---------- ADDITIONS BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND CHANGES END DESCRIPTION OF PERIOD EXPENSES RETIREMENTS ADD (DEDUCT) OF PERIOD - ----------------------------- ---------- ---------- ----------- ------------ ---------- Year ended September 26, 1992: Machinery & equipment...... $29,294 $ 6,728 $ 879 $(151) $34,992 Leasehold improvements..... 6,997 1,298 -- -- 8,295 ------- ------- ------ ----- ------- $36,291 $ 8,026 $ 879 $(151) $43,287 ======= ======= ====== ===== ======= Year ended September 25, 1993: Machinery & equipment...... $34,992 $ 7,783 $ 896 -- $41,879 Leasehold improvements..... 8,295 1,456 241 -- 9,510 ------- ------- ------ ----- ------- $43,287 $ 9,239 $1,137 -- $51,389 ======= ======= ====== ===== ======= Year ended September 24, 1994: Machinery & equipment...... $41,879 $ 9,443 $ 984 -- $50,338 Leasehold improvements..... 9,510 1,535 444 -- 10,601 ------- ------- ------ ----- ------- $51,389 $10,978 $1,428 -- $60,939 ======= ======= ====== ===== =======
The estimated useful lives of the principal classes of assets are as follows: machinery and equipment--5 to 15 years; leasehold improvements--shorter of useful life or life of lease. F-4 ADVO, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------ ---------- --------------------- ---------- ---------- ADDITIONS --------------------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT BEGINNING COSTS AND OTHER FROM END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD - ------------------------------ ---------- ---------- ---------- ---------- ---------- Year ended September 26, 1992: Allowances for sales adjustments................ $ 1,557 $ -- $9,356(c) $ 8,565 $ 2,348 Allowances for doubtful accounts................... 1,151 3,086 36(b) 3,204(a) 1,069 Accumulated amortization-- Goodwill................... 158 144 -- -- 302 Accumulated amortization-- Intangibles................ 248 988 -- -- 1,236 ------- ------- ------ ------- ------- $ 3,114 $ 4,218 $9,392 $11,769 $ 4,955 ======= ======= ====== ======= ======= Year ended September 25, 1993: Allowances for sales adjustments................ $ 2,348 $ -- $6,277(c) $ 5,738 $ 2,887 Allowances for doubtful accounts................... 1,069 2,879 -- 2,363(a) 1,585 Restructuring reserve....... -- 25,750 -- -- 25,750 Accumulated amortization-- Goodwill................... 302 340 -- -- 642 Accumulated amortization-- Intangibles................ 1,236 1,554 -- -- 2,790 ------- ------- ------ ------- ------- $ 4,955 $30,523 $6,277 $ 8,101 $33,654 ======= ======= ====== ======= ======= Year ended September 24, 1994: Allowances for sales adjustments................ $ 2,887 $ -- $6,992(c) $ 6,558 $ 3,321 Allowances for doubtful accounts................... 1,585 3,402 -- 3,203(a) 1,784 Restructuring reserve....... 25,750 -- -- 8,641 17,109 Accumulated amortization-- Goodwill................... 642 331 -- 270 703 Accumulated amortization-- Intangibles................ 2,790 1,477 -- 280 3,987 ------- ------- ------ ------- ------- $33,654 $ 5,210 $6,992 $18,952 $26,904 ======= ======= ====== ======= =======
- -------- (a) Write off of uncollectible accounts, net of recoveries on accounts previously written off. (b) Accounts of companies acquired. (c) Reduction of revenues. F-5 ADVO, INC. SCHEDULE IX--SHORT-TERM BORROWINGS (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ------------------------------- ---------- -------- ----------- ----------- ----------- MAXIMUM AVERAGE WEIGHTED WEIGHTED AMOUNT AMOUNT AVERAGE BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST CATEGORY OF AGGREGATE END OF INTEREST DURING THE DURING THE RATE DURING SHORT-TERM BORROWINGS PERIOD RATE PERIOD PERIOD THE PERIOD - ------------------------------- ---------- -------- ----------- ----------- ----------- Year ended September 26, 1992: Notes payable to bank (a).... $1,475 6.90% $4,625 $1,813(b) 7.54%(c) Year ended September 25, 1993: Notes payable to bank (a).... $ -- 6.00% $5,625 $2,573(b) 6.00%(c) Year ended September 24, 1994: Notes payable to bank (d).... $ -- -- $5,850 $ 64(e) 3.69%(f)
- -------- (a) Notes payable to bank represented borrowings under lines of credit borrowing arrangements which had no termination date but were reviewed semi-annually for renewal. (b) The average amount outstanding during the period was computed by dividing the total of month-end outstanding principal balances by 12. (c) The weighted average interest rate during the period was computed by dividing the actual interest expense by average short-term debt outstanding. (d) Represents borrowings under the Company's revolving credit agreement with a bank expiring December 31, 1995. (e) The average amount outstanding during the period was based on the average daily outstanding balance. (f) The weighted average interest rate only for the number of days the borrowing was outstanding. F-6 EX-10 2 EXECUTIVE SEVERANCE AGREEMENT Exhibit 10(o) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of September 1, 1992, by and between ADVO, Inc. (the "Company") and Joseph Durrett (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 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 or (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) a reorganization, merger or consolidation of the Company in which the Company is not the surviving or resulting corporation or pursuant to which the common stock would be converted into cash, securities or other property (other than a merger or other business combination involving the Company, in which the holders of the common stock of the Company immediately prior to the merger have the same proportionate ownership of the common stock of the surviving corporation immediately after the merger), (ii) the approval by the stockholders of the Company of any plan or proposal for the dissolution or liquidation of the Company, or (iii) a sale, lease, exchange or other transfer (in one transaction or a 2 series of related transactions) of all, or substantially all of the Company's consolidated assets. For purposes of this Section 1(d): (iv) "Exempt Reorganization" means a Reorganization in which either (x) the election or appointment of the individuals who immediately after the effective time of the Reorganization constitute the directors of the Continuing Corporation was approved by a vote of at least two-thirds of the individuals constituting the directors of the Company immediately prior to such effective time (each such individual in office immediately prior to the effective time, a "Prior Director") or (y) a majority of the directors of the Continuing Corporation immediately after such effective time were Prior Directors. (v) "Reorganization" means: (1) a reorganization, merger or consolidation of the Company in which the Company is not the surviving or resulting corporation or pursuant to which the common stock would be converted into securities or other property, or (2) a reorganization of the Company into a holding company structure, including such a reorganization involving a business combination with another corporation or entity, or (3) a sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the Company's consolidated assets or a dissolution or liquidation of the Company, in each case pursuant to which the holders of the common stock receive securities of another entity. (vi) "Continuing Corporation" means the entity surviving a Reorganization. (vii) "Prior Director" shall be deemed to include any individual proposed by Warburg, Pincus Capital Partners, L.P. ("Warburg") as a substitute for a Prior Director and elected a director of the Continuing Corporation. In addition, subject to the foregoing, a Change of Control shall be deemed to 3 have occurred if (A) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended), other than Warburg and its affiliates, shall become the beneficial owner (within the meaning of Rule 13d-3) under such Act) of 30% or more of the Company's common stock or (B) at any time Eligible Directors shall cease for any reason to constitute a majority of the entire Board of Directors of the Company. An "Eligible Director" shall mean (i) any individual who was a director at September 27, 1990 (a "1990 Director), (ii) any individual proposed by Warburg and elected as a director in place of a 1990 Director, or (iii) any director elected by, or nominated for election by the Company's stockholders by, the vote of at least two-thirds of the directors who at the time of such vote were Eligible Directors. (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. The determination of whether a Termination of the Executive's employment is for "Cause" shall be made by the Chief Executive Officer 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, 4 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. (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 provisions 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 TWO years following the occurrence of the Change of Control, and (ii) the Executive's death. 5 (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 Date"), unless previously terminated, and 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. 