-----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, Ga3C0np15UxuADmzNk01+Zns3eyZkGyZ4IYJKHjDftRjGwmxx0jUk6qGnhcXFpox 3qztNsBLYK+jZmsJUsk7vg== 0000950109-97-007608.txt : 19971219 0000950109-97-007608.hdr.sgml : 19971219 ACCESSION NUMBER: 0000950109-97-007608 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971218 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: SEC FILE NUMBER: 001-11720 FILM NUMBER: 97740335 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 27, 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 27, 1997 ------------------ OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to ------ ------ Commission file number 1-11720 ADVO, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 06-0885252 - -------------------------------------- ---------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Univac Lane, P.O. Box 755, Windsor, CT 06095-0755 - ------------------------------------------- -------------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (860) 285-6100 Securities registered pursuant to Section 12(b) of the Act: Common Stock and Rights, par value $.01 per share ------------------------------------------------- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: NONE ---- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the registrant at November 28, 1997 was $446,458,574. On that date, there were 22,487,846 outstanding shares of the registrant's common stock. Documents Incorporated by Reference: Portions of the 1997 Annual Report to Stockholders are incorporated by reference into Parts II and IV of this Report. Portions of the Proxy Statement for the 1998 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 27, 1997 PART I
ITEM PAGE - ---- ---- 1. Business.............................................................. 1 2. Properties............................................................ 5 3. Legal Proceedings..................................................... 5 4. Submission of Matters to a Vote of Security Holders................... 5 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters. 6 6. Selected Financial Data............................................... 6 7. Management's Discussion and Analysis of Financial Condition and Re- sults of Operations................................................... 7 8. Financial Statements and Supplementary Data........................... 7 9. Changes in and Disagreements with Accountants on Accounting and Finan- cial Disclosure....................................................... 7 PART III 10. Directors and Executive Officers of the Registrant.................... 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....... 8
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 120 markets. This program is used by local and national retailers. The ZIP Code configuration selected for each market is normally determined by population density and by proximity to retail outlets. Retailers with multiple locations and weekly frequency have a great influence on the ZIP Codes chosen by the Company for its weekly mailings. The Company derives most of its revenues from the Marriage Mail(R) program. At the beginning of fiscal 1997, the Company announced that it had formed a new network, known as A.N.N.E. (ADVO National Network Extension), of regional shared mail companies to provide its clients with extended coverage outside the markets already served by the Company. The Company handles the clients' orders directly and manages distribution of their advertising through A.N.N.E.'s network partners. Conversely, the A.N.N.E. network enables participating partners (shared mail companies) to offer their clients extended marketplace reach using the Company's services. SOLO MAIL Solo mail services include addressing and processing brochures and circulars for an individual customer for distribution through the USPS. Each customer bears the full cost of postage and handling for each mailing. Customers choosing this form of direct mail are generally those who wish to maintain an exclusive image and complete control over the timing and the target of their mailings. The Company processes solo mail using its own mailing list or lists supplied by the customer. The Company charges a processing fee based on the solo mail services rendered. OTHER PRODUCTS AND SERVICES 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 114 million delivery points (constituting nearly all of the 2 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 1980 and 1990 census questionnaire mailings. The Company's management believes that the list is particularly valuable and that replication in its entirety by competitors would be extremely difficult and costly. The list enables the Company to target mailings to best serve its customers. ADVO's list is updated on a regular basis with information supplied by the USPS. Bimonthly, ADVO submits each address on its mailing list to the USPS. The USPS then provides to ADVO any changes to the addresses within the ZIP Code. Such changes would cover whether the address is still occupied, whether the address still exists at all (i.e., demolished buildings) and any new addresses included in the ZIP Code (i.e., new construction). The USPS also indicates to ADVO changes in the walk sequence order of addresses 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% complete on a ZIP Code basis. ADVO believes its list is nearly 100% accurate. CUSTOMER BASE Typically, the Company's customers are those businesses whose products and services are used by the general population. These businesses (supermarkets, fast food, drug stores, discount and department stores and consumer products manufacturers) require continuous advertising to a mass audience. No one customer accounted for more than 4% of the Company's sales in fiscal 1997, 1996 or 1995. OPERATIONS Customers' advertising circulars are processed by approximately 2,500 production employees who work at 19 mail processing facilities which are strategically located throughout the nation. State-of-the-art inserting machines (which combine the individual advertising pieces into the mailing packages), addressing and labeling, and quarter-folding machines are the principal equipment used to process the Company's products and services. At several of the Company's production facilities, new computerized mail sorters are being utilized and developed. In all 19 of ADVO's mail processing facilities, the USPS accepts and verifies the Company's mail to help ensure rapid package acceptance and distribution, which benefits both the USPS and the Company. In most instances, the mail is then shipped by the Company to the destination office of the USPS for final delivery. During fiscal 1996, the Company entered into a ten year agreement with Integrated Systems Solutions Corporation, now known as IBM Global Services, to provide systems development and technical support to the Company. As a result of this outsourcing, ADVO's computer center moved from Hartford to IBM Global Services' computer center located in Southbury, Connecticut. The Company's branches are on-line to this computer center which enables the day-to-day processing functions to be performed and provides corporate headquarters with management information. The systems include: order processing and production control, transportation/distribution, address list maintenance, market analysis, label printing and distribution, billing and financial and carrier routing of addresses received from customer files and demographic analyses. COMPETITION In general, the printed advertising market is highly competitive with companies competing primarily on the basis of price, speed of delivery and ability to target selected potential customers on a cost-effective basis. ADVO's competitors for the delivery of retail and other printed advertising are numerous, and include newspapers, regional and local mailers, direct marketing firms, "shoppers" and "pennysavers". 3 Newspapers represent the Company's most significant and direct competition. Through the distribution of preprinted circulars, classified advertising and run of press advertising ("ROP"), newspapers have been the traditional and dominant medium for advertising by retailers for many years. Insertion rates are highly competitive and many newspapers' financial resources are substantial. ADVO's principal direct marketing competitors are other companies with residential lists or similar cooperative mailing programs. These companies have a significant presence in many of the Company's markets and represent serious competition to the Company's Marriage Mail(R) programs in those markets. There are local mailers in practically every market of the country. In addition to local mailers, there are many local private delivery services such as "shoppers" and "pennysavers" which compete by selling ROP advertisements and classified advertisements. ADVO believes that it competes effectively in its various markets. SEASONALITY ADVO's business generally follows the trends of retail advertising spending. The Company has historically experienced higher revenues in the second half of the calendar year. RESEARCH AND DEVELOPMENT Expenditures of the Company in research and development during the last three years have not been material. ENVIRONMENTAL MATTERS The Company believes that it is substantially in compliance with all regulations concerning the discharge of materials into the environment, and such regulations have not had a material effect on the capital expenditures or operations of the Company. RAW MATERIALS The Company manages approximately 45,000 tons of paper per year and another 10,000 tons through its printing network on behalf of its print vendors. ADVO has agreements with various paper suppliers and print vendors to assure the supply of proper paper grades at competitive prices. EMPLOYEES As of September 27, 1997, the Company had a total of approximately 4,700 full and part-time employees. ADVO also uses outside temporary employees, particularly during busy seasons. ADVO has one union contract, covering production employees in the Hartford, Connecticut branch. The Company believes that its relations with its employees are satisfactory. FORWARD LOOKING STATEMENTS Except for the historical information stated herein, the matters discussed in this Report on Form 10-K contain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward looking statements are accompanied by cautionary factors which would cause the Company's actual results to differ materially from those in the forward looking statements. Such factors include but are not limited to changes in customer demand; 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 4 to the Company's data centers and telecommunication lines; the efficiencies achieved with technology upgrades; the amount of shares the Company will purchase in the future under its buyback program; the evaluation of the impact of year 2000 costs; and other general economic factors. 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 19 mail processing facilities and approximately 65 sales offices (which excludes the sales offices that are located in the mail processing facilities) throughout the United States. The Company believes its facilities are suitable and adequate for the purposes for which they are used and are adequately maintained. ITEM 3. LEGAL PROCEEDINGS ADVO is party to various lawsuits and regulatory proceedings which are incidental to its business and which the Company believes will not have a material adverse effect on its consolidated financial condition, liquidity or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH COMPANY ---- --- --------------------- Robert Kamerschen......... 61 Chairman and Chief Executive Officer Gary M. Mulloy............ 52 President and Chief Operating Officer Donald E. McCombs......... 41 Senior Vice President and Chief Financial Officer Rick Kurz................. 57 Senior Vice President Myron L. Lubin............ 57 Senior Vice President A. Brian Sanders.......... 36 Senior Vice President Robert S. Hirst........... 51 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 has been President and Chief Operating Officer since November 4, 1996 and was elected to the Board of Directors on December 3, 1996. From 1990 to October 1996 he was President and Chief Executive Officer of Pilkington Barnes-Hind, Inc., a division of Pilkington Vision Care. Mr. McCombs became Senior Vice President and Chief Financial Officer on November 7, 1997. From 1989 to October 1997, he was Vice President--Financial Planning and Measurements. He had held that position for the last eight years. Mr. Kurz became Senior Vice President and Chief Strategic Growth Officer on April 15, 1997. From April 1993 to March 1997, he held the position of Senior Vice President--Chief Marketing Officer. Prior to that, he was a Managing Partner of Marketing Corporation of America, a marketing consulting firm. 5 Mr. Lubin became Senior Vice President--Chief Sales Officer on December 4, 1995. From January 1990 to November 1995, he held the position of Senior Vice President-President Western Division. Mr. Sanders became Senior Vice President--Chief Marketing Officer on May 19, 1997. For the five years prior to that he held several executive positions at Pilkington Barnes-Hind, Inc., a division of Pilkington Vision Care. Mr. Hirst became Vice President and Controller on April 16, 1990. He has held that position for the last seven 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 been qualified, or until his earlier resignation or removal. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ADVO's 1997 Annual Report to Stockholders includes on page 37 under the caption "Quarterly Financial Data (Unaudited)" the reported high and low market prices of ADVO's common stock for the past two fiscal years, and such information is incorporated herein by reference and made a part hereof (see Exhibit 13). For the fiscal year ended September 27, 1997, the Company declared no cash dividends. During fiscal 1996, the Company paid a regular first quarter dividend of $.025 per share of ADVO common stock, payable to shareholders of record on December 27, 1995. On January 17, 1996 the Company announced the declaration of a special one time dividend (the "Special Dividend") of $10 per share of ADVO common stock to 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 Company is currently subject to ratio restrictions regarding future cash dividends exceeding $.025 per share as stipulated in its renegotiated credit agreement dated September 29, 1997, with Chase Manhattan Bank. The 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. The closing price as of November 28, 1997 of the Company's common stock, under the symbol AD, on the New York Stock Exchange as reported in The Wall Street Journal was $21 3/4 per share. The approximate number of holders of record of the common stock on November 28, 1997 was 915. During fiscal 1997, 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 1997 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). 6 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 1997 Annual Report to Stockholders on pages 21 through 25 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, 1997, appearing on pages 26 through 38 of ADVO's 1997 Annual Report to Stockholders, are incorporated herein by reference and made a part hereof (see Exhibit 13). The selected quarterly information required by this item is included under the caption "Quarterly Financial Data (Unaudited)" on page 37 of ADVO's 1997 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 3 and 4 of the Company's definitive proxy statement dated December 18, 1997 for the annual meeting of stockholders to be held on January 22, 1998 (the "Proxy Statement"), under the caption "Election of Directors", and on page 6 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 6 through 16 (except for those portions appearing under the subcaptions "Report of the Compensation Committee" and "Company Financial Performance"), and "Governance of the Company" on pages 2 and 3, of ADVO's Proxy Statement and is incorporated herein by reference and made a part hereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" on page 2 and on pages 5 and 6, respectively, of ADVO's Proxy Statement and is incorporated herein by reference and made a part hereof. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included under the caption "Related Party Transactions" on page 16 and page 17 of ADVO's Proxy Statement and in footnote 8 under the caption "Security Ownership of Management" on pages 5 and 6 of ADVO's Proxy Statement and is incorporated herein by reference and made a part hereof. 7 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements. See the Index to Financial Statements and Financial Statement Schedules on page F-1. (2) Financial Statement Schedules. See the Index to Financial Statements and Financial Statement Schedules on page F-1. (3) Exhibits. The following is a list of the exhibits to this Report:
EXHIBIT NO. EXHIBIT WHERE LOCATED - ----------- ------- ------------- 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 A of ADVO, as amended.* to the Company's definitive Proxy Statement for the annual meeting held on January 16, 1997. 10(c) 1988 Non-Qualified Stock Option Plan Incorporated by reference to Exhibit B and 1993 Stock Option Subplan of to the Company's definitive Proxy ADVO, as amended.* Statement for the annual meeting held on January 16, 1997. 10(d) The ADVO Savings Continuation Plan, Incorporated by reference to Exhibit effective January 1, 1988.* 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1988. 10(e) Executive Severance Agreement, dated Incorporated by reference to Exhibit October 17, 1995 between ADVO and 10(k) to the Company's Annual Report Robert Kamerschen.* on Form 10-K for the fiscal year ended September 30, 1995. 10(f) Executive Severance Agreements, dated Incorporated by reference to Exhibit October 17, 1995 between ADVO and 10(m) to the Company's Annual Report the executive officers named on Form 10-K for the fiscal year therein.* ended September 30, 1995. 10(g) 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(h) Employment Agreement, dated May 29, Incorporated by reference to Exhibit 1996 between ADVO and Robert 10(k) to the Company's Annual Report Kamerschen.* on Form 10-K for the fiscal year ended September 28, 1996. 10(i) Employment Agreement, dated November Incorporated by reference to Exhibit 4, 1996 between ADVO and Gary M. 10(l) to the Company's Annual Report Mulloy.* on Form 10-K for the fiscal year ended September 28, 1996. 10(j) Executive Severance Agreement, dated Incorporated by reference to Exhibit November 4, 1996 between ADVO and 10(m) to the Company's Annual Report Gary M. Mulloy.* on Form 10-K for the fiscal year ended September 28, 1996. 10(k) Executive Severance Agreement dated Filed herewith. May 19, 1997 between ADVO and A. Brian Sanders.* 10(l) Executive Severance Agreement dated Filed herewith. July 21, 1997 between ADVO and Lowell W. Robinson.* 10(m) Executive Severance Agreement dated Filed herewith. November 7, 1997 between ADVO and Donald E. McCombs.* 10(n) Information Technology Agreement Incorporated by reference to Exhibit dated as of July 16, 1996 between 10(o) to the Company's Annual Report ADVO and Integrated Systems on Form 10-K for the fiscal year Solutions Corporation. ended September 28, 1996. 10(o) Amended and Restated Credit Agreement Incorporated by reference to Exhibit dated September 29, 1997 between 99(b) of the Company's Form 8-K dated ADVO and a syndicate of lenders led September 29, 1997. by Chase Manhattan Bank as Administrative Agent. 11 Computation of Per Share Earnings. Filed herewith. 13 1997 Annual Report to Stockholders. Furnished herewith; however, such report, except for those portions thereof which are expressly incorporated by reference into this Annual Report on Form 10-K, is for the information of the Commission and is not deemed "filed". 21 Subsidiaries of the Registrant. Filed herewith. 22 Power of Attorney. See signature page. 23 Consent of Independent Auditors. Filed herewith. 27 Financial Data Schedule. Filed herewith.
