-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VIwoouxbKtdrG2GbbOV54m+gzBu9jWalHm0p9qUgf7BRGD2etW9EzXGgL6nepTsD 9g+cnhK3mLHDXeFMU+w++Q== 0000950109-95-005317.txt : 19951220 0000950109-95-005317.hdr.sgml : 19951220 ACCESSION NUMBER: 0000950109-95-005317 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951219 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11720 FILM NUMBER: 95602683 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-K405 1 FORM 10-K FOR 09/30/95 ADVO, Inc. Form 10-K September 30, 1995 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 30, 1995 ------------------ 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 offices) Registrant's telephone number, including area code: (860) 285-6100 Securities registered pursuant to Section 12(b) of the Act: Common Stock and Rights, par value $.01 per share ------------------------------------------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: NONE ---- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant at November 24, 1995 was $445,950,003. On that date, there were 20,836,403 outstanding shares of the registrant's common stock. Documents Incorporated by Reference: Portions of the 1995 Annual Report to Stockholders are incorporated by reference into Parts II and IV of this Report. Portions of the Proxy Statement for the 1996 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 30, 1995 PART I
ITEM PAGE ---- ---- 1. Business........................................................... 1 2. Properties......................................................... 4 3. Legal Proceedings.................................................. 5 4. Submission of Matters to a Vote of Security Holders................ 5 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................... 6 6. Selected Financial Data............................................ 6 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 6 8. Financial Statements and Supplementary Data........................ 6 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 7 PART III 10. Directors and Executive Officers of the Registrant................. 7 11. Executive Compensation............................................. 7 12. Security Ownership of Certain Beneficial Owners and Management..... 7 13. Certain Relationships and Related Transactions..................... 7 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 7
PART I ITEM 1. BUSINESS GENERAL ADVO, Inc. ("ADVO" or the "Company") is a direct marketing firm primarily engaged in soliciting and processing printed advertising from retailers, manufacturers and service companies for targeted distribution by both shared and solo mail to consumer households in the United States on a national, regional and local basis. Founded in 1929 as a hand delivery company, the Company entered the direct mail industry as a solo mailer in 1946 and began its shared mail program in 1980. The Company currently is the largest commercial user of third-class mail in the United States. ADVO competes primarily with newspapers, direct mail companies, broadcast media, periodicals and other local distribution entities for retail advertising expenditures. The Company believes that direct mail, which enables advertisers to target advertisements to specific customers or geographic areas, is the most efficient vehicle for delivering printed advertising on a saturation or full market coverage basis, as well as an effective means of targeted coverage. ADVO 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. ADVO's principal executive offices are located at One Univac Lane, Windsor, Connecticut, 06095. In September of 1995, the Company announced plans to sell its in-store marketing segment which provides marketing services to a wide range of manufacturers and marketers using proprietary operating systems. From September 30, 1995 (and by restatement of prior periods), the Company is accounting for its in-store marketing segment as a discontinued operation in this Annual Report on Form 10-K for the fiscal year ended September 30, 1995. The discussion of the Company's business under Items 1 and 2 hereof includes only the Company's continuing operations. PRODUCTS AND SERVICES ADVO's direct 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 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. 1 As a part of its shared mail programs, the Company provides the addresses of the households receiving the mail packages and sorts, processes and transports the advertising material for ultimate delivery through the United States Postal Service ("USPS"). Generally, larger businesses, such as food chains and mass merchandisers, will provide the Company with preprinted advertising materials in predetermined quantities. In the case of manufacturers and small retail customers, the Company may perform graphics services and act as a broker for the required printing. The Company also offers shared mail customers numerous standard turnkey advertising products in a variety of sizes and colors. The Company believes its shared mail programs are the largest programs of their kind. Marriage Mail(R) is a weekly mail program with coverage, on average, of 61 million households in approximately 130 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 brochures and circulars for an individual customer for distribution through the USPS. Each customer bears the full cost of postage and handling for each mailing. Customers choosing this form of direct mail are generally those who wish to maintain an exclusive image and complete control over the timing and the target of their mailings. The Company processes solo mail using its own mailing list or lists supplied by the customer. The Company charges a processing fee based on the solo mail services rendered. OTHER PRODUCTS AND SERVICES The Company rents portions of its mailing list to organizations interested in distributing their own solo mailings. The Company may or may not perform the associated distribution services for the customer. 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. ADVO Target Communications, Inc., and ADVOLink, Inc., based in Texas, are wholly-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. MAILING LIST ADVO's management believes its computerized mailing list is the largest residential/household mailing list in the country. It contains over 111 million delivery points (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 2 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. 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 1995, 1994 or 1993. OPERATIONS Customers' advertising circulars are processed by approximately 3,000 production employees who work at 20 mail processing facilities which are strategically located throughout the nation. State-of-the-art inserting machines (which combine the individual advertising pieces into the mailing packages) and modern quarter-folding equipment are the principal equipment used to process the Company's products and services. In nearly all 20 of ADVO's mail processing facilities, the USPS accepts and verifies the Company's mail to help ensure rapid package acceptance and distribution, which benefits both the USPS and the Company. In most instances, the mail is then shipped by the Company to the destination office of the USPS for final delivery. 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. 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". Newspapers represent the Company's most significant and direct competition. Through the distribution of preprinted circulars, classified advertising and run of press advertising ("ROP"), newspapers have been the traditional and dominant medium for advertising by retailers for many years. Insertion rates are highly competitive and many newspapers' financial resources are substantial. 3 ADVO's principal direct marketing competitors are other companies with residential lists or similar cooperative mailing programs. These companies have a significant presence in many of the Company's markets and represent serious competition to the Company's Marriage Mail(R) programs in those markets. There are local mailers in practically every market of the country. In addition to local mailers, there are many local private delivery services such as "shoppers" and "pennysavers" which compete by selling ROP advertisements and classified advertisements. ADVO believes that it competes effectively in its various markets. SEASONALITY ADVO's business generally follows the trends of retail advertising spending. The Company has historically experienced higher revenues in the second half of the calendar year. RESEARCH AND DEVELOPMENT Expenditures of the Company in research and development during the last three years have not been material. ENVIRONMENTAL MATTERS The Company believes that it is substantially in compliance with all regulations concerning the discharge of materials into the environment, and such regulations have not had a material effect on the capital expenditures or operations of the Company. RAW MATERIALS The Company manages 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 turnkey family products at favorable prices. EMPLOYEES As of September 30, 1995, the Company had a total of approximately 5,200 full and part-time employees. ADVO also uses outside temporary employees, particularly during busy seasons. ADVO has one union contract, covering production employees in the Hartford, Connecticut branch. The Company believes that its relations with its employees are satisfactory. ITEM 2. PROPERTIES ADVO does not own any real estate except for its corporate headquarters, which the Company purchased in February of 1995. The corporate headquarters, located in Windsor, Connecticut, consist of two buildings totaling approximately 136,000 square feet. The Company leases 20 mail processing facilities and 70 sales offices (which excludes the sales offices that are located in the mail processing facilities) throughout the United States. The Company believes its facilities are suitable and adequate for the purposes for which they are used and are adequately maintained. 4 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........... 59 Chairman and Chief Executive Officer Joseph P. Durrett........... 50 President and Chief Operating Officer Larry G. Morris............. 57 Senior Executive Vice President, Chief Administrative and Process Development Officer Lowell W. Robinson.......... 46 Executive Vice President and Chief Financial Officer Peter A. Corrao............. 41 Senior Vice President Rick Kurz................... 55 Senior Vice President Frederick Leick............. 51 Senior Vice President Myron L. Lubin.............. 55 Senior Vice President Frank J. Talz............... 51 Senior Vice President Robert S. Hirst............. 49 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 Domain, Inc. 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. Mr. Durrett is chairman-elect of the Children's Miracle Network. 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--Special Accounts on December 4, 1995. From January 1990 to November 1995, he held the position of Senior Vice President--President National Accounts Marketing Division. 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. 5 Mr. Leick became Senior Vice President--Operations on December 4, 1995. From February 1994 to November 1995, he held the position of Senior Vice President--President Atlantic Division. 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--Sales on December 4, 1995. From January 1990 to November 1995, he held the position of Senior Vice President-- President Western Division. Mr. Talz became Senior Vice President--Organizational Development on December 4, 1995. From January 1990 to November 1995, he held the position of Senior Vice President--President Central Division. Mr. Hirst became Vice President and Controller on April 16, 1990. He has held that position for the last five years. The Company is not aware of any family relationships between any of the foregoing officers and any of the Company's directors. Each of the foregoing officers hold such office until his successor shall have been duly chosen and shall have qualified, or until his earlier resignation or removal. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ADVO's 1995 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 30, 1995, September 24, 1994 and September 25, 1993, the Company declared cash dividends of $.10, $.095 and $.06 per share, respectively, to holders of ADVO Common Stock. The closing price as of November 24, 1995 of the Company's Common Stock, under the symbol AD, on the New York Stock Exchange as reported in The Wall Street Journal was $26 1/2 per share. The approximate number of holders of record of the common stock on November 24, 1995 was 931. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included in ADVO's 1995 Annual Report to Stockholders on page 20 under the caption "Selected Financial Data" and is incorporated herein by reference and made a part hereof (see Exhibit 13). 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 1995 Annual Report to Stockholders on pages 21 through 23 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 24, 1995, appearing on pages 24 through 36 of ADVO's 1995 Annual Report to Stockholders, are incorporated herein by reference and made a part hereof (see Exhibit 13). 6 The selected quarterly information required by this item is included under the caption "Quarterly Financial Data (unaudited)" on page 35 of ADVO's 1995 Annual Report to Stockholders and is incorporated herein by reference and made a part hereof (see Exhibit 13). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item, to the extent not included under the caption "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K, appears on pages 4 and 5 of the Company's definitive proxy statement dated December 18, 1995 for the annual meeting of stockholders to be held on January 18, 1996 (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. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under the caption "Executive Compensation" on pages 8 through 19 (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 page 19 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: 7
EXHIBIT NO. EXHIBIT WHERE LOCATED - ----------- ------- ------------- 3(a) Restated Certificate of Incorporation Incorporated by reference to Exhibit of ADVO. 3(a) to the Company's Form 10 filed on September 15, 1986 (No. 1-11720). 3(b) Restated By-laws of ADVO. Incorporated by reference to Exhibit 3(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1989 (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. 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) Amendment dated August 18, 1992 of 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(c) 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(d) 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(e) 1988 Non-Qualified Stock Option Plan Incorporated by reference to Exhibit and 1993 Stock Option Subplan of A to the Company's definitive Proxy ADVO, as amended. * statement for the annual meeting held on January 19, 1995. 10(f) 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(g) 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(h) 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(i) Employment Agreement, dated August Incorporated by reference to Exhibit 21, 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.