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 6 (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, 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 7 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) a location other than the location where the Executive was employed immediately preceding the date of the Change of Control, or (B) any office or location greater 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, the following 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 the sum of two times (A) Base Pay at the rate in effect at the time within the 90- ------------- day period preceding the date of 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 year from and including the third year prior to the first occurrence of a Change of Control; and 8 (ii) For the remainder of the Severance Period, 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 polices 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 duration of the Severance Period. (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, 9 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 benefits which the Executive receives or is then entitled to receive from the Company that would constitute a "parachute payment" within the meaning of Section 28OG of the Code, less (ii) the amount of federal 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, 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)(i). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it make such determination, furnish the Company and the Executive an option 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. 10 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 the extent hereafter provided, 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 other member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. In the event that the Executive prevails, in whole or in part, in connection with any such litigation, 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: Except as otherwise provided in this Agreement, the -------------------- 11 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. Successor 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 purpose 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 purposed of this Agreement, all communications, including ------- 12 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 pre-paid, 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; 13 provided, however, that any amounts received by this Executive pursuant to this Agreement shall be in lieu of any benefits which the Executive is entitled to receive or may be 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: 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, expressed 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. 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 Robert Kamerschen ------------------------- (NAME) 14 EX-11 3 COMPUTATION OF PER SHARE EXHIBIT 11 PAGE 1 OF 2 ADVO, INC. COMPUTATION OF PRIMARY PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 26, 1994 1993 1992 ------------- ------------- ------------- EARNINGS APPLICABLE TO COMMON STOCK.. $25,171 $ 5,351 $22,493 ======= ======= ======= AVERAGE COMMON AND COMMON EQUIVALENT SHARES (A) Average common shares outstanding.... 21,104 20,631 17,921 Assumed conversion or exercise of: Warrants........................... 2,236 2,303 2,726 Stock options...................... 496 1,097 1,098 Series A Preferred Stock........... -- 1,229 3,304 Restricted stock................... 50 129 217 ------- ------- ------- Weighted average common and common equivalent shares................... 23,886 25,389 25,266 ======= ======= ======= EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE.................... $ 1.05 $ .21 $ .89 ======= ======= =======
- -------- (A) Fiscal 1992 restated for 5-for-4 stock split distributed March 5, 1993 and for 2,115,956 common shares issued in connection with the merger of ADVO, Inc. and Marketing Force, Inc., on August 19, 1993 accounted for as a pooling of interests. The shares are being treated as if issued as of the beginning of each period presented. EXHIBIT 11 PAGE 2 OF 2 ADVO, INC. COMPUTATION OF FULLY DILUTED PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 26, 1994 1993 1992 ------------- ------------- ------------- EARNINGS APPLICABLE TO FULLY DILUTED SHARES.............................. $25,171 $ 5,351 $22,493 ======= ======= ======= FULLY DILUTED SHARES (A) Average common shares outstanding.... 21,104 20,631 17,921 Assumed conversion or exercise of: Warrants........................... 2,242 2,303 2,789 Stock options...................... 512 1,097 1,167 Series A Preferred Stock........... -- 1,229 3,304 Restricted stock................... 66 152 236 ------- ------- ------- Fully diluted shares................. 23,924 25,412 25,417 ======= ======= ======= EARNINGS PER SHARE ASSUMING FULL DILUTION............................ $ 1.05 $ .21 $ .88 ======= ======= =======
- -------- (A) Fiscal 1992 restated for 5-for-4 stock split distributed March 5, 1993 and for 2,115,956 common shares issued in connection with the merger of ADVO, Inc. and Marketing Force, Inc., on August 19, 1993 accounted for as a pooling of interests. The shares are being treated as if issued as of the beginning of each period presented. EX-13 4 SELECTED FINANCIAL DATA Exhibit 13 ADVO, Inc. Consolidated Financial Statements SELECTED FINANCIAL DATA
Year ended Year ended Year ended Year ended Year ended September 24, September 25, September 26, September 28, September 29, (In millions, except per share data) 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------------- Summary of Operations Revenues $975.5 $910.8 $828.6 $727.9 $677.1 Operating income (1) 40.6 6.8 32.2 26.1 22.1 Net income 25.2 5.4 22.5 19.2 16.0 Earnings per share (2): Primary 1.05 .21 .89 .78 .68 Fully diluted 1.05 .21 .88 .77 .68 Cash dividends declared per share .095 .06 -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Weighted average common and common equivalent shares (2) 23.9 25.4 25.4 24.9 23.6 - ---------------------------------------------------------------------------------------------------------------------------------- September 24, September 25, September 26, September 28, September 29, (In millions, except per share data) 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data Cash, cash equivalents and marketable securities $ 71.1 $ 71.4 $ 65.7 $ 52.6 $ 41.6 Total assets 225.7 226.5 201.1 163.7 140.1 Long-term debt -- -- .2 .4 .3 Preferred stock (3) -- -- 13.1 12.7 12.1 Stockholders' equity 108.0 118.3 112.7 91.3 68.7 Book value per share (2) 5.17 5.32 5.08 4.19 3.25 - ----------------------------------------------------------------------------------------------------------------------------------
On August 19, 1993 a merger (the "Merger") was consummated between ADVO, Inc. and Marketing Force, Inc. (see Note 2 to the consolidated financial statements). The Merger was accounted for under the pooling of interests method and, accordingly, selected financial data for the fiscal years presented above reflect the combined selected financial results, financial position and share data of the two corporations as if the Merger had been consummated as of the beginning of each of the periods presented. (1) Reflects a one-time restructuring charge to operations of $25.8 million in fiscal 1993 (See Note 8 to the consolidated financial statements). (2) Prior years restated for 5-for-4 stock split effected in the form of a dividend on March 5, 1993. (3) All outstanding preferred shares were converted to ADVO Common Stock in February 1993. 21 ADVO, Inc. Financial Report FINANCIAL REPORT FINANCIAL OVERVIEW Fiscal 1994 was highlighted by the Company's significant revenue growth, and a 25% increase in operating income when compared with fiscal 1993 results (adjusted for the restructure charge taken in FY93). Achievements made in unit volumes and price/mix gains flowed through to ADVO's bottom line in addition to the successful implementation of the Company's cost control initiatives. Despite 1994's revenue and earnings performance, the Company faces two critical issues in the near term, the scheduled postal rate increase for January 1995 and the continued economic uncertainty and consolidation throughout the retail sector. Despite these issues, ADVO's management is confident that it will be able to continue its fiscal 1994 successes in fiscal 1995 and beyond. FISCAL 1994 COMPARED TO FISCAL 1993 Revenues Fiscal 1994 revenues increased 7.1% or $64.7 million to $975.5 million. Direct mail revenues accounted for almost all of the growth, experiencing a $63.7 million gain to $920.3 million. Both pricing and volume growth contributed to the increase with volume gains being the more significant contributor. Overall, shared mail distribution increased 7.4% to 24.2 billion pieces mailed and shared mail packages distributed grew to 3.1 billion from 3.0 billion in fiscal 1993. The key barometer of shared mail pieces per package increased to 7.69 in fiscal 