- -------- * Management contract or compensatory plan required to be filed as an exhibit pursuant to item 14(c) of this report. 9 (b) Reports on Form 8-K. No report on Form 8-K was filed by the Company with respect to the quarter ended September 27, 1997. A report on Form 8-K dated September 29, 1997 was filed by the Company subsequent to year end. The Form reported under Item 5 thereof, that the Company announced it had increased its previously announced stock repurchase authorization from 2 million shares to 3.2 million shares. In connection with the increased authorization, the Company purchased 1,936,098 shares of its common stock from Warburg, Pincus Capital Partners, L. P. for $34.8 million, at $18.00 per share. The closing price on September 29, 1997 was $18 3/8 per share. The Company also announced it had renegotiated its March 4, 1996 credit agreement with a consortium of banks, led by Chase Manhattan Bank. The most prominent features of the new agreement included an increased credit limit to $300 million (from $250 million); a reduction in the interest rate; and an increased limit on the Company's authorization to buyback its stock from $40 million to $100 million. 10 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Date: December 18, 1997 ADVO, Inc. ------------------------------- By: Robert S. Hirst /s/ --------------------------------- ROBERT S. HIRST VICE PRESIDENT AND CONTROLLER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. 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, 1997 Robert Kamerschen /s/ Chairman, Chief Executive ---------------------------- Officer and Director ROBERT KAMERSCHEN (Principal Executive Officer) December 18, 1997 Gary M. Mulloy /s/ President, Chief ---------------------------- Operating Officer and GARY M. MULLOY Director December 18, 1997 Donald E. McCombs /s/ Senior Vice President and ---------------------------- Chief Financial Officer DONALD E. MCCOMBS (Principal Financial Officer) December 18, 1997 Robert S. Hirst /s/ Vice President and ---------------------------- Controller (Principal ROBERT S. HIRST Accounting Officer) December 18, 1997 Bruce Crawford /s/ Director ---------------------------- BRUCE CRAWFORD December 18, 1997 David F. Dyer /s/ Director ---------------------------- DAVID F. DYER December 18, 1997 James A. Eskridge /s/ Director ---------------------------- JAMES A. ESKRIDGE December 18, 1997 Jack W. Fritz /s/ Director ---------------------------- JACK W. FRITZ December 18, 1997 Howard H. Newman /s/ Director ---------------------------- HOWARD H. NEWMAN December 18, 1997 John R. Rockwell /s/ Director ---------------------------- JOHN R. ROCKWELL December 18, 1997 John L. Vogelstein /s/ Director ---------------------------- JOHN L. VOGELSTEIN 11 ADVO, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE ---- Report of independent auditors........................................... * Consolidated statements of operations for the years ended September 27, 1997, September 28, 1996 and September 30, 1995......................... * Consolidated balance sheets at September 27, 1997 and September 28, 1996. * Consolidated statements of cash flows for the years ended September 27, 1997, September 28, 1996 and September 30, 1995......................... * Consolidated statements of changes in stockholders' equity (deficiency) for the years ended September 27, 1997, September 28, 1996 and September 30, 1995................................................................ * 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. - -------- * Incorporated herein by reference from pages 26 to 38 of the ADVO, Inc. 1997 Annual Report to Stockholders. F-1 ADVO, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ---------- --------------------- ---------- ---------- ADDITIONS --------------------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT BEGINNING COSTS AND OTHER FROM END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES PERIOD ----------- ---------- ---------- ---------- ---------- ---------- Year ended September 30, 1995: Allowances for sales ad- justments.............. $ 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 ad- justments.............. $ 2,126 $ -- $ 10,007(b) $ 9,297 $ 2,836 Allowances for doubtful accounts............... 1,292 3,701 -- 3,603(a) 1,390 Restructuring reserve... 9,879 -- -- 7,820 2,059 Accumulated amortization Goodwill............... 1,032 390 -- -- 1,422 Accumulated amortization Intangibles............ 4,398 892 -- -- 5,290 ------- ------ -------- ------- ------- $18,727 $4,983 $ 10,007 $20,720 $12,997 ======= ====== ======== ======= ======= Year ended September 27, 1997: Allowances for sales ad- justments.............. $ 2,836 $ -- $ 4,889(b) $ 5,143 $ 2,582 Allowances for doubtful accounts............... 1,390 5,374 -- 4,186(a) 2,578 Restructuring reserve... 2,059 -- -- 1,711 348 Accumulated amortization Goodwill............... 1,422 392 -- -- 1,814 Accumulated amortization Intangibles............ 5,290 729 -- -- 6,019 ------- ------ -------- ------- ------- $12,997 $6,495 $ 4,889 $11,040 $13,341 ======= ====== ======== ======= =======
- -------- (a) Write off of uncollectible accounts, net of recoveries on accounts previously written off. (b) Reduction of revenues. (c) Reclassification of allowances related to discontinued operations. F-2 EX-10.K 2 EXECUTIVE SEVERANCE AGREEMENT Exhibit 10(k) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of May 19, 1997 by and between ADVO, Inc. (the "Company") and A. Brian Sanders (the "Executive"). RECITALS: -------- A. The Executive is an executive of the Company and has made and is expected to continue to make major contributions to the short-and long-term profitability, growth, and financial strength of the Company; B. The Company recognizes that the possibility of a Change of Control (as hereafter defined) exists; C. The Company desires to assure itself of both present and future continuity of its management and desires to establish certain severance benefits for key executive officers of the Company, including the Executive, applicable in the event of a Change of Control; and D. The Company wishes to aid in assuring that such executives are not practically disabled from discharging their duties in respect of a proposed or actual transaction involving a Change of Control. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Certain Defined Terms: In addition to terms defined elsewhere herein, --------------------- the following terms have the following meanings when used in this Agreement with initial capital letters: (a) "Affiliate" means (i) each entity in which the Company, alone or together with one or more other Affiliates of the Company, owns not less than 80% of the then outstanding voting securities or, for any entity that is not a corporation, at least 80% of the then-outstanding capital interests of such entity and (ii) any additional entity which is deemed by action of the Board to be an Affiliate for the purposes of this Agreement. (b) "Base Pay" means the Executive's annual aggregate fixed base salary from the Company at the time in question. (c) "Board" means the Board of Directors of the Company. (d) "Change of Control" means the occurrence during the Term of any of the following events: 1 (i) The acquisition by an individual, entity or group (within the meaning of Section 13 (d)(3) or 14 (d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided however, that for purposes of this Subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 30% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 30% or more of the Outstanding Company Voting Securities; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; and provided, further, that any partner, employee or representative of Warburg proposed by Warburg to be elected to the Board shall be considered a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then 2 outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For the purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. (f) "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that if the Executive is Terminated by the Company other than for Cause or for disability pursuant to Section 2(a) (ii), the Date of Termination will be the date on which the Executive receives the Notice of Termination from the Company; and provided further, 3 if the Executive is Terminated by reason of death or disability pursuant to Section 2(a)(i) or 2(a)(ii), the Date of Termination will be the last day of the month in which occurs the date of death or the disability effective date, as the case may be. (g) "Employee Benefits" means the perquisites, benefits and service credit for benefits as provided under the plans and programs maintained by the Company, including, but not limited to, plans and programs which are "employee benefit plans" under Section 3 (3) of the Employee Retirement Income Security Act of 1974, as amended, and any amendment or successor, to such plans or programs (whether insured, funded or unfunded). (h) "Good Reason" means the occurrence of any of the events listed in Sections 2(b)(i) through 2(b)(vii), inclusive. (i) "Incentive Pay" means an annual amount equal to the aggregate annual bonus, in addition to Base Pay, made or to be made in regard to services rendered in any calendar year or performance period pursuant to any bonus plan of the Company. (j) "Notice of Termination" means a written notice which (i) indicates the specific provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for the Termination under the provision so indicated, and (iii) if the effective date of the Termination is other than the date of receipt of such notice, specifies the effective date of Termination (which date will not be more than sixty (60) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing that the Executive is entitled to the benefits intended to be provided by this Agreement will not constitute a waiver of any right of the Executive hereunder or otherwise preclude the Executive from later asserting such fact or circumstance in enforcing the Executive's rights hereunder. (k) "Severance Period" means the period of time commencing on the date of an occurrence of a Change of Control and continuing until the earlier of (i) the date which is one and one-half years following the occurrence of the Change of Control, and (ii) the Executive's death. (l) "Subsidiary" means an entity, at least a majority of the total voting power of the then-outstanding voting securities of which is held, directly or indirectly, by the Company and/or one or more other Subsidiaries or, for any entity that is not a corporation, at least a majority of the then- outstanding capital interests of which is so held. (m) "Term" means (A) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to 4 as the "Renewal Date"), unless previously terminated, the Term shall be automatically extended so as to terminate two years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Term shall not be so extended, (B) if, prior to a Change of Control, for any reason the Executive is Terminated or Terminates, thereupon without further action the Term shall be deemed to have expired and this Agreement will immediately terminate and be of no further effect, and (C) in the event of a Change of Control, the Term will, without further action, be considered to terminate at the expiration of the Severance Period. (n) "Terminate" and correlative terms mean the termination of the Executive's employment with the Company and any Affiliate or Subsidiary. (o) "Warburg" means Warburg, Pincus Capital Partners, L.P., and/or any of its affiliates. 2. Termination Following a Change of Control: (a) If, during the ----------------------------------------- Severance Period, the Executive is Terminated, the Executive will be entitled to the benefits provided by Sections 3 and 4 unless such termination is by reason of one or more of the following events: (i) The Executive's death; (ii) The permanent and total disability of the Executive as defined in any long term disability plan of the Company, applicable to the Executive, as in effect immediately prior to the Change of Control; (iii) Cause; or (iv) The Executive's voluntary Termination in circumstances in which Good Reason does not exist. (b) In the event of the occurrence of a Change of Control, the Executive may Terminate during the Severance Period with the right to severance compensation as provided in Sections 3 and 4 upon the occurrence of one or more of the following events (regardless of whether any other reason, other than Cause as hereinabove provided, for Termination exists or has occurred, including without limitation other employment): (i) An adverse change in the nature or scope of the authorities, powers, functions, responsibilities, or duties attached to the position with the Company; which the Executive held immediately prior to the Change of Control; (ii) A reduction in the Executive's Base Pay as in effect immediately prior to any Change of Control, or as it may have been increased from time to time thereafter; 5 (iii) Any failure by the Company to continue in effect any plan or arrangement providing Incentive Pay in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing substantially similar benefits) or the taking of any action by the Company, any Affiliate or Subsidiary which would adversely affect the Executive's participation in any such plan or arrangement or reduce the Executive's benefits under any such plan or arrangement in a manner inconsistent with the practices of the Company prior to the Change of Control; (iv) Any failure by the Company to continue in effect any Employee Benefits in which the Executive is participating at the time of a Change of Control (or any other plans or arrangements providing the Executive with substantially similar benefits) or the taking of any action by the Company, an Affiliate or Subsidiary which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any Employee Benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of a Change of Control; (v) The liquidation, dissolution, merger, consolidation, or reorganization of the Company or transfer of all or substantially all of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization, transfer, or otherwise) to which all or a significant portion of its business and/or assets have been transferred (directly or by operation of law) assumed all duties and obligations of the Company under this Agreement pursuant to Section 9; (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto; or (vii) Any action by the Company which causes the Executive's services to be performed at a location which is more than thirty five (35) miles from the location where the Executive was employed immediately preceding the date of the Change of Control. (c) Any Termination will be communicated by Notice of Termination hereto given in accordance with Section 10 of this Agreement. 