-----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, SlB2pMvgSdSrlztDXcSsbi667JeHwVe2pU2MolxqhMVb4oTgzqnJ9Z+IezPWD32b nCHCFesGW2jM3E1nxoC92w== 0000950109-96-008508.txt : 19961219 0000950109-96-008508.hdr.sgml : 19961219 ACCESSION NUMBER: 0000950109-96-008508 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19960928 FILED AS OF DATE: 19961218 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVO INC CENTRAL INDEX KEY: 0000801622 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DIRECT MAIL ADVERTISING SERVICES [7331] IRS NUMBER: 060885252 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11720 FILM NUMBER: 96682529 BUSINESS ADDRESS: STREET 1: ONE UNIVAC LN STREET 2: P O BOX 755 CITY: WINDSOR STATE: CT ZIP: 06095 BUSINESS PHONE: 2032856100 MAIL ADDRESS: STREET 1: ONE UNIVAC LANE STREET 2: P O BOX 755 CITY: WINDSOR STATE: CT ZIP: 06095-2668 FORMER COMPANY: FORMER CONFORMED NAME: ADVO SYSTEM INC DATE OF NAME CHANGE: 19920128 10-K 1 ANNUAL REPORT ADVO, Inc. Form 10-K September 28, 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended September 28, 1996 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, 06095-0755 Windsor, CT _____________________________________ _____________________________________ (Zip Code) (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. [_] The aggregate market value of voting stock held by non-affiliates of the registrant at November 22, 1996 was $221,859,112. On that date, there were 24,260,666 outstanding shares of the registrant's common stock. Documents Incorporated by Reference: Portions of the 1996 Annual Report to Stockholders are incorporated by reference into Parts II and IV of this report. Portions of the Proxy Statement for the 1997 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 28, 1996 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 Conditions 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's principal executive offices are located at One Univac Lane, Windsor, Connecticut 06095. In fiscal year 1995, the Company announced its plan to sell its in-store marketing segment which provided marketing services to a wide range of manufacturers and marketers using proprietary operating systems. The sale of substantially all of the net assets of this segment was completed on March 1, 1996. For fiscal year 1995 and 1996 (and by restatement of prior periods), the Company is accounting for its in-store marketing segment as a discontinued operation in this Annual Report on Form 10-K. The discussion of the Company's business under Items 1 and 2 hereof includes only the Company's continuing operations. PRODUCTS AND SERVICES ADVO's direct marketing products and services include shared mail and solo mail. ADVO also provides certain transportation and ancillary services in conjunction with its direct marketing programs. SHARED MAIL In the Company's shared mail programs (Marriage Mail(R) and Mailbox Values(R)), the advertisements of several advertisers are combined in a single mail package. Shared mail packages are assembled by the Company for distribution by ZIP Code and, in most instances, each household within the ZIP Code will receive a mail package. Individual customers can choose a portion of the designated mailing area for their distributions, ranging from part of a ZIP Code to all ZIP Codes covered by the program. This flexibility enables major customers, such as retail store chains, to select areas serviced by their retail stores and, at the same time, distribute different versions of their advertisements to accommodate the needs of their individual stores. It also allows a smaller retailer to target only those ZIP Codes or portions of ZIP Codes needed to accommodate its customer base, thereby reducing overall advertising costs. The Company's shared mail programs offer the features of penetration and target marketing at a significant cost reduction when compared to mailing on an individual or solo mail basis. This cost advantage is available because the Company pays the total postage expense, and advertisers are generally charged a selling price based upon, among other factors, the incremental weight of their promotional pieces. 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. Trans-ADVO, Inc., a wholly-owned subsidiary of the Company, is a Class 1 ICC Contract Carrier presently engaged in the transportation of time-sensitive advertising material and general freight. Trans-ADVO, Inc., utilizes contracted carriers to provide direct pickup and delivery services throughout the 48 contiguous states. ADVO Creative Services, Inc., based in Texas, is a wholly-owned subsidiary of the Company which specializes in the coordination and production of custom promotional magazines and circulars which, in most cases, are then distributed by the Company. MAILING LIST ADVO's management believes its computerized mailing list is the largest residential/household mailing list in the country. It contains over 113 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 extremely difficult and costly. The list enables the Company to target mailings to best serve its customers. 2 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 changes in the walk sequence order of addresses so that ADVO can qualify for the lowest possible postage rates. The USPS provides these updates for a fee, provided that the user's list is at least 90% 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 5% of the Company's sales in fiscal 1996, 1995 or 1994. OPERATIONS Customers' advertising circulars are processed by approximately 2,800 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), addressing and labeling, and quarter-folding equipment are the principal equipment used to process the Company's products and services. At two of the Company's production facilities, a new computerized mail sorter is being utilized and developed. The Company expects an increased rate of production for packages and greater flexibility and efficiency in targeting specific groups. 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. In July 1996, the Company entered into a ten year agreement with Integrated Systems Solutions Corporation (d/b/a ISSC) to provide systems development and technical support to the Company. As a result of this outsourcing, ADVO's computer center moved from Hartford to ISSC's computer center located in Southbury, Connecticut. The Company's branches are on-line to this computer center which enables the day-to-day processing functions to be performed and provides corporate headquarters with management information. The systems include: order processing and production control, transportation/distribution, address list maintenance, market analysis, label printing and distribution, billing and financial systems, and carrier routing of addresses received from customer files and demographic analyses. COMPETITION In general, the printed advertising market is highly competitive with companies competing primarily on 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"), 3 newspapers have been the traditional and dominant medium for advertising by retailers for many years. Insertion rates are highly competitive and many newspapers' financial resources are substantial. ADVO's principal direct marketing competitors are other companies with residential lists or similar cooperative mailing programs. These companies have a significant presence in many of the Company's markets and represent serious competition to the Company's Marriage Mail 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 48,000 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 28, 1996, the Company had a total of approximately 4,800 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 fiscal year 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 approximately 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..... 60 Chairman and Chief Executive Officer Gary M. Mulloy........ 51 President and Chief Operating Officer Lowell W. Robinson.... 47 Executive Vice President and Chief Financial Officer Rick Kurz............. 56 Senior Vice President Myron L. Lubin........ 56 Senior Vice President Robert S. Hirst....... 50 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 Micrografx, Inc., Domain, Inc. and Cognizant Corporation. Mr. Mulloy became President and Chief Operating Officer on November 4, 1996 and was elected to the Board of Directors on December 3, 1996. From 1990 to October 1996 he was President and Chief Executive Officer of Pilkington Barnes-Hind, Inc., a division of Pilkington Vision Care. Mr. 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. 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. 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. Hirst became Vice President and Controller on April 16, 1990. He has held that position for the last six 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. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ADVO's 1996 Annual Report to Stockholders includes on page 37 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). During fiscal 1996, the Company paid its regular first quarter dividend of $.025 per share of ADVO common stock payable to shareholders of record on December 27, 1995. On January 17, 1996 the Company announced the declaration of a special one time dividend (the "Special Dividend") of $10 per share of ADVO common stock to shareholders of record on February 20, 1996. The announcement was a result of the Company's initiative to explore strategic alternatives aimed at increasing shareholder value, which began at the end of fiscal 1995. In addition, the Board of Directors suspended the Company's regular quarterly dividend of $.025 per share of ADVO common stock after the declaration of the Special Dividend. The Special Dividend was funded through a credit agreement with a syndicate of lenders. This credit agreement subjects the Company to ratio and time restrictions regarding future cash dividends. The Company declared quarterly cash dividends of $.025 per share to holders of ADVO common stock during the fiscal year ended September 30, 1995 for total cash dividends of $.10 per share. During the fiscal year ended September 24, 1994, the Company declared cash dividends of $.02 per share in the first quarter and $.025 per share in the last three quarters for total cash dividends of $.095 per share for the 1994 fiscal year. The closing price as of November 22, 1996 of the Company's common stock, under the symbol AD, on the New York Stock Exchange as reported in The Wall Street Journal was $12 5/8 per share. The approximate number of holders of record of the common stock on November 22, 1996 was 850. During fiscal 1996, the Company engaged in no sales of its securities that were not registered under the Securities Act of 1933. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is included in ADVO's 1996 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 1996 Annual Report to Stockholders on pages 21 through 24 under the caption "Financial Report" and is incorporated herein by reference and made a part hereof (see Exhibit 13). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ADVO's consolidated financial statements, together with the Report of Independent Auditors thereon dated October 21, 1996, appearing on pages 25 through 38 of ADVO's 1996 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 37 of ADVO's 1996 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, 1996 for the annual meeting of stockholders to be held on January 16, 1997 (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 7 through 18 (except for those portions appearing under the subcaptions "Report of the Compensation Committee" and "Company Financial Performance"), and "Governance of the Company" on page 3 of ADVO's Proxy Statement and is incorporated herein by reference and made a part hereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" on page 2 and on page 6, respectively, of ADVO's Proxy Statement and is incorporated herein by reference and made a part hereof. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included under the caption "Related Party Transactions" on pages 18 and 19 of ADVO's Proxy Statement and in footnotes 1 and 2 under the caption "Security Ownership of Certain Beneficial Owners" on page 2 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. 7 (3) Exhibits. The following is a list of the exhibits to this Report:
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. 4(a) Stockholder Protection Rights Incorporated by reference to Exhibit Agreement, dated as of February 5, 4.1 of the Company's Form 8-K dated 1993, between the Company and Mellon February 5, 1993. Securities Trust Company, as Rights Agent, including Exhibit A and Exhibit B. 10(a) 1986 Stock Option Plan of ADVO.* Incorporated by reference to Exhibit 4.1 to the Company's Form S-8 filed on July 16, 1987 (No. 33-15856). 10(b) 1986 Employee Restricted Stock Plan Incorporated by reference to Exhibit of ADVO, as amended. * A to the Company's definitive Proxy Statement for the annual meeting held on January 24, 1991. 10(c) 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 18, 1996. 10(d) The ADVO Savings Continuation Plan, Incorporated by reference to Exhibit effective January 1, 1988. * 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1988. 10(e) Executive Severance Agreement, dated Incorporated by reference to Exhibit October 17, 1995 between ADVO and 10(k) to the Company's Annual Report Robert Kamerschen. * on Form 10-K for the fiscal year ended September 30, 1995. 10(f) Executive Severance Agreements, dated Incorporated by reference to Exhibit October 17, 1995 between ADVO and 10(l) to the Company's Annual Report the executive officer named therein. on Form 10-K for the fiscal year * ended September 30, 1995. 10(g) Executive Severance Agreements, dated Incorporated by reference to Exhibit October 17, 1995 between ADVO and 10(m) to the Company's Annual Report the executive officer named therein. on Form 10-K for the fiscal year * ended September 30, 1995. 10(h) Executive Severance Agreement, dated Incorporated by reference to Exhibit October 17, 1995 between ADVO and 10(n) to the Company's Annual Report Robert S. Hirst. * on Form 10-K for the fiscal year ended September 30, 1995.
8
EXHIBIT NO. EXHIBIT WHERE LOCATED - ----------- ------- ------------- 10(i) Executive Severance Agreement dated Incorporated by reference to Exhibit April 3, 1996 between ADVO and Larry 10 to the Company's Quarterly Report G. Morris. * on Form 10-Q for the quarter ended March 30, 1996. 10(j) Executive Severance Agreement dated Incorporated by reference to Exhibit May 1, 1996 between ADVO and Joseph 10 to the Company's Quarterly Report P. Durrett. * on Form 10-Q for the quarter ended June 29, 1996. 10(k) Employment Agreement, dated May 29, Filed herewith. 1996 between ADVO and Robert Kamerschen. * 10(l) Employment Agreement, dated November Filed herewith. 4, 1996 between ADVO and Gary M. Mulloy. * 10(m) Executive Severance Agreement dated Filed herewith. November 4, 1996 between ADVO and Gary M. Mulloy. * 10(n) Credit Agreement dated March 4, 1996 Incorporated by reference to Exhibit between ADVO and a syndicate of 99.3 of the Company's Form 8-K dated lenders led by Chase Manhattan Bank March 5, 1996. (National Association) as Administrative Agent. 10(o) Information Technology Agreement Filed herewith. dated as of July 16, 1996 between ADVO and Integrated Systems Solutions Corporation (d/b/a ISSC). 11 Computation of Per Share Earnings. Filed herewith. 13 1996 Annual Report to Stockholders. Furnished herewith; however, such report, except for those portions thereof which are expressly incorporated by reference into this Annual Report on Form 10-K, is for the information of the Commission and is not deemed "filed". 21 Subsidiaries of the Registrant. Filed herewith. 23 Consent of Independent Auditors. Filed herewith. 27 Financial Data Schedule. Filed herewith.
- -------- * Management contract or compensatory plan required to be filed as an exhibit pursuant to item 14(c) of this report. (b) Reports on Form 8-K. No report on Form 8-K was filed by the Company with respect to the quarter ended September 28, 1996. 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. December 18, 1996 Date: _______________________________ ADVO, Inc. Robert S. Hirst /s/ By: _________________________________ ROBERT S. HIRST VICE PRESIDENT AND CONTROLLER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES DAVID M. STIGLER AND ROBERT S. HIRST, AND EACH OF THEM SINGLY, SUCH PERSON'S TRUE AND LAWFUL ATTORNEYS, WITH FULL POWER TO THEM AND EACH OF THEM, TO SIGN FOR SUCH PERSON AND IN SUCH PERSON'S NAME AND CAPACITY AS INDICATED BELOW, ANY AND ALL AMENDMENTS TO THIS REPORT, HEREBY RATIFYING AND CONFIRMING SUCH PERSON'S SIGNATURE AS IT MAY BE SIGNED BY SAID ATTORNEYS TO ANY AND ALL AMENDMENTS. DATE SIGNATURE TITLE December 18, 1996 Robert Kamerschen /s/ Chairman, Chief Executive ---------------------------- Officer and Director ROBERT KAMERSCHEN (Principal Executive Officer) December 18, 1996 Gary M. Mulloy /s/ President, Chief ---------------------------- Operating Officer and GARY M. MULLOY Director December 18, 1996 Lowell W. Robinson /s/ Executive Vice President ---------------------------- and Chief Financial LOWELL W. ROBINSON Officer (Principal Financial Officer) December 18, 1996 Robert S. Hirst /s/ Vice President and ---------------------------- Controller (Principal ROBERT S. HIRST Accounting Officer) December 18, 1996 James A. Eskridge /s/ Director ---------------------------- JAMES A. ESKRIDGE December 18, 1996 Jack W. Fritz /s/ Director ---------------------------- JACK W. FRITZ December 18, 1996 Lawrence Lachman /s/ Director ---------------------------- LAWRENCE LACHMAN December 18, 1996 Howard H. Newman /s/ Director ---------------------------- HOWARD H. NEWMAN December 18, 1996 John R. Rockwell /s/ Director ---------------------------- JOHN R. ROCKWELL December 18, 1996 John L. Vogelstein /s/ 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 28, 1996, September 30, 1995 and September 24, 1994......................... * Consolidated balance sheets at September 28, 1996 and September 30, 1995. * Consolidated statements of cash flows for the years ended September 28, 1996, September 30, 1995 and September 24, 1994......................... * Consolidated statements of changes in stockholders' equity/(deficiency) for the years ended September 28, 1996, September 30, 1995 and September 24, 1994................................................................ * 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 25 to 38 of the ADVO, Inc. 1996 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 BEGINNING OF COST AND OTHER FROM BALANCE AT DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVES END OF PERIOD ----------- ------------ ---------- ---------- ---------- ------------- 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 ======= ====== ======= ======= ======= Year ended September 28, 1996: Allowances for sales adjustments.......... $ 2,126 $ -- $10,007(b) $ 9,297 $ 2,836 Allowances for doubtful accounts.... 1,292 3,701 -- 3,603(a) 1,390 Restructuring reserve. 9,879 -- -- 7,820 2,059 Accumulated amortization-- Goodwill............. 1,032 390 -- -- 1,422 Accumulated amortization-- Intangibles.......... 4,398 892 -- -- 5,290 ------- ------ ------- ------- ------- $18,727 $4,983 $10,007 $20,720 $12,997 ======= ====== ======= ======= =======
- -------- (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 EXHIBIT 10K - EMPLOYMENT AGREEMENT/MAY 1996 EMPLOYMENT AGREEMENT -------------------- AGREEMENT made this 29th day of May, 1996, by and between ADVO, Inc., a Delaware corporation (the "Company"), and Robert J. Kamerschen (the "Employee"). RECITAL ------- The Company desires to continue to employ the Employee to perform the functions as a senior executive officer of the Company and to obtain the benefit of the Employee's knowledge, experience and abilities, and the Employee is willing to serve as an officer of and be employed by the Company. NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Position and Responsibilities. ----------------------------- 1.1 During the Employment Period (as hereinafter defined), the Company shall employ the Employee and the Employee shall serve the Company in a Senior Executive Capacity in a role defined by the Company's Board of Directors, which shall initially be as Chairman and Chief Executive Officer of the Company. "Senior Executive Capacity" shall mean the offices of Chairman and/or Chief Executive Officer, or internal consultant. The role of 'internal consultant' shall mean the provision of advice, counsel and assistance on a senior level to the Company on a reasonable basis, as requested by the Company. The Employee shall devote his full business time and best efforts to the business and affairs of the Company and the promotion of its interests and performing all duties and services on behalf of the Company necessary to carry out the function of such offices as determined from time to time by the Board of Directors of the Company. During 1 the Employment Period, and without additional compensation, the Employee shall serve in such other office or offices (including as a director) of the Company and its subsidiaries to which he may be elected or appointed from time to time. The Employee shall continue as a director of the Company throughout the Employment Period. 2. Employment Period. ----------------- 2.1 The Employment Period shall be the period commencing as of May 29, 1996 and continuing until November 14, 2001. 2.2 Notwithstanding the provisions of Section 2.1 hereof, the Company shall have the right in its sole discretion, on written notice to the Employee, to terminate the Employee's employment with or without Cause (as hereinafter defined), such termination to be effective as of the date on which notice is given or as of such later date otherwise specified in the notice. In the event of the death of the Employee prior to any other termination of his employment hereunder or the Employment Period (i) his employment hereunder and the Employment Period shall terminate on the date of his death (ii) except as expressly provided in Section 5.1 hereof and the Employee's Executive Severance Agreement (hereinafter "Severance Agreement"), the Company shall not have any obligation to pay any salary or provide any benefits under this Agreement to the heirs, estate, executors, administrators or legal representative of the Employee in respect of any period after the death of the Employee. 3. Compensation. ------------ 3.1 The Corporation shall pay to the Employee for the services to be rendered by the Employee hereunder a base salary at the rate of Five Hundred Thousand ($500,000) Dollars per annum, as such base salary may be increased pursuant hereto, payable in equal 2 installments no less frequently than every two weeks. Such salary will be reviewed at least annually after the end of the fiscal year, and may be increased, but not decreased, by the Board of Directors of the Company (or the Compensation Committee thereof as appropriate) in its sole discretion, to be effective in the first pay period of the ensuing January. In addition, the Employee shall be entitled to participate during the Employment Period in the Corporate Management Incentive Plan (the "Bonus Plan") which the Company has adopted. The Employee's target bonus under that or any successor plan shall be 75% of his base salary (the "Target Bonus"). 3.2 The Employee shall be entitled to participate in, and receive benefits from, any insurance, medical, disability, stock purchase or any other employee benefit plan of the Company which may be in effect at any time during the course of his employment by the Company and which shall be generally available to senior executives of the Company. 3.3 The Company shall reimburse the Employee for all reasonable and necessary business expenses incurred by him in the course of performing his duties and services described in Section 1 hereof against the presentation by the Employee of appropriate vouchers therefor or other evidence as may be reasonably requested by the Company. 3.4 As long as the Employee's physical presence in the Hartford area is required, the Employee shall receive a housing allowance of $3,191.28 per month as long as he remains employed with the Company, which amount shall increase annually effective January 1 of each year by the same percentage as the United States City Average Consumer Price Index for all Urban Consumers for All Items increased in the previous year. 4. Other Activities During and After the Employment Period. ------------------------------------------------------- 4.1 During the Employment Period the Employee shall not undertake, continue 3 or otherwise engage in any employment, occupation or business enterprise other than as provided in Section 1 of this Agreement except that subject to compliance with the provisions of this Agreement, the Employee may engage in reasonable activities with respect to personal investments of the Employee and may continue to serve on the Boards of Directors of a maximum of four outside companies. The maximum may be changed only with the approval of the Board. 4.2 The Employee shall not at any time during or after the Employment Period (regardless of the reason for the termination thereof), directly or indirectly divulge, furnish, use, publish or make accessible to any person or entity any Confidential Information (as hereinafter defined) except as properly required in the conduct of the Company's business. Any records of Confidential Information prepared by the Employee or which come into the Employee's possession are and remain the property of the Company and upon termination shall be either left with or returned to the Company. The term "Confidential Information" shall mean information disclosed to the Employee or known, learned, created or observed by him as a consequence of or through his employment by the Company or any subsidiary of the Company which is confidential, secret or otherwise not generally known in the relevant trade or industry, and pertains directly or indirectly to the business activities, products, services or processes of the Company, any subsidiary of the Company or any of their clients, customers or suppliers, including but not limited to information concerning mailing lists, advertising, sales promotion, publicity, sales data, research, copy, other printed matter, tear sheets, artwork, photographs, films, reproductions, layout, finances, accounting, methods, processes, trade secrets, business plans, client lists and records, potential client lists, and client billing. 4.3 During the Employment Period, and the period of one year thereafter, the 4 Employee shall not directly or indirectly engage in any business (whether as a consultant, officer, director, owner, employee, agent, partner or other participant) with or for, be financially interested in (whether as a lender, guarantor or otherwise), represent or otherwise render assistance to: (i) any person or entity who or which competes or intends to compete, or who or which is affiliated (by reason of common control, ownership or otherwise) with any other person or entity who or which competes or intends to compete, directly or indirectly with the business then conducted by the Company; or (ii) any entity that has a name similar to the name of the Company or any subsidiary or name under which the Company or any subsidiary shall have conducted business; provided, however, that the foregoing shall not be deemed to prevent the Employee from investing in securities if such class of securities in which the investment is so made is listed on a national securities exchange or is issued by a company registered under Section 12(g) of the Securities Exchange Act of 1934 or subject to the obligations of Section 15(d) of that Act, so long as such investment holdings do not, in the aggregate, constitute more than 1% of the voting stock of any company's securities. 4.4 The Employee will not, during the Employment Period and one year thereafter, hire or offer to hire or entice away or in any other manner persuade or attempt to persuade, either in the Employee's individual capacity or as agent for another, any officers, employees, or agents of the Company or any subsidiary to discontinue their relationship with the Company or any subsidiary, nor divert or attempt to divert from the company or any subsidiary any business whatsoever by influencing or attempting to influence any customer or supplier of the Company or any subsidiary. 4.5 The Employee acknowledges that he has been employed for his special 5 talents and that his leaving the employ of the Company would seriously hamper the business of the Company. The Employee agrees that the Company shall be entitled to injunctive relief, in addition to all remedies permitted by law, to enforce the provisions of this Section 4. The Employee further acknowledges that his training, experience and technical skills are of such breadth that they can be employed to advantage in other areas which are not competitive with the present business of the Company and consequently the foregoing obligation will not unreasonably impair his ability to engage in business activity after the termination of his present employment. 