1994 from 7.61 in fiscal 1993. In-store marketing revenues increased approximately $1.0 million due primarily to volume growth in its merchandising and promotion services. Operating Expenses Cost of sales as a percentage of revenues decreased to 74.5% in fiscal 1994 from 75.1% in fiscal 1993. This improvement was mainly due to improved postage utilization as reflected in fiscal 1994's shared mail pieces per package growth and operational efficiencies. In absolute terms, cost of sales increased $42.4 million or 6.2% over the prior year. The majority of the increase was attributable to a 5% increase in shared mail delivery costs and a 12% increase in print costs. These increases were a result of the Company's fiscal 1994 shared mail package and turnkey product piece growth over fiscal 1993's volumes. Selling expense, including the provision for bad debts, remained flat as a percentage of revenues at 12.5% in both fiscal 1994 and fiscal 1993. Overall, selling expense increased $8.5 million in fiscal 1994 over the prior year mainly as a function of increased commission costs resulting from the revenue growth over fiscal 1993. As a percentage of revenue, general and administrative costs remained constant at 8.8% both in fiscal 1994 and fiscal 1993. General and administrative costs increased $5.8 million or 7.3% in fiscal 1994 over fiscal 1993. The increase was primarily related to increases in promotional costs, system development expenditures and wages. During fiscal 1993 the Company recorded a $25.8 million charge to operations in connection with a plan of restructuring (see Note 8 to the consolidated financial statements). As of September 24, 1994 the Company has utilized $8.6 million of this reserve for the reorganization and upgrade of the Company's management team, the shutdown and consolidation of its Indianapolis production facility into pre-existing facilities, the downsizing of its former Atlantic Division office and the abandonment of certain non-core Micromarketing projects that had not proven profitable. The benefits realized during fiscal 1994 consisted of reduced overhead costs and the improved strategic alignment and profitability of the Company's Atlantic Division. The benefits of some of these actions will not be fully realized until the Company's 1995 fiscal year and beyond. The remainder of the reserve will be utilized over future periods during which benefits will be realized through more efficient and low-cost operations and enhanced revenue growth through improved management ability and structure. The Company's management believes that all benefits anticipated to be realized by its plan of restructure remain intact as of the close of its 1994 fiscal year. Operating Income As a result of the aforementioned and the 1993 restructuring reserve, the Company reported a $33.8 million increase in operating income to $40.6 million versus $6.8 million in fiscal 1993. Direct mail operating income for fiscal 1994 was $39.7 million compared with $2.3 million in the prior year, inclusive of the $25.8 million restructuring charge. In-store marketing services experienced a decrease in operating income in fiscal 1994, primarily related to infrastructure and system development costs. Interest Income and Other Expense Interest income results primarily from the investment of excess cash and amounted to $1.9 million in fiscal 1994 versus $2.0 million in fiscal 1993. Other expense increased $0.6 million in fiscal 1994 to $1.3 million primarily due to increased non-income related taxes and fees. Income Taxes The Company's effective tax rate for fiscal 1994 was 39% while the rate in fiscal 1993 was 34%. The fiscal 1993 effective rate was favorably impacted by the recognition of tax benefits associated with certain amortizable assets. Since these benefits were substantially utilized in fiscal 1993 and prior periods the Company's effective tax rate, starting with fiscal 1994, will more closely reflect the statutory tax rates. During 22 ADVO, Inc. Financial Report the first quarter of fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The effect of this accounting change was not material to either the Company's results of operations or financial position. Earnings per Share Earnings per share increased to $1.05 in fiscal 1994 versus $0.21 in fiscal 1993 ($0.88 adjusted for fiscal 1993's restructuring charge) on a fully diluted basis. The increase was due to the increase in net income and in part to the approximate 1.5 million share decrease in the weighted average common and common equivalent shares outstanding. This decrease was primarily a result of the Company's stock repurchase program undertaken in October 1993 to repurchase 2.1 million shares of ADVO common stock. FISCAL 1993 COMPARED TO FISCAL 1992 Revenues Fiscal 1993 revenues increased $82.2 million or 9.9%. Direct mail revenues accounted for $69.0 million of the increase and the in-store marketing group contributed $13.2 million. The growth in the direct mail revenues was mainly attributed to volume growth reflected in the 1.9% increase in shared mail pieces per package to 7.61 and the 7.6% increase in packages mailed to 3.0 billion when compared to fiscal 1992. These volume increases were primarily related to increased frequency of mailings, market expansions and the acquisition of CBA Shared Mail Systems, Inc. on October 14, 1992. The volume gains were offset to a slight degree by pricing decreases experienced in some of the Company's national product lines when compared with fiscal 1992. The in- store marketing services increase was attributed to increased volume within existing product lines over the prior year's results. Operating Expenses Cost of sales increased $67.1 million or 10.9% over fiscal 1992. The increase was primarily related to the $36.7 million increase in postage and related distribution costs resulting from the growth in shared mail piece and package volume. Printing and other production costs also increased as a result of the increase in distribution volume. The in-store marketing cost of sales increased $9.7 million when comparing fiscal 1993 to fiscal 1992 also primarily related to volume growth experienced within its existing product lines. As percentage of revenue cost of sales increased to 75.1% in fiscal 1993 from 74.5% in fiscal 1992. This was mainly reflective of the increased package volume and associated distribution costs. Selling expense, including the provision for bad debts, increased 10.2% or $10.6 million when comparing fiscal 1993 with fiscal 1992. The increase was primarily associated with increased commissions and sales support costs resulting from the growth in revenues. As a percentage of revenues selling expense remained constant at 12.5% in fiscal 1993 when compared with fiscal 1992. General and administrative costs in fiscal 1993 increased $4.2 million or 5.6% over fiscal 1992. The Direct Mail group experienced an increase of $1.5 million while the in-store services group costs increased $2.7 million. The increases were mainly reflective of increased employee costs and the development of management information systems. As a percentage of revenues, general and administrative costs were 8.8% in fiscal 1993 versus 9.1% in fiscal 1992. The Company recorded a restructuring charge in the fourth quarter of fiscal 1993 of $25.8 million (see Note 8 to the consolidated financial statements). The charge provides for the shutdown and relocation of certain production facilities to more geographically advantageous locations, the restructuring and reorganization of the Company's current management team and for the discontinuation of certain Micromarketing initiatives that have not proven profitable. Of the $25.8 million, $7.7 million would have been charged to operations through depreciation, amortization and lease payments in the absence of a restructuring plan. Operating Income As a result of the aforementioned, the Company reported a $25.4 million decrease in operating income to $6.8 million when comparing fiscal 1993 to fiscal 1992. Direct mail operating income for fiscal 1993 was $2.3 million, inclusive of the one-time $25.8 million restructuring charge, compared to $28.6 million in fiscal 1992. In-store marketing services operating income increased $0.9 million in fiscal 1993 to $4.5 million versus $3.6 million in 1992. Interest Income and Other Expense Interest income results primarily from the investment of excess cash and amounted to $2.0 million in fiscal 1993 versus $2.4 million in fiscal 1992. The decline in interest income was mainly reflective of the general decline in interest rates. Income Taxes The effective income tax rate for fiscal 1993 was 34% versus 32.9% in fiscal 1992. The increase in the effective rate was due to the increase in the statutory Federal Tax rate and the expiration of Federal Tax benefits available in prior years. Earnings per Share Earnings per share declined to $0.21 in fiscal 1993 from $.88 in fiscal 1992 on a fully diluted basis. The decline was principally due to the $25.8 million restructuring charge recorded in fiscal 1993 or $.67 per share. 