3. Severance Compensation: (a) If, following the occurrence of a Change ---------------------- of Control, the Executive is Terminated by the Company during the Severance Period other than in the circumstances set forth in Section 2 (a) (i), 2 (a) (ii), or 2 (a) (iii), or if the Executive Terminates for Good Reason: (i) The Company will pay to the Executive in a lump sum in cash within five (5) business days after the later of the date on which the Company receives the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination the aggregate of the amount (the "Severance Payment") equal to one and one-half times the sum of (A) the Executive's Base Pay at the highest rate in effect at any time within the 90-day period preceding the date the Notice of Termination was given or, 6 if higher, at the highest rate in effect at any time within the 90-day period preceding the date of the first occurrence of a Change of Control, and (B) an amount equal to the greatest amount of Incentive Pay received by the Executive during any calendar year or portion thereof from and including the third calendar year prior to the first occurrence of a Change of Control; and (ii) For the period of one and one-half years from the Date of Termination, the Executive shall be eligible for participation in and shall receive all benefits under such benefit plans, practices, policies and programs of the Company that provide medical, prescription dental, or life insurance coverage, with the costs of such participation to be paid by the Company to the same extent as prior to the Executive's Termination. In the event that such continued participation is not allowed under the terms and provisions of such plans or programs, then in lieu thereof, the Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company for the period referred to in the preceding sentence. (b) There will be no right of set-off or counter-claim in respect of any claim, debt, or obligation against any payment to or benefit for the Executive provided for in this Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of The Wall Street Journal. Such interest will be payable as ----------------------- it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties, respective rights and obligations under this Section 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. Excise and Other Taxes. The Executive shall bear all expense of, and ---------------------- be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder, including, without limitation, any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code); provided, however, that all payments under this Agreement shall be reduced to the extent necessary so that no portion thereof shall be subject to the excise tax imposed by Section 4999 of the Code but only if, by reason of such reduction, the net after-tax benefit received by the Executive shall exceed the net after-tax benefit received by the Executive if no such 7 reduction was made. For purposes of this Section 4, "net after-tax benefit" shall mean (i) the total of all payments and the value of all benefits which the Executive receives or is then entitled to receive from the Company that would constitute "parachute payments" within the meaning of Section 280G of the Code, less (ii) the amount of all federal, state and local income taxes payable with respect to the foregoing calculated at the maximum marginal income tax rate for each year in which the foregoing shall be paid to the Executive (based on the rate in effect for such year as set forth in the Code as in effect at the time of the first payment of the foregoing), less (iii) the amount of excise taxes imposed with respect to the payments and benefits described in (i) above by Section 4999 of the Code. The foregoing determination will be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive and reasonably acceptable to the Company (which may be, but will not be required to be, the Company's independent auditors). The Executive will direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within fifteen (15) days after the Date of Termination. If the Accounting Firm determines that such reduction is required by this Section 4, the Company shall pay such reduced amount to the Executive in accordance with Section 3 (a). If the Accounting Firm determines that no reduction is necessary under this Section 4, it will, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the Executive will not be liable for any excise tax under Section 4999 of the Code. The Company and the Executive will each provide the Accounting Firm access to and copies of any books, records, and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by this Section 4. The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by this Section 4 will be borne by the Company. 5. No Mitigation Obligation: The Company hereby acknowledges that it ------------------------ will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Date of Termination. The payment of the severance compensation by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and the Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings, or other benefits from any source whatsoever create any mitigation, offset, reduction, or any other obligation on the part of the Executive hereunder or otherwise. 6. Legal Fees and Expenses: If the Company has failed to comply with any ----------------------- of its obligations under this Agreement or in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, the Executive the benefits provided or intended to be provided to the Executive hereunder, the Company irrevocably authorizes the Executive from time to 8 time to retain counsel of the Executive's choice, at the expense of the Company, to advise and represent the Executive in connection with any such interpretation, enforcement, or defense, including without limitation the initiation or defense of any litigation or other legal action, whether by or against the Company or any member of the Board, officer, stockholder, or other person or entity affiliated with the Company, in any jurisdiction. The Company will pay and be solely financially responsible for any and all attorneys' and related fees and expenses incurred by the Executive in connection with such litigation. 7. Employment Rights: Nothing expressed or implied in this Agreement ----------------- will create any right or duty on the part of the Company or the Executive to have the Executive remain in the employment of the Company, or any Affiliate or Subsidiary prior to or following any Change of Control. 8. Withholding of Taxes: The Company may withhold from any amounts -------------------- payable under this Agreement all federal, state, city, or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. 9. Successors and Binding Agreement: (a) The Company will require any -------------------------------- successor (whether direct or indirect, by purchase, merger, consolidation, reorganization, or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company, whether by purchase, merger, consolidation, reorganization, or otherwise (and such successor will thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable, or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, and/or legatees. (c) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer, or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Sections 9 (a) and 9 (b). Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable, or delegable, whether by pledge, creation of a security interest, or otherwise, other than by a transfer by will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 9 (c), the Company will have no liability to pay any amount so attempted to be assigned, transferred, or delegated. 9 10. Notices: For all purposes of this Agreement, all communications, ------- including, without limitation, notices, consents, requests, or approvals, required or permitted to be given hereunder will be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof orally confirmed), or two business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or one business day after having been sent by a nationally recognized overnight courier service addressed to the Company (to the attention of the General Counsel of the Company) at its principal Executive office and to the Executive at the Executive's principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address will be effective only upon receipt. 11. Governing Law: The validity, interpretation, construction, and ------------- performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Connecticut, without giving effect to the principles of conflict of laws of such State, to the extent not preempted by applicable federal law. 12. Validity: If any provision of this Agreement or the application of -------- any provision hereof to any person or circumstances is held invalid, unenforceable, or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable, or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid, or legal. 13. Non-Exclusivity of Rights: Nothing in this Agreement will prevent or ------------------------- limit the Executive's present or future participation in any benefit, bonus, incentive, or other plan or program provided by the Company or any Affiliate or Subsidiary for which the Executive may qualify, nor will this Agreement in any manner limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any Affiliate or Subsidiary. Amounts or benefits which are vested or which the Executive is otherwise entitled to receive under any plan or program of the Company at or subsequent to the Date of Termination will be payable in accordance with such plan or program, except as otherwise expressly provided in this Agreement; provided, however, that any amounts received by the Executive pursuant to this Agreement shall be in lieu of any benefits which the Executive is entitled to receive or may become entitled to receive under any reduction-in-force or severance pay plan or practice which the Company now has in effect or may hereafter put into effect, any other benefits to which the Executive may be entitled under any individual agreement of employment with the Company which would provide a benefit to the Executive upon the occurrence of a Change of Control of the Company, and any severance benefits required under federal or state law to be paid to the Executive. 14. Miscellaneous: (a) No provision of this Agreement may be modified, ------------- waived, or discharged unless such waiver, modification, or discharge is agreed to in 10 writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. (b) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. ADVO, Inc. By ROBERT KAMERSCHEN /s/ ---------------------- Robert Kamerschen A. BRIAN SANDERS /s/ ---------------------- A. Brian Sanders 11 EX-10.L 3 EXECUTIVE SEVERANCE AGREEMENT / JULY 1997 Exhibit 10(l) FORM OF AGREEMENT Revised July 21, 1997 - --------------------- April 29, 1997 Lowell W. Robinson Hartford, CT 06103 Dear Lowell: This letter will confirm our discussion regarding your termination from your position of Executive Vice President and Chief Financial Officer of ADVO. Moreover, this letter will further serve as our Agreement on the terms and conditions of the severance arrangement ADVO, Inc. will provide you. 1. You are leaving your position with ADVO, Inc. as of May 31, 1997. During the next 5 weeks, you will be working closely with myself and Gary Mulloy to ensure a smooth transition in all of your areas. 2. Effective end of business May 31, 1997, you will be placed on inactive wage continuation pay status for a period of one year, through May 31, 1998. While on inactive pay status, you will be paid on each regular pay date throughout this period at your current rate of pay. If you were participating in the Company's medical, dental, group universal life, dependent life, 401(k) (Sales Savings) or Employee Stock Purchase plans on your termination date, you may continue such participation up to the date your wage continuation ends (provided you make any required associate contributions). You will continue to be covered by the Company's basic group life insurance plan. Matching employer Social Security contributions will be made on your behalf throughout this period as well. You will not be eligible for the Company's short-term and long-term disability benefits plans, workers' compensation, vacation accrual, auto allowance, or bonus beyond your termination date. Any earned vacation pay you have not taken will be paid in a lump sum and added to your last wage continuation payment. The Executive Long-Term Disability Supplement will be continued at ADVO's expense through the end of the calendar year 1997. At that time, a representative from Paul Revere will contact you to discuss continuing coverage at your own expense. Currently, the annual premium for calendar year 1997 is $4,569.41. You will be reimbursed for any penalty incurred because of any early termination of your lease at the Gold Street address. 3. Your fiscal 1997 bonus will be paid in November, prorated for your active service through May 31, 1997, dependent on company performance. Per your April 28, 1994 agreement, you will receive your full target bonus for the one year of salary continuation starting on June 1, 1997 and ending on May 31, 1998. You will not be eligible for any other bonus consideration. 4. All company property (i.e., keys, credit cards, etc.) must be returned to Mardelle Pena no later than May 31, 1997, unless other arrangements are mutually agreed upon prior to that time. You will be entitled to the use of your phone card through the end of your wage continuation or upon reemployement, whichever occurs first. Also, per your request, the fair market value for the fax machine is $250.00. Please make a check payable to ADVO, Inc. in that amount and forward it to Rosemary Begley. 5. If you obtain other employment during your period of inactive pay status, you must notify me of such other employment, and you will then be removed from inactive pay status on the first day you start work at your new job. At that time, you will be given as a lump sum, less applicable withholding, the amount due to you thereunder through May 31, 1998. 6. As long as you are on the inactive wage continuation status described above, all stock options shall continue to vest on their normal schedule. When you leave inactive wage continuation status, all vesting shall cease. You will have three months after that date in which to exercise any outstanding options. You can contact David Stigler directly for more information about stock-related matters. 7. ADVO, Inc. will provide you full executive outplacement services through Beam Pines. Their telephone number for their New York office is 212-476- 4100 ext. 264, and your contact will be Howard Pines. You will have the option of either using their office facilities and support staff or utilizing an office in an executive suite arrangement, within New York City, including administrative support at ADVO's expense. This will need to be coordinated through Mardelle Pena. This outplacement assistance, which is something for which you would not be eligible under ADVO's policy, is in consideration for your signing this Agreement. While you are in outplacement, you will cooperate with the Company on any transitional issues. 8. After your wage continuation status ends, ADVO will not contest on the basis of termination, any application which you make for unemployment compensation at the appropriate agency as long as all other aspects of the application are accurate. 