8
EXHIBIT NO. EXHIBIT WHERE LOCATED - ----------- ------- ------------- 10(j) 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(k) Executive Severance Agreement, dated Filed herewith. October 17, 1995 between ADVO and Robert Kamerschen. * 10(l) Executive Severance Agreements, dated Filed herewith. October 17, 1995 between ADVO and the executive officer named therein. * 10(m) Executive Severance Agreements, dated Filed herewith. October 17, 1995 between ADVO and the executive officer named therein. * 10(n) Executive Severance Agreements, dated Filed herewith. October 17, 1995 between ADVO and Robert S. Hirst. 11 Computation of Per Share Earnings. Filed herewith. 13 1995 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. A report on Form 8-K dated September 26, 1995 was filed by the Company during the quarter ended September 30, 1995. The Form 8-K reported under item 5 thereof the Company's announcement that it had retained Goldman, Sachs & Co. as its investment advisor to assist its Board of Directors in exploring strategic alternatives aimed at enhancing long-term shareholder value. The Company also announced that it had elected to sell its Marketing Force segment. For financial reporting purposes the sale would be treated as a discontinued operation. 9 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 15, 1995 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 15, 1995 Robert Kamerschen /s/ Chairman, Chief Executive ---------------------------- Officer and Director ROBERT KAMERSCHEN (Principal Executive Officer) December 15, 1995 Joseph P. Durrett /s/ President, Chief ---------------------------- Operating Officer and JOSEPH P. DURRETT Director December 15, 1995 Larry G. Morris /s/ Senior Executive Vice ---------------------------- President, Chief LARRY G. MORRIS Administrative and Process Development Officer and Director December 15, 1995 Lowell W. Robinson /s/ Executive Vice President ---------------------------- and Chief Financial LOWELL W. ROBINSON Officer (Principal Financial Officer) December 15, 1995 Robert S. Hirst /s/ Vice President and ---------------------------- Controller (Principal ROBERT S. HIRST Accounting Officer) December 15, 1995 Jack W. Fritz /s/ Director ---------------------------- JACK W. FRITZ December 15, 1995 Lawrence Lachman /s/ Director ---------------------------- LAWRENCE LACHMAN December 15, 1995 Howard H. Newman /s/ Director ---------------------------- HOWARD H. NEWMAN December 15, 1995 John R. Rockwell /s/ Director ---------------------------- JOHN R. ROCKWELL December 15, 1995 Richard H. Stowe /s/ Director ---------------------------- RICHARD H. STOWE December 15, 1995 Director ---------------------------- JOHN L. VOGELSTEIN 10 ADVO, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE ---- Report of independent auditors........................................... * Consolidated statements of operations for the years ended September 30, 1995, September 24, 1994 and September 25, 1993........................................ * Consolidated balance sheets at September 30, 1995 and September 24, 1994. * Consolidated statements of cash flows for the years ended September 30, 1995, September 24, 1994 and September 25, 1993........................................ * Consolidated statements of changes in stockholders' equity for the years ended September 30, 1995, September 24, 1994 and September 25, 1993..... * Notes to consolidated financial statements............................... * Consolidated Schedules II--Valuation and Qualifying Accounts.................................. F-2
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 24 to 36 of the ADVO, Inc. 1995 Annual Report to Stockholders. F-1 ADVO, INC. SCHEDULE II--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 COST AND OTHER FROM END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD ----------- ---------- ---------- ---------- ---------- ---------- Year ended September 25, 1993: Allowances for sales adjustments.......... $ 2,348 $ -- $ 6,277(b) $ 5,738 $ 2,887 Allowances for doubtful accounts.... 1,069 2,683 -- 2,167(a)(c) 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 $30,327 $ 6,277 $ 7,905 $33,654 ======= ======= ======= ======= ======= Year ended September 24, 1994: Allowances for sales adjustments.......... $ 2,887 $ -- $ 6,992(b) $ 6,558 $ 3,321 Allowances for doubtful accounts.... 1,585 3,304 -- 3,105(a)(c) 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 $ 5,112 $ 6,992 $18,854 $26,904 ======= ======= ======= ======= ======= Year ended September 30, 1995: Allowances for sales adjustments.......... $ 3,321 $ -- $ 5,758(b) $ 6,953 $ 2,126 Allowances for doubtful accounts.... 1,784 2,953 -- 3,445(a)(c) 1,292 Restructuring reserve. 17,109 -- -- 7,230 9,879 Accumulated amortization-- Goodwill............. 703 329 -- -- 1,032 Accumulated amortization-- Intangibles.......... 3,987 1,015 -- 604 4,398 ------- ------- ------- ------- ------- $26,904 $ 4,297 $ 5,758 $18,232 $18,727 ======= ======= ======= ======= =======
- -------- (a) Write off of uncollectible accounts, net of recoveries on accounts previously written off. (b) Reduction of revenues. (c) Reclassification of allowances related to discontinued operations. F-2 EX-10.K 2 EXECUTIVE SEVERANCE AGREEMENT EXHIBIT 10(k) - ------------- EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of October 17, 1995, by and between ADVO, Inc. (the "Company") and Robert Kamerschen (the "Executive" ). RECITALS: -------- A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere herein, --------------------- the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Affiliate" means (i) each entity in which the Company, alone or together with one or more other Affiliates of the Company, owns not less than 80% of the then outstanding voting securities or, for any entity that is not a corporation, at least 80% of the then-outstanding capital interests of such entity and (ii) any additional entity which is deemed by action of the Board to be an Affiliate for the purposes of this Agreement. (b) "Base Pay" means the Executive's annual aggregate fixed base salary from the Company at the time in question. (c) "Board" means the Board of Directors of the Company. (d) "Change of Control" means the occurrence during the Term of any of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 30% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 30% or more of the Outstanding Company Voting Securities; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; and provided, further, than any partner, employee or representative of Warburg proposed by Warburg to be elected to the Board shall be considered a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, im- mediately prior to such Business Combination of the Outstanding Company Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. (f) "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that if the Executive is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives the Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination will be the last day of the month in which occurs the date of death or the disability effective date, as the case may be. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, including, but not limited to, plans and programs which are "employee benefit plans" under Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and any amendment, or successor, to such plans or programs (whether insured, funded or unfunded). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "Incentive Pay" means an annual amount equal to the aggregate annual bonus, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year or performance period pursuant to any bonus plan of the Company. (j) "Notice of Termination" means a written notice which (i) indicates the specific provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the Termination under the provision so indicated, and (iii) if the effective date of the Termination is other than the date of receipt of such notice, specifies the effective date of Termination (which date will be not more than sixty (60) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing that the Executive is entitled to the benefits intended to be provided by this Agreement will not constitute a waiver of any right of the Executive hereunder or otherwise preclude the Executive from later asserting such fact or circumstance in enforcing the Executive's rights hereunder. (k) "Severance Period" means the period of time commencing on the date of an occurrence of a Change of Control and continuing until the earlier of (i) the date which is two years following the occurrence of the Change of Control, and (ii) the Executive's death. (l) "Subsidiary" means an entity, at least a majority of the total voting power of the then-outstanding voting securities of which is held, directly or indirectly, by the Company and/or one or more other Subsidiaries or, for any entity that is not a corporation, at least a majority of the then- outstanding capital interests of which is so held. (m) "Term" means (A) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (B) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (C) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (n) "Terminate" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. (o) "Warburg" means Warburg, Pincus Capital Partners, L.P., and/or any of its affiliates. 2. Termination Following a Change of Control: (a) If, during the ----------------------------------------- Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Sections 3 and 4 unless such termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) The Executive's voluntary Termination in circumstances in which Good Reason does not exist. (b) In the event of the occurrence of a Change of Control, the Executive may Terminate during the Severance Period with the right to severance compensation as provided in Sections 3 and 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for Termination exists or has occurred, including without limitation other employment): (i) An adverse change in the nature or scope of the authorities, powers, functions, responsibilities, or duties attached to the position with the Company, which the Executive held immediately prior to the Change of Control; (ii) A reduction in the Executive's Base Pay as in effect immediately prior to any Change of Control, or as it may have been increased from time to time thereafter; (iii) Any failure by the Company to continue in effect any plan or arrangement providing Incentive Pay in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing substantially similar benefits) or the taking of any action by the Company, any Affiliate or Subsidiary which would adversely affect the Executive's participation in any such plan or arrangement or reduce the Executive's benefits under any such plan or arrangement in a manner inconsistent with the practices of the Company prior to the Change of Control; (iv) Any failure by the Company to continue in effect any Employee Benefits in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing the Executive with substantially similar benefits) or the taking of any action by the Company, an Affiliate or Subsidiary which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any Employee Benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of a Change of Control; (v) The liquidation, dissolution, merger, consolidation, or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer, or otherwise) to which all or a significant portion of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company which causes the Executive's services to be performed at a location which is more than thirty five (35) miles from the location where the Executive was employed immediately preceding the date of the Change of Control. (c) Any Termination will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. Severance Compensation: (a) If, following the occurrence of a Change of ---------------------- Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five (5) business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination the aggregate of the amount (the "Severance Payment") equal to two times the sum of (A) the Executive's Base Pay at the highest rate in effect at any time within the 90-day period preceding the date the Notice of Termination was given or, if higher, at the highest rate in effect at any time within the 90-day period preceding the date of the first occurrence of a Change of Control, and (B) an amount equal to the greatest amount of Incentive Pay received by the Executive during any calendar year or portion thereof from and including the third calendar year prior to the first occurrence of a Change of Control; and (ii) For the period of two years from the Date of Termination, the Executive shall be eligible for participation in and shall receive all benefits under such benefit plans, practices, policies and programs of the Company that provide medical, prescription dental, or life insurance coverage, with the costs of such participation to be paid by the Company to the same extent as prior to the Executive's Termination. In the event that such continued participation is not allowed under the terms and provisions of such plans or programs, then in lieu thereof, the Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company for the period referred to in the preceding sentence. (b) There will be no right of set-off or counterclaim in respect of any claim, debt, or obligation against any payment to or benefit for the Executive provided for in this Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of The Wall Street Journal. Such interest will be payable as ----------------------- it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties, respective rights and obligations under this Section 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. Excise and Other Taxes. The Executive shall bear all expense of, and ---------------------- be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder, including, without limitation, any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code); provided, however, that all payments under this Agreement shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit received by the Executive shall exceed the net after-tax benefit received by the Executive if no such reduction was made. For purposes of this Section 4, "net after-tax benefit" shall mean (i) the total of all payments and the value of all benefits which the Executive receives or is then entitled to receive from the Company that would constitute "parachute payments" within the meaning of Section 280G of the Code, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the Code. The foregoing determination will be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive and reasonably acceptable to the Company (which may be, but will not be required to be, the Company's independent auditors). The Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within fifteen (15) days after the Date of Termination. If the Accounting Firm determines that such reduction is required by this Section 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. No Mitigation Obligation: The Company hereby acknowledges that ------------------------ it will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Date of Termination. The payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise. 6. Legal Fees and Expenses: If the Company has failed to comply ------------------------ with any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company, to advise and represent the Executive in connection with any such interpretation, enforcement, or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. The Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with such litigation. 7. Employment Rights: Nothing expressed or implied in this ----------------- Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company, or any Affiliate or Subsidiary prior to or following any Change of Control. 8. Withholding of Taxes: The Company may withhold from any amounts -------------------- payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. Successors and Binding Agreement: (a) The Company will require -------------------------------- any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization, or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company, whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, and/or legatees. (c) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer, or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 9(a) and 9(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable, or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. Notices: For all purposes of this Agreement, all ------- communications, including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the General Counsel of the Company) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. Governing Law: The validity, interpretation, construction, and ------------- performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. Validity: If any provision of this Agreement or the application -------- of any provision hereof to any person or circumstances is held invalid, unenforceable, or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable, or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid, or legal. 13. Non-Exclusivity of Rights: Nothing in this Agreement will ------------------------- prevent or limit the Executive's present or future participation in any benefit, bonus, incentive, or other plan or program provided by the Company or any Affiliate or Subsidiary for which the Executive may qualify, nor will this Agreement in any manner limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any Affiliate or Subsidiary. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company at or subsequent to the Date of Termination will be payable in accordance with such plan or program, except as otherwise expressly provided in this Agreement; provided, however, that any amounts received by the Executive pursuant to this Agreement shall be in lieu of any benefits which the Executive is entitled to receive or may become entitled to receive under any reduction-in- force or severance pay plan or practice which the Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any individual agreement of employment with the Company which would provide a benefit to the Executive upon the occurrence of a Change of Control of the Company, and any severance benefits required under federal or state law to be paid to the Executive. 14. Miscellaneous: (a) No provision of this Agreement may be ------------- modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. (b) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof, other than the Employment Agreement between the Executive and the Company dated as of November 14, 1991. 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 David M.Stigler/s/ -------------------------- Robert Kamerschen/s/ ---------------------------- Robert Kamerschen EX-10.L 3 EXECUTIVE SEVERANCE AGREEMENT EXHIBIT 10(l) - ------------- Following is a copy of the Executive Severance Agreement, dated as of October 17, 1995, by and between ADVO, Inc. and each of the following executive officers: Joseph P. Durrett Larry G. Morris Lowell W. Robinson EXHIBIT 10(l) - ------------- EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of October 17, 1995, by and between ADVO, Inc. (the "Company") and ______________(the "Executive"). RECITALS: -------- A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere --------------------- herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Affiliate" means (i) each entity in which the Company, alone or together with one or more other Affiliates of the Company, owns not less than 80% of the then outstanding voting securities or, for any entity that is not a corporation, at least 80% of the then-outstanding capital interests of such entity and (ii) any additional entity which is deemed by action of the Board to be an Affiliate for the purposes of this Agreement. (b) "Base Pay" means the Executive's annual aggregate fixed base salary from the Company at the time in question. (c) "Board" means the Board of Directors of the Company. (d) "Change of Control" means the occurrence during the Term of any of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 30% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 30% or more of the Outstanding Company Voting Securities; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; and provided, further, than any partner, employee or representative of Warburg proposed by Warburg to be elected to the Board shall be considered a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Busi- ness Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. (f) "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that if the Executive is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termi nation will be the date on which the Executive receives the Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination will be the last day of the month in which occurs the date of death or the disability effective date, as the case may be. (g) "Employee Benefits" means the perquisites, ben efits and service credit for benefits as provided under the plans and programs maintained by the Company, including, but not limited to, plans and programs which are "employee benefit plans" under Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and any amendment, or succes sor, to such plans or programs (whether insured, funded or unfunded). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "Incentive Pay" means an annual amount equal to the aggregate annual bonus, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year or performance period pursuant to any bonus plan of the Company. (j) "Notice of Termination" means a written notice which (i) indicates the specific provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the Termination under the provision so indicated, and (iii) if the effective date of the Termination is other than the date of receipt of such notice, specifies the effective date of Termination (which date will be not more than sixty (60) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing that the Executive is entitled to the benefits intended to be provided by this Agreement will not constitute a waiver of any right of the Executive hereunder or otherwise preclude the Executive from later asserting such fact or circumstance in enforcing the Executive's rights hereunder. (k) "Severance Period" means the period of time com- mencing 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. (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, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (B) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (C) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (n) "Terminate" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. (o) "Warburg" means Warburg, Pincus Capital Partners, L.P., and/or any of its affiliates. 2. Termination Following a Change of Control: (a) If, during the ----------------------------------------- Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Sections 3 and 4 unless such termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) The Executive's voluntary Termination in circumstances in which Good Reason does not exist. (b) In the event of the occurrence of a Change of Control, the Executive may Terminate during the Severance Period with the right to severance compensation as provided in Sections 3 and 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for Termination exists or has occurred, including without limitation other employment): (i) An adverse change in the nature or scope of the authorities, powers, functions, responsibilities, or duties attached to the position with the Company, which the Executive held immediately prior to the Change of Control; (ii) A reduction in the Executive's Base Pay as in effect immediately prior to any Change of Control, or as it may have been increased from time to time thereafter; (iii) Any failure by the Company to continue in effect any plan or arrangement providing Incentive Pay in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing substantially similar benefits) or the taking of any action by the Company, any Affiliate or Subsidiary which would adversely affect the Executive's participation in any such plan or arrangement or reduce the Executive's benefits under any such plan or arrangement in a manner inconsistent with the practices of the Company prior to the Change of Control; (iv) Any failure by the Company to continue in effect any Employee Benefits in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing the Executive with substantially similar benefits) or the taking of any action by the Company, an Affiliate or Subsidiary which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any Employee Benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of a Change of Control; (v) The liquidation, dissolution, merger, consolidation, or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer, or otherwise) to which all or a significant portion of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company which causes the Executive's services to be performed at a location which is more than thirty five (35) miles from the location where the Executive was employed immediately preceding the date of the Change of Control. (c) Any Termination will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. Severance Compensation: (a) If, following the occurrence of a ---------------------- Change of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five (5) business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination the aggregate of the amount (the "Severance Payment") equal to two times the sum of (A) the Executive's Base Pay at the highest rate in effect at any time within the 90-day period preceding the date the Notice of Termination was given or, if higher, at the highest rate in effect at any time within the 90-day period preceding the date of the first occurrence of a Change of Control, and (B) an amount equal to the greatest amount of Incentive Pay received by the Executive during any calendar year or portion thereof from and including the third calendar year prior to the first occurrence of a Change of Control; and (ii) For the period of two years from the Date of Termination, the Executive shall be eligible for participation in and shall receive all benefits under such benefit plans, practices, policies and programs of the Company that provide medical, prescription dental, or life insurance coverage, with the costs of such participation to be paid by the Company to the same extent as prior to the Executive's Termination. In the event that such continued participation is not allowed under the terms and provisions of such plans or programs, then in lieu thereof, the Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company for the period referred to in the preceding sentence. (b) There will be no right of set-off or counterclaim in respect of any claim, debt, or obligation against any payment to or benefit for the Executive provided for in this Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of The Wall Street Journal. Such interest will be payable as ----------------------- it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties, respective rights and obligations under this Section 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. Excise and Other Taxes. The Executive shall bear all expense of, ---------------------- and be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder, including, without limitation, any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code); provided, however, that all payments under this Agreement shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit received by the Executive shall exceed the net after-tax benefit received by the Executive if no such reduction was made. For purposes of this Section 4, "net after-tax benefit" shall mean (i) the total of all payments and the value of all benefits which the Executive receives or is then entitled to receive from the Company that would constitute "parachute payments" within the meaning of Section 280G of the Code, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the Code. The foregoing determination will be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive and reasonably acceptable to the Company (which may be, but will not be required to be, the Company's independent auditors). The Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within fifteen (15) days after the Date of Termination. If the Accounting Firm determines that such reduction is required by this Section 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. No Mitigation Obligation: The Company hereby acknowledges that ------------------------ it will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Date of Termination. The payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise. 6. Legal Fees and Expenses: If the Company has failed to comply with ----------------------- any of its obligations under this Agree ment or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company, to advise and represent the Executive in connection with any such interpretation, enforcement, or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. The Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with such litigation. 7. Employment Rights: Nothing expressed or implied in this ----------------- Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company, or any Affiliate or Subsidiary prior to or following any Change of Control. 8. Withholding of Taxes: The Company may withhold -------------------- from any amounts payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. Successors and Binding Agreement: (a) The Company will require -------------------------------- any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization, or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company, whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, and/or legatees. (c) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer, or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 9(a) and 9(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable, or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. Notices: For all purposes of this Agreement, all communications, ------- including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the General Counsel of the Company) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. Governing Law: The validity, interpretation, construction, and ------------- performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. Validity: If any provision of this Agreement or the application -------- of any provision hereof to any person or circumstances is held invalid, unenforceable, or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable, or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid, or legal. 13. Non-Exclusivity of Rights: Nothing in this Agreement will ------------------------- prevent or limit the Executive's present or future participation in any benefit, bonus, incentive, or other plan or program provided by the Company or any Affiliate or Subsidiary for which the Executive may qualify, nor will this Agreement in any manner limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any Affiliate or Subsidiary. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company at or subsequent to the Date of Termination will be payable in accordance with such plan or program, except as otherwise expressly provided in this Agreement; provided, however, that any amounts received by the Executive pursuant to this Agreement shall be in lieu of any benefits which the Executive is entitled to receive or may become entitled to receive under any reduction-in- force or severance pay plan or practice which the Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any individual agreement of employment with the Company which would provide a benefit to the Executive upon the occurrence of a Change of Control of the Company, and any severance benefits required under federal or state law to be paid to the Executive. 14. Miscellaneous: (a) No provision of this Agreement may be ------------- modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. (b) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof, other than the Employment Agreement between the Executive and the Company dated as of July 13, 1992. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. ADVO, Inc. By__________________________ Robert Kamerschen ____________________________ [Executive] EX-10.M 4 EXECUTIVE SEVERANCE AGREEMENT EXHIBIT 10(m) - ------------- Following is a copy of the Executive Severance Agreement, dated as of October 17, 1995, by and between ADVO, Inc. and each of the following executive officers: Peter A. Corrao Rick Kurz Fredrick Leick Myron L. Lubin Frank J. Talz EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of October 17, 1995, by and between ADVO, Inc. (the "Company") and _______________(the "Executive"). RECITALS: -------- A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere --------------------- herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Affiliate" means (i) each entity in which the Company, alone or together with one or more other Affiliates of the Company, owns not less than 80% of the then outstanding voting securities or, for any entity that is not a corporation, at least 80% of the then-outstanding capital interests of such entity and (ii) any additional entity which is deemed by action of the Board to be an Affiliate for the purposes of this Agreement. (b) "Base Pay" means the Executive's annual aggregate fixed base salary from the Company at the time in question. (c) "Board" means the Board of Directors of the Company. (d) "Change of Control" means the occurrence during the Term of any of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 30% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 30% or more of the Outstanding Company Voting Securities; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; and provided, further, than any partner, employee or representative of Warburg proposed by Warburg to be elected to the Board shall be considered a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Busi- ness Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities im- mediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. (f) "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that if the Executive is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives the Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination will be the last day of the month in which occurs the date of death or the disability effective date, as the case may be. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, including, but not limited to, plans and programs which are "employee benefit plans" under Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and any amendment, or successor, to such plans or programs (whether insured, funded or unfunded). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "Incentive Pay" means an annual amount equal to the aggregate annual bonus, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year or performance period pursuant to any bonus plan of the Company. (j) "Notice of Termination" means a written notice which (i) indicates the specific provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the Termination under the provision so indicated, and (iii) if the effective date of the Termination is other than the date of receipt of such notice, specifies the effective date of Termination (which date will be not more than sixty (60) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing that the Executive is entitled to the benefits intended to be provided by this Agreement will not constitute a waiver of any right of the Executive hereunder or otherwise preclude the Executive from later asserting such fact or circumstance in enforcing the Executive's rights hereunder. (k) "Severance Period" means the period of time com- mencing on the date of an occurrence of a Change of Control and continuing until the earlier of (i) the date which is one and one-half years following the occurrence of the Change of Control, and (ii) the Executive's death. (l) "Subsidiary" means an entity, at least a majority of the total voting power of the then-outstanding voting securities of which is held, directly or indirectly, by the Company and/or one or more other Subsidiaries or, for any entity that is not a corporation, at least a majority of the then- outstanding capital interests of which is so held. (m) "Term" means (A) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (B) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (C) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (n) "Terminate" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. (o) "Warburg" means Warburg, Pincus Capital Partners, L.P., and/or any of its affiliates. 2. Termination Following a Change of Control: (a) If, during the ----------------------------------------- Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Sections 3 and 4 unless such termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) The Executive's voluntary Termination in circumstances in which Good Reason does not exist. (b) In the event of the occurrence of a Change of Control, the Executive may Terminate during the Severance Period with the right to severance compensation as provided in Sections 3 and 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for Termination exists or has occurred, including without limitation other employment): (i) An adverse change in the nature or scope of the authorities, powers, functions, responsibilities, or duties attached to the position with the Company, which the Executive held immediately prior to the Change of Control; (ii) A reduction in the Executive's Base Pay as in effect immediately prior to any Change of Control, or as it may have been increased from time to time thereafter; (iii) Any failure by the Company to continue in effect any plan or arrangement providing Incentive Pay in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing substantially similar benefits) or the taking of any action by the Company, any Affiliate or Subsidiary which would adversely affect the Executive's participation in any such plan or arrangement or reduce the Executive's benefits under any such plan or arrangement in a manner inconsistent with the practices of the Company prior to the Change of Control; (iv) Any failure by the Company to continue in effect any Employee Benefits in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing the Executive with substantially similar benefits) or the taking of any action by the Company, an Affiliate or Subsidiary which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any Employee Benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of a Change of Control; (v) The liquidation, dissolution, merger, consolidation, or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer, or otherwise) to which all or a significant portion of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company which causes the Executive's services to be performed at a location which is more than thirty five (35) miles from the location where the Executive was employed immediately preceding the date of the Change of Control. (c) Any Termination will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. Severance Compensation: (a) If, following the occurrence of a ---------------------- Change of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five (5) business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination the aggregate of the amount (the "Severance Payment") equal to one and one-half times the sum of (A) the Executive's Base Pay at the highest rate in effect at any time within the 90-day period preceding the date the Notice of Termination was given or, if higher, at the highest rate in effect at any time within the 90-day period preceding the date of the first occurrence of a Change of Control, and (B) an amount equal to the greatest amount of Incentive Pay received by the Executive during any calendar year or portion thereof from and including the third calendar year prior to the first occurrence of a Change of Control; and (ii) For the period of one and one-half years from the Date of Termination, the Executive shall be eligible for participation in and shall receive all benefits under such benefit plans, practices, policies and programs of the Company that provide medical, prescription dental, or life insurance coverage, with the costs of such participation to be paid by the Company to the same extent as prior to the Executive's Termination. In the event that such continued participation is not allowed under the terms and provisions of such plans or programs, then in lieu thereof, the Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company for the period referred to in the preceding sentence. (b) There will be no right of set-off or counterclaim in respect of any claim, debt, or obligation against any payment to or benefit for the Executive provided for in this Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of The Wall Street Journal. Such interest will be payable as ----------------------- it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties, respective rights and obligations under this Section 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. Excise and Other Taxes. The Executive shall bear all expense of, ---------------------- and be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder, including, without limitation, any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code); provided, however, that all payments under this Agreement shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit received by the Executive shall exceed the net after-tax benefit received by the Executive if no such reduction was made. For purposes of this Section 4, "net after-tax benefit" shall mean (i) the total of all payments and the value of all benefits which the Executive receives or is then entitled to receive from the Company that would constitute "parachute payments" within the meaning of Section 280G of the Code, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the Code. The foregoing determination will be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive and reasonably acceptable to the Company (which may be, but will not be required to be, the Company's independent auditors). The Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within fifteen (15) days after the Date of Termination. If the Accounting Firm determines that such reduction is required by this Section 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. No Mitigation Obligation: The Company hereby acknowledges that ------------------------ it will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Date of Termination. The payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise. 6. Legal Fees and Expenses: If the Company has failed to comply with ----------------------- any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company, to advise and represent the Executive in connection with any such interpretation, enforcement, or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. The Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with such litigation. 7. Employment Rights: Nothing expressed or implied in this ----------------- Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company, or any Affiliate or Subsidiary prior to or following any Change of Control. 8. Withholding of Taxes: The Company may withhold -------------------- from any amounts payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. Successors and Binding Agreement: (a) The Company will require -------------------------------- any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization, or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company, whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, and/or legatees. (c) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer, or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 9(a) and 9(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable, or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. Notices: For all purposes of this Agreement, all communications, ------- including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the General Counsel of the Company) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. Governing Law: The validity, interpretation, construction, and ------------- performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. Validity: If any provision of this Agreement or the application -------- of any provision hereof to any person or circumstances is held invalid, unenforceable, or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable, or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid, or legal. 13. Non-Exclusivity of Rights: Nothing in this Agreement will ------------------------- prevent or limit the Executive's present or future participation in any benefit, bonus, incentive, or other plan or program provided by the Company or any Affiliate or Subsidiary for which the Executive may qualify, nor will this Agreement in any manner limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any Affiliate or Subsidiary. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company at or subsequent to the Date of Termination will be payable in accordance with such plan or program, except as otherwise expressly provided in this Agreement; provided, however, that any amounts received by the Executive pursuant to this Agreement shall be in lieu of any benefits which the Executive is entitled to receive or may become entitled to receive under any reduction-in- force or severance pay plan or practice which the Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any individual agreement of employment with the Company which would provide a benefit to the Executive upon the occurrence of a Change of Control of the Company, and any severance benefits required under federal or state law to be paid to the Executive. 14. Miscellaneous: (a) No provision of this Agreement may be ------------- modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. (b) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. ADVO, Inc. By__________________________ Robert Kamerschen ____________________________ [Executive] EX-10.N 5 EXECUTIVE SEVERANCE AGREEMENT EXHIBIT 10(n) - ------------- EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of October 17, 1995, by and between ADVO, Inc. (the "Company") and Robert S. Hirst (the "Executive"). RECITALS: -------- A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short- and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere --------------------- herein, the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Affiliate" means (i) each entity in which the Company, alone or together with one or more other Affiliates of the Company, owns not less than 80% of the then outstanding voting securities or, for any entity that is not a corporation, at least 80% of the then-outstanding capital interests of such entity and (ii) any additional entity which is deemed by action of the Board to be an Affiliate for the purposes of this Agreement. (b) "Base Pay" means the Executive's annual aggregate fixed base salary from the Company at the time in question. (c) "Board" means the Board of Directors of the Company. (d) "Change of Control" means the occurrence during the Term of any of the following events: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 30% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 30% or more of the Outstanding Company Voting Securities; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; and provided, further, than any partner, employee or representative of Warburg proposed by Warburg to be elected to the Board shall be considered a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Busi- ness Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. (f) "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that if the Executive is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a)(ii), the Date of Termination will be the date on which the Executive receives the Notice of Termination from the Company; and provided further, if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination will be the last day of the month in which occurs the date of death or the disability effective date, as the case may be. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, including, but not limited to, plans and programs which are "employee benefit plans" under Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and any amendment, or successor, to such plans or programs (whether insured, funded or unfunded). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "Incentive Pay" means an annual amount equal to the aggregate annual bonus, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year or performance period pursuant to any bonus plan of the Company. (j) "Notice of Termination" means a written notice which (i) indicates the specific provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the Termination under the provision so indicated, and (iii) if the effective date of the Termination is other than the date of receipt of such notice, specifies the effective date of Termination (which date will be not more than sixty (60) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing that the Executive is entitled to the benefits intended to be provided by this Agreement will not constitute a waiver of any right of the Executive hereunder or otherwise preclude the Executive from later asserting such fact or circumstance in enforcing the Executive's rights hereunder. (k) "Severance Period" means the period of time commencing on the date of an occurrence of a Change of Control and continuing until the earlier of (i) the date which is one year following the occurrence of the Change of Control, and (ii) the Executive's death. (l) "Subsidiary" means an entity, at least a majority of the total voting power of the then-outstanding voting securities of which is held, directly or indirectly, by the Company and/or one or more other Subsidiaries or, for any entity that is not a corporation, at least a majority of the then- outstanding capital interests of which is so held. (m) "Term" means (A) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (B) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (C) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (n) "Terminate" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. (o) "Warburg" means Warburg, Pincus Capital Partners, L.P., and/or any of its affiliates. 2. Termination Following a Change of Control: (a) If, during the ----------------------------------------- Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Sections 3 and 4 unless such termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) The Executive's voluntary Termination in circumstances in which Good Reason does not exist. (b) In the event of the occurrence of a Change of Control, the Executive may Terminate during the Severance Period with the right to severance compensation as provided in Sections 3 and 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for Termination exists or has occurred, including without limitation other employment): (i) An adverse change in the nature or scope of the authorities, powers, functions, responsibilities, or duties attached to the position with the Company, which the Executive held immediately prior to the Change of Control; (ii) A reduction in the Executive's Base Pay as in effect immediately prior to any Change of Control, or as it may have been increased from time to time thereafter; (iii) Any failure by the Company to continue in effect any plan or arrangement providing Incentive Pay in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing substantially similar benefits) or the taking of any action by the Company, any Affiliate or Subsidiary which would adversely affect the Executive's participation in any such plan or arrangement or reduce the Executive's benefits under any such plan or arrangement in a manner inconsistent with the practices of the Company prior to the Change of Control; (iv) Any failure by the Company to continue in effect any Employee Benefits in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing the Executive with substantially similar benefits) or the taking of any action by the Company, an Affiliate or Subsidiary which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any Employee Benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of a Change of Control; (v) The liquidation, dissolution, merger, consolidation, or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer, or otherwise) to which all or a significant portion of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company which causes the Executive's services to be performed at a location which is more than thirty five (35) miles from the location where the Executive was employed immediately preceding the date of the Change of Control. (c) Any Termination will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. Severance Compensation: (a) If, following the occurrence of a ---------------------- Change of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2(a)(i), 2(a)(ii), or 2(a)(iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five (5) business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination the aggregate of the amount (the "Severance Payment") equal to one times the sum of (A) the Executive's Base