23 ADVO, Inc. Financial Report FINANCIAL POSITION Working Capital Working capital decreased to $46.7 million at September 24, 1994 from $60.2 million at September 25, 1993. The decrease in working capital was primarily related to the Company's purchase of its common stock for treasury under a repurchase program announced by the Company in October 1993. The repurchase program resulted in the acquisition of 2.1 million shares for $36.6 million. The Company also acquired $7.6 million of its common stock for treasury pursuant to elections made by employees to satisfy tax withholding requirements under the Company's restricted stock and stock option plans. As a result of the above, the Company experienced a decrease in its working capital ratio to 1.45 at September 24, 1994 versus 1.66 at September 25, 1993. Property and Equipment Capital additions in fiscal 1994 totaled $13.3 million compared to $14.2 million in fiscal 1993. The expenditures were primarily for modernization and replacement of existing equipment and for the expansion of certain of the Company's facilities. Cash provided from operating activities has been sufficient to cover the financing of these capital expenditures. For fiscal 1995, capital additions are expected to approximate those expended in fiscal 1994. These expenditures, principally for new equipment, are intended to improve operating efficiency. The book value of disposals aggregated $.6 million both in fiscal 1994 and 1993. Stockholders' Equity Stockholders' equity decreased $10.3 million in fiscal 1994 to $108.0 million at September 24, 1994 compared to $118.3 million at September 25, 1993. The decrease was primarily reflective of the increase in treasury stock. Offsetting the treasury stock purchases to a degree were the Company's fiscal 1994 net income of $25.2 million and the $8.2 million tax benefit realized on the exercise of employee stock options and the vesting of restricted stock. In fiscal 1993, stockholders' equity increased $5.6 million from $112.7 million at September 26, 1992. The increase was mainly attributable to the Company's fiscal 1993 net income of $5.4 million. Book value per common share at September 24, 1994 was $5.17 compared with $5.32 at September 25, 1993. Liquidity The Company's main source of liquidity continues to be funds from operating activities. Cash provided by operating activities was $50.5 million during fiscal 1994 compared with $33.0 million in fiscal 1993. Cash and cash equivalents decreased $11.3 million in fiscal 1994, principally reflecting the $44.2 million used to purchase stock for treasury, when compared with a decrease of $14.7 million in fiscal 1993. Cash used for the purchase of the Company's common stock for treasury was made pursuant to the Company's stock repurchase plan and elections made by employees to satisfy withholding tax requirements on the exercise of stock options and vesting of restricted stock. Cash provided by operating activities in fiscal 1994 was also offset by $13.3 million used for capital additions and $11.5 million used to invest in marketable securities. Cash used in financing activities also included $1.5 million used to pay the Company's quarterly dividend to holders of ADVO common stock. During fiscal 1993, the Company recorded a $25.8 million charge to operations for restructuring. Funds provided by operating activities have been sufficient to cover the fiscal 1994 cash requirements of the restructuring plan and the Company's management believes that cash generated by operations will be sufficient to provide for all future expenditures related to the restructuring plan. The Company has in place a credit facility with a bank providing up to $25 million of borrowing availability pursuant to a Revolving Credit Agreement which expires December 31, 1995. Borrowings under the agreement may take the form of either a domestic loan, a certificate of deposit loan, a money market loan or a Eurodollar loan, as defined in the agreement. The Company pays a commitment fee of one quarter of one percent per annum on the average daily balance of the unused portion of the commitment. The terms of the agreement include certain covenants which provide restrictions relating to the maintenance of minimum levels of working capital and net worth and include requirements to maintain certain financial ratios. At September 24, 1994, there are no borrowings under the Revolving Credit Agreement. The Company also has outstanding letters of credit of $6.7 million at September 24, 1994 primarily related to its workers' compensation program. On February 16, 1994 the Company announced an increase in its quarterly dividend from $.02 per share to $.025 per share or $.10 annually from $.08. The increase in the dividend began with the quarter ended March 26, 1994 or the Company's second fiscal quarter. 24 ADVO, Inc. Consolidated Financial Statements CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Year ended Year ended September 24, September 25, September 26, (In thousands, except per share data) 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- Revenues $975,493 $910,794 $828,592 Costs and expenses: Cost of sales 726,721 684,350 617,230 Selling, general and administrative 204,787 191,012 176,044 Restructuring charge -- 25,750 -- Provision for bad debts 3,402 2,879 3,086 - ----------------------------------------------------------------------------------------------------------------------- Operating income 40,583 6,803 32,232 Interest income (1) 1,947 1,986 2,377 Other expense 1,266 682 1,082 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes 41,264 8,107 33,527 Provision for income taxes 16,093 2,756 11,034 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 25,171 $ 5,351 $ 22,493 - ----------------------------------------------------------------------------------------------------------------------- Earnings per share: Primary $ 1.05 $ .21 $ .89 Fully diluted $ 1.05 $ .21 $ .88 Dividends declared per share $ .095 $ .06 $ -- Weighted average common and common equivalent shares: Primary 23,886 25,389 25,266 Fully diluted 23,924 25,412 25,417 - -----------------------------------------------------------------------------------------------------------------------
(1) Includes interest income from related party of $1,885,000, $1,932,000 and $2,317,000 in fiscal 1994, 1993 and 1992, respectively. See accompanying Notes to Consolidated Financial Statements. 25 ADVO, Inc. Consolidated Financial Statements CONSOLIDATED BALANCE SHEETS
September 24, September 25, (In thousands, except share data) 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (1) $ 39,748 $ 51,080 Marketable securities - related party 31,392 20,368 Accounts receivable, less allowances of $5,105 in 1994 and $4,472 in 1993 55,340 56,516 Inventories 5,138 6,622 Prepaid expenses and other current assets 4,863 5,238 Deferred income taxes 14,619 11,667 - ----------------------------------------------------------------------------------------------------------------------------------- Total Current Assets 151,100 151,491 Property and equipment: Machinery and equipment 102,141 91,538 Leasehold improvements 15,307 14,654 - ----------------------------------------------------------------------------------------------------------------------------------- 117,448 106,192 Accumulated depreciation and amortization (60,939) (51,389) - ----------------------------------------------------------------------------------------------------------------------------------- Net property and equipment 56,509 54,803 Non-current deferred income taxes -- 348 Other assets 18,100 19,883 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $225,709 $226,525 - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 28,540 $ 24,879 Accrued compensation and benefits 28,121 24,175 Customer advances 16,516 15,079 Federal and state income taxes payable 4,159 5,450 Restructure reserve - short-term 8,371 9,356 Accrued other expenses 18,646 12,380 - ----------------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 104,353 91,319 Deferred liabilities 573 554 Deferred income taxes 4,047 -- Restructure reserve - long-term 8,738 16,394 Stockholders' equity: 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 24,393,108 in 1994 and 23,234,958 in 1993) 244 232 Additional paid-in capital 134,881 124,299 Retained earnings 32,146 8,972 Less shares of common stock held in treasury at cost, 3,521,186 in 1994 and 1,016,143 in 1993 (59,273) (15,245) - ----------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 107,998 118,258 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $225,709 $226,525 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes cash and cash equivalents invested with related party of $10,891,000 at September 24, 1994 and $32,449,000 at September 25, 1993. See accompanying Notes to Consolidated Financial Statements. 26 ADVO, Inc. Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Year ended Year ended September 24, September 25, September 26, (In thousands) 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 25,171 $ 5,351 $ 22,493 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 12,786 11,133 9,158 Amortization of deferred compensation 1,662 2,350 2,643 Deferred income taxes 1,443 (10,898) (1,680) Provisions for bad debts 3,402 2,879 3,086 Restructuring charge -- 25,750 -- Pro forma adjustment for income taxes -- 1,696 1,393 Other 1,022 276 214 Change in assets and liabilities, net of effects of acquisitions: Accounts receivable (2,226) (2,958) (16,725) Inventories 1,484 (1,070) 425 Other current assets 377 (966) (766) Other assets (498) (2,079) (124) Accounts payable 3,661 (240) 10,551 Accrued compensation and benefits 3,946 628 3,338 Customer advances 1,437 1,271 4,912 Federal and state income taxes payable (1,291) (380) 1,293 Other current liabilities 5,743 396 (517) Restructuring charge (7,617) -- -- Deferred liabilities 19 (132) (99) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 50,521 33,007 39,595 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisitions, net of cash acquired (546) (7,576) (6,200) Expenditures for property and equipment (13,304) (14,189) (11,941) Proceeds from disposals of property and equipment 85 74 125 Marketable securities -- purchases (47,388) (73,743) -- Marketable securities -- sales and maturities 35,873 53,626 -- - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (25,280) (41,808) (18,016) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Increase (decrease) in bank overdraft -- (615) 7 Proceeds (payments) of short-term debt -- (1,475) (3,150) Principal payments on long-term debt -- (384) (520) Transactions related to subchapter S corporation -- (2,614) 146 Tax effect - vesting of restricted stock/options exercised 8,244 1,150 2,154 Proceeds from exercise of stock options and warrants 832 486 3,233 Purchases of common stock for treasury (44,173) (1,603) (10,345) Cash dividends paid (1,476) (803) -- Other -- (10) 1 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (36,573) (5,868) (8,474) - ----------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (11,332) (14,669) 13,105 Cash and cash equivalents at beginning of year 51,080 65,749 52,644 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 39,748 $ 51,080 $ 65,749 - ----------------------------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Income tax payments $ 7,810 $ 11,705 $ 8,168 Interest paid -- 195 223 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 27 ADVO, Inc. Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Series A Convertible Additional Retained Preferred stock Common stock Treasury stock paid-in earnings Total (In thousands, except share data) Shares Amount Shares Amount Shares Amount capital (deficit) equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance -- September 28, 1991 2,301,780 $12,680 15,636,051 $156 (429,622) $ (3,312) $101,106 $(19,347) $ 91,283 Purchase of common stock for treasury (520,584) (10,345) (10,345) Cancellation of restricted stock (45,168) Grant of restricted stock 119,500 1 1 Exercise of stock options 206,717 2 1,500 15 1,416 1,433 Conversion of preferred stock (69,241) (302) 80,111 1 301 Exercise of warrants 530,973 5 1,795 1,800 Tax effect -- employee stock plans 2,154 2,154 Amortization of deferred compensation (1) 2,643 2,643 Accretion of preferred stock 693 (693) Cash distribution to satisfy subchapter S tax liability (1,003) (1,003) Capital contribution to subchapter S corporation 250 250 Redemption of subchapter S common stock (25) (380) (405) Sale of subchapter S common stock 1,000 1,000 Pro forma provision for income taxes 1,393 1,393 Net Income 22,493 22,493 - ------------------------------------------------------------------------------------------------------------------------------------ Balance -- September 26, 1992 2,232,539 13,071 16,528,184 165 (948,706) (13,642) 110,640 2,463 112,697 Purchase of common stock for treasury (67,437) (1,603) (1,603) Cancellation of restricted stock (11,709) Grant of restricted stock 54,000 Exercise of stock options 60,772 1 485 486 Conversion of preferred stock (2,232,539) (9,700) 2,594,212 26 9,674 Tax effect -- employee stock plans 1,150 1,150 Amortization of deferred compensation (1) 2,350 2,350 Accretion of preferred stock (3,371) 3,371 Cash dividends declared ($.06 per share) (1,245) (1,245) Stock split 4,009,499 40 (40) Cash settlement for fractional shares on stock split (10) (10) Cash distributions to satisfy subchapter S tax liability (2,614) (2,614) Pro forma provision for income taxes 1,696 1,696 Net Income 5,351 5,351 - ------------------------------------------------------------------------------------------------------------------------------------
(Continued on following page.) 28 ADVO, Inc. Consolidated Financial Statements
Series A Convertible Additional Retained Preferred stock Common stock Treasury stock paid-in earnings Total (In thousands, except share data) Shares Amount Shares Amount Shares Amount capital (deficit) equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance -- September 25, 1993 0 $0 23,234,958 $ 232 (1,016,143) $(15,245) $ 124,299 $ 8,972 $118,258 Purchase of common stock for treasury (2,514,043) (44,173) (44,173) Grant of restricted stock 44,000 1 9,000 145 (145) 1 Exercise of stock options 1,114,150 11 821 832 Tax effect -- employee stock plans 8,244 8,244 Amortization of deferred compensation (1) 1,662 1,662 Cash dividends declared ($.095 per share) (1,997) (1,997) Net Income 25,171 25,171 Balance -- September 24, 1994 0 $0 24,393,108 $244 (3,521,186) $(59,273) $ 134,881 $ 32,146 $107,998 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Unamortized deferred compensation at September 24, 1994, September 25, 1993 and September 26, 1992 was $1,991,000, $2,726,000 and $4,264,000, respectively. See accompanying Notes to Consolidated Financial Statements. 29 ADVO, Inc. Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 Summary of Accounting Policies 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 are eliminated. Certain reclassifications have been made in the fiscal 1993 and 1992 financial statements to conform with the fiscal 1994 presentation. ADVO's fiscal closing date is the last Saturday in September. Cash Equivalents Cash equivalents include highly liquid investment instruments with original maturities of three months or less. These investments are valued at cost, which approximates market. Marketable Securities Marketable securities, consisting principally of U.S. Treasury securities and municipal bonds, are carried at cost, which approximates market at September 24, 1994 and September 25, 1993. The cost of securities sold is determined by the specific identification method. 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 and Equipment Property and equipment are recorded at cost. Depreciation and amortization are computed generally by the straight-line method over the estimated useful lives of the respective assets or over the terms of the related leases. Intangible Assets The excess of cost over net assets acquired and other intangible assets related to acquisitions are being amortized over their expected useful lives which range from 3 to 20 years. 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. In-store marketing services revenue is recognized as hours are worked. Earnings per Common Share Earnings per common share is computed based on the weighted average number of common and common equivalent shares outstanding during the year. Common share equivalents consist of the average number of shares issuable upon the exercise of warrants and options, and the assumed conversion of preferred stock. Note 2 Acquisitions On August 19, 1993 a plan of merger was consummated between the Company and Marketing Force, Inc., ("MF" or "Marketing Force") a privately held specialty marketing company located in Michigan through the exchange of 2,115,956 shares of ADVO Common Stock for all of the outstanding stock of MF. The merger was accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements were restated to include the accounts and operations of MF for all periods presented. MF's fiscal year end and reported financial results were adjusted to conform to the financial presentation of the Company. There were no significant intercompany transactions or differences in accounting policies between the Company and MF. Prior to the merger, MF had elected to be taxed as an S corporation for U.S. Federal and State purposes. As an S corporation, MF's shareholders were required to pay individual income taxes based on MF's taxable income. Income taxes on income for the periods MF was a subchapter S corporation have been provided on a pro forma basis at an effective rate of 41%. The 41% effective rate is ADVO's estimate of the federal and state tax rates that would have been applied to MF had it been merged with ADVO for the periods presented. During the three year period ended September 24, 1994, the Company has also made certain acquisitions aimed at expanding its direct mail operations. These acquisitions have been accounted for under the purchase method of accounting and, accordingly, the results of operations of the acquired companies have been included in the consolidated statements of operations from their acquisition dates. The acquired assets have been recorded at their estimated fair values. These acquisitions did not have a material pro forma effect on operations for periods prior to the acquisition. The excess of the purchase price over the estimated fair values of net assets acquired of $4.3 million is reflected in other assets. Also included in other assets is $7.6 million of other intangible assets, net of accumulated amortization, which were acquired in the acquisitions. As of September 24, 1994 and September 25, 1993, accumulated amortization of goodwill and other intangibles was $4.7 million and $3.4 million, respectively. 30 ADVO, Inc. Notes to Consolidated Financial Statements Note 3 Accrued Compensation and Benefits The composition of accrued compensation and benefits is as follows:
September 24, September 25, (In thousands) 1994 1993 - ------------------------------------------------------------------------------ Compensation $18,839 $14,764 Workers' compensation 5,798 5,225 Employee withholdings and other benefits 3,484 4,186 - ------------------------------------------------------------------------------ Total $28,121 $24,175 - ------------------------------------------------------------------------------
Note 4 Financing Arrangements ADVO has in place a credit facility with a bank providing up to $25 million of combined borrowing availability pursuant to a Revolving Credit Agreement which expires December 31, 1995. Borrowing under the agreement may take the form of either a domestic loan, a certificate of deposit loan, a money market loan, or a Eurodollar loan, as defined in the agreement. The interest rate for such borrowing will be at least equal to the bank's base rate for the particular type of loan and will vary from that rate depending upon the borrowing period. The Company pays a commitment fee of one quarter of one percent per annum on the average daily balance of the unused portion of the commitment. The terms of the agreement include certain covenants which provide restrictions relating to the maintenance of minimum levels of working capital and net worth, and includes requirements to maintain certain financial ratios. At September 24, 1994, there are no borrowings under the Revolving Credit Agreement. The Company has outstanding letters of credit of approximately $6.7 million under agreements primarily related to its workers' compensation program. Note 5 Stockholders' Equity The Series A Convertible Preferred Stock (the "Preferred Stock") was held by Warburg, Pincus Capital Partners, L.P. ("Warburg"), Welsh, Carson, Anderson & Stowe IV (WCAS IV) and WCAS Venture Partners (WCAS VP) (together, the "Investors"). On February 11, 1993 the holders of ADVO preferred stock converted all such shares to 2,594,212 shares (3,242,765 shares after the 5-for-4 stock split) of Company Common Stock. Accretion of the Preferred Stock dividend amounted to $693,000 in fiscal 1992. Upon conversion of the Preferred Stock to ADVO common stock in fiscal 1993 the entire accredited dividend was reversed in the amount of $3,371,000. The Preferred Stock had five votes per share, and the holders had the right to elect a majority of the Board of Directors as long as at least half of the Preferred Stock was outstanding. On August 27, 1986, 2,301,780 warrants to purchase shares of ADVO common stock were issued to the Investors for $1,000,000 and are exercisable at any time through August 27, 1996. In the event the Company issues common stock or equivalents at a price below either current market price or the exercise price of the warrants, the number of shares issuable in exchange for the warrants and the warrant exercise price are subject to adjustment. At September 24, 1994, the exercise price is $2.71 per share and the number of common shares issuable upon exercise of the warrants is 2,656,827. On August 18, 1992 WCAS IV and WCAS VP exercised all of their warrants to purchase 530,973 shares (633,716 shares after the 5-for-4 stock split) of ADVO common stock at an exercise price of $3.39 per share. These shares were all distributed to the individual partners of those partnerships in conjunction with the warrant exercise. WCAS IV and WCAS VP converted 69,241 preferred shares into 80,111 shares of ADVO common stock. These shares were then purchased for treasury by ADVO pursuant to an election made by the holders of ADVO stock subscription warrants to pay the warrant exercise price with that common stock. On March 5, 1993 a 5-for-4 stock split was effected in the form of a 25% stock dividend for the holders of Company Common Stock which resulted in the issuance of 4,009,499 shares of Common Stock. Share data have been restated for all periods presented to reflect the stock split. During fiscal 1993, the Company implemented 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. At September 24, 1994 there are 5,007,981 shares of common stock reserved for issuance upon the exercise of stock options and the exercise of warrants. 31 ADVO, Inc. Notes to Consolidated Financial Statements Note 6 Benefit 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 a non-qualified savings plan for the commissioned sales staff. Both plans permit contributions by employees of up to 10% of their compensation. The Company matches up to 6% of employees' compensation, depending upon the level of employee contribution. The expense for matching contributions was $3,590,000, $3,025,000 and $2,044,000 for fiscal 1994, 1993 and 1992, respectively. During fiscal 1994 the Company made certain amendments to its employee stock options plans with respect to options granted under the plans to make available reload options. The reload option feature allows for the exercise of options in "stock-for-stock" transactions enabling the employee to retain any further appreciation in the market value of shares traded in to pay the exercise price of the options and to satisfy tax withholding requirements. The expiration date of a reload option would be the same as that of the original option unless otherwise determined by the Company's Compensation Committee or Board of Directors. Reload options may be authorized with respect to options that are themselves granted as reload options. The 1986 Stock Option Plan provides for the granting of non-qualified options for the purchase of up to 625,000 shares of common stock to key employees. The terms of the options may not exceed ten years, and the option prices shall not be less than the fair market value of the common stock on the date of grant. Options generally are exercisable 25% each year, cumulatively, beginning one year from date of grant. Certain grants also stipulate that the market price of the Company's common stock must reach certain levels before the options become exercisable in addition to the 25% per year time vesting provisions. These options will become exercisable for 90 days at six years from the grant date if the market price provision is not met. At September 24, 1994 there were 103,393 options exercisable and 13,988 options available for future grant under this plan. At September 25, 1993 there were 197,213 options exercisable and 1,897 options available for future grant under this plan.
Option price Shares per share - -------------------------------------------------------------------------------- Outstanding at September 28, 1991 387,796 $ 3.60-17.35 Granted 12,500 14.35-15.40 Cancelled (6,510) 4.10 Exercised (96,865) 4.10-8.70 - -------------------------------------------------------------------------------- Outstanding at September 26, 1992 296,921 3.60-17.35 Exercised (37,991) 3.60-8.10 - -------------------------------------------------------------------------------- Outstanding at September 25, 1993 258,930 4.20-17.35 Granted 64,761 17.63-18.75 Cancelled (25,411) 4.60-18.63 Exercised (122,725) 4.20-14.35 - -------------------------------------------------------------------------------- Outstanding at September 24, 1994 175,555 $4.20-18.75 - --------------------------------------------------------------------------------
The 1988 Stock Option Plan provides for the granting of non-qualified options for the purchase of up to 3,300,000 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 the grant. Each option granted is exercisable at a specified rate each year, generally 25%, as determined by the Board of Directors at the date of grant. Certain grants also stipulate that the market price of the Company's common stock must reach certain levels before the options become exercisable in addition to the 25% per year time vesting provisions. These options will become exercisable for 90 days at six years from the grant date if the market price provision is not met. At September 24, 1994 there are 662,161 options exercisable and 181,185 options available for future grant under this plan. At September 25, 1993 there were 1,755,357 options exercisable and 174,770 options available for future grant under this plan.