9. Within 14 days of the end of your wage continuation period, you will receive notification of your right under COBRA legislation to elect continuation of group coverage under the Company's medical and/or dental plans. Additionally, you may have the option to convert your group medical coverage to an individual policy basis at the expiration of the COBRA continuation period. You will have up to 31 days to convert your group basic and universal life insurance to an individual policy basis. You will receive the written COBRA notice from the Corporate Benefits Department and may inquire to them about details regarding these privileges, 860-285-6307. 10. In consideration for the outplacement described in paragraph 7 and additional wage continuation beyond policy discussed in paragraph 2, which you would otherwise not have been entitled to, you affirm that your leaving ADVO is not caused by any act of 2 discrimination by ADVO, its employees, officers or directors, past or present. You agree not to make any claims of any kind against ADVO before any agency, court or other forum, and you agree to release ADVO from any claim, known or unknown, arising in any way from any actions taken by ADVO up to the date of the signing of this Agreement including, but not limited to, any claim for wrongful discharge, breach of contract or other common law claims, or under any Federal, State or local statute or regulation including, but not limited to, Title VII of the Civil Rights Act of 1964 as Amended, 42 U.S.C. 2000E et. seq.; the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. 1001 et. seq.; the Age Discrimination in Employment Act, as amended, and the Civil Rights Act of 1991, and any claims for attorney's fees, expenses, or costs of litigation. 11. Also in consideration for the outplacement assistance discussed in paragraph 7 and additional wage continuation beyond policy discussed in paragraph 2, you promise not to disparage or otherwise reflect negatively upon the Company, its personnel or its business practices. You also promise to keep the terms of this agreement completely confidential. References that continue to reinforce the reasons put forth in the organizational announcement will be handled by me personally. 12. This Agreement supersedes all other Agreements or understandings, written or oral, that you may have with ADVO, Inc. on the subject matter discussed above, except that the Non-Compete Agreement between you and ADVO shall remain in full force and effect pursuant to its terms. This Agreement shall be binding upon ADVO's successor or assignee, if the control of ADVO should change during its term. 13. You acknowledge that you have read this Agreement carefully and fully understand its terms. You have been advised to seek counsel and have had an opportunity to do so, and you are executing this Agreement voluntarily and knowingly. You fully understand that signing this Agreement waives all legal claims against ADVO based on any actions taken by ADVO up to the date of the signing of this Agreement. 14. In the event that any provision of this Agreement is held to be void and unenforceable by a Court of competent jurisdiction, the remaining provisions of this Agreement shall nevertheless be binding upon the parties with the same effect as though the void or unenforceable part had been deleted. This Agreement shall be governed by and construed under the laws of the State of Connecticut and shall not be modified, in whole or in part, except by agreement in writing signed by ADVO and you. If you have any questions concerning this matter, please discuss them with me as soon as possible. 3 Please signify your acceptance of this Agreement by signing and returning a copy to me. You acknowledge that you have had a reasonable time to consider this Agreement. If it is acceptable to you, please sign it below and return it to me within 22 days. You will have seven (7) days thereafter to revoke this Agreement, after which it will be final. We will proceed to implement this Agreement as if you will sign it, but if you fail to do so, you will not be entitled to the outplacement services described in paragraph 7, or the wage continuation in excess of policy. Sincerely, ROBERT KAMERSCHEN /s/ - --------------------- Robert Kamerschen Accepted and agreed to this _______ day of _____________, 1997. - ----------------------- Lowell W. Robinson 4 EX-10.M 4 EXECUTIVE SEVERANCE AGREEMENT / NOV. 1997 Exhibit 10(m) EXECUTIVE SEVERANCE AGREEMENT ----------------------------- This EXECUTIVE SEVERANCE AGREEMENT (the "Agreement"), is made as of November 7, 1997 by and between ADVO, Inc. (the "Company") and Donald McCombs (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. 1 (d) "Change of Control" means the occurrence during the Term of any of the following events: (i) The acquisition by an individual, entity or group (within the meaning of Section 13 (d)(3) or 14 (d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Warburg (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 30% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided however, that for purposes of this Subsection (i), the following acquisitions shall not be deemed to result in a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 30% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 30% or more of the Outstanding Company Voting Securities; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; and provided, further, that any partner, employee or representative of Warburg proposed by Warburg to be elected to the Board shall be considered a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business 2 Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (e) "Cause" means that, prior to any Termination by the Executive for Good Reason, the Executive shall have: (i) committed an intentional act of fraud, embezzlement, or theft in connection with the Executive's duties or in the course of his employment with the Company; (ii) committed intentional wrongful damage to property of the Company; or (iii) intentionally and wrongfully disclosed confidential information of the Company; and any such act shall have been materially harmful to the Company. For the purposes of this Agreement, no act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interests of the Company. (f) "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, that if the Executive is Terminated by the Company other than for Cause or for disability 3 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 not be more than sixty (60) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing that the Executive is entitled to the benefits intended to be provided by this Agreement will not constitute a waiver of any right of the Executive hereunder or otherwise preclude the Executive from later asserting such fact or circumstance in enforcing the Executive's rights hereunder. (k) "Severance Period" means the period of time commencing on the date of an occurrence of a Change of Control and continuing until the earlier of (i) the date which is one and one-half years following the occurrence of the Change of Control, and (ii) the Executive's death. (l) "Subsidiary" means an entity, at least a majority of the total voting power of the then-outstanding voting securities of which is held, directly or indirectly, by the Company and/or one or more other Subsidiaries or, for any entity that is not a corporation, at least a majority of the then- outstanding capital interests of which is so held. (m) "Term" means (A) the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that 4 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 herein above 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; 5 (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 6 the determination of the Accounting Firm required in Section 4 hereof or the Date of Termination the aggregate of the amount (the "Severance Payment") equal to one and one-half times the sum of (A) the Executive's Base Pay at the highest rate in effect at any time within the 90-day period preceding the date the Notice of Termination was given or, if higher, at the highest rate in effect at any time within the 90-day period preceding the date of the first occurrence of a Change of Control, and (B) an amount equal to the greatest amount of Incentive Pay received by the Executive during any calendar year or portion thereof from and including the third calendar year prior to the first occurrence of a Change of Control; and (ii) For the period of one and one-half years from the Date of Termination, the Executive shall be eligible for participation in and shall receive all benefits under such benefit plans, practices, policies and programs of the Company that provide medical, prescription dental, or life insurance coverage, with the costs of such participation to be paid by the Company to the same extent as prior to the Executive's Termination. In the event that such continued participation is not allowed under the terms and provisions of such plans or programs, then in lieu thereof, the Company shall acquire individual insurance policies providing comparable coverage for the Executive; provided that if any such individual coverage is unavailable, the Company shall pay to the Executive an amount equal to the contributions that would have been made by the Company for such coverage on the Executive's behalf if the Executive had remained in the employ of the Company for the period referred to in the preceding sentence. (b) There will be no right of set-off or counter-claim in respect of any claim, debt, or obligation against any payment to or benefit for the Executive provided for in this Agreement. (c) Without limiting the rights of the Executive at law or in equity, if the Company fails to make any payment or provide any benefit required to be made or provided under this Agreement (including under this Section 3 or Section 6) on a timely basis, the Company will pay interest on the amount or value thereof at an annualized rate of interest equal to the so-called composite "prime rate" as quoted from time to time during the relevant period in the Northeast Edition of The Wall Street Journal. Such interest will be payable as ----------------------- it accrues on demand. Any change in such prime rate will be effective on and as of the date of such change. (d) Notwithstanding any other provision hereof, the parties, respective rights and obligations under this Section 3 and under Sections 4 and 6 will survive any termination or expiration of this Agreement following a Change of Control or any Termination following a Change of Control for any reason whatsoever. 4. Excise and Other Taxes. The Executive shall bear all expense of, and ---------------------- be solely responsible for, all federal, state, local or foreign taxes due with respect to any payment received hereunder, including, without limitation, any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code); provided, 7 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 8 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 9 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. 10 14. Miscellaneous: (a) No provision of this Agreement may be modified, ------------- waived, or discharged unless such waiver, modification, or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. References to Sections are to references to Sections of this Agreement. (b) The Executive and the Company acknowledge that this Agreement supersedes any other agreement between them concerning the subject matter hereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written. ADVO, Inc. By : ROBERT KAMERSCHEN /s/ ---------------------- Robert Kamerschen DONALD MCCOMBS /s/ ------------------ Donald McCombs 11 EX-11 5 COMPUTATION OF SHARES 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 27, SEPTEMBER 28, SEPTEMBER 30, 1997 1996 1995 ------------- ------------- ------------- EARNINGS APPLICABLE TO COMMON STOCK.. $26,798 $ 3,108 $24,951 ======= ======= ======= AVERAGE COMMON AND COMMON EQUIVALENT SHARES Average common shares outstanding.... 24,320 22,803 20,663 Assumed conversion or exercise of: Warrants........................... -- 844 2,272 Stock options...................... 357 462 310 Restricted stock................... 11 17 41 ------- ------- ------- Weighted average common and common equivalent shares................... 24,688 24,126 23,286 ======= ======= ======= EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES................... $ 1.09 $ .13 $ 1.07 ======= ======= =======
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 27, SEPTEMBER 28, SEPTEMBER 30, 1997 1996 1995 ------------- ------------- ------------- EARNINGS APPLICABLE TO FULLY DILUTED SHARES.............................. $26,798 $ 3,108 $24,951 ======= ======= ======= FULLY DILUTED SHARES Average common shares outstanding.... 24,320 22,803 20,663 Assumed conversion or exercise of: Warrants........................... -- 844 2,354 Stock options...................... 568 462 606 Restricted stock................... 13 38 74 ------- ------- ------- Fully diluted shares................. 24,901 24,147 23,697 ======= ======= ======= EARNINGS PER SHARE ASSUMING FULL DILUTION............................ $ 1.08 $ .13 $ 1.05 ======= ======= =======
EX-13 6 FINANCIAL STATEMENTS ADVO, INC. [Financial Contents] - ------------------------------------------------------------------------------- Selected Financial Data 20 Financial Report 21 Consolidated Statements of Operations 26 Consolidated Balance Sheets 27 Consolidated Statements of Cash Flows 28 Consolidated Statements of Changes in Stockholders' Equity (Deficiency) 29 Notes to Consolidated Financial Statements 30 Report of Independent Auditors 38 Financial Responsibility 38 Exhibit 13 ADVO, INC. Selected Financial Data
Year ended Year ended Year ended Year ended Year ended September 27, September 28, September 30, September 24, September 25, (In millions, except per share data) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Summary of Operations Revenues $1,016.5 $986.2 $1,011.9 $920.3 $856.6 Operating income 58.5 24.8(1) 46.3 39.7 2.3(2) Income from continuing operations 26.8 11.3 30.9 24.6 2.8 Net income 26.8 3.1 25.0 25.2 5.4 Earnings per share from continuing operations 1.09 .47 1.33 1.03 .11 Net earnings per share 1.09 .13 1.07(3) 1.05 .21 Cash dividends declared per share -- 10.025(4) .10 .095 .06 Weighted average common and common equivalent shares 24.7 24.1 23.3 23.9 25.4 - -----------------------------------------------------------------------------------------------------------------------------
September 27, September 28, September 30, September 24, September 25, (In millions, except per share data) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data Cash, cash equivalents and marketable securities $ 26.0 $ 13.3 $ 54.5 $ 71.1 $ 71.4 Total assets 208.6 185.1 234.2 225.7 226.5 Long-term debt 140.7 161.1 -- -- -- Stockholders' equity (deficiency) (59.9) (85.2) 130.4 108.0 118.3 Book value per share (2.46) (3.54) 6.26 5.17 5.32