Pay at the highest rate in effect at any time within the 90-day period preceding the date the Notice of Termination was given or, if higher, at the highest rate in effect at any time within the 90-day period preceding the date of the first occurrence of a Change of Control, and (B) an amount equal to the greatest amount of Incentive Pay received by the Executive during any calendar year or portion thereof from and including the third calendar year prior to the first occurrence of a Change of Control; and (ii) For the period of one year from the Date of Termination, the Executive shall be eligible for participation in and shall receive all benefits under such benefit plans, practices, policies and programs of the Company that provide medical, prescription dental, or life insurance coverage, with the costs of such participation to be paid by the Company to the same extent as prior to the Executive's Termination. In the event that such continued participation is not allowed under the terms and provisions of such plans or programs, then in lieu thereof, the Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company for the period referred to in the preceding sentence. (b) There will be no right of set-off or counterclaim in respect of any claim, debt, or obligation against any payment to or benefit for the Executive provided for in this Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of The Wall Street Journal. Such interest will be payable as ----------------------- it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties, respective rights and obligations under this Section 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. Excise and Other Taxes. The Executive shall bear all expense of, ---------------------- and be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder, including, without limitation, any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code); provided, however, that all payments under this Agreement shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit received by the Executive shall exceed the net after-tax benefit received by the Executive if no such reduction was made. For purposes of this Section 4, "net after-tax benefit" shall mean (i) the total of all payments and the value of all benefits which the Executive receives or is then entitled to receive from the Company that would constitute "parachute payments" within the meaning of Section 280G of the Code, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the Code. The foregoing determination will be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive and reasonably acceptable to the Company (which may be, but will not be required to be, the Company's independent auditors). The Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within fifteen (15) days after the Date of Termination. If the Accounting Firm determines that such reduction is required by this Section 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3(a). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. No Mitigation Obligation: The Company hereby acknowledges that ------------------------ it will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Date of Termination. The payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise. 6. Legal Fees and Expenses: If the Company has failed to comply with ----------------------- any of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to time to retain counsel of the Executive's choice, at the expense of the Company, to advise and represent the Executive in connection with any such interpretation, enforcement, or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. The Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with such litigation. 7. Employment Rights: Nothing expressed or implied in this ----------------- Agreement will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company, or any Affiliate or Subsidiary prior to or following any Change of Control. 8. Withholding of Taxes: The Company may withhold from any amounts -------------------- payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. Successors and Binding Agreement: (a) The Company will require -------------------------------- any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization, or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company, whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, and/or legatees. (c) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer, or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 9(a) and 9(b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable, or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 9(c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 10. Notices: For all purposes of this Agreement, all communications, ------- including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service, addressed to the Company (to the attention of the General Counsel of the Company) at its principal executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. Governing Law: The validity, interpretation, construction, and ------------- performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. Validity: If any provision of this Agreement or the application -------- of any provision hereof to any person or circumstances is held invalid, unenforceable, or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable, or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid, or legal. 13. Non-Exclusivity of Rights: Nothing in this Agreement will ------------------------- prevent or limit the Executive's present or future participation in any benefit, bonus, incentive, or other plan or program provided by the Company or any Affiliate or Subsidiary for which the Executive may qualify, nor will this Agreement in any manner limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any Affiliate or Subsidiary. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company at or subsequent to the Date of Termination will be payable in accordance with such plan or program, except as otherwise expressly provided in this Agreement; provided, however, that any amounts received by the Executive pursuant to this Agreement shall be in lieu of any benefits which the Executive is entitled to receive or may become entitled to receive under any reduction-in- force or severance pay plan or practice which the Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any individual agreement of employment with the Company which would provide a benefit to the Executive upon the occurrence of a Change of Control of the Company, and any severance benefits required under federal or state law to be paid to the Executive. 14. Miscellaneous: (a) No provision of this Agreement may be ------------- modified, waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. (b) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. ADVO, Inc. By Robert Kamerschen/s/ -------------------------- Robert Kamerschen Robert S. Hirst/s/ ----------------------------- Robert S. Hirst EX-11 6 PRIMARY PSE 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 30, SEPTEMBER 24, SEPTEMBER 25, 1995 1994 1993 ------------- ------------- ------------- EARNINGS APPLICABLE TO COMMON STOCK.. $24,951 $25,171 $ 5,351 ======= ======= ======= AVERAGE COMMON AND COMMON EQUIVALENT SHARES Average common shares outstanding.... 20,663 21,104 20,631 Assumed conversion or exercise of: Warrants........................... 2,272 2,236 2,303 Stock options...................... 310 496 1,097 Series A Preferred Stock........... -- -- 1,229 Restricted stock................... 41 50 129 ------- ------- ------- Weighted average common and common equivalent shares................... 23,286 23,886 25,389 ======= ======= ======= EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES................... $ 1.07 $ 1.05 $ .21 ======= ======= =======
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 30, SEPTEMBER 24, SEPTEMBER 25, 1995 1994 1993 ------------- ------------- ------------- EARNINGS APPLICABLE TO FULLY DILUTED SHARES.............................. $24,951 $25,171 $ 5,351 ======= ======= ======= FULLY DILUTED SHARES Average common shares outstanding.... 20,663 21,104 20,631 Assumed conversion or exercise of: Warrants........................... 2,354 2,242 2,303 Stock options...................... 606 512 1,097 Series A Preferred Stock........... -- -- 1,229 Restricted stock................... 74 66 152 ------- ------- ------- Fully diluted shares................. 23,697 23,924 25,412 ======= ======= ======= EARNINGS PER SHARE ASSUMING FULL DILUTION............................ $ 1.05 $ 1.05 $ .21 ======= ======= =======
EX-13 7 FINANCIAL STATEMENTS 1995 ANNUAL REPORT ADVO, INC. Selected Financial Data
Year ended Year ended Year ended Year ended Year ended September 30, September 24, September 25, September 26, September 28, (In millions, except per share data) 1995 1994 1993 1992 1991 =================================================================================================================================== Summary of Operations Revenues $1,011.9 $920.3 $856.6 $787.6 $697.4 Operating income 48.5 39.7 2.3(1) 28.6 25.7 Income from continuing operations 30.9 24.6 2.8 20.5 19.3 Net income 25.0 25.2 5.4 22.5 19.2 Earnings per share from continuing operations (2): Primary 1.33 1.03 .11 .81 .78 Fully diluted 1.31 1.03 .11 .80 .77 Net earnings per share(2)(3): Primary 1.07 1.05 .21 .89 .78 Fully diluted 1.05 1.05 .21 .88 .77 Cash dividends declared per share .10 .095 .06 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Weighted average common and common equivalent shares (2) 23.7 23.9 25.4 25.4 24.9 =================================================================================================================================== September 30, September 24, September 25, September 26, September 28, (In millions, except per share data) 1995 1994 1993 1992 1991 =================================================================================================================================== Balance Sheet Data Cash, cash equivalents and marketable securities $ 54.5 $ 71.1 $ 71.4 $ 65.7 $ 52.6 Total assets 234.2 225.7 226.5 201.1 163.7 Long-term debt -- -- -- .2 .4 Preferred stock (4) -- -- -- 13.1 12.7 Stockholders' equity 130.4 108.0 118.3 112.7 91.3 Book value per share (2) 6.26 5.17 5.32 5.08 4.19
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 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. In September 1995, the Company's management decided that this in- store marketing segment was not consistent with the Company's future strategy and initiated a plan to sell this segment. As a result, this segment has been excluded from continuing operations for the fiscal years presented. (See Note 3 to the consolidated financial statements.) (1) Reflects a one-time restructuring charge to operations of $25.8 million in fiscal 1993 (See Note 11 to the consolidated financial statements). (2) Fiscal years 1992 and 1991 were restated for 5-for-4 stock split effected in the form of a dividend on March 5, 1993. (3) Reflects a charge for cumulative effect of accounting change of $1.5 million, net of tax, or $.07 per share in fiscal 1995. (See Note 9 to the consolidated financial statements). (4) All outstanding preferred shares were converted to ADVO Common Stock in February 1993. 20 1995 ANNUAL REPORT ADVO, INC. Financial Report BASIS OF PRESENTATION In September 1995 ADVO, Inc. (the "Company") announced its plan to sell its in- store marketing segment. (See Note 3 to the consolidated financial statements.) As a result, the Company's results of operations for all years presented have been restated to separately reflect continuing and discontinued operations in the consolidated statements of operations and cash flows. In addition, the fiscal 1995 consolidated balance sheet has been reclassified to reflect the assets and liabilities of the discontinued operation under separate captions. The fiscal 1994 consolidated balance sheet has not been restated. The following discussion on the results of operations excludes the revenues, cost of sales, selling, general and administrative costs, interest income and other expense of this discontinued segment. FINANCIAL OVERVIEW Fiscal 1995 was another year in which the Company was able to demonstrate its commitment to competitive fitness. The Company was able to maintain its revenue and income growth despite simultaneous increases in postage and paper costs. These adversities and the sluggish retail environment of fiscal 1995 notwithstanding, the Company's income from continuing operations experienced a 26% profit growth. The continued implementation of company-wide cost control initiatives both in operational and administrative areas contributed to the successes of fiscal 1995. FISCAL 1995 COMPARED TO FISCAL 1994 CONTINUING OPERATIONS REVENUES Fiscal 1995 revenues from continuing operations increased $91.6 million over fiscal 1994. Price and volume growth contributed to the 10.0% increase in revenues. The volume growth was achieved through increased shared mail packages delivered, which grew 2.9% to 3.2 billion packages, and shared mail piece distribution which increased 5.3% over the comparable period of a year earlier to 25.5 billion pieces. For fiscal 1995, the key indicator of average shared mail pieces per package increased from 7.69 pieces per package to 7.88, representing a 2.4% growth over the prior year. The pricing gains were primarily the result of the 14% increase in postal rates instituted on January 1, 1995 and the approximate 35% increase in paper costs experienced throughout the year. OPERATING EXPENSES Cost of sales increased $84.9 million or 12.5% over fiscal 1994. As a percentage of revenues, cost of sales was 75.5% for the year ended September 30, 1995 and 73.8% for the year ended September 24, 1994. The increase in absolute terms, and as a percentage of revenues, was reflective of the January 1, 1995 14% increase in postal costs and, to a lesser extent, paper cost increases. Postage expense increased 11.9% which was reflective of the postal rate increase and to a lesser degree the volume growth experienced in shared mail pieces and package volume. Print expense, inclusive of paper costs, increased 16.6% over the prior year as a result of higher paper costs and the shared mail volume growth. During fiscal 1995, selling expense, including the provision for bad debts, increased $6.2 million or 5.1%. Increases in commission expense and related sales support costs, resulting from the revenue growth, were the major elements in the selling expense increase. As a percentage of revenues, selling expense decreased from 13.3% in fiscal 1994 to 12.7% in fiscal 1995. General and administrative costs declined $6.2 million or 7.9% in fiscal 1995 over fiscal 1994. As a percentage of revenues, general and administrative costs were 7.2% for the year ended September 30, 1995 versus 8.6% for the year ended September 24, 1994. The decrease was due to the Company's selected consolidation of operating facilities and the downsizing of its administrative offices, as well as overall cost control initiatives. GAIN ON SALE OF INTEREST IN JOINT VENTURE During the first quarter of fiscal 1995, the Company sold its 50% ownership in InfoBase Services to Acxiom Corporation and recognized a before tax gain on this transaction of $2.2 million ($1.4 million after tax or $.06 per share). OPERATING INCOME As a result of the aforementioned, the Company reported a $8.8 million increase in operating income from direct mail operations to $48.5 million compared to $39.7 million in fiscal 1994, a 22.3% improvement. INTEREST INCOME Interest income results primarily from the investment of excess cash and amounted to $2.8 million in fiscal 1995 versus $1.9 million in fiscal 1994. The increase was primarily due to the general increase in interest rates. INCOME TAXES The Company's effective tax rate for continuing operations for both fiscal 1995 and fiscal 1994 was approximately 39%. EARNINGS PER SHARE Earnings per share from continuing operations, on a fully diluted basis, increased to $1.31 per share in fiscal 1995 from $1.03 per share in fiscal 1994 primarily related to the improved operating results. CUMULATIVE EFFECT OF ACCOUNTING CHANGE During the first quarter of fiscal 1995 the Company adopted Statements of Financial Accounting Standards No. 112 ("SFAS No. 112"), "Employers' Accounting for Postemployment Benefits" and No. 115, "Accounting for Certain Investments in Debt and Equity 21 1995 ANNUAL REPORT ADVO, INC. Securities". The cumulative effect of adopting SFAS No. 112 was an after tax charge of $1.5 million or $.07 per share. RESTRUCTURE RESERVE During fiscal 1993 the Company recorded a $25.8 million charge to operations in connection with a plan of restructuring (see Note 11 to the consolidated financial statements). As of September 30, 1995 the Company had utilized $15.9 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. Most of the remaining reserve will be utilized in fiscal 1996 for severance benefits related to the ongoing centralization and strengthening of the Company's operations under its clientizing initiative. Management believes that this restructuring project will reduce future annual operating costs. FISCAL 1994 COMPARED TO FISCAL 1993 CONTINUING OPERATIONS REVENUES Fiscal 1994 revenues from continuing operations increased 7.4% or $63.7 million 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. Shared mail pieces per package increased to 7.69 in fiscal 1994 from 7.61 in fiscal 1993. OPERATING EXPENSES Cost of sales as a percentage of revenues decreased to 73.8% in fiscal 1994 from 75.2% 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 $35.2 million or 5.5% 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 consistent as a percentage of revenues at 13.3% in fiscal 1994 and fiscal 1993. Overall, selling expense increased $8.3 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 increased from 8.2% in fiscal 1993 to 8.6% in fiscal 1994. General and administrative costs increased $8.6 million or 12.2% in fiscal 1994 over fiscal 1993. The increase was primarily related to increases in promotional costs, system development expenditures and wages. OPERATING INCOME As a result of the aforementioned and the 1993 restructuring reserve, the Company reported a $37.4 million increase in operating income from continuing operations to $39.7 million versus $2.3 million in fiscal 1993. 