Option price Shares per share - -------------------------------------------------------------------------------- Outstanding at September 28, 1991 2,259,266 $ 3.30-17.35 Granted 128,125 14.35-19.10 Cancelled (68,750) 4.20-13.80 Exercised (163,406) 4.20-13.80 - -------------------------------------------------------------------------------- Outstanding at September 26, 1992 2,155,235 3.30-19.10 Granted 209,875 17.13-22.00 Cancelled (6,250) 19.25 Exercised (30,985) 4.80-13.80 - -------------------------------------------------------------------------------- Outstanding at September 25, 1993 2,327,875 3.30-22.00 Granted 1,228,099 15.75-18.63 Cancelled (49,999) 4.80-21.30 Exercised (1,330,376) 3.30-16.30 - -------------------------------------------------------------------------------- Outstanding at September 24, 1994 2,175,599 $ 3.30-22.00 - --------------------------------------------------------------------------------
32 ADVO, Inc. Notes to Consolidated Financial Statements The 1986 Employee Restricted Stock Plan provides for the granting of up to 2,437,500 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). The market value of shares at the date of award in excess of cash consideration received is being amortized as compensation expense over the restriction period. 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 charge to operations in connection with the restricted stock was $1,554,000, $2,286,000, and $2,569,000 for the years ended September 24, 1994, September 25, 1993 and September 26, 1992, respectively. Unamortized deferred compensation is $1,908,000 at September 24, 1994. There are 52,254 shares available for future grant under this plan at September 24, 1994.
Shares - -------------------------------------------------------------------------------- Outstanding at September 28, 1991 2,206,040 Granted 149,375 Cancelled (56,460) - -------------------------------------------------------------------------------- Outstanding at September 26, 1992 2,298,955 Granted 55,000 Cancelled (12,709) - -------------------------------------------------------------------------------- Outstanding at September 25, 1993 2,341,246 Granted 44,000 - -------------------------------------------------------------------------------- Outstanding at September 24, 1994 2,385,246 - --------------------------------------------------------------------------------
The 1990 Non-employee Directors' Restricted Stock Plan provides for an aggregate maximum of up to 125,000 shares of common stock to be issued under stock awards. During fiscal 1994, 9,000 shares were granted, 3,000 vested immediately and 6,000 shares are vesting in installments over a period of two years. The market value of shares at the date of award is being charged to operations over the restriction period with $108,000, $64,000 and $74,000 charged for the fiscal years ended September 24, 1994, September 25, 1993 and September 26, 1992. Unamortized deferred directors' compensation is $83,000 at September 24, 1994. There are 88,500 shares available for future grant under this plan at September 24, 1994. Note 7 Segment Information During fiscal 1993 the Company consummated a merger with an in-store marketing service company (see Note 2) which is being accounted for under the pooling of interests method. Information with regard to revenues, operating income, identifiable assets, capital expenditures and depreciation and amortization expense between the Company's direct mail and in-store marketing segments is as follows:
September 24, September 25, September 26, (In thousands) 1994 1993 1992 - -------------------------------------------------------------------------------- Revenues Direct Mail $920,325 $856,626 $787,648 In-store marketing 55,168 54,168 40,944 - -------------------------------------------------------------------------------- Total $975,493 $910,794 $828,592 - -------------------------------------------------------------------------------- Operating Income (1) Direct Mail $ 39,650 $ 2,298 $ 28,630 In-store marketing 933 4,505 3,602 - -------------------------------------------------------------------------------- Total $ 40,583 $ 6,803 $ 32,232 - -------------------------------------------------------------------------------- Identifiable Assets Direct Mail $207,659 $208,885 $189,758 In-store marketing 18,050 17,640 11,312 - -------------------------------------------------------------------------------- Total $225,709 $226,525 $201,070 - -------------------------------------------------------------------------------- Capital Expenditures Direct Mail $ 10,357 $ 12,525 $ 11,178 In-store marketing 2,947 1,664 763 - -------------------------------------------------------------------------------- Total $ 13,304 $ 14,189 $ 11,941 - -------------------------------------------------------------------------------- Depreciation and Amortization Direct Mail $ 11,955 $ 10,589 $ 8,722 In-store marketing 831 544 436 - -------------------------------------------------------------------------------- Total $ 12,786 $ 11,133 $ 9,158 - --------------------------------------------------------------------------------
(1) Reflects one-time restructuring charge of $25.8 million in fiscal 1993. Note 8 Restructuring During the fourth quarter of the fiscal year ended September 25, 1993, ADVO recorded a one-time restructuring charge to operations of $25.8 million. The charge consisted of three elements; the shutdown/relocation of several regional facilities aimed at repositioning their location in a more geographically strategic area; the reorganization of certain management groups to enhance the Company's cost containment initiatives as well as restructure the current management team; and the discontinuation of several Micromarketing initiatives that have proven unprofitable. During fiscal 1994 the Company recorded reductions of $8.6 million to the reserve in accordance with its plan of restructure. The $8.6 million included costs for the shutdown and consolidation of its Indianapolis production facility into other regions; the downsizing of its former Atlantic Division office; severance and related costs for upgrades to the Company's sales management team and the abandonment of certain nonprofitable Micromarketing programs. As of 33 ADVO, Inc. Notes to Consolidated Financial Statements September 24, 1994 the Company had terminated approximately 77 people and recorded $1.4 million in severance pay and related benefits to the restructure reserve. The Company's management continues to believe that cost efficiencies and future benefits originally anticipated in its plan of restructure will be realized. The Company expects to utilize the remaining reserve over future periods with benefits being realized over the same periods through more efficient and low cost operations and enhanced revenue growth through improved management ability and structure. Note 9 Income Taxes In the first quarter of fiscal 1994, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109, "Accounting for Income Taxes". As permitted by Statement 109, the Company has elected not to restate prior years. The effect of the change was not material to the Company's results of operations or financial position. The components of the provision for income taxes by taxing jurisdiction were:
Liability Deferred Method Method Year ended Year ended Year ended September 24, September 25, September 26, (In thousands) 1994 1993 1992 - -------------------------------------------------------------------------------- Federal: Current $12,146 $10,957 $10,046 Deferred 842 (8,759) (1,330) - -------------------------------------------------------------------------------- Total Federal 12,988 2,198 8,716 - -------------------------------------------------------------------------------- State: Current 2,504 2,697 2,668 Deferred 601 (2,139) (350) - -------------------------------------------------------------------------------- Total State 3,105 558 2,318 Total Provision $16,093 $ 2,756 $11,034 - --------------------------------------------------------------------------------
The Company's effective income tax rate differed from the Federal statutory rate as follows:
Year ended Year ended Year ended September 24, September 25, September 26, 1994 1993 1992 - -------------------------------------------------------------------------------- Federal statutory rate 35.0% 34.0% 34.0% State income taxes, net of federal benefit 4.9 4.5 4.6 Tax benefits related to Section 338 basis adjustment -- (12.3) (5.8) Targeted jobs tax credit (.2) (.9) (.4) Other (.7) 8.7 .5 - -------------------------------------------------------------------------------- Effective income tax rate 39.0% 34.0% 32.9% - --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities as required by FASB Statement No. 109 are as follows:
Year ended September 24, (In thousands) 1994 - -------------------------------------------------------------------------------- Deferred Tax Assets: Reserve for restructure 7,119 Reserve for deferred compensation 2,247 Reserve for employee benefits 3,838 Other 4,941 - -------------------------------------------------------------------------------- Total deferred tax assets 18,145 - -------------------------------------------------------------------------------- Deferred Tax Liabilities: Tax over book depreciation and amortization (7,573) - -------------------------------------------------------------------------------- Total deferred tax liabilities (7,573) - -------------------------------------------------------------------------------- Net Federal and State Deferred assets 10,572 - --------------------------------------------------------------------------------
Deferred income taxes (benefits) in fiscal 1993 and 1992 represent the tax effects of transactions which are reported in different periods for tax and financial reporting purposes. Changes in deferred federal and state income taxes include the effects of:
Year ended Year ended September 25, September 26, (In thousands) 1993 1992 - -------------------------------------------------------------------------------- Depreciation and amortization $ 139 $ (223) Amortization of deferred compensation (657) (774) Reserve for restructuring (9,979) -- Various accrued expenses (401) (683) - -------------------------------------------------------------------------------- $(10,898) $(1,680) - --------------------------------------------------------------------------------
Note 10 Commitments and Contingencies ADVO leases property and equipment under noncancellable operating lease agreements which expire at various dates through 2004. The leases generally provide that the Company pay the taxes, insurance and maintenance expenses related to the leased assets. Rental commitments at September 24, 1994 under long term noncancellable operating leases are as follows:
(In thousands) - ---------------------------------------------------------- Fiscal year: 1995 $17,966 1996 14,950 1997 9,417 1998 7,033 1999 5,486 Thereafter 13,418 - ---------------------------------------------------------- Total minimum lease payments $68,270 - ----------------------------------------------------------
34 Certain of these leases contain renewal options and certain leases also provide for cost escalation payments. Rental expense for the years ended September 24, 1994, September 25, 1993 and September 26, 1992 was approximately $24,947,000, $24,487,000, and $23,246,000, respectively. ADVO is party to various legal proceedings and claims related to its normal business operations, including several suits in which it is a defendant. In the opinion of management, the Company has substantial and meritorious defenses for these claims and proceedings in which it is a defendant, and believes these matters will be ultimately resolved without material adverse effect on the consolidated financial position of the Company. Outstanding commitments for capital expenditures at September 24, 1994 totaled $8.5 million. Note 11 Related Party Transactions The Company invests in money market mutual funds and marketable securities through an investment advisor, Warburg, Pincus Counsellors, Inc. ("Counsellors"). The general partner of Warburg, Pincus Capital Partners, L.P. ("Warburg") who is the Company's largest shareholder, owns a majority interest in Counsellors. Income earned on investments managed by Counsellors was $1,885,000, $1,932,000 and $2,317,000 in fiscal 1994, 1993 and 1992, respectively. At September 24, 1994 and September 25, 1993, $42,283,000 and $52,817,000, respectively, were 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 12 Recent Accounting Pronouncements During November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Post Employment Benefits". The standard, which requires the accrual method of accounting for post-employment benefits will be adopted by the Company in its 1995 fiscal year. The Company expects the cumulative effect of this accounting change to be approximately $1.5 million after tax or $.06 per share. The Company estimates that the ongoing annual expense of this accounting change on future periods will not be material to the Company's financial statements. In May of 1993 the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities". The standard expands the use of fair value accounting for debt and equity securities. The Company will also adopt this standard in fiscal 1995. The Company expects that there will not be a material impact to the Company's consolidated financial position or results of operations as a result of the adoption this statement. Note 13 Subsequent Events On October 31, 1994 the Company announced the sale of its 50% ownership in Infobase Services to Acxiom Corporation, the other joint venture partner. The Company will recognize a before tax gain on this transaction of approximately $2.2 million in its first fiscal quarter of 1995. Note 14 Quarterly Financial Data (unaudited)
(In millions, except per share data) Fiscal year ended First Second Third Fourth September 24, 1994 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Revenues $246.8 $229.7 $256.1 $242.9 Gross profit 62.2 55.4 69.0 62.2 Operating income 11.3 3.7 14.6 10.9 Net income 7.3 2.4 8.9 6.6 Earnings per share (1) .29 .10 .38 .28 Common stock price High 17 1/2 20 18 1/2 18 3/4 Low 14 1/4 16 3/4 15 7/8 15 - -------------------------------------------------------------------------------- Fiscal year ended First Second Third Fourth September 25, 1993 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Revenues $228.0 $212.8 $235.4 $234.6 Gross profit 57.9 50.5 60.8 57.2 Operating income (loss) 9.5 3.0 12.1 (17.8) Net income (loss) 6.5 2.1 8.4 (11.6) Earnings (loss) per share (1) .26 .08 .33 (.53) Common stock price High 22 1/8 24 3/4 24 1/4 21 3/4 Low 18 1/2 20 3/8 20 16 - --------------------------------------------------------------------------------
(1) Both primary and fully diluted. 35 ADVO, Inc. Consolidated Financial Statements 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 24, 1994 and September 25, 1993, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the three years in the period ended September 24, 1994. 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 24, 1994 and September 25, 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 24, 1994 in conformity with generally accepted accounting principles. Hartford, Connecticut October 19, 1994 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. Robert Kamerschen Chairman and Chief Executive Officer Lowell W. Robinson Executive Vice President and Chief Financial Officer Robert S. Hirst Vice President and Controller October 19, 1994 36 EX-21 5 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF ADVO, INC. AS OF SEPTEMBER 24, 1994
PERCENT OF VOTING STATE OF SECURITIES OWNED AS INCORPORATION NAME OF SUBSIDIARY OF SEPTEMBER 24, 1994 ------------- ------------------ --------------------- Delaware Trans-ADVO, Inc. 100 Delaware ADVO Target Communications 100 Delaware ADVO Investment Company, Inc. 100 Delaware ADVOLink, Inc. 55 Delaware Value Fair, Inc. 100 Delaware MBV, Inc. 100 Delaware Marketing Force, Inc. 100(1)
- -------- (1)Owned by ADVO Investment Company, Inc. EX-23 6 AUDITORS CONSENT 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 19, 1994, included in the 1994 Annual Report to Stockholders of ADVO. Our audits also included the consolidated financial statement schedules of ADVO listed in item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Post-Effective Amendment No. 3 to the ADVO Form S-8 No. 33-40402) 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. 4 to the ADVO Form S-8 No. 33-52747) pertaining to the 1988 Non- Qualified Stock Option Plan, as amended, of ADVO and in the related Prospectuses of our report dated October 19, 1994, 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 schedules included in this Annual Report (Form-10K) of ADVO. Ernst & Young LLP Hartford, Connecticut December 12, 1994 EX-27 7 FINANCIAL DATA SCHEDULE
5 YEAR SEP-24-1994 SEP-26-1993 SEP-24-1994 39,748 31,392 60,445 5,105 5,138 151,100 117,448 60,939 225,709 104,353 0 244 0 0 107,754 107,998 0 975,493 0 726,721 0 3,402 1,947 41,264 16,093 40,583 0 0 0 25,171 1.05 1.05
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