(1) Reflects nonrecurring charges of $12.1 million. (See Note 12 to the consolidated financial statements). (2) Reflects a one-time restructuring charge to operations of $25.8 million. (See Note 13 to the consolidated financial statements). (3) Reflects a charge for cumulative effect of accounting change of $1.5 million, net of tax, or $.07 per share. (See Note 9 to the consolidated financial statements). (4) Reflects a special $10 per share dividend declared in January of 1996. (See Note 7 to the consolidated financial statements). Page 20 ADVO, INC. Financial Report This section should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto. Basis of Presentation In fiscal year 1995 the Company announced its plan to sell Marketing Force, its in-store marketing segment. The sale of substantially all of the net assets of this segment was completed in fiscal 1996. (See Note 3 to the consolidated financial statements). The Company's results of operations have been presented for the periods ended September 28, 1996 and September 30, 1995 to separately reflect continuing and discontinued operations in the consolidated statements of operations and cash flows. In addition, the results of operations discussed in this Financial Report exclude the revenues, cost of sales, selling, and general and administrative costs of the discontinued segment. Financial Overview Fiscal 1997 was an exceptional year for ADVO, Inc. ("ADVO" or the "Company"). The Company's record fiscal 1997 results are highlighted by a 59% increase in operating income, a 40% increase in earnings per share from continuing operations (both excluding nonrecurring charges) and a robust 9% increase in pieces per packages, when compared to fiscal 1996. These achievements reflect significant gains in unit volumes, improved sales force productivity and lower cost of sales associated with favorable postage and paper prices. The strong operating results in fiscal 1997 indicate the solid progress the Company has made to overcome the confluence of internal and external factors it was confronted with during fiscal 1996. The factors which influenced the strong performance included: . Strong unit volume gains reflected by the Company's sales realignment and the change in sales compensation design, driving sales force productivity improvement. . The implementation of the Enhanced Carrier-Route subclass for third class mail, which commenced during the last quarter of fiscal 1996. This subclass favorably impacted the Company's postage expense during fiscal 1997 by recognizing the price sensitivity and lower postal processing costs for efficient mailers like ADVO. In conjunction with this, lower paper prices also favorably impacted the Company's cost of sales. . The first full year under the new `Clientizing' infrastructure, the Company's reengineering initiative. During fiscal 1996 the Company was reorganized along process lines creating a better aligned and more effective structure. The continued cost stabilization and savings from this initiative was reflected in the Company's strong financial performance in fiscal 1997. In addition, the Company was able to pay down its credit agreement by $17.6 million. At the same time, supported by strong cash flow management, the Company funded technology investments and initiated a stock buyback program. The credit agreement entered into by the Company during fiscal 1996, with a syndicate of lenders, financed the declaration of a $10 per share dividend (the "Special Dividend") and the related transaction and recapitalization expenses which ended the Company's `strategic alternatives' process. This credit agreement was renegotiated subsequent to year end on September 29, 1997. The material features of this amended agreement were an increase in available commitments from $250 million to $300 million, a decrease in interest rates, and an increased limit on the Company's authorization to purchase its stock from $40 million to $100 million. Subsequent to year end an additional buyback program was announced by the Company. The two programs combined increased the Company's total share buyback commitment to 3.2 million shares. In connection with the announcement of the second buyback program, the Company purchased approximately 1.9 million shares on September 29, 1997 from Warburg Pincus Capital Partners, L.P. (See Note 7 to the consolidated financial statements). The following table adjusts fiscal 1996 results for the Special Dividend related nonrecurring charges (see Note 12 to the consolidated financial statements) in order to present a normalized review of the Company's earnings. Operating Results: Comparative Analysis
Reported Adjustment Adjusted Year ended Year ended Year ended Year ended September 27, September 28, Nonrecurring September 28, September 30, (In millions, except per share data) 1997 1996 Charges 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Revenues $1,016.5 $986.2 $986.2 $1,011.9 Gross profit 259.1 224.7 224.7 247.7 Operating income 58.5 24.8 $12.1 36.9 46.3 Income from continuing operations 26.8 11.3 7.4 18.7 30.9 Earnings per share from continuing operations 1.09 .47 .31 .78 1.33 - ---------------------------------------------------------------------------------------------------------------------------
Page 21 ADVO, INC. Fiscal 1997 Compared to Fiscal 1996 Continuing Operations Revenues Fiscal 1997 revenues increased $30.3 million to a record $1,016.5 million over the comparable revenues of fiscal 1996. Volume gains were the largest contributor to the 3.1% increase in revenues. The volume growth was driven by the 8.8% increase in average shared mail pieces per package from 7.84 pieces in fiscal 1996 to 8.53 pieces in fiscal 1997. Offsetting these volume gains to a degree was the strategically driven decision to discontinue the second in-home date programs in specified markets and the closing of unprofitable markets. Total shared mail packages for fiscal 1997 were 3,111 million, down 2.7%, and revenue per thousand pieces decreased 3.2% as compared to fiscal 1996. The decline in revenue per thousand pieces was the result of shifts in product mix, volume related declines in price and, earlier in the year, a decrease in product weights associated with the Company's preprint customers. Operating Expenses Cost of sales decreased $4.1 million from fiscal 1996. As a percentage of revenues, cost of sales decreased 2.7% from 77.2% in fiscal 1996 to 74.5% in fiscal 1997. The decrease in cost of sales for the fiscal year ending 1997 was equally attributable to both lower print and paper costs and lower postage costs. Print and paper costs were lower in fiscal 1997 when compared to fiscal 1996 as a result of reduced paper prices and the decline in turnkey volume. Postage costs were favorably impacted by the postage reclassification implemented by the United States Postal Service in July 1996 and to a lesser extent by the decline in preprint product weights. These postage savings were offset to a degree by additional overweight postage costs incurred with the volume gains, as demonstrated by the growth in shared mail pieces distributed to 26.5 billion pieces, a 6.0% increase from the prior year. During fiscal 1997, selling expense, including the provision for bad debts, increased $8.4 million over the prior fiscal period. Increases in commission expense, sales support costs, and additional bad debt expense resulting from the revenue growth were the major elements in the higher selling expense. As a percentage of revenues, selling expense increased from 13.3% in fiscal 1996 to 13.7% in fiscal 1997. General and administrative costs increased $4.4 million or 7.7% in fiscal 1997 over fiscal 1996. As a percentage of revenues, general and administrative costs were 6.0% for fiscal 1997 versus 5.7% for fiscal 1996. Continued cost savings associated with the Company's reengineering effort were offset by increases in severance and incentive wages, as well as investments in technological improvements. Operating Income As a result of the aforementioned, the Company reported a 58.7% increase in operating income from $36.9 million (excluding nonrecurring charges) in fiscal 1996 to $58.5 million in fiscal 1997. Operating income as a percentage of revenue increased to 5.8% in fiscal 1997 versus 3.7% in the prior year (excluding nonrecurring charges). Interest Expense Interest expense relating to the Company's credit facilities totaled $14.8 million for fiscal 1997. In the prior year, at the onset of the facilities, interest expense totaled $9.7 million. Interest Income and Other Expense Interest income results primarily from the investment of excess cash and amounted to $.7 million in fiscal 1997 versus $1.3 million in fiscal 1996. The decrease was a result of the liquidation of available-for-sale securities during fiscal 1996. Other expense increased slightly to $.7 million in fiscal 1997. Income Taxes The effective tax rate was approximately 39% for the Company's continuing operations in both fiscal 1997 and fiscal 1996. Earnings per Share Earnings per share from continuing operations increased from $.47 in fiscal 1996 to $1.09 in fiscal 1997. Adjusting for the nonrecurring charges in fiscal 1996, earnings per share from continuing operations would have been $.78 in fiscal 1996 versus $1.09 in fiscal 1997. This 39.7% increase was a result of the Company's improved operating results. 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 the discontinuance 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. Page 22 ADVO, INC. 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 costs. 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 fiscal year 1996 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 were 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 fiscal year 1996. As a result of the reengineering effort, at September 28, 1996 headcount had been reduced by 440 associates in all areas of the Company since June of 1995, which was the start of the reengineering program. Operating Income As a result of the aforementioned, the Company reported a $9.4 million decrease in operating income (excluding nonrecurring charges) to $36.9 million when comparing fiscal 1996 to fiscal 1995. 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 fiscal 1995, 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. 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. Financial Position Working Capital The Company's working capital ratio at September 27, 1997 was approximately 1.00 versus 1.04 in the prior year. Increases in current assets of $11.9 million were more than offset by increases in current liabilities of $15.5 million and resulted in the decline of working capital. The driving forces behind the change in current assets were an improvement in cash and cash equivalents generated mainly from the Company's operating results, and an increase in accounts receivable as a result of the revenue growth and the timing of customer payments. The main sources of change in current liabilities were trade payable increases primarily due to the timing of vendor payments and increases in accrued compensation and benefits related to the associate incentive plan reflecting the Company's improved results. Property, Plant and Equipment Investments in property, plant and equipment for the year ended September 27, 1997 totaled approximately $28.6 million, which was approximately $10.9 million greater than prior year additions. During the current fiscal year the Company continued to implement its plan to upgrade and enhance technology throughout all Company Page 23 ADVO, INC. processes. Machinery and equipment purchases reflected the transition to new computerized mail sorters that are expected to achieve efficiencies in targeting specific groups, and the replacement of other existing production equipment at the Company's production facilities. The Company also continued to roll out personal computers and peripherals to the sales force to allow for a greater focus on customer service. Computer hardware was also upgraded in other areas of the Company to meet the needs of financial and operational software currently being developed by the Company. The developed software is expected to improve operating efficiency and reduce overhead. The Company's current capital plan calls for fiscal 1998 expenditures to be slightly less than fiscal 1997 expenditures. Cash provided by operating activities was sufficient to cover fiscal 1997 capital additions and continues to be the expected source of financing for the planned fiscal 1998 capital investments. Stockholders' Deficiency Stockholders' deficiency decreased $25.3 million from the prior year to a net deficiency of $59.9 million. The decrease was essentially related to the Company's fiscal 1997 net income of $26.8 million and $2.9 million of employee stock plan activity and related tax benefits relating to the vesting of restricted stock and exercise of stock options. Slightly offsetting these increases was $4.7 million of common stock purchases for treasury primarily related to the buyback program announced by the Company in April 1997. Subsequent to year end, on September 29, 1997, the Company purchased 1.9 million shares at a total purchase price of $34.8 million from Warburg Pincus Capital Partners L.P., the Company's largest shareholder at September 27, 1997. The Company financed this transaction through available credit commitments under its renegotiated credit agreement. After this transaction there are approximately one million shares approved for purchase under the buyback program. Liquidity Cash flow is generated from operating activities and is the Company's primary resource for funding working capital, capital investments and other operating requirements. The Company also has available commitments under its renegotiated credit agreement, which may be used to fund operating activities. Cash provided by operating activities increased over the prior year by $22.6 million. The year over year increase was largely related to the $15.5 million growth in operating results, as compared to an $18.1 million decrease in operating results in the prior year. Year over year changes in accounts receivable and accounts payable due to the timing of cash receipts and cash disbursements, respectively, the increases in accrued incentive compensation as a result of the improved operating results and the variance in paper inventory as a result of the Company's change in its inventory purchasing strategy were also major components affecting the cash provided by operating activities. Overall cash and cash equivalents increased $12.7 million over fiscal 1996. Cash flows from operating activities were offset in part by cash expenditures primarily related to property and equipment purchases of $28.6 million and debt repayments of $17.6 million. In the prior fiscal year the payment of the Special Dividend and the related debt transactions were the primary reasons for the overall $10.5 million decrease in cash and cash equivalents. During fiscal 1996, the Company entered into a ten-year agreement with Integrated System Solutions Corporation, now known as IBM Global Services, to provide systems development and technical support to the Company. The contract allows for cancellation after the completion of the third year, subject to termination charges ranging between $3.1 million and $.5 million depending on the year in which the cancellation becomes effective. During fiscal 1997 the Company incurred $15.9 million in fees related to the contract, half of which related to software development. Future commitments for the noncancellable portion of the agreement, excluding termination fees and the cost of living adjustments are $14.9 million and $10.7 million for fiscal years 1998 and 1999, respectively. The Company anticipates funding these fees through continuing operations. Financing Arrangements On September 29, 1997, the Company renegotiated the terms of its credit agreement dated March 4, 1996. The more significant amendments made to the agreement (the "Amended Agreement") were an increase in available commitments from $250 million to $300 million, a decrease in interest rates and an increase in the authorized amount of the Company's capital stock that it may purchase from $40 million to $100 million. The Amended Agreement provides for credit facilities consisting of a $135 million term loan and a $165 million reducing revolving line of credit, both maturing at various dates through September 2003. Available commitments under the Amended Agreement, including fiscal 1998 additional net borrowings of $37 million through November 1997 totaled approximately $102 million. 