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 $0.8 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 continuing operations in fiscal 1994 was 39% while the rate in fiscal 1993 was 26%. 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 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 from continuing operations increased to $1.03 in fiscal 1994 versus $.11 in fiscal 1993 ($.86 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. FINANCIAL POSITION WORKING CAPITAL Working capital increased to $58.9 million at September 30, 1995 from $46.7 million at September 24, 1994. The increase in working capital was primarily attributable to the improvement in continuing operating results which, along with the timing of customer receipts, accounted for the increase in accounts receivable. In addition, the increase in 22 1995 ANNUAL REPORT ADVO, INC. working capital is also due to the decrease in current liabilities related to reduced future cash outlay requirements associated with brokered trucking, legal and consulting fees, and taxes other than income. As a result of the aforementioned improvement in continuing operating results and the decrease in current liabilities, the Company experienced an increase in its working capital ratio to 1.61 at September 30, 1995 versus 1.45 at September 24, 1994. PROPERTY, PLANT AND EQUIPMENT Capital additions from continuing operations in fiscal 1995 totaled $20.3 million compared to $10.4 million in fiscal 1994. The expenditures were primarily for the purchase of the Company's corporate facilities in Windsor, Connecticut to save lease costs, the replacement of existing production equipment and the upgrading and replacement of computer hardware. Cash provided from operating activities has been sufficient to cover the financing of these capital expenditures. For fiscal 1996, capital additions for new equipment are expected to approximate $12.0 million. In addition, there are significant potential capital expenditures related to the design and development of new financial and operational systems intended to improve operating efficiency and reduce overhead. The book value of disposals aggregated $1.6 million in fiscal 1995 and $.6 million in fiscal 1994. STOCKHOLDERS' EQUITY Stockholders' equity increased $22.4 million in fiscal 1995 to $130.4 million at September 30, 1995 compared to $108.0 million at September 24, 1994. The increase was primarily related to the Company's fiscal 1995 net income of $25.0 million, the $2.5 million recorded for the exercise of stock options and related tax benefit under the Company's employee stock plans and $1.3 million for the amortization of deferred compensation. These increases were offset in part by $4.3 million used for the purchase of the Company's common stock for treasury and $2.1 million for the Company's normal quarterly dividend. In fiscal 1994, stockholders' equity decreased $10.3 million from $118.3 million at September 25, 1993. The decrease was mainly attributable to the Company's purchase of common stock for treasury under a repurchase program announced by the Company in October of 1993. The purchases were partially offset by 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. Book value per common share at September 30, 1995 was $6.26 compared with $5.17 at September 24, 1994. LIQUIDITY The Company's main source of liquidity continues to be funds from continuing operating activities. Cash provided by continuing operating activities was $14.0 million during fiscal 1995 compared with $47.5 million in fiscal 1994. The decrease in cash provided by operating activities is due primarily to the increase in accounts receivable, which was related to the revenue growth from the increased pricing and the timing of customer receipts. Also contributing to the decrease was a reduction in other current liabilities which was reflective of reduced requirements for brokered trucking, legal and consulting fees, and taxes other than income at fiscal 1995 year end versus fiscal 1994. Overall, cash and cash equivalents decreased $15.9 million. Offsetting the cash provided from the continuing operating activities described above was cash used in investing activities of $13.3 million. Included in the investing activities was the purchase of $20.3 million in property, plant and equipment, partially offset by the proceeds received from the sale of the Company's 50% interest in its InfoBase Services joint venture. The effect of the $12.8 million used in the discontinued in-store marketing segment also contributed to the decrease in cash and cash equivalents. 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 1995 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. On May 24, 1995, the Company replaced its existing $25 million credit facility. The new Revolving Credit Agreement expires April 30, 2000 and provides up to $50 million of combined borrowing availability with a bank. Borrowings under the agreement may take the form of either a domestic loan or a Eurodollar loan, as defined in the agreement. The interest rate for such borrowings will be at least equal to the bank's base rate for the particular type of loan and will vary from the rate depending upon the borrowing period. The Company pays a commitment fee of one-eighth of one percent on the average daily balance of the unused portion of the commitment. The terms of the agreement include certain covenants which provide restrictions to the maintenance of net worth and include requirements to maintain certain financial ratios. At September 30, 1995, there are no borrowings under the Revolving Credit Agreement. The Company has outstanding letters of credit of approximately $5.9 million under separate agreements primarily related to its workers' compensation program. 23 1995 ANNUAL REPORT ADVO, INC. Consolidated Statements of Operations
Year ended Year ended Year ended September 30, September 24, September 25, (In thousands, except per share data) 1995 1994 1993 ============================================================================================================================= Revenues $1,011,904 $ 920,325 $ 856,626 Costs and expenses: Cost of sales 764,198 679,258 644,096 Selling, general and administrative 198,496 198,113 181,800 Restructuring charge -- -- 25,750 Provision for bad debts 2,953 3,304 2,683 Gain on sale of interest in joint venture (2,243) -- -- - ----------------------------------------------------------------------------------------------------------------------------- Operating income 48,500 39,650 2,297 Interest income (1) 2,817 1,936 1,970 Other expense 772 1,266 486 - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 50,545 40,320 3,781 Provision for income taxes 19,596 15,693 983 - ----------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 30,949 24,627 2,798 - ----------------------------------------------------------------------------------------------------------------------------- Discontinued operations: (Loss) income from discontinued operations, net of tax (3,522) 544 2,553 Estimated loss on disposal of discontinued operations, net of tax (931) -- -- - ----------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 26,496 25,171 5,351 Cumulative effect of change in accounting for post-employment benefits, net of tax (1,545) -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net income $ 24,951 $ 25,171 $ 5,351 ============================================================================================================================= Earnings per share: Primary: Earnings from continuing operations $ 1.33 $ 1.03 $ .11 Discontinued operations: (Loss) income from discontinued operations, net of tax (.15) .02 .10 Estimated loss on disposal, net of tax (.04) -- -- Cumulative effect of change in accounting for post-employment benefits, net of tax (.07) -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net earnings per share $ 1.07 $ 1.05 $ .21 - ----------------------------------------------------------------------------------------------------------------------------- Fully diluted: Earnings from continuing operations $ 1.31 $ 1.03 $ .11 Discontinued operations: (Loss) income from discontinued operations, net of tax (.15) .02 .10 Estimated loss on disposal, net of tax (.04) -- -- Cumulative effect of change in accounting for post-employment benefits, net of tax (.07) -- -- - ----------------------------------------------------------------------------------------------------------------------------- Net earnings per share $ 1.05 $ 1.05 $ .21 - ----------------------------------------------------------------------------------------------------------------------------- Dividends declared per share $ .10 $ .095 $ .06 Weighted average common and common equivalent shares: Primary 23,286 23,886 25,389 Fully diluted 23,697 23,924 25,412 =============================================================================================================================
(1) Includes interest income from related party of $2,757,000, $1,885,000 and $1,932,000 in fiscal 1995, 1994 and 1993, respectively. See accompanying Notes to Consolidated Financial Statements 24 1995 ANNUAL REPORT ADVO, INC. Consolidated Balance Sheets
September 30, September 24, (In thousands, except share data) 1995 1994 ========================================================================================================================= Assets Current assets: Cash and cash equivalents (1) $ 23,849 $ 39,748 Available-for-sale securities -- related party 30,611 31,392 Accounts receivable, less allowances of $3,418 in 1995 and $5,105 in 1994 61,089 55,340 Inventories 8,742 5,138 Prepaid expenses and other current assets 4,369 4,863 Deferred income taxes 13,049 14,619 Current assets of discontinued operations 13,950 -- - ------------------------------------------------------------------------------------------------------------------------- Total Current Assets 155,659 151,100 Property, plant and equipment: Land, building and building improvements 6,744 -- Machinery and equipment 108,538 102,141 Leasehold improvements 13,579 15,307 - ------------------------------------------------------------------------------------------------------------------------- 128,861 117,448 Accumulated depreciation and amortization (68,385) (60,939) - ------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 60,476 56,509 Other assets 10,848 18,100 Non-current assets of discontinued operations 7,220 -- - ------------------------------------------------------------------------------------------------------------------------- Total Assets $234,203 $225,709 - ------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 24,556 $ 28,540 Accrued compensation and benefits 25,482 28,121 Customer advances 10,309 16,516 Federal and state income taxes payable 4,364 4,159 Restructure reserve -- short-term 9,015 8,371 Accrued other expenses 14,951 18,646 Current liabilities of discontinued operations 8,118 -- - ------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 96,795 104,353 Deferred liabilities 352 573 Deferred income taxes 5,786 4,047 Restructure reserve -- long-term 864 8,738 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 24,583,092 in 1995 and 24,393,108 in 1994) 246 244 Additional paid-in capital 138,735 134,881 Unrealized losses on available-for-sale securities, net of tax (62) -- Retained earnings 55,020 32,146 Less shares of common stock held in treasury at cost, 3,759,449 in 1995 and 3,521,186 in 1994 (63,533) (59,273) - ------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 130,406 107,998 - ------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $234,203 $225,709 =========================================================================================================================
(1) Includes cash and cash equivalents invested with related party of $12,905,000 at September 30, 1995 and $10,891,000 at September 24, 1994. See accompanying Notes to Consolidated Financial Statements 25 1995 ANNUAL REPORT ADVO, INC. Consolidated Statements of Cash Flows
Year ended Year ended Year ended September 30, September 24, September 25, (In thousands) 1995 1994 1993 =============================================================================================================================== Cash flows from continuing operating activities: Net income $ 24,951 $ 25,171 $ 5,351 Less: (Loss) income from discontinued operations (4,453) 544 2,553 - ------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations (includes accounting change) 29,404 24,627 2,798 Adjustments to reconcile net income to net cash flows from continuing operating activities: Cumulative effect of change in accounting for post-employment benefits 1,545 -- -- Depreciation and amortization 12,985 11,955 10,589 Amortization of deferred compensation 1,346 1,662 2,350 Deferred income taxes 4,232 1,556 (10,884) Provision for bad debts 2,953 3,304 2,683 Restructuring charge -- -- 25,750 Gain on sale of interest in joint venture (2,243) -- -- Other 361 997 265 Change in assets and liabilities, net of effects of acquisitions: Accounts receivable (16,188) (4,237) (1,949) Inventories (3,533) 1,483 (1,070) Prepaid expenses and other current assets 131 413 (766) Other assets 458 (395) (2,056) Accounts payable (157) 2,849 175 Accrued compensation and benefits (2,232) 4,836 (8) Customer advances (2,890) 1,635 (867) Federal and state income taxes payable 205 (1,292) (381) Other current liabilities (4,915) 5,704 633 Restructure reserve (7,230) (7,617) -- Deferred liabilities (222) 20 (132) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operating activities 14,010 47,500 27,130 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from continuing investing activities: Proceeds from sale of interest in joint venture 9,000 -- -- Acquisitions, net of cash acquired (2,448) (546) (7,576) Expenditures for property, plant and equipment (20,315) (10,357) (12,525) Proceeds from disposals of property and equipment 11 85 74 Available-for-sale securities - purchases (55,899) (47,388) (73,743) Available-for-sale securities - sales and maturities 56,355 35,874 53,626 - ------------------------------------------------------------------------------------------------------------------------------- Net cash used in continuing investing activities (13,296) (22,332) (40,144) - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from continuing financing activities: Tax effect - vesting of restricted stock/options exercised 699 8,244 1,150 Proceeds from exercise of stock options and warrants 1,811 832 486 Purchases of common stock for treasury (4,260) (44,173) (1,603) Cash dividends paid (2,078) (1,920) (803) Other -- -- (10) - ------------------------------------------------------------------------------------------------------------------------------- Net cash used in continuing financing activities (3,828) (37,017) (780) - ------------------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by discontinued operations (12,785) 517 (875) - ------------------------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (15,899) (11,332) (14,669) Cash and cash equivalents at beginning of year 39,748 51,080 65,749 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 23,849 $ 39,748 $ 51,080 - ------------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information-- Income tax payments $ 11,829 $ 7,810 $ 11,705 ===============================================================================================================================
26 See accompanying Notes to Consolidated Financial Statements 1995 ANNUAL REPORT ADVO, INC. Consolidated Statements of Changes in Stockholders' Equity
Unrealized gains (losses) Series A Convertible Additional on available- (In thousands, except Preferred stock Common stock Treasury stock paid-in for-sale Retained Total per share data) Shares Amount Shares Amount Shares Amount capital securities earnings equity =================================================================================================================================== Balance -- September 26, 1992 2,233 $13,071 16,528 $165 (949) $(13,642) $110,640 $0 $ 2,463 $112,697 Purchase of common stock for treasury (67) (1,603) (1,603) Cancellation of restricted stock (12) Grants of restricted stock 54 Exercise of stock options 61 1 485 486 Conversion of preferred stock (2,233) (9,700) 2,594 26 9,674 Tax effect -- employee stock plans 1,150 1,150 Amortization of deferred compensation (1) 2,350 2,350 Accretion of preferred stock (3,371) 3,371 Cash dividends declared ($.06 per share) (1,245) (1,245) Stock split 4,010 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 ==================================================================================================================================== Balance -- September 25, 1993 0 $0 23,235 $232 (1,016) $(15,245) $124,299 $0 $ 8,972 $118,258 Purchase of common stock for treasury (2,514) (44,173) (44,173) Grants of restricted stock 44 1 9 145 (145) 1 Exercise of stock options 1,114 11 821 832 Tax effect -- employee stock plans 8,244 8,244 Amortization of deferred compensation (1) 1,662 1,662 Cash dividends declared ($.095 per share) (1,997) (1,997) Net Income 25,171 25,171 ====================================================================================================================================
27 1995 ANNUAL REPORT ADVO, INC.