5. Severance Pay. ------------- 5.1 In the event that (a) the Company terminates the Employment Period for any reason other than for Cause (as hereinafter defined), or (b) the Employee terminates his employment as a result of any of the following reasons (a "Section 5.1 Termination"): (i) the Company assigned to the Employee duties that are not in a Senior Executive Capacity (the Employee acknowledges that the Company's Board of Directors may, during the Employment Period, change or reduce his current job content and scope without invoking this provision); (ii) the Company reduces the Employee's bonus by a proportion greater than the average proportionate reduction in bonus awarded to the Company's other executive officers other than by operation of the Bonus Plan, or fails to increase the Employee's salary by the average being awarded to the other comparable executives; or (iii) the Company breaches any of its material obligations under this Agreement, then for the duration of the Employment Period, the Company shall continue to pay an amount of severance (the "Severance Compensation") to the Employee at the rate and in the manner provided in Section 3.1 hereof, including an amount equal to the Target Bonus, and shall continue to allow the Employee to participate in the insurance, medical 6 and disability plans (to the extent permitted by such plans) in which the Employee shall have been participating at the date of termination. As long as the Severance Compensation is being paid, the Employee's granted, but unvested stock rights, shall continue to vest on their regularly scheduled dates. If at the time of a Section 5.1 Termination there are more than two years left in the Employment Period, for the period in excess of the two years the Severance Compensation will not include any Target Bonus. The obligation of the Company to pay such Severance Compensation and allow such participation in such plans shall be the only obligations of the Company to the Employee in the event of a termination pursuant to clauses (a) or (b) above. Notwithstanding the foregoing, the Company shall not in any case have any obligation to pay such Severance Compensation or allow such participation in the event of any material breach by the Employee of his obligations under this Agreement or in the event the Employee is eligible to receive compensation pursuant to Section 6 hereof. The Company shall not be relieved of its obligation to pay Severance Compensation pursuant to this Section 5.1 by the reason of the death of the Employee during the period in which Severance Compensation is being paid. 5.2 For purposes of this Agreement, the term "Cause" shall mean: (i) failure by the Employee to comply with any of the material terms of this Agreement; (ii) willful engagement by the Employee in his capacity as an executive officer of the Company or any subsidiary, in gross misconduct injurious to the Company or any subsidiary; (iii) neglect or refusal by the Employee to attend to the material duties assigned to him by the Board of Directors of the Company; (iv) intentional misappropriation of property of the Company or any subsidiary to the Employee's own use; (v) the commission by the Employee of an act of fraud or embezzlement; (vi) conviction of the Employee for a crime (excluding minor traffic offenses); or (vii) the failure of the Employee 7 because of illness or other incapacity to render any services or perform any duties required pursuant to Section 1 hereof for any period of ninety (90) consecutive days during the Employment Period or for shorter periods aggregating more than six (6) months during the Employment Period ("Disability"); provided, however, if the Employee should leave the Company under the circumstances described in (vii), he will be entitled to such benefits as provided in the then-current long- and short-term disability plans. 6. Change of Control. ----------------- 6.1 The terms of the Severance Agreement shall govern the Company's treatment of the Employee if there should be a change of Control (as defined therein), except for the provision of paragraph 6.2, below. 6.2 If the Employee's termination following a Change of Control should entitle him to severance compensation as described in the Severance Agreement, the multiple for determining that compensation (as given in paragraph 3(a)(i) of the Severance Agreement) shall be the number of years and fraction thereof remaining in this Agreement, if that number is greater than two (2) years. 7. Restricted Shares and Options. In the event of Change of Control of ----------------------------- the Company, the Employee shall immediately become fully vested in his Restricted Shares and Stock Options pursuant to the term of those plans. 8. Assignments. This Agreement shall inure to the benefit of and be ----------- binding upon the Company, its successors and assigns, and upon the Employee and his heirs, estate, executors, administrators and legal representatives. No rights or obligations under this Agreement shall be assignable by the Employee, except those which survive his death or disability which may be 8 assigned upon that occurrence. 9. No Third Party Beneficiaries. This Agreement does not create, and ---------------------------- shall not be construed as creating, any rights enforceable by any person to a party to this Agreement, except with respect to salary or other payments or benefits required to be paid after the death of the Employee pursuant to Section 5.1 and the Severance Agreement. 10. Headings. The headings of the sections hereof are inserted for -------- convenience only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 11. Interpretation. In case any one or more of the provisions contained -------------- in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 12. Notices. All notices under this Agreement shall be in writing and ------- shall be deemed to have been given at the time when mailed by registered or certified mail, addressed to the address below stated of the party to which notice is given, or to such changed address as such party may have fixed by notice: To the Company: ADVO, Inc. One Univac Lane Windsor, CT 06095 Attention: General Counsel 9 To the Employee: Mr. Robert Kamerschen 204 Parade Hill Road New Canaan, CT 06840 provided, however, that any notice of change of address shall be effective only upon receipt. 13. Waivers. If either party should waive any breach of any provision of ------- this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 14. Complete Agreement; Amendments; Counterparts. The foregoing is the -------------------------------------------- entire agreement of the parties with respect to the subject matter hereof and may not be amended, supplemented, canceled or discharged except by written instrument executed by both parties hereto. This Agreement specifically supersedes and replaces the agreement between the parties dated November 14, 1991. This Agreement may be executed in counterparts, each of which shall be an original copy and which together shall constitute one and the same instrument. 15. Governing Law. This Agreement is to be governed by and construed in ------------- accordance with the laws of the State of Connecticut, without giving effect to principles of conflicts of law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ADVO, INC. By: /s/ David M. Stigler ------------------------------------- David M. Stigler By: /s/ Robert Kamerschen ------------------------------------- Robert Kamerschen 10 EX-10.L 3 EXHIBIT 10L - EMPLOYMENT AGREEMENT/NOV 1996 EMPLOYMENT AGREEMENT AGREEMENT made as of the 4th day of November, 1996, by and between ADVO, Inc., a Delaware corporation (the "Company"), and Gary M. Mulloy (the "Employee"). RECITALS A. The Employee has valuable knowledge, experience, and abilities which the Company requires for the conduct of its business, and the Company desires to employ the Employee as an officer of the Company and to obtain the benefit of Employee's knowledge, experience and abilities. B. The Employee is willing to serve as an officer of and be employed by the Company. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows: 1. Position and Responsibilities. ----------------------------- 1.1 As of the date of this Agreement, the Company shall employ and the Employee shall serve the Company in an executive capacity as President and Chief Operating Officer of the Company, reporting to the Chief Executive Officer. Subject to the approval of the Company's Board of Directors and Shareholders, the Employee shall sit on the Company's Board of Directors. 1.2 During the Employment Period (as defined below), the Employee shall serve the Company in the capacities described above, devoting his full time and best efforts to the business and affairs of the Company and the promotion of its interests, and performing all duties and services on behalf of the Company necessary to carry out the function of the offices as determined from time to time by the Board of Directors of the Company. 2. Employment Period. ----------------- 2.1 The "Employment Period" shall be the period from November 4, 1996 through November 4, 1999, unless sooner terminated pursuant to Section 2.3 or terminated by the Employee Severance Agreement (hereinafter "Severance Agreement"). 2.2 This Agreement will automatically renew every two (2) years, on the anniversary of the date set forth above, unless the Company gives the Employee six (6) months' notice prior to a renewal date that it does not intend to renew the Agreement. 2.3 Notwithstanding the provisions of Sections 2.1 and 2.2, the Company shall have the right in its sole discretion, on written notice to the Employee, to terminate the Employee's employment with or without cause, such termination to be effective as of the date on which notice is given or as of such later date otherwise specified in the notice. In the event of the death of the Employee prior to any other termination of his employment or the Employment Period (i) his employment and the Employment Period shall terminate on the date of his death and (ii) except as expressly provided in Sections 3.2, and 6.1 hereof, the Company shall not have any obligation to pay salary or provide any benefits under this Agreement to the heirs, estate, executors, administrators or legal representative of the Employee in respect of any period after the death of the Employee. 2 3. Compensation. ------------ 3.1 The Company shall pay to the Employee for services to be rendered by the Employee a salary at the rate of Four Hundred Thousand ($400,000) dollars per annum, payable in equal installments no less frequently than twice monthly. Such salary will be reviewed at least annually and may be increased by the Board of Directors of the Company in its sole discretion. In addition, the Board of Directors of the Company may award an annual bonus to the Employee based on a target bonus of 50 percent of his base salary (the "Target Bonus") in accordance with the Corporate Bonus Plan or Plans which the Company then currently has in effect. If the Employee is still actively employed by the Company on September 30, 1997, the bonus for fiscal year 1997 shall be the greater of $200,000 or the actual corporate bonus. 3.2 The Employee shall be entitled to participate in, and receive benefits from, any insurance, medical, disability, savings plans, stock option, or other employee benefit of the Company which may be in effect at any time during the course of his employment by the Company, pursuant to the terms of the plans, and which shall be generally available to senior executives of the Company. He shall have a vacation entitlement of four weeks per calendar year, starting in 1997. 4. Other Activities During and After the Employment Period. ------------------------------------------------------- 4.1 During the Employment Period the Employee shall not undertake, continue, or otherwise engage in any employment, occupation, or business enterprise other than as provided in Section 1 of this Agreement except that subject to compliance with the provisions of this Agreement, the Employee may engage in reasonable activities with respect to personal investments of the Employee, outside board memberships or any outside activity previously approved by the Board of Directors of the Company. 3 4.2 The Employee shall not at any time during or after the Employment Period (regardless of the reason for the termination thereof), directly or indirectly divulge, furnish, use, publish, or make accessible to any person or entity any Confidential Information (as hereinafter defined below) except as properly required in the conduct of the Company's business. Any records of Confidential Information prepared by the Employee or which come into the Employee's possession during the Employment Period are and remain the property of the Company, and upon termination of the Employee's employment all such records and copies thereof shall be either left with or returned to the Company. 4.3 The term "Confidential Information" shall mean information disclosed to the Employee or known, learned, created, or observed by him as a consequence of or through his employment by the Company which is confidential, secret, or otherwise not generally known in the relevant trade or industry, and pertains directly or indirectly to the business activities, products, services, or processes of the Company, any subsidiary of the Company or any of their clients, customers or suppliers, including but not limited to information concerning mailing lists, advertising, sales promotion, publicity, sales data, research, copy, other printed matter, tear sheets, artwork, photographs, films, reproductions, layout, finances, accounting methods, processes, trade secrets, business plans, postal strategy, client lists and records, potential client lists, and client billing. 5. Post-Employment Activities. -------------------------- 5.1 During the Employee's service with the Company, and the period of one year commencing with the Employee's last compensation payment from the Company, regardless of the reason for such termination, the Employee shall not directly or indirectly engage in any business (whether as a lender, guarantor or otherwise), represent or otherwise render assistance to 4 any person or entity who or which competes or intends to compete, or who or which is affiliated (by reason of common control, ownership, or otherwise) with any other person or entity who or which competes or intends to compete, directly or indirectly with the business then conducted by the Company with respect to advertising or other mailing services in the United States; provided, however, that the foregoing shall not prevent the Employee from investing in securities if such class of securities in which the investment is so made is listed on a national securities exchange or is issued by a company registered under Section 12(g) of the Securities Exchange Act of 1934, so long as such investment holdings do not, in the aggregate, constitute more than 1 percent of the voting stock of any company's securities. 5.2 The Employee will not, during the period of one year after the receipt of his last compensation payment from the Company, regardless of the reason for his termination, hire or offer to hire or entice away or in any other manner persuade, either in the Employee's individual capacity or an agent for another, any officers, employees, or agents of the Company or any subsidiary to discontinue their relationship with the Company or any subsidiary, not divert or attempt to divert from the Company or any subsidiary any business whatsoever by influencing or attempting to influence any customer or supplier of the Company or any subsidiary. 5.3 The Employee acknowledges that he has been employed for his special talents and this his leaving the employ of the Company could seriously hamper the business of the Company. The Employee agrees that the Company shall be entitled to injunctive relief, in addition to all remedies permitted by law, to enforce the provisions of this Section 5. The Employee further acknowledges that his training, experience, and technical skills are of such breadth that they can be employed to advantage in other areas which are not competitive with the present business of 5 the Company and consequently the foregoing obligations will not unreasonably impair his ability to engage in business activity after the termination of his present employment. 6. Severance Pay. ------------- 6.1 Except as otherwise provided in the Severance Agreement, in the event that the Company terminates the Employment Period prior to November 4, 1999 for any reason other than for Cause (as hereinafter defined), or the Employee terminates his employment as a result of any of the following reasons (i) without the Employee's consent, the Company assigns to the Employee duties inconsistent with this present position that materially diminish the scope of the Employee's duties or change his reporting relationship; (ii) the Company reduces the Employee's salary, or reduces the Employee's bonus, by a proportion substantially greater than the average proportionate reduction in salary or bonus awarded to the Company's other executive offices other than by operation of the Corporate Staff Bonus Plan (or any applicable successor plan); (iii) the Employee is not nominated for re-election to the Company's Board of Directors; (iv) this Agreement or a successor Agreement is not renewed pursuant to Section 2.2 (notification of which shall constitute the start of the period for which the payment of benefits hereunder (including Severance Pay), the remaining term of this Agreement notwithstanding); or (v) the Company breaches any of its material obligations under this Agreement, then pursuant to the terms of the Company's policy III-20-6, the Company shall continue to pay salary continuation to the Employee at his then-current level, and shall continue to allow the Employee to participate in all plans and benefit programs in which the Employee shall have been participating, pursuant to Section 3.2, except stock options and grant plans, vacation accrual, and any car allowances, when the Employee's inactive pay status begins, for one (1) year after the Employee's inactive pay status begins. The Employee shall be entitled to a target bonus, to be paid at the regular time for 6 Company bonus payments. The Employee shall have the option of taking the amount due to him under this provision in a lump sum, less required withholding, within ten days of the termination, which will have the effect of terminating his entitlement to continued participation in the Company's benefit plans. Any balance of the year's compensation due the Employee if he should find other employment in this year will be paid in a lump sum at that time. However, the Company shall not in any case have the obligation to pay such salary or allow such participation in the event of any material breach by the Employee of his obligations under this Agreement. The Company shall not be relieved of its obligations to pay salary pursuant to this Section 6.1 by reason of the death of the Employee. 6.2 For purposes of this Agreement, the term "Cause" shall mean: (i) failure by the Employee to comply with any of the material terms of this Agreement; (ii) willful engagement by the Employee, in his capacity as an executive officer of the Company or any subsidiary; in gross misconduct injurious to the Company or any subsidiary; (iii) neglect or refusal by the Employee to attend to the material duties assigned to him by the Board of Directors of the Company; (iv) intentional misappropriation of property of the Company or any subsidiary; (v) the commission by the Employee of an act of fraud or embezzlement; (vi) conviction of the Employee for a crime (excluding minor traffic offenses); or (vii) the failure of the Employee because of illness or other incapacity to render any services or perform any duties required pursuant to Section 1 hereof for any period of one hundred sixty (160) consecutive days during the Employment Period or for shorter periods aggregating more than six months during the Employment Period; provided, however, if the Employee should leave the Company under the circumstances described in (vii), he will be entitled to such benefits as provided in the then current Long- and Short-term disability plans. 7 7. Restricted Shares and Stock Options. ----------------------------------- 7.1 Upon the day of the first meeting of the Company's Board of Directors after the commencement of the Employee's Employment Period ("First Board Meeting"), the Employee shall be entitled to receive the following stock grants: (a) 30,000 restricted shares of the Company's common stock, which shall be subject to the terms of the 1986 Employee Restricted Stock Plan. The stock shall vest one-third on each of the first, second and third anniversaries of this grant if the Employee is still on the payroll of the Company on those dates. (b) Options to purchase 100,000 shares of the Company's common stock under the Company's 1988 Stock Option Plan, subject to the terms of that plan. Said options shall vest one-quarter each on each of the first, second, third and fourth anniversaries of this grant if the Employee is still on the payroll of the Company on those dates. 7.2 After the Employee goes on inactive pay status, all stock options and restricted stock then held by the Employee shall continue to vest as long as the Employee remains on wage continuation, as described in paragraph 6.1 above, notwithstanding any provision in any relevant plan to the contrary. 7.3 In the event of Change of Control of the Company, as described in the Severance Agreement, the Employee shall immediately become fully vested in his Restricted Shares and Stock Options pursuant to the terms of the relevant plan documents. 8. Other Considerations. -------------------- (a) Employee shall receive a car allowance commensurate with that received by other officers in the Company at his level. That amount is currently at $600 per month. 8 (b) In lieu of policy relocation compensation and standard home buyout reimbursement, the Employee shall receive (1) A sign-on bonus of $100,000 (gross). (2) Minor relocation of limited personal effects to the Hartford area. (3) Closing costs on purchase of a residence in the Hartford area. 9. Assignment. This Agreement shall insure to the benefit of and be ---------- binding upon the Company, its successors and assigns, and upon the Employee and his heirs, estate, executors, administrators, and legal representatives. This Agreement shall not be assignable by the Employee. 10. No Third Party Beneficiaries. This Agreement does not create, and ---------------------------- shall not be construed as creating, any rights enforceable by any person not a party to this Agreement, except (i) with respect to salary or other payments or benefits required to be paid after the death of the Employee pursuant to Section 6.1 hereof and (ii) the Severance Agreement. 11. Arbitration. Any controversy or claim arising out of or relating to ----------- this contract, or the breach, termination or validity thereof, except a breach by the Employee of Section 5, shall be settled by arbitration in accordance with the American Arbitration Association's Employment Dispute Resolution Rules, in Hartford, Connecticut. 12. Headings. The headings of the sections are inserted for convenience -------- only and shall not be deemed to constitute a part hereof nor to affect the meaning thereof. 13. Interpretation. In case any one or more of the provisions contained -------------- in this Agreement shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, 9 such invalidity, illegality, or unenforceable provision shall be treated as if it had never been contained herein. If, moreover, any one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to duration, geographical scope, activity, or subject, it shall be construed by limiting and reducing it, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. 14. Notices. All notices under this Agreement shall be in writing and ------- shall be deemed to have been given at the time when mailed by registered or certified mail, addressed to the address below stated of the party to which notice is given, or to such changed address as such party may have fixed by notice: To the Company: ADVO, Inc. One Univac Lane Windsor, CT 06095 Attn: General Counsel To the Employee: Mr. Gary M. Mulloy 1 UNIVAC LANE ----------------------- WINDSOR, CT. ----------------------- provided, however, that any notice of change of address shall be effective only upon receipt. 15. Waivers. If either party should waive any breach of any provision ------- of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of the Agreement. 16. Complete Agreement; Amendments. The foregoing is the entire ------------------------------ Agreement of the parties with respect to the subject matter hereof and may not be amended, supplemented, cancelled, or discharged except by written instrument executed by both parties hereto. 10 17. Governing Law. This Agreement is to be governed by and construed in ------------- accordance with the laws of the State of Connecticut, without giving effect to principles or conflicts of law. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. ADVO, INC. BY /s/ Robert Kamerschen ------------------------- Robert Kamerschen Chairman /s/ Gary M. Mulloy ------------------------- Gary M. Mulloy 11 EX-10.M 4 EXHIBIT 10M - EXECUTIVE SEVERANCE AGREEMENT EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of November 4, 1996, by and between ADVO, Inc. (the "Company") and Gary M. Mulloy (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 sub- stantially 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 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 4, 1996. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. ADVO, Inc. By /s/ Robert Kamerschen ------------------------------- Robert Kamerschen /s/ Gary M. Mulloy ---------------------------- Gary M. Mulloy EX-10.O 5 EXHIBIT 10O - ISSC CONTRACT Exhibit 10.O This Information Technology Services Agreement ("Agreement"), dated as of July 16, 1996, is by and between ADVO, Inc., a corporation having a place of business at One Univac Lane, Windsor, CT 06095 ("ADVO"), and Integrated Systems Solutions Corporation, {d/b/a/ISSC}, a wholly owned subsidiary of International Business Machines Corporation, having its headquarters at Route 100, Somers, NY 10589 ("ISSC"). ADVO and ISSC agree that the following terms and conditions will apply to services provided by ISSC under this Agreement. ADVO and ISSC may be referred to individually as a "Party" and collectively as the "Parties". 1.0 Background and Objectives ADVO desires that the Information Technology Services as described herein and currently performed by or for ADVO be performed and managed by ISSC. ISSC has conducted due diligence to determine its ability to perform and manage such activities and responsibilities and desires to provide the Information Technology Services, defined herein, to ADVO. ADVO's objectives in entering into this Agreement are as follows: a) establishing a price for the known scope of work so that ADVO's expenditures on information technology services for this work would be no higher under the Agreement than they would have been if ADVO continued to perform the same arrangements on its own; b) structuring the provisions concerning future services for unknown scope or the migration of services from a mainframe environment to a mid- range or server environment so that ADVO's costs for such future services or costs of and after migration would be at least as favorable to ADVO under the Agreement as they would have been if ADVO had not entered into the Agreement and performed such future services on its own; and c) assuring that the Services are delivered in a way that 1) does not unnecessarily increase ADVO's dependence on ISSC, or ADVO's costs, for New Services or for services after the termination of this arrangement; 2) minimizes the costs and effort of ADVO's migration from ISSC at the termination of the Agreement; and 3) does not reduce ADVO's ability to take advantage of new technology in order to improve its services or reduce its costs. ISSC will assist ADVO in achieving the above objectives as further set forth herein. After careful evaluation of ISSC's proposals and other alternatives, ADVO agrees to purchase from ISSC the Information Technology Services during the Term. This Agreement documents the terms and conditions under which ADVO agrees to purchase and ISSC agrees to provide the Services. 2.0 Definitions, Documents and Term 2.1 General Definitions As used in this Agreement: a) "Additional Resource Charge Rate" ("ARC Rate") means the charge for additional utilization of a Resource Unit in excess of its Baseline, as set forth in the Supplement and Schedule J. b) "AD/M Services" means both Applications Development and Applications Maintenance Services. c) "ADVO Machines" means Machines within the Data Center and Network that are owned, leased or rented and retained by ADVO after the Commencement Date and that are used by ISSC so that ISSC may provide the Services. ADVO retains financial responsibility for ADVO Machines. ADVO Machines are listed in Schedule C. d) "ADVO Network" means the Machines and Software located at 239 West Service Road, Hartford, CT 06120 as of the Commencement Date and any other locations at which Machines may be installed or relocated from time to time in accordance with this Agreement. e) "Affiliate" means, with respect to a Party, any entity at any time controlling, controlled by or under common control with, such Party. The term "Control" as used in this Agreement shall mean the legal, beneficial or equitable ownership, directly or indirectly, of more than 50% of the aggregate of all voting equity interests in such entity. f) "Annual Services Charge" means the fixed charge to ADVO for ISSC's provision of the Services and includes the quantity of Resource Units set forth under Baselines in the Supplement. g) "Applications Development" means the programming of: 1) any new applications software and changes or enhancements to such new applications software which provide new or additional functionality including the projects identified in Exhibit E-3 of Schedule E; 2) regulatory/statutory mandated changes; 3) version upgrades to Applications Software; and 4) changes or enhancements to existing Applications Software, which provide new or additional functionality, including as a project to be specified on Exhibit E-3 of Schedule E, making those applications identified on Schedule A as Year 2000 critical, Year 2000 Compliant. Programming effort shall include the pre and post development analyses, planning, design, coding, testing, installation, provision of a single set of program and training documentation per Applications Software program and Training necessary to complete the task. h) "Applications Maintenance" consists of the activities which address changes, corrections, and additional functions that are required once an application is put into production after development. These activities fall into the following categories: 1) "Corrective" means actions taken which result in the fixing or restoration of defective Applications Software features or functions or otherwise eliminates errors or failures associated with processing the data. This includes emergency repair and recovery activities. 2) "Perfective" means actions taken which result in improved quality, performance, reliability, efficiency, maintainability or usability of the application. 