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). The "applicable margin" under the Amended Agreement ranges from .50% to 1.50% on the LIBOR rate and 0% to Page 24 ADVO, INC. .25% on the base rate versus the applicable margin under the March 4, 1996 agreement of 1.50% to 3.00% and .25% to 1.75%, respectively. Interest is payable quarterly or upon the maturity of the LIBOR contracts, whichever period is shorter. The Company is required to maintain certain financial ratios under the Amended Agreement. In addition, the Amended Agreement also places restrictions on disposal of assets, mergers and acquisitions, dividend payments, investments and additional debt. In connection with the Amended Agreement, the Company is required to maintain Interest Rate Protection Agreements to protect itself against three month LIBOR rates exceeding 8.0% per annum as to a notional principal amount equal to the lesser of $100 million or 50% of the aggregate principal amount of the loans made on the effective date, for a period of at least two years. During the prior year, the Company entered into two separate two year Interest Rate Collar Agreements to hedge notional amounts totaling $150 million. The cap rates range from 7.39% to 8.0% with the floor rate ranging from 5.0% to 5.5%. These agreements entitle the Company to pay no more or less than the specified limits plus applicable margin, as defined. The Company believes the interest rate collar agreements limit substantial risk should interest rates fluctuate. The interest rate collar agreements had no effect on interest expense in either fiscal 1997 or 1996. During fiscal 1997, the Company repaid $17.6 million of the fiscal 1996 long term debt balance with funds generated from continuing operations. As defined by the March 4, 1996 agreement, $11.0 million of the 1997 repayments related to a fiscal 1996 "Excess Cash Flow" calculation. No excess cash flow payment is required for fiscal 1997 or under the Amended Agreement. The total fiscal 1998 maturities of long-term debt of $10.1 million, as well as future scheduled repayments, are expected to be paid through funds generated from ongoing operations. Year 2000 Compliance The Company recently put in place a team of individuals dedicated to analyzing the issues associated with the year 2000 compliance. The costs and effects on financial results of year 2000 compliance are unknown by the Company at this time. Forward Looking Statements Except for the historical information stated herein, the matters discussed in this Financial Report contain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward looking statements are accompanied by cautionary factors which would cause the Company's actual results to differ materially from those in the forward looking statements. Such factors include but are not limited to changes in customer demand; 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 efficiencies achieved with technology upgrades; the amount of shares the Company will purchase in the future under its buyback program; the evaluation of the impact of year 2000 costs; and other general economic factors. Page 25 ADVO, INC. Consolidated Statements of Operations
Year ended Year ended Year ended September 27, September 28, September 30, (In thousands, except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- Revenues $1,016,492 $986,162 $1,011,904 Costs and expenses: Cost of sales 757,413 761,506 764,198 Selling, general and administrative 195,196 184,084 198,496 Nonrecurring charges -- 12,082 -- Provision for bad debts 5,374 3,701 2,953 - -------------------------------------------------------------------------------------------------------------------------- Operating income 58,509 24,789 46,257 Gain on sale of business lines -- 2,687 2,243 Interest income (1) 687 1,285 2,817 Interest expense 14,820 9,669 -- Other expense 660 556 772 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 43,716 18,536 50,545 Provision for income taxes 16,918 7,229 19,596 - -------------------------------------------------------------------------------------------------------------------------- Income from continuing operations 26,798 11,307 30,949 Discontinued operations: Loss from discontinued operations, net of tax -- -- (3,522) Loss on disposal of discontinued operations, net of tax -- (8,199) (931) - -------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 26,798 3,108 26,496 Cumulative effect of change in accounting for postemployment benefits, net of tax -- -- (1,545) - -------------------------------------------------------------------------------------------------------------------------- Net income $ 26,798 $ 3,108 $ 24,951 - -------------------------------------------------------------------------------------------------------------------------- Earnings per share: Earnings from continuing operations $ 1.09 $ .47 $ 1.33 Discontinued operations: Loss from discontinued operations, net of tax -- -- (.15) 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 $ 1.09 $ .13 $ 1.07 Dividends declared per share $ -- $ 10.025 $ .10 Weighted average common and common equivalent shares 24,688 24,126 23,286 - --------------------------------------------------------------------------------------------------------------------------
(1) Includes interest income from related party of $458,000, $1,219,000 and $2,757,000 in fiscal 1997,1996 and 1995, respectively. See accompanying Notes to Consolidated Financial Statements Page 26 ADVO, INC. Consolidated Balance Sheets
September 27, September 28, (In thousands, except share data) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (1) $ 25,963 $ 13,303 Accounts receivable, less allowances of $5,160 in 1997 and $4,226 in 1996 66,664 62,668 Inventories 4,149 7,518 Prepaid expenses and other current assets 4,759 4,512 Deferred income taxes 14,248 15,839 - -------------------------------------------------------------------------------------------------------------------------- Total Current Assets 115,783 103,840 Property, plant and equipment-net 76,092 64,175 Other assets 16,678 17,111 - -------------------------------------------------------------------------------------------------------------------------- Total Assets $ 208,553 $ 185,126 Liabilities and Stockholders' Deficiency Current liabilities: Current portion of long-term debt $ 10,125 $ 7,225 Accounts payable 44,644 37,868 Accrued compensation and benefits 29,245 22,892 Customer advances 3,409 5,960 Federal and state income taxes payable 7,080 5,877 Accrued other expenses 21,080 20,257 - -------------------------------------------------------------------------------------------------------------------------- Total Current Liabilities 115,583 100,079 Long-term debt 140,666 161,125 Deferred income taxes 9,589 6,618 Other liabilities 2,636 2,509 Stockholders' deficiency: Series A Convertible Preferred Stock, $.01 par value (Authorized 5,000,000 shares, none issued) -- -- Common Stock, $.01 par value (Authorized 40,000,000 shares, Issued 28,428,952 in 1997 and 27,900,756 in 1996) 284 279 Additional paid-in capital 163,317 160,704 Accumulated deficit (155,113) (181,914) Less shares of common stock held in treasury at cost, 4,077,371 in 1997 and 3,804,363 in 1996 (68,409) (64,274) - -------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Deficiency (59,921) (85,205) - -------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Deficiency $ 208,553 $ 185,126 - --------------------------------------------------------------------------------------------------------------------------
(1) Includes cash and cash equivalents invested with related party of $11,613,000 at September 27, 1997 and $5,362,000 at September 28, 1996. See accompanying Notes to Consolidated Financial Statements page 27 ADVO, INC. Consolidated Statements of Cash Flows
Year ended Year ended Year ended September 27, September 28, September 30, (In thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- Cash flows from continuing operating activities: Net income $ 26,798 $ 3,108 $ 24,951 Less: Loss from discontinued operations -- (8,199) (4,453) - -------------------------------------------------------------------------------------------------------------------------- Income from continuing operations (includes accounting change) 26,798 11,307 29,404 Adjustments to reconcile net income to net cash flows from continuing operating activities: Cumulative effect of change in accounting for postemployment benefits -- -- 1,545 Cashless option exercises and option repricing -- 8,747 -- Depreciation 16,150 12,967 11,641 Amortization 2,096 2,203 2,690 Deferred income taxes 4,562 (2,275) 4,232 Provision for bad debts 5,374 3,701 2,953 Gain on sale of business lines -- (2,687) (2,243) Other 528 1 361 Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (9,370) (5,280) (16,188) Inventories 3,369 470 (3,533) Prepaid expenses and other current assets (247) 539 131 Other assets (1,367) 332 458 Accounts payable 6,776 13,401 (157) Accrued compensation and benefits 6,353 (2,815) (2,232) Customer advances (2,551) (4,350) (2,890) Federal and state income taxes payable 1,732 4,486 904 Other liabilities 950 (2,155) (12,367) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operating activities 61,153 38,592 14,709 Cash flows from continuing investing activities: Proceeds from sale of business lines -- 742 9,000 Acquisitions, net of cash acquired -- -- (2,448) Expenditures for property, plant and equipment (28,615) (17,679) (20,315) Proceeds from disposals of property and equipment 18 10 11 Available-for-sale securities - purchases -- (49,604) (55,899) Available-for-sale securities - sales and maturities -- 80,482 56,355 - -------------------------------------------------------------------------------------------------------------------------- Net cash (used) provided by continuing investing activities (28,597) 13,951 (13,296) Cash flows from continuing financing activities: Proceeds from long-term borrowings - term loans -- 155,000 -- Payments on long-term borrowings - term loans (17,559) (1,650) -- Revolving line of credit - net -- 15,000 -- Payment of debt issue costs -- (5,458) -- Proceeds from exercise of warrants -- 7,200 -- Proceeds from exercise of stock options 2,323 2,473 1,811 Purchases of common stock for treasury (4,660) (741) (4,260) Cash dividends paid -- (240,561) (2,078) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in continuing financing activities (19,896) (68,737) (4,527) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by discontinued operations -- 5,648 (12,785) - -------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 12,660 (10,546) (15,899) Cash and cash equivalents at beginning of year 13,303 23,849 39,748 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 25,963 $ 13,303 $ 23,849 - --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements page 28 ADVO, INC. Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
Unrealized gains (losses) Additional on available- Accumulated Total (In thousands, except Common stock Treasury stock paid-in for-sale earnings equity per share data) Shares Amount Shares Amount capital securities (deficit) (deficiency) - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- Balance -- September 30, 1995 24,583 $246 (3,759) $(63,533) $138,735 $(62) $55,020 $130,406 Purchase of common stock for treasury (45) (741) (741) Cancellation of restricted stock (5) Exercise of stock options and warrants 3,323 33 18,387 18,420 Tax effect-- employee stock plans 2,973 2,973 Amortization of deferred compensation (1) 609 609 Cash dividends declared ($10.025 per share) (240,042) (240,042) Unrealized gains on available-for-sale securities 62 62 Net Income 3,108 3,108 - ----------------------------------------------------------------------------------------------------------------------------------- Balance -- September 28, 1996 27,901 $279 (3,804) $(64,274) $160,704 $ 0 $(181,914) $(85,205) Purchase of common stock for treasury (304) (4,660) (4,660) Grants of restricted stock 31 30 506 (506) Exercise of stock options 497 5 1 19 2,299 2,323 Tax effect -- employee stock plans 529 529 Amortization of deferred compensation and other (1) 291 3 294 Net Income 26,798 26,798 - ----------------------------------------------------------------------------------------------------------------------------------- Balance -- September 27, 1997 28,429 $284 (4,077) $(68,409) $163,317 $ 0 $(155,113) $(59,921) - -----------------------------------------------------------------------------------------------------------------------------------