Unrealized gains (losses) Series A Convertible Additional on available- (In thousands, except Preferred stock Common stock Treasury stock paid-in for-sale Retained Total per share data) Shares Amount Shares Amount Shares Amount capital securities earnings equity =================================================================================================================================== Balance -- September 24, 1994 0 $0 24,393 $244 (3,521) $(59,273) $134,881 $0 $32,146 $107,998 Purchase of common stock for treasury (238) (4,260) (4,260) Grants of restricted stock 11 Exercise of stock options 179 2 1,809 1,811 Tax effect -- employee stock plans 699 699 Amortization of deferred compensation (1) 1,346 1,346 Cash dividends declared ($.10 per share) (2,077) (2,077) Unrealized losses on available-for-sale securities (62) (62) Net Income 24,951 24,951 Balance -- September 30, 1995 0 $0 24,583 $246 (3,759) $(63,533) $138,735 $(62) $55,020 $130,406 ====================================================================================================================================
(1) Unamortized deferred compensation at September 30, 1995, September 24, 1994 and September 25, 1993 was $836,000, $1,991,000 and $2,726,000, respectively. See accompanying Notes to Consolidated Financial Statements 28 1995 ANNUAL REPORT ADVO, INC. 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 have been eliminated. Certain reclassifications have been made in the fiscal 1994 and 1993 financial statements to conform with the fiscal 1995 presentation. ADVO's fiscal closing date is the last Saturday in September. The fiscal year includes operations for a 53-week period in 1995 and a 52-week period in 1994 and 1993. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid investment instruments with original maturities of three months or less. These investments are valued at cost, which approximates market. AVAILABLE-FOR-SALE SECURITIES In May 1993 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company adopted the provisions of the new standard in the first quarter of fiscal 1995. In accordance with the Statement, prior period financial statements have not been restated. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company's securities are classified as available-for-sale at September 30, 1995. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. At September 24, 1994, marketable securities were carried at cost which approximated market. INVENTORIES Inventories, which consist of raw materials, finished goods and spare parts, are valued at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation and amortization are computed generally by the straight-line method over the estimated useful lives of the respective assets (ranging from 5 to 35 years) or over the terms of the related leases of the leasehold improvements. 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. 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 in-store 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. (See Note 3 to the consolidated financial statements.) During the three year period ended September 30, 1995, 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. 29 1995 ANNUAL REPORT ADVO, INC. The excess of the purchase price over the estimated fair values of net assets acquired of $5.3 million and $4.3 million, net of accumulated amortization is reflected in other assets at September 30, 1995 and September 24, 1994, respectively. Also included in other assets at September 30, 1995 and September 24, 1994 is $4.5 million and $7.6 million, respectively, of other intangible assets, net of accumulated amortization, which were acquired in the acquisitions. As of September 30, 1995 and September 24, 1994, accumulated amortization of goodwill and other intangibles was $5.4 million and $4.7 million, respectively. NOTE 3 DISCONTINUED OPERATIONS In September of 1995, the Company initiated a plan to sell its in-store marketing segment. As a result, the Company recorded an estimated loss on disposal of $1,432,000 ($931,000 net of tax) which consists of a provision for anticipated operating losses during the phase out period and other costs directly related to the sale. The Company anticipates the sale will be completed by early 1996 and anticipates no further significant gain or loss on the sale. However, the ultimate gain or loss is dependent on the actual timing of the disposition. The disposition is being treated as a discontinued operation and prior year consolidated statements of operations have been restated to reflect this treatment. The results of the discontinued operations reflected in the consolidated statements of operations are as follows:
Year ended Year ended Year ended September 30, September 24, September 25, (In thousands) 1995 1994 1993 =================================================================================================== Net Revenues $57,668 $55,168 $54,168 - --------------------------------------------------------------------------------------------------- (Loss) income before income taxes $(5,361) $ 944 $ 4,326 Provision (benefit) for income taxes (1,839) 400 1,773 - --------------------------------------------------------------------------------------------------- (Loss) income from discontinued operations $(3,522) $ 544 $ 2,553 =================================================================================================== Operating loss from October 1, 1995 to anticipated disposal date $(1,432) -- -- Income tax benefit (501) -- -- - --------------------------------------------------------------------------------------------------- Estimated loss on disposal of discontinued operations, net of tax $ (931) -- -- ===================================================================================================
The assets and liabilities of discontinued operations have been segregated in the September 30, 1995 consolidated balance sheet as current assets, non-current assets and current liabilities of discontinued operations. These amounts consist of the assets and liabilities associated with the operations to be sold, including the estimated loss on disposal of $1,432,000. The major components of the assets and liabilities of discontinued operations are as follows:
(In thousands) ========================================================================================== Accounts receivable-net $13,342 Prepaid expenses and other current assets 608 - ------------------------------------------------------------------------------------------ Current assets of discontinued operations $13,950 ========================================================================================== Property, plant & equipment-net $ 7,033 Other non-current assets 187 - ------------------------------------------------------------------------------------------ Non-current assets of discontinued operations $ 7,220 ========================================================================================== Accounts payable $ 2,794 Accrued compensation & benefits 1,695 Customer advances 1,550 Other current liabilities 647 Estimated loss on disposal 1,432 - ------------------------------------------------------------------------------------------ Current liabilities of discontinued operations $ 8,118 ==========================================================================================
NOTE 4 AVAILABLE-FOR-SALE SECURITIES The following is a summary of available-for-sale securities at September 30, 1995:
Gross Gross Estimated Unrealized Unrealized Fair (In thousands) Cost Gains (Losses) Value =========================================================================================== U.S. Government Obligations $ 4,001 $ -- $ (11) $ 3,990 Municipal Bonds 17,211 11 (9) 17,213 U.S. Corp. Debt Securities 9,494 -- (86) 9,408 - ------------------------------------------------------------------------------------------- Total securities $30,706 $ 11 $(106) $30,611 ===========================================================================================
All but approximately $1.8 million of the above securities mature within one year. NOTE 5 ACCRUED COMPENSATION AND BENEFITS The composition of accrued compensation and benefits is as follows:
September 30, September 24, (In thousands) 1995 1994 ================================================================================ Compensation $15,427 $18,839 Workers' compensation 5,247 5,798 Employee withholdings and other benefits 4,808 3,484 - -------------------------------------------------------------------------------- Total $25,482 $28,121 ================================================================================
30 1995 ANNUAL REPORT ADVO, INC. NOTE 6 FINANCING ARRANGEMENTS On May 24, 1995, the Company replaced its existing $25 million credit facility. The new Revolving Credit Agreement expires April 30, 2000 and provides up to $50 million of combined borrowing availability with a bank. Borrowings under the agreement may take the form of either a domestic loan or a Eurodollar loan, as defined in the agreement. The interest rate for such borrowings will be at least equal to the bank's base rate for the particular type of loan and will vary from the rate depending upon the borrowing period. The Company pays a commitment fee of one-eighth of one percent on the average daily balance of the unused portion of the commitment. The terms of the agreement include certain covenants which provide restrictions to the maintenance of net worth and include requirements to maintain certain financial ratios. At September 30, 1995, there are no borrowings under the Revolving Credit Agreement. The Company has outstanding letters of credit of approximately $5.9 million under separate agreements primarily related to its workers' compensation program. NOTE 7 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. 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 30, 1995, 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 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. Where applicable share data have been restated to reflect the stock split. The Company has a Shareholder Protection Rights Plan (the "Rights Plan") to protect shareholders from potential unfair hostile takeovers. Pursuant to the Rights Plan, common shareholders have one Right for each share of Common Stock held. The Rights become exercisable only in the event that any person acquires or commences a tender offer to acquire 20% or more of the Company's Common Stock, as defined. At September 30, 1995 there are 5,359,035 shares of common stock reserved for issuance upon the exercise of stock options and the exercise of warrants. NOTE 8 GAIN ON SALE OF INTEREST IN JOINT VENTURE During the first quarter of fiscal 1995, the Company sold its 50% ownership in InfoBase Services to Acxiom Corporation and recognized a before tax gain on this transaction of $2.2 million ($1.4 million after tax or $.06 per share). NOTE 9 POSTEMPLOYMENT BENEFITS The Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS No. 112") in accounting for short-term disability benefits and severance and related medical benefits during the Company's first quarter of fiscal 1995. Under SFAS No. 112, the Company accrues these benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid. The Company previously recognized the cost of providing these benefits on a cash basis. The cumulative effect of this change in accounting for postemployment benefits resulted in a one-time after-tax charge of $1.5 million or $.07 per share. The Company estimates that the ongoing annual effect of this accounting change will not be material to the Company's financial statements. As required by SFAS No. 112, prior year financial statements have not been restated to reflect the change in accounting principle. 31 1995 ANNUAL REPORT ADVO, INC. NOTE 10 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 $3,796,000, $3,590,000 and $3,025,000 for fiscal 1995, 1994 and 1993, respectively. During fiscal 1994 the Company made certain amendments to its employee stock option 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 30, 1995 there were 91,186 options exercisable and 12,488 options available for future grant under this plan. At September 24, 1994 there were 103,393 options exercisable and 13,988 options available for future grant under this plan.
Option price Shares per share ================================================================================ 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 Granted 16,825 18.00-18.63 Cancelled (1,500) 18.63 Exercised (49,843) 4.20-18.63 - -------------------------------------------------------------------------------- Outstanding at September 30, 1995 141,037 $ 7.10-18.75 ================================================================================
The 1988 Stock Option Plan provides for the granting of non-qualified options for the purchase of up to 3,800,000 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 30, 1995 there are 1,395,346 options exercisable and 163,192 options available for future grant under this plan. At September 24, 1994 there were 662,161 options exercisable and 181,185 options available for future grant under this plan.
Option price Shares per share ================================================================================ 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 Granted 612,271 16.38-20.50 Cancelled (64,207) 9.90-21.50 Exercised (162,492) 4.80-18.63 - -------------------------------------------------------------------------------- Outstanding at September 30, 1995 2,561,171 $ 3.30-22.00 ================================================================================
32 1995 ANNUAL REPORT ADVO, INC. 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 $1,288,000, $1,554,000, and $2,286,000 for the years ended September 30, 1995, September 24, 1994 and September 25, 1993, respectively. Unamortized deferred compensation is $811,000 at September 30, 1995. There are 41,754 shares available for future grant under this plan at September 30, 1995.