3) "Vendor Release Upgrade" means actions taken which result in the installation and available use of later or more recent releases and/or versions of third party software. Applications Maintenance does not include changes for correcting date- handling problems related to the change in millennium (Year 2000); such changes are within the scope of Applications Development. i) Applications Software" means those programs and programming, including all supporting documentation and media, that perform specific user related data processing and telecommunication tasks. Applications Software is listed in Schedule A. j) "Baseline" means the specified quantity of resources for a resource category included within the Annual Services Charge, as set forth in the Supplement and Schedule J. k) "Channel Extension Services" means the connectivity between the ISSC Data Center and input/output devices in the ADVO Network. Channel Extension Services includes Network Control Program ("NCP") support but does not include maintenance for the Model 3745-170 Transmission Control Unit. l) "Commencement Date" means July 16, 1996. m) "Data Center" means both the ISSC Data Center and the ADVO Network. n) "End User Locations" means those locations within ADVO's sites at which End User Machines, equipment and associated software are located, which locations are facilities or floors in facilities outside the Data Center. o) "End Users" means users of Services who are authorized to receive such Services within ADVO. p) "End User Machines" means all workstations, terminals, LAN servers, printers and associated peripheral equipment which satisfy the following criteria: 1) owned or leased by ADVO; 2) located at End User Locations; and 3) operated by End Users. q) "Function Points" ("FP" or "FPs") means the metric used to measure the functional output of AD/M Services as defined by the International Function Points Users Group ("IFPUG") Function Point Counting Practices Manual, or IFPUG's designated successor. r) "Information Technology Services" ("Services") means those services and functions which ISSC agrees to provide to ADVO pursuant to this Agreement. s) "ISSC Data Center" means the Machines and Software to be located at an ISSC location to include Southbury, CT and at such other locations as ISSC may establish thereafter upon prior notification to ADVO with information on such new location and an opportunity to comment provided to ADVO and the data line connecting the ISSC Data Center to the ADVO Network. t) "ISSC Machines" means Machines within the Data Center and Network which are provided by ISSC on or after the Commencement Date in order to meet its obligations under this Agreement. ISSC Machines which are located at ADVO facilities are listed in Schedule D. u) "Licenses" means those written contractual arrangements under which ADVO received the right to use and maintenance for software products for which ISSC has undertaken financial and administrative responsibility as of the Maintenance Period Date as specified on Schedule F. Licenses are listed in Schedule F. v) "Losses" means all losses, liabilities, damages and claims (including taxes), and all related costs and expenses (including any and all reasonable attorneys' fees and reasonable costs of investigation, litigation, settlement, judgment, interest and penalties). w) "Machines" means both ADVO Machines and ISSC Machines. x) "Network" means all Machines, associated attachments, features and accessories, Software, lines and cabling used to connect and transmit data and voice. y) "Performance Standards" means the service levels and performance responsibilities under which the Services will be provided. The Performance Standards are described and listed in Schedule E. z) "Reduced Resource Credit Rate" ("RRC Rate") means the credit for reduced utilization of a Resource Unit below the Baseline, as set forth in the Supplement and Schedule J. aa) "Required Consents" means any consents or approvals required for the licensing or transfer of the right to use applicable facilities, space, equipment, Software or third party services to ISSC. ab) "Resource Unit" ("RU") means a particular unit of resource utilization, as described in Schedule J, which is used to determine "Additional Resource Charges" ("ARCs") and "Reduced Resource Credits" ("RRCs") as described in Section 6 and Schedule J. ac) "Software" means both Applications Software and Systems Software. ad) "Systems Software" means those programs and programming, including all supporting documentation and media, that perform tasks basic to the functioning of the data processing and telecommunication equipment and which are required to operate the Applications Software or otherwise support the provision of Services by ISSC. Systems Software is listed in Schedule B. ae) "Training" means providing to an ADVO focal point such Applications Development documentation and/or information as ADVO reasonably determines it requires to allow the focal point to provide training to End Users. af) "Year 2000 Compliant" means the ability of a piece of software to correctly interpret and manipulate the relationship between 19XX and 20XX date-related data (where "X" is an integer between 0 and 9) without resulting in or causing logical or mathematical inconsistencies. 2.2 Associated Contract Documents This Agreement also includes: a) a Supplement ("Supplement") containing the charges, Term, and certain other necessary information; and b) Schedules A through P which will be updated by ISSC as necessary or appropriate during the Term; provided, however, that no changes to the Schedules shall become effective unless agreed to in writing by both Parties. 2.3 Term The term of this Agreement will begin as of 12:01 a.m. on the Commencement Date and will end as of 12:00 midnight on June 30, 2006 (the "Term"), unless earlier terminated or extended in accordance with this Agreement. 2.4 Renewal and Expiration ISSC agrees to notify ADVO whether it desires to renew this Agreement and of the proposed prices and terms to govern such renewal not less than 18 months prior to the expiration of the Term. If ISSC notifies ADVO that it desires to renew this Agreement, ADVO agrees to inform ISSC in writing whether it desires to renew not less than six months prior to the expiration of the Term. If ADVO notifies ISSC that it desires to renew the Agreement, but the Parties are unable to agree upon renewal prices, terms and conditions as of six months prior to the expiration of the Term, this Agreement will be extended for one year at the then current prices, terms and conditions. If the Parties are unable to reach agreement on renewal during such extension period, this Agreement will expire at the end of such extension period. 3.0 Overview 3.1 Transition of Services a) There will be a transition period ("Transition Period") during which transition shall be accomplished in accordance with the Transition Plan more fully described in Schedule H. ISSC shall migrate the information technology services performed by or for ADVO from ADVO to the ISSC Data Center. During the Transition Period, ADVO will be responsible for providing such services. The Transition Period may be extended by mutual agreement of the Parties. b) During the Transition Period, the Parties will commence and complete a written plan to be mutually agreed upon that is consistent with Schedule H. Such plan shall be set forth in Section H-2 of Schedule H for the transition of the necessary resources from ADVO to ISSC. ADVO will cooperate with ISSC in accomplishing all aspects of the transition, including the commitment of the resources necessary to complete the transition during the Transition Period. An outline of the tasks necessary to accomplish the migration of the Services to ISSC is set forth in Section H-1 of Schedule H. c) The Transition Plan will provide that at least two weeks prior to the cutover date to the ISSC Data Center from ADVO, as set out in the Transition Plan, ISSC will have established and tested systems at the ISSC Data Center which are capable of functionally duplicating all data processing Services then being performed by ADVO. Prior to cutover to the ISSC Data Center, ISSC will implement the portion of the Transition Plan which will require testing designed to establish that the ISSC Data Center is capable of providing such Services. d) ISSC shall maintain the redundancy described in subsection 3.1(c), at no additional cost to ADVO, for at least two weeks after cutover to the ISSC Data Center (the "Redundancy Period"). The Redundancy Period shall end on October 19, 1996 unless there is a cutback to the redundant facility prior to that date. If there is such a cutback, the Parties will use all reasonable efforts to cut over on as timely a basis as practicable. In no event shall the redundancy be maintained beyond December 15, 1996. In order to maintain redundancy during the Redundancy Period, ISSC will not use ADVO Machines to provide the data processing Services, except as necessitated by a failure of the transition to the ISSC Data Center, as set out below. As further set out below, ISSC shall be responsible for the reasonable, necessary and verified additional direct costs to ADVO of such redundancy, including any such incurred software license charges during the Redundancy Period. The Transition Plan shall include provisions for cutting back to ADVO's system if, during the Redundancy Period, either: 1) the weekly average for Systems Availability, as defined in Schedule E, falls below 90%; or 2) there is any single outage of greater than 8 hours in any rolling 24 hour period impacting Systems Availability. e) The Transition Plan will provide for migration to the ISSC Data Center on or before September 29, 1996 or October 5, 1996 as the case may be. However, if during the Redundancy Period ISSC fails to complete the Customer Test milestone, as set out in the Transition Plan, then: 1) ADVO may delay migration to the ISSC Data Center until December 15, 1996 (the "Hold Period"). During the Hold Period ISSC shall be responsible for providing the data processing Services described herein using the Machines, necessary personnel and facilities then employed by ADVO. 2) During the Hold Period ADVO represents that its total liquidated damages arising out of or related to such delay will total $1,568,000. ISSC will proportionately credit this amount on a monthly basis, as ADVO's sole and exclusive remedy for such delay, against each month's portion of the Annual Services Charge during the Hold Period. 3.2 Staff a) ADVO will use reasonable efforts to maintain staffing of the ADVO Network, AD/M functions, and print operations prior to and during the Transition Period; provided, however, that ADVO shall not be obligated to increase staffing levels. b) During the Transition Period ISSC or its subcontractors may interview those ADVO employees listed on Schedule O (the "Affected Associates"). All Affected Associates designated on Schedule O as "Data Center" will be interviewed. ISSC may waive the interviews for those Affected Associates designated on Schedule O as "Key Associate" and as "AD/M". c) Upon the Commencement Date, if not made previously, ISSC will make offers for employment to those ADVO employees designated on Schedule O as "Key Associate" and "AD/M" provided they: 1) are employed by ADVO as of the date the offer is made; 2) have submitted an application for employment; 3) meet ISSC's customary preemployment screening procedures for interviews, drug screening, and background verification; and 4) accept the offer of employment from ISSC within seven days from the date the offer is made. d) By no later than 90 days after the Commencement Date, ISSC will offer employment to those Affected Associates designated on Schedule O as "Key Associate" and as "Data Center" provided they satisfy sections 3.2.(c)(1) through 3.2.(c)(4) above. All other Affected Associates designated on Schedule O as "Data Center" but not as "Key Associate" will be considered for positions at other ISSC locations. e) ISSC or its subcontractors will be solely responsible for making any hiring decisions regarding the Affected Associates. f) All Affected Associates remaining on ADVO's payroll shall perform their duties under the direction and control of ADVO and will be treated as ADVO employees for all purposes throughout the Transition Period; provided, however, that nothing herein shall be interpreted so as to relieve ISSC of its obligations to provide the Services as of the Commencement Date. g) Replacements for the Affected Associates shall be selected by ISSC as it deems necessary consistent with Section 4.1(d), and ISSC shall have financial responsibility for salary and benefits for replacements of Affected Associates. h) Each offer of employment to an Affected Associate shall include: 1) an initial base salary not less than the base salary each such Affected Associate currently receives from ADVO; and 2) a benefits package, equivalent to the package available to ISSC employees who have accrued the same number of years of service with ISSC that the Affected Associate has accrued with ADVO. The benefits package includes (i) vacation days, up to ISSC's cap, and (ii) current participation in retirement benefits. i) ISSC shall conduct all employment practices described herein in accordance with all applicable laws. 3.3 Software As of the Commencement Date, and from time to time thereafter, ADVO will make the Software available to ISSC solely for the purpose of providing the Services and ISSC will be responsible for managing the Systems Software Licenses listed in Schedule F and for paying all related expenses, including the Systems Software maintenance fees beginning after the maintenance period date specified in Schedule F. Subject to the Parties obtaining any Required Consents in accordance with Section 3.4, ISSC will comply with all obligations of ADVO, including those of nondisclosure, under any such Systems Software License to the extent such obligations were disclosed to ISSC on or before the Commencement Date, and from time to time thereafter, through receipt by ISSC of a copy of the relevant documents, the receipt of which will be acknowledged by ISSC. ADVO represents and warrants that all obligations with respect to such Software Licenses accruing prior to the Commencement Date have been satisfied. 3.4 Required Consents ADVO shall be responsible for obtaining all Required Consents necessary to enable ISSC to use the Software and ADVO Machines except for Required Consents from ISSC Affiliates, which shall be obtained by ISSC. ADVO shall bear the costs, if any, of obtaining all Required Consents except for Required Consents from ISSC Affiliates, the costs of which shall be borne by ISSC. In the event that any Required Consent is not obtained with respect to the Software Licenses and ADVO Machines, then, unless and until such Required Consents are obtained, the Parties shall cooperate with each other in achieving a reasonable alternative arrangement for ADVO to continue to process its work with minimum interference to its business operations. Such failure by ADVO to obtain any Required Consent shall not per se be a breach of this Agreement by ADVO to the extent it participates in the foregoing. 3.5 Agency and Disbursements Beginning on October 1, 1996, ISSC will pay the Software vendors and suppliers listed in Schedule F or reimburse ADVO in a timely manner for payments made by ADVO to such vendors and suppliers for periods after the maintenance period date specified in Schedule F. ADVO appoints ISSC as its limited agent for the purposes of administration and payment as it pertains to the Software Licenses and ADVO shall not terminate, extend or amend such Software Licenses without the prior written approval of ISSC. ADVO agrees to promptly notify all the appropriate third parties of such appointment, such reasonable notification shall not be deemed to violate any confidentiality obligation of ADVO to ISSC. ISSC may terminate, cancel, substitute or change such Software Licenses as it chooses so long as ISSC continues to perform the Services in the manner required by this Agreement, provided ISSC (i) demonstrates to ADVO's satisfaction that any new arrangement can be migrated upon termination of this Agreement, and (ii) ISSC obtains ADVO's prior written consent which consent shall not unreasonably be withheld. Further, ISSC shall promptly pay or reimburse ADVO for any termination penalties, damages payable by ADVO to such third parties that are directly attributable to ISSC's decision to breach the third party agreement or to other termination charges associated with and paid by ADVO for such action. 3.6 Joint Verification During the 90 day period following the Commencement Date, ISSC and ADVO reserve the right to inventory, validate and update, any information that is reflected in or omitted from the attached Supplement or Schedules. If discrepancies are detected during such period, the Parties shall attempt to negotiate in good faith modifications to the Supplement or Schedules and/or an equitable adjustment to the Annual Services Charge. If the Parties are unable to reach agreement on modifications or an equitable adjustment, then the Parties will submit the matter to the Joint Advisory Committee for dispute resolution as specified in Section 16 of this Agreement. Nothing in this Section shall prevent the Parties from exercising any other remedies available to them at law or under this Agreement; including, but not limited to, any termination remedies. 3.7 Other Obligations Beginning on the earlier of the date this Agreement is executed by the Parties or the Commencement Date, ADVO will not enter into any new or amend any existing agreements or arrangements, written or oral, affecting or impacting upon Affected Associates or Software Licenses, as specified in the various Schedules to this Agreement, without the prior written consent of ISSC, which consent shall not unreasonably be withheld. 3.8 Software Currency The Parties agree to maintain reasonable currency for releases and versions of Software, unless otherwise mutually agreed. For purposes of this Section, "reasonable currency" shall mean that the installed version or release is no more than one version or release older than the newest commercially-available version or release, unless otherwise agreed to by the Parties, and subject to the Change Management Procedures outlined in Section 4.5(b). If, upon the Commencement Date, any Software is not reasonably current, the Parties will not be obligated to bring such Software into reasonable currency immediately. The Parties will, as part of the AD/M Services described in Schedule E, prepare a plan for either (a) bringing the Software into reasonable currency, or (b) replacing the Software. In the event either Party requests the other Party to delay upgrading of specific Software beyond the reasonable currency period or requires operation and maintenance of multiple versions of Software, the other Party shall do so, provided, that if such Party: a) is prevented from taking economic or performance advantage of technological advancements in the industry; or b) incurs additional costs (e.g., Software support costs due to withdrawal of maintenance by the licensor, multiple version charges, etc.); then, the requesting party will either update the Software to the current level or reimburse the other party for any increased costs incurred pursuant to the above. In addition, in the case where ADVO is the requesting Party, ADVO shall relieve ISSC from compliance with any related Performance Standards until such time as the affected Software is deemed current to the extent such failure to comply is a direct result of delayed upgrading. 3.9 ADVO Approvals and Notification For those areas of the Services where ADVO: a) has reserved right-of-approval or consent or agreement; b) is required to provide notification; and/or c) is required to perform a responsibility set forth in this Agreement; and such approval, consent, notification or performance is delayed or withheld by ADVO without authorization or right (which authorization or right shall be deemed to include the right of ADVO to reasonably object or to deny consent) beyond the period provided in this Agreement or the Schedules and such delay or withholding is not caused by ISSC and affects ISSC's ability to provide the Services under this Agreement, then ADVO will relieve ISSC of the responsibility for that portion of the Services affected by the delay or withholding during the period such approval, consent, notification or performance is delayed or withheld beyond the period provided in this Agreement or the Schedules and ADVO will reimburse ISSC for all additional expenses, if any, incurred during such period as a result thereof. For purposes of this Agreement, if a time period is not specified for such approval, consent, agreement, notification or performance, then such time period shall be deemed to be not greater than ten business days. 4.0 ISSC Responsibilities 4.1 ISSC Personnel ISSC will designate, prior to the Commencement Date, an ISSC Project Executive to whom all ADVO's communications may be addressed and who has the authority to act for and bind ISSC and its subcontractors in connection with all aspects of this Agreement. a) ISSC shall cause the person assigned to the position of Project Executive to devote substantially his or her full time and effort to the provision of the Services under this Agreement, and to the extent such Services are not provided from a dedicated facility, to the operation and management of the Data Center and AD/M staff. Before assigning an individual to the position of Project Executive, whether the individual is initially assigned or is subsequently assigned, ISSC shall: 1) notify ADVO of the proposed assignment; 2) introduce the individual to appropriate ADVO representatives; and 3) consistent with ISSC's personnel practices, provide ADVO with any other information about the individual reasonably requested by ADVO. ISSC agrees to discuss with ADVO any objections ADVO may have to such assignment and attempt to resolve such concerns on a mutually agreeable basis. b) ISSC will undertake to minimize change of the Project Executive and will give ADVO at least 30 days advance notice of a change of the Project Executive and will discuss with ADVO any objections ADVO may have to such change. c) In the event that ADVO reasonably and in good faith determines that it is not in the best interests of ADVO for any ISSC employee or subcontractor to continue performing any of the Services, then ADVO shall give ISSC written notice specifying the reasons for its position and requesting that the employee or subcontractor be replaced. Promptly after its receipt of such a notice, ISSC shall investigate the matters stated in such notice and, if it determines that ADVO's concerns are reasonable, ISSC shall take appropriate action. d) The Parties agree that it is in their best interests to keep the turnover rate of the ISSC and ISSC subcontractor personnel performing the Services to a reasonably low level. Accordingly: 1) for at least the first nine months following the Commencement Date, ISSC will not reassign any Affected Associate, for so long as the Affected Associate continues to be employed by ISSC, in a way that prevents him or her from spending substantially all of his or her time performing Services hereunder unless the Affected Associate requests reassignment or unless ADVO consents to such reassignment, which consent shall not be unreasonably withheld; and 2) for so long as the Affected Associate continues to be employed by ISSC, ISSC will not reassign any Affected Associate identified on Schedule O as "Critical/System", unless the Affected Associate requests reassignment or unless ADVO consents to such reassignment, which consent shall not be unreasonably withheld, until the earlier of: (i) full documentation of the system for which the Affected Associate was responsible in a form reasonably satisfactory to ADVO, or (ii) replacement of the system for which the Affected Associate was responsible. Further, if ADVO reasonably determines that the personnel turnover rate is or may be excessive and so notifies ISSC, ISSC shall provide data regarding the turnover rate and shall meet with ADVO to discuss the reasons for the turnover rate. If reasonably requested by ADVO, ISSC shall submit to ADVO its proposals for reducing the turnover rate, or seeking to prevent an excessive turnover rate, and the Parties shall mutually agree on a program promptly to maintain or reduce the turnover rate to an acceptable level, as appropriate. In any event, notwithstanding transfer or turnover of personnel, ISSC remains obligated to perform the Services without degredation and in accordance with this Agreement. 4.2 Standards ISSC agrees that: a) all Services performed by ISSC for ADVO will be performed in a professional and workmanlike manner in accordance with industry standards and practices applicable to the performance of such Services; and b) its performance of the Services will meet or exceed each of the applicable Performance Standards. 4.3 Efficient Use of Resources ISSC shall take reasonable action, taking into account economic circumstances, to efficiently use resources that will be chargeable to ADVO under this Agreement including, but not limited to: a) making schedule adjustments (consistent with ADVO's priorities and schedules for the Services and ISSC's obligation to meet the Performance Standards); b) delaying the performance of noncritical functions within established limits; and c) tuning or optimizing the systems used to perform the Services. 4.4 Technological Advancements ISSC agrees to take reasonable action, taking into account economic circumstances, without an increase in charges to ADVO, subject to the provisions of Section 6.5 and the Performance Standards, to provide the Services to ADVO at a technological level that will enable ADVO to take advantage of technological advancement in its industry. Further, ISSC may, at ISSC's option and expense, implement technological advancements relative to the provision of the Services; provided, however, ISSC continues to perform the Services in accordance with the Performance Standards set forth in this Agreement. Notwithstanding the foregoing, ISSC shall not without ADVO's express consent, and unless only in effect during the Term, implement any technological advancement that materially adversely affects ADVO's ability, at expiration or termination of this Agreement, to migrate to: (i) another technology platform, or (ii) another services provider, or (iii) ADVO itself. If such technological advancement(s) will have an effect on any Baseline(s) and/or ARC/RRC Rate(s) for any resource provided under the Agreement, ISSC will normalize such affected Baseline(s) and/or ARC/RRC Rate(s), consistent with the rebaselining procedures set forth in Schedule J, so that ADVO receives the same level of performance and the same price-performance as provided under the methodology used at inception of this Agreement. ISSC will review with ADVO the conversion methodology (e.g., benchmarking, historical data, etc.) which ISSC used to support such adjustment(s). ISSC will explore the implementation of technological advancements reasonably requested by ADVO. 4.5 Management and Control a) Within 180 days after the Commencement Date, ISSC shall provide a manual describing the operating processes and procedures relating to the performance of the Services (the "Procedures Manual"). Recognizing that certain components of the Procedures Manual need to be completed in advance of 180 days, the Parties agree to deliver such priority components in accordance with the timeframe set forth in Schedule H. 1) The Procedures Manual shall be provided to ADVO for review, comment, and approval, and any reasonable comments or suggestions of ADVO will be incorporated therein. 2) ISSC shall periodically update the Procedures Manual, subject to ADVO's reasonable approval, to reflect any changes in the operations or procedures described therein. 3) ISSC shall perform all Services in accordance with the Procedures Manual. b) Within 180 days after the Commencement Date, ISSC shall provide the "Change Management Procedures", which shall include, at a minimum, that: 1) ISSC will make no change which may adversely affect the business operations of ADVO without first obtaining approval from ADVO. 2) ISSC will assure that all programs are moved from the application development and test environments to the production environment in a controlled and documented manner. 3) ISSC will schedule all Data Center and AD/M projects so as not to unreasonably interrupt ADVO business operations. 4) ISSC will prepare monthly, a rolling quarterly "look ahead" schedule for ongoing and planned Data Center and AD/M changes. The status of changes will be monitored and tracked against the applicable schedule. 5) ISSC will document and provide to ADVO a notification of all Data Center and AD/M changes performed for emergency purposes or as otherwise not precluded in Section 4.5(b)(1) as soon as practicable, but in no event later than five business days after change was made. Regardless of whether the Procedures Manual or Change Management Procedures or components thereof are completed on schedule, unless otherwise specified in the Transition Plan in accordance with Schedule H, the above procedures will be applicable from the Commencement Date. The Change Management Procedures will be included in the Procedures Manual and shall be provided to ADVO for review, comment, and approval, and any reasonable comments or suggestions of ADVO will be incorporated therein. c) Upon reasonable request by ADVO, ISSC will provide periodic reports to ADVO that will include, at a minimum, the following: 1) a monthly performance report documenting ISSC's performance with respect to the Performance Standards; 2) a weekly project schedule report containing the information described in Section 4.5(b)(5); 3) a monthly change report setting forth a record of all changes performed during the previous month; and 4) a monthly report describing ADVO's utilization of each particular type of RU during such month, and comparing such utilization to the then applicable Baseline for each RU. ISSC will provide ADVO with such documentation and other information as may be reasonably requested by ADVO from time to time in order to verify the accuracy of the reports specified above. d) The Parties will mutually determine an appropriate set of periodic meetings to be held between representatives of ADVO and ISSC. ISSC will attend all such meetings. The agenda will be mutually agreed upon in advance by the Parties. At a minimum, these meetings will include the following: 1) a weekly meeting among operational personnel to discuss ongoing issues relating generally to daily performance and planned or anticipated activities and changes; 2) a monthly management meeting to review the performance report, the project schedule report, the changes report, and such other matters as appropriate; and 3) a quarterly senior management meeting to review relevant contract and performance issues. All meetings will have a published agenda issued by ISSC sufficiently in advance of the meeting to allow meeting participants a reasonable opportunity to prepare for the meeting. 4.6 Machines ISSC will provide the Services using ISSC and ADVO Machines. Additional or replacement ISSC Machines, including upgrades, will be added by ISSC to the Data Center and Channel Extension Services, as necessary to perform the Services in accordance with the Performance Standards, subject to ARCs for growth beyond the specified Baseline. ISSC retains all right, title and interest in and to all ISSC Machines, subject to Section 10.4 with respect to ADVO's rights upon termination or expiration of this Agreement. 