(1) Unamortized deferred compensation at September 27, 1997, September 28, 1996 and September 30, 1995 was $780,000, $140,000 and $836,000, respectively. See accompanying Notes to Consolidated Financial Statements page 29 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 mail 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 1996 and 1995 financial statements to conform with the fiscal 1997 presentation. ADVO's fiscal closing date is the last Saturday in September. The fiscal year includes operations for a 52-week period in 1997 and 1996 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 when purchased. These investments are valued at cost, which approximates market. Inventories Inventories, which consist of raw materials, finished goods and spare parts, are valued at the lower of cost (first-in, first-out method) or market. Property, Plant and Equipment Property, plant and equipment are recorded at cost and include amounts associated with the development of software for internal use. Depreciation and amortization are computed generally by the straight-line method over the estimated useful lives of the respective assets (ranging from 2 to 35 years) or over the terms of the related leases for 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. Stock Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and related interpretations in accounting for its employee stock plans. Earnings Per Share Earnings per share are 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 used in the preparation of these financial statements are appropriate, actual results could differ from those estimates. Note 2 Acquisitions In fiscal 1995, the Company acquired the Door Store, a local alternate delivery company, for approximately $2.4 million. This acquisition has been accounted for under the purchase method of accounting and, accordingly, the results of operations of the acquired company have been included in the consolidated statements of operations from its acquisition date. The acquired assets have been recorded at their estimated fair values. This acquisition did not have a material pro forma effect on operations for periods prior to the acquisition. The excess of the purchase price over the estimated fair values of net assets acquired in connection with acquisitions by the Company amounted to $4.5 million and $4.9 million, net of accumulated amortization and is reflected in other assets at September 27, 1997 and September 28, 1996, respectively. Also included in other assets at September 27, page.30 ADVO, INC. 1997 and September 28, 1996 is $2.8 million and $3.6 million, respectively, of other intangible assets, net of accumulated amortization, which were acquired in the acquisitions. As of September 27, 1997 and September 28, 1996, accumulated amortization of goodwill and other intangibles was $7.8 million and $6.7 million, respectively. Note 3 Discontinued Operations In September 1995, the Company initiated a plan to sell its in-store marketing segment. Through the date of the preparation of the fiscal 1995 financial statements, the Company was in the process of negotiating the sale. At that time, management estimated its loss on disposal to be $1.4 million ($.9 million net of tax) consisting of a provision for anticipated operating losses during the phase out period and other costs directly related to the sale. On March 1, 1996 the Company completed the sale of substantially all of the net operating assets of this segment. The net assets were sold at book value in exchange for $5.0 million in cash and a long-term note receivable for $10.8 million. The operating results of the segment through the date of disposal were worse than anticipated, which caused losses in excess of the estimates provided in fiscal 1995. The additional losses affected the ultimate terms of the transaction, including the terms of the related note, and caused substantial doubt as to whether the note could be paid by the buyer. Accordingly, the Company ultimately determined that the sales price should not reflect the note and immediately wrote it off. This write off, together with the additional operating losses, were reflected in the fiscal 1996 loss on disposal of discontinued operations, net of tax. The Company did not provide any debt or contract performance guarantees on behalf of the business sold. The results of the discontinued operations reflected in the consolidated statements of operations are as follows:
Year ended Year ended September 28, September 30, (In thousands) 1996 1995 - ------------------------------------------------------------------------------ Revenues $ 19,283 $ 57,668 - ------------------------------------------------------------------------------ Loss before income taxes -- $ (5,361) Income tax benefit -- (1,839) - ------------------------------------------------------------------------------ Loss from discontinued operations, net of tax -- $ (3,522) - ------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------
Note 4 Property, Plant and Equipment Balances of major classes of property, plant and equipment and accumulated depreciation and amortization are as follows:
September 27, September 28, (In thousands) 1997 1996 - ------------------------------------------------------------------------------ Land, buildings and building improvements $ 8,083 $ 7,623 Leasehold improvements 11,867 12,014 Machinery and equipment 71,844 66,857 Furniture and fixtures 17,719 17,206 Computer hardware 33,145 25,370 Computer software and software development 24,333 12,959 - ------------------------------------------------------------------------------ Total $166,991 $ 142,029 Less accumulated depreciation and amortization 90,899 77,854 - ------------------------------------------------------------------------------ Property, plant and equipment-net $ 76,092 $ 64,175 - ------------------------------------------------------------------------------
Note 5 Accrued Compensation and Benefits The composition of accrued compensation and benefits is as follows:
September 27, September 28, (In thousands) 1997 1996 - ------------------------------------------------------------------------------ Employee compensation $18,316 $13,048 Workers' compensation 5,638 4,924 Employee withholdings and other benefits 5,291 4,920 - ------------------------------------------------------------------------------ Total $29,245 $22,892 - ------------------------------------------------------------------------------
Note 6 Financing Arrangements On September 29, 1997, the Company renegotiated the terms of its credit agreement dated March 4, 1996. The more significant amendments made to the agreement (the "Amended Agreement") were an increase in available commitments from $250 million to $300 million, a decrease in interest rates and an increase in the authorized amount of the Company's capital stock that the Company may purchase from $40 million to $100 million. The Company paid a $1.3 million arrangement fee in connection with the Amended Agreement. Also on September 29, 1997, the Company borrowed an additional $34.8 million to fund the purchase of 1,936,098 shares of its common stock from Warburg, Pincus Capital Partners, L.P. (see Note 7). The Amended Agreement provides for credit facilities consisting of a $135 million term loan and a $165 million reducing revolving line of credit, both maturing at various dates through September 2003. The commitment levels on the revolving line range from a high of $165 million, from inception through December 1999, to a low of $22.5 million, for the period June page.31 ADVO, INC. 2003 through September 2003. Mandatory repayments of debt in defined amounts are required in the event of certain triggering events including the sale of assets. The Company and its subsidiaries have pledged all of their assets as collateral for the credit agreement. The total outstanding credit facilities at September 27, 1997 and September 28, 1996 reflect the March 4, 1996 credit agreement. The current portion of long term debt at September 27, 1997 reflects the repayment schedule of the Amended Agreement. The outstanding facilities balance consists of the following:
September 27, September 28, (In thousands) 1997 1996 - ------------------------------------------------------------------------------ Revolving line of credit $ 15,000 $ 15,000 Term loan - A 52,165 63,600 Term loan - B 83,626 89,750 - ------------------------------------------------------------------------------ 150,791 168,350 Less: Current portion of long-term debt 10,125 7,225 - ------------------------------------------------------------------------------ $ 140,666 $ 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). The "applicable margin" under the Amended Agreement ranges from .50% to 1.50% on the LIBOR rate and 0% to .25% on the base rate versus the applicable margin under the March 4, 1996 agreement of 1.50% to 3.00% and .25% to 1.75%, respectively. Interest is payable quarterly or upon the maturity of the LIBOR contracts, whichever period is shorter. The interest rate at September 27, 1997 and September 28, 1996 was 7.21% and 7.57%, respectively, on the revolving line of credit and on Term loan - A; and for Term loan - B, 8.71% and 8.57%, respectively. The Company is required to maintain certain financial ratios under the Amended Agreement. In addition, the Amended Agreement also places restrictions on disposal of assets, mergers and acquisitions, dividend payments, investments and additional debt. In connection with the Amended Agreement, the Company is required to maintain Interest Rate Protection Agreements to protect itself against three month LIBOR rates exceeding 8.0% per annum as to a notional principal amount equal to the lessor of $100 million or 50% of the aggregate principal amount of the loans made on the effective date, for a period of at least two years. During the prior year, the Company entered into two separate two year Interest Rate Collar Agreements to hedge notional amounts totaling $150 million. The cap rates range from 7.39% to 8.0% with the floor rate ranging from 5.0% to 5.5%. These agreements entitle the Company to pay no more or less than the specified limits plus applicable margin, as defined. The Company believes the interest rate collar agreements limit substantial risk should interest rates fluctuate. The interest rate collar agreements had no effect on interest expense in either fiscal 1997 or 1996. The Company pays fees on the unused commitments under the Amended Agreement at a rate ranging from .175% to .375% depending on the Company's total debt ratio, as defined. Commitment fees under the March 4, 1996 agreement were .375% or .50% depending on the total debt ratio, as defined. As of September 27, 1997 and September 28, 1996, $70 million of the revolver was available for future borrowings. Total maturities of long-term debt over the next five fiscal years and thereafter at September 27, 1997 reflect the Amended Agreement and are as follows:
(In thousands) - ------------------------------------------------------------------------------- 1998 $ 10,125 1999 16,200 2000 20,250 2001 22,950 2002 27,002 Thereafter 54,264 - ------------------------------------------------------------------------------- Total maturities $150,791 - -------------------------------------------------------------------------------
The revolving line of credit has been classified as long-term since management has the intent and ability to maintain the September 27, 1997 outstanding balance throughout fiscal 1998. The Company capitalized debt issue costs directly associated with the issuance of the March 4, 1996 Agreement totaling $5.5 million. These costs are included in other assets and are being amortized over the term of the debt agreement. At September 27, 1997 and September 28, 1996 unamortized costs totaled $4.4 million and $5.1 million, respectively. The Company has outstanding letters of credit totaling approximately $6.6 million under separate agreements primarily related to its workers' compensation program. Carrying amounts of the financing arrangements approximate fair value. Note 7 Stockholders' Equity (Deficiency) - ------------------------------------------------------------------------------- On August 27, 1986, 2,301,780 warrants to purchase shares of ADVO common stock were issued to Warburg, Pincus Capital Partners, L.P. ("Warburg"), Welsh, Carson, Anderson & Stowe IV (WCAS IV) and WCAS Venture Partners (WCAS VP) (together, the "Investors") for $1,000,000. On February 15, 1996, Warburg, who was the Company's largest shareholder page.32 ADVO, INC. at September 27, 1997, exercised the last outstanding warrants and purchased 2,666,667 shares of common stock at an exercise price of $2.70 per share. The Company has a Shareholder Protection Rights Plan (the "Rights Plan") to protect shareholders from potential unfair hostile takeovers. Pursuant to the Rights Plan, common shareholders have one Right for each share of common stock held. The Rights become exercisable only in the event that any person acquires or commences a tender offer to acquire 20% or more of the Company's common stock, as defined. 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.) On April 30, 1997, the Company announced a stock buyback program to purchase up to 2 million shares of the Company's common stock. As of September 27, 1997, the Company had purchased 208,600 shares for $3.4 million in connection with the buyback program. On September 29, 1997, the Company increased its stock buyback program authorization to 3.2 million shares. In connection with the increased authorization, the Company purchased 1,936,098 shares of its common stock from Warburg for $34.8 million. At September 27, 1997 there were 2,260,438 shares of common stock reserved for issuance upon the exercise of stock options. Note 8 Gain on Sale of Business Lines - ------------------------------------------------------------------------------- MidCoast Press, the Company's commercial web offset printer, was sold during the first quarter of fiscal 1996 for $4.2 million, of which $3.5 million was in the form of a non-recourse note. The note was structured to require interim interest payments with a balloon payment to be paid in full on December 31, 2002. The note will be paid off earlier if specific criteria are met regarding the cash flows of the divested company. The note bears interest at the rate of 7% per annum. The Company recognized a before tax gain of $2.7 million ($1.7 million after tax or $.07 per share) 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 9 Postemployment Benefits - ------------------------------------------------------------------------------- The Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS No. 112") in accounting for short-term disability benefits and severance and related medical benefits during the Company's first quarter of fiscal 1995. Under SFAS No. 112, the Company accrues these benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid. The Company previously recognized the cost of providing these benefits on a cash basis. The cumulative effect of this change in accounting for postemployment benefits resulted in a one-time after tax charge of $1.5 million or $.07 per share. Note 10 Savings Plans - ------------------------------------------------------------------------------- The Company has a savings plan for salaried employees which qualifies as a profit sharing plan under the Internal Revenue Code of 1986, as amended, and other non-qualified savings plans. All plans feature both employee and employer matching contributions. The expense for matching contributions was $3.4 million, $3.7 million and $3.8 million for fiscal 1997, 1996 and 1995, respectively. Note 11 Stock Compensation Plans - ------------------------------------------------------------------------------- As of September 27, 1997 the Company has five stock based compensation plans, three are fixed stock option plans (the 1986 Stock Option Plan, the 1988 Stock Option Plan and the 1995 Non-Employee Directors' Stock Option Plan) and two are nonvested stock plans (the 1986 Employee Restricted Stock Plan and the 1990 Non-Employee Directors' Restricted Stock Plan). The Company applies APB Opinion No. 25 in accounting for its plans. Since all options are granted with an exercise price equal to the fair market value on the date of the grant, no compensation cost has been recognized for the fixed option stock grants. The market value of shares at the date of the nonvested stock award in excess of cash consideration received is charged to operations over the stock award's restriction period. The compensation costs associated with the nonvested stock plans are disclosed below. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 "Accounting for Stock-Based Compensation"("SFAS No. 123"), and has been determined as if the Company had accounted for its employee stock options under the fair value method of the statement. The fair value of the fixed stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996, respectively: page.33 ADVO, INC. dividend yield of zero percent for both years; volatility factor of expected market price of the Company's common stock of .32 and .36; risk-free interest rates ranging from 4.8 to 7.3 percent and 5.4 to 6.3 percent; and the expected life of an option ranging from 1.5 years to 7 years for both years. The weighted average fair value of options granted in 1997 and 1996 was $4.61 for both years.