Shares ================================================================================ 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 Granted 10,500 - -------------------------------------------------------------------------------- Outstanding at September 30, 1995 2,395,746 ================================================================================
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 1995, no shares were awarded or canceled. 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 $58,000, $108,000 and $64,000 charged for the fiscal years ended September 30, 1995, September 24, 1994 and September 25, 1993, respectively. Unamortized deferred directors' compensation is $25,000 at September 30, 1995. There are 97,500 shares available for future grant under this plan at September 30, 1995. During fiscal 1995, three directors were each granted 1,000 stock options. The options will become exercisable in equal annual installments over the next four years. NOTE 11 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 had proven unprofitable. During fiscal 1995 and 1994 the Company recorded reductions of $7.2 million and $8.6 million, respectively, to the reserve in accordance with its plan of restructure. The fiscal 1995 and 1994 charges to the reserve included costs related to the shutdown and consolidation of the Indianapolis facility; severance and related costs for upgrades to the Company's sales management team and various other management groups; and the abandonment of certain nonprofitable Micromarketing programs. In addition, fiscal 1994 charges also included costs related to the downsizing of its former Atlantic Division office. During fiscal 1995, management reallocated approximately $9 million of the original restructuring charge from the regional facility relocation project to severance arrangements associated with the Company's ongoing initiative to centralize and streamline its operations, in connection with the reorganization of certain management groups and the restructuring of the current management team. NOTE 12 INCOME TAXES During 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 on continuing operations were as follows:
Liability Method Deferred Method Year ended Year ended Year ended September 30, September 24, September 25, (In thousands) 1995 1994 1993 ==================================================================================== Federal: Current $12,910 $ 11,677 $9,513 Deferred 3,429 951 (8,748) - ------------------------------------------------------------------------------------ Total Federal 16,339 12,628 765 - ------------------------------------------------------------------------------------ State: Current 2,454 2,460 2,354 Deferred 803 605 (2,136) - ------------------------------------------------------------------------------------ Total State 3,257 3,065 218 Total Provision $19,596 $15,693 $ 983 ====================================================================================
33 1995 ANNUAL REPORT ADVO, INC. The Company's effective income tax rate for continuing operations differed from the Federal statutory rate for the following reasons:
Year ended Year ended Year ended September 30, September 24, September 25, 1995 1994 1993 ========================================================================================= Federal statutory rate 35.0% 35.0% 34.0% State income taxes, net of federal benefit 4.1 4.9 3.8 Tax benefits related to Section 338 basis adjustment -- -- (26.4) Targeted jobs tax credit (.2) (.2) (1.9) Other (.1) (.8) 16.5 - ----------------------------------------------------------------------------------------- Effective income tax rate 38.8% 38.9% 26.0% =========================================================================================
Significant components of the Company's deferred tax assets and liabilities as required by FASB Statement No. 109 are as follows:
September 30, September 24, (In thousands) 1995 1994 ================================================================================ Deferred Tax Assets: Reserve for restructure $ 4,001 $ 7,119 Reserve for deferred compensation 2,785 2,247 Reserve for employee benefits 4,246 3,838 Other 2,996 4,941 - -------------------------------------------------------------------------------- Total deferred tax assets 14,028 18,145 ================================================================================ Deferred Tax Liabilities: Tax over book depreciation and amortization (6,765) (7,573) - -------------------------------------------------------------------------------- Net federal and state deferred assets $ 7,263 $10,572 ================================================================================
Deferred income taxes (benefits) in fiscal 1993 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 September 25, (In thousands) 1993 ================================================================================ Amortization of deferred compensation $ (657) Reserve for restructuring (9,979) Various accrued expenses (248) - -------------------------------------------------------------------------------- $ (10,884) ================================================================================
NOTE 13 COMMITMENTS AND CONTINGENCIES ADVO leases property and equipment under noncancelable operating lease agreements which expire at various dates through 2005. The leases generally provide that the Company pay the taxes, insurance and maintenance expenses related to the leased assets. Rental commitments at September 30, 1995 under long term noncancelable operating leases are as follows:
(In thousands) ================================================================================ Fiscal year: 1996 $15,681 1997 11,896 1998 9,910 1999 7,842 2000 5,880 Thereafter 14,165 - -------------------------------------------------------------------------------- Total minimum lease payments $65,374 ================================================================================
Certain of these leases contain renewal options and certain leases also provide for cost escalation payments. Rental expense for the years ended September 30, 1995, September 24, 1994 and September 25, 1993 was approximately $22,845,000, $24,947,000 and $24,487,000, 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 30, 1995 totaled $6.3 million. NOTE 14 RELATED PARTY TRANSACTIONS The Company invests in money market mutual funds and available-for-sale securities through an investment advisor, Warburg, Pincus Counsellors, Inc. ("Counsellors"). The general partner of Warburg, Pincus Capital Partners, L.P. ("Warburg") who is 34 1995 ANNUAL REPORT ADVO, INC. the Company's largest shareholder, owns a majority interest in Counsellors. Income earned on investments managed by Counsellors was $2,757,000, $1,885,000 and $1,932,000 in fiscal 1995, 1994 and 1993, respectively. At September 30, 1995 and September 24, 1994, $43,516,000 and $42,283,000, 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 15 RECENT ACCOUNTING PRONOUNCEMENTS In March of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of". The long-lived assets covered by the Statement include plant and equipment, certain identifiable intangibles and goodwill. Under Statement 121, the Company is not required to actively search for impairments of assets that are employed in the business. A review is necessary only when events indicate that an impairment may exist. The Statement will be adopted by the Company in fiscal 1997. 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. In October of 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The Statement establishes the financial accounting and reporting standards for stock based compensation plans, including stock purchase plans, stock options and restricted stock. These plans allow for certain associates to receive shares of the Company's stock. The Statement requires that these transactions be accounted for based on the fair value of the consideration received, or continue to be accounted for based on the method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Company will adopt this Statement in fiscal 1997 and plans to continue accounting for these transactions in accordance with APB 25, however proforma disclosures of net income and earnings per share, using the fair value based method described in Statement No. 123 will be disclosed in fiscal 1997. NOTE 16 QUARTERLY FINANCIAL DATA (UNAUDITED)
(In millions, except per share data) Fiscal year ended First Second Third Fourth September 30, 1995 (1) Quarter Quarter Quarter Quarter =============================================================================================== Revenues $248.1 $239.6 $256.7 $267.5 Gross profit 65.7 55.8 63.8 62.4 Operating income 16.2 4.8 15.4 12.1 Income before cumulative effect of accounting change 10.2 2.8 9.2 4.3 Net income 8.7 2.8 9.2 4.3 Earnings per share: (2) Before cumulative effect of accounting change .44 .12 .39 .18 Net income .37 .12 .39 .18 Common stock price High 18 3/4 19 1/4 21 7/8 23 3/4 Low 15 1/4 16 1/2 17 3/4 16 5/8 =============================================================================================== Fiscal year ended First Second Third Fourth September 24, 1994 (1) Quarter Quarter Quarter Quarter =============================================================================================== Revenues $231.1 $217.1 $241.1 $231.0 Gross profit 58.5 52.9 67.5 62.2 Operating income 10.0 3.7 14.6 11.4 Net income 7.3 2.4 8.9 6.6 Earnings per share: (2) Net income .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 ===============================================================================================
(1) Quarterly data has been restated to exclude the results of the in-store marketing segment from revenues, gross profit, and operating income, as a result of the Company's plan to sell this segment. (See Note 3 to the consolidated financial statements.) In addition, certain reclassifications have been made to the first and second quarter of 1995 and all of the fiscal 1994 data to conform with the fiscal 1995 year end presentation. (2) Both primary and fully diluted. 35 1995 ANNUAL REPORT ADVO, INC. Report of Independent Auditors / Financial Responsibility TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ADVO, INC. We have audited the accompanying consolidated balance sheets of ADVO, Inc. at September 30, 1995 and September 24, 1994, 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 30, 1995. 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 30, 1995 and September 24, 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. /s/ Ernst & Young Hartford, Connecticut October 24, 1995 TO THE STOCKHOLDERS OF ADVO, INC. The management of ADVO, Inc. is responsible for the integrity and objectivity of the consolidated financial statements and other financial information presented in this report. These statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on judgements and estimates by management. ADVO maintains internal accounting control policies and related procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and properly recorded, and that accounting records may be relied upon for the preparation of reliable published annual and interim financial statements and other financial information. The design, monitoring, and revision of internal accounting control systems involve, among other things, management's judgement with respect to the relative cost and expected benefits of specific control measures. The Company also maintains an internal auditing function which evaluates and reports on the adequacy and effectiveness of internal accounting controls and policies and procedures. The Company's consolidated financial statements have been audited by independent auditors who have expressed their opinion with respect to the fairness of these statements. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with ADVO's management, internal auditors and independent auditors to review matters relating to the quality of financial reporting and internal accounting controls. Both the internal auditors and the independent auditors have unrestricted access to the Committee. /s/ Robert Kamerschen Robert Kamerschen Chairman and Chief Executive Officer /s/ Lowell W. Robinson Lowell W. Robinson Executive Vice President and Chief Financial Officer /s/ Robert S. Hirst Robert S. Hirst Vice President and Controller October 24, 1995 36 EX-21 8 SUBSIDIARIES OF ADVO, INC. EXHIBIT 21 SUBSIDIARIES OF ADVO, INC. AS OF SEPTEMBER 30, 1995
PERCENT OF VOTING STATE OF SECURITIES OWNED AS INCORPORATION NAME OF SUBSIDIARY OF SEPTEMBER 30, 1995 ------------- ------------------ --------------------- Delaware Trans-ADVO, Inc. 100 Delaware ADVO Target Communications 100 Delaware ADVO Investment Company, Inc. 100 Delaware ADVOLink, Inc. 100 Delaware Value Fair, Inc. 100 Delaware MBV, Inc. 100 Delaware Marketing Force, Inc. 100(1)
- -------- (1)Owned by ADVO Investment Company, Inc. EX-23 9 CONSENT OF E&Y 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 24, 1995, included in the 1995 Annual Report to Stockholders of ADVO. Our audits also included the financial statement schedule of ADVO listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (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. 5 to the ADVO Form S-8 No. 33-58483) pertaining to the 1988 Non- Qualified Stock Option Plan, as amended, of ADVO and in the related Prospectuses of our report dated October 24, 1995, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of ADVO. Ernst & Young LLP Hartford, Connecticut December 13, 1995 EX-27.1 10 ARTICLE 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1995 SEP-25-1994 SEP-30-1995 23,849 30,611 64,507 3,418 8,742 155,659 128,861 68,385 234,203 96,795 0 246 0 0 130,160 234,203 0 1,011,904 0 764,198 0 2,953 0 50,545 19,596 30,949 (4,453) 0 (1,545) 24,951 1.07 1.05
EX-27.2 11 ARTICLE 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 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 0 107,754 225,709 0 920,325 0 679,258 0 3,304 0 40,320 15,693 24,627 544 0 0 25,171 1.05 1.05
EX-27.3 12 ARTICLE 5 FDS
5 1,000 3-MOS SEP-30-1995 SEP-25-1994 DEC-24-1994 45,402 30,501 67,846 5,124 6,184 166,896 122,803 63,126 236,629 111,394 0 244 0 0 112,646 236,629 0 248,088 0 182,411 0 699 0 16,783 6,546 10,237 (15) 0 (1,545) 8,676 0.37 0.37
EX-27.4 13 ARTICLE 5 FDS
5 1,000 6-MOS SEP-30-1995 SEP-25-1994 MAR-25-1995 37,654 31,195 70,863 4,491 7,113 164,113 132,700 65,767 241,601 113,641 0 245 0 0 115,980 241,601 0 487,706 0 366,185 0 1,510 0 22,178 8,659 13,519 (494) 0 (1,545) 11,479 0.50 0.49
EX-27.5 14 ARTICLE 5 FDS
5 1,000 9-MOS SEP-30-1995 SEP-25-1994 JUN-24-1995 31,032 31,966 76,581 4,179 6,629 162,000 136,847 68,921 239,495 101,949 0 245 0 0 125,619 239,495 0 744,435 0 559,120 0 2,178 0 38,070 14,867 23,203 (975) 0 (1,545) 20,683 0.89 0.89
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