4.7 Data Transmission (Lines/Circuits) ISSC will undertake financial and administrative responsibility for the necessary leased lines and circuits to provide Channel Extension Services between the ADVO Network and ISSC Data Center. 4.8 Software Services As part of the Services, ISSC will: a) operate, maintain and enhance, as necessary to perform in accordance with the Performance Standards, all Systems Software in the Data Center, except as otherwise provided in Schedule B; b) apply preventive maintenance and program temporary fixes to correct defects in the Systems Software running in the Data Center; c) in accordance with the Software currency provisions of Section 3.8, provide or obtain new versions and releases, upgrades, replacements or additional Systems Software as ISSC deems necessary in order to perform the Services in accordance with the Performance Standards; and d) operate and install new versions and releases, upgrades, replacements and additional Applications Software in the Data Center. 4.9 Operations, Support and Maintenance As part of the Services, ISSC will: a) operate the Data Center using the Machines and Software; b) provide maintenance services for ISSC Machines in the ISSC Data Center; c) provide maintenance services for the Hitachi disk storage drives specified on Schedule C; d) operate and support the 3745 and all related Software and provide Channel Extension Services; e) provide print operations in accordance with Schedule E; f) transmit electronic print files to the ADVO Network in accordance with Schedule E; g) store, maintain and provide security for storage media (tapes, disk packs, etc.) provided to ISSC; and h) provide reasonable system capacity to support Applications Development, in accordance with Schedule E, the resources utilized for which will be included when calculating RUs. 4.10 Consolidation and Relocation Services Subject to any ADVO right to receive notice and to object set forth in the Change Management Procedures, ISSC will install, rearrange and relocate equipment in the ISSC Data Center as ISSC deems necessary in order to perform in accordance with the Performance Standards and in such a manner so as to minimize service level impact to End Users in accordance with the Change Management Procedures. ADVO shall receive notice with an opportunity for reasonable comment prior to any material physical relocation of ISSC production control and key operational liaison personnel. 4.11 Systems Management As part of the Services, ISSC will: a) perform capacity planning, performance analysis and tuning for the Machines and Systems Software in the Data Center; b) implement controls, in accordance with Schedule L and this Agreement, to effectively manage the Data Center environments, including change and problem management systems according to the Procedures Manual; c) provide back-up and restore capability for data and programs maintained in the Data Center; d) invoke the disaster recovery plan when appropriate; and e) provide for systems access security through the use of appropriate security products. 4.12 Disaster Recovery ISSC will provide disaster recovery services in accordance with Schedule G. 4.13 Production Services As part of the Services, ISSC will: a) schedule, control and monitor the running of production jobs in the Data Center using scheduling and quality control procedures, as specified in the Procedures Manual; and b) follow procedures for scheduling and directing output of all production work (including workload and performance balancing), as specified in the Procedures Manual. 4.14 AD/M Services As part of the Services, ISSC will provide Applications Development and Maintenance as further specified in Schedule E and at the resource levels as established in Schedule J and set forth in the Supplement. 4.15 Help Desk ISSC will provide single point-of-contact support to End Users to assist them with problem determination, tracking and resolution, how-to questions, systems status, and changes which may affect them, in accordance with Schedule M. 4.16 Audits In accordance with this Section, SAS-70, and any other regulatory requirements, ADVO may have an independent third party audit conducted of the facilities. The audit objective will be to report on the internal control structure employed by ISSC for the duration of this Agreement and will include reviews of: computer operation procedures, backup, off-site storage, contingency planning, DASD management controls, physical security, software and data security, systems software support, tape library control and other areas as reasonably deemed appropriate. ISSC will reasonably assist ADVO in meeting its audit and regulatory requirements and in reasonably minimizing costs associated with such requirements, including providing access to the Data Center to enable ADVO and its auditors and examiners to conduct appropriate audits and examinations of the operations of ISSC relating to the performance of the Services to verify: a) the accuracy of ISSC's charges, other than the Annual Services Charge, to ADVO; b) that ISSC is exercising reasonable procedures to control the resources provided by ADVO to ISSC such as heat, light and utilities utilized in providing Services to ADVO; and c) that Services are being provided in accordance with the Performance Standards. Such access will require 24 hours notice to ISSC and will be provided at reasonable hours, provided that any audit does not interfere with ISSC's ability to perform the Services in accordance with the Performance Standards. ISSC will provide access only to information reasonably necessary to perform the audit. ISSC will provide access to ISSC proprietary data, subject to the provisions of Section 9. Under no condition will ADVO have access to the data of other ISSC customers. ISSC will also assist ADVO's employees or auditors in testing ADVO's data files and programs, including, without limitation, installing and running audit software, subject to the provisions of Section 6. Subject to Section 6.5, ISSC agrees to make any changes and take other actions which are necessary in order to maintain compliance with applicable laws or regulations or generally acceptable accounting procedures. ADVO may submit additional findings or recommendations to ISSC for its consideration, and ISSC shall consider such findings and ISSC shall implement such findings and recommendations it reasonably determines to be appropriate. If any audit or examination reveals that ISSC's invoices for the audited period are not correct for such period, ISSC shall promptly reimburse ADVO for the amount of any overcharges, or ADVO shall promptly pay ISSC for the amount of any undercharges. 4.17 Benchmarks Beginning in the second contract year from the Commencement Date, and no more than once in a calendar year, ADVO reserves the right to have a third party that has been mutually agreed upon between ADVO and ISSC, conduct a confidential benchmark study at ADVO's expense to compare the cost, quality and delivery of the Services being benchmarked to services provided to other entities receiving comparable services (the "Benchmark"). The Benchmark will be designed to provide a representative comparison of the benchmarked services provided by vendors across various industries. Subject to appropriate confidentiality restrictions, ISSC will reasonably cooperate with such third party in performing the Benchmark provided ISSC receives reasonable notice and that any Benchmark does not interfere with ISSC's ability to perform the Services in accordance with the Performance Standards. ADVO will determine the scope of the study and the categories to be compared. The Parties will mutually determine necessary adjustments to address comparability factors of the total scope of Services such as the Term of the Agreement, complexity of the transition to ISSC's Services, and environmental or other unique aspects of the Services. Upon request by ADVO, the Parties will analyze the Benchmark results and ISSC, at its expense (unless the Benchmark fails to comport with the scope of the categories studied or adjustments as agreed between ADVO and ISSC, or the Benchmark results can be shown to be based on factually inaccurate assumptions or data or other inputs upon which the conclusions are based, in which case the Benchmark can be corrected for such deviations) and within 60 days of completion of the Benchmark, will: a) prepare an analysis report to address any material deviations, higher or lower, of the cost, quality, or delivery of the Services as compared to the Benchmark results; and b) prepare a plan for achieving higher levels of service and/or improved price performance. ISSC and ADVO will implement the plan when and to the extent it is approved by ADVO to the extent such implementation is feasible. 5.0 ADVO Responsibilities 5.1 ADVO Project Executive ADVO agrees to designate, prior to the Commencement Date, a Project Executive to whom all ISSC communications may be addressed and who has the authority to act for and bind ADVO and its subcontractors in connection with all aspects of this Agreement. 5.2 Applications Software During the Term, ADVO will be responsible for defining business requirements for Applications Software. ADVO will also retain responsibility for all license and related charges and for prioritizing the AD/M workload necessary to maintain and support all Applications Software. ADVO shall provide ISSC, to the extent ADVO has such license rights, with source code that matches all application load modules executed in the production environment for Applications Software. ADVO may reasonably audit, control and approve all new Applications Software prior to its promotion into production. 5.3 Facilities To enable ISSC to provide the Services, ADVO agrees: a) to provide, at no charge to ISSC, the use of the ADVO facilities and such additional space as may be reasonably necessary for the performance of the Services. This includes reasonable office space for a minimum of 60 people and individual offices for four managers, storage space, telephone capability (but excluding long-distance telephone charges, for which ADVO will be reimbursed by ISSC), office support services (e.g., janitorial and security), office supplies and furniture. ADVO shall be responsible for ensuring such ADVO facilities provide for a safe working environment, including compliance with national, state and local codes, ordinances, laws, authorities having jurisdiction and nationally recognized standards; b) to provide, for the ADVO facilities located at premises under ADVO's management and control during the Term the utilities as may reasonably be necessary for ISSC to perform the Services as described in this Agreement, such as heat, light, power, air conditioning, uninterruptible power supply, and such other similar utilities; c) to provide access to ADVO parking and cafeteria (if any) facilities for ISSC employees; d) if ADVO decides to relocate its current facility from which the Services are being provided, ADVO will provide comparable space, facilities and resources in the new location and reimbursement of personnel relocation for ISSC employees and subcontractors under the same terms and conditions of this Agreement; and e) following the expiration or termination of this Agreement, ADVO will allow ISSC the use, at no charge, of those ADVO facilities then being used to perform the Services for up to 60 days following the effective date of such expiration or termination (or from the last day of any Services Transfer Assistance period) to enable ISSC to affect an orderly transition of ISSC resources. It is understood that ISSC's use of the ADVO facilities does not constitute or create a leasehold interest. When the ADVO Network and/or the other ADVO facilities are no longer being utilized by ISSC to perform the Services, ADVO's obligations set forth in this Section with respect to the ADVO Network and/or the other ADVO facilities will cease. 5.4 Support Services ADVO agrees to: a) perform its responsibilities in accordance with the Procedures Manual and Performance Standards and until such time as those documents are completed, in whole or in part, in accordance with ADVO's practices and policies as of the Commencement Date; b) provide to ISSC, to the extent not otherwise sold, assigned or licensed to ISSC, for the purposes of meeting its obligations under this Agreement, full access to, and use of, Machines and Software on the terms and conditions set forth in this Agreement; c) supply the End User Machines and software being used by the Affected Associates as of the Commencement Date for 180 days from the Commencement Date. Such machines and software shall remain the property of ADVO. Any replacement machines or software will be the responsibility of ISSC and such replacements will be the property of ISSC; and d) maintain and replace as necessary any machines retained by ADVO and required by ISSC to operate Applications Software. 5.5 Other Responsibilities ADVO also agrees to: a) provide data entry and coordinate such activities with ISSC's systems design and production functions as described in Schedule E; b) be responsible for Network including WAN and LAN management, voice services and voice network services; c) be responsible for all servers except for servers operating Applications Software for which ISSC has operational responsibility; d) provide for maintenance of the input/output devices in the ADVO Network; e) designate and document application information requirements, including report design and content, frequency of reports, and accessibility to information; f) provide additions, upgrades and replacements for all End User Machines used by ADVO employees; g) maintain and support all End User Machines used by ADVO employees; h) provide personnel and equipment to reasonably ensure the physical security of ADVO facilities; i) provide all preprinted forms; j) provide all paper forms and supplies required by End Users employed by ADVO; k) pay all usage fees for disaster recovery contracts, if any, until completion of migration to the ISSC Data Center; l) be responsible for all mail, messenger, postage, courier and print distribution services; m) be responsible for all costs associated with off-site data storage; n) be responsible for such other ADVO activities and functions as are described in this Agreement; and o) cooperate to establish the required FP Baselines within the time required as further set forth in Schedule E hereto, without undue delay. 6.0 Charges and Expenses 6.1 Annual Services Charge ADVO agrees to pay the Annual Services Charge specified in the Supplement for each year of the Term together with the other amounts and subject to credits as described in this Section 6 and Section 7 and set forth in the Supplement. 6.2 Resource Charges and Credits One month after the establishment of Baselines, other than Help Desk Baselines, pursuant to Schedule J, and monthly thereafter, ISSC will review the quantity of Resource Units utilized by ADVO during the preceding month, and calculate Additional Resource Charges (ARCs) and/or Reduced Resource Credits (RRCs) in accordance with the Supplement and Schedule J. Six months after the establishment of Help Desk Baselines pursuant to Schedule J, and every three months thereafter, ISSC will review the cumulative quantity of Resource Units utilized by ADVO during the preceding three months, and calculate Additional Resource Charges (ARCs) and/or Reduced Resource Credits (RRCs) in accordance with the Supplement and Schedule J. ADVO agrees to pay Additional Resource Charges in accordance with Section 7. ISSC agrees to credit Reduced Resource Credits in accordance with Section 7. 6.3 Cost of Living Adjustment ADVO agrees to pay ISSC a Cost of Living Adjustment ("COLA"), in accordance with Schedule J if the actual cumulative year-to-year inflation increases. The Parties agree to use the December unadjusted Consumer Price Index, as published in the "Summary Data from the Consumer Price Index News Release" by the Bureau of Labor Statistics, U.S. Department of Labor, For All Urban Consumers, ("CPI-U"), for purposes of determining actual inflation. 6.4 New Entities If ADVO acquires any additional Affiliate during the Term and ADVO desires that ISSC provide Services for such Affiliate, subject to additional charges if acceptance of such responsibilities would require New Services as described in Section 6.5 and/or resources in excess of existing Baselines, then ISSC will provide such Affiliate with Services in accordance with this Agreement. 6.5 New Services In the event that ADVO requests ISSC to perform functions different from, and in addition to, the Services ("New Services"), the charge to ADVO for ISSC performing such functions will be determined as follows: a) If the additional function requires only those resources which have a current Baseline, the additional function will not be considered a New Service and the charges for the incremental resources, if any, will be recovered through the ARC methodology, subject to a Baseline adjustment in accordance with Schedule J. b) If the additional function requires resources not covered by an existing Baseline and/or requires additional start-up expenses, then such additional function will be considered New Services, and prior to performing such New Services: 1) ISSC will quote to ADVO the adjustment in the Annual Services Charge or other payment method that will reflect such New Services, which will be based upon the required proportional adjustment in system and other applicable resources relative to the Annual Services Charge; and 2) ADVO, upon receipt of such quote, may then elect to have ISSC perform the New Services, and the Annual Services Charge and the Baselines will be adjusted, if necessary, to reflect such New Services. 6.6 Taxes a) The Annual Services Charge and ARCs (if any) paid by ADVO are inclusive of any applicable sales, use, personal property or other taxes (exclusive of telecommunications taxes) attributable to periods on or after the Commencement Date based upon or measured by ISSC's cost in acquiring or providing equipment, materials, supplies or services furnished or used by ISSC in performing or furnishing the Services, including without limitation, all personal property and use taxes, if any, due on ISSC Machines and Systems Software. b) In the event that a sales, use, excise or services tax is assessed on the provision of the Services (or any New Services) by ISSC to ADVO or on ISSC's charges to ADVO under this Agreement, however levied or assessed, ADVO will be responsible for and pay the amount of any such tax. ADVO will also be responsible for paying all personal property or use taxes due on or with respect to ADVO Machines, End User Machines and Applications Software and for the payment of any telecommunications taxes for network lines and circuits. c) Each Party shall bear sole responsibility for all taxes, assessments and other real property-related levies on its owned or leased real property. d) The Parties agree to reasonably cooperate with each other to more accurately determine each Party's tax liability and to minimize such liability to the extent legally permissible. e) Each Party shall provide and make available to the other any resale certificates, information regarding out-of-state sales or use of equipment, materials or services, and other exemption certificates or information reasonably requested by either Party. The Parties will also work together to segregate the Annual Services Charge and ARCs into separate payment streams: 1) that for taxable Services; 2) that for nontaxable Services; 3) that for which a sales, use or similar tax has already been paid by ISSC; and 4) that for which ISSC functions merely as a paying agent for ADVO in receiving goods, supplies or services (including leasing and licensing arrangements) that otherwise are nontaxable or have previously been subject to tax. 6.7 Extraordinary Reduction of ADVO Work a) If, during the Term, ADVO experiences significant changes in the scope or nature of its business which have or are reasonably expected to have the effect of causing sustained substantial decreases in the amount of ISSC resources used in performing the Services, provided such decreases are not due to ADVO resuming the provision of such Services by itself or ADVO transferring the provision of such Services to another vendor, such changes shall be governed by this Section. Substantial decreases shall be considered: 1) a 35% or more decrease in the amount of ISSC resources used in performing AD/M Services; or 2) a 25% or more decrease in the total amount of ISSC resources used in performing all Services, including AD/M Services. Examples of the kinds of events that might cause such substantial decreases include but are not limited to; 1) voluntary or involuntary bankruptcy; 2) changes to locations where ADVO operates; 3) changes in ADVO's products or markets; 4) mergers, acquisitions or divestitures (which in the case of mergers or acquisitions could include the performance of some of the Services by the surviving third-party entity of the merger or the acquirer, or the designee of either of them, which shall be deemed not to be the transfer of Services to another vendor, provided that the merger or acquisition is primarily for business reasons unrelated to ADVO's avoidance of its obligations under this Agreement); 5) changes in the method of service delivery (other than use of another vendor); or 6) changes in market priorities. b) ADVO will notify ISSC of any event or discrete set of events which ADVO believes qualifies under this Section and ISSC will identify the changes that need to be made to accommodate the extraordinary decrease of resource requirements in a cost-effective manner without disruption to ADVO's ongoing operations, and the cost savings that will result therefrom in a plan that will be submitted to ADVO for review and acceptance. c) Effective upon the occurrence of the event or discrete sets of events, unless otherwise notified by ADVO, ISSC will make any applicable adjustments to the charges and the Baselines to reflect the foregoing and distribute an amended Supplement to the Parties. d) ADVO may, at its option and expense, employ an accredited and independent auditor to verify that ISSC's methodology for calculating the savings referenced in Section 6.7(b) above conform to accepted accounting practices, and to verify that ISSC's methodology captures, for ADVO's benefit, any savings resulting from the extraordinary reduction in resource requirements. ADVO may raise any discrepancy it may have with the adjustment made pursuant to Section 6.7(c) above by disputing the first invoice reflecting such adjustment pursuant to Section 7.5. 6.8 Services Transfer Assistance It is the intent of the Parties that at the expiration or termination of this Agreement, ISSC will cooperate with ADVO to assist with the orderly transfer of the services, functions and operations provided by ISSC hereunder to another services provider or ADVO itself. Prior to expiration or termination of the Agreement, ADVO may request ISSC to perform and, if so requested, ISSC shall perform (except in the event of a termination due to a failure by ADVO to pay any undisputed amounts due and payable under this Agreement) services in connection with migrating the work of ADVO to another services provider or ADVO itself ("Services Transfer Assistance"). Services Transfer Assistance shall be provided until the effective date of expiration or termination with respect to the Services, and for expiration or termination related services other than those relating to the Services, for up to six additional months after the effective date of expiration or termination. Subject to Section 6.8(d) below, Services Transfer Assistance shall include, but not be limited to, providing ADVO and its Affiliates and their agents, contractors and consultants, as necessary, with services such as the following: a) Premigration Services 1) freezing all noncritical Software changes, 2) notifying all outside vendors of procedures to be followed during the turnover phase, 3) reviewing all Software libraries (tests and production) with the new service provider and/or ADVO, 4) assisting in establishing naming conventions for the new production site, 5) analyzing space required for the data bases and Software libraries, and 6) generating a tape and computer listing of the source code in a form reasonably requested by ADVO. b) Migration Services 1) unloading the production data bases, 2) delivering tapes of production data bases (with content listings) to the new operations staff, 3) assisting with the loading of the data bases, 4) assisting in the execution of a parallel operation until the effective date of expiration or termination of this Agreement. c) Postmigration Services 1) answering questions regarding the Services on an "as needed" basis, and 2) turning over of any remaining ADVO owned reports and documentation still in ISSC's possession. d) If any Services Transfer Assistance provided by ISSC requires the utilization of additional resources for which there is a current Baseline that ISSC would not otherwise use in the performance of this Agreement, ADVO will pay ISSC for such usage at the then current Agreement charges. If the Services Transfer Assistance requires ISSC to incur expenses in addition to the expenses that ISSC would otherwise incur in the performance of this Agreement, then: 1) ISSC shall notify ADVO of any additional expenses associated with the performance of any additional services pursuant to this Section prior to performing such services; 2) upon ADVO's authorization, ISSC shall perform the additional services and invoice ADVO for such services; and 3) ADVO shall pay ISSC for such additional expenses incurred to provide the additional services within ten business days of the date of the invoice. 6.9 Other Expenses and Charges ADVO will be financially responsible for all costs and expenses associated with its responsibilities specified in Section 5. Such costs and expenses are not included within the Annual Services Charge, ARCs or any other charges payable by ADVO under this Agreement. 7.0 Invoicing and Payment 7.1 Annual Services Charge Invoices ISSC will invoice ADVO on a monthly basis the proportional amount of the Annual Services Charge for that month in advance. The portion of the Annual Services Charge attributable to Applications Development will be separately stated on the invoice. The invoice will state separately applicable taxes owed by ADVO, if any, by tax jurisdiction. 7.2 ARC, RRC and COLA Invoicing Beginning three months following the establishment of the Baselines pursuant to Schedule J, ISSC will invoice ADVO quarterly for the amount due, if any, for the preceding three months. The invoice will detail a single, three-month ARC for Help Desk calls and three, one-month ARCs-less- RRCs calculations for Resource Units other than Help Desk calls. ISSC will invoice ADVO for COLA in accordance with Section 6.3. 7.3 Other Charges Any amount due under this Agreement for which a time for payment is not otherwise specified will be due and payable within 60 days after the date of the invoice. 7.4 Invoice Payment a) Annual Services Charge and COLA Invoices: Beginning on or about the Commencement Date and at the beginning of each month thereafter, ISSC will invoice ADVO for the proportional amount of the Annual Services Charge. ADVO agrees to pay the charges within 30 days of the date of the invoice. b) ARC and RRC Invoices: ADVO will pay each invoice within 60 days of the date of an invoice. In the event that any payments for charges not disputed by ADVO in accordance with Section 7.5 are not received by ISSC within five days following the due date, a late fee equal to the lower of two percent of the amount of such payment per month or the maximum amount allowed by applicable law shall also be paid to ISSC by ADVO. 7.5 Disputed Charges a) In the event that ADVO has reasonable cause to believe an invoiced amount is in error, ADVO may withhold the disputed amount from the payment for such invoice and notify ISSC of the disputed amount in writing with appropriate documentation demonstrating ADVO's position. If ISSC agrees that the disputed amount is not due ISSC, it will notify ADVO in writing that it accepts ADVO's position and will correct the billing error with a credit on the next quarter's ARC/RRC invoice, unless the Parties mutually agree to an alternative invoice method for such correction. If ISSC determines that the disputed amount is due ISSC, in full or in part, it will notify ADVO in writing of the amount still due with appropriate documentation supporting its position. If the Parties still do not agree on the disputed amount, the matter will be addressed through the Dispute Resolution process as described in Section 16.2. Upon resolution: 1) if the disputed amount is due ISSC, ISSC will invoice ADVO for such amount on the next quarter's ARC/RRC invoice and ADVO will pay such amount in accordance with the payment terms defined in Section 7.4; or 2) if the disputed amount is not due ISSC, ISSC (once the dispute is resolved) will correct the billing error with a credit on the next quarter's ARC/RRC invoice, unless the Parties mutually agree to an alternative invoice method for such correction. Notwithstanding the foregoing, the maximum amount ADVO may withhold pursuant to this Section 7.5 shall not in the aggregate exceed one month's payment of the Annual Services Charge hereunder. ADVO shall pay disputed amounts above the foregoing threshold to ISSC under protest, without waiving any of ADVO's rights to recover such disputed amounts. b) In the event that ADVO, as the result of an audit or other examination of its records, has reasonable cause to believe a previously-paid amount was in error, ADVO may report the disputed amount to ISSC in writing with appropriate documentation demonstrating ADVO's position. 1) If ISSC agrees that the disputed amount was not due ISSC, it will notify ADVO in writing that it accepts ADVO's position and will reimburse ADVO for the disputed amount by issuing a credit for such amount on the next quarter's ARC/RRC invoice, unless the Parties mutually agree to an alternative invoice method for such correction. 