September 27, September 28, (In thousands, except per share amounts) 1997 1996 - ------------------------------------------------------------------------------- Pro forma net income $25,386 $ 2,802 Pro forma net earnings per share $ 1.04 $ .12 - -------------------------------------------------------------------------------
For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the fixed stock options vesting period ranging from 1 to 4 years. The pro forma information during the initial phase-in period, as required by SFAS No. 123, was based on fixed stock options granted during fiscal 1996 and fiscal 1997. Therefore, the pro forma information may not be indicative of the effects of compensation cost on pro forma net income and net earnings per share in future years since the options vest over several years and new grants are possible. Fixed Stock Option Plans The 1986 Stock Option Plan and the 1988 Stock Option Plan provide for the granting of non-qualified options for the purchase of up to 5,425,000 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. The Company amended these 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. In connection with the Special Dividend (see Note 7), the Company made equitable adjustments to outstanding options. As a result, 2.1 million options were repriced. The repriced options have retained their original vesting schedules and expiration dates. The 1995 Non-Employee Directors' Stock Option Plan provides for the granting of non-qualified options for the purchase of shares of common stock. The terms of the options may not exceed ten years, and the option prices shall not be less than the fair market value of the common stock on the date of grant. Options generally are exercisable 25% each year, cumulatively, beginning one year from date of grant. At September 27, 1997 and September 28, 1996 there were 588,769 and 413,709 options available for future grant under the fixed stock option plans, respectively. The following tables summarize information about all of the Company's fixed stock option plans:
Weighted Average Shares Exercise Price - ------------------------------------------------------------------------------ Outstanding at September 24, 1994 2,351,154 $ 14.703 Granted 632,096 18.071 Cancelled (65,707) 18.189 Exercised (212,335) 11.395 - ------------------------------------------------------------------------------ Outstanding at September 30, 1995 2,705,208 15.672 Granted 2,871,129 9.869 Cancelled (2,296,127) 18.122 Exercised (939,560) 7.514 - ------------------------------------------------------------------------------ Outstanding at September 28, 1996 2,340,650 9.425 Granted 1,222,227 13.665 Cancelled (269,637) 9.619 Exercised (1,032,802) 9.078 - ------------------------------------------------------------------------------ Outstanding at September 27, 1997 2,260,438 $11.853 - ------------------------------------------------------------------------------
Options Outstanding
Weighted-Average Outstanding as of Remaining Weighted-Average Range of Exercise Prices September 27, 1997 Contractual Life Exercise Price - -------------------------------------------------------------------------------- $ 5.000 - $ 7.625 84,202 5.5 $ 6.937 8.000 - 8.625 486,536 4.7 8.285 9.100 - 12.250 575,279 6.6 11.735 12.625 - 12.875 545,809 2.3 12.847 13.500 - 14.125 456,800 9.3 14.094 16.437 - 19.250 111,812 8.1 17.677 - -------------------------------------------------------------------------------- 2,260,438 5.7 $11.853 - --------------------------------------------------------------------------------
page.34 ADVO, INC. Options Exercisable
Exercisable as of Weighted-Average Range of Exercise Prices September 27, 1997 Exercise Price - ------------------------------------------------------------------------------ $ 5.000 - $ 7.625 56,352 $ 6.984 8.000 - 8.625 69,217 8.355 9.100 - 12.250 127,422 11.075 12.625 - 12.875 -- -- 13.500 - 14.125 800 14.125 16.437 - 19.250 3,575 17.944 - ------------------------------------------------------------------------------ 257,366 $ 9.553 - ------------------------------------------------------------------------------
Nonvested Stock Plans The 1986 Employee Restricted Stock Plan and 1990 Non-Employee Directors' Restricted Stock Plan provide for the granting of up to 2,592,500 shares of common stock to executives who, with certain exceptions, are subject to specified periods of continuous employment (generally vesting one-third per year over three years) and to directors. These shares are votable by the holders, and the vesting period is determined by the Board of Directors at the date of grant. The compensation cost charged against income over the restriction period was $.3 million, $.6 million, and $1.3 million for the years ended September 27, 1997, September 28, 1996 and September 30, 1995, respectively. Unamortized deferred compensation was $.8 million at September 27, 1997. There were 143,588 and 144,255 shares available for future grant under these plans at September 27, 1997 and September 28, 1996, respectively. The weighted average grant price of shares granted during fiscal 1997 and fiscal 1995 was $18.431 and $18.238, respectively. There were no shares granted during fiscal 1996. Certain participants in the 1986 Employee Restricted Stock Plan were given the opportunity to reinvest the Special Dividend applicable to restricted shares in the Company's common stock. Any such reinvestment will be distributed when the restricted shares vest. Information with respect to the Company's nonvested stock plans is summarized below:
Shares - ------------------------------------------------------------------------------ Outstanding at September 24, 1994 2,412,746 Granted 10,500 - ------------------------------------------------------------------------------ Outstanding at September 30, 1995 2,423,246 Cancelled (5,001) - ------------------------------------------------------------------------------ Outstanding at September 28, 1996 2,418,245 Granted 31,000 Cancelled (333) - ------------------------------------------------------------------------------ Outstanding at September 27, 1997 2,448,912 - ------------------------------------------------------------------------------
During fiscal 1997, 30,000 nonvested shares were awarded to an employee. These shares take on the same characteristics as the shares in the 1986 Employee Restricted Stock Plan. Note 12 Nonrecurring Charges In connection with the Special Dividend (see Note 7), the Company made equitable adjustments to outstanding unexercised employee stock options. Generally, the equitable adjustments were reductions in the exercise price of the outstanding unexercised employee stock options equal to the $10 per share Special Dividend payment. No modifications were made to any other terms of the options. This repricing changed the intrinsic value of the outstanding options and resulted in the Company recording $8.8 million of noncash compensation expense. Also included as nonrecurring charges were $3.3 million in legal and various other fees incurred as a result of the Company's exploration of strategic alternatives to enhance shareholder value which resulted in the payment of the Special Dividend. Note 13 Restructure Reserve In fiscal 1993, the Company recorded a $25.8 million charge for a plan of restructuring. The plan included the shutdown/relocation of certain operating facilities aimed at repositioning their location in more geographically strategic areas, the reorganization and centralization of the Company's operations and the discontinuance of certain unprofitable Micromarketing initiatives. At September 27, 1997 the Company had remaining liabilities relating to its plan of restructuring of $0.4 million, principally relating to obligations existing under operating leases of exited business operations. These operating leases provide for obligations extending through the year 2000. All significant elements of the Company's plan of restructure were completed by the end of its fiscal 1997 year. For fiscal 1997, 1996, and 1995, respectively, $1.6 million, $7.3 million and $3.6 million were charged to the reserve for cash payments related to severance costs and other termination based arrangements for exited activities and the centralization of operations. For fiscal 1997, 1996, and 1995, $0.1 million, $0.6 million and $3.6 million, respectively, were charged for cash payments related to facility closure and downsizing costs and $0.1 million in fiscal 1995 was charged to the reserve for the write off of assets associated with exited activities. For the three year period ending September 27, 1997, a total of 480 employees were terminated from all functions of the organization (representing approximately 20% of the salaried workforce) under the restructuring plan. page.35 ADVO, INC. Note 14 Income Taxes The components of the provision for income taxes on continuing operations are as follows:
Year ended Year ended Year ended September 27, September 28, September 30, (In thousands) 1997 1996 1995 - ------------------------------------------------------------------------------ Federal: Current $10,660 $5,494 $ 12,910 Deferred 3,844 505 3,429 - ------------------------------------------------------------------------------ Total Federal 14,504 5,999 16,339 State: Current 1,696 742 2,454 Deferred 718 488 803 - ------------------------------------------------------------------------------ Total State 2,414 1,230 3,257 - ------------------------------------------------------------------------------ Total Provision $16,918 $7,229 $19,596 - ------------------------------------------------------------------------------
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 27, September 28, September 30, 1997 1996 1995 - ------------------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 3.6 4.3 4.1 Targeted jobs tax credit -- -- (.2) Other .1 (.3) (.1) - ------------------------------------------------------------------------------- Effective income tax rate 38.7% 39.0% 38.8% - -------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are as follows:
September 27, September 28, (In thousands) 1997 1996 - ------------------------------------------------------------------------------- Deferred Tax Assets: Reserve for deferred compensation $ 5,455 $ 5,762 Reserve for employee benefits 4,123 3,610 Loss due to discontinued operations -- 2,948 Other 5,567 4,262 - ------------------------------------------------------------------------------- Total deferred tax assets 15,145 16,582 - ------------------------------------------------------------------------------- Deferred Tax Liabilities: Tax over book depreciation and amortization (10,486) (7,361) - ------------------------------------------------------------------------------- Net federal and state deferred assets $ 4,659 $ 9,221 - -------------------------------------------------------------------------------
Note 15 Commitments and Contingencies ADVO leases property and equipment under noncancellable operating lease agreements which expire at various dates through 2007. The leases generally provide that the Company pay the taxes, insurance and maintenance expenses related to the leased assets. Rental commitments at September 27, 1997 under long term noncancellable operating leases are as follows:
(In thousands) - ------------------------------------------------------------------------------- Fiscal year: 1998 $12,710 1999 10,394 2000 7,657 2001 6,300 2002 5,109 Thereafter 9,183 - ------------------------------------------------------------------------------- Total minimum lease payments $51,353 - -------------------------------------------------------------------------------
Certain of these leases contain renewal options and certain leases also provide for cost escalation payments. Rental expense for the years ended September 27, 1997, September 28, 1996 and September 30, 1995 was approximately $17.1 million, $20.6 million and $22.8 million, respectively. During fiscal 1996, the Company entered into a ten-year agreement with Integrated System Solutions Corporation, now known as IBM Global Services, to provide systems development and technical support to the Company. The contract allows for cancellation after the completion of the third year, subject to termination charges ranging between $3.1 million and $.5 million depending on the year in which the cancellation becomes effective. Total base charges under the term of the agreement since inception through the year 2006 would be $106.0 million. The agreement also provides for the Company to pay a cost of living adjustment due to inflation increases beginning in fiscal 1997. Cost of living adjustments for fiscal 1997 totaled approximately $.3 million. Future commitments for the noncancellable portion of the agreement, excluding termination fees and the cost of living adjustments are $14.9 million and $10.7 million for fiscal years 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 and liquidity of the Company. Outstanding commitments for capital expenditures at September 27, 1997 totaled $9.6 million. Note 16 Related Party Transactions The Company invests in money market mutual funds through an investment advisor, Warburg, Pincus Counsellors, Inc. ("Counsellors"). The general partner of Warburg, Pincus Capital Partners, L.P.("Warburg"), the Company's largest shareholder at September 27, 1997, owns a majority interest in Counsellors. Income earned on investments managed by Counsellors was $.5 million, $1.2 million and $2.8 million in page.36 ADVO, INC. fiscal 1997, 1996 and 1995, respectively. At September 27, 1997 and September 28, 1996, $11.6 million and $5.4 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. In addition, the Company purchased 1.9 million shares of its common stock from Warburg subsequent to year end. (See Note 7). Note 17 Supplemental Cash Flow Information Cash paid for income taxes was $11.0 million, $3.2 million and $11.8 million in fiscal 1997, 1996 and 1995, respectively. Cash paid for interest expense in fiscal 1997 and 1996 was $14.4 and $7.2 million, respectively. No interest expense payments were made in fiscal year 1995. 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 8.) Note 18 Recent Accounting Pronouncements In February of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share". The Statement establishes standards for computing and presenting earnings per share ("EPS"). The statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, "Earnings Per Share", and makes them comparable to international EPS standards. The statement requires the presentation of basic and diluted EPS. Basic EPS excludes common stock equivalents, such as stock options, and is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if common stock equivalents, such as stock options, were exercised. The Company will adopt this statement in the first quarter of fiscal 1998 and expects that there will not be a material dilution to the Company's earnings per share as a result of the adoption. In June of 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This statement establishes standards for the reporting of comprehensive income and its components in a full set of general-purpose financial statements. The financial statements are required to include certain components of net income, as well as, other transactions affecting stockholders' equity. This statement is effective for fiscal years beginning after December 15, 1997 and will be adopted by the Company in fiscal 1999. In June of 1997, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information". This Statement establishes standards for the way that public enterprises report information about operating segments in annual financial statements and interim financial stockholders' reports. The Statement requires the Company to report information by operating segment or in general on the basis which it uses internally for evaluating performance. The effective date of the Statement is for periods beginning after December 15, 1997. The Company will adopt this Statement in fiscal 1999. Note 19 Quarterly Financial Data (Unaudited)
(In millions, except per share data) Fiscal year ended First Second Third Fourth September 27, 1997 Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------- Revenues $255.1 $242.5 $258.2 $260.7 Gross profit 62.8 58.2 69.3 68.8 Operating income 14.0 8.0 19.1 17.4 Net income 6.2 2.6 9.4 8.6 Earnings per share .25 .11 .38 .35 Common stock price High 14 1/4 14 5/8 16 13/16 19 7/16 Low 11 11 5/8 11 3/8 15 5/8 - -------------------------------------------------------------------------------
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) 8.3 (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 - ------------------------------------------------------------------------------
(1) Operating income for the second quarter of fiscal 1996 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 7.) page.37 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 27, 1997 and September 28, 1996, 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 27, 1997. 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 27, 1997 and September 28, 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 27, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Hartford, Connecticut October 21, 1997 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 and acting Chief Financial Officer /s/ Robert S. Hirst Robert S. Hirst Vice President and Controller October 21, 1997 page.38 EX-21 7 SUBSIDIARIES OF ADVO EXHIBIT 21 SUBSIDIARIES OF ADVO, INC. AS OF SEPTEMBER 27, 1997
PERCENT OF VOTING STATE OF SECURITIES OWNED AS INCORPORATION NAME OF SUBSIDIARY OF SEPTEMBER 27, 1997 - ------------- ------------------- --------------------- 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 8 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, 1997, included in the 1997 Annual Report to Stockholders of ADVO. Our audits also included the financial statement schedule of ADVO listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-38237) pertaining to the ADVO, Inc.'s President's Club Stock Award Plan, (Form S-8 No. 333-11323) pertaining to the ADVO, Inc. 401(k) Plan, (Form S-3 No. 333-03777) pertaining to Dividend Reinvestment, (Post-Effective Amendment No. 4 to the ADVO Form S-8 No. 333-24131) pertaining to the 1986 Employee Restricted Stock Plan, as amended, (Form S-8 No. 33-15856) pertaining to the 1986 Stock Option Plan, and (Post-Effective Amendment No. 5 to the ADVO Form S-8 No. 33-58483) pertaining to the 1988 Non-Qualified Stock Option Plan, as amended, of ADVO and in the related Prospectuses of our report dated October 21, 1997, 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 12, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADVO, INC'S. FORM 10K FOR THE YEAR ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-27-1997 SEP-29-1996 SEP-27-1997 25,963 0 71,824 5,160 4,149 115,783 166,991 90,899 208,553 115,583 140,666 0 0 284 (60,205) 208,553 0 1,016,492 0 757,413 0 5,374 14,820 43,716 16,918 26,798 0 0 0 26,798 $1.09 $1.08
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