2) If ISSC determines that any portion of the disputed amount was, in fact, due ISSC, it will notify ADVO in writing of its findings with reasons for such determination. If the Parties still do not agree on the disputed amount, the matter will be addressed through the Dispute Resolution process as described in Section 16.2. Upon resolution, if any portion of the disputed amount is due ADVO, ISSC will reimburse ADVO for such portion of the disputed amount by issuing a credit for such portion of the disputed amount on the next quarter's ARC/RRC invoice, unless the Parties mutually agree to an alternative invoice method for such correction. In the event such credits as described in this Section 7.5(b) are not issued to ADVO by ISSC in accordance with clause 7.5(b), a late fee equal to the lower of two percent of the amount of such payment per month or the maximum amount allowed by applicable law shall also be due to ADVO by ISSC. 7.6 Proration All periodic charges under this Agreement are to be computed on a basis of 12 equal months, and will be prorated on a per diem basis for any partial month, unless specifically stated otherwise in this Agreement. 7.7 Refundable Items If ISSC should receive during the Term any refund, credit or other rebate in respect of a License which is attributable to a period prior to the Maintenance Period Date specified on Schedule F, ISSC will promptly notify ADVO of such refund, credit or rebate and will promptly pay to ADVO the full amount of such refund, credit or rebate. If ADVO should receive during the Term any refund, credit or other rebate in respect of a License which is attributable to a period on or after the Maintenance Period Date specified on Schedule F, ADVO will promptly notify ISSC of such refund, credit or rebate and will promptly pay to ISSC the full amount of such refund, credit or rebate. 7.8 Other Credits Except as otherwise set forth in this Agreement, with respect to any amount to be paid or reimbursed to ADVO by ISSC pursuant to this Agreement, ISSC may, at its option, pay that amount to ADVO by giving ADVO a credit against the charges otherwise payable to ISSC hereunder at the time any such amount is due and payable to ADVO. 8.0 Intellectual Property Rights Pursuant to this Agreement, ISSC, its subcontractors and ADVO personnel may develop, create, modify or personalize (collectively, "Develop") certain computer programming code, including source and object code ("Code") and documentation to perform the Services. 8.1 Intellectual Property Definitions a) "Derivative Work" means a work based on one or more preexisting works, including, without limitation, a condensation, transformation, expansion or adaptation, which, if prepared without authorization of the owner of the copyright of such preexisting work, would constitute a copyright infringement. b) "Materials" means Type I, Type II, Type III, Type IV and Type V Materials collectively. c) "Type I Material" means Developed Code which constitutes a Derivative Work of software for which the copyright is owned by ADVO, and any related Type V Materials. d) "Type II Materials" means Developed Code funded by ADVO as an ADVO- owned deliverable (including if so funded through FTEs and FPs as described in Schedule J) and any related Type V Materials which are provided as a Service hereunder and which does not constitute a Derivative Work of any Software owned by IBM or its Affiliates or any third party. Type II Materials do not include Developed Code that is: 1) jointly funded by ISSC with ADVO; or 2) jointly funded by ADVO with any other customer of ISSC to the extent such funding relationship was agreed to by the Parties. The ownership of such jointly funded Materials and Code shall be determined by the Parties as a part of such agreement. e) "Type III Material" means any other Developed Code which does not constitute a Derivative Work of any software owned by ADVO, IBM or its Affiliates or any third party, and any related Type V Materials. f) "Type IV Material" means Code Developed under this Agreement which constitutes Derivative Works of software for which the copyright is owned by IBM, its Affiliates or subcontractors, and any related Type V Materials. g) "Type V Material" means literary works of authorship Developed under this Agreement, such as user manuals, charts, graphs and other written documentation and machine-readable text and files and excludes Code. 8.2 ISSC Developed Code With respect to any Materials whether Developed solely by ISSC or its subcontractors, or jointly by ADVO personnel and ISSC or its subcontractors, ownership will be as follows: a) Type I and II Materials shall be owned by ADVO, and ISSC shall have the following license rights: 1) an irrevocable, nonexclusive, worldwide, paid-up license to use, execute, reproduce, display, perform and distribute such Materials internally for the sole benefit of and exclusive use by ADVO during the Term; and 2) the right to sublicense third parties to do any of the foregoing. b) Type III and IV Materials shall be owned by ISSC, and ADVO shall have the following license rights: 1) an irrevocable, nonexclusive, worldwide, paid-up license to use, execute, reproduce, display, perform and distribute such Materials internally within ADVO and its Affiliates; and 2) the right to sublicense third parties to do any of the foregoing. 8.3 ADVO Developed Code With respect to any Materials whether or not Developed under this Agreement, which are or have been Developed solely by ADVO personnel or as Type I or Type II Materials, such Materials shall be owned by ADVO, and ISSC, at ADVO's sole option, shall have the following license rights: a) an irrevocable, nonexclusive, worldwide, paid-up license to use, execute, reproduce, display, perform and distribute such Materials for the purpose of performing the Services for the sole benefit of ADVO during the Term; and b) the right to sublicense third parties to do any of the foregoing. 8.4 General Rights a) At the expiration or earlier termination of this Agreement, so long as ADVO has not materially breached its obligations under this Agreement, ISSC will grant to ADVO the following license rights in the Materials owned by ISSC: 1) an irrevocable, nonexclusive, worldwide, paid-up license to use, execute, reproduce, display, perform, modify and distribute the Materials internally for the sole benefit of and exclusive use by ADVO and its Affiliates; and 2) the right to sublicense third parties to do any of the foregoing. b) Any ownership or license rights herein granted to either Party are limited by and subject to any patents and copyrights held by, and terms and conditions of any license agreements with, applicable third party software providers and unless otherwise agreed to by the Parties, the Parties shall make a diligent effort to assure that no such license agreements unduly restrict use of such Materials for the benefit of the other Party or unduly increase the other Party's cost. c) To the extent any of the Materials may not, by operation of law, be owned by the Party to which ownership has been granted (as described in this Section 8), each Party agrees to assign and hereby assigns, without further consideration, the ownership of all right, title and interest in all U.S. and foreign copyrights and mask work rights (if any) in such Materials to the other Party, and such assignee Party shall have the right to obtain and hold in its own name copyrights, registrations, renewals and all other rights relating or pertinent thereto. d) The Parties agree to reproduce copyright legends which appear on any portion of the Materials which may be owned by third parties. e) This Agreement shall not preclude ISSC from developing materials or providing services which are competitive to the Materials irrespective of their similarity to computer programming code, documentation or other materials or services which might be delivered pursuant to this Agreement, except to the extent any of same may infringe any of ADVO's patent rights or copyrights or disclose Confidential Information in violation of Section 9. For any Materials developed by ISSC personnel directly supporting ADVO during the Term, excepting ISSC Data Center operators, ISSC will use its reasonable good faith efforts to identify and provide information concerning such Materials to ADVO, and if ADVO notifies ISSC that such Materials contain or may contain information or materials or know-how unique to ADVO's type of business and/or proprietary to ADVO (but not in any instance network management or general data processing information or materials or know-how) (the "Sensitive Materials"), ADVO may request a review of such Materials to determine if they, in fact, contain such information or materials or know-how. If ADVO can reasonably make a showing that the Materials are Sensitive Materials, then ISSC shall limit its use of such Materials in the telecommunications and media industry to its own internal use; any other use of the Materials shall first be reviewed and approved by ADVO and such approval shall not be unreasonably withheld or delayed. Any disputes arising under this Section 8.4(e) shall be resolved in accordance with the dispute resolution provisions of Section 16.2. The employees of each Party during the Term may further develop their general knowledge, skills and experience. The subsequent use by such employees of such general knowledge, skills and expertise in the ordinary course of business does not constitute a breach of this Agreement provided it does not infringe any intellectual property rights of the disclosing Party (including any intellectual property rights granted hereunder). However, except for the licenses expressly granted under this Section 8, neither this Agreement nor any disclosure made hereunder grants any license to either Party under any patents or copyrights of the other Party. f) Each Party shall cooperate with the other Party, at such other Party's expense, in registering or renewing copyrights or patent rights for Materials of which the ownership by the other Party is identified in this Section 8. 9.0 Confidentiality/Data Security 9.1 Confidential Information ISSC and ADVO each acknowledge that the other possesses and will continue to possess information that has been created, discovered, developed by or provided to it by a third party and in which property rights have been assigned or otherwise conveyed to it, which information has commercial value in its business and is not in the public domain. Except as otherwise specifically provided by the Parties, "Confidential Information" shall mean: a) all information marked or otherwise identified as confidential (whether or not specifically enumerated in this Section 9), restricted, or proprietary by either Party; and b) ADVO's customer lists, customer information, account information, and information regarding business planning and operations of ADVO and ADVO's administrative, financial or marketing activities. 9.2 Obligations a) ISSC and ADVO will protect Confidential Information residing on the system in accordance with the responsibilities set forth in Schedule L. b) With respect to all other Confidential Information (e.g., hardcopy, E- Mail, fax) provided by one Party to the other, each will use the same care to prevent disclosing to third parties such Confidential Information of the other as it employs to avoid disclosure, publication or dissemination of its own information of a similar nature. c) Notwithstanding the foregoing, the Parties may disclose such information to subcontractors involved in providing Services under this Agreement, or to others with a reasonable need to know, where: 1) such disclosure is necessary to permit the subcontractor to perform its duties hereunder; 2) the disclosing Party assumes full responsibility for the acts or omissions of its subcontractor, no less than if the acts or omissions were those of the disclosing Party; and 3) pursuant to a mutually satisfactory confidentiality agreement. d) Without limiting the generality of the foregoing, neither Party will publicly disclose the terms of this Agreement, except to the extent permitted by Section 9.3 and Section 15, without the prior written consent of the other. Furthermore, neither ISSC nor ADVO will: 1) make any use of the Confidential Information of the other except as contemplated by this Agreement; 2) acquire any right in or assert any lien against the Confidential Information of the other; or 3) refuse to promptly return, provide a copy of or destroy such Confidential Information upon the request of the other Party; provided, however, that the employees of each Party during the Term may further develop their general knowledge, skills and experience. The subsequent use by such employees of such general knowledge, skills and expertise in the ordinary course of business does not constitute a breach of this Agreement provided it does not infringe any intellectual property rights of the disclosing party. e) These obligations shall apply during the Term and for a period of five years thereafter. 9.3 Exclusions Notwithstanding the foregoing, this Section will not apply to any information which ISSC or ADVO can demonstrate was: a) at the time of disclosure to it, in the public domain (provided however that any compilation of information in the public domain shall not itself per se be considered to be in the public domain); b) after disclosure to it, published or otherwise becomes part of the public domain through no fault of the receiving Party; c) in the possession of the receiving Party at the time of disclosure to it; d) received after disclosure to it from a third party who had a lawful right to disclose such information to it; or e) independently developed by the receiving Party without reference to Confidential Information of the furnishing Party. Further, either Party may disclose Confidential Information of the other to the extent required by law or order of a court or governmental agency; provided, however, that the recipient of such Confidential Information must give the discloser prompt notice and make a reasonable effort to obtain a protective order or otherwise protect the confidentiality of such information, all at the discloser's cost and expense. It is understood that the receipt of Confidential Information under this Agreement will not limit or restrict assignment or reassignment of employees of ISSC and ADVO within or between the respective Parties and their Affiliates. 9.4 Loss of Confidential Information In the event of any disclosure or loss of Confidential Information, the receiving Party will notify the furnishing Party immediately. 9.5 Limitation ISSC will not be responsible for corruption, loss or mistransmission of data or for the security of data during transmission via public telecommunications facilities, provided ISSC has performed its obligations under this Agreement with respect to such data. 10.0 Termination 10.1 Termination for Convenience Subject to the other provisions of this Agreement, ADVO may terminate this Agreement beginning three years after the Commencement Date upon at least 180 days prior written notice to ISSC. If ADVO terminates this Agreement prior to the expiration of the Term, other than as specified in Section 10.2, ADVO agrees to pay ISSC on the effective date of the termination, the Termination Charge, as specified in the Supplement, which the Parties agree is ADVO's sole and exclusive liability for such termination. Any termination charge will be prorated according to the following formula: [{(A-B) / 12 months} x C] + B = Prorated Termination Charge. where: A = the Termination Charge specified in the Supplement for the year in which termination is effective; B = the Termination Charge specified in the Supplement for the year after the year in which termination is effective; and C = the number of months remaining during the year in which termination is effective. 10.2 Termination for Cause Upon written notice, either Party may terminate this Agreement, or to the extent reasonably practicable a portion thereof, without charge to the terminating Party, in the event of a material breach by the other. However, the Party seeking termination will provide the other Party with sufficient, reasonable written prior notice of such material breach and the opportunity to cure same, as follows: a) in the event of a failure to pay any amount due and payable under this Agreement when due, at least thirty (30) days in the first instance of such failure and ten (10) days in any subsequent instance of such failure within any 12 month period; and b) in the event of any other material breach, at least 45 days in the first instance of such failure and thirty (30) days in any subsequent instance of such failure within any twelve month period. If the nature of any first occurrence in any twelve month period of any nonmonetary breach is such that it would be unreasonable to expect a cure within a 45 day period, the breaching Party shall be given an additional 15 days to cure such breach. In the event the material breach is not cured within the periods specified above after delivery of the notice, the nonbreaching Party may terminate this Agreement, which termination shall be in writing, as of a date specified in such notice of termination. The terminating Party shall have all rights and remedies generally afforded by law or equity, subject to the limitations expressed in this Agreement. 10.3 Extension of Services Except in the case of a termination of this Agreement due to a material breach by ADVO, ADVO may once request and ISSC will extend the provision of Services for a period not to exceed 180 days beyond the effective date of termination or expiration. Such request must be in the form of a written notice received by ISSC not less than 60 days prior to the effective date of termination or expiration of the Agreement. ADVO will reimburse ISSC for all additional expenses, if any, incurred by ISSC as a result of ISSC's provision of such extended Services from the effective date of Termination which are not otherwise covered by the Annual Services Charge, ARCs or other charging methodology described herein. 10.4 Other Rights Upon Termination Provided ADVO has not materially breached its obligations under this Agreement: a) ADVO may request to purchase and ISSC may consider to sell, at its reasonable discretion, the ISSC-owned machines then currently being used by ISSC on a dedicated basis to perform the Services at fair market value, as determined by a mutually agreed upon appraisal. ADVO shall be responsible for any taxes associated with the purchase of, as well as the costs for any appraisals of, such equipment. b) For Software proprietary to ISSC or its Affiliates (if necessary to be used to provide the Services) and not otherwise owned by or licensed to ADVO in accordance with Section 8 and not generally commercially available: 1) ISSC will provide a license to ADVO, for its internal use only, upon terms and prices to be mutually agreed upon by the Parties that are comparable to, and in the case of prices, that do not exceed, the prices and terms for similar commercial software. If such similar commercial software does not exist, such license will be provided at a price intended to generally compensate ISSC for its investment in such software as such compensation would be implemented in its commercial products; or 2) at ADVO's option, ISSC will recommend a mutually agreeable commercially available substitute to perform the same function. c) ISSC will use reasonable efforts to obtain the right to transfer all Software licenses used in support of ADVO to ADVO at the termination or expiration of the Term without charge. If this is not possible, ISSC will notify ADVO prior to obtaining such Software and subject to ADVO's acceptance of any applicable vendor terms and conditions and payment by ADVO of any transfer fee, license fee or other charges imposed by such vendor: 1) with respect to generally commercially available Software, if ISSC has licensed or purchased and is using any such Software solely for providing the Services to ADVO at the date of expiration or termination, ISSC will transfer the requested Software to ADVO and ADVO will reimburse ISSC for initial license or purchase charges for such Software in an amount equal to the remaining unamortized cost of such Software, if any, depreciated over a five year life; 2) with respect to generally commercially available Software, if ISSC has licensed or purchased and is using any such Software for providing the Services to ADVO and other ISSC customers in a shared environment at the date of expiration or termination, ISSC will assist ADVO in obtaining licenses for such Software; and 3) ISSC will transfer or assign to ADVO or its designee, upon ADVO's request, on mutually acceptable terms and conditions, any contracts applicable solely to the Services being provided to ADVO (i.e., maintenance, disaster recovery services and other necessary third party services with the exception of subcontractor services) then being used by ISSC to perform the Services. d) ISSC will further use its reasonable efforts, where necessary or appropriate, to obtain new Software licenses in ADVO's name and through the Change Management Procedures, during the Term. e) ISSC will provide Services Transfer Assistance pursuant to Section 6.8. 11.0 Liability 11.1 General Intent Each Party's and each of its subcontractor's entire liability to the other Party and their exclusive remedies are set forth in this Section and Section 13. Subject to the specific provisions of this Section, it is the intent of the Parties that each Party will be liable to the other Party for any damages incurred by the nonbreaching Party as a result of the breaching Party's failure to perform its obligations in the manner required by this Agreement. 11.2 Damages a) Each Party's and each of its subcontractor's entire liability for actual, direct damages resulting from such party's performance or nonperformance under this Agreement, regardless of the form of action, and whether in contract, tort (including, without limitation, negligence), warranty or other legal or equitable grounds, will be limited in the aggregate for all claims to an amount equal to: 1) the amount actually paid by ADVO to ISSC for the Services during the six months prior to the occurrence of the first event which is the subject of the first claim; or 2) in the case where less than six months of the Term have elapsed at the time of an event which is the subject of a claim, the actual charges during the first six months of the Term. b) This limitation will not apply to: 1) any obligation or failure by ADVO to pay any amounts due or past due and owing to ISSC pursuant to the terms of this Agreement; 2) Losses by either Party for bodily injury or damage to real property or tangible personal property, as described in Section 13.3; 3) Losses incurred by a Party caused by or arising out of the inaccuracy or untruthfulness of the representations and warranties of the other Party contained in this Agreement; 4) either Party's obligation to indemnify the other for patent and copyright infringement Losses and Losses relating to tax liabilities, as provided in Sections 13.1(a) and (f) and 13.2(a) and (c), respectively; and 5) Losses incurred by either Party arising under the indemnity by the other Party under Section 13.1(d) and (e) and 13.2(d). c) In no event will either Party have any liability whether based on contract, tort (including, without limitation, negligence), warranty or any other legal or equitable grounds, for any loss of interest, profit or revenue by the other Party or for any consequential, indirect, incidental, special, punitive or exemplary damages suffered by the other Party, arising from or related to this Agreement, even if such Party has been advised of the possibility of such losses or damages; provided, however, that this clause will not prevent either Party from recovering amounts owed under this Agreement. d) In no event will ISSC or its subcontractors be liable for any damages if and to the extent caused by ADVO's failure to perform its responsibilities, nor shall ADVO be liable for any damages if and to the extent caused by any failure to perform by ISSC or its subcontractors. 12.0 Warranty 12.1 Claims ADVO warrants it has no knowledge or notice of any actual or threatened claim or action by, on behalf of or related to, any of the Affected Associates, including, but not limited to, claims arising under the Occupational Safety and Health Administration, Equal Employment Opportunity Commission, National Labor Relations Board or Fair Labor Standards Act, or other applicable federal, state or local laws or regulations, except as such claims or actions are identified in Schedule P. 12.2 Ownership of ADVO Machines ADVO represents that ADVO is either the owner of each ADVO Machine or is authorized by its owner to include it under this Agreement. 12.3 Environmental a) ADVO represents that: 1) ADVO is authorized to permit ISSC access to and use of the ADVO Network and other ADVO facilities used in connection with performing the Services, (the "Facilities"), and ISSC is performing the Services for ADVO at the Facilities at ADVO's request; and 2) the Facilities are in compliance with all material applicable federal, state and local laws governing the storage, existence, discharge and handling of Hazardous Materials. ADVO is responsible for any waste generated at its Facilities and, if applicable, the proper manifest of any hazardous waste to appropriate disposal sites under ADVO's name and identification number. b) "Hazardous Materials" means: 1) any "hazardous substance" as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time (42 U.S.C. 9601 et seq.) and the regulations promulgated thereunder; 2) any asbestos or asbestos-containing materials; 3) petroleum, crude oil or any fraction thereof, natural gas or synthetic gas used for fuel; and 4) any additional substances or materials which at such time are classified or considered to be hazardous or toxic under the laws of the state wherein the Facilities are located. c) In the event that Hazardous Materials are present at the Facilities during the Term of this Agreement, ISSC may cease the performance of that portion of the Services affected by their presence if, in the reasonable judgment of ISSC, ISSC's ability to perform such portion of the Services safely and properly is adversely impacted by the presence of such Hazardous Materials. ADVO shall be responsible for causing any violation of federal, state or local law with respect to the presence of such Hazardous Materials to be remedied, it being understood that matters relating to the investigation, detection, abatement and remediation of any Hazardous Materials present at the Facilities are not within the scope of this Agreement and that ISSC shall not be liable or responsible for any expense incurred by ADVO in this connection, unless ADVO's investigation reveals that the presence of the Hazardous Materials was caused by the conduct of an ISSC employee, invitee, or subcontractor. In such event, the limitations of this paragraph will not apply. 12.4 Noninfringement The Parties represent and warrant that they will perform their responsibilities under this Agreement in a manner that does not infringe, or constitute an infringement or misappropriation of, any patent, trade secret, copyright or other proprietary right of any third party. 12.5 Compliance with Obligations Each Party represents and warrants that its entry into this Agreement does not violate or constitute a breach of any of its contractual obligations with third parties. 12.6 Disclaimer a) ISSC does not warrant the accuracy of any advice, report, data or other product delivered to ADVO which is produced with or from data and/or Software provided by ADVO. Such products are delivered AS IS, and ISSC shall not be liable for any inaccuracy thereof. b) Subject to the obligations of ISSC contained in this Agreement, ISSC does not assure uninterrupted or error-free operation of the Machines. c) EXCEPT AS PROVIDED IN THIS AGREEMENT, THERE ARE NO OTHER EXPRESS WARRANTIES AND THERE ARE NO IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 12.7 Authorization and Enforceability Each Party hereby represents that: a) it has all requisite corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby; b) the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of each Party; and c) this Agreement has been duly executed and delivered by such Party and (assuming the due authorization, execution and delivery hereof by the other Party) is a valid and binding obligation of such Party, enforceable against it in accordance with its terms. 12.8 Regulatory and Corporate Proceedings Each Party agrees to obtain all necessary regulatory approvals applicable to its business, obtain any necessary permits, and comply with any regulatory requirement applicable to the performance of the Services. 13.0 Indemnities 13.1 Indemnity by ISSC ISSC, for itself and on behalf of its subcontractors, where applicable, agrees to indemnify, defend and hold ADVO, its Affiliates and their respective officers, directors, employees, agents, successors and assigns harmless, in accordance with the procedures described in Section 13.6 from and against any and all Losses incurred by ADVO arising from or in connection with: a) any claims of infringement made against ADVO of any United States letters patent, or any copyright, trademark, service mark, trade name or similar proprietary rights conferred by contract or by common law or by any law of the United States or any state, alleged to have occurred because of equipment, systems, products or other resources or items provided to ADVO by ISSC; provided, however, that ISSC will have no obligation with respect to any Losses to the extent the same arise out of or in connection with ADVO's modification of a program or a machine or ADVO's combination, operation or use with devices, data or programs not furnished by ISSC or its subcontractors; b) any duties or obligations accruing on or after the Commencement Date arising out of or in connection with any Licenses, subject to Sections 3.3 and 3.4; c) any claims by ADVO Affiliates against ISSC related to the Services; d) any claim or action by, on behalf of, or related to, an Affected Associate (except as set forth in Section 4.1(c)), including claims arising under applicable federal, state or local laws or regulations, including without limitation workers' compensation laws, relating to ISSC's employment, offer of employment, or other ISSC obligations in Section 3.2 hereof, of the Affected Associates on or after the Commencement Date; e) any claim or action by, on behalf of, or related to, any Affected Associate not hired by ISSC arising directly out of the fact that such Affected Associate was not hired by ISSC, including claims arising under applicable federal, state or local laws or regulations; and f) any amounts, such as taxes, interest and penalties, assessed against ADVO which are obligations of ISSC pursuant to Section 6.6. 13.2 Indemnity by ADVO ADVO agrees to indemnify, defend and hold ISSC, its Affiliates and their respective officers, directors, employees, agents, successors and assigns harmless, in accordance with the procedures described in Section 13.6, from and against any and all Losses, arising from or in connection with: a) any claims of infringement made against ISSC of any United States letters patent, or any copyright, trademark, service mark, trade name or similar proprietary rights conferred by contract or by common law or by any law of the United States or any state, alleged to have occurred because of equipment, systems, products or other resources or items provided to ISSC by ADVO hereunder, provided, however that ADVO will have no obligation with respect to any Losses to the extent that, unless required by ADVO hereunder, the same arise out of or in connection with ISSC's modification of a program or a machine or ISSC's combination, operation or use with devices, data or programs not furnished by ADVO; b) any duties or obligations accruing prior to the Maintenance Period Date specified on Schedule F by ADVO arising out of or in connection with any Licenses; c) any amounts, including but not limited to taxes, interest and penalties, assessed against ISSC which are obligations of ADVO pursuant to Section 6.6; d) any claim or action by, on behalf of, or related to, the Affected Associate, including but not limited to claims arising under applicable federal, state or local laws or regulations, including without limitation workers' compensation laws, relating to ADVO's employment of the Affected Associates prior to their employment by ISSC; and e) any environmental claim arising out of this Agreement or as a result of the Services performed at ADVO's Facilities unless ISSC has caused the environmental damage by actions unrelated to and unauthorized by this Agreement. 13.3 Cross Indemnity and Contribution Each Party agrees to contribute to the amount paid or payable by the other Party for any and all Losses for which such Party is legally liable and in proportion to such Party's comparative fault in causing such Losses, arising in favor of any person, corporation or other entity, including the Parties hereto and their employees, contractors and agents, on account of personal injuries, death or damage to tangible personal or real property in any way incident to, or in connection with or arising out of: a) this Agreement; b) the Services provided by ISSC hereunder; c) the presence of such Party, its employees, contractors or agents on the premises of the other Party; or d) the act or omission of such Party, its employees, contractors or agents. 13.4 Subrogation In the event that an Indemnifying Party shall be obligated to indemnify an Indemnified Party pursuant to Sections 13.1, 13.2 or 13.3, the Indemnifying Party shall, upon payment of such indemnity in full, be subrogated to all rights of the Indemnified Party with respect to the claims and defenses to which such indemnification relates. 13.5 Exclusive Remedy The indemnification rights of each Indemnified Party pursuant to Sections 13.1, 13.2 or 13.3, together with any equitable remedies, shall be the exclusive remedies of such Indemnified Party with respect to the claims to which such indemnification directly relates. 13.6 Indemnification Procedures a) If any civil, criminal, administrative or investigative action or proceeding (any of the above being a "Claim") is commenced against any Party entitled to indemnification under Sections 13.1, 13.2 or 13.3 (an "Indemnified Party") written notice thereof shall be given to the Party that is obligated to provide indemnification under such Sections (the "Indemnifying Party") as promptly as practicable. After such notice, if the Indemnifying Party shall acknowledge in writing to such Indemnified Party that this Agreement applies with respect to such Claim, then the Indemnifying Party shall be entitled, if it so elects, in a written notice delivered to the Indemnified Party not fewer than 10 days prior to the date on which a response to such Claim is due, to take control of the defense and investigation of such Claim and to employ and engage attorneys to handle and defend the same, at the Indemnifying Party's sole cost and expense after providing the Indemnified Party advance written notice of the counsel to be retained and allowing for reasonable comment. The Indemnified Party shall cooperate in all reasonable respects with the Indemnifying Party and its attorneys in the investigation, trial and defense of such Claim and any appeal arising therefrom; provided, however, that the Indemnified Party may, at its own cost and expense, participate, through its attorneys or otherwise, in such investigation, trial and defense of such Claim and any appeal arising therefrom. No settlement of a Claim that involves a remedy other than the payment of money by the Indemnifying Party without contribution by the Indemnified Party shall be entered into without the consent of the Indemnified Party, which consent will not be unreasonably withheld. b) After notice by the Indemnifying Party to the Indemnified Party of its election to assume full control of the defense of any such Claim, the Indemnifying Party shall not be liable to the Indemnified Party for any legal expenses incurred thereafter by such Indemnified Party in connection with the defense of that Claim. If the Indemnifying Party does not assume full control over the defense of a Claim subject to such defense as provided in this Section 13.6, the Indemnifying Party may participate in such defense, at its sole cost and expense, and the Indemnified Party shall have the right to defend the Claim in such manner as it may deem appropriate, at the cost and expense of the Indemnifying Party. 14.0 Insurance and Risk of Loss 14.1 Insurance When this Agreement requires performance by ISSC's or ADVO's employees or subcontractors on the other Party's premises, the performing Party shall carry and maintain Worker's Compensation Insurance, including Employers Liability Insurance, covering its employees and subcontractors engaged in such performance in amounts no less than required by law in the applicable location. 14.2 Risk of Loss ADVO is responsible for risk of loss of, or damage to, Machines located on ADVO's premises and any loss of or damage to Software in ADVO's possession at the time of such loss or damage. ISSC is responsible for risk of loss of, or damage to, Machines located on ISSC's premises and any loss of or damage to Software in ISSC's possession at the time of such loss or damage. The foregoing shall not be interpreted to relieve ISSC of any of its express obligations otherwise set forth in this Agreement. 15.0 Publicity Each Party will submit to the other all advertising, written sales promotion, press releases and other publicity matters relating to this Agreement in which the other Party's name or mark is mentioned or language from which the connection of said name or mark may be inferred or implied, and will not publish or use such advertising, sales promotion, press releases, or publicity matters without prior written approval of the other Party. However, either Party may include the other Party's name and a factual description of the work performed under this Agreement on employee bulletin boards, in its list of references and in the experience section of proposals to third parties, in internal business planning documents and in its annual report to stockholders, and whenever required by reason of legal, accounting or regulatory requirements. 16.0 Review Committee and Dispute Resolution 16.1 Joint Advisory Committee ISSC and ADVO agree to create a Joint Advisory Committee consisting of four people of the following titles from each Party: ISSC 1) Director, ISSC Media Industry 2) Project Delivery Executive, ISSC Media Industry 3) ISSC Project Executive ADVO 1) Vice President and Chief Information Officer 2) ADVO Finance Director 3) ADVO Project Executive The Joint Advisory Committee will: a) conduct quarterly reviews of the progress on projects; b) annually review the operating and strategic plans prepared by the Project Executives; c) review, on an annual basis, performance objectives and measurements; d) provide advice and direction on technology changes; and e) resolve disputes between the Parties. 16.2 Dispute Resolution a) Any dispute between the Parties either with respect to the interpretation of any provision of this Agreement or with respect to the performance by ISSC or by ADVO hereunder shall be resolved as specified in this Section 16.2. 1) Upon the written request of either Party, each of the Parties will appoint a designated representative who does not devote substantially all of his or her time to performance under this Agreement, whose task it will be to meet for the purpose of endeavoring to resolve such dispute. 2) The designated representatives shall meet as often as necessary to gather and furnish to the other all information with respect to the matter in issue which is appropriate and germane in connection with its resolution. 3) Such representatives shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding relating thereto. 4) During the course of such negotiation, all reasonable requests made by one Party to the other for nonprivileged information reasonably related to this Agreement, will be honored in order that each of the Parties may be fully advised of the other's position. 5) The specific format for such discussions will be left to the discretion of the designated representatives but may include the preparation of agreed upon statements of fact or written statements of position furnished to the other Party. b) If the designated representatives cannot resolve the dispute, then the dispute shall be escalated to the President of ADVO and the President of ISSC, for their review and resolution. If the dispute cannot be resolved by such officers, then the Parties may initiate formal proceedings; however, formal proceedings for the judicial resolution of any such dispute may not be commenced until the earlier of: 1) the designated representatives concluding in good faith that amicable resolution through continued negotiation of the matter in issue does not appear likely; or 2) 30 days after the initial request to negotiate such dispute; or 3) 30 days before the statute of limitations governing any cause of action relating to such dispute would expire. 16.3 Continued Performance Except where clearly prevented by the area in dispute, both Parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved unless and until such obligations are terminated or expire in accordance with the provisions hereof. 17.0 General 17.1 Control of Services a) This Agreement shall not be construed as constituting either Party as partner of the other or to create any other form of legal association that would impose liability upon one Party for the act or failure to act of the other or as providing either Party with the right, power or authority (express or implied) to create any duty or obligation of the other Party. b) Each Party shall be responsible for the management, direction and control of its employees and such employees shall not be employees of the other Party. c) Except where this Agreement expressly provides that ISSC will perform certain identified Services as agent for ADVO, the Services will be under the control, management and supervision of ISSC. 17.2 Right to Perform Services for Others Each Party recognizes that ISSC personnel providing Services to ADVO under this Agreement may perform similar services for others and this Agreement shall not prevent ISSC from using the personnel and equipment provided to ADVO under this Agreement for such purposes. ISSC may perform its obligations through its subsidiaries, Affiliates or through the use of ISSC-selected independent contractors; provided, however, that: a) ISSC will obtain the advance approval of ADVO (which approval shall not be unreasonably withheld or delayed) prior to bringing any subcontractor on ADVO premises; b) ISSC will obtain the advance approval of ADVO (which approval shall not be unreasonably withheld or delayed) prior to subcontracting any Services requiring a direct interface between the subcontractor and ADVO; and c) ISSC will not be relieved of any of its obligations under this Agreement by use of any such subsidiaries, Affiliates or subcontractors. For the purposes of this Section, any subcontractors listed on Schedule K shall be considered to have been approved by ADVO. 17.3 Scope of Services The Services provided under this Agreement are for Machines and facilities located within the United States, Puerto Rico or Guam. 17.4 Amendments and Revisions No changes or modifications to this Agreement, its Supplement and Schedules may be made orally, but only by a written amendment or revision signed by both Parties. Any terms and conditions varying from this Agreement, its Supplement and Schedules on any order or written notification from either Party are void. 17.5 Force Majeure a) Neither Party shall be liable for any default or delay in the performance of its obligations hereunder: 1) if and to the extent such default or delay is caused, directly or indirectly, by fire, flood, earthquake, elements of nature or acts of God, acts of war, terrorism, riots, civil disorders, rebellions or revolutions in the United States, strikes, lockouts, or labor difficulties, or any other similar cause beyond the reasonable control of such Party; or 2) provided such default or delay could not have been prevented by reasonable precautions and cannot reasonably be circumvented by the nonperforming Party through the use of alternate sources, work-around plans or other means, (individually, each being a "Force Majeure Event"). b) In such event, the nonperforming Party will be excused from any further performance or observance of the obligation(s) so affected for as long as such circumstances prevail and such Party continues to use commercially reasonable efforts to recommence performance or observance whenever and to whatever extent possible without delay. Any Party so delayed in its performance will immediately notify the other by telephone (to be confirmed in writing within five days of the inception of such delay) and describe at a reasonable level of detail the circumstances causing such delay. c) If any Force Majeure Event substantially prevents, hinders, or delays perfor-mance of the Services necessary for the performance of ADVO's critical functions for more than 30 consecutive days, then at ADVO's option: 1) ADVO may procure such Services from an alternate source and ISSC will be liable for payment for such Services in excess of ISSC's charges under this Agreement for up to 180 days; or 2) this Agreement will terminate as of a date specified by ADVO in a written notice of termination to ISSC and ADVO will pay ISSC any unrecovered start-up costs, anticipated profit prorated to the date of termination, and any reasonable out-of-pocket expenses associated with ramp down transition costs, all subject to independent audit. d) This Section 17.5 does not limit or otherwise affect ISSC's obligation to provide disaster recovery services in accordance with Schedule G; provided, however, that such Force Majeure Event does not also prevent ISSC's provision of the Services from the recovery center(s). e) With the exception of charges for the directly affected portion of Services, this Section 17.5 does not limit or otherwise relieve ADVO's obligation to pay any monies due ISSC under the terms of this Agreement. 17.6 Nonperformance To the extent any Party is not able to perform its nonmonetary obligations under this Agreement as a result of the other Party's failure to perform its obligations under this Agreement, such nonperformance shall be excused. 17.7 Remarketing ADVO may not remarket all or any portion of the Services provided under this Agreement, or make all or any portion of the Services available to any party other than ADVO or its Affiliates, without the prior written consent of ISSC. 17.8 Waiver No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof. 17.9 Severability If any provision of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and such provision shall be deemed to be restated to reflect the original intentions of the Parties as nearly as possible in accordance with applicable law(s). 17.10 Limitations Period upon Termination Neither Party may bring an action, regardless of form, arising out of this Agreement more than two years after the cause of action was discovered or four years from the date the cause of action reasonably should have been discovered. 17.11 Counterparts This Agreement shall be executed in duplicate counterparts. Each such counterpart shall be an original and both together shall constitute but one and the same document. 17.12 Governing Law This Agreement shall be governed by the laws of the State of New York as such laws are applied to contracts which are entered into and performed entirely within the State of New York. The Parties agree that the exclusive jurisdiction for any dispute arising hereunder shall be in the federal district court with appropriate jurisdiction in the State of Connecticut, or if there is no jurisdiction in federal district court, then in the state court in Connecticut with appropriate jurisdiction. 17.13 Survival, Binding Nature and Assignment Any terms of this Agreement which by their nature extend beyond its expiration or termination remain in effect until fulfilled. This Agreement will be binding on the Parties and their respective successors and permitted assigns. For purposes of this Agreement, a change in Control of a Party or a sale of all or substantially all of the assets of a Party shall be deemed an assignment of this Agreement. Neither Party may, or will have the power to, assign this Agreement without the prior written consent of the other, except that either Party may assign its rights and obligations under this Agreement, without the approval of the other, to an Affiliate or to any party acquiring all or substantially all of ADVO's assets which expressly assumes such Party's obligations and responsibilities hereunder, provided that the assigning Party remains fully liable for and shall not be relieved from the full performance of all obligations under this Agreement. Any attempted assignment that does not comply with the terms of this Section shall be null and void. Any Party assigning its rights or obligations to an Affiliate in accordance with this Agreement shall, within three business days of such assignment, provide written notice thereof to the other Party together with a copy of the assignment document. 17.14 Notices Under this Agreement whenever one Party is required or permitted to give notice to the other, such notice will be deemed given when delivered in hand, one day after being given to an express courier with a reliable system for tracking delivery, or three days after the day of mailing, when mailed by United States mail, registered or certified mail, return receipt requested, postage prepaid, or when sent by facsimile and thereafter delivered by one of the foregoing methods of delivery. Notifications will be addressed as follows: 1) For termination, breach or default, notify: In the case of ISSC: ISSC Project Executive c/o ADVO One Univac Lane Windsor, CT 06095 Facsimile: 860-285-6411 with a copy to: ISSC General Counsel Route 100 Somers, NY 10589 Facsimile: 914-766-8444 In the case of ADVO: Vice President and CIO One Univac Lane Windsor, CT 06095 Facsimile: 860-285-6411 with a copy to: ADVO General Counsel One Univac Lane Windsor, CT 06095 Facsimile: 860-285-6230 2) For all other notices: In the case of ISSC: ISSC Project Executive c/o ADVO One Univac Lane Windsor, CT 06095 Facsimile: 860-285-6411 In the case of ADVO: Vice President and CIO One Univac Lane Windsor, CT 06095 Facsimile: 860-285-6411 Either Party hereto may from time to time change its address for notification purposes by giving the other prior written notice of the new address and the date upon which it will become effective. 17.15 No Third Party Beneficiaries Except as specified in Section 11 with respect to either Party's contractors or subcontractors, the Parties do not intend, nor will any clause be interpreted, to create for any third party any obligations to or benefit from either ISSC or ADVO. 17.16 Other Documents On or after the Commencement Date and the date(s) of any amendments or revisions hereto and at the request of the other Party, each Party shall furnish to the other such certificate of its Secretary, certified copy of resolutions of its Board of Directors, or opinion of its counsel as shall evidence that this Agreement or any amendment or revision hereto has been duly executed and delivered on behalf of such Party. During the Term and at the reasonable request of the other Party, each Party shall furnish to the other a certificate stating that: 1) this Agreement is in full force and effect; and 2) the other Party is not materially in breach hereof at such time. The Parties will execute and deliver or cause to be delivered such further documents and other reasonable supporting documentation as is necessary to make a showing, to the reasonable satisfaction of the other Party, that a Party is able to meet its obligations hereunder, as may reasonably be required for the purposes of assuring and confirming the rights hereby created, on a current and prospective basis, or for facilitating the performance of the terms of the Agreement. 17.17 Headings All headings herein and the table of contents are not to be considered in the construction or interpretation of any provision of this Agreement. This Agreement was drafted with the joint participation of both Parties and shall be construed neither against nor in favor of either, but rather in accordance with the fair meaning thereof. In the event of any apparent conflicts or inconsistencies between this Agreement or any Supplements, Schedules, Exhibits or other Attachments to this Agreement, to the extent possible such provisions shall be interpreted so as to make them consistent, and if such is not possible, the provisions of this Agreement shall prevail. THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES RELATING TO THIS SUBJECT SHALL CONSIST OF 1) THIS AGREEMENT, 2) THE SUPPLEMENT AND 3) THE SCHEDULES, INCLUDING THOSE MADE EFFECTIVE BY THE PARTIES IN THE FUTURE. THIS STATEMENT OF THE AGREEMENT SUPERSEDES ALL PROPOSALS OR OTHER PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AGREEMENT.
Accepted by: Accepted by: Integrated Systems Solutions Corporation ADVO, Inc. By /s/ Randy M. Favero July 16, 1996 By /s/ Lowell W. Robinson July 16, 1996 ----------------------------------------- -------------------------------------------
EX-11 6 EXHIBIT 11 - COMPUTATION OF PRIMARY PER SHARE EARNINGS 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 28, SEPTEMBER 30, SEPTEMBER 24, 1996 1995 1994 ------------- ------------- ------------- EARNINGS APPLICABLE TO COMMON STOCK.. $3,108 $24,951 $25,171 ====== ======= ======= AVERAGE COMMON AND COMMON EQUIVALENT SHARES Average common shares outstanding.... 22,803 20,663 21,104 Assumed conversion or exercise of: Warrants........................... 844 2,272 2,236 Stock options...................... 462 310 496 Restricted stock................... 17 41 50 ------ ------- ------- Weighted average common and common equivalent shares................... 24,126 23,286 23,886 ====== ======= ======= EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES................... $ .13 $ 1.07 $ 1.05 ====== ======= =======
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 28, SEPTEMBER 30, SEPTEMBER 24, 1996 1995 1994 ------------- ------------- ------------- EARNINGS APPLICABLE TO FULLY DILUTED SHARES.............................. $3,108 $24,951 $25,171 ====== ======= ======= FULLY DILUTED SHARES Average common shares outstanding.... 22,803 20,663 21,104 Assumed conversion or exercise of: Warrants........................... 844 2,354 2,242 Stock options...................... 462 606 512 Restricted stock................... 38 74 66 ------ ------- ------- Fully diluted shares................. 24,147 23,697 23,924 ====== ======= ======= EARNINGS PER SHARE ASSUMING FULL DILUTION............................ $ .13 $ 1.05 $ 1.05 ====== ======= =======
EX-13 7 EXHIBIT 13 - FINANCIAL STATEMENTS FINANCIAL CONTENTS Selected Financial Data 20 Financial Report 21 Consolidated Statements of Operations 25 Consolidated Balance Sheets 26 Consolidated Statements of Cash Flows 27 Consolidated Statements of Changes in Stockholders' Equity/(Deficiency) 28 Notes to Consolidated Financial Statements 30 Report of Independent Auditors 38 Financial Responsibility 38 Corporate Information 39 NINETEEN [LOGO OF ADVO, INC. APPEARS HERE] Selected Financial Data
Year ended Year ended Year ended Year ended Year ended September 28, September 30, September 24, September 25, September 26, (In millions, except per share data) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Summary of Operations Revenues $986.2 $1,011.9 $920.3 $856.6 $787.6 Operating income 27.5(1) 48.5 39.7 2.3(2) 28.6 Income from continuing operations 11.3 30.9 24.6 2.8 20.5 Net income 3.1 25.0 25.2 5.4 22.5 Earnings per share from continuing operations .47 1.33 1.03 .11 .81 Net earnings per share .13 1.07(3) 1.05 .21 .89 Cash dividends declared per share 10.025(4) .10 .095 .06 -- Weighted average common and common equivalent shares 24.1 23.3 23.9 25.4 25.3
September 28, September 30, September 24, September 25, September 26, (In millions, except per share data) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data Cash, cash equivalents and marketable securities $ 13.3 $ 54.5 $ 71.1 $ 71.4 $ 65.7 Total assets 185.1 234.2 225.7 226.5 201.1 Long-term debt 161.1 -- -- -- .2 Preferred stock (5) -- -- -- -- 13.1 Stockholders' equity/(deficiency) (85.2) 130.4 108.0 118.3 112.7 Book value per share (3.54) 6.26 5.17 5.32 5.08
(1) Reflects nonrecurring charges of $12.1 million in fiscal 1996. (See Note 12 to the consolidated financial statements). (2) Reflects a one-time restructuring charge to operations of $25.8 million in fiscal 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 10 to the consolidated financial statements). (4) Reflects a special $10 per share dividend declared in January of 1996. (See Note 8 to the consolidated financial statements). (5) All outstanding preferred shares were converted to ADVO Common Stock in February 1993. T W E N T Y [LOGO OF ADVO, INC. APPEARS HERE] Financial Report This section should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto. Except for the historical information stated herein, the matters discussed in this Financial Report contain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward looking statements are accompanied by cautionary factors which would cause the Company's actual results to differ materially from those in the forward looking statements. The cautionary factors presented should not be construed as exhaustive. Basis of Presentation In fiscal year 1995 the Company announced its plan to sell Marketing Force, its in-store marketing segment. The sale of substantially all of the net assets of this segment was completed on March 1, 1996. (See Note 3 to the consolidated financial statements.) The Company's results of operations have been presented for the periods ended September 28, 1996, September 30, 1995 and September 24, 1994 to separately reflect continuing and discontinued operations in the consolidated statements of operations and cash flows. The consolidated balance sheet as of September 30, 1995 reflects the assets and liabilities of the discontinued operation under separate captions. In addition, the results of operations discussed in this Financial Report exclude the revenues, cost of sales, selling, and general and administrative costs of the discontinued segment. Financial Overview In fiscal 1996, the Company experienced a confluence of external and internal events that impacted its performance. Externally, the postal rate increase on January 1, 1995 combined with an increase in paper costs continued to cause significant cost/price pressure, which resulted in both increased cancellations and reductions in the average weight of pieces mailed during the first three quarters of fiscal 1996. At the beginning of the fourth quarter of fiscal 1996, the Postal Rate Commission announced the implementation of an Enhanced Carrier- Route subclass for third-class mail. This subclass recognizes the price sensitivity and lower postal processing costs for efficient mailers like the Company. Since postage costs represent a significant portion of cost of sales to the Company, these cost structure changes began to have a positive impact to the Company in the fourth quarter of fiscal 1996 and are expected to continue to favorably affect postage expense in fiscal 1997. In addition, a decline in paper prices also began to have a favorable impact to the Company during the fourth quarter of fiscal 1996. From an internal perspective, the Company continued its reengineering initiative which has eliminated over 400 positions through September 28, 1996. The Company was reorganized along process lines, which created a more centralized structure. These changes favorably impacted selling, general and administrative costs in fiscal 1996 and are expected to continue to positively affect fiscal 1997. The Company also divested two non-core subsidiaries during fiscal 1996. MidCoast Press, the commercial web offset printer, was sold during the first quarter of fiscal 1996 and, as a result, the Company recorded a before tax gain of $2.7 million. Marketing Force, the in-store promotion and merchandising subsidiary purchased in 1993, was sold during the second quarter of fiscal 1996 and the Company recorded a loss of $8.2 million (net of tax) on the disposal of this discontinued operation. In addition, the Company retained Goldman Sachs and embarked on a "strategic alternatives" process in September 1995, which culminated in the Board of Directors declaration of a special cash dividend (the"Special Dividend") of $10 per share of common stock. This Special Dividend enabled all of the Company's shareholders to realize in cash a significant portion of the current value of their shares, while at the same time allowing them to retain their ownership interest in the Company and participate in future growth. In order to finance the Special Dividend, transaction expenses and related recapitalization costs, the Company entered into a credit agreement (the "Agreement") with a syndicate of lenders. The Agreement provides for total credit facilities of $250 million. In conjunction with the Special Dividend, the Company recorded nonrecurring charges of $12.1 million. These charges related to equitable adjustments made to outstanding employee stock options, legal fees, and various other fees associated with the Special Dividend and the Company's exploration of strategic alternatives. In the following table, reported results have been adjusted for the Special Dividend related charges in order to provide a more normalized review of fiscal 1996 results.
- --------------------------------------------------------------------------------------------------------------------- Operating Results: Comparative Analysis Reported Adjustment Adjusted Year ended ------------ Year ended Year ended Year ended September 28, Nonrecurring September 28, September 30, September 24, (In millions, except per share data) 1996 Charges 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Net revenues $986.2 $986.2 $1,011.9 $920.3 Gross profit 224.7 224.7 247.7 241.1 Operating income 27.5 $12.1 39.6 48.5 39.7 Income from continuing operations 11.3 7.4 18.7 30.9 24.6 Earnings per share from continuing operations .47 .31 .78 1.33 1.03 - ---------------------------------------------------------------------------------------------------------------------
T W E N T Y O N E [LOGO OF ADVO, INC. APPEARS HERE] Fiscal 1996 Compared to Fiscal 1995 Continuing Operations Revenues Revenues from continuing operations for fiscal 1996 of $986.2 million decreased 2.5% or $25.7 million over fiscal 1995. The revenue decline during the year was caused by decreases in volume and price, as well as shifts in product weight and mix, which were a direct result of higher postage and paper costs that resulted in increased mailing costs to our clients. The price deterioration was primarily caused by a decrease in shared mail product weights, which was the result of a continued reduction in advertising pages mailed by the Company's larger preprint customers. Pieces per package for the year decreased to 7.84 in fiscal 1996 from 7.88 in fiscal 1995. Packages mailed were 3,196.9 million during fiscal 1996 versus 3,240.1 million during the prior year. The decrease was primarily due to a loss of our second in home date in Chicago and Texas. Operating Expenses Cost of sales as a percentage of revenue increased from 75.5% in fiscal 1995 to 77.2% in fiscal 1996. The increase was due to the volume declines in pieces per package and piece weight declines which affected postage absorption and hence increased cost of sales as a percentage of revenue. These volume and piece weight declines were primarily caused by client reactions to the pass through of higher paper and postage. Cost of sales, in absolute terms, decreased $2.7 million. This decline was attributable to lower postage expense due to fewer mailings made by the Company as evidenced by the reduction in pieces per package and shared mail package distribution and also the implementation of lower postal rates which commenced on July 1, 1996. These declines were somewhat offset by higher postal rates which occurred during the first quarter of the fiscal year when compared with the same quarter of fiscal 1995. As a result of the lower volume, print and paper expenditures decreased $1.6 million which also contributed to the decline in cost of sales. Selling expense, including the provision for bad debts, increased 1.6% over fiscal 1995 to $131.1 million in fiscal 1996. Selling expense as a percentage of revenue increased to 13.3% in the current year from 12.7% in the prior year. The increase in selling expense resulted from the transition to the Company's new sales margin based compensation system and the Company's realignment of the regional general manager function into a role with more of an emphasis on sales. As a percentage of revenues, general and administrative costs were 5.7% for year ended 1996 versus 7.2% for year ended 1995. General and administrative costs decreased $15.8 million or 21.8% in fiscal 1996 over fiscal 1995. The significant reduction in general and administrative expenses is the direct result of the Company's ongoing reengineering program to streamline and improve efficiencies in its processes, operations, and systems; the realignment of its administrative functions; and strict cost controls implemented during the current fiscal year. As a result of the reengineering effort, headcount has been reduced by 440 associates in all areas of the Company since June of 1995, which was the start of the reengineering program. Gain on Sale of Business Lines During the first quarter of fiscal 1996, the Company recognized a pretax gain of $2.7 million ($1.7 million after tax or $.07 per share) on the sale of its MidCoast Press operation, a commercial web offset printer. In the first quarter of the previous year, the Company recognized a $2.2 million pretax gain ($1.4 million after tax, or $.06 per share) on the sale of its 50 percent ownership in InfoBase Services, a data base joint venture. Operating Income As a result of the aforementioned, the Company reported a $8.9 million decrease in operating income (excluding nonrecurring charges) to $39.6 million when comparing fiscal 1996 to fiscal 1995. Interest Income Interest income results primarily from the investment of excess cash. Interest income was $1.3 million in fiscal 1996 versus $2.8 million in fiscal 1995. The $1.5 million decrease was due to the liquidation of the available-for-sale securities in connection with payment of the Special Dividend. Interest Expense The Company obtained credit facilities totaling $250 million during the second quarter of fiscal 1996 in connection with the payment of the Special Dividend. Interest expense and commitment fees related to the debt totaled $9.7 million ($5.9 million after tax or $.24 per share) for the year ended September 28, 1996. Income Taxes The effective tax rate was approximately 39% for the Company's continuing operations in both fiscal 1996 and fiscal 1995. Earnings per Share Earnings per share from continuing operations decreased to $.47 in fiscal 1996 from $1.33 in fiscal 1995. Earnings per share for fiscal 1996 was negatively impacted by the transactions associated with the Special Dividend and the interest expense. Adjusting for both the nonrecurring charges and interest expense, earnings per share from continuing operations would have been $1.02 in fiscal 1996 versus $1.33 in fiscal 1995. 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 T W E N T Y T W O [LOGO OF ADVO, INC. APPEARS HERE] 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 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 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 increased to $1.33 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 Securities". The cumulative effect of adopting SFAS No. 112 was an after tax charge of $1.5 million or $.07 per share. Financial Position Overview The declaration and payment of the Special Dividend to shareholders of record on February 20, 1996 had a major effect on the Company's financial position. The Special Dividend totaled approximately $240 million and was paid on March 5, 1996. It was financed mainly through borrowings of $195 million from the Company's new $250 million credit facility (the "Debt"), the liquidation (net of purchases) of available-for-sale securities (the "Securities Liquidation") of $30.9 million, and available cash on hand. Working Capital Working capital decreased from $58.9 million in fiscal 1995 to $1.9 million in fiscal 1996. Liquidity requirements to pay the Special Dividend, such as the Securities Liquidation, the current portion of the Debt, and use of cash on hand accounted for the decrease in working capital year over year. Property, Plant and Equipment Capital expenditures totaled $17.7 million for the year ended September 28, 1996. The majority of the capital additions were for the upgrade and enhancement of the Company's technology in the areas of production equipment and computer software and hardware. At two of the Company's production facilities, a new computerized mail sorter is being utilized and developed, which the Company expects to increase the rate of production for packages and achieve greater flexibility and efficiency in targeting specific groups. In the area of computer technology, the Company began purchasing laptop computers for its sales force. The laptops are expected to allow the sales force more time to focus on customer service, as opposed to administrative tasks. The Company also began developing new financial and operational systems intended to improve operating efficiency and reduce overhead. Cash provided from operating activities has been sufficient to cover the financing of these capital expenditures and is expected to cover future expenditures. The Company plans to continue with the programs discussed above. Capital additions in fiscal 1997 are expected to be approximately $27 million. Stockholders' Equity Stockholders' equity decreased $215.6 million from September 30, 1995 to a net deficiency of $85.2 million at September 28, 1996. The decrease was primarily the T W E N T Y T H R E E [LOGO OF ADVO, INC. APPEARS HERE] result of the Special Dividend totaling approximately $240 million. Offsetting this to a degree was $8.8 million related to the option repricing and the cashless exercises connected with the Special Dividend; $7.2 million related to the exercise by Warburg Pincus Capital Partners, L.P. of their warrant to obtain 2.7 million shares of ADVO common stock; $5.4 million from employee stock plan activity and the related tax benefits; and year to date net income of $3.1 million. Liquidity The Company continues to rely on funds generated from continuing operating activities as its primary operational source of liquidity. In addition, the Company has unused credit commitments of $80 million which may be used to fund working capital. Cash flows generated from operating activities increased $21.6 million to $35.6 million in fiscal 1996. The increase year over year is mainly due to the increases in accounts payable and other accrued liabilities resulting from the timing of payments to the Company's vendors and consulting contracts related to systems development and technical support. In addition, the year to year increase in accounts receivable and its impact on cash flows from continuing operations was lower in fiscal year 1996 versus fiscal year 1995, primarily due to a greater focus on account collections. Cash and cash equivalents at September 28, 1996 declined $10.5 million from the prior year. The payment of the Special Dividend was the primary cause of the decrease. On July 16, 1996, the Company entered into a ten year agreement with Integrated Systems Solutions Corporation (d/b/a ISSC) to provide systems development and technical support to the Company. These services were formerly provided by internal sources. The contract allows for cancellation after the completion of the third year, subject to termination charges ranging between $3.1 million and $.5 million depending on the year in which the cancellation becomes effective. Fiscal 1997 fees related to the contract are expected to total approximately $15 million. The Company anticipates funding these costs through continuing operations. Financing Arrangements On March 4, 1996, the Company entered into a credit agreement (the "Agreement") with a syndicate of lenders. The credit was obtained to finance the Special Dividend and may be used to fund ongoing working capital and capital expenditure requirements. The Agreement provides for total credit facilities of $250 million, consisting of $155 million in term loans and a $95 million reducing revolving line of credit. At September 28, 1996 there was $168.4 million of debt outstanding. During October of 1996, the Company subsequently reborrowed an additional $5 million under the revolving line of credit. The Debt bears interest at either the London Interbank Offered Rate ("LIBOR") or at the bank's "base rate", whichever the Company chooses for each tranche due at various maturity dates, plus an "applicable margin" (based on certain financial ratios) ranging from 1.50% to 3.00% on the LIBOR rate and .25% to 1.75% on the base rate. Interest is payable quarterly or at the maturity of the LIBOR contract whichever is shorter. The Company also pays fees on the unused commitments. At September 28, 1996 available commitments totaled $80 million. The Company is required to maintain certain financial ratios under the Agreement. In addition, the Agreement also places restrictions on disposal of assets, mergers and acquisitions, dividend payments, investments and additional debt. The Company was in compliance with all applicable covenants as of September 28, 1996. In connection with the Agreement, the Company is required to maintain Interest Rate Protection Agreements to protect against three month LIBOR rates exceeding 9.0% per annum as to a notional principal amount equal to $100 million. The Company entered into two separate two year Interest Rate Collar Agreements to hedge notional amounts totaling $150 million. The cap rate ranges from 7.39% to 8.0% with the floor rate ranging from 5.0% to 5.5%. The total fiscal 1997 maturities of long-term debt of $7.2 million are expected to be paid through funds generated from ongoing operations. In addition, during the first quarter of fiscal 1997, the Company must also remit to the bank 60% of its "Excess Cash Flow", as defined by the Agreement. This yields an additional $11 million pay down of the term loans. The Company expects to fund this pay down through use of its available long-term revolving line of credit commitments. The Company anticipates it will be able to meet its long-term debt obligations through funds generated from continuing operations. Forward Looking Statements The forward looking statements contained in this filing are subject to many uncertainties in the Company's operations and business environment. Examples of such uncertainties include changes in customer demand; postal and paper prices; the realization of benefits associated with the Company's reengineering initiative; possible governmental regulation or legislation affecting aspects of the Company's business; the risk of damage to the Company's data centers and telecommunication lines; the amount of pricing concessions the Company will pass through to customers in connection with the postal reclassification; and other general economic factors. T W E N T Y F O U R ADVO, INC. Consolidated Statements of Operations
Year ended Year ended Year ended September 28, September 30, September 24, (In thousands, except per share data) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- Revenues $ 986,162 $1,011,904 $ 920,325 Costs and expenses: Cost of sales 761,506 764,198 679,258 Selling, general and administrative 184,084 198,496 198,113 Nonrecurring charges 12,082 -- -- Provision for bad debts 3,701 2,953 3,304 Gain on sale of business lines (2,687) (2,243) -- ------------------------------------------------------ Operating income 27,476 48,500 39,650 Interest income (1) 1,285 2,817 1,936 Interest expense 9,669 -- -- Other expense 556 772 1,266 ------------------------------------------------------ Income before income taxes 18,536 50,545 40,320 Provision for income taxes 7,229 19,596 15,693 ------------------------------------------------------ Income from continuing operations 11,307 30,949 24,627 ------------------------------------------------------ Discontinued operations: (Loss) income from discontinued operations, net of tax -- (3,522) 544 Loss on disposal of discontinued operations, net of tax (8,199) (931) -- ------------------------------------------------------ Income before cumulative effect of accounting change 3,108 26,496 25,171 Cumulative effect of change in accounting for postemployment benefits, net of tax -- (1,545) -- ------------------------------------------------------ Net income $ 3,108 $ 24,951 $ 25,171 -------------------------------------------------------- Earnings per share: Earnings from continuing operations $ .47 $ 1.33 $ 1.03 Discontinued operations: (Loss) income from discontinued operations, net of tax -- (.15) .02 Loss on disposal of discontinued operations, net of tax (.34) (.04) -- Cumulative effect of change in accounting for postemployment benefits, net of tax -- (.07) -- ------------------------------------------------------ Net earnings per share $ .13 $ 1.07 $ 1.05 ------------------------------------------------------ Dividends declared per share $ 10.025 $ .10 $ .095 ------------------------------------------------------ Weighted average common and common equivalent shares 24,126 23,286 23,886 - ---------------------------------------------------------------------------------------------------------------------------
(1) Includes interest income from related party of $1,219,000, $2,757,000 and $1,885,000 in fiscal 1996,1995 and 1994, respectively. See accompanying Notes to Consolidated Financial Statements T W E N T Y F I V E ADVO, INC. Consolidated Balance Sheets
September 28, September 30, (In thousands, except share data) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (1) $ 13,303 $ 23,849 Available-for-sale securities - related party -- 30,611 Accounts receivable, less allowances of $4,226 in 1996 and $3,418 in 1995 62,668 61,089 Inventories 7,518 8,742 Prepaid expenses and other current assets 4,512 4,369 Deferred income taxes 15,839 13,049 Current assets of discontinued operations -- 13,950 - ------------------------------------------------------------------------------------------------------------------- Total Current Assets 103,840 155,659 Property, plant and equipment: Land, building and building improvements 7,623 6,744 Machinery and equipment 122,392 108,538 Leasehold improvements 12,014 13,579 - ------------------------------------------------------------------------------------------------------------------- 142,029 128,861 Accumulated depreciation and amortization (77,854) (68,385) - ------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 64,175 60,476 Other assets 17,111 10,848 Non-current assets of discontinued operations -- 7,220 - ------------------------------------------------------------------------------------------------------------------- Total Assets $ 185,126 $234,203 - ------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity/(Deficiency) Current liabilities: Current portion of long-term debt $ 7,225 $ -- Accounts payable 37,868 24,556 Accrued compensation and benefits 22,892 25,482 Customer advances 5,960 10,309 Federal and state income taxes payable 5,877 4,364 Restructure reserve 1,718 9,015 Accrued other expenses 20,431 14,951 Current liabilities of discontinued operations -- 8,118 - ------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 101,971 96,795 Long-term debt 161,125 -- Deferred income taxes 6,618 5,786 Other liabilities 617 1,216 Stockholders' equity/(deficiency): Series A Convertible Preferred Stock, $.01 par value (Authorized 5,000,000 shares, none issued) -- -- Common Stock, $.01 par value (Authorized 40,000,000 shares, Issued 27,900,756 in 1996 and 24,583,092 in 1995) 279 246 Additional paid-in capital 160,704 138,735 Unrealized losses on available-for-sale securities, net of tax -- (62) Accumulated (deficit) earnings (181,914) 55,020 Less shares of common stock held in treasury at cost, 3,804,363 in 1996 and 3,759,449 in 1995 (64,274) (63,533) - ------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity/(Deficiency) (85,205) 130,406 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity/(Deficiency) $ 185,126 $ 234,203 - --------------------------------------------------------------------------------------------------------------------
(1) Includes cash and cash equivalents invested with related party of $5,362,000 at September 28, 1996 and $12,905,000 at September 30, 1995. See accompanying Notes to Consolidated Financial Statements T W E N T Y S I X ADVO, INC. Consolidated Statements of Cash Flows
Year ended Year ended Year ended September 28, September 30, September 24, (In thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from continuing operating activities: Net income $ 3,108 $ 24,951 $ 25,171 Less: (Loss) income from discontinued operations (8,199) (4,453) 544 - --------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations (includes accounting change) 11,307 29,404 24,627 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 -- Cashless option exercises and option repricing 8,747 -- -- Depreciation and amortization 15,170 14,331 13,617 Deferred income taxes (2,275) 4,232 1,556 Provision for bad debts 3,701 2,953 3,304 Gain on sale of business lines (2,687) (2,243) -- Other 1 361 997 Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (5,280) (16,188) (4,237) Inventories 470 (3,533) 1,483 Prepaid expenses and other current assets 539 131 413 Other assets 332 458 (395) Accounts payable 13,401 (157) 2,849 Accrued compensation and benefits (2,815) (2,232) 4,836 Customer advances (4,350) (2,890) 1,635 Federal and state income taxes payable 1,513 205 (1,292) Other current liabilities 5,741 (4,915) 5,704 Restructure reserve (7,820) (7,230) (7,617) Other liabilities (76) (222) 20 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by continuing operating activities 35,619 14,010 47,500 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from continuing investing activities: Proceeds from sale of business lines 742 9,000 -- Acquisitions, net of cash acquired -- (2,448) (546) Expenditures for property, plant and equipment (17,679) (20,315) (10,357) Proceeds from disposals of property and equipment 10 11 85 Available-for-sale securities - purchases (49,604) (55,899) (47,388) Available-for-sale securities - sales and maturities 80,482 56,355 35,874 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by continuing investing activities 13,951 (13,296) (22,332) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from continuing financing activities: Proceeds from long-term borrowings - term loans 155,000 -- -- Payments on long-term borrowings - term loans (1,650) -- -- Revolving line of credit - net 15,000 -- -- Payment of debt issue costs (5,458) -- -- Proceeds from exercise of warrants 7,200 -- -- Tax effect - employee stock plans 2,973 699 8,244 Proceeds from exercise of stock options 2,473 1,811 832 Purchases of common stock for treasury (741) (4,260) (44,173) Cash dividends paid (240,561) (2,078) (1,920) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in continuing financing activities (65,764) (3,828) (37,017) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by discontinued operations 5,648 (12,785) 517 - ------------------------------------------------------------------------------------------------------------------------------------ Decrease in cash and cash equivalents (10,546) (15,899) (11,332) Cash and cash equivalents at beginning of year 23,849 39,748 51,080 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 13,303 $ 23,849 $ 39,748 - -------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements T W E N T Y S E V E N ADVO, INC. Consolidated Statements of Changes in Stockholders' Equity/(Deficiency)
Unrealized gains (losses) Additional on available- Accumulated Total Common stock Treasury stock paid-in for-sale earnings equity Shares Amount Shares Amount capital securities (deficit) (deficiency) (In thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------------------------ Balance -- September 25, 1993 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 - ----------------------------------------------------------------------------------------------------------------------------------- Balance -- September 24, 1994 24,393 $244 (3,521) $(59,273) $134,881 $0 $32,146 $107,998 Purchase of common stock for treasury (238) (4,260) (4,260) Grants of restricted stock 11 Exercise of stock options 179 2 1,809 1,811 Tax effect -- employee stock plans 699 699 Amortization of deferred compensation (1) 1,346 1,346 Cash dividends declared ($.10 per share) (2,077) (2,077) Unrealized losses on available-for-sale securities (62) (62) Net Income 24,951 24,951 - -----------------------------------------------------------------------------------------------------------------------------------
T W E N T Y E I G H T ADVO, INC.
Unrealized gains (losses) Additional on available- Accumulated Total (In thousands, Common stock Treasury stock paid-in for-sale earnings equity except per share data) Shares Amount Shares Amount capital securities (deficit) (deficiency) - ------------------------------------------------------------------------------------------------------------------------------------ Balance -- September 30, 1995 24,583 $246 (3,759) $(63,533) $138,735 $ (62) $55,020 $130,406 Purchase of common stock for treasury (45) (741) (741) Cancellation of restricted stock (5) Exercise of stock options and warrants 3,323 33 18,387 18,420 Tax effect -- employee stock plans 2,973 2,973 Amortization of deferred compensation (1) 609 609 Cash dividends declared ($10.025 per share) (240,042) (240,042) Unrealized gains on available-for-sale securities 62 62 Net Income 3,108 3,108 - ------------------------------------------------------------------------------------------------------------------------------------ Balance -- September 28, 1996 27,901 $279 (3,804) $(64,274) $160,704 $ 0 $(181,914) $(85,205) - ------------------------------------------------------------------------------------------------------------------------------------
(1) Unamortized deferred compensation at September 28, 1996, September 30, 1995 and September 24, 1994 was $140,000, $836,000 and $1,991,000, respectively. See accompanying Notes to Consolidated Financial Statements T W E N T Y N I N E ADVO, INC. Notes to Consolidated Financial Statements Note 1 Summary of Accounting Policies Organization ADVO, Inc. ("ADVO" or the "Company") is a direct marketing firm primarily engaged in soliciting and processing printed advertising from retailers, manufacturers and service companies for targeted distribution by both shared and solo mail to consumer households in the United States on a national, regional and local basis. Founded in 1929 as a hand delivery company, ADVO entered the direct mail industry as a solo mailer in 1946 and began its shared mail program in 1980. The Company currently is the largest commercial user of third-class mail in the United States. ADVO's direct marketing products and services include shared mail and solo mail. ADVO also provides certain transportation and ancillary services in conjunction with its direct mail programs. The Company's predominant source of revenue is from its shared mail programs. In these programs, the advertisements of several advertisers are combined in a single mail package. This offers the features of penetration and targeted marketing at a significant cost reduction when compared to mailing on an individual or solo mail basis. The Company's client base consists of national and local grocers, fast food chains, drug stores and local retailers. Principles of Consolidation The consolidated financial statements include the accounts of ADVO and its subsidiaries. All significant intercompany transactions and balances among ADVO and its subsidiaries have been eliminated. Certain reclassifications have been made in the fiscal 1995 and 1994 financial statements to conform with the fiscal 1996 presentation. ADVO's fiscal closing date is the last Saturday in September. The fiscal year includes operations for a 52-week period in 1996 and 1994 and a 53-week period in 1995. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investment instruments with original maturities of three months or less. These investments are valued at cost, which approximates market. Available-for-sale Securities The Company's securities were 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. All of the available-for-sale securities were sold during fiscal 1996. 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 3 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 (goodwill) and other intangible assets related to acquisitions are being amortized over their expected useful lives which range from 3 to 20 years. The Company continually monitors its goodwill and its other intangibles to determine whether any impairment of these assets has occurred. In making such determination, the Company evaluates the performance, on an undiscounted basis, of the underlying assets which gave rise to such amount. Revenues Revenues are recognized when services are rendered and are presented in the financial statements net of sales allowances and adjustments. The Company's services are considered rendered when all printing, sorting, labeling and ancillary services have been provided and the mailing material has been received by the United States Postal Service. Earnings per Share Earnings per 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. Primary and fully diluted earnings per share are not significantly different. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While management believes that the estimates and related assumptions in the preparation of these financial statements are appropriate, actual results could differ from those estimates. Note 2 Acquisitions During the two year period ended September 30, 1995, the Company 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 acqui- THIRTY ADVO, INC. Notes to Consolidated Financial Statements sition dates. The acquired assets have been recorded at their estimated fair values. These acquisitions did not have a material pro forma effect on operations for periods prior to the acquisition. The excess of the purchase price over the estimated fair values of net assets acquired of $4.9 million and $5.3 million, net of accumulated amortization is reflected in other assets at September 28, 1996 and September 30, 1995, respectively. Also included in other assets at September 28, 1996 and September 30, 1995 is $3.6 million and $4.5 million, respectively, of other intangible assets, net of accumulated amortization, which were acquired in the acquisitions. As of September 28, 1996 and September 30, 1995, accumulated amortization of goodwill and other intangibles was $6.7 million and $5.4 million, respectively. Note 3 Discontinued Operations In September 1995, the Company initiated a plan to sell its in-store marketing segment. At that time, the Company recorded an estimated loss on disposal of $1.4 million ($.9 million net of tax) consisting of a provision for anticipated operating losses during the phase out period and other costs directly related to the sale. On March 1, 1996 the Company completed the sale of substantially all of the net operating assets of this segment. The net assets were sold at book value in exchange for $5.0 million in cash and a long-term note receivable for $10.8 million. The long-term note was subsequently written off and is reflected in the fiscal 1996 loss on disposal of discontinued operations, net of tax. The loss on disposal for the year ended September 28, 1996 also includes operating losses in excess of the estimates provided for the year ended September 30, 1995. The results of the discontinued operations reflected in the consolidated statements of operations are as follows:
Year ended Year ended Year ended September 28, September 30, September 24, (In thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------- Net revenues $ 19,283 $57,668 $55,168 - -------------------------------------------------------------------------------------- (Loss) income before income taxes -- $(5,361) $ 944 Provision (benefit) for income taxes -- (1,839) 400 - -------------------------------------------------------------------------------------- (Loss) income from discontinued operations -- $(3,522) $ 544 - -------------------------------------------------------------------------------------- Losses to disposal date $(13,827) $(1,432) Income tax benefit (5,628) (501) -- - -------------------------------------------------------------------------------------- Loss on disposal of discontinued operations, net of tax $ (8,199) $ (931) -- - --------------------------------------------------------------------------------------
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 operation sold, including the fiscal 1995 estimated loss on disposal of $1.4 million. The major components of the assets and liabilities of discontinued operations at September 30, 1995 were 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 and equipment-net $ 7,033 Other non-current assets 187 - ---------------------------------------------------------------- Non-current assets of discontinued operations $ 7,220 - ---------------------------------------------------------------- Accounts payable $ 2,794 Accrued compensation and 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 During fiscal 1996 all available-for-sale securities were sold to help fund a special dividend payment (the "Special Dividend"). (See Note 8.) 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 - --------------------------------------------------------------------------------
Note 5 Accrued Compensation and Benefits The composition of accrued compensation and benefits is as follows:
September 28, September 30, (In thousands) 1996 1995 - ------------------------------------------------------------------ Compensation $13,048 $15,427 Workers' compensation 4,924 5,247 Employee withholdings and other benefits 4,920 4,808 - ------------------------------------------------------------------ Total $22,892 $25,482 - ------------------------------------------------------------------
THIRTY ONE ADVO, INC. Notes to Consolidated Financial Statements Note 6 Restructure Reserve Reductions to the Company's restructure reserve in fiscal 1996 totaled $7.8 million and consisted mainly of severance and other related costs connected with the initiative to streamline and centralize the Company's operations. Charges to the reserve in fiscal 1995 and 1994 were $7.2 million and $8.6 million, respectively. Fiscal 1995 and 1994 reserve reductions 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. Fiscal 1994 charges also related to the downsizing of the Company's former Atlantic Division office. Note 7 Financing Arrangements On March 4, 1996, the Company replaced its existing $50 million credit facility and entered into a credit agreement (the "Agreement") with a syndicate of lenders. The credit was obtained to finance the Special Dividend payable March 5, 1996 and related recapitalization costs. (See Notes 8 and 12.) Any unutilized credit may be used to fund ongoing working capital and capital expenditure requirements. The agreement provides for total credit facilities of $250 million, consisting of $155 million in term loans, maturing at various dates through March 31, 2004, and a $95 million reducing revolving line of credit, maturing at various dates through March 31, 2002. The commitment levels on the revolving line range from a high of $95 million for the period March 4, 1996 through September 30, 1997 to a low of $33.3 million for the period September 30, 2001 through March 31, 2002. Mandatory repayments of debt in defined amounts are required in the event of certain triggering events including the sale of assets and the achievement of certain financial ratios. The Company and its subsidiaries have pledged all of their assets as collateral for the credit agreement. Total outstanding credit facilities at September 28, 1996 consist of the following:
(In thousands) - --------------------------------------------- Revolving line of credit $15,000 Term loan - A 63,600 Term loan - B 89,750 - --------------------------------------------- 168,350 Less: Current portion 7,225 - --------------------------------------------- $161,125 - ---------------------------------------------
The debt bears interest at either the London Interbank Offered Rate ("LIBOR") or at the bank's "base rate", whichever the Company chooses for each tranche due at various maturity dates, plus an "applicable margin" (based on certain financial ratios) ranging from 1.50% to 3.00% on the LIBOR rate and .25% to 1.75% on the base rate. Interest is payable quarterly or upon the maturity of the LIBOR contracts, whichever period is shorter. The interest rate at September 28, 1996 was 7.57% on the revolving line of credit and on Term loan - A and 8.57% on Term loan - B. The Company is required to maintain certain financial ratios under the Agreement. In addition, the Agreement also places restrictions on disposal of assets, mergers and acquisitions, dividend payments, investments and additional debt. The Company was in compliance with all applicable covenants as of September 28, 1996. In connection with the Agreement, the Company is required to maintain Interest Rate Protection Agreements to protect against three month LIBOR rates exceeding 9.0% per annum as to a notional principal amount equal to $100 million. During the third quarter of 1996, the Company entered into two separate two year Interest Rate Collar Agreements to hedge notional amounts totaling $150 million. The cap rate ranges from 7.39% to 8.0% with the floor rate ranging from 5.0% to 5.5%. The Company pays fees on the unused commitments at a rate of 3/8 of 1% or 1/2 of 1% depending on the Company's total leverage ratio as defined. As of September 28, 1996, $80 million of the revolving line of credit was unused. Total maturities of long-term debt over the next five fiscal years and thereafter at September 28, 1996 are as follows:
(In thousands) - ------------------------------------- 1997 $ 7,225 1998 9,650 1999 10,500 2000 12,975 2001 15,800 Thereafter 112,200 - ------------------------------------- Total Maturities $168,350 - -------------------------------------
Included as long-term debt is approximately $11 million in excess cash flow payments, as defined by the Agreement, that the Company is required to pay to the bank during the first quarter of fiscal 1997. This amount will be applied toward the term loans. The Company expects to pay these funds through use of available revolving line of credit commitments. The revolving line of credit has been classified as long-term since management has the intent and ability to maintain the September 28, 1996 outstanding balance throughout fiscal 1997. THIRTY TWO ADVO, INC. Notes to Consolidated Financial Statements The Company capitalized debt issue costs directly associated with the issuance of the Agreement totaling $5.5 million. These costs are included in other assets and are being amortized over the term of the debt agreement. The Company has outstanding letters of credit of approximately $5.6 million under separate agreements primarily related to its workers' compensation program. Carrying amounts of the financing arrangements approximate fair value. Note 8 Stockholders' Equity/(Deficiency) On August 27, 1986, 2,301,780 warrants to purchase shares of ADVO common stock were issued to Warburg, Pincus Capital Partners, L.P. ("Warburg"), Welsh, Carson, Anderson & Stowe IV (WCAS IV) and WCAS Venture Partners (WCAS VP) (together, the "Investors") for $1,000,000. On February 15, 1996, Warburg, the Company's largest shareholder, exercised the last outstanding warrants and purchased 2,666,667 shares of common stock at an exercise price of $2.70 per share. The Company has a Shareholder Protection Rights Plan (the "Rights Plan") to protect shareholders from potential unfair hostile takeovers. Pursuant to the Rights Plan, common shareholders have one Right for each share of common stock held. The Rights become exercisable only in the event that any person acquires or commences a tender offer to acquire 20% or more of the Company's common stock, as defined. On January 17, 1996 the Company announced the declaration of a Special Dividend of $10 per share of common stock to shareholders of record on February 20, 1996. The announcement was a result of the Company's initiative to explore strategic alternatives aimed at increasing shareholder value, which began at the end of fiscal 1995. Total shares outstanding as of the record date were approximately 24 million resulting in dividends of approximately $240 million, which were paid on March 5, 1996. The Company also recorded noncash compensation expense totaling $8.8 million relating to the Special Dividend. (See Note 12.) At September 28, 1996 there are 2,324,150 shares of common stock reserved for issuance upon the exercise of stock options. Note 9 Gain on Sale of Business Lines MidCoast Press, the Company's commercial web offset printer, was sold during the first quarter of fiscal 1996. The Company recognized a before tax gain of $2.7 million ($1.7 million after tax or $.07 per share) and received a note for $3.5 million in conjunction with the sale. During the first quarter of fiscal 1995, the Company sold its 50% ownership in InfoBase Services and recognized a before tax gain on this transaction of $2.2 million ($1.4 million after tax or $.06 per share). Note 10 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 during fiscal 1995. 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. Note 11 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 non-qualified savings plans. All plans feature both employee and employer matching contributions. The expense for matching contributions was $3.7 million, $3.8 million and $3.6 million for fiscal 1996, 1995 and 1994, 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. T H I R T Y T H R E E ADVO, INC. Notes to Consolidated Financial Statements In connection with the Special Dividend (see Notes 8 and 12), the Company made equitable adjustments to outstanding employee stock options. As a result, 2.1 million options were repriced. The repriced options have retained their original vesting schedules and expiration dates. In addition, certain participants in the 1986 Employee Restricted Stock Plan were given the opportunity to reinvest the Special Dividend applicable to restricted shares in the Company's common stock. Any such reinvestment will be distributed when the restricted shares vest. 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 28, 1996 there were 23,414 options exercisable and 17,551 options available for future grant under this plan. At September 30, 1995 there were 91,186 options exercisable and 12,488 options available for future grant under this plan.
Option price Shares per share - ------------------------------------------------------------------ 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 Granted 114,023 5.40-21.25 Cancelled (94,900) 8.63-21.25 Exercised (90,819) 5.40-18.63 - ------------------------------------------------------------------ Outstanding at September 28, 1996 69,341 $ 5.40-11.25 - ------------------------------------------------------------------
The 1988 Stock Option Plan provides for the granting of non-qualified options for the purchase of up to 4,300,000 shares of common stock to key employees. The terms of the options may not exceed ten years, and the option prices shall not be less than the fair market value of the common stock on the date of the grant. Each option granted is exercisable at a specified rate each year, generally 25%, as determined by the Board of Directors at the date of grant. Certain grants also stipulate that the market price of the Company's common stock must reach certain levels before the options become exercisable in addition to the 25% per year time vesting provisions. These options will become exercisable for 90 days at six years from the grant date if the market price provision is not met. At September 28, 1996 there were 776,666 options exercisable and 396,158 options available for future grant under this plan. At September 30, 1995 there were 1,395,346 options exercisable and 163,192 options available for future grant under this plan.
Option price Shares per share - ------------------------------------------------------------------ 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 Granted 2,743,606 5.00-27.00 Cancelled (2,201,227) 6.75-27.00 Exercised (848,741) 3.30-18.63 - ------------------------------------------------------------------ Outstanding at September 28, 1996 2,254,809 $ 5.00-17.00 - ------------------------------------------------------------------
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 $.6 million, $1.3 million, and $1.6 million for the years ended September 28, 1996, September 30, 1995 and September 24, 1994, respectively. Unamortized deferred compensation was $.1 million at September 28, 1996. There are 46,755 shares available for future grant under this plan at September 28, 1996.
Shares - ------------------------------------------------------------------ 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 Cancelled (5,001) - ------------------------------------------------------------------ Outstanding at September 28, 1996 2,390,745 - ------------------------------------------------------------------
THIRTY FOUR ADVO, INC. Notes to Consolidated Financial Statements 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 1996, no shares were awarded or cancelled. The market value of shares at the date of award is being charged to operations over the restriction period with $.03 million, $.06 million and $.1 million charged for the fiscal years ended September 28, 1996, September 30, 1995 and September 24, 1994, respectively. There was no unamortized deferred director's compensation at September 28, 1996. There are 97,500 shares available for future grant under this plan at September 28, 1996. During fiscal 1996, three directors were each granted 4,500 stock options and during fiscal 1995, they were each granted 1,000 stock options. The options become exercisable in equal annual installments over the next four years from the grant date. Note 12 Nonrecurring Charges In connection with the Special Dividend (see Note 8), the Company made equitable adjustments to outstanding employee stock options. As a result of the adjustments, the Company recorded noncash compensation expense totaling $8.8 million in fiscal 1996. Also included as nonrecurring charges are $3.3 million in legal and various other fees associated with the Special Dividend and the Company's exploration of strategic alternatives to enhance shareholder value. Note 13 Income Taxes The components of the provision for income taxes on continuing operations are as follows:
Year ended Year ended Year ended September 28, September 30, September 24, (In thousands) 1996 1995 1994 - ------------------------------------------------------------------ Federal: Current $5,494 $12,910 $11,677 Deferred 505 3,429 951 - ------------------------------------------------------------------ Total Federal 5,999 16,339 12,628 - ------------------------------------------------------------------ State: Current 742 2,454 2,460 Deferred 488 803 605 - ------------------------------------------------------------------ Total State 1,230 3,257 3,065 - ------------------------------------------------------------------ Total Provision $7,229 $19,596 $15,693 - ------------------------------------------------------------------
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 28, September 30, September 24, 1996 1995 1994 - --------------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 4.3 4.1 4.9 Targeted jobs tax credit -- (.2) (.2) Other (.3) (.1) (.8) - --------------------------------------------------------------------------- Effective income tax rate 39.0% 38.8% 38.9% - ---------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are as follows:
September 28, September 30, (In thousands) 1996 1995 - ------------------------------------------------------------------------------- Deferred Tax Assets: Restructure reserve $ 809 $ 4,001 Reserve for deferred compensation 5,762 2,785 Reserve for employee benefits 3,610 4,246 Loss due to discontinued operations 2,948 -- Other 3,453 2,996 - ------------------------------------------------------------------------------- Total deferred tax assets 16,582 14,028 - ------------------------------------------------------------------------------- Deferred Tax Liabilities: Tax over book depreciation and amortization (7,361) (6,765) - ------------------------------------------------------------------------------- Net federal and state deferred assets $ 9,221 $ 7,263 - -------------------------------------------------------------------------------
Note 14 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 28, 1996 under long-term noncancelable operating leases are as follows:
(In thousands) - -------------------------------------------- Fiscal year: 1997 $11,782 1998 9,935 1999 7,876 2000 5,813 2001 4,686 Thereafter 9,508 - -------------------------------------------- Total minimum lease payments $49,600 - --------------------------------------------
THIRTY FIVE ADVO, INC. Notes to Consolidated Financial Statements Certain of these leases contain renewal options and certain leases also provide for cost escalation payments. Rental expense for the years ended September 28, 1996, September 30, 1995 and September 24, 1994 was approximately $20.6 million, $22.8 million and $24.9 million respectively. On July 16, 1996, the Company entered into a ten year agreement with Integrated Systems Solutions Corporation (d/b/a ISSC) to provide systems development and technical support to the Company. These services were formerly provided by internal sources. The contract allows for cancellation after the completion of the third year, subject to termination charges ranging between $3.1 million and $.5 million depending on the year in which the cancellation becomes effective. Total charges under the term of the agreement through the year 2006 would be $106.0 million. Future commitments for the noncancelable portion of the agreement, excluding termination fees, are $15.4 million, $14.9 million and $10.7 million for fiscal years 1997, 1998 and 1999, respectively. ADVO is party to various legal proceedings and claims related to its normal business operations, including several suits in which it is a defendant. In the opinion of management, the Company has substantial and meritorious defenses for these claims and proceedings in which it is a defendant, and believes these matters will be ultimately resolved without material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. Outstanding commitments for capital expenditures at September 28, 1996 totaled $12.2 million. Note 15 Related Party Transactions The Company invests in money market mutual funds through an investment advisor, Warburg, Pincus Counsellors, Inc. ("Counsellors"). The general partner of Warburg, Pincus Capital Partners, L.P.("Warburg") who is the Company's largest shareholder, owns a majority interest in Counsellors. Income earned on investments managed by Counsellors was $1.2 million, $2.8 million and $1.9 million in fiscal 1996, 1995 and 1994, respectively. At September 28, 1996 and September 30, 1995, $5.4 million and $43.5 million, respectively, was being managed by Counsellors. Two Directors of the Company are officers of Warburg and another Director is a Director of the various Counsellors managed mutual funds. Note 16 Supplemental Cash Flow Information Cash paid for income taxes was $3.2 million, $11.8 million and $7.8 million in fiscal 1996, 1995 and 1994, respectively. Cash paid for interest expense, net of amounts capitalized, in fiscal 1996 was $7.2 million. No interest expense payments were made in fiscal years 1995 and 1994. Excluded from continuing investing activities was the effect of a certain noncash activity in which the Company received a note for $3.5 million in conjunction with the sale of a business line in fiscal 1996. (See Note 9.) Note 17 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 No. 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 pro forma 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. THIRTY SIX ADVO, INC. Notes to Consolidated Financial Statements Note 18 Quarterly Financial Data (Unaudited)
(In millions, except per share data) Fiscal year ended First Second Third Fourth September 28, 1996 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------- Revenues $256.5 $232.0 $245.7 $252.0 Gross profit 56.6 46.7 55.5 65.9 Operating income (loss) (1) 11.0 (10.8) 11.7 15.6 Net income (loss) 6.0 (14.4) 4.4 7.1 Earnings (loss) per share .25 (.64) .18 .29 Common stock price (2) High 27 1/2 26 1/8 11 3/4 11 5/8 Low 22 3/4 9 1/4 9 1/8 9 1/8 - ------------------------------------------------------------------------------------- Fiscal year ended First Second Third Fourth September 30, 1995 (3) 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: 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 - -------------------------------------------------------------------------------------
(1) Operating income for the second quarter includes nonrecurring charges of $12.1 million. (See Note 12.) (2) The decrease in the market price during the second quarter of fiscal 1996 was reflective of the Special Dividend. (See Note 8.) (3) 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 sale of this segment. (See Note 3.) In addition, certain reclassifications have been made to the first and second quarter of 1995 to conform with the fiscal 1995 year end presentation. T H I R T Y S E V E N ADVO, INC. Report of Independent Auditors To the Board of Directors and Stockholders of ADVO, Inc. We have audited the accompanying consolidated balance sheets of ADVO, Inc. at September 28, 1996 and September 30, 1995, and the related consolidated statements of operations, cash flows, and changes in stockholders' equity/ (deficiency) for each of the three years in the period ended September 28, 1996. 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 28, 1996 and September 30, 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 28, 1996 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Hartford, Connecticut October 21, 1996 Financial Responsibility To the Stockholders of ADVO, Inc. The management of ADVO, Inc. is responsible for the integrity and objectivity of the consolidated financial statements and other financial information presented in this report. These statements have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on judgements and estimates by management. ADVO maintains internal accounting control policies and related procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and properly recorded, and that accounting records may be relied upon for the preparation of reliable published annual and interim financial statements and other financial information. The design, monitoring, and revision of internal accounting control systems involve, among other things, management's judgement with respect to the relative cost and expected benefits of specific control measures. The Company also maintains an internal auditing function which evaluates and reports on the adequacy and effectiveness of internal accounting controls and policies and procedures. The Company's consolidated financial statements have been audited by independent auditors who have expressed their opinion with respect to the fairness of these statements. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with ADVO's management, internal auditors and independent auditors to review matters relating to the quality of financial reporting and internal accounting controls. Both the internal auditors and the independent auditors have unrestricted access to the Committee. /s/ Robert Kamerschen Robert Kamerschen Chairman and Chief Executive Officer /s/ 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 21, 1996 THIRTY EIGHT EX-21 8 EXHIBIT 21 - SUBSIDIARIES OF ADVO EXHIBIT 21 SUBSIDIARIES OF ADVO, INC. AS OF SEPTEMBER 28, 1996 PERCENT OF VOTING STATE OF SECURITIES OWNED AS INCORPORATION NAME OF SUBSIDIARY OF SEPTEMBER 28, 1996 - ------------- ------------------ --------------------- Delaware Trans-ADVO, Inc. 100 Delaware ADVO Investment Company, Inc. 100 Delaware ADVO Creative Services, Inc. 100 Delaware Value Fair, Inc. 100 Delaware MBV, Inc 100 Delaware Stighen, Inc. (formerly Marketing Force Inc.) 100(1) - -------- (1) Owned by ADVO Investment Company, Inc. EX-23 9 EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of ADVO, Inc. ("ADVO") of our report dated October 21, 1996, included in the 1996 Annual Report to Stockholders of ADVO. Our audits also included the financial statement schedule of ADVO listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-11323) pertaining to the ADVO, Inc. 401(k) Savings Plan, (Form S-3 No. 333-03777) pertaining to Dividend Reinvestment, (Form S-8 No. 33-40402 Post-Effective Amendment No. 3) pertaining to the 1986 Employee Restricted Stock Plan, as amended, (Form S-8 No. 33-15856) pertaining to the 1986 Stock Option Plan, and (Form S-8 No. 33-58483 Post-Effective Amendment No. 5) pertaining to the 1988 Non-Qualified Stock Option Plan and the 1993 Stock Option Subplan, as amended, of ADVO and in the related Prospectuses of our report dated October 21, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of ADVO. Ernst & Young LLP /s/ Hartford, Connecticut December 16, 1996 EX-27 10 FDS - ARTICLE 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO INC.'S FORM 10K FOR THE YEAR ENDED SEPTEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-28-1996 OCT-01-1995 SEP-28-1996 13,303 0 66,894 4,226 7,518 103,840 142,029 77,854 185,126 101,971 0 0 0 279 0 (85,205) 0 986,162 0 761,506 0 3,701 9,669 18,536 7,229 11,307 (8,199) 0 